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Good morning, everyone. Welcome to our results video conference for the first quarter of '24. I'm Sergio Serio, Head of IR. And Dennis, our CEO; and Maia, our CFO, are here with me today. As usual, in this first section, we hope to present you with the most important highlights about the results for the first quarter of '24. We kindly ask participants who intend to ask questions live to keep their hands raised and press the button at the bottom of the Zoom platform. If you prefer to send a question in writing, use the Q&A button on Zoom, which we'll try to answer here live or later via our IR team.Before proceeding, we would like to clarify that any statements that may be made during this video conference regarding TOTVS' business prospects, projections, operational and financial goals are beliefs and assumptions of the company's management as well as currently available information. Future considerations are not guarantee of performance. They involve risks, uncertainties, and assumptions as they refer to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions, and other operational factors may affect TOTVS' future performance and may cause it to produce results that differ materially from those expressed in such forward-looking statements.I'll now turn over to Dennis who will deliver his initial remarks.
Good morning. Good morning, Sergio. Good morning, everyone, here with us today. The year '24 started positively for TOTVS with relevant progress on all fronts, improving our results, and maintaining the subtle balance between growth and profitability. Regarding growth, revenue grew 17% compared to the first quarter '23, mainly reflecting the focus on expanding recurring revenue, intensified with the 3D strategy that significantly expanded the company's addressable markets. Today, revenues from SaaS Management, Business Performance, and Techfin represent almost half of total revenue and 75% of the year-over-year increase in revenue, the company's highest historical level in profitability.AEBITDA showed a strong growth when compared to the fourth quarter, reaching BRL 306 million, which is also another historical record. The AEBITDA margin was 24%, which represents 300 basis points above the fourth quarter. In addition to the positive seasonal effect of the corporate model, this margin evolution is mainly linked to the increase in Business Performance and management profitability, making good evidence that factors that impacted the fourth quarter '23 were very specific, as explained in the last quarter. When compared to the first quarter, the 10% increase in AEBITDA, led to a 17% growth in cash profit in the same period. These results only show once again the company's incredible ability to deliver solid results, especially when it comes to longer periods and not only quarter over quarter. This is what we call a serial compounder.Now let me turn over to Maia for his comments on the management area after Slide 5, or starting with Slide 5.
Thank you, Dennis, and good morning, everyone. In Management, we had another quarter of strong sales with the 32% growth in SaaS, which combined with a high renewal rate of 98.7%, resulted in BRL 142 million organic net addition to ARR, which is 10% above the organic addition in the first quarter of '23, even without the readjustments of contracts updated by the IGP-M, given that this inflation index completed 1 year in the negative field. As a result, the volume factor reached 85% of the net addition in the last 12 months. This performance added to the seasonal contribution of the corporate model and also the inorganic addition of Quiver led to the total addition of ARR to almost BRL 200 million and a recurring revenue of BRL 956 million in the quarter, representing 17% year-over-year growth altogether.As we have reinforced for quite a while now, Management market continues to have many growth opportunities. Spending on these solutions as a percentage of the company's revenue, especially in SMB, is still approximately 1/3 of what a company invests in developed market. Therefore, TOTVS believes it is possible to grow at an accelerated rate for many years, combining new names and a strong level of cross- and up-sell as demonstrated last quarter by the cohort analysis of recent years. This ability to bring new customers in and carry out cross- and up-sell associated with disciplined execution meant that Management AEBITDA presented on Slide 5 closed this quarter close to BRL 300 million, an increase of 8.8% year over year with a 26.6% margin, one of the highest levels since the IPO. The comparison with the fourth quarter of '23, the AEBITDA margin increased by 270 bps, in special due to the seasonal impact of the corporate model and the gain in profitability of that dimension, as mentioned by Dennis before me.Let us move to Slide 6. I will talk about the Business Performance quarter. We had a very significant evolution as a consequence of our mono to multi product which continues to drive sales growth, especially in the RD Conversas, RD CRM, and RD Digital Marketing solutions. This sales performance led to the organic addition of ARR to reach BRL 31 million, surpassing the addition in the fourth quarter, even with the negative seasonality at the beginning of the year, in addition to representing a 35% growth over the organic addition in the first quarter of '23, resulting in the 44% increase in ARR, which surpassed the BRL 0.5 billion mark and also the 47% growth in revenue over the same quarter the previous year.I highlight the work done in expanding the portfolio entering solutions which already make up the most complete suite in the Brazilian market for digitizing