Arco reports third quarter 2022 results
SÃo paulo--(business wire)--arco platform limited, or arco or company (nasdaq: arce), today reported financial and operating results for the third quarter ended september 30th, 2022. "we are concluding the 2022 cycle with 100% acv bookings recognition, leading to a 48% top line growth and an increase in profitability. initiatives put in place this year were a great first step in a long path towards improving efficiency and integration, reducing redundancy, and making arco a more agile company to better service our partner schools and generate greater value to our shareholders. in this context free cash flow is a key success metric for our management team, together with growth, which, with a now comprehensive portfolio that includes pedagogical, financial and software solutions, will be powered by a more mature cross-selling strategy." ari de sÁ neto, ceo and founder net revenue cash gross profit adj. ebitda 2022 cycle r$1,561m r$1,249m r$526m +47.7% yoy +49.0% yoy +58.3% yoy 3q22 9m22 net revenue cash gross profit net revenue cash gross profit r$253.9m r$206.7m r$1,096.1m r$858.3m adj. ebitda adj. net income adj. ebitda adj. net income r$37.2m r$(61.9)m r$294.5m r$(51.8)m note: please see adjusted ebitda reconciliation on page 17 and adjusted net income reconciliation on pages 17 and 18. cycle highlights arco concluded the 2022 cycle with net revenue of r$1,561 million (100% recognition of the 2022 acv bookings provided at the beginning of the year), a 47.7% increase year-over-year (or 33.8% organic top line growth yoy). net revenue for core solutions totaled r$1.237 million (+46.9% yoy), while net revenue for supplemental solutions totaled r$325 million (+50.7% yoy). cash gross profit was r$1,249 million (+49.0% yoy), leading to an 80.0% cash gross margin (versus 79.3% for the 2021 cycle). integration and efficiency initiatives contributed to an adjusted ebitda of r$526 million for the 2022 cycle, translating into a 230-basis point expansion in adjusted ebitda margin to 33.7%. 3q22 and 9m22 highlights net revenue for the third quarter was r$253.9 million, a 38.6% yoy increase, with core solutions totaling r$207.1 million (+38.1% yoy) and supplemental solutions totaling r$46.8 million (+40.5% yoy). for the first nine months of 2022, net revenue increased 42.1% yoy to r$1,096.1 million, with core solutions increasing 49.8% to r$920.6 million and supplemental solutions increasing 12.1% to r$175.5 million. excluding recent m&a1, net revenue increased 19.5% yoy in 3q22 and 28.6% yoy in 9m22 yoy. cash gross margin (gross margin excluding depreciation and amortization) was 81.4% in 3q22 (vs. 79.7% in 3q21). for the first nine months of 2022, cash gross margin was 78.3% (vs. 78.7% in 9m21). the positive results from our integration and efficiency initiatives were key to partially offset non-recurring costs resulting from late additional orders of pedagogical materials by our partner schools in the second quarter, as rush printing costs are on average 25% higher than regular printing costs and books were shipped using express tariffs and through more expensive shipping methods (air, dedicated trucks). in the first nine months of 2022, arco delivered r$33 million in cost savings, above the total amount expected in cost savings for the full year. higher selling expenses excluding depreciation and amortization at r$128.5 million in 3q22 (+42.1% yoy) and r$413.8 million (+47.7% yoy) in the first nine months of 2022 reflect (i) higher investments in commercial activities (identifying and developing leads and cross sell opportunities, intensifying pedagogical support to partner schools, resumption of in-person interactions and events, among others), which are key to fostering strong growth potential opportunities and capturing more market share over time in both core and supplemental segments, and (ii) higher inflation for the period (mainly impacting travel expenses). excluding recent m&a¹, selling expenses increased 35.5% in 3q22 and 41.3% in 9m22. as a result of the diligent cash collection process and its close relationship with partner schools, arco was able to improve the quality of its receivables, resulting in a consistent decrease in allowance for doubtful accounts. 1 recent m&as refer to businesses acquired in 2021 (me salva, eduqo, edupass, coc, dom bosco) and 2022 (pgs, mentes). allowance for doubtful accounts (r$m) 3q22 3q21 yoy 2q22 qoq 9m22 9m21 yoy allowance for doubtful accounts (1.9) 6.0 n/a 0.4 n/a (8.5) 16.5 n/a % of net revenue - 0.8% 3.3% -4.1 p.p. -0.1% 0.7p.p. -0.8% 2.1% -2.9 p.p. general and administrative expenses (g&a) continue to show the trend of a more integrated back-office strategy. in 3q22, g&a expenses excluding depreciation and amortization were r$70.5 million (-29.1% yoy) and represented 27.8% of net revenue (versus 54.2% in 3q21). excluding recent m&a¹, g&a expenses decreased to r$67.7 million (-31.7% yoy) in 3q22. share-based compensation plan expenses increased 47.4% yoy in 3q22 (excluding