GlobeNewswire Inc | Aug 17, 2020 04:15PM EDT

August 17, 2020

2Q20 Net revenues up 71% Year-Over-Year, reaffirming Arco's resilient business model and high-quality solutions.

SAO PAULO, Brazil, Aug. 17, 2020 (GLOBE NEWSWIRE) -- Arco Platform Limited, or Arco (Nasdaq: ARCE), today reported financial and operating results for the second quarter 2020 ended June 30, 2020.

The superior academic results are possible because we have a customer-oriented culture, attached to our always-evolving proprietary methodology, break-through technology-driven platform and tailored pedagogical consultancy. These pillars are not established overnight. They come from over 50 years of experience in education with a clear focus on quality.

First Half 2020 Results

-- Net Revenue of R$496.4 million; -- Net Profit of R$20.1 million; -- Adjusted Net Income of R$114.1 million; and -- Adjusted EBITDA of R$197.5 million.

Second Quarter 2020 Results

-- Net Revenue of R$234.9 million; -- Net Profit of R$16.2 million; -- Adjusted Net Income of R$57.9 million; and -- Adjusted EBITDA of R$100.6 million.

Revenue Recognition and Seasonality

As we report the second quarter 2020 results, it is important to highlight the revenue recognition and seasonality of our business.

We typically deliver our Core Curriculum content four times each year, in March, June, August and December and our Supplemental Solutions content twice each year, in June and December, usually two to three months prior to the start of each school quarter. The amount of revenue recognized is proportional to the amount of content made available, which is not linearly distributed among the quarters, which causes revenue seasonality in our business.

A significant portion of our expenses is also seasonal. Due to the nature of our business cycle, we require significant working capital, typically in September or October of each year, to cover costs related to production and accumulation of inventory, selling and marketing expenses, and delivery of our teaching materials at the end of each fiscal year in preparation for the beginning of each school year. Therefore, such operating expenses are generally incurred in the period between September and December of each year.

Full Year 2020 guidance:

-- Adjusted EBITDA Margin is expected to be in the range of 35.5% to 37.5%.

Completion of Positivos corporate restructuring:On July 07, 2020, according to a resolution approved by the Board of Directors and registered at the Board of Trade of Cear, the corporate name of the subsidiary EAS Educao S.A. was changed to PSD Educao S.A.

On August 01, 2020, continuing the corporate restructuring, PSD Educao S.A. incorporated the Companies Positivo Solues Didticas Ltda. and Editora Pi Ltda. When PSD Educao S.A. acquired these entities, goodwill and fair value adjustments recognized in the amount of R$830,028 and R$726,876, respectively, were treated as not deductible. However, after this transaction, PSD Educao S.A has the tax benefit of the deductibility of the goodwill and fair value adjustments of R$529,347. The fair value adjustments should be deductible over the next 5 to 20 years, according to the useful life of the identified asset and the goodwill should be deductible for at least 5 years, under of Brazilian tax laws, depending on the utilization curve established by the Company in the initial use of the benefit.

At the end of each fiscal year, if the tax benefit is greater than the taxable income, the Company will recognize a deferred tax asset from the tax loss, which may be offset in the next fiscal years, limited to 30% of taxable income.

Information related to COVID-19 pandemic:As discussed in more detail in our June 30, 2020 condensed consolidated financial statements submitted to the Securities and Exchange Commission on Form 6-K, the COVID-19 pandemic has not had a material impact on the Companys operations, distribution capacity and revenue recognition so far. As of June 30, 2020, there was a total impact of R$7,898 on the Company's condensed consolidated financial statements related to the Covid-19 pandemic mainly related to: (i) revision of the Companys estimated credit losses from its trade receivables based on expected increases in financial default and in unemployment rates in Brazil for the next months, which resulted in an increase of R$4,028 thousand, (ii) the Company incurred additional expenses of R$3,680 related to IT, network infrastructure and an integrated teaching platform, as well as expenses to maintain protective measures.