the SMB front. This multiproduct strategy has already led us to have approximately 40% of the dimension's revenue coming from customers who use more than 1 product in the suite and the renewal rate in the universe of customers is similar to that of the Management dimension. This performance is comparable to the performance of the best American SaaS operations growth wise, with the advantage of already having positive margin and growing quickly.In Slide 7, it can be seen that Business Performance AEBITDA reached BRL 9.5 million during the quarter, which is 150% above the same period of the previous year with a margin of 7.3%, representing an increase of 310 bps, demonstrating the economies of scale from the acceleration in revenue in the period. This margin growth is even more important because we had several acquisitions with negative margins. Therefore, the most mature operations in this dimension already have an AEBITDA exceeding double digits and the most recent ones with very positive unit economics and heading towards breakeven. Here, it is worth mentioning again that TOTVS has already consolidated its position as the largest Business Performance player in the SMB market with annualized revenue of more than BRL 500 million, growth above 40%, and operational leverage, all in a market that is still little explored. Here, we have achieved the so-called thought leadership that we already experienced for many years in Management.Moving on to Techfin dimension on Slide 8. Net funding revenue increased 16% year over year, growth higher than that of credit production, reflecting the optimization of the funding costs mainly associated with the change in the mix funding in the last quarter, the best cash position, and #3, the reduction in the Selic rate in the period. The credit portfolio grew 15% year over year and ended the quarter with an average maturity of 79.4 days, influenced by the greater representation of agribusiness in the portfolio mix, which originated in previous quarters and has more concentrated maturities from the month of May. It is also important to highlight that this new increase in the portfolio is followed by the third consecutive drop in the default level above 90 days, ending the quarter 300 basis points below the Brazilian average.In Slide 9, moving on to AEBITDA, the JV ended the quarter close to breakeven even with the negative seasonality of the production in the first half of the year, with supplier's positive margin practically offsetting the investments made in developing the portfolio of what we call organic Techfin. I highlight that this dimension is self-sustainable since supplier's profitability finances organic Techfin's investments, not to mention the strong cash position since the creation of the JV. The name of the game here is to launch new products and start making progress in gaining market share in an addressable market share several times larger than that of the software.I'll now turn the floor back to Dennis who will talk about the ESG highlights on Slide 10. Dennis, it's up to you.
Thank you, Maia. This quarter we had 2 important ESG events. The first 1 was the ordinary shareholders' meeting on April 23. We had more than 70% of the company's voting capital, with all proposed matters widely approved, among which it is worth highlighting the election of the Board of Directors. The second was the revision of the outlook to positive of TOTVS' AA positive rating assigned by Fitch based on the expectation of strengthening TOTVS' business profile driven by the consolidation of the revenue diversification strategy with the growth of the Business Performance dimension, formation of the JV Techfin, and the consistent generation of cash flow which supports the growth strategy by means of acquisitions without overloading the capital structure.Moving on to my final message on Slide 11. '24 is my 6th year leading TOTVS. When I arrived in 2018, we decided to analyze 5-year cycles, and therefore, this is a good time to reflect about the first 1, and also about what I see for the second cycle. To start with, it has, and it still is, a great combination of pleasure, challenge, honor, and responsibility to lead this fantastic organization called TOTVS. Its name says it all. In Latin, it means everything and everyone. Anyone who has this meaning in their name naturally has an inclusive culture, flexible and prepared to navigate in any situation. Its motto is to be the same, always being different. What does this contradiction mean? It means that we are nonconformists, that we have the power and duty to define our own path. What could be bolder and more up to date than that?Upon my arrival, I found a young and ambitious team committed to advancing product quality and customer satisfaction, and also a founder committed to making his succession another chapter of success. We designed a strategy to expand our value proposition, creating new markets, and with that, occupying a new position as a trusted advisor for our clients. Therefore, does innovative and unprecedented 3D ecosystem emerge, the same, but always different. The result this far, 20 consecutive quarters with 2-digit growth in recurring revenue. The AEBITDA of the first quarter of '24 is almost the total AEBITDA of 2018. The AEBITDA margin grew by more than 10 percentage points, the market value multiplied by almost 3.5 times. We reached the highest historical levels of NPS, eNPS, addition of ARR, among other operational indicators. We also had 2 successful follow-ons and about 2 dozen M&A operations buying, selling, and associating. Above all, TOTVS continued to increase its relevance.Those are major achievements that are basically shared with all our stakeholders. For