Arco reports second quarter 2022 results
SÃo paulo, brazil--(business wire)--arco platform limited, or arco or company (nasdaq: arce), today reported financial and operating results for the second quarter ended june 30, 2022. “the resumption of in-person classes in the brazilian private k-12 segment and consequent return of students who dropped-out during the pandemic led to great enthusiasm inside our partner schools. the significant increase in additional orders of our acv bookings impacted our revenue recognition seasonality, as part of the books typically delivered in q1 were delivered in april instead and, as a result, 2q22 had a stronger top line. looking at the broader picture, we have already recognized 83.2% of the acv bookings for the 2022 cycle and we are confident that we will recognize 100% by q3. our integration and efficiency agenda is progressing well, and initial results can be observed in all lines, from costs and expenses to working capital and capex. as for the commercial cycle for 2023, although still early - the strongest months for new contracts are typically september, october, and november -, our ability to attend and promote in-person events and visit our partner schools has proven to be an extremely powerful tool to retain our partner schools and convert leads developed in prior cycles.” ari de sÁ neto, ceo and founder 2q22 6m22 net revenue gross profit net revenue gross profit r$412.1m r$279.1m r$842.2m r$592.5m adj. ebitda¹ adj. net income² adj. ebitda¹ adj. net income² r$110.7m r$(23.2)m r$257.3m r$8.1m 1) please see adjusted ebitda reconciliation on page 17. 2) please see adjusted net income reconciliation on pages 17 and 18. financial highlights net revenue for the second quarter was r$412.1 million, a 61% year-over-year (yoy) increase, representing a 26.4% revenue recognition of 2022 acv bookings. core solutions totaled r$367.3 million (+83% yoy), while supplemental solutions were r$44.8 million (-20% yoy) as most of the revenue recognition for this segment takes place in q4 (cycle-to-date 82.7% of the supplemental solutions’ acv has already been recognized). for the first six months of 2022, net revenue increased 43% year-over-year to r$842.2 million, with core solutions increasing 54% to r$713.5 million and supplemental solutions increasing 4% to r$128.7 million. excluding recent m&a1, net revenue increased 47% yoy in 2q22 and 31% in 6m22 yoy. on a cycle-to-date (ctd) perspective, arco already recognized 83.2% of the 2022 acv and is confident that will be able to recognize 100% by q3. the positive effects of our integration and efficiency agenda were crucial to partially offset non-recurring increase in operating costs (content providing and freight) resulting from late orders, as rush printing costs are on average 25% higher than regular printing costs and books were shipped under express tariffs and through more expensive shipping methods (air, dedicated trucks). as a result, gross margin in 2q22 was 67.7% (vs 73.4% in 2q21). when excluding depreciation and amortization, cash gross margin was 75.8% for the same period (vs. 78.1% in 2q21). for the 6 months of 2022, gross margin was 70.4% (vs 73.6% in 6m21) and cash gross margin was 77.4% (vs 78.4% in 6m21). excluding those non-recurring impacts and recent m&a¹, cash gross margin for 6m22 would be 80.9%. higher selling expenses excluding depreciation and amortization at r$147.4 million in 2q22 (+54% yoy) and r$285.3 million (+50% yoy) in the first six months of 2022 reflect higher investments in commercial activities (identifying and developing leads and cross sell opportunities, intensifying pedagogical support to partner schools, resumption of in-person interactions and events, etc), which are crucial to foster the strong growth potential opportunities