geekie’s sop2 in 2021), representing 8.5% of 3q22 revenue (vs. 8.0% of revenue in 3q21). for the first nine months of 2022, g&a expenses excluding depreciation and amortization were r$209.1 million (-4.6% yoy) and represented 19.1% of net revenue (versus 28.4% in 9m21). excluding the effects of recent m&a¹, g&a expenses decreased 10.7% yoy in 9m22 to r$194.2 million. share-based compensation plan expenses increased 24.3% yoy in 9m22, representing 3.7% of 9m22 revenue (vs. 4.3% of revenue in 9m21). from a cost savings perspective, arco surpassed its initial goal for the year, delivering g&a savings of r$59 million in 9m22, above the r$47 million goal for the full year. adjusted ebitda was r$37.2 million in 3q22 (+135.1% yoy), with an adjusted ebitda margin of 14.6% (versus 8.6% in 3q21). as for the first nine months of 2022, adjusted ebitda increased 42.6% yoy to r$294.5 million, and adjusted ebitda margin was 26.9% (versus 26.8% in 9m21). we expect the 2022 full year adjusted ebitda margin to be around the bottom of the 36.5% and 38.5% guidance range we provided at the beginning of the year. adjusted net income (loss) in 3q22 was r$(61.9) million, with an adjusted net margin of -24.4% (versus -11.9% in 3q21), impacted by higher finance expenses and depreciation and amortization. for the nine-month period ended september 30th, 2022, adjusted net income was r$(51.8) million, with an adjusted net margin of -4.7% (versus 7.0% in 9m21). a solid cash collection process in the quarter led to an important improvement in the quality of accounts receivable, with a reduction in days of sales outstanding (dso) to 98 days in 3q22 from 141 days in 2q22 and 104 days in 3q21, and a 2.1 p.p. reduction in delinquency levels to 4.0% in 3q22 from 5.6% in 2q22 and 6.1% in 3q21. days of sales outstanding sep. 30, 2022 sep. 30, 2021 yoy june 30, 2022 qoq trade receivables (r$m) 510.9 382.3 34% 687.6 -26% (-) allowance for doubtful accounts 77.4 77.1 0% 79.7 -3% trade receivables, net (r$m) 433.5 305.1 42% 607.8 -29% net revenue ltm pro-forma¹ 1,614.5 1,073.2 50% 1,568.9 3% adjusted dso 98 104 -6% 141 -30% 1) calculated as net revenue for the last twelve months added to the pro forma revenues from businesses acquired in the period to accurately reflect the company’s operations. arco’s corporate restructuring is ongoing. in october arco concluded the incorporation of geekie into cbe (companhia brasileira de educaÇÃo e sistemas de ensino, arco’s wholly-owned entity which incorporates acquired businesses), leading to estimated future annual income tax savings of approximately r$17million. future incorporations include pleno (2023), escola da inteligÊncia (2023) and sae digital (2024). as we keep incorporating other businesses into cbe, we expect to capture additional tax benefits and therefore further reduce our effective tax rate, currently at 8.7% in 9m22 (versus 17.3% in 9m21). 2 as part of geekie’s acquisition, arco acquired management future stake in geekie, resulting from the exercise of their existing sop. the fair value of sop was calculated using the same valuation method as the accounts payable to selling shareholders for the acquisition of the remaining interest, resulting in the final transaction price, which were updated quarterly for geekie’s most recent fair value, until was settled in june/2022. intangible assets - net balances (r$m) sep. 30, 2022 sep. 30, 2021 yoy june 30, 2022 qoq business combination 2,922.5 2,334.6 25% 2,949.9 -1% trademarks 479.6 437.3 10% 488.8 -2% customer relationships 246.4 261.4 -6% 255.8 -4% educational system 215.7 209.6 3% 224.6 -4% softwares 9.8 11.4 -14% 8.6 14% educational platform 4.7 5.7 -18% 4.4 7% others¹ 15.4 16.4 -6% 16.8 -8% goodwill 1,950.9 1,392.8 40% 1,950.9 0% operational 279.8 206.5 35% 288.1 -3% educational platform² 178.1 141.7 26% 200.1 -11% softwares 77.1 53.0 45% 77.1 0% copyrights 24.6 11.8 108% 10.8 127% customer relationships 0.1 0.1 -35% 0.1 -35% total 3,202.2 2,541.2 26% 3,238.0 -1% 1) non-compete agreements and rights on contracts. 2) includes content development in progress. amortization of intangible assets (r$m) 3q22 3q21 yoy 2q22 qoq 9m22 9m21 yoy business combination (79.2) (55.9) 42% (73.5) 8% (213.0) (165.9) 28% trademarks (8) (6.5) 20% (8.0) -3% (23.5) (19.3) 22% customer relationships (9.7) (8.6) 13% (9.4) 3% (28.2) (25.6) 10% educational system (8.9) (8.1) 9% (9.4) -6% (27.6) (24.2) 14% softwares (0.7) (0.9) -22% (0.7) 1% (2.1) (2.1) 0% educational platform (0.2) (0.3) -17% (0.2) 24% (0.6) (0.7) -7% others¹ (1.4) (1.3) 4% (1.5) -10% (4.3) (3.6) 18% goodwill (50.6) (30.1) 68% (44.3) 14% (126.8) (90.3) 40% operational (34.2) (22.8) 50% (29.1) 17% (92.8) (61.6) 51% educational platform² (26.8) (16.3) 64% (21.7) 24% (70.8) (45.3) 56% softwares (5.6) (4.5) 24% (5.4) 4% (16.2) (10.1) 60% copyrights (1.6) (2.0) -20% (1.8) -11% (5.3) (6.1) -13% customer relationships (0.2) - na (0.2) -10% (0.5) (0.1) 380% total (113.4) (78.7) 44% (102.6) 11% (305.9) (227.5) 34% 1) non-compete agreements and rights on contracts. 