the second cycle that has just begun, the most important corporate objective was transformed into the motto of our strategic kickoff, 3 dimensions and a single destination. Converging dimensions into a large and integrated ecosystem with a unique, strong, and innovative culture is what drives us and will allow us to remain trusted advisors of our clients. Continuing to deliver excellent financial and operational results is a natural consequence of that. Being an inspiring leader, increasingly closer to all our employees and our thousands of customers, always seeking balance and common sense is my main personal objective. I thank everyone of you who participated and continues to take part in this beautiful journey, and I call upon you to make the next 5 years even more enjoyable and successful. We are now at your service for the question-and-answer session that will be led by Sergio, as always.
Thank you, Dennis. Guys, just reminding you of the guidelines that we set in the beginning of the video conference. And if you want to ask a question live, keep your hands up and pressing the button, and I will announce the name and release the audio. And if you want to ask in written, you can use the Zoom Q&A button, or we can try to answer in the end of the session and through our Investor Relations team. So, the first question comes from Thiago Kapulskis from Itau. Thiago, please feel free.
I actually have 2 questions. The first 1 is with regards to the margins, which has been an important debate since Q4, especially with regards to the marketing expenses that were slightly higher. And in this quarter, both that line as well as the R&D lines have improved significantly. Could you just give us some more color on what you've been doing for that? And what is it that we should expect along the year for those 2 lines in the performance, precisely with regards to the revenue?Second question is with regards to the Business Performance. And the results were indeed fantastic, pretty encouraging results, and the levels are incredibly high. Is this sustainable at all? Is this something that might concern us? Is this too much? Is this tending to go down?
You see, Thiago, we are quite confident, you see, for the rest of the year, and I think we're going to have a rather positive year, to say the least, really, because this dynamic, on one hand, we have the combination of a market, as we said, for quite some years now, it's relatively unexplored market from the expenses and on the other hand, a good execution. And TOTVS has been doing a great job in executing this. So, this combination, in our view, is continuing. And as you saw in the ARR addition and this combination with the Management, that continues to be extremely positive. And it basically points to the continuation of this very good performance. As we had stated as well in Q4 of last year, of course, we have seasonality. TOTVS' business is not absolutely linear. We do have some oscillations. You have the corporate and the Q2 and then Q3. It's usually weaker precisely because we don't have the corporate, and you still have the impact on the annual agreements. And then Qs 3 and 4 drive margins up because you don't have the annual agreements anymore. And then they push the recovery of the deployment of the inflation on the contract. So, that is Management wise.Now for the Techfins, we know already that the first half of the year is from seasonally much, much weaker than the second. So, last year we had something like 70% of the results, even more, maybe 75% of the results of our suppliers taking place on second half of the year. And I can assure you that this year won't be different, really. And we have the Business Performance that is in this accelerating and ascending performance, as you said yourself, with great margin gains. And so, I envision that this year of 2024 is nothing but positive to TOTVS as you see, and those expense lines are going to perform in a very controlled manner. So, again, the message is the one of confidence, right?Specifically about Business Performance, of course, we always concern because the business is growing more than 50% on an year-over-year basis. Now, being frank with you, this Business Performance journey is just about to start. We are just taking off, and we are talking about an operation that made a whole number of acquisitions in the last year, last 1.5 year. So, we are still accommodating those M&As within the R&D, let's say, architecture. And we are still seizing the positive effects of that. That's why we have highlighted here the relevance of the single and moving to the multi-product and the percentage level of clients with more than 1 product. But this is still in the beginning of the curve. And the fact of having 40% of clients with more than 1 product doesn't mean that we have all the products. So, we still have room for growth which is actually hard for us to calculate. And aside, Thiago, to all that, we also have to fit the Business Performance offer within the corporate structure of TOTVS altogether. And this is even more incipient if compared to this first movement. So, we already noticed this very important increase in the participation of the traditional commercial structure, software structure in the Business Performance area. And this is already very relevant for the ARR addition in the Business Performance. This is not exactly relevant for the TOTVS profile altogether. But when you check on the 30-something-million addition of ARR in Business Performance, the software channel already starts to show its relevance that we believe it's growing and it's going to be a growing one, even with the other Business Performance channels growing with very relevant levels.
