Afya Limited Announces First-Quarter 2022 Financial Results
May 23, 2022 at 17:31 PM EDT
High and Predictable Growth
Full Year 2022 Guidance Reaffirmed
Robust EPS Expansion
Afya Limited (Nasdaq: AFYA) (“Afya” or the “Company”), the leading medical education group and digital health services provider in Brazil, reported today financial and operating results for the three-month period ended March 31, 2022 (first quarter 2022). Financial results are expressed in Brazilian Reais and are presented in accordance with International Financial Reporting Standards (IFRS).
First Quarter 2022 Highlights
1. Message from Management
For us in Afya, these results indicate another great start for the year ahead. We are proud to present, once again, strong results, reaffirming the success and the resilience of Afya, along with high and predictable growth, and a record cash generation. It is important to highlight that our operational leverage and capital allocation discipline are resulting in a robust EPS expansion even considering the higher net debt and interest rate in the market.
We can finally see the pandemic losing its strength, pushing our students, employees, and partners to continue extracting the best from our campuses and digital health services.
One good example of that is our Continuing Education recovery in this quarter. After challenging periods, our practical classes are boosting again, as we’ve invested in an expansion plan that allowed us to more than double our campuses, launch new courses, and strengthen our intake process.
As presented last month at our Investors and ESG Day, our digital services strategy is more thriving than ever. Throughout development and new acquisitions, our digital ecosystem is being built with multiple offerings, unlocking new interactions and revenue streams that go beyond the physicians, achieving pharma players, hospitals, labs and drugstores chains through our platforms, scratching the surface of a total addressable market of R$28.4 billion.
M&A remains a key growth strategy for us and we will continue to evaluate opportunities to deploy capital into strategic acquisitions. In addition to Além da Medicina and Cardiopapers, we are proud to announce today another business combination, our third of 2022: Glic, a free diabetes care and management app solution for physicians and patients, that uses technology to improve diabetes education and daily routine practices, connecting users, devices and health providers. This business combination represents Afya´s entering into the physician-patient relationship pillar and further strengthens Afya's digital services strategy and ecosystem. Also, we are committed to continuing to expand our undergrad medical operation granting at least 200 medical seats per year through M&A deals, as we also have a pipeline of more than 4,500 seats.
In the undergrad scenario, we’ve successfully consolidated our leadership in medical school seats in Brazil. The expansion of our offering in the undergrad business continues to grow strong, and, already in 2022, we have increased 200 operational seats with four new Mais Médicos authorized units by MEC, with operations to start in the second semester, along with 28 new seats from the UniSL Ji-Paraná campus. So far, Afya has reached 2,759 approved seats, representing almost 20 thousand students at maturity. Considering all acquisitions and seats approved by MEC, we’ve added 1,307 seats since our IPO and we have become extremely efficient in operating medical schools and we continue to see opportunities in this area. All this effort means one thing: that our medical education business remains, and will continue to be, the cornerstone of our business in the short and middle terms.
Regarding equity operations in the quarter, one is very important to be mentioned, even though it has happened after the quarter: this month, Afya was notified of the closing of the transaction where Bertelsmann SE& Co. KGaA, or “Bertelsmann”, acquired 6,000,000 Class B common shares of Afya at the purchase price of US$26.90 per share, from Nicolau Carvalho Esteves, Rosângela de Oliveira Tavares Esteves and NRE Capital Ventures Ltd. As a result of the closing of the transaction, Bertelsmann and the Esteves family will beneficially own ~57.5% and ~33.1% voting interest, and ~31% and ~17.9% of the total shares, respectively, in Afya. As previously said, we are delighted that Bertelsmann, one of the world’s leading media companies with a significant footprint in the education sector, has evidenced its commitment to Afya’s long-term strategy through its evaluation of increasing its stake. We look forward to continuing to benefit from the vision and commitment of the Esteves family with their significant shareholding and active participation in our company.
Last, but not least, as also shown at our Investors and ESG Day, we’ve been making significant improvements in the environmental, social, and governance agenda, sequentially. Subjects related to climate change, clean energy powering, environmental governance, social impact on vulnerable areas, diversity agenda and corporate culture, human rights, relationship with the community, transparency and compliance, internal audit and cyber security were widely disclosed. I would like to invite all of you that could not participate in Afya’s Investors and ESG Day to visit our Investor Relations website to check not only the video of the event but also our 2021 Sustainability Report, which we are proud to announce the availability simultaneously with this earnings release.