2) includes content development in progress. amortization of intangible assets (r$m) impacts p&l originates tax benefit amortization with tax benefit in 3q22² amortization tax benefit impact on net income business combination (58.8) 20.0 (38.8) trademarks yes yes² (2.0) 0.7 (1.3) customer relationships yes yes² (2.9) 1.0 (1.9) educational system yes yes² (3.3) 1.1 (2.2) educational platform yes yes² 0.5 (0.2) 0.4 others¹ yes yes² (0.5) 0.2 (0.4) goodwill no yes² (50.6) 17.2 (33.4) operational yes yes (34.2) 11.6 (22.6) total (93.0) 31.6 (61.4) 1) non-compete agreements and rights on contracts. 2) amortizations are tax deductible only after the incorporation of the acquired business. amortization of intangible assets from business combination that generate tax benefit – breakdown by type (r$m) businesses with current tax benefit undefined² 2022¹ 2023 2024 2025 2026+ trademarks 21 27 27 27 318 66 customer relationships 21 25 25 25 59 111 educational system 25 27 27 27 106 32 software license - - - - - 11 rights on contracts 1 1 1 1 3 1 others 2 2 2 1 1 10 goodwill 183 237 231 227 761 355 total 253 319 313 308 1.247 587 maximum tax benefit 86 108 106 105 424 199 1) considers the maximum tax benefit for full year 2022. in 3q22 we have benefited from r$17.6 million (totalizing r$44.6 million in 9m22). 2) businesses with future tax benefit (not yet incorporated). amortization of intangible assets from business combination that generate tax benefit – breakdown by solutions (r$m) businesses with current tax benefit undefined² 2022¹ 2023 2024 2025 2026+ geekie 7 42 42 42 279 - nave 9 9 9 9 11 - p2d3 57 89 89 89 364 - positivo, conquista, pes english 170 170 170 169 593 - other companies 10 10 4 - - - acquired companies not yet incorporated n/a n/a n/a n/a n/a 587 total 253 319 313 308 1.247 587 maximum tax benefit 86 108 106 105 424 199 1) considers the maximum tax benefit for full year 2022. in 3q22 we have benefited from r$17.6 million (totalizing r$44.6 in 9m22). 2) businesses with future tax benefit (not yet incorporated). 3) refer to coc and dom bosco solutions acquired in 2021. capex in 3q22 was r$30.9 million, representing 12.2% of net revenue (versus 21.4% of net revenue in 3q21). for 9m22, capex totaled r$121.1 million, or 11.1% of net revenue (versus 14.8% of net revenue in 9m21), and within the guidance range of 10.0% to 12.0% of net revenue for 2022 full year we provided in 3q21. capex (r$m) 3q22 3q21 yoy 2q22 qoq 9m22 9m21 yoy acquisition of intangible assets¹ 27.0 35.0 -23% 41.5 -35% 108.8 104.8 4% educational platform - content development 0.9 13.4 -93% 4.5 -80% 9.3 31.7 -71% educational platform - platforms & tech 15.2 8.5 79% 17.9 -15% 57.7 35.7 62% software 7.7 10.5 -27% 16.5 -54% 34.5 30.2 14% copyrights and others 3.2 2.5 29% 2.6 22% 7.3 7.2 2% acquisition of pp&e 3.9 4.0 -2% 1.7 128% 12.3 9.5 30% total¹ 30.9 39.0 -21% 43.2 -29% 121.1 114.3 6% 1) for 9m22 excludes r$14.2 million related to m&a payments (pgs’ and mentes’ acquisition, being r$5.5 million in 1q22 and r$8.7 million in 2q22) from the accounting capex of r$135.4 million. cash from operations for 3q22 and 9m22 were r$89.7 million (from r$74.1 million in 3q21) and r$384.1 million (from r$276.5 million in 9m21), respectively. free cash flow to firm3 in 3q22 increased 253.5% yoy to r$55.7 million, representing 22.0% of net revenues (vs. 8.6% of net revenue in 3q21). for the nine-month period ended september 30th, 2022, free cash flow to firm also presented a significant improvement, increasing 131.9% yoy to r$212.4 million, or 19.4% of net revenue (vs. 11.9% in 9m21). 3 please reference page 19 (reconciliation of free cash flow) for additional details. free cash flow to firm (managerial) 9m21 % of net revenue 9m22 % of net revenue yoy adjusted ebitda 206.5 26.8% 294.5 26.9% +43% (+/-) noncash adjustments (2.4) -0.3% (12.6) -1.2% +430% (+/-) working capital 72.5 9.4% 102.2 9.3% +41% (-) income taxes paid (70.7) -9.2% (50.6) -4.6% -28% (-) capex¹ (114.3) -14.8% (121.1) -11.1% +6% free cash flow to firm (managerial) 91.6 11.9% 212.4 19.4% +132% 1) excludes r$14.2 million related to m&a payments (pgs’ and mentes’ acquisition, being r$5.5 million in 1q22 and r$8.7 million in 2q22) from the accounting capex of r$135.4 million for 9m22 arco’s cash and cash equivalents plus financial investments position as of september 30th, 2022, was r$1,015 million, while financial debt and accounts payable to selling shareholders were r$2,797 million, leading to a net debt of r$1,782 million. as part of arco’s balance sheet management strategy, on august 5th, 2022, we announced the closing of a new debentures issuance amounting to r$1,200 million. net proceeds were partially used to prepay the debentures issued in august 2021, and the balance was used to strengthen arco’s cash position while extending its debt maturity profile. the new debentures mature on august 3rd, 2027, with principal to be amortized in three equal installments payable on august 3rd, 2025, august 3rd, 2026, and august 3rd, 2027, and