Next question from Marcelo Santos, J.P. Morgan. Marcelo, feel free.
And again piggybacking on the Business Performance part. Dennis, do you see the current services portfolio, is this fully adequate to capture the opportunities that you envision, or do you still have things that are still beyond, or are you intending to do M&As? And then what is it that you still have to do in terms of attacking the market? And the second question now more towards the Techfin. Could you give us some updates on the scheduling? Because we know that there are some projects that are on the pilot phase. You mentioned the working capital, the digital account. What is the expected timeline for the launch of this?
Marcelo, the Business Performance portfolio is already the biggest of the market. What absolutely does not equal to saying that it's finished, which is, by the way, a very important characteristic of this Business Performance market. It's novel still, and as a consequence of that, it's rather fluid and formattable in the development of new solutions. So, those are 2 different things. The portfolio is pretty broad and very solid and concrete, and for no other reasons, we got this growing and very strong results. What does not mean that our opportunities are dwindling down. So, it is expected that both from the organic perspective as well as through the M&As or other, the development of other partnerships, that we might add new solutions to the Business Performance portfolio.Now, addressing the Techfin part of your question, you see, we have been making progress according to plan, and if I'm not mistaken, it was by the end of last year when we said that the first pilot would take place in the Q1 of the verticalized Consignado product, and that this was from the turn of the first to the second quarter. And this is moving on well, and we said that along the 2Q, we would have the working capital. So, this pilot is again on the move, and we have the long, as we call it and we. And this is being actually done within the supplier itself. In other words, we love working on short deadlines, good part of the supplier portfolio, because that allows us to reset the conditions in a more agile fashion. That leads us to a larger number of cohorts. So, the model altogether is more powerful. But we still want to have a good origination line that works on longer deadlines. And so, this is the product that we have started the trial phase.The digital account, in particular, as we mentioned, is expected to take slightly longer, right? And we hope to work with the pilot more towards the end of the year. And the reason for that is that differently from the credit products, the digital accounting has a much more extensive and a deeper contact with the [ RPs ], what requires longer testing periods and development times. And having said all that, I should say, Marcelo, that very soon we should have, in particular, speaking of the long and the Consignado trials, starting its production line in the next few weeks, maybe months, certainly not much longer than that.
So, you'd say that the working capital would be slightly more ahead, right? Or would it be together?
No, working capital, if I'm not mistaken, it started 1.5 months after. So, it's natural if it takes 2 months or more than that. Now, the digital account, we don't even have the pilot yet. The pilot is, in theory, supposed to start more towards the end of the year, precisely because of this need for technological development and the scale is slightly different from the credit products.
So, Leo Olmos from UBS. Leo, please feel free to ask.
My question is a bit of a follow-up for Kapulskis's topic about the Management margins. We have discussed a little bit, and we have 2 other questions that are part of the EBITDA. On the gross margin. There was another shrinkage, right, of this gross margin in the year-on-year basis, because you've actually compared this to last year, the revenue was slightly higher on the corporate. So I just wanted to hear from you whether you had the [ cloud costing's ] cost, because that might have been a topic on the Q4 on the gross margin. And the other question is, with regards to the Management expenses, if you could say something about the effect which you expect for the incorporation of the franchises on the commercial expenses or even in other elements or other factors that might have an impact on your Management AEBITDA. So, those are the questions I have for you.