High and predictable growth, strong guidance for the year, and segments ramp-up: this proves how are we evolving and empowering our mission to become the reference in medical education and digital services, encouraging students and physicians to transform their ambitions into rewarding lifelong experiences. We are proud of our business and of what we have achieved so far, and also excited for what comes next during this year.
2. Key Events in the Quarter:
3. Subsequent Events in the Quarter
4. Full Year 2022 Guidance Reaffirmed
The Company is reaffirming its previously issued guidance for FY22 including the successfully concluded acceptances of new medical students for the first semester, ensuring 100% occupancy in all of its medical schools.
The guidance for FY2022 is defined in the following table:
5. 1Q22 Overview
Afya is the only company offering educational and technological solutions to support physicians across every stage of the medical career, from undergraduate students in their medical school years through medical residency preparatory courses, medical specialization programs and continuing medical education. The Company also offers solutions to empower the physicians in their daily routine including supporting clinic decisions through mobile app subscription and delivering practice management tools through a Software as a Service (SaaS model).
The Company reports results for three distinct business units. The first, Undergrad – medical schools, other healthcare programs and ex-health degrees. Revenue is generated from the monthly tuition fees the Company charges students enrolled in the undergraduate programs. The second, Continuing Education – specialization programs and graduate courses for physicians. Revenue is also generated from the monthly tuition fees the Company charges students enrolled in the specialization and graduate courses. The third is Digital Services – digital services offered by the Company at every stage of the medical career. This business unit is divided into: Content & Technology for Medical Education, Clinical Decision Software, Practice Management Tools & Electronic Medical Records, Physician-Patient Relationship, Telemedicine and Digital Prescription for physicians and provides access and demand for the healthcare players. Revenue is generated from printed books and e-books, which is recognized at the point in time when control is transferred to the customer and subscription fees (SaaS model).
Key Revenue Drivers – Undergraduate Courses
Key Revenue Drivers – Continuing Education and Digital Services
Key Operational Drivers – Digital Services
Monthly Active Users (MaU) represents the number of unique individuals that consumed Digital Services content in each one of our products in the last 30 days of a specific period.
Monthly Active Unique Users (MUAU) represents the number of unique individuals, without overlap of users among products, in the last 30 days of a specific period. Since this concept is being implemented for the first time starting this quarter, historical metrics of MUAU could not be disclosed.
Total monthly active users reached approximately 260 thousand, 17.1% higher over the same period in the last year.
Undergrad’s and Continuing Education tuition revenues are related to the intake process and monthly tuition fees charged to students over the period thus the Company does not have significant fluctuations during the semester. Digital Services is comprised mostly by Medcel, Pebmed and iClinic revenues. While Pebmed and iClinic do not have significant fluctuation regarding seasonality, Medcel’s revenue is concentrated in the first and last quarter of the year, as a result of the enrollments of Medcel’s clients period. The majority of Medcel’s revenues are derived from printed books and e-books, which are recognized at the point in time when control is transferred to the customer. Consequently, the Digital Services segment generally has higher revenues and results of operations in the first and last quarters of the year compared to the second and third quarters of the year.
Adjusted Net Revenue for the first quarter of 2022 was R$567.7 million, an increase of 41.0% over the same period of the prior year, mainly due to the maturation of medical seats, an increase in the average ticket of Medical programs and consolidation of acquisitions of medical schools and digital services. Adjusted Net Revenue also includes an impact of R$ 1.4 million due to the remaining net temporary discounts in tuition fees granted by individual and collective legal proceedings and public civil proceedings related to COVID-19, that are expected to end during the second quarter.
Excluding acquisitions, Adjusted Net Revenue in the first quarter increased 10.6% YoY to R$445.3 million, mainly due to the expansion of Undergrad and the Continuing Education recovery, which ended the first quarter with a 23.7% increase in net revenue, mainly due to the interruption of the effects of the COVID-19 pandemic. The growth in Adjusted Net Revenue was partially offset by Digital Services revenue, which decreased 23.9%, due to a lower performance of Medcel in the 1Q22, which was caused by higher competition in the Residency Preparatory market.
Adjusted EBITDA for the three-month period ended March 31, 2022 increased 30.4% to R$ 270.8 million, up from R$ 207.7 million in the same period of the prior year, while the Adjusted EBITDA Margin decreased 390 basis points to 47.7%, mainly due to consolidations of acquisitions with lower EBITDA Margins and a decrease in Medcel Net Revenue, mainly due to higher competition in the Residency Preparatory market.
Excluding acquisitions, Adjusted EBITDA for the three months period ended March 31, 2022 increased 3.0% YoY to R$ 213.9 million from R$ 207.7 million, while the Adjusted EBITDA Margin decreased 360 basis points to 48.0%, mainly due to Medcel lower results.