and to capture more market share over time in both core and supplemental segments, as well as higher inflation for the period (mainly impacting travel expenses). excluding recent m&a1, selling expenses increased 50% in 2q22 and 44% in 6m22. due to the diligent cash collection process and close relationship with partner schools, arco was able to improve the quality of its receivables, resulting in a consistent reduction of allowance for doubtful accounts (-106% yoy in 2q22, -163% yoy in 6m22). allowance for doubtful accounts (r$m) 2q22 2q21 yoy 1q22 qoq 6m22 6m21 yoy allowance for doubtful accounts 0.4 (6.6) -106% 6.2 -94% 6.6 (10.5) -163% % of net revenues 0.1% -2.6% 2.7 p.p. 1.4% -1.3 p.p. 0.8% -1.8% 2.6 p.p. general & administrative expenses (g&a) continue to show the results of a more integrated back-office strategy. in 2q22, g&a expenses excluding depreciation and amortization were r$66.0 million (+28% yoy) and represented 16% of net revenue (versus 20% in 2q21). excluding recent m&a¹ g&a expenses increased to r$62.9 million (+25% yoy) in 2q22. share-based compensation plan increased 3% in 2q22 yoy. for the first six months of 2022, g&a expenses excluding depreciation and amortization were r$138.6 million (+16% yoy) and represented 17% of net revenue (versus 20% in 6m21). excluding the effects of recent m&a¹, g&a expenses increased 7% yoy in 6m22 to r$126.5 million. 1 recent m&as refer to businesses acquired in 2021 (me salva, eduqo, edupass, coc, dom bosco) and 2022 (pgs, mentes). adjusted ebitda was r$110.7 million in 2q22 (+53% yoy), with an adjusted ebitda margin of 26.9% (versus 28.2% in 2q21). despite temporarily lower cash gross margin in 2q22 (-2.3 p.p. yoy), adjusted ebtida was positively impacted by g&a efficiencies (+4.1 p.p. yoy). as for the first six months of 2022, adjusted ebitda increased 35% yoy to r$257.3 million, and adjusted ebtida margin was 30.6% (versus 32.4% in 6m21). excluding the one-off impact from late orders, adjusted ebitda margin was 31.4% in 2q22 and 33.2% in 6m22. we expect the adjusted ebitda margin to be within the 36.5% and 38.5% guidance range by the end of 2022. arco presented an adjusted net income (loss) in 2q22 of r$(23.2) million and adjusted net margin of -5.6% (-14p.p. yoy), impacted by higher finance expenses and d&a. for the six-month period of 2022, adjusted net income was r$8.1 million, with an adjusted net margin of 1.0% (versus 13.0% in 6m21). from a cycle perspective, 48% revenue growth ctd (35% excluding m&a) is consistent with the robust volume of acv bookings announced for the 2022 commercial cycle. efficiency improvements also demonstrate the initial results of our integration strategy, delivering 52% adjusted ebitda growth and a 1p.p. adjusted ebitda margin growth versus 2021 ctd (2.7 p.p. growth excluding one-off impact of late orders). a solid cash collection process led to an important improvement in the quality of accounts receivable, with reduced days sales outstanding - dso (141 days in 2q22 from 212 days in 1q22) and delinquency levels (5.6% in 2q22 from 10.0% in 2q21). in 2q22, r$519 million of receivables were collected, 30% above the r$400 million estimated for the 2q22 at 1q22 earnings result. days of sales outstanding 2q22 2q21 yoy 1q22 qoq 6m22 6m21 yoy trade receivables (r$m) 687.6 477.7 44% 887.1 -22% 687.6 477.7 44% (-) allowance for doubtful accounts (79.7) (71.3) 12% (80.9) -1% (79.7) (71.3) 12% trade receivables, net (r$m) 607.8 406.4 50% 806.2 -25% 607.8 406.4 50% net revenue ltm pro-forma¹ 1,568.9 1,118.6 40% 1,387.3 13% 1,568.9 1,118.6 40% adjusted dso 141 133 7% 212 -33% 141 133 7% 1) calculated as net revenues for the last twelve months added to the pro forma revenues from businesses acquired in the period to accurately reflect the company’s operations. capex