Leo, let me address your first question, and Maia, if you can help me with the second one. But you see, Leo, as you said, with regards to the year-on-year drop of the gross margin, all that is based on a comparison that has started with a very, very high bar. So, if we compare '22 to '23, the parameters were surprisingly high, surprisingly positive, and especially the IGP-M index and the inflation and the deceleration was pretty strong. It hadn't turned negative as of yet, but it was still in the halting phase. So, that sooner or later would end up pushing our licenses revenue from the corporate, which is exactly what happened this year.So, what I can tell you is that at the very last minute, we had the corporate license revenues slightly better than expected in the beginning of the year. But at the end of the day, that license revenue, especially on the very, very short term, it has a pretty high profitability. So, whenever you see this relevant shrinkage on the year-on-year basis, it's absolutely inevitable and it's really a mathematical consequence of that to have this contraction. On the clouding costs, Leo, not really what we said on Q4, and we started to feel this in Q1, and it's likely that this is going to be the same in the coming years, the clouding contracts with external suppliers, those are usually long-term contracts. So, what happens is during the renewal of those contracts, what happened in the beginning of last year, because of the growth rates, we might have this ledge that will drive the costs up. And that happened on Q3 and from the Q1 of this year, and in a couple of years' time, we might have exactly the opposite. This ledge is going to reduce, and which is similar exactly to what happened to the annual agreements. We have the annual agreements in January, and that will naturally drive the people's costs up, but the revenue is going to be adjusted by the inflation along the year, which is exactly what is going to happen. Our revenue is going to keep on growing. The cost is going to remain under control. What means that the clouding effect on the gross margin for the coming years, the coming semester is going to be extremely positive, right? And so, Maia, please, the next question.
Well, regarding the question of the franchises, the movements that were made by our franchises will give us an opportunity to better explore these areas. Initially, this will lead to a need for more investments to be made in franchises in the second half of the year. Last year it was clear, and now in the beginning of this year, we had something in the inner state of Sao Paulo. We need to make more investments in these structures so that we can better explore these opportunities and that also influence the behavior of the sales expense lines over time. But of course, I believe we'll be able to revert that into results and it will be diluted. There's another factor that we mentioned in our press release, which is a more intensified focus in recurring revenue. This has an impact both in this investments and also with the gross margin. As you intensify production of recurring revenue. We cannot make ends meet. They don't meet immediately with the new revenues. But as this recurring revenue is built up, it also has an impact in the gross margin as well.
Very nice. Well, you have very positive news for us, and they decrease the concerns we had with margins in the fourth quarter. Congratulations for your achievements.
Next question, Fred Mendes from Bank of America. Fred, your audio is open. Fred?
Can you hear me?
Yes, we can now.
I have 2 questions myself. The first one you probably already answered partially, but I wanted to better understand in terms of Business Performance, does the result come more from direct sales or are you also being -- or have you also been able to convince shareholders that it's worthwhile developing another product to help with sales? So where does the cross-sell come from?Number 2, it was a relevant quarter for the results, but could you tell us a little bit more what it's like today and have you noticed any advancements? Are they what you expected them to be?
Regarding the Business Performance cross-sell in the Management client base and using the business structure and the traditional software distribution platform, we are all in for it as well. We also understand that this is going to be a very important growth driver for the company as a whole, not only for Business Performance. Having said that, I will give you a piece of news that might be surprising. The performance of the franchises in this cross-sell has been better than with our own products. The development of the franchises in Business Performance is a very important investment. Today I may be mistaken, but I don't think we have any franchises that has not made an acquisition from a relevant business performance agency, or that at least has strategic agreements with 1 or more agencies in their own region. So, today their capability to work with larger sales and higher tickets is very relevant. And this has been a very relevant driver for us in this cross-sell between Management and Business Performance.Once again, we believe that the franchises will continue leading this process. And our work actually, right now, is in terms of guaranteeing that our own operations reach the same level of investment that the franchises have. And about the Dimensa. Fred, things are back in track. In the fourth quarter, which was very difficult for the company, for Dimensa. But I think then we reached the bottom, and we had a strong belief that we would be able to go back to a margin-gain performance. And this is what happened in this first quarter. So, everything is moving. And of course, Dimensa does not have the same level of margins that it delivered in the beginning of '23. Things don't usually change as significantly from one quarter to the other, but the results are better than the results we had in the first quarter. And I would say that it's no longer a concern for us in the fourth quarter I mean.
