Vasta Platform Ltd
NASDAQ:VSTA
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Earnings Call Analysis
Q4-2023 Analysis
Vasta Platform Ltd
Vasta ended the fiscal year with an impressive 18% growth in net revenue, driven by the conversion of Annual Contract Value (ACV) into revenue, coupled with the performance of Business-to-Government (B2G) business. Notably, the company's foray into the Brazilian public sector was fruitful, contributing BRL 81 million to the 2023 fiscal year's revenue. The complementary solutions segment shined with a significant 34% growth compared to 2022, a sign of expanding market penetration and an increasing student base.
Adjusted EBITDA showed a strong 20% increase reaching BRL 451 million, largely thanks to enhanced operating efficiency and a strategic sales mix favoring subscription products. The commitment to efficiency also reflected in an improved free cash flow, which rose to BRL 189 million, marking a robust improvement from BRL 89 million in the previous year.
Subscription revenues ascended by 14% organically to BRL 1.278 billion, representing a solid component of Vasta's growth, whereas nonsubscription segments faced a 35% decline to BRL 39 million. The focus on subscription-based models is evident, with an intent to diminish reliance on nonsubscription revenues, which currently represent a mere 9% of total revenue.
Forward-looking, Vasta secured a compound annual growth rate of 20%, finishing the commercial cycle of 2024 with BRL 1.4 billion in signed contracts. This included a notable 14% increase for traditional learning systems and an ambitious 24% increase in the complementary solutions segment, indicative of strategic focus areas with a substantial new school partner base surpassing 1,700 schools.
Vasta's net debt rose slightly to BRL 1.064 billion, influenced by financial interest costs and the share repurchase program. However, the net debt to adjusted EBITDA ratio improved to 2.36x, marking progress in the company's leverage situation compared to the previous year.
Vasta emphasizes growth through improved pricing and a better mix of subscription services. With an established margin of 30%, the company has met its targeted profitability and now seeks to consolidate its position. The guidance for the next year predicts a modest deceleration in growth, but with an active focus on premium brands and premium schools as major growth levers, particularly in the more penetrated learning system market.
The company's engagement with the public sector, marked by the B2G initiative, exemplifies its strategic expansion and successful revenue generation. With the renewal of significant contracts and a positive outlook for new deals, Vasta reinforces its confidence in delivering customized education solutions.
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Good day, everyone, and welcome to the Vasta Platform Fourth Quarter 2023 Financial Results Call.
Before we begin, I would like to read forward-looking statements. During today's presentation, our executives will make forward-looking statements. Forward-looking statements generally relate to future events or future financial or operating performance and involve known and unknown risks, uncertainties and other facts that may cause our actual results to differ materially from those contemplated by those forward-looking statements.
Forward-looking statements in this presentation include, but are not limited to, statements related to our business and financial performance, expectations for future periods, our expectations regarding our strategic product initiatives and their related benefits and our expectations regarding the market. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. These risks include those set forth in the press release that we are issuing today as well as those more fully described in our filings with the Securities and Exchange Commission.
The forward-looking statements in this presentation are based on the information available to us as of today. You should not rely on them as predictions of the future events, and we disclaim any obligation to update any forward-looking statements, except as required by law.
In addition, management may reference non-IFRS financial measures on this call. The non-IFRS financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with IFRS.
I will now turn the call over to Marcelo Werneck, Investor Relations. Please go ahead.
Good evening, everyone. Thank you for joining us in this conference call to discuss Vasta Platform's Fourth Quarter and Full Year of '23 results. The fourth quarter also represented the first quarter of the 2024 sales cycle, which goes from October '23 to September '24. I am Marcelo Werneck, Vasta's Investor Relations. And today, we have the presence of Guilherme Melega, Vasta's CEO; and Cesar Silva, Vasta's CFO, who will be joining me on the call.
Let me now hand over the floor to Guilherme Melega to make his opening statement.
Thank you, Marcelo. Thank you all for participating in our earnings release call. I would like to cover Slide #3 with some highlights of 2023 fiscal year. Vasta concluded this year with 18% net revenue growth over the same period of last year, mostly due to the conversion of ACV into revenue and the performance of the B2G business unit.