in 2q22 was r$43.2 million, a 9.6% increase yoy and 10.5% of net revenue (versus 15.4% in 2q21). for 6m22 capex totaled r$90.2 million, down 210 bps yoy to 10.7% of net revenue (versus 12.8% in 6m21), within the guidance range of 10% to 12% of revenues for 2022 full year. capex (r$m) 2q22 2q21 yoy 1q22 qoq 6m22 6m21 yoy acquisition of intangible assets¹ 41.5 36.8 13% 40.3 3% 81.8 69.6 18% educational platform - content development 4.5 1.3 246% 3.9 15% 8.4 18.3 -54% educational platform - platforms & tech 17.9 19.7 -9% 24.6 -27% 42.5 27.1 57% software 16.5 13.8 20% 10.3 60% 26.8 19.6 37% copyrights and others 2.6 2.1 24% 1.5 73% 4.1 4.7 -13% acquisition of pp&e 1.7 2.5 -32% 6.7 -75% 8.4 5.5 53% total¹ 43.2 39.4 10% 47.0 -8% 90.2 75.1 20% 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$52.0 million for 2q22 and r$104.5 million for 6m22. cash from operations for 2q22 and 6m22 highlights a better cash generation profile versus previous years. in 2q22 cash from operations increased to r$191.6 million, from r$113.2 million in 2q21, representing 173.1% of the 2q22 adjusted ebitda (+16.5 p.p. versus 156.6% of the 2q21 adjusted ebitda). adjusted free cash flow2 in 2q22 increased to r$89.5 million, from r$64.10 million in 2q21, representing 80.9% of the 2q22 adjusted ebitda (-7.8 p.p. versus 88.7% of the 2q21 adjusted ebitda). for the six-month period ended june 30, 2022, cash from operations increased to r$294.3 million, from r$202.4 million in 6m21, representing 114.4% of 6m22 adjusted ebitda (+8.2 p.p. versus 106.2% of 6m21 adjusted ebitda). even in a scenario of rising interest rates, adjusted free cash flow grew 38% yoy in 6m22, representing 33.2% of the 6m22 adjusted ebitda versus 32.5% in 6m21. arco’s corporate restructuring is ongoing. in may 2022 arco concluded the incorporation of coc and dom bosco 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$12 million. additionally, in june, arco completed the acquisition of the remaining 42.6% stake in geekie for r$223.9 million and its incorporation is in progress with conclusion expected for 4q22. future incorporations include sae digital (2023), pleno (2023) and escola da inteligÊncia (2023). as we keep incorporating other businesses into cbe, we expect to capture additional tax benefits and therefore further reduce our effective tax rate, currently at 10% in 6m22 (versus 19% in 6m21). intangible assets - net balances (r$m) 2q22 2q21 yoy 1q22 qoq 6m22 6m21 yoy business combination 2,949.9 2,374.1 24% 2,977.8 -1% 2,949.9 2,374.1 24% trademarks 488.8 443.0 10% 495.2 -1% 488.8 443.0 10% customer relationships 255.8 266.8 -4% 265.5 -4% 255.8 266.8 -4% educational system 224.6 216.4 4% 233.9 -4% 224.6 216.4 4% softwares 8.6 7.3 18% 10.3 -17% 8.6 7.3 18% educational platform 4.4 6.0 -27% 4.1 7% 4.4 6 -27% others¹ 16.8 15.9 6% 19.0 -11% 16.8 15.9 6% goodwill 1,950.9 1,418.7 38% 1,949.9 0% 1,950.9 1,418.7 38% operational 288.1 193.0 49% 276.1 4% 288.1 193.0 49% educational platform² 200.1 136.0 47% 198.3 1% 200.1 136.0 47% softwares 77.1 45.3 70% 66.8 15% 77.1 45.3 70% copyrights 10.8 11.7 -8% 11.0 -2% 10.8 11.7 -8% customer relationships 0.1 0.1 -100% 0.1 0% 0.1 0.1 -100% total 3,238.0 2,567.1 26% 3,253.9 0% 3,238.0 2,567.1 26% 1) non-compete agreements and rights on contracts. 2) includes content development in progress. amortization of intangible assets (r$m) 2q22 2q21 yoy 1q22 qoq 6m22 6m21 yoy business combination (73.5) (55.0) 34% (60.4) 22% (133.8) (110.0) 22% trademarks (8.0) (6.4) 25% (7.7) 4% (15.7) (12.8) 23% customer relationships (9.4) (8.5) 11% (9.2) 2% (18.5) (17.0) 9% educational system (9.4) (8.1) 16% (9.3) 1% (18.7) (16.1) 16% softwares (0.7) (0.6) 17% (0.7) 0% (1.4) (1.2) 17% educational platform (0.2) (0.2) 0% (0.2) 0% (0.5) (0.4) 25% others¹ (1.5) (1.2) 25% (1.4) 7% (2.8) (2.3) 22% goodwill (44.3) (30.1) 47% (31.9) 39% (76.2) (60.2) 27% operational (29.1) (20.6) 41% (29.5) -1% (58.5) (38.8) 51% educational platform² (21.7) (15.2) 42% (22.3) -3% (43.9) (29.0) 51% softwares (5.4) (3.4) 59% (5.2) 4% (10.6) (5.6) 89% copyrights (1.8) (2.1) -14% (1.9) -5% (3.7) (4.1) -11% customer relationships (0.2) (0.0) n.a. (0.1) 100% (0.3) (0.1) 220% total (102.6) (75.7) 36% (89.9) 14% (192.3) (148.8) 29% 1) non-compete agreements and rights on contracts. 