Competitive Advantages

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Our Competitive Advantages

We believe to be well positioned to compete in the Brazilian higher education market-mainly in the Northeast and North Regions-in view of the following factors:

Unique positioning in areas with a great potential for growth

We believe we are the largest private higher education organization in number of units in the Northeast region’s market, with 43 units on December 31, 2017. We also have a strong presence in the country’s North region, where we have another 14 units. We believe we are the company with the most widespread presence in the sector: we have units in every state in the country. We are also the post-secondary institution with the highest number of places approved by the Ministry of Education (MEC), totaling approximately 536,200 annual places on December 31, 2017.

The Northeast and North regions are the fastest-growing regions in terms of the number of students enrolled in undergraduate courses in Brazil. In accordance with the data provided by the MEC, between 2011 and 2016, the number of undergraduate students in Brazil grew at a compound rate of 3.6% p.a., as follows: 5.1% p.a. in the Northeast and 4.7% p.a. in the North, substantially higher than the 3.0% p.a., 3.4% p.a. and 3.0% p.a. recorded in the Southeast, the Midwest and the South, respectively.

Value creation, financial performance and growth

Over the last few years, we have implemented several efforts to improve the operation of our units, as well as their results and profitability. For example, in 2014, we launched a Shared Service Center (CSC) that has relevant idle capacity, enabling our student base to grow at very low marginal costs. In 2016, we launched our new distance learning operations center in Recife. We believe this center will allow us to absorb all the projected future needs of our distance learning operations.

As a result of these efforts, our total student base grew substantially, at a compound annual growth rate of 9.2% between December 31, 2015 and December 31, 2017, despite the challenging period in the Brazilian economy, during which the GDP fell by 3.8% and 3.6% in 2015 and 2016, respectively, and grew by 1% in 2017. Our average monthly ticket also had sustainable growth in the period, increasing by 13.4% between the fourth quarter of the year ended December 31, 2015 and the fourth quarter of the year ended December 31, 2017, while the IPC-A climbed 13.4% between December 2015 and December 2017.

Higher scalability, replicability and standardization of operations

We believe we are able to expand our operations through acquisitions, generating important efficiency gains thanks to our scalable business model that allows us to absorb a higher number of units and students at a low additional cost. Since our Initial Public Offering of Shares, in December 2013, we have acquired and integrated more than 20 institutions. On average, all the systems of these acquired companies were integrated into ours and their syllabi were adapted to our model six months after the acquisition. Our operational efficiency, gained through the implementation of innovative control instruments in the industry, such as efficient classroom management and standardization of processes and educational plans, with intensive use of technology, allows us to add new units, courses and students quickly and efficiently without compromising profitability. Our unified educational project allows us to control the quality and consistency of our programs more efficiently, disseminate the best educational practices and provide better and consistent educational content throughout our educational network. Our administrative activities are concentrated in our Shared Service Center, which allows us to implement our growth plan efficiently, generating gains in scale. This model has helped us improve the quality and efficiency of our internal processes, supporting growth at low additional costs. We believe this structure enables us to expand our operations organically and through acquisitions, while our scalable business model and standardized processes generate important efficiency gains. In addition to the inorganic growth opportunities, we believe we are operationally prepared for the organic growth of our on-campus units and our distance learning platforms. We also have 45 new units in the accreditation process and 400 new centers in the application process.

Differentiated value proposition for students

We believe potential students choose their higher education institution based on a combination of five main factors::

(i) Prime location and easy access for students: Main factor determining potential students’ choice of an educational institution, our units are strategically located in major capital cities and metropolitan regions in the Northeast, North and Southeast Regions, usually close to our target audience’s workplaces or homes, as well as in easily accessible areas with local infrastructure convenient for students. This characteristic increased the higher perceived value of both on-campus and distance learning courses among our target audience, as students enrolled in distance learning courses must periodically go to the units. We believe that combination of factors has a significant impact on the value perceived by students. Since location is a key factor in the success of an educational company, we will evaluate options that enable us to secure the best properties in the cities where we operate and, at the same time, obtain appropriate returns. We also consider our units a decisive factor in the growth and expansion of our distance learning segment since they also serve as educational centers for this service. Indeed, even distance learning students must go to educational units regularly;