Adjusted Net Income
Net Income for the first quarter of 2022 was R$134.9 million, an increase of 19.1% over the same period of the prior year. Net Income results were mainly affected by an increase of 141.4% in finance expenses, especially due to a higher debt position related to 9 business combinations and license acquisitions executed in the last 12 months, and a higher interest rate over the same period last year.
Our EPS reached R$1.42 per share, an increase of 22.4% year over year, reflecting the increase in our Net Income, and capital allocation discipline executing our three buyback programs.
Adjusted Net Income for the first quarter of 2022 was R$ 167.2 million, an increase of 4.5% over the same period of the prior year. The difference between Net Income and Adjusted Net Income in this quarter was reduced mainly related to decreases of 39.8% and 79.1% in non-recurring expenses and in share-based compensation, respectively.
Cash and Debt Position
For the three-month period ended March 31, 2022, Afya reported Adjusted Cash Flow from Operations of R$293.6 million, up from R$194.1 million in the same period of the previous year, an increase of 51.3% YoY, boosted by the solid operational result.
Operating Cash Conversion Ratio for the three-month period ended March 31, 2022, was 113.0%, compared with 102.5% in the same period of the previous year. This increase was mainly due to a decrease in the growth of the trade receivables comparing 1Q22 over FY2021, mainly affected by the end of the grace period of tuition renegotiation that occurred in 2020 and highly affected the 1Q21 and the enrollment renewals.
Cash and cash equivalents on March 31, 2022 were R$ 789.4 million, a decrease of 18.2% over the same period in 2021.
On March 31, 2022, net debt, excluding the effect of IFRS 16, totaled R$1,368.7 million, compared with net debt of R$230.0 million in the same period in 2021, mainly due to payments related to (a) 9 business combinations and license acquisitions executed in the last 12 months, totaling R$1,184.5 million; (b) shares repurchase program of R$237.7 million, executed in the last 12 months and (c) investments activities in properties, equipment and intangibles (excluding license acquisitions) totaling R$213.4 million in the last 12 months, that were partially offset by the R$730.3 million cash generation from March 31, 2021 through March 31, 2022. The following table shows more information regarding the cost of debt for the first quarter, considering loans and financing and accounts payable to selling shareholders.
Capital expenditures is consisting of the purchase of property and equipment and intangible assets, including expenditures mainly related to the expansion and maintenance of our campuses and headquarters including leasehold improvements, and the development of new solutions in the digital segment, among others.
For the first quarter of 2022, CAPEX went from R$32.9 million to R$76.8 million, an increase of 133.2% over the same period of the prior year, due to higher expenditures related to intangible assets, mainly explained by the R$24.4 million earn-out related to the 28 additional seats of Centro Universitário São Lucas, in Ji-Parana, that was approved in March, 2022.
ESG commitment is an important part of Afya’s strategy and permeates the Company’s core values. Afya has been advancing year after year on its core pillars and, since 2021, ESG metrics have been disclosed in the Company’s quarterly financial results.
In August 2021, Afya assumed a voluntary commitment to have at least 50% women in its management positions by 2030. In addition, Afya announced that it was certificated by Women on Board, an independent initiative whose purpose is to acknowledge, value and promote corporate environments in which women are part of the board of directors. The company voluntarily committed to continuing to have at least two women as board members.
On January 2022, Afya announced that it is one of 418 companies across 45 countries and regions to join the 2022 Bloomberg Gender-Equality Index (GEI), a modified market capitalization-weighted index that aims to track the performance of public companies committed to transparency in gender-data reporting. This reference index measures gender equality across five pillars: female leadership & talent pipeline, equal pay & gender pay parity, inclusive culture, anti-sexual harassment policies, and pro-women brand. Afya was included on this year’s index for scoring above a global threshold established by Bloomberg to reflect disclosure and the achievement or adoption of best-in-class statistics and policies.
Simultaneously with the quarterly results, we are also proud to announce Afya’s 2021 Sustainability Report.
We have consolidated our leadership position in Medical Education, and continued our inroads into the Digital Medical Services segment, which is consistent with our proposal to be the physician's partner in all stages of their academic training and professional journey. This strategy, which guides our business, as well as its unfolding, is detailed in the report, along with the results achieved from our operations. In it, we have also gathered information on our Management structure and ESG practices, in addition to the socio-environmental impacts we produce through our operations.