bear interest at cdi +2.30% per annum, payable semi-annually on february 3rd and august 3rd. we had another strong commercial cycle for the 2023 school year, with a new student intake and upsell for both core and supplemental solutions indicating healthy organic growth yoy. retention rates remained consistent with historical trends and average price increase was 2-3 p.p. above inflation (considers expected inflation – ipca – of 5.88% for 2022 and 5.01% for 2023, as per brazilian central bank focus report as of november 18th, 2022). cross-sell initiatives were again a key driver to our go-to-market strategy, leading to a ~2 p.p. increase in the number of schools in our core base with at least one supplemental solution to ~17% (from ~15% in 2022 school year). we are providing a 2023 acv guidance for our pedagogical solutions of approximately r$1,930 million, which represents approximately 24% organic growth versus 2022 cycle net revenues of r$1,561 million. coc, one of our recently acquired core solutions had positive results for its first commercial cycle post acquisition, with a 17-point increase in the nps to 66 leading to a 15 p.p. improvement in retention rate for the 2023 school year to 95%. we were able to implement significant price increases for the 2023 cycle (~4 p.p. above expected inflation). finally, the year-over-year acv growth was over 30%. we are also providing an adjusted ebitda margin guidance range for 2023 fiscal year for our pedagogical solutions of 36.5% to 38.5%, in line with the range provided for 2022 fiscal year, and a capex as a percentage of revenue guidance range for 2023 fiscal year of 8.0% to 10.0%, below the 10.0% to 12.0% range provided for 2022 fiscal year. the expansion of our adjusted ebitda – capex as a percentage of revenue metric reflects arco’s integration initiatives and corporate restructuring in place as arco paves the way to become a portfolio hub of education solutions and a more efficient company, including (i) strategic sourcing, (ii) supply chain: printing costs & freight, (iii) it systems optimization, (iv) corporate reorganization, (v) supplemental synergies, (vi) sales & operations planning, (vii) increased cooperation among core units, and (viii) technology integration. arco initiated its efficiency and integration agenda in 2021, with the goal of improving our operations, internal processes, and capital allocation strategy, leading to enhanced cash generation and generating more value to our shareholders. accordingly, free cash flow became a key success metric to management, with three main drivers: (i) continuous margin expansion; (ii) return of capex to pre-covid levels as a percentage of revenue (at high single-digit rates), and (iii) normalization of working capital. finally, the brazilian antitrust agency (cade) approved the isaac acquisition on november 16th. the transaction is expected to close on january 2nd, 2023. conference call information arco will discuss its third quarter 2022 results today, december 1st, 2022, via a conference call at 5 p.m. eastern time (6 p.m. brasilia time). to access the call, please dial: +1 (412) 717-9627, +1 (844) 204-8942 or +55 (11) 4090-1621. for enhanced audio connection investors may connect through web phone (access code: 7636515). an audio replay of the call will be available through december 7th, 2022, by dialing +55 (11) 3193-1012 and entering access code 1608874#. a live and archived webcast of the call will be available on the investor relations section of the company’s website at https://investor.arcoplatform.com/. about arco platform limited (nasdaq: arce) arco has empowered hundreds of thousands of students to rewrite their futures through education. our data-driven learning methodology, proprietary adaptable curriculum, interactive hybrid content, and high-quality pedagogical services allow students to personalize their learning experience while enabling schools to thrive. 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 company’s 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 company’s 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 company’s 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-gaap financial measures including adjusted ebitda, adjusted ebitda margin, adjusted net income (loss), adjusted net income (loss) margin, taxable income reconciliation and free cash flow. forward-looking statements represent the company management’s 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 press release 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 company’s 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 company’s most recent forms 20-f and 6-k. these documents are available on the sec filings section of the investor relations section of the company’s 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 board—iasb, we use adjusted ebitda, adjusted ebitda margin, adjusted net income, adjusted net income margin and managerial free cash flow and which are non-gaap financial measures. we calculate adjusted ebitda