Vasta subscription revenue has reached BRL 1.278 billion. Our complementary solutions segment continues to stand out, showcasing the highest growth rate among our business segments, with a 34% increase compared to 2022 and with an accelerated increase in both student base and market penetration.
Moreover, as mentioned in the last quarter, in 2023, Vasta started to offer its products and service to the Brazilian public sector and we generated BRL 81 million in revenue from the B2G sector in 2023 fiscal year. The expansion into the public sector marks a momentous opportunity for Vasta, allowing us to contribute to advanced education in Brazil while creating new revenue streams.
Moving to the company's profitability. In 2023, our adjusted EBITDA experienced a growth of 20%, reaching BRL 451 million, while increasing an adjusted EBITDA margin to 30.3%. This increase was mainly driven by gains in operating efficiency, cost savings and sales mix that benefited from the growth of subscription products.
Finally, this was another year of significant improvement in our cash flow. In 2023, free cash flow totaled BRL 189 million, a BRL 100 million increase from BRL 89 million in 2022. The free cash flow to adjusted EBITDA conversion rate improved from 24% to 42% as a result of faster growth and implementation of efficiency measures.
I'll turn back to Marcelo will talk about the financial results on the quarter and 2023 fiscal year.
Thank you, Melega. In these slides, we present the composition of Vasta net revenue. On the left side, you can observe the organic year-on-year growth in total net revenue for the fourth quarter, which increased by 10%, reaching BRL 554 million. On the right side, let's detail the key components of this revenue growth.
Total subscription revenue had an increase of 16%, reaching BRL 550 million and representing 93% of our total revenue for this quarter. PAR, our tax book subscription products, also increased by 16%, amounting to BRL 78 million, benefiting from the migration of nonsubscription. Nonsubscription dropped 35% to BRL 39 million. And as expected, we did not record B2G revenue in this quarter.
Moving to Slide #5, we analyze the net revenue for the '23 fiscal year. In 2023, we achieved an organic net revenue growth of 18%, amounting to BRL 1.486 billion. As you can see on the right, our total subscription revenue increased by 14% on an organic basis to BRL 1.278 billion. Subscription revenue, excluding PAR, had an increase of 16%, reaching BRL 1.155 billion. And PAR, our textbook subscription products, declined by 3% in the year, amounting to BRL 123 million.
Subscription revenue continues to be the major contributor to our total revenue, representing 86% of the revenue share. The B2G contributed to 5% of our overall revenue in '23 and generated BRL 81 million in revenue. Non-subscription revenue now comprises only 9% of total revenue and, as expected, dropped 11% to BRL 127 million.
Moving to Slide #6. In this quarter, our adjusted EBITDA amounted to BRL 240 million and with a margin of 43.2%, an increase of 20% from the BRL 200 million in the fourth quarter of '22. This positive performance can be attributed to several factors, including strong sales results, cost dilution and operational efficiency. On the right side, we see that adjusted EBITDA in '23 also increased by 20% and reached BRL 451 million, with a margin of 30.3%.
Let's now move to the next slide and explain the breakdown of the adjusted EBITDA margin. In Slide #7, we observed that EBITDA margin improved 60 basis points, from 29.7% in '22 to 30.3% in '23. Firstly, our gross margin declined 1 percentage point as 2023 was a year that the industry faced higher inventory costs caused by the rising inflation on paper and production costs. Provision for doubtful accounts, or PDA, declined 0.2 percentage points between the years, in line with the revised credit landscape.
As a percentage of the net revenue, our commercial expenses increased by 1.2 percentage points, driven by higher expenses related to business expansion and marketing investments. And adjusted cash G&A expenses improved by 2.9 percentage points, mainly driven by workforce optimization and budgetary discipline.
Slide #8, in the fourth quarter of 2023, adjusted net profit totaled BRL 96 million, a 32% increase compared to adjusted net profit of BRL 73 million in the fourth quarter of '22. In 2023 fiscal year, adjusted net profit reached BRL 60 million, a 55% increase from an adjusted net profit of BRL 39 million in '22. Finance costs in a scenario of the spike of interest rates continues to impact our bottom line. However, we have remained committed to the deleveraging, as you see further in this presentation.