2) includes content development in progress. 2 please see adjusted free cash flow reconciliation on page 18. impacts p&l originates tax benefit amortization with tax benefit in 2q22² amortization tax benefit impact on net income business combination (52.6) 17.9 (34.7) trademarks yes yes² (2.0) 0.7 (1.3) customer relationships yes yes² (2.9) 1.0 (1.9) educational system yes yes² (3.4) 1.1 (2.2) educational platform yes yes² 0.5 (0.2) 0.4 others¹ yes yes² (0.5) 0.2 (0.4) goodwill no yes² (44.3) 15.1 (29.3) operational yes yes (29.1) 9.9 (19.2) total (81.7) 27.8 (53.9) 1) non-compete agreements and rights on contracts. 2) amortizations are tax deductible only after the incorporation of the acquired business. amortization of intangible assets from business combination that generate tax benefit – breakdown by type (r$m) businesses with current tax benefit undefined² 2022¹ 2023 2024 2025 2026+ trademarks 19 20 20 20 277 128 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 177 202 196 192 520 514 total 246 277 271 266 965 808 maximum tax benefit 83 94 92 90 328 275 1) considers the maximum tax benefit for full year 2022. in 2q22 we have benefited from r$17.9 million, adding to r$29.9 million in 6m22. 2) businesses with future tax benefit (not yet incorporated). amortization of intangible assets from business combination that generate tax benefit – breakdown by solutions (r$m) businesses with current tax benefit undefined² 2022¹ 2023 2024 2025 2026+ nave 8 9 9 9 8 - p2d³ 57 89 89 89 364 - positivo, conquista, pes english 170 170 170 169 593 - other companies 10 10 4 0 0 808 total 246 277 271 266 965 808 maximum tax benefit 83 94 92 90 328 275 1) considers the maximum tax benefit for full year 2022. in 2q22 we have benefited from r$16.4 million, adding to r$28.4 million in 6m22. 2) businesses with future tax benefit (not yet incorporated). 3) refers to coc and dom bosco solutions acquired in 2021. arco’s cash and cash equivalents plus financial investments position as of june 30, 2022 was r$753.9 million, while debt and accounts payable to selling shareholders was r$2,528.4 million, leading to a net debt of r$1,774.5 million. as part of arco’s balance sheet management strategy, on august 5 we announced the closing of a debentures issuance amounting to r$1,200.0 million. net proceeds were partially used to prepay the debentures issued in august 2021 and the balance will strengthen arco’s cash position while extending the debt maturity profile. the debentures mature on august 3, 2027, with principal to be amortized in three equal installments payable on august 3, 2025, august 3, 2026, and august 3, 2027, and bear interest at cdi +2.30% per annum, payable semi-annually on february 3 and august 3. although early in the commercial cycle for the 2023 school year, the schools’ enthusiasm shows encouraging preliminary results, boosted by the resumption of in-person interactions and events. conference call information arco will discuss its second quarter 2022 results today, august 18, 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 august 24, 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-ifrs 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 adjusted 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 adjusted 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 