as profit (loss) for the year (or period) plus/minus income taxes, plus/minus finance result, plus depreciation and amortization, plus/minus share of (profit) loss of equity-accounted investees, plus share-based compensation plan and restricted stock units, plus provision for payroll taxes (restricted stock units), plus/minus m&a related (gains) losses and 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 (loss) for the year, 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 accounts payable to selling shareholders (which refers to changes in fair value of contingent consideration and accounts payable to selling shareholders—finance costs), plus interest income (expenses), net (which refers to interest expenses related to accounts payable to selling shareholders from business combinations adjusted by fair value), plus share-based compensation plan, restricted stock units and related payroll taxes (restricted stock units), plus/minus non-cash adjustments related to derivatives and convertible notes, plus m&a expenses (expenses related to acquisitions, and legal services mainly due to international school arbitration), minus other changes to equity accounted on investees, plus non-recurring expenses, which are related to consulting expenses for sarbanes-oxley implementation, plus effects related to covid-19 pandemic, which includes the revision of the company’s estimated credit losses from its trade receivables based on expected increases in financial default and in unemployment rates in brazil for the year and plus/minus changes in current and deferred tax recognized in statements of income applied to all adjustments to net income (which refers to tax effects of changes in deferred tax assets and liabilities recognized in profit or loss corresponding to financial instruments from acquisition of interests, tax benefit from tax deductible goodwill, share-based compensation and amortization of intangible assets). for purposes of the calculation of adjusted net income for the year ended december 31, 2021, we have excluded the following adjustments that we applied to the calculation of adjusted net income for prior periods: (i) interest income (expenses) linked to a fixed rate (we will maintain the adjustment for interest income (expenses) that refers to adjustments by fair value); (ii) foreign exchange effects on cash and cash equivalents and (iii) share of loss of equity accounted investees and. these adjustments will not be applied to the calculation of adjusted net income going forward. we believe that eliminating these adjustments from our calculation of adjusted net income for the year ended december 31, 2021 and going forward does not impact our investors’ ability to assess our results of operations. we have not retroactively restated net adjusted income for the periods prior to 2021. we calculate managerial free cash flow as net cash flows from operating activities, less acquisition of property and equipment, less acquisition of intangible assets, less m&a-related payments. 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 understand that, although adjusted ebitda, adjusted ebitda margin, adjusted net income, adjusted net income margin and managerial 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 and managerial 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. arco platform limited interim condensed consolidated statements of financial position september 30, december 31, (in thousands of brazilian reais) 2022 2021 assets (unaudited) current assets cash and cash equivalents 314,015 211,143 financial investments 661,465 973,294 trade receivables 433,491 593,263 inventories 231,470 158,582 recoverable taxes 65,069 38,811 derivative financial instruments - 301 related parties 3,838 4,571 other assets 87,948 66,962 total current assets 1,797,296 2,046,927 non-current assets financial investments 39,057 40,762 derivative financial instruments - 560 related parties - 6,819 recoverable taxes 12,657 22,216 deferred income tax 367,340 321,223 other assets 73,916 57,534 investments and interests in other entities 121,787 126,873 property and equipment 64,558 73,885 right-of-use assets 25,229 35,960 intangible assets 3,202,214 3,257,360 total non-current assets 3,906,758 3,943,192 total assets 5,704,054 5,990,119 september 30, december 31, (in thousands of brazilian reais) 2022 2021 liabilities (unaudited) current liabilities trade payables 152,336 103,292 labor and social obligations 108,087 157,601 lease liabilities 20,688 20,122 loans and financing 58,772 228,448 derivative financial instruments 2,671 - taxes and contributions payable 5,384 7,953 income taxes payable 13,468 37,775 advances from customers 5,731 35,291 accounts payable to selling shareholders 879,418 799,553 other liabilities 5,188 3,176 total current liabilities 1,251,743 1,393,211 non-current liabilities labor and social obligations 1,179 661 lease liabilities 10,611 22,996 loans and financing 1,853,495 1,602,879 derivative financial instruments 63,947 223,561 provision