Moving to Slide #9, we show the free cash flow evolution. Our cash flow generation was one of the main highlights of the year. In the fourth quarter of '23, the free cash flow totaled negative BRL 100,000, representing an increase compared to negative BRL 43 million in the fourth quarter of '22. Now on the right side, in 2023, our free cash flow reached BRL 189 million, a BRL 100 million increase from the BRL 89 million in '22, as a result of Vasta's growth implementation of efficiency measures. Another important metric, our free cash flow to EBITDA conversion rate improved from 23.8 to 41.8, reinforcing the message that cash generation continues to be a key focus of our business.
Moving to Slide #10, we show the provision for doubtful accounts. Total expenses with PDA in the fourth quarter of '23 totaled BRL 29 million, representing 5.2% of net revenue compared to an expense of BRL 29 million in the comparable quarter. Moving to the right side of the slide, we can observe that PDA in '23 fiscal year grew from 3.6% to 3.8% of net revenue. In '22, PDA had an impact of the provision of 100% of the accounts receivable from large retail companies undergoing judicial recovery. In '23, PDA is linked to a credit scenario review tied to the refinement of our customer base strategy, where we have chosen to cease financing mainstream school with low-value contracts and we're increasingly putting emphasis on premium schools. This shift is promoting growth in high-quality education systems such as Anglo, PH, Amplia, Mckenzie and Fibonacci. These brands show higher average ticket values, lower default rates, greater adoption of complementary solutions and foster long-term relationships.
Moving to the next slide, we observe that the average payment terms of Vasta's accounts receivable portfolio was 169 days in the fourth quarter of '23, which is 16 days lower than the fourth quarter of '22.
Moving to Slide #12. Let's take a closer look at the net debt movement. As of the end of '23 fiscal year, Vasta had a net debt position of BRL 1.064 billion, a BRL 66 million increase compared to the third quarter of '23, mainly due to impacts of financial interest costs and the share repurchase program. In comparison to the fourth quarter of '22, the net debt position increased BRL 22 million from BRL 1.042 billion, driven also by the financial interest costs, the share repurchase program and M&A expenses, which were partially offset by the positive free cash flow of BRL 189 million in '23.
I will conclude my presentation with Slide #13, where we can observe that as of the fourth quarter of '23, the net debt to adjusted EBITDA ratio stands at 2.36x, which marks an improvement of 0.07x compared to the third quarter of '23 and an improvement of 0.4x when compared to the fourth quarter of '22.
With that being said, I'll pass the word to our CEO, Guilherme Melega.
Thank you, Marcelo. Moving to Slide 14, let's talk about ACV. From the commercial cycle of 2020 to 2023, we have achieved a compound annual growth rate of 20%. In the commercial cycle of 2024, we ended with BRL 1.4 billion in contract signed. Traditional learning system represents 77% of our subscription revenue, and we will increase 14% in comparison to the 2023 commercial cycle. Higher growth observed in our premium brands such as Anglo, PH, Fibonacci and Amplia, reassuring our perception that quality and reputation remain decisive in our business.
Complementary solutions will have the highest growth rate among the business segments, with a 24% increase compared to the 2023 cycle subscription revenue, continuing to ramp up penetration across our current client base. The partner schools base that uses our complementary solutions increased by over 300 new schools, surpassing 1,700 schools and a 14% growth in the number of students served by our solutions. The growth of the complementary solutions is concentrated in 3 main solutions: Mind Makers, Lider em Mim and Eduall. And finally, consistently with our strategy, we continue to invest in the migration from PAR, paper-based products, to PAR -- digital subscription products, our Textbook as a Service platform offered on a fee-per-student basis.
Moving to Slide 15. Let me provide you with an exciting update on our significant avenue of growth. As mentioned last quarter, the launch of Start Anglo franchise, combined bilingualism with academic excellence, signifies a strategic expansion in our quest for new revenue. And we are happy to report that we currently have 2 fully operational units in 2024. The first is our flagship in São José do Rio Preto, which is operating with 300 students. And additionally, our inaugural franchise in Alphaville is exceeding expectations, boasting over 170 students, surpassing our target of 120 students. Furthermore, we have secured a contract with a prestigious institution Liceu Pasteur for a new flagship in Sao Paulo, planned to commence operations under the Start Anglo brand in 2025. With 15 contracts already in place, we are optimistic that this franchise model will play a pivotal role in the successful execution of our business strategy.
