Positivo Tecnologia SA

BOVESPA:POSI3

Earnings Call Transcript 2023-Q1

[Rafaella Nolli, executive]

Good morning, everyone. Welcome to the video conference of Positivo Tecnologia's Earnings for the first quarter of 2023. I'm here today with Helium Rotenberg, our Founder and CEO; and Caio Goncalves Moraes, our CFO and IRO, who will give a brief presentation, and then we will open for a Q&A session. [Operator Instructions] Now I hand the floor over to Helium, who will start the presentation.

[Helium Rotenberg, executive]

Good morning, everyone. We have here earnings that may seem weaker than the first quarter of 2022. But when we compare them on the same basis, they are not. We have the proper margins and they are aligned with what we were planning. We gave the guidance of around BRL 5 billion, and it was based on this quarter exactly as what happened. So we are within our expectations and planning. And when we compare the basis, we had a growth in gross revenue. And that means removing the earnings with electronic ballot boxes, which were quite strong in the second quarter of last year and which we will have in the second half of this year. We have seen our EBITDA margin going up, our net profit going down, we had a positive operational cash flow generation of BRL 241 million, and our leverage ratio went to 1.5 according to our expectations and an increase in our ROIC. Despite the decrease in corporate market sales, we are looking forward to an increase in this segment, especially in our Payment Solutions, where we have almost all our acquirers with signed contracts, and we are starting to deliver to them.

Just going back to our business model, it's important to remember that we are a company in transformation, consumer is very important. It used to represent 70% of our billing. And now it's around 30% which we believe is the proper participation of this segment in our company is our [indiscernible] And 70% is commercial, which we have public institutions, which is a very high segment for us. And so in commercial, we're doing well with 70% of our earnings and 30% in the consumer segment. So just to remember in commercial, we sell computers, hardware as services, Payment Solutions. The Positivo Tech services, which is going really well, and I'll give more information of that further on. Educational technology, which is an area that we've been working on for several years for private and public school, Service & Solutions where we have all the added services and tablets as well. And the other 30%, we have the PCs, accessories, smartphones and features phones, IoT for smart homes and also tablets.

So this is what our company looks like, and it's what we imagine it's going to look like in the future as well. There are some things I would like to highlight in the commercial segment because despite the decrease in sales, this is where we believe we'll have growth. We have been gaining market share and more customers in large accounts, establishing ourselves as a major player for medium and large companies, both with sales, lease and as HaaS. We are the first to launch hardware as a service for zero-carbon and HaaS for education specific for the educational market from schools to universities. In tech services, we are continuing to grow and winning new clients. And I'm happy to say that out of the four major private banks in Brazil, 2 of them are tech services clients. In Services & Solutions, we are performing well, and we want to improve our sales of service. We launched the PSS Connect Channel Program with a lot of loyalty. We've had 73 additions to this program the last time I saw. We have our new digital transformation units, which aims to take this new conversion technology to the medium and large companies in Brazil. So offering a complete solution combining hardware software value-added services.

We started organizing this area. Less than a year ago, there was a -- we hired very skilled professionals and now we are starting to see the results. And as I mentioned, Payment Solutions, we have the main acquirers. Just one of them is not yet our client, but we have 3 more new acquirers, and we have a very significant contracted value for 2023. So -- and it goes along with HaaS and other sales models. When we move to public institutions in the commercial segment, we went very well in the first quarter. We are delivering things that were contracted last year. And there was a notice published today that in the federal administration is still being informed. So that decreases the pipeline, but we are optimistic for the second half, especially with regard to education. So the pipeline did decrease, but we are still optimistic. But in the guidance, we do have a decrease in this number, and it's in that BRL 5.5 billion to BRL 6.5 billion, and with BRL 4.8 billion in the pipeline, and the federal government has increased its budget for technology, not necessarily for hardware, but there's always some of hardware in that and also the full -- basic education fund has budget of BRL 40 billion, and we believe that can also result in the purchase. Tablets, computers and pure technology in the form of software.