(ii) Brands with strong appeal in their respective regions of operation: we have strong regional brands that are highly recognized by the target audience and the job market for their educational excellence. Grupo Ser brands are considered Top of Mind in eight cities in the Northeast, North and Southeast regions. Our "Maurício de Nassau" brand has a high recall rate in the higher education industry in the Northeast and North Regions. In fact, it is the most mentioned higher education brand in Pernambuco State and one of the most recognized brands in the other northeastern states, in accordance with surveys conducted by the Company, a result that is associated with quality education. UNINASSAU was the top-of-mind brand of Higher Education Institution in 2017, according to Jornal do Commercio’s Brand Recall Award; in addition, it has high brand recall rates in João Pessoa, Maceió, Natal, Fortaleza and Salvador. This brand positioning strengthens the demand for our courses, contributes to our marketing efforts and impacts our ability to attract and retain good professionals in our areas of operation. In 2016, Universidade da Amazônia ("UNAMA") was recognized as the Best Private University in Brazil’s North Region by Guia do Estudante, a publication of Editora Abril that has been evaluating undergraduate courses and Brazilian universities for 27 years and is one of the most respected publications dedicated to evaluating Brazil’s post-secondary education sector. In addition to the existing brands, in 2016, we launched UNIVERITAS, a brand that will be focused on the Southeast, Midwest and South regions. We made significant investments in marketing focused on the dissemination and recognition of this brand. Based on the performance of the first unit, launched in Rio de Janeiro, we believe the UNIVERITAS brand will be extremely well-accepted by the market, complementing our brand portfolio;

(iii) Physical and technological infrastructure offered by the institutions: renovated buildings with classrooms equipped with air-conditioning, wi-fi and audiovisual equipment, in addition to modern laboratories. For example, our digital platform for student and faculty academic activities allows them to monitor their academic life through a portal with access to several information, such as the electronic class register, collegiate tests, financial agreements with us, online applications, enrollment in a new semester, among others; and

(iv) Employability: thanks to our recognized excellence, we have high employability rates, further encouraged by initiatives such as an extensive career portal and partnerships with more than 3,000 companies.

Quality and cost-effectiveness

The structure we developed has allowed us to offer quality education to our students at a more competitive price than our main competitors. Our academic programs, undergraduate and graduate educational services, as well as our faculty, students and facilities have always been consistently evaluated positively by the MEC and by our students. Virtually all our institutions have an IGC (Índice Geral de Cursos, or General Index of Courses) equal to or greater than 3.

We believe this performance reflects our ongoing efforts to improve the educational quality and infrastructure of our different programs. We have an academic audit department that standardizes and monitors our academic activities, enabling us to maintain high quality and consistency in all our processes. We believe our high educational standards-over 60% of our professors have a Master’s degree or a PhD-also attract potential students.

Our tuition fees are carefully set based on the price charged by our direct competitors at a level that is appropriate for our value proposition and ensures healthy return levels. This is possible because, by improving academic development, faculty training and administrative and management functions in our head office, we are able to reduce costs related to the administrative and management structure at each unit. This allows us to charge affordable tuition fees and continue providing quality educational services for our students.

Professional management and well-established corporate governance

We have been focusing on adopting a business philosophy in our operations since inception. Our Management team is comprised of professional executives with extensive experience in the educational industry, particularly in higher education, with a business vision based on clearly defined targets, considerable experience in opening new units, obtaining authorization for new academic programs and acquiring other companies. This speeds up the decision-making process. Most of our senior executives have over 10 years’ experience on average in the industry and have been at the Company for over six years. In addition, we believe strategic partnerships, which bring knowledge and experience complementary to our own, add great value to our business. In addition to the Remuneration and Finance Committees, Ser Educacional introduced a Statutory Audit Committee, composed of three members, in 2015 after the proposal submitted spontaneously by the Company’s Management was approved. As part of Management’s plan, the Statutory Audit Committee was reinstated for fiscal years 2016, 2017 and 2018.

