Ânima reports high dropout rate, but says the worst is over

Ânima Educação reported a second quarter with significant operational challenges – with a high dropout rate in the ‘core’ segment (which includes in-person and hybrid courses) and especially in the digital segment, impacted by the new regulatory framework for distance learning (EAD). Nevertheless, the owner of Universidade São Judas Tadeu and Anhembi Morumbi managed to compensate for this volume loss with an increase in ticket prices – which grew in all three segments –, leading to an expansion of the top line.

The company's net revenue for the quarter grew 4.4% to R$ 1.05 billion, in line with consensus but a slowdown compared to the first quarter, when revenue had grown 7.7%. The growth came basically from tuition fee increases. The ‘core’ segment's ticket price grew 7.4%; the digital segment's, 4.2%; and Inspirali's (the medical course vertical), 6.5%.

Meanwhile, the student base fell 9.1% to 348,000, with an increase in dropout rates in the ‘core’ segment, which suffered a 4.4% drop in total students, and in the digital segment, which saw a 18.1% drop. On the other hand, Inspirali increased its base by 11%.

CEO Paula Harraca told Brazil Journal that the increase in dropout rates had to do with some operational challenges the company faced during the quarter, "but we detected them and have already taken action very quickly." "We made many simultaneous changes," said the CEO. "We anticipated all adjustments to the regulatory framework, with system adjustments, moderator teacher adjustments, and integration of hybrid operations.

All this happened at the same time in a short time frame, which created challenges. There were students, for example, who did not have an allocated teacher." "Those were mistakes, but we have already been able to review the systems and make adjustments. Now we are very solid and operating very well in the third quarter, which should have a dropout rate not very different from what we had in the same period last year."

Another factor that impacted dropout rates, according to the CEO, was the fact that the company had more freshmen in its base (a public that drops out more) and was growing in the hybrid modality, which has a higher dropout rate than in-person courses. In the digital segment, the impact also had to do with the new EAD regulatory framework, which prohibited health, engineering, and pedagogy courses from being offered in 100% digital format. Ânima did not have health courses in the digital segment, but was affected in engineering and pedagogy.

Regarding the digital segment, the CEO said that the company is focusing on repositioning its courses – seeking a quality differentiation to "not go into that red sea that the market has become." "We are positioning the product in a higher price range, and for that, we are making significant improvements to the product quality, so that students perceive more value," she said. "Price competition does not match our brands."

In the quarter, Ânima reported an adjusted EBITDA of R$ 383 million, slightly above consensus, and a net profit of R$ 29.1 million, slightly below. Cash generation was R$ 149 million, and leverage closed at 2.41x EBITDA, compared to 2.39x in the previous quarter. The result comes about a month after Ânima announced the acquisition of FMU – a move that caused the stock to plummet, with the market criticizing the valuation paid (3x the company's multiple on the stock exchange) and the increase in leverage.

When the incorporation is completed, leverage is expected to rise to 2.7x EBITDA. Since the announcement on July 14, Ânima's stock has accumulated a 27% drop, with the company valued at R$ 820 million on the stock exchange.

CFO Átila Simões said that the market overreacted. "The market is very sensitive and thinks we have to play the same tune over and over, the one of deleveraging. Anything that deviates from that, they don't understand well. They didn't understand the long term and our ability to unlock value and generate synergies. Now it's up to us to show that the market is wrong and that for every cent of leverage increase, we will return it with cash generation in the future."