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 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. arco platform limited interim condensed consolidated statements of financial position june 30, december 31, (in thousands of brazilian reais) 2022 2021 assets (unaudited) current assets cash and cash equivalents 375,753 211,143 financial investments 378,134 973,294 trade receivables 607,826 593,263 inventories 174,021 158,582 recoverable taxes 39,055 38,811 derivative financial assets - 301 related parties - 4,571 other assets 95,378 66,962 total current assets 1,670,167 2,046,927 non-current assets deferred income tax 327,574 321,223 recoverable taxes 22,216 22,216 financial investments 33,382 40,762 derivative financial assets - 560 related parties 3,722 6,819 other assets 69,835 57,534 investments and interests in other entities 126,116 126,873 property and equipment 67,932 73,885 right-of-use assets 29,160 35,960 intangible assets 3,237,964 3,257,360 total non-current assets 3,917,901 3,943,192 total assets 5,588,068 5,990,119 june 30, december 31, (in thousands of brazilian reais) 2022 2021 liabilities (unaudited) current liabilities trade payables 154,929 103,292 labor and social obligations 104,422 157,601 taxes and contributions payable 7,047 7,953 income taxes payable 12,404 37,775 advances from customers 60,932 35,291 lease liabilities 19,251 20,122 loans and financing 28,466 228,448 derivative financial liabilities 2,394 - accounts payable to selling shareholders 857,979 799,553 other liabilities 12,140 3,176 total current liabilities 1,259,964 1,393,211 non-current liabilities labor and social obligations 651 661 lease liabilities 15,210 22,996 loans and financing 1,621,957 1,602,879 derivative financial liabilities 123,513 223,561 provision for legal proceedings 1,292 1,398 accounts payable to selling shareholders 642,086 869,233 other liabilities 1,140 946 total non-current liabilities 2,405,849 2,721,674 equity share capital 11 11 capital reserve 2,222,912 2,203,857 treasury shares (232,391) (180,775) share-based compensation reserve 81,077 90,813 accumulated losses (149,354) (238,672) total equity 1,922,255 1,875,234 total liabilities and equity 5,588,068 5,990,119 arco platform limited interim condensed consolidated statements of income three-month period ended june 30, six-month period ended june 30, (in thousands of brazilian reais, except earnings per share) 2022 2021 2022 2021 (unaudited) (unaudited) (unaudited) (unaudited) revenue 412,137 256,301 842,174 587,973 cost of sales (133,054) (68,103) (249,632) (155,228) gross profit 279,083 188,198 592,542 432,745 operating expenses: selling expenses (174,439) (118,727) (338,792) (238,385) general and administrative expenses (80,037) (61,988) (166,137) (136,294) other income, net 1,676 975 19,070 2,500 operating profit 26,283 8,458 106,683 60,566 finance income 214,382 12,114 373,615 22,054 finance costs (238,485) (45,678) (363,586) (84,292) finance result (24,103) (33,564) 10,029 (62,238) share of loss of equity-accounted investees (14,294) (1,728) (19,936) (2,751) (loss) profit before income taxes (12,114) (26,834) 96,776 (4,423) income taxes - income (expense) current 8,038 (18,544) (13,809) (35,897) deferred (9,265) 25,359 6,351 32,112 total income taxes – income (expense) (1,227) 6,815 (7,458) (3,785) net (loss) profit for the period (13,341) (20,019) 89,318 (8,208) basic earnings per share – in brazilian reais class a (0.24) (0.35) 1.59 (0.14) class b (0.24) (0.35) 1.59 (0.14) diluted earnings per share – in brazilian reais class a (0.24) (0.35) (1.45) (0.14) class b (0.24) (0.35) 1.59 (0.14) weighted-average shares used to compute net (loss) profit per share: basic 55,917 57,020 56,008 57,214 diluted 55,917 57,020 61,180 57,214 arco platform limited