Despite legally mandated school closures, the Company did not suspend its activities and, following health and social distancing guidelines, its workforce continues to work remotely from home, with the exception of teams from the distribution centers that are working on site, however, with several safety rules, in accordance with health and social distancing guidelines. In this scenario, the Company made investments in IT and network infrastructure, had additional expenses for cleaning and disinfecting the installations, bought alcohol and masks, funded COVID-19 tests and H1N1 flu vaccination campaigns with the objective of taking care of employees, reducing the demand for care in health units and to facilitate the diagnosis of COVID-19 in order to safeguard the health and safety of its employees, customers and suppliers. Our content production continues according to the scheduled curriculum calendar and the current educational material has been delivered to the schools according to the planned schedule, enabling the Company to recognize the revenues on these products.

The future impact of the COVID-19 pandemic on an ongoing basis is still uncertain, and the Companys management team will continue to closely monitor and assess the potential impacts it may have on the Companys business, its financial performance and position.

The extent to which the coronavirus (COVID-19) impacts our financial results and operations will depend on future developments, which are uncertain, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the impact of the coronavirus (COVID-19) pandemic. Based on future developments of the coronavirus (COVID-19), it is possible that we may, in the future, be required to take actions or steps in relation to our business that could have a disruptive or a material and adverse effect on our business.

About Arco Platform Limited (Nasdaq: ARCE)

Arco has empowered hundreds of thousands of students to rewrite their futures through education. Our data-driven learning, interactive proprietary content, and scalable curriculum allows students to personalize their learning experience with high-quality solutions while enabling schools to provide a broader approach to education.

Forward-Looking Statements

This press release contains forward-looking statements as pertains to Arco Platform Limited (the Company) within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, the Companys expectations or predictions of future financial or business performance conditions. The achievement or success of the matters covered by statements herein involves substantial known and unknown risks, uncertainties, and assumptions, including with respect to the COVID-19 pandemic. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, the Companys results could differ materially from the results expressed or implied by the statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward looking statements are made based on the Companys current expectations and projections relating to its financial conditions, result of operations, plans, objectives, future performance and business, and these statements are not guarantees of future performance.

Statements which herein address activities, events, conditions or developments that the Company expects, believes or anticipates will or may occur in the future are forward-looking statements. You can generally identify forward-looking statements by the use of forward-looking terminology such as anticipate, believe, can, continue, could, estimate, evaluate, expect, explore, forecast, guidance, intend, likely, may, might, outlook, plan, potential, predict, probable, project, seek, should, view, or will, or the negative thereof or other variations thereon or comparable terminology. All statements other than statements of historical fact could be deemed forward looking, including risks and uncertainties related to statements about our competition; our ability to attract, upsell and retain customers; our ability to increase the price of our solutions; our ability to expand our sales and marketing capabilities; general market, political, economic, and business conditions in Brazil or abroad; and our financial targets which include revenue, share count and other IFRS measures, as well as non-IFRS financial measures including Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Adjusted Net Income Margin, Free Cash Flow and Adjusted Free Cash Flow.

Forward-looking statements represent the Company managements beliefs and assumptions only as of the date such statements are made, and the Company undertakes no obligation to update any forward-looking statements made in this presentation to reflect events or circumstances after the date of this press release or to reflect new information or the occurrence of unanticipated events, except as required by law.

Further information on these and other factors that could affect the Companys financial results is included in filings the Company makes with the Securities and Exchange Commission from time to time, including the section titled Risk Factors in the Companys most recent Forms 20-F and 6-K. These documents are available on the SEC Filings section of the Investor Relations section of the Companys website at: https://investor.arcoplatform.com/

Key Business Metrics

ACV Bookings: We define ACV Bookings as the revenue we would contractually expect to recognize from a partner school in each school year pursuant to the terms of our contract with such partner school, assuming no further additions or reductions in the number of enrolled students that will access our content at such partner school in such school year (we define school year for purposes of calculation of ACV Bookings as the twelve-month period starting in October of the previous year to September of the mentioned current year). We calculate ACV Bookings by multiplying the number of enrolled students at each partner school with the average ticket per student per year; the related number of enrolled students and average ticket per student per year are each calculated in accordance with the terms of each contract with the related partner school.

