Vasta Platform Limited (VSTP) intends to raise $100 million in an IPO of its Class A common shares, according to an F-1 registration statement.

The firm provides private K-12 education and related administrative services to partner schools in Brazil.

VSTP has grown quickly but is likely feeling the full effects of the growing Covid19 pandemic in Brazil.

Sao Paulo, Brazil-based Vasta was founded to build two platforms to provide K-12 education services through partner schools:

  • Content & EdTech - Core educational content solutions
  • Digital Platform - Partner school administrative integration

Management is headed by Chairman Mr. Rodrigo Calvo Galindo, who was previously Administrative Associate Dean at the University of Cuiaba and has held a number of management positions at various educational institutions in the past 28 years.

Vasta is the result of the acquisition by parent company Cogna of Somos Sistemas along with certain carve-outs of various elements of the Somos business.

Vasta has received at least $1.2 billion from investors including Cogna Educacao, the largest private educational company in Brazil.

The company acquires customer partner school customers via direct sales and marketing efforts and provides both content and administrative technologies to schools, as shown in the chart below:

vastaplatform

The firm has restructured its go-to-market approach by increasing its consulting sales force, improving training, and launching new collections or educational content.

General & Administrative expenses as a percentage of total revenue have been dropping as revenues have increased.

The General & Administrative efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of General & Administrative spend, dropped to 0.3x in the most recent reporting period.

According to a 2018 market research report by LEK Consulting, private education in Brazil accounted for less than 20% of the overall market, compared to 30% in other emerging economies such as India.

Nearly a majority of private schools in Brazil use some form of learning systems 'that provide content and services such as teacher training and classroom management tools.’

The report stated that there is 'significant headroom for growth in Brazil's technology-enabled education services market.’

Also, the B2B approach, which Vasta takes, faces longer growth and sales cycles due to 'inadequate infrastructure in schools (Brazil has four times as many students per computer compared to the OECD average).'

The company faces varying competitors depending on category:

  • Publishers
  • Textbook providers
  • Online learning solutions

Vasta’s recent financial results can be summarized as follows:

  • Growing topline revenue, although at a decelerating rate
  • Increasing gross profit and variable gross margin
  • Increasing operating profit and margin
  • A swing to net income
  • Strong growth in cash flow from operations

Below are relevant recent financial results derived from the firm’s registration statement:

vastapl

Source: Company registration statement

As of March 31, 2020, Vasta had $17.8 million in cash and $608.7 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2020, was $49 million.

Vasta intends to raise $100 million in gross proceeds from an IPO of its Class A common shares, although the final amount may differ.

Class A common shareholders will be entitled to one vote per share and Class B shareholders will receive ten votes per share.

The S&P 500 Index no longer admits firms with multiple classes of shares into its index.

Management says it will use the net proceeds from the IPO as follows:

use approximately one half of the net proceeds from this offering to repay part of the debt owed to our parent company. As of March 31, 2020, we had outstanding debt owed to our parent company in the amount of R$1.6 billion, which matures on August 15, 2023 and bears average interest of CDI + 1.15% per annum...;

and use the other half of the net proceeds to fund expansion through acquisitions or investments in complementary businesses, products or technologies (including to pay the balance of the purchase price of MindMakers;

Management’s presentation of the company roadshow is not available.

Listed bookrunners of the IPO are Goldman Sachs, BofA Securities, Morgan Stanley, Itau BBA, UBS Investment Bank, and Bradesco BBI.

Commentary

Vasta is seeking U.S. funding as it is carved out of parent firm Cogna.

The company’s financials show the effect of the Covid19 pandemic on its most recent quarter of results, as revenue growth decelerated.

Management reported taking a number of steps in response to the pandemic in Brazil, which has only grown in effect since the F-1 filing.

I suspect the firm’s results will worsen in Q2 and Q3 2020 despite likely being temporary in nature. The question is how long ‘temporary’ will be.

General & Administrative expenses as a percentage of total revenue have dropped as revenues have increased; its General & Administrative efficiency rate has dropped in the most recent reporting quarter.

The market opportunity for providing technologies to partner schools is significant in Brazil and the firm’s approach to selling the ‘picks and shovels’ to the schools is an intriguing one.

Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 84.3% since their IPO. This is a top-tier performance for all major underwriters during the period.

Now that we are beyond the end of Q2, I look forward to seeing Q2’s financial results in a future filing to better understand the effects of the Covid19 pandemic on the firm’s operations.

Expected IPO Pricing Date: To be announced.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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