interim condensed consolidated statements of cash flows three-month period ended june 30, six-month period ended june 30, (in thousands of brazilian reais) 2022 2021 2022 2021 (unaudited) (unaudited) (unaudited) (unaudited) operating activities profit (loss) before income taxes for the period (12,114) (26,834) 96,776 (4,423) adj. to reconcile profit (loss) before income taxes to cash from operations depreciation and amortization 74,302 45,423 140,083 93,475 inventory reserves 10,940 5,162 13,339 7,386 allowance for doubtful accounts (372) 6,610 (6,603) 10,499 loss on sale/disposal of property and equipment and intangible (114) 2 (192) 135 fair value change in financial derivatives (84,320) - (95,973) - changes in accounts payable to selling shareholders (33,348) 2,677 (26,320) 489 share of loss of equity-accounted investees 14,294 1,728 19,936 2,751 share-based compensation plan 2,851 6,189 9,046 15,555 accrued interest on loans and financing 56,774 5,216 105,544 8,905 interest accretion on acquisition liability 45,744 26,643 89,674 54,024 income from financial investments (17,793) (4,729) (38,353) (8,495) interest on lease liabilities 1,126 1,138 2,287 2,157 provision for legal proceedings 11 (857) 106 (211) provision for payroll taxes (restricted stock units) 177 1,948 (3,083) 1,427 foreign exchange (income) expenses, net 61,644 3,813 (43,662) 4,092 gain on changes of interest of investment (1,345) - (17,758) - other financial expense (income), net (2,205) (2,139) (3,128) (2,498) 116,252 71,990 241,719 185,268 changes in assets and liabilities trade receivables 202,582 109,460 (4,344) 385 inventories (29,786) (15,545) (27,671) (11,967) recoverable taxes 5,266 2,944 8,448 2,467 other assets (27,067) (4,524) (35,077) (8,455) trade payables 22,182 (4,893) 51,637 7,225 labor and social obligations 11,630 7,921 25,745 10,256 taxes and contributions payable 228 (2,279) (978) (5,083) advances from customers (109,529) (53,798) 25,641 19,985 other liabilities (196) 1,881 9,228 2,304 cash from operations 191,562 113,157 294,348 202,385 income taxes paid (4,792) (4,529) (47,474) (51,517) interest paid on lease liabilities (1,039) (743) (2,346) (1,603) interest paid on accounts payable to selling shareholders (36,536) (70) (36,914) (4,223) interest paid on loans and financing (16,412) (4,378) (31,992) (7,945) payments for contingent consideration (70,541) (332) (70,541) (332) payments of stock options (75,578) - (75,578) - net cash flows from operating activities (13,336) 103,105 29,503 136,765 investing activities acquisition of property and equipment (1,726) (2,534) (8,398) (5,532) payment of investments and interests in other entities - (48,195) (18) (73,222) acquisition of subsidiaries. net of cash acquired - - - (15,217) payments of accounts payable to selling shareholders - (92,836) - (92,836) acquisition of intangible assets (50,241) (36,842) (96,053) (69,543) maturity of financial investments 382,188 97,818 640,893 152,935 loans to related parties (4,812) - (4,812) - net cash flows from (used in) investing activities 325,409 (82,589) 531,612 (103,415) financing activities purchase of treasury shares (16,893) (56,711) (51,616) (109,737) payment of lease liabilities (5,712) (2,964) (12,005) (6,354) payment to owners to acquire entity’s shares (119,293) (949) (121,270) (19,442) loans and financings paid (5,469) (1,743) (211,329) (3,443) net cash flows used in financing activities (147,367) (62,367) (396,220) (138,976) foreign exchange effects on cash and cash equivalents 1,743 (3,813) (285) (4,092) (decrease) increase in cash and cash equivalents 166,449 (45,664) 164,610 (109,718) cash and cash equivalents at the beginning of the period 209,304 360,356 211,143 424,410 at the end of the period 375,753 314,692 375,753 314,692 (decrease) increase