for legal proceedings 2,821 1,398 accounts payable to selling shareholders 653,917 869,233 other liabilities 365 946 total non-current liabilities 2,586,335 2,721,674 equity share capital 11 11 capital reserve 2,103,699 2,203,857 treasury shares (114,701) (180,775) share-based compensation reserve 98,785 90,813 accumulated losses (221,818) (238,672) total equity 1,865,976 1,875,234 total liabilities and equity 5,704,054 5,990,119 arco platform limited interim condensed consolidated statements of income three-month period ended september 30, nine-month period ended september 30, (in thousands of brazilian reais, except earnings per share) 2022 2021 2022 2021 (unaudited) (unaudited) (unaudited) (unaudited) revenue 253,922 183,267 1,096,096 771,240 cost of sales (62,820) (44,766) (312,452) (199,994) gross profit 191,102 138,501 783,644 571,246 operating expenses: selling expenses (153,549) (114,982) (492,341) (353,367) general and administrative expenses (85,518) (109,867) (251,655) (246,161) other income, net (1,714) 413 17,356 2,913 operating profit (49,679) (85,935) 57,004 (25,369) finance income 105,629 20,353 479,244 42,407 finance costs (159,511) (124,947) (523,097) (209,239) finance result (53,882) (104,594) (43,853) (166,832) share of loss of equity-accounted investees (4,284) (5,575) (24,220) (8,326) (loss) profit before income taxes (107,845) (196,104) (11,069) (200,527) income taxes - income (expense) current (4,385) (1,246) (18,194) (37,143) deferred 39,766 53,290 46,117 85,402 total income taxes – income (expense) 35,381 52,044 27,923 48,259 net (loss) profit for the period (72,464) (144,060) 16,854 (152,268) basic earnings per share – in brazilian reais class a (1.30) (2,53) 0.30 (2.67) class b (1.30) (2,53) 0.30 (2.67) diluted earnings per share – in brazilian reais class a (1.30) (2,53) 0.30 (2.67) class b (1.30) (2,53) 0.30 (2.67) weighted-average shares used to compute net (loss) profit per share: basic 55,807 56,902 55,940 57,109 diluted 55,807 57,122 61,228 57,329 arco platform limited interim condensed consolidated statements of cash flows three-month period ended september 30, nine-month period ended september 30, (in thousands of brazilian reais) 2022 2021 2022 2021 (unaudited) (unaudited) (unaudited) (unaudited) operating activities loss before income taxes (107,845) (196,104) (11,069) (200,527) adjustments to reconcile loss before income taxes to cash from operations depreciation and amortization 55,617 42,605 195,700 136,080 inventory reserves 9,264 5,579 22,603 12,965 provision (reversal) for expected credit losses (1,919) 5,987 (8,522) 16,486 loss (profit) on sale/disposal of property and equipment and intangible 2 87 (190) 222 fair value change in financial derivative (58,589) - (154,562) - fair value adjustment in accounts payable to selling shareholders - 74,664 (26,320) 75,153 share of loss of equity-accounted investees 4,284 5,575 24,220 8,326 share-based compensation plan 17,706 41,760 26,752 57,315 accrued interest on loans and financing 72,549 11,705 178,093 20,610 interest accretion on accounts payable to selling shareholders 47,268 30,802 136,942 84,826 interest from financial investment (24,763) (6,421) (63,116) (14,916) interest on lease liabilities 1,001 1,204 3,288 3,361 provision for legal proceedings 1,317 248 1,423 37 provision for payroll taxes (restricted stock units) 3,871 1,259 788 2,686 foreign exchange (income) expenses, net 21,316 (1,945) (22,346) 2,147 gain on changes of interest of investment 46 - (17,712) - other financial expense (income), net (987) 1,792 (4,115) (706) 40,138 18,797 281,857 204,065 changes in assets and liabilities trade receivables 170,531 95,594 166,187 95,979 inventories (47,514) (6,372) (75,185) (18,339) recoverable taxes (16,421) (5,463) (7,973) (2,996) other assets 9,867 (12,776) (25,210) (21,231) trade payables (2,593) 21,809 49,044 29,034 labor and social obligations 324 1,069 26,069 11,325 taxes and contributions payable (1,671) (1,388) (2,649) (6,471) advances from customers (55,201) (36,559) (29,560) (16,574) other liabilities (7,713) (574) 1,515 1,730 cash from operations 89,747 74,137 384,095 276,522 income taxes paid (3,101) (19,167) (50,575) (70,684) interest paid on lease liabilities (1,250) (918) (3,596) (2,521) interest paid on accounts payable to selling shareholders (1,702) (1,031) (38,616) (5,254) interest paid on loans and financing (115,856) (5,461) (147,848) (13,406) payments for contingent consideration (146) - (70,687) (332) payments for stock options - - (75,578) - net cash flows from operating activities (32,308) 47,560 (2,805) 184,325 investing activities acquisition of property and equipment (3,925) (4,010) (12,323) (9,542) payment of investments and interests in other entities (14) (53,538) (32) (126,760) acquisition of subsidiaries, net of cash acquired - (15,839) - (31,056) payments of accounts payable to selling shareholders (1,270) (8,449) (1,270) (101,285) acquisition of intangible assets (26,976) (35,190) (123,029) (104,733) maturity of financial