Non-GAAP Financial Measures

To supplement the Company's condensed consolidated financial statements, which are prepared and presented in accordance with International Financial Reporting Standards as issued by the International Accounting Standards BoardIASB, we use Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Adjusted Net Income Margin, Free Cash Flow and Adjusted Free Cash Flow which are non-GAAP financial measures.

We calculate Adjusted EBITDA as profit for the year (or period) plus income taxes, plus/minus finance result, plus depreciation and amortization, plus share of loss of equity-accounted investees, plus share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units), plus M&A expenses, plus non-recurring expenses and plus effects related to Covid-19 pandemic. We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by Net Revenue.

We calculate Adjusted Net Income as profit for the year (or period) plus share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units), plus amortization of intangible assets from business combinations (which refers to the amortization of the following intangible assets from business combinations: (i) rights on contracts, (ii) customer relationships, (iii) educational system, (iv) trademarks, (v) non-compete agreement and (vi) software resulting from acquisitions), plus/minus changes in fair value of derivative instruments (which refers to (i) changes in fair value of derivative instrumentsfinance income, and plus (ii) changes in fair value of derivative instrumentsfinance costs), plus/minus changes in accounts payable to selling shareholders plus share of loss of equity-accounted investees, plus/minus changes in current and deferred tax recognized in statements of income applied to all adjustments to net income, plus/minus foreign exchange gains/loss on cash and cash equivalents, plus interest expenses, plus M&A expenses, plus non-recurring expenses and plus effects related to Covid-19 pandemic. We calculate Adjusted Net Income Margin as Adjusted Net Income divided by Net Revenue.

We calculate Free Cash Flow as Net Cash Flows from Operating activities less acquisition of property and equipment less acquisition of intangible assets. We consider Free Cash Flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by operating activities and cash used for investments in property and equipment required to maintain and grow our business. We calculate Adjusted Free Cash Flow as free cash flow for the year (or period) plus (i) interest change in financial investments, (ii) M&A expenses and (iii) non-recurring expenses.

We understand that, although Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Adjusted Net Income Margin, Free Cash Flow and Adjusted Free Cash Flow are used by investors and securities analysts in their evaluation of companies, these measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results of operations as reported under IFRS. Additionally, our calculations of Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Adjusted Net Income Margin Free Cash Flow and Adjusted Free Cash Flow may be different from the calculation used by other companies, including our competitors in the education services industry, and therefore, our measures may not be comparable to those of other companies.

Conference Call Information

Arco will discuss its second quarter 2020 results today, August 17, 2020, via a conference call at 4:30 p.m. Eastern Time. To access the call (ID: 2374425), please dial: (866) 679-4032 or +1 (409) 217-8315. An audio replay of the call will be available through August 31, 2020 by dialing (855) 859-2056 or +1 (404) 537-3406 and entering access code 2374425. A webcast of the call will be available on the Investor Relations section of the Companys website at https://arcoeducacao.gcs-web.com/.

Investor Relations Contact:

Arco Platform LimitedIR@arcoeducacao.com.brSource: Arco Platform Ltd.