in cash and cash equivalents 166,449 (45,664) 164,610 (109,718) arco platform limited reconciliation of taxable income three-months period ended june 30, six-months period ended june 30, (in thousands of brazilian reais) 2022 2021 2022 2021 taxable income reconciliation (unaudited) (unaudited) (unaudited) (unaudited) (loss) profit before income taxes (12,114) (26,834) 96,776 (4,423) (+) share-based compensation plan, rsu and provision for payroll taxes¹ (19,763) 466 (18,814) 9,036 (+) amortization of intangible assets from business combinations before incorporation¹ 6,094 4,859 13,846 9,760 (+/-) changes in accounts payable to selling shareholders¹ (6,269) 21,765 23,604 39,411 (+/-) share of loss of equity‑accounted investees 14,294 (587) 19,936 (935) (+) net income from arco platform (cayman) 5,007 8,151 (104,508) 13,800 (+) fiscal loss without deferred 6,694 3,383 11,846 4,767 (+/-) provisions booked in the period 19,770 8,854 44,119 13,327 (+) tax loss carryforward 3,588 74,312 37,023 91,366 (+) others 5,094 4,756 10,172 8,519 taxable income 22,395 99,125 134,000 184,628 current income tax under actual profit method (7,614) (33,703) (45,560) (62,774) % tax rate under actual profit method 34.0% 34.0% 34.0% 34.0% (+) effect of presumed profit benefit - 2,774 - 3,266 effective current income tax (7,614) (30,929) (45,560) (59,508) % effective tax rate 34.0% 31.2% 34.0% 32.2% (+) recognition of tax-deductible amortization of goodwill and added value² 15,546 11,097 26,868 21,935 (+/-) other additions (exclusions) 106 1,287 4,882 1,675 effective current income tax accounted for goodwill benefit 8,038 (18,545) (13,810) (35,898) % effective tax rate accounting for goodwill benefit -35.9% 18.7% 10.3% 19.4% 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. arco platform limited reconciliation of non-gaap measures three-month period ended june 30, six-month period ended june 30, (in thousands of brazilian reais) 2022 2021 2022 2021 adjusted ebitda reconciliation (unaudited) (unaudited) (unaudited) (unaudited) net (loss) profit for the period (13,341) (20,019) 89,318 (8,208) (+/-) income taxes 1,227 (6,815) 7,458 3,785 (+/-) finance result 24,103 33,564 (10,029) 62,238 (+) depreciation and amortization 74,302 45,423 140,083 93,475 (+) share of loss of equity-accounted investees 14,294 1,728 19,936 2,751 ebitda 100,585 53,881 246,766 154,041 (+) share-based compensation plan 3,726 9,324 19,149 21,048 (+) share-based compensation plan and restricted stock units 1,810 6,319 9,830 15,685 (+) provision for payroll taxes (restricted stock units) 1,916 3,005 9,319 5,363 (+) m&a expenses 7,714 8,452 9,186 13,756 (-) other changes to equity accounted investees3 (1,345) - (17,758) - (+) non-recurring expenses - 84 - 652 (+) effects related to covid-19 pandemic - 523 - 1,152 adjusted ebitda 110,680 72,264 257,343 190,649 revenue 412,137 256,301 842,174 587,973 ebitda margin 24.4% 21.0% 29.3% 26.2% adjusted ebitda margin 26.9% 28.2% 30.6% 32.4% three-month period ended june 30, (in thousands of brazilian reais, except earnings per share) 2022 2021 pro forma1 2021 reported adjusted net income reconciliation (unaudited) (unaudited) (unaudited) net (loss) profit for the period (13,341) (20,019) (20,019) (+/-) adjustments related to business combination 8,134 44,665 54,210 (+) amortization of intangible assets from business combinations 29,142 24,890 24,890 (+/-) changes in accounts payable to selling shareholders (33,348) 2,677 2,677 (+) interest expenses, net (adjusted by fair value) 12,340 17,098 17,098 (+) interest on acquisition of investments, net (linked to a fixed rate)1 - - 9,545 (+) share-based compensation plan 3,726 9,324 9,324 (+) share-based compensation plan and restricted stock units 1,810 6,319 6,319 (+) provision for payroll taxes (restricted