investments (264,243) 213,374 376,650 366,309 loans to related parties 1 - (4,811) - net cash flows from (used in) investing activities (296,427) 96,348 235,185 (7,067) financing activities purchase of treasury shares (1,523) (25,069) (53,139) (134,806) payment of lease liabilities (3,774) (4,245) (15,779) (10,599) payment of accounts payable to selling shareholders (10,884) (13) (132,154) (19,455) loans and financings - additions 1,189,058 891,116 1,189,058 887,673 loans and financings – payment (905,582) - (1,116,911) - net cash flows (used in) from financing activities 267,295 861,789 (128,925) 722,813 foreign exchange effects on cash and cash equivalents (298) 1,945 (583) (2,147) increase in cash and cash equivalents (61,738) 1,007,642 102,872 897,924 cash and cash equivalents at the beginning of the period 375,753 314,692 211,143 424,410 at the end of the period 314,015 1,322,334 314,015 1,322,334 increase in cash and cash equivalents (61,738) 1,007,642 102,872 897,924 arco platform limited reconciliation of non-gaap measures reconciliation of adjusted ebitda three-month period ended september 30, nine-month period ended september 30, (in thousands of brazilian reais) 2022 2021 2022 2021 (unaudited) (unaudited) (unaudited) (unaudited) net (loss) profit for the period (72,464) (144,060) 16,854 (152,268) (+/-) income taxes (35,381) (52,044) (27,923) (48,259) (+/-) finance result 53,882 104,594 43,853 166,832 (+) depreciation and amortization 55,617 42,605 195,700 136,080 (+) share of loss of equity-accounted investees 4,284 5,575 24,220 8,326 ebitda 5,938 (43,330) 252,704 110,711 (+) share-based compensation plan 21,596 42,993 40,745 64,041 (+) share-based compensation plan and restricted stock units 16,922 41,630 26,752 57,315 (+) provision for payroll taxes (restricted stock units) 4,674 1,363 13,993 6,726 (+) m&a expenses 1,490 15,299 10,676 29,055 (+/-) other changes to equity accounted investees3 46 - (17,712) - (+) non-recurring expenses 8,083 296 8,083 948 (+) effects related to covid-19 pandemic - 544 - 1,696 adjusted ebitda 37,153 15,802 294,496 206,451 revenue 253,922 183,267 1,096,096 771,240 ebitda margin 2.3% -23.6% 23.1% 14.4% adjusted ebitda margin 14.6% 8.6% 26.9% 26.8% reconciliation of adjusted net income three-month period ended september 30, (in thousands of brazilian reais) 2022 2021 pro forma1 2021 reported (unaudited) (unaudited) (unaudited) net loss for the period (72,464) (144,060) (144,060) (+) share-based compensation plan 21,596 42,993 42,993 (+) share-based compensation plan and restricted stock units 16,922 41,630 41,630 (+) provision for payroll taxes (restricted stock units) 4,674 1,363 1,363 (+) m&a expenses 1,490 15,299 14,353 (+/-) other changes to equity accounted investees3 46 - - (+) non-recurring expenses 8,083 296 1,242 (+) effects related to covid-19 pandemic - 544 544 (+/-) adjustments related to business combination 31,435 114,669 131,064 (+) amortization of intangible assets from business combinations 23,911 25,598 25,598 (+/-) changes in accounts payable to selling shareholders - 74,664 74,664 (+) interest expenses, net (adjusted by fair value) 7,524 14,407 14,407 (+) interest on acquisition of investments, net (linked to a fixed rate)1 - - 16,395 (+/-) non-cash adjustments related to derivative instruments and convertible notes (32,690) - - (+/-) foreign exchange on cash and cash equivalents1 - - (1,945) (+) share of loss of equity-accounted investees1 - - 5,575 (+/-) tax effects (19,441) (51,579) (61,738) adjusted net income (61,945) (21,838) (11,972) net revenue 253,922 183,267 183,267 adjusted net income margin -24.4% -11.9% -6.5% weighted average shares 55,807 56,902 56,902 adjusted eps (1.11) (0.38) (0.21) nine-month period ended september 30, (in thousands of brazilian reais) 2022 2021 pro forma1 2021 reported (unaudited) (unaudited) (unaudited) net (loss) profit for the period 16,854 (152,268) (152,268) (+) share-based compensation plan 40,745 64,041 64,041 (+) share-based compensation plan and restricted stock units 26,752 57,315 57,315 (+) provision for payroll taxes (restricted stock units) 13,993 6,726 6,726 (+) m&a expenses 10,676 29,055 22,203 (+/-) other changes to equity accounted investees3 (17,712) - - (+) non-recurring expenses 8,083 948 7,800 (+) effects related to covid-19 pandemic - 1,696 1,696 (+/-) adjustments related to business combination 89,472 204,482 235,329 (+) amortization of intangible assets from business combinations 81,510 75,350 75,350 (+/-) changes in accounts payable to selling shareholders (26,320) 75,153 75,153 (+) interest expenses, net (adjusted by fair value) 34,282 53,979 53,979 (+) interest on acquisition of investments, net (linked to a fixed rate)1 - - 30,847 (+/-) non-cash adjustments related to derivative instruments and convertible notes2 (157,910) - - (+/-) foreign exchange on cash and cash equivalents1 - - 2,147 (+) share of loss of equity-accounted investees1 - - 8,326 (+/-) tax effects (41,963) (93,634) (103,793) adjusted net income (51,755) 54,320 85,481 net revenue 1,096,096 771,240 771,240 adjusted net income margin -4.7% 7.0% 11.1% weighted average shares 55,940 57,109 57,109 adjusted eps (0.93) 0.95 1.50 1) adjusted net income for previous periods presented in this column excludes the following adjustments: (i) interest on acquisition of investments, net (linked to a fixed rate); (ii) foreign exchange on cash and cash equivalents; and (iii) share of loss of equity-accounted investees. such adjustments will be no longer consider in the net income reconciliation from 4q21 onwards and are presented for comparison purposes only in the “reported” column. 