Arco Platform LimitedInterim Condensed Consolidated Statements of Financial Position June 30, December 31,(In thousands of Brazilian reais) 2020 2019Assets (unaudited) Current assets Cash and cash equivalents 188,894 48,900Financial investments 702,761 574,804Trade receivables 298,407 329,428Inventories 47,175 40,106Recoverable taxes 29,175 15,612Financial instruments from acquisition of - 3,794interestRelated parties 1,321 1,298Other assets 32,207 14,630Total current assets 1,299,940 1,028,572 Non-current assets Financial instruments from acquisition of 32,311 32,152interestDeferred income tax 198,377 156,748Recoverable taxes 9,531 6,613Financial investments 4,791 4,690Related parties 15,106 14,813Other assets 16,136 14,399Investments and interests in other entities 57,250 48,574Property and equipment 22,082 21,328Right-of-use assets 19,409 21,631Intangible assets 1,793,850 1,811,903Total non-current assets 2,168,843 2,132,851 Total assets 3,468,783 3,161,423

June 30, December 31,(In thousands of Brazilian reais) 2020 2019Liabilities (unaudited) Current liabilities Trade payables 30,806 34,521 Labor and social obligations 89,645 68,511 Taxes and contributions payable 4,729 7,508 Income taxes payable 54,506 52,038 Advances from customers 36,452 25,626 Lease liabilities 7,639 6,845 Loans and financing 302,682 98,561 Accounts payable to selling shareholders 344,214 117,959 Other liabilities 757 607 Total current liabilities 871,430 412,176 Non-current liabilities Labor and social obligations 6,335 2,801 Lease liabilities 16,758 19,012 Loans and financing 1,226 - Financial instruments from acquisition of 29,446 33,940 interestProvision for legal proceedings 845 251 Accounts payable to selling shareholders 911,192 1,098,273 Other liabilities 787 160 Total non-current liabilities 966,589 1,154,437 Equity Share capital 11 11 Capital reserve 1,608,499 1,607,622 Share-based compensation reserve 99,558 84,546 Accumulated losses (77,304 ) (97,369 )Total equity 1,630,764 1,594,810 Total liabilities and equity 3,468,783 3,161,423

Arco Platform LimitedInterim Condensed Consolidated Statements of Income Three months period ended Six months period ended June 30, June 30,(In thousands ofBrazilian reais, except 2020 2019 2020 2019earnings per share) (unaudited) (unaudited) (unaudited) (unaudited)Net revenue 234,864 137,566 496,443 254,621 Cost of sales (43,120 ) (25,827 ) (110,340 ) (47,696 )Gross profit 191,744 111,739 386,103 206,925 Operating expenses: Selling expenses (88,070 ) (39,315 ) (175,970 ) (75,450 )General and (60,139 ) (44,926 ) (126,922 ) (65,758 )administrative expensesOther income (expense), 347 (437 ) 759 2,922 netOperating profit 43,882 27,061 83,970 68,639 Finance income 12,792 13,961 22,179 30,917 Finance costs (30,752 ) (12,374 ) (69,091 ) (28,855 )Finance result (17,960 ) 1,587 (46,912 ) 2,062 Share of loss ofequity-accounted (3,293 ) (667 ) (3,999 ) (1,159 )investees Profit before income 22,629 27,981 33,059 69,542 taxesIncome taxes - income (expense)Current (22,435 ) (10,899 ) (54,623 ) (29,151 )Deferred 16,050 8,617 41,629 16,149 Total income taxes ? (6,385 ) (2,282 ) (12,994 ) (13,002 )income (expense)Net profit for the 16,244 25,699 20,065 56,540 period Basic earnings pershare ? in Brazilian reaisClass A 0.30 0.51 0.37 1.12 Class B 0.30 0.51 0.37 1.12 Diluted earnings pershare ? in Brazilian reaisClass A 0.29 0.49 0.36 1.09 Class B 0.30 0.50 0.37 1.10 Weighted-average sharesused to compute net income per share:Basic 54,942 50,709 54,941 50,505 Diluted 55,335 51,276 55,334 51,072