Moving on to the Consumer segment. We can say we are doing well. We earned -- we gained some market share in computers. We are doing well. We would say that the market in general is a little bit low, but we're growing. We are performing well with smartphones, that the Infinix continues growing and permit itself in a very good activation level. We've launched a new model. We are in more than 250 retailers and over 7,000 points of sales. We have now a new model in the market, which has 5G and it's in the major price point of BRL 1,000 to BRL 2,000. Now we have the new Vaio tablets which was just launched. It's performing well. It's been very well accepted in the market. It's an excellent tablet for productivity. I myself really believe in it, and I think we are going to be surprised with the results from this product. I'd like to hand it over to Caio for the financial highlights.

[Caio Moraes, executive]

Thank you. It's important to mention that we have a first quarter aligned with our expectations. And it was the beginning of the recovery of consumer sales, highlighting the growth of the Infinix. And in this first quarter, we had more than half the sales that it had last year and also with an increase in PCs. In addition to the recovery of consumer sales, we've also had the public revenues. It increased 26%, especially with education departments and the Ministry of Economy. However, the corporate sales decreased, as we said, more or less the same proportion as a public institutions because there was a major concentration of POS and has in the first quarter of last year. And I have to repeat that we are optimistic with the revenues of this segment for this year. So it's within the expectations, and we have a very robust pipeline. So for servers, HaaS, payment solutions, tech services, we believe in its growth, but with the concentration in the second half.

As we said, we are -- we've increased 40% of our client bases with an allocation of more than 50%. We have another tech services, contract signed with a major bank. And this all corroborates our optimism. So when we look at EBITDA and the margin, although we had less revenue, so less EBITDA in terms of value, our margin remains the same as the first quarter of last year. So the greatest margins although less revenue, we can say that servers are a good example of that and a greater margin in Infinix, which helped us maintain this higher margin, and it's the same for net income, although it is lower due to the lower EBITDA. We had a profit that was 30% lower. But structurally, our business is doing very well, and we are going to see an increase in the sales, and we will see more net income and more cash flow. The next slide, we speak of our return on invested capital. As we had mentioned in the fourth quarter of last year, we were expecting this result we built.

We had -- we built a lot in the fourth quarter. It was [ BRL 350 million ] which we transformed into cash and that helped to maintain the ROIC in around 30% despite the unfavorable seasonality in the current quarter -- in the first quarter, sorry. So we were able to have an operating cash generation of BRL 241 million, which helped to reduce indebtedness. So we went down to [ BRL 940 million ] And we were able to even reduce more the leverage, which went from 1.6 to 1.5, and we consider that a very appropriate level. We are keeping around 50% of the debt in long term, and we are always paying attention to see what we can do in terms of cost reduction despite the current market stress. Given the dynamic of growth in the corporate market and a strong pipeline in public institutions and recovery of consumer margins we are going to reduce our net indebtedness, which will allow us to keep this leverage maybe even lower than the current level and consistently generating cash. And we'll now hand it back to Helium to speak of our guidance.

[Helium Rotenberg, executive]

As I mentioned, we reiterate the gross revenue guidance for 2023. We believe we will be able to keep within the planned BRL 5.5 billion to BRL 6.5 billion with a gain of market share. In addition to the banks, we are expanding to other business segments as well. And we -- that's where we need to attack, and we believe we can gain more margin. So as I mentioned, the continuity of the expansion of payment solutions, we have a lot of relevant projects planned for servers in the second half. They are still in the pipeline, but we believe several of them will come through. And in consumer, we had the growth in penetration of premium Infinix smartphones in public institutions, we have BRL 1.2 billion of revenue already secured and a very good pipeline, which will allow for good future sales. For the electronic ballot boxes, we already have BRL 1.4 billion, which will be partially built and we had an abandonment that allowed to increase 25% for a total of 220,000 ballot boxes. We do not know when delivery will happen, but we believe that most of this BRL 1.4 billion will be delivered in the second half of 2023, and that's why we reiterate our guidance for this year.

And you can clearly see, the difference from last year, we are going to have a weaker first half and a stronger second half not only because of the ballot boxes, but also the corporate projects that will be deployed in the second half and the seasonality that was weak last year, but we believe that this year will be stronger given the growth of Infinix and our position in PCs. So here in yellow -- in purple, you can see that the first quarter is still going to be weaker than last year, but the second quarter will be stronger to allow us to meet our guidance. So this is what we wanted to present today, explain the differences where last year in the first half, we had the sales of the largest server in Latin America. We don't know if we will deliver another one this year. If it doesn't, will happen in the second half, and of course, 130 million in billings of electronic ballot boxes in the second half -- in the first half. And then this year, we see the ballot boxes in the second half, and then we have the contracts for Payment Solutions to be delivered in the second half of 2023.