Moving to Slide 16. And finally, let me provide you an update on another growth avenue, our B2G initiative. 2023 marked the year when we expanded our products and service to serve the Brazilian public sector. We generated BRL 81 million in revenue from the B2G sector in 2023, and we have already renewed this contract for 2024. We are very optimistic about the possibilities this development presents and are committed to deliver high-quality education solutions tailored to the unique needs of the public sector.
With all of these accomplishments in mind, 2023 was an extraordinary year and another milestone in our journey. These achievements position us favorably to face the future challenges. We have the confidence that we are on the right path to continue delivering outstanding results for our shareholders, solidify partnerships and make a significant contribution to education in our country.
Having said that, I'll finish our presentation and invite you all to the Q&A session.
[Operator Instructions] We will take our first question from Marcelo Santos with JPMorgan.
I have actually 2. The first question is on the ACV. Could you discuss the evolution of ACV that you have up to like the 2024 cycle in terms of volume, price churn? Could you give an idea how these things moved versus the previous year? Just to understand the dynamics. Sorry if that was on the slide, but I couldn't really get the presentation so far.
And the second question is regarding the margin outlook for 2024. So now that you have the cost pressures behind, what kind of evolution -- I mean it looks like it's going to be a good evolution in terms of margin for 2024. Is that the case? What are the moving parts here to understand the outlook of margin for 2024?
Marcelo, thanks very much for your question. Let me give you some color about ACV. And now since we are the only player delivering details about the results, we will consider to reduce a little bit the disclosure about the ACV details, but I can give you some color about that. We are pretty much breakeven in terms of volume, and our ACV growth relies on pricing and better mix. That's pretty much the major drivers of growth on our ACV.
And in terms of margins, I would say we already reached the 30% margin that we aimed for. Cost pressures are definitely behind us, and we had a very good year in terms of savings and reducing redundancy in process with SG&A savings. But we intend to spend commercially in acquiring new contracts. So we do not forecast major improvements in the margin, so they should be around the 30% level.
[Operator Instructions] We'll take our next question from [ Mariella Oliveira ] with Bank of America.
I have one question on the growth perspective. The ACV for the next year implies a slight deceleration from the past years. Could you comment a little bit on the -- if this deceleration is driven more by the traditional learning system or if it's lower growth on the complementary solutions, so a little bit of the mix here? And a second question, could you provide any more details on the B2G contract that you just renewed?
Thank you very much, [ Mariella ], for your questions. So in terms of ACV, complementary keep boosting the growth is the most fasting product that we have. We grew more than 30% less cycle, and we intend to keep the pace. It's definitely where we have more room to grow.
In terms of products of learning system, we have a slower growth from learning system. It's a more penetrated market. And our strategy is to focus on premium brands. So we will focus on premium schools focusing on Anglo, PH, Amplia and Mckenzie. This will be the major focus for our learning system growth, but complementary is the main lever for the growth.
And regarding B2G, we renewed our contract with PARA, pretty much in the same terms that we had last year. So it's already a huge accomplishment. So our business will keep the same. We'll start the growth from the same level that we left on 2023. And we are very confident to book new contracts very soon. We have a very heated pipeline. And on Q1, we already have the sales for the PARA contract, and we expect to have new contracts in Q2. But for the time being, we don't have anyone signed yet. So I can just share with you our positive sensation about the business.
[Operator Instructions] And there are no further questions at this time. I'd like to turn the call back over to Guilherme Melega for closing remarks.
Thank you all very much for attending the Vasta Q4 conference call. We are very proud to deliver the results that we reached in 2023. Just to mention a few: our revenue grew 18%; our EBITDA, 20%; our free cash flow grew 112%. So very solid results. And we opened our 2024 year at a very good momentum. We launched last year the Start Anglo and we are seeing the new franchisees piling up, new contracts being signed. It's very positive for the company. And also B2B, with a very significant pipeline for new contracts, we are aiming major states and huge municipalities. So we definitely expect to have new contracts very soon. Thank you all very much. Looking forward to see you in the Q1 conference call.
Thank you. That does conclude today's presentation. Thank you for your participation, and you may now disconnect.