Arco Platform LimitedInterim Condensed Consolidated Statements of Cash Flows Three months period ended Six months period ended June 30, June 30,(In thousands of 2020 2019 2020 2019Brazilian reais) (unaudited) (unaudited) (unaudited) (unaudited)Operating activitiesProfit beforeincome taxes for 22,629 27,981 33,059 69,542 the periodAdjustments toreconcile profit before income taxesDepreciation and 31,373 9,103 60,048 16,343 amortizationInventory reserves 1,538 1,332 3,644 3,560 Allowance for 6,386 550 12,554 2,203 doubtful accountsLoss on sale/disposal ofproperty and 780 29 1,452 131 equipment andintangible assetsdisposedFair value changein financialinstruments from (913 ) - (859 ) 1,866 acquisitioninterestsChanges in accountspayable to selling 294 - 6,894 - shareholdersShare of loss ofequity-accounted 3,293 667 3,999 1,159 investeesShare-based 8,741 14,296 17,648 14,433 compensation planInterest accretionon acquisition 16,711 8,498 36,977 14,440 liabilityAccrued interest on 5,733 - 6,975 - loans and financingIncome on financial (3,617 ) - (5,656 ) - investmentsInterest on lease 687 387 1,419 782 liabilitiesProvision for legal 561 132 594 211 proceedingsProvision forpayroll taxes 3,158 6,518 9,046 6,518 (restricted stockunits)Foreign exchange 922 592 180 516 incomeGain on sale of - 2 - (3,286 )investmentOther financial (1,038 ) (1,202 ) (1,038 ) (1,202 )cost/revenue, net 97,238 68,885 186,936 127,216 Changes in assets and liabilitiesTrade receivables 39,179 7,792 18,467 (8,409 )Inventories (7,078 ) (2,067 ) (7,563 ) (2,031 )Recoverable taxes (2,610 ) (401 ) (4,304 ) (5,373 )Other assets (1,865 ) (9,778 ) (18,901 ) (7,826 )Trade payables (16,353 ) (27 ) (3,715 ) 659 Labor and social 21,164 6,580 15,622 11,354 obligationsTaxes andcontributions (219 ) (475 ) (2,779 ) (1,047 )payableAdvances from (38,654 ) (5,830 ) 10,826 14,998 customersOther liabilities (924 ) (53 ) (982 ) (354 )Cash generated from 89,878 64,626 193,607 129,187 operationsIncome taxes paid (6,477 ) (5,175 ) (64,020 ) (23,210 )Interest paid on (285 ) (220 ) (710 ) (220 )lease liabilitiesNet cash flows fromoperating 83,116 59,231 128,877 105,757 activities Investing activitiesAcquisition ofproperty and (1,665 ) (3,036 ) (4,042 ) (5,829 )equipmentPayment ofinvestments and - (4,200 ) (12,675 ) (4,200 )interests in otherentitiesAcquisition ofsubsidiaries, net - (16,137 ) - (16,137 )of cash acquiredAcquisition of (22,421 ) (6,887 ) (39,480 ) (18,379 )intangible assetsPurchase offinancial 60,774 (36,238 ) (122,402 ) (62,529 )investmentsLoans to related - - - (14,000 )partiesNet cash flows from(used in) investing 36,688 (66,498 ) (178,599 ) (121,074 )activities

Financing activities Capital increase - 12,611 - 13,829 Share issuance costs - - - (673 )Payment of lease liabilities (1,425 ) (565 ) (3,779 ) (1,080 )Payment of loans and financing - (14 ) - (14 )Payment to owners to acquire (1,001 ) - (1,001 ) - entity?s sharesLoans and financing (553 ) - 198,372 - Dividends paid by subsidiaries - - (3,696 ) - Net cash flows (used in) from (2,979 ) 12,032 189,896 12,062 financing activities Foreign exchange effects on cash (922 ) (592 ) (180 ) (516 )and cash equivalentsIncrease (decrease) in cash and 115,903 4,173 139,994 (3,771 )cash equivalents Cash and cash equivalents at the 72,991 4,357 48,900 12,301 beginning of the periodCash and cash equivalents at the 188,894 8,530 188,894 8,530 end of the periodIncrease (decrease) in cash and 115,903 4,173 139,994 (3,771 )cash equivalents