Our Strategy

Our goal is to maintain our leadership position in the Post-Secondary Education market in the North and Northeast regions and also become even more relevant in the other regions of the country. In order to achieve this, we have developed a growth strategy based on three main pillars: (i) organic growth in the on-campus segment through the creation of new undergraduate programs in existing units and the accreditation of new units; (ii) organic growth in the distance learning segment, which is still underexplored and combines great growth potential and higher margins; and (iii) growth through select acquisitions that complement our operating platform in two fronts: (a) acquisition of institutions with consolidated regional recognition; and (b) acquisition of accreditations, i.e. institutions or white label entities (onerous assignment of accreditation for the operation of courses maintained by a given institution, without the need to acquire assets or the company) that have satisfactory quality concepts from the MEC, enabling the Group to grow faster in certain cities.

Organic growth in the North, Northeast and Southeast regions

a) Investment and creation of new undergraduate courses and increase in the number of places in existing units

Our activities have expanded strongly over the last five years, with a focus on organic growth. In 2009, we received approval from the MEC for 21,300 annual places compared with 536,200 annual places on December 31, 2017, an annual average growth rate of 49.7%.

We will seek to expand our smaller units in order to increase the number of available places, enabling organic growth while requiring low investments and presenting low risk. In addition, the University Centers we operate have greater autonomy to create new courses and increase the number of places, potentially enabling the acceleration of our organic growth.

We will continue to create new courses in our units that offer growth opportunities, focusing on the most profitable and highest demand courses, such as those in the health (Medicine, Dentistry, Psychology, among others) and engineering areas, which have a higher average monthly ticket and lower dropout rates.

b) Accreditation of new units

The accreditation process of new on-campus units by the MEC takes an average of 36 months. Based on Ser Educacional’s market intelligence, as well as Management’s experience of opening new campuses, the Company has identified opportunities for inaugurating new units in locations where demand has not yet been met by the existing local educational institutions. These new units will be strategically located to maintain the current level of attractiveness of our courses in other cities.

We currently have 45 new accreditation applications filed with the MEC. Of this total, 37 have completed the accreditation process. We believe these new accreditations will enable resilient and sustainable growth over the coming years, allowing the opening of new places in markets and regions where we currently do not operate.

c) Expansion of distance learning

The New Regulatory Framework for the distance learning segment, established by MEC Ordinance 11 of June 20, 2017, introduced standards for the accreditation and offering of distance learning courses, in accordance with Presidential Decree 9,057 of May 25, 2017. The New Regulatory Framework, among other rules, ensures autonomy to educational institutions accredited by the MEC to expand their distance learning centers, as long as they follow certain educational quality standards.

We believe we can strongly benefit from this regulatory change that limits supply in the distance learning market. We believe that strong regional brands will prevail over brands without a strong local presence when potential students choose which institution to attend and that the recognition of the UNINASSAU, Maurício de Nassau, UNAMA and UNIVERITAS brands will enable the sustainable growth of our distance learning program. Distance learning will also generate higher returns, since the marginal cost of new students is low and its operating expenses will be largely assimilated by our existing administrative structure. The segment is growing strongly in Brazil thanks to its affordable prices and more convenience, thereby attracting students with lower purchasing power living in cities that are far from the major urban centers.

We began the distance learning intake process in the first quarter of 2014. In November 2015, Universidade de Guarulhos (UNG) was accredited by the MEC to offer distance learning in Brazil. After the accreditation, UNG initially offered 18 distance learning courses through six centers in the cities of Guarulhos, Atibaia, Bragança Paulista and Itaquaquecetuba, significantly increasing UNG’s competitive skills. In December 2015, UNINASSAU secured the recognition of its distance learning course and filed an application for the accreditation of 400 new distance learning centers. These applications are concentrated in Brazil’s Northeast and North regions and are part of the Company’s organic growth strategy. Ser has already identified partners and the location of all 400 centers. On December 31, 2016, we had 15 distance learning centers and 6,100 students in the distance learning segment. On December 31, 2017, we expanded to 118 distance learning centers with 9,500 students.

d) Strengthening of our marketing campaigns in order to maintain the high recognition of our brands and attract more students