I think Fred's audio went down. Thank you for your question. We will move on with our Q&A. The next question, and the one that is going to wrap up this session is from Felipe Cheng, Santander. Cheng, your audio is released.
I have a question, perhaps it's a follow-up to previous questions in this call. I wanted to better understand what you expect in terms of seasonality this year. Usually the first quarter is stronger, but this year we had some other elements and inflation that was a little bit higher. But I wanted to ask your opinion about seasonality as a whole and whether you believe that there will be a stronger acceleration in the second half of the year.
If we look at the history of our businesses, and I think that Dennis talked a little bit about this in his previous answers, the first quarter had a positive impact by the corporate area, and, of course, there is impact in the [indiscernible], but in general it has been favored by the corporate contribution also for other aspects as well. This quarter was weaker than the first quarter in terms of top line, but not production. As the year advances, the cross-sell performance improves. But the fact that there's not a more specific contribution from corporate, it does make a difference. We also have the TOTVS' Universe, and this is also another seasonal element. Consequently, when we look at the second half, we benefit from the revenue in the first half, and we have also the collective agreement. And so, the third quarter usually benefits a lot and is usually a very strong period for us.Last year we had other impacts which affected our profitability in the fourth quarter. But we do not anticipate anything like that for this year. And therefore, it is reasonable to expect to have a better fourth quarter this year and better results than we had in the first half. In terms of performance in the first quarter, despite everything that has been said, it's not usually the strongest quarter in the year for us. The behavior is stabilized over the year, but Business Performance has the summit, an event in RD. It is carried out in the fourth quarter, and it affects our profitability a little bit. You can see the behavior of Business Performance compared from the fourth to the first quarter. This is very specific, and it would have an impact in the Business Performance results.Now, finally, talking about Techfin, as Dennis commented, agribusiness has become more relevant. It has become more relevant over the year. The first half of the year is usually weaker in terms of production, in terms of crops, but then in the second half we already have some effect or cash effect origination, and therefore we usually see these results in the second half of the year. Last year we had 2/3 of our credits observed in the second half of the year. So, looking at the history, yes, there is a seasonal behavior which is more favorable for Techfin, Management as well, and Business Performance in the second half of the year.
Perfect. I would like to add a second question. Could you please update us in terms of M&A, what is your expectation for the year?
Yes, it is still doing well. We continue working hard. There are a lot of opportunities, and this is the most we can usually say. Things have been doing well and as usual, there are new factors during the year or in the future. M&A is and will continue to be an integral part of our strategy, our business strategy.
And with that, we are going to close our Q&A session, and I would like to give the floor back to Dennis for the close up.
Well, thank you, Sergio. And let me close this conference with a special invite that we usually do in the first half of the year, which is to take part on the TOTVS Investor Day of 2024. It's an exclusive event for market analysts, investors, and capital market professionals. It will be held on June 18, and it will happen within the TOTVS Universe, which is our main technology and business event. Actually, it's the main one of the country, and we hope to offer you 2 ways to take part, either digital or face to face. The in-person participation [ gives ] access to the 2 days of TOTVS Universe program, providing you with a unique opportunity, as it's been so traditionally, a great opportunity to get to know and to interact with the company's entire ecosystem. And for further information and all the conditions, you can either access TOTVS' Investor Relations website or get in touch with Sergio and the IR team, and I hope to see you all there. Once again, thank you very, very much for your participation, and I wish you all a great rest of the week and great rest of the semester. Thank you.