Arco Platform LimitedReconciliation of Non-GAAP Measures Three months period ended Six months period ended June 30, June 30,(In thousands of 2020 2019 2020 2019Brazilian reais)Adjusted EBITDA (unaudited) (unaudited) (unaudited) (unaudited)ReconciliationProfit for the 16,244 25,699 20,065 56,540 period(+) Income taxes 6,385 2,282 12,994 13,002 (+/-) Finance 17,960 (1,587 ) 46,912 (2,062 )result(+) Depreciation 31,373 9,103 60,048 16,343 and amortization(+) Share of lossof equity-accounted 3,293 667 3,999 1,159 investeesEBITDA 75,255 36,164 144,018 84,982 (+) Share-basedcompensation plan,restricted stockunits and provision 15,480 20,814 31,440 20,951 for payroll taxes(restricted stockunits)(+) M&A expenses 2,427 4,423 3,991 4,423 (+) Non-recurring 2,827 - 10,058 - expenses(+) Effects relatedto Covid-19 4,591 - 7,993 - pandemicAdjusted EBITDA 100,580 61,401 197,500 110,356 Net Revenue 234,864 137,566 496,443 254,621 EBITDA Margin 32.0 % 26.3 % 29.0 % 33.4 %Adjusted EBITDA 42.8 % 44.6 % 39.8 % 43.3 %Margin Three months period ended Six months period ended June 30, June 30,(In thousands of 2020 2019 2020 2019Brazilian reais)Adjusted Net Income (unaudited) (unaudited) (unaudited) (unaudited)ReconciliationProfit for the 16,244 25,699 20,065 56,540 period(+) Share-basedcompensation plan,restricted stockunits and provision 15,480 20,814 31,440 20,951 for payroll taxes(restricted stockunits)(+) Amortization ofintangible assets 18,252 3,085 36,235 6,065 from businesscombinations(+/-) Changes infair value of (913 ) - (859 ) 1,866 derivativeinstruments(+/-) Changes inaccounts payable to 294 - 6,894 - sellingshareholders(+) Share of lossof equity-accounted 3,293 667 3,999 1,159 investees(-) Tax effects (21,996 ) (10,732 ) (42,424 ) (13,724 )(+) Foreignexchange on cash 922 592 180 516 and cashequivalents(+) Interestexpenses (income), 16,478 6,357 36,496 13,881 net(+) M&A expenses 2,427 4,423 3,991 4,423 (+) Non-recurring 2,827 - 10,058 - expenses(+) Effects relatedto Covid-19 4,591 - 7,993 - pandemicAdjusted Net Income 57,899 50,905 114,068 91,677 Net Revenue 234,864 137,566 496,443 254,621 Adjusted Net Income 24.7 % 37.0 % 23.0 % 36.0 %Margin

Three months period ended Six months period ended June 30, June 30,(In thousands of 2020 2019 2020 2019Brazilian reais)Free Cash Flow (unaudited) (unaudited) (unaudited) (unaudited)ReconciliationCash generated from 89,878 64,626 193,607 129,187 operations(-) Income tax paid (6,477 ) (5,175 ) (64,020 ) (23,210 )(-) Interest paidon lease (285 ) (220 ) (710 ) (220 )liabilitiesCash Flow fromOperating 83,116 59,231 128,877 105,757 Activities(-) Acquisition ofproperty and (1,665 ) (3,036 ) (4,042 ) (5,829 )equipment(-) Acquisition of (22,421 ) (6,887 ) (39,480 ) (18,379 )intangible assetsFree Cash Flow 59,030 49,308 85,355 81,549 (+) Interest changein financial 3,617 - 5,656 - investments(+) M&A expenses 2,427 - 3,991 - (+) Others 2,827 - 14,408 - Adjusted Free Cash 67,901 49,308 109,410 81,549 Flow