stock units) 1,916 3,005 3,005 (+/-) non-cash adjustments related to derivative instruments and convertible notes (19,571) - - (+) m&a expenses 7,714 8,452 3,853 (-) other changes to equity accounted investees3 (1,345) - - (+) non-recurring expenses - 84 4,683 (+) effects related to covid-19 pandemic - 523 523 (+/-) foreign exchange on cash and cash equivalents1 - - 3,813 (+) share of loss of equity-accounted investees1 - - 1,728 (+/-) tax effects (8,500) (21,733) (21,733) adjusted net income (23,183) 21,296 36,382 net revenue 412,137 256,301 256,301 adjusted net income margin -5.6% 8.3% 14.2% weighted-average shares 55,917 57,020 57,020 adjusted eps (0.41) 0.37 0.64 six-month period ended june 30, (in thousands of brazilian reais) 2022 2021 pro forma1 2021 reported adjusted net income reconciliation (unaudited) (unaudited) (unaudited) net (loss) profit for the period 89,318 (8,208) (8,208) (+/-) adjustments related to business combination 58,037 89,813 104,265 (+) amortization of intangible assets from business combinations 57,599 49,752 49,752 (+/-) changes in accounts payable to selling shareholders (26,320) 489 489 (+) interest expenses, net (adjusted by fair value) 26,758 39,572 39,572 (+) interest on acquisition of investments, net (linked to a fixed rate)1 - - 14,452 (+) share-based compensation plan 19,149 21,048 21,048 (+) share-based compensation plan and restricted stock units 9,830 15,685 15,685 (+) provision for payroll taxes (restricted stock units) 9,319 5,363 5,363 (+/-) non-cash adjustments related to derivative instruments and convertible notes2 (125,220) - - (+) m&a expenses 9,186 13,756 7,850 (-) other changes to equity accounted investees3 (17,758) - - (+) non-recurring expenses - 652 6,558 (+) effects related to covid-19 pandemic - 1,152 1,152 (+/-) foreign exchange on cash and cash equivalents1 - - 4,092 (+) share of loss of equity-accounted investees1 - - 2,751 (+/-) tax effects (24,640) (42,055) (42,055) adjusted net income 8,072 76,158 97,453 net revenue 842,174 587,973 587,973 adjusted net income margin 1.0% 13.0% 16.6% weighted-average shares 56,008 57,214 57,214 adjusted eps 0.14 1.33 1.70 1) adj. 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. three-month period ended june 30, six-month period ended june 30, (in thousands of brazilian reais) 2022 2021 2022 2021 adjusted free cash flow reconciliation (unaudited) (unaudited) (unaudited) (unaudited) (loss) profit before income taxes (12,114) (26,834) 96,776 (4,423) (+/-) non-cash adjustments 128,366 98,824 144,943 189,691 (+/-) working capital (changes in assets and liabilities) 75,310 41,167 52,629 17,117 cash from operations 191,562 113,157 294,348 202,385 (-) income tax paid (4,792) (4,529) (47,474) (51,517) (-) interest paid on loans and financings & lease liabilities (17,451) (5,121) (34,338) (9,548) (-) interest paid on accounts payable to selling shareholders (36,536) (70) (36,914) (4,223) (-) payments for contingent consideration (70,541) (332) (70,541) (332) (-) payments of stock options¹ (75,578) - (75,578) - net cash flows from operating activities (13,336) 103,105 29,503 136,765 (-) capex (51,967) (39,376) (104,451) (75,075) free cash flow (65,303) 63,729 (74,948) 61,690 (-) m&a classified as payments of stock options¹ 75,578 - 75,578 - (-) m&a classified as capex² 8,701 - 14,208 - (-) m&a classified as payments for contingent consideration³ 70,541 332 70,541 332 adjusted free cash flow 89,517 64,061 85,379 62,022 1) related to m&a payment (geekie employees’ sop). 2) related to m&a payments (pgs’ and mentes’ acquisition, being r$5.5 million in 1q22 and r$8.7 million in 2q22). 3) related to m&a payment (difference between the amount in ppa and the final transaction amount calculated by the earn-out multiple, related to geekie’s acquisition).