This material, as it has been since our 1st edition, was prepared based on the guidelines laid down by the Global Reporting Initiative (GRI), which is the international benchmark for the preparation of sustainability reports. To depict the impacts of our operations on society and the environment, we have complemented the information with elements from the approach determined by the International Integrated Reporting Council (IIRC), the institution that sets the parameters for Integrated Reports.
For the purpose of providing more information to those who wish to assess our performance as regards ESG practices, we have incorporated some indicators from the Sustainability Accounting Standards Board (SASB), an international organization that establishes parameters for a better analysis of these topics. We have also indicated, throughout the report, how our initiatives contribute to achieving the goals established by global movements led by the United Nations Organization (UNO): the Global Compact, to which we have been a signatory since 2020, and by the 2030 Agenda, which unfolds in the Sustainable Development Goals (SDGs).
The 2021 Sustainability Report can be found at: https://ir.afya.com.br/ >> Corporate Governance >> Sustainability.
6. Conference Call and Webcast Information
7. About Afya Limited (Nasdaq: AFYA)
Afya is the leading medical education group in Brazil based on number of medical school seats. It delivers an end-to-end physician-centric ecosystem that serves and empowers students to be lifelong medical learners, from the moment they enroll as medical students, through their medical residency preparation, graduate program, and continuing medical education activities. Afya also offers content and clinical decision applications for healthcare professionals through its products WhiteBook, Nursebook and Portal PEBMED. For more information, please visit www.afya.com.br.
8. Forward – Looking Statements
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. All statements other than statements of historical fact could be deemed forward looking, and include risks and uncertainties related to statements about our competition; our ability to attract, upsell and retain students; our ability to increase tuition prices and prep course fees; our ability to anticipate and meet the evolving needs of students and professors; our ability to source and successfully integrate acquisitions; general market, political, economic, and business conditions; and our financial targets such as revenue, share count and IFRS and non-IFRS financial measures including gross margin, operating margin, net income (loss) per diluted share, and free cash flow. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, such as statements about the potential impacts of the COVID-19 pandemic on our business operations, financial results and financial position and the Brazilian economy.
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. The achievement or success of the matters covered by such forward-looking statements involves known and unknown risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. Readers should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent management’s beliefs and assumptions only as of the date such statements are made. Further information on these and other factors that could affect the Company’s financial results are included in the filings made with the United States Securities and Exchange Commission (SEC) from time to time, including the section titled “Risk Factors” in the most recent Rule 434(b) prospectus. These documents are available on the SEC Filings section of the investor relations section of our website at: https://ir.afya.com.br/.
9. Non-GAAP Financial Measures
To supplement the Company's consolidated financial statements, which are prepared and presented in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board—IASB, Afya uses Adjusted EBITDA and Operating Cash Conversion Ratio information, which are non-GAAP financial measures, for the convenience of investors. A non-GAAP financial measure is generally defined as one that intends to measure financial performance but excludes or includes amounts that would not be equally adjusted in the most comparable GAAP measure.
Afya calculates Adjusted EBITDA as net income plus/minus net financial result plus income taxes expense plus depreciation and amortization plus interest received on late payments of monthly tuition fees, plus share-based compensation plus/minus share of income of associate plus/minus non-recurring expenses. The calculation of Adjusted Net Income is net income plus amortization of customer relationships and trademark, plus share-based compensation. We calculate Operating Cash Conversion Ratio as the cash flow from operations, adjusted with income taxes paid divided by Adjusted EBITDA plus/minus non-recurring expenses.
Management presents Adjusted EBITDA, because it believes these measures provide investors with a supplemental measure of financial performance of the core operations that facilitates period-to-period comparisons on a consistent basis. Afya also presents Operating Cash Conversion Ratio because it believes this measure provides investors with a measure of how efficiently the Company converts EBITDA into cash. The non-GAAP financial measures described in this prospectus are not a substitute for the IFRS measures of earnings. Additionally, calculations of Adjusted EBITDA and Operating Cash Conversion Ratio may be different from the calculations used by other companies, including competitors in the education services industry, and therefore, Afya’s measures may not be comparable to those of other companies.
10. Investor Relations Contact
Renata Couto, Head of Investor Relations
11. Financial Tables
Consolidated statements of income
For the three months period ended March 31, 2022 and 2021
(In thousands of Brazilian Reais, except earnings per share)
Consolidated balance sheets - For the three months period ended March 31, 2022 and December 31, 2021
(In thousands of Brazilian Reais)
Consolidated statements of cash flow - For the three months period ended March 31, 2022 and 2021
(In thousands of Brazilian Reais)
Reconciliation between Net Income and Adjusted EBITDA