IPO Update: Vasta Platform Pursues $306 Million U.S. IPO

Summary

• Vasta Platform has filed to raise $306 million in an IPO.
• The firm provides educational content and digital services to K-12 partner schools in Brazil.
• VSTA is growing revenue but is exposed to the COVID-19 pandemic in Brazil and the history of the Real's depreciation against the dollar.
• Looking for more stock ideas like this one? Get them exclusively at IPO Edge. Get started today »

Quick Take

Vasta Platform (NASDAQ:VSTA) has filed to raise $306 million from the sale of its Class A common stock in an IPO, according to an amended registration statement.

The company provides education content and administrative technology solutions to K-12 partner schools in Brazil.

Vasta has performed well but is exposed to the growing effects of the COVID-19 pandemic and, for U.S. investors, the continued depreciation of the Real against the dollar, so I'll watch this IPO from the sidelines.

Company & Technology

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

• Content & EdTech - core educational 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 (OTCQX:COGNY), the largest private educational company in Brazil.

Customer/User Acquisition

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

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, as the figures below indicate:

General & Administrative	Expenses vs. Revenue
Period	Percentage
Three Mos. Ended March 31, 2020	37.5%
2019	47.0%
2018	79.8%

Click to enlarge

Source: Company registration statement

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, as shown in the table below:

General & Administrative	Efficiency Rate
Period	Multiple
Three Mos. Ended March 31, 2020	0.3
2019	0.6

Click to enlarge

Source: Company registration statement

Market & Competition

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

• Arco Platform (ARCE)

Financial Performance

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 financial results derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Three Mos. Ended March 31, 2020	$75,500,000	12.5%
2019	$190,400,000	35.1%
2018	$140,904,000
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
Three Mos. Ended March 31, 2020	$43,300,000	31.1%
2019	$104,400,000	15.9%
2018	$90,079,000
Gross Margin
Period	Gross Margin
Three Mos. Ended March 31, 2020	57.35%
2019	54.83%
2018	63.93%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Three Mos. Ended March 31, 2020	$15,100,000	20.0%
2019	$15,900,000	8.4%
2018	$(21,052,000)	-14.9%
Net Income (Loss)
Period	Net Income (Loss)
Three Mos. Ended March 31, 2020	$5,300,000
2019	$(11,700,000)
2018	$(116,717,000)
Cash Flow From Operations
Period	Cash Flow From Operations
Three Mos. Ended March 31, 2020	$16,099,270
2019	$1,374,080
2018	$(17,108,550)
(Glossary Of Terms)

Click to enlarge

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.

IPO Details

Vasta intends to sell 18.6 million shares of Class A stock at a midpoint price of $16.50 per share for gross proceeds of approximately $306 million, not including the sale of customary underwriter options.

Class A stockholders will be entitled to one vote per share and Class B shares will provide parent firm Cogna with ten votes per share.

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

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $1.66 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 22.38%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds 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 available here.

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

Commentary

Vasta seeks to raise U.S. capital to pay part of the cost of separating from its parent firm Cogna.

The firm’s financials indicate a softening of topline revenue growth but improved gross profit, operating profit and a swing to net income.

Cash flow from operations also grew markedly in the most recent period.

General & Administrative expenses as a percentage of total revenue have dropped substantially as revenues have increased.

The market opportunity for providing a full range of technology solutions to K-12 schools in Brazil shows ‘significant headroom for growth’ potential in the future

As a comparable-based valuation to competitor Arco Platform, the IPO appears reasonably valued, as I suspect the firm’s recent revenue growth rate drop was due to COVID-19 pandemic effects and should be temporary in nature - perhaps lasting through the end of 2020.

One difficulty for U.S.-based investors is that the firm’s financial operations are denominated in the local currency, the Real.

Over the past five years, the Real has depreciated by 34.5%, reaching a new low of $0.19 per Real recently.

Since the company does not perform currency hedging, U.S. investors are fully exposed to any future drop in the value of the Real, which is a potential outcome given the last five-year period of performance.

While I like the company’s results and approach, its exposure to the continuing COVID-19 pandemic and, for U.S. investors, the currency depreciation potential, make the IPO riskier than I would prefer.

Expected IPO Pricing Date: July 30, 2020.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.