So this was our message for today. We are optimistic and we reiterate our guidance. There was no surprise in our earnings, and we believe that this company has received and has reached a new level of revenue and margins, and we have a bright future ahead.

[Rafaella Nolli, executive]

So let's move on to the Q&A session. We already have questions. And the first one is from Andre Salles from UBS, and he would like to ask his question live. Please open the mic for Andre.

[Andre Salles, analyst]

Good morning, everyone. Thank you for allowing me to ask this question. I have 2. One, in regards to the dynamic of the corporate market. What's the sales strategy for new accounts. And you mentioned the issue of banks. Is there another sector that you're looking at? What's the sales force in this channel for the corporate market. And also about the fourth quarter, we know there's a seasonality, contract maturity. What do you see the demand for this specific segment, especially when you see this decrease of revenue year-on-year. And I would also like to understand gross margin and EBITDA margin, I think keeping the EBITDA margin is a good sign of the profitability of the company, but the gross margin has expanded year-on-year. Do you believe that's stable? And why does this -- why didn't this expansion result in even greater EBITDA this quarter?

[Helium Rotenberg, executive]

Okay. Let me speak of the corporate market, and I'll let Caio respond to the issue of margins in the -- so almost 2 years ago, we hired a new VP for this area. I think it's someone that admire profoundly to structure the corporate area so that we could grow. And he brought a great team with him several officers and experts in digital transformation, we had almost 100 people hired over the past 1.5 years to cater to this market, and that's what we're doing. We're not going through verticals. But company size, we are looking at medium and large companies, the ones that we believe we need to work on and we go after them.

Of course, there are some references that we know are important for us to conquer so that they can see that we are no longer just a retailer, but we are also aimed at the corporate market. We are so strong in retail, but we cater very well to the corporate and public institutions. And this goes throughout all our businesses, the hardware services, which is consistently growing servers and increase in tax services, we've just signed contract, we can't say yet who it is. But we see that we are on the right path. And it's not just the banking segment. It's several segments we are working with. Health care, we have several clients in that area. So it's more of coincidence. We don't privilege any segment. We are working with the context of the largest consumer technology with the largest companies that consume technology in Brazil. So we had a very good result in 2022 and also in 2023 with smaller companies.

This decrease was due to the server delivery and we had a lot of HaaS for telecommunication companies due to what we had in stock. So these were one timer businesses that reflected in the first quarter of last year. But everything is within what we planned, and we do expect significant growth in the corporate market for this year and also the next years. I'll let Caio respond about the margins.

[Caio Moraes, executive]

If structurally we can preserve the margins, we believe we can, both the gross margin and the EBITDA margin. And we are starting to benefit from the decrease in input costs. So we are selling older stocks that had a higher cost, especially in the consumer channel. This is something that's in progress, and we believe we will continue with the strategy throughout the first half of the year, and then we'll have normalized stock and normalized prices. So this gross margin will benefit from this effect and remain higher. The difference from the EBITDA has to do with operating and commercial expenses, which were a little higher, and that's normal, especially in the commercial area as we have a recovery in consumption, especially Infinix, so that does lead to an increase in expenses. But I would say that the margins are going well. We believe they will preserve throughout the year and may even grow.

[Rafaella Nolli, executive]

We have Marco Nardini from XP who will ask us question live.

[Marco Nardini, analyst]

I want to understand the delivery of electronic ballot boxes in the amount of BRL 1.4 billion in the second half of this year, what do you believe will be built this year? Is it around 60% and also the impact on the margin for the second half?

[Helium Rotenberg, executive]

It's still too early for us to say how many ballot boxes we will deliver because we had this 25% increase, but this is something we're planning. This -- we believe this 25% actually will not be delivered this year because we are just starting to purchase the components. So the other 80% of the whole, we would say that almost all of that will be delivered this year. That's what we are expecting. As for the margins, I think as Caio mentioned, this dynamic has been for us to replace stock of higher value at a lower cost as the market has prepared for a correct market size this year which is different from last year when we had higher stock, we believe things will normalize now with component prices, and we do believe of an increase in the margin this year or at least maintenance.