We believe that brands with a strong regional appeal and identification with the communities they serve will prevail in the post-secondary education market. We will thus continue to invest in communications initiatives with our surrounding communities, aiming to maintain or expand our brand recognition. We employ an integrated communications strategy that combines media insertions, social and environmental initiatives, support for sport and advertising campaigns to recruit students, not only to increase student intake in each period, but also to generate brand recognition and make our Group an integral part of its local communities. These initiatives are carried out jointly with our sales force, who works in coordination with our sales efforts at our units, directly contacting our target audiences. We also make use of other specific sales initiatives, such as partnerships with companies for internship and trainee programs, as well as with public agencies and schools. We also take part in college fairs and other important events in order to recruit potential students.

Since 2016, we have been making significant investments in marketing focused on the dissemination and recognition of its new brand, UNIVERITAS. In order to increase the Group’s presence nationwide, in 2016, we launched UNIVERITAS, whose operations are focused in Brazil’s Southeast, Midwest and South regions. As a result, we now operate in all the country’s regions, reinforcing its strategy of having recognized local brand with great appeal for students, professors, employers and society.

Acquisitions and sector consolidation

We intend to accelerate our growth through strategic and select acquisitions that complement our operating platform and our brand portfolio. Our inorganic growth strategy may be divided into two fronts: the acquisition of institutions with consolidated regional brand recognition, designed to expand our portfolios and achieve synergies with our distance learning platform; and the acquisition of accreditations, i.e. institutions with low brand recognition (known as white label), which have satisfactory concepts with the MEC and enable the Group to grow faster in certain cities, reducing both the operation’s maturation period and the investment risk compared with the term for approval of accreditation with the MEC and the high risk of launching a new unit in a new market.

The acquisition of institutions with regional recognition is intended to expand our brand portfolio and allow us to enter markets where we do not operate. In this strategy, we seek to acquire sizable institutions with regionally established brands that are more focused on health courses and preferably operate university centers.

The acquisition of accreditations, or white labels, allows accelerated growth using our already recognized brands. This strategy is similar to the organic opening of a unit, but takes substantially less time than the usual MEC accreditation process. This strategy is used to enter markets where our brands have great recall, but we still do not have any units or accreditations in progress.

We adopt strict criteria when acquiring new units, which include the suitability of the location and the facilities, their convenience for our students and the local competitive environment, all of which are verified through an extensive market analysis which includes variables, such as the size of the target market, the competitive dynamics, the post-secondary education penetration rate, number of high school graduates, the purchasing power of potential students and income stratification. Given the structure of the post-secondary market in the North and Northeast, where most of the possible acquisition targets are small and medium-sized colleges, university centers and universities, we conduct market surveys into the implementation of new programs that meet the needs of the acquired units.

Constant pursuit of increased efficiency and profitability

We invest constantly in the innovation of our academic model and will continue to develop and offer high-quality university and vocational programs that are continuously updated in order to meet the needs and profiles of our students and the market, administered by highly qualified professors, backed by up-to-date teaching methodologies and tools and appropriate and conveniently located campuses. We are aware that our students not only value receiving a first-class education that equips them for the job market, but they also value the Company’s high level of services. As a result, we will continue to invest heavily in infrastructure, especially digital infrastructure, seeking to improve our students’ experience. We also plan to improve our operating efficiency by (i) intelligently managing our course portfolio, focusing on programs with high demand and profitability; (ii) creating classes with a minimum number of students; and (iii) interconnecting our curricula. We regularly reassess our course portfolio based on market research, the economic development of each region where we operate, and the offerings of our competitors. The Company’s centralized academic team is always alert to the development of new programs, in addition to further developing those it already offers, if demand should so dictate.

Ongoing investments in technology

We intend to continue investing in technology in order to constantly improve the quality of our teaching and our relations with students and faculty. By doing so, we believe we will increase our operating efficiency, reduce costs, improve the comfort of our students and management and ensure more flexible product offerings, generating even more teaching quality control gains and further reducing campus costs. Finally, we will also be investing heavily in order to support our expected growth, ensuring an appropriate technological infrastructure for our students, faculty and administrative staff