2) such adjustment was previously named “(+/−) changes in fair value of derivative instruments”. 3) refers to (gains) losses related to capital contribution from others on investees leading to an increase in equity of the investee. reconciliation of free cash flow three-month period ended september 30, nine-month period ended september 30, (in thousands of brazilian reais) 2022 2021 2022 2021 (unaudited) (unaudited) (unaudited) (unaudited) loss profit before income taxes (107,845) (196,104) (11,069) (200,527) (+/-) non-cash adjustments to reconcile adj. ebitda to cash from operations 147,983 214,901 292,926 404,592 (+/-) working capital (changes in assets and liabilities) 49,609 55,340 102,238 72,457 cash from operations 89,747 74,137 384,095 276,522 (-) income tax paid (3,101) (19,167) (50,575) (70,684) (-) capex (30,901) (39,200) (135,352) (114,275) free cash flow to firm 55,745 15,770 198,168 91,563 (-) interest paid on loans and financings & lease liabilities (117,106) (6,379) (151,444) (15,927) (-) interest paid on accounts payable to selling shareholders (1,702) (1,031) (38,616) (5,254) (-) payments for contingent consideration (146) - (70,687) (332) (-) payments of stock options¹ - - (75,578) - free cash flow (63,209) 8,360 (138,157) 70,050 (-) m&a classified as payments of stock options¹ - - 75,578 - (-) m&a classified as capex² - - 14,208 - (-) m&a classified as payments for contingent consideration³ 146 - 70,687 332 free cash flow (managerial) (63,063) 8,360 22,316 70,382 1) for 9m22 considers r$75 million related to m&a payment booked as stock option plan expense (geekie employees’ sop). 2) for 9m22, considers r$14.2 million related to m&a payments (pgs’ and mentes’ acquisition, being r$5.5 million in 1q22 and r$8.7 million in 2q22) from the accounting capex of r$135.4 million. 3) for 9m22, considers r$70 million of contingent consideration related to m&a payment (difference between amount in the ppa and the final transaction amount calculated by the earn-out multiple. three-month period ended september 30, nine-month period ended september 30, (in thousands of brazilian reais) 2022 2021 2022 2021 (unaudited) (unaudited) (unaudited) (unaudited) free cash flow to firm 55,745 15,770 198,168 91,563 (+) m&a classified as capex¹ - - 14,208 - free cash flow to firm (managerial) 55,745 15,770 212,376 91,563 1) for 9m22, considers r$14.2 million related to m&a payments (pgs’ and mentes’ acquisition, being r$5.5 million in 1q22 and r$8.7 million in 2q22) from the accounting capex of r$135.4 million. reconciliation of taxable income three months period ended september 30, nine months period ended september 30, (in thousands of brazilian reais) 2022 2021 2022 2021 (unaudited) (unaudited) (unaudited) (unaudited) loss before income taxes (107,845) (196,104) (11,069) (200,527) (+) share-based compensation plan, rsu and provision for payroll taxes¹ 26,215 44,929 7,401 53,965 (+) amortization of intangible assets from business combinations before incorporation¹ 7,477 725 21,323 10,485 (+/-) changes in accounts payable to selling shareholders¹ 17,751 92,173 41,355 131,584 (+/-) share of loss of equity‑accounted investees 4,284 (1,896) 24,220 (2,831) (+) net income from arco platform (cayman) (7,719) 2,971 (112,227) 16,771 (+) fiscal loss without deferred 3,487 4,168 15,333 8,935 (+/-) provisions booked in the period (14,706) (3,546) 29,413 9,781 (+) tax loss carryforward 131,869 77,673 168,892 169,039 (+) others 13,471 9,349 23,643 17,868 taxable income 74,284 30,442 208,284 215,070 current income tax under actual profit method (25,257) (10,350) (70,817) (73,123) % tax rate under actual profit method 34.0% 34.0% 34.0% 34.0% (+) effect of presumed profit benefit - - - 3,266 effective current income tax (25,257) (10,350) (70,817) (69,857) % effective tax rate 34.0% 34.0% 34.0% 32.5% (+) recognition of tax-deductible amortization of goodwill and added value² 17,692 10,867 44,560 32,802 (+/-) other additions (exclusions) 3,181 (1,763) 8,063 (88) effective current income tax accounted for goodwill benefit (4,385) (1,246) (18,194) (37,143) % effective tax rate accounting for goodwill benefit 5.9% 4.1% 8.7% 17.3% 1) temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base that will yield amounts that can be deducted in the future when determining taxable profit or loss. 2) added value refers to the fair value of intangible assets from business combinations.