[Rafaella Nolli, executive]

The second question is from [ Thiago Iris ] from Nexus investment. In the comparison with the same quarter last year in consumer, you had 70% increase. What do you think led to that was that the Infinix phone or other business areas. How are the corporate decrease was this due to seasonality? Or can you give us more details per business?

[Helium Rotenberg, executive]

Consumer grew due to 2 factors. It was the Infinix and also notebooks. We earned share in the first quarter. We did not do so well in terms of market share. Our models were a bit outdated due to the stock. So it took us a while for us to launch new products. But when we launched them, they have performed well. So it's not just Infinix, but also notebooks resulted for this increase in the consumer segment. And again, as I said, the decrease in sales were due to the specific businesses done in the first quarter of last year. So it is a normal seasonality. But last year, it was still a little bit confusing. We were going after stock. We had stock that we sold and we had robust server businesses in the first quarter. But again, this is all within our normalcy, and we do believe that over the next quarters, we will see the corporate segment increase and grow.

[Rafaella Nolli, executive]

[indiscernible] asked, what are the perspectives in the corporate and commercial segments for the second quarter of 2023?

[Helium Rotenberg, executive]

We showed the guidance chart with a modest growth for the second quarter with more growth in the third and fourth quarter, we believe that the commercial will improve a bit more in corporate and public institutions that what we're looking -- that will happen in the second quarter.

[Rafaella Nolli, executive]

Now from [indiscernible], that HaaS was achieved, does Positivo have any special projects in the pipeline in addition to the ballot boxes, not in the same size as the ballot boxes business?

[Helium Rotenberg, executive]

We think that there may be more than 150,000 ballot boxes being -- there will be a bidding for 150,000 ballot boxes over the next years, but we are not sure that we happened. But we are going after other special projects, but nothing that we believe that will be of this magnitude, but we are looking at totems, at lotteries and for public services. We are looking also at smart city, security and several other sectors.

[Rafaella Nolli, executive]

Another question from [ Alessandro Ferreira ] Considering the decrease in cross revenue, is it still feasible for the company to reach the higher level of the 2023 guidance?

[Helium Rotenberg, executive]

Well, the purpose of guidance is to have a range, and it's hard to be precise on where we will be on that range, but we do believe we will be within the guidance range.

[Rafaella Nolli, executive]

Would be the new market technology and trends that Positivo will be using to grow over the next years?

[Helium Rotenberg, executive]

Well, we are always talking about future and technology trends where you have a lot of experts. We have an enormous R&D area, and we are always investing. It's going to be around BRL 200 million in R&D, and we pay attention to all the technology trends, for example. Now the major revolution has been artificial intelligence. Everyone's talking about ChatGPT, Google held its conference on its response to ChatGPT which is more aligned with Microsoft. So we see Google answering into this. And I was actually at a Microsoft event in Florida for all Intel CEOs, and we talked about the geopolitics, nearshoring and how this is going to dominate the issue of microchips. We are a hardware company ultimately. We don't have AI as a service, but we create a hardware that's going to process the AI, and we need to be able to do that well, and we are very well prepared. We have been discussing our processes, the settings, the interface and foreign factors that appear and we are very well positioned, not only for the consumer market, but also the corporate market with all these new technology trends.

[Rafaella Nolli, executive]

We have another question from [indiscernible]. Can you give us the market shares of PCs and smartphones?

[Helium Rotenberg, executive]

According to IDC, it's about -- we have 13% for smartphones. This is what we have. It varies a bit among the categories. And we don't have the fiscal reports related to retail, But we believe we increased 20% to 30% of market share in comparison to the first quarter of last year. Yes. This is for PCs. We have a small market share for smartphones. We were just at the entry level for phones from BRL 600 to BRL 700. We were actually had a relevant market share, but it's a small percentage of the home market. So that -- but now with a Infinix, we are seeing what we call in the market as the -- call it the higher -- the middle range, so it's BRL 1,000 to BRL 2,000. So we can increase this share and maybe double or triple our smartphone market share.

[Rafaella Nolli, executive]

Another retail question. When we -- when will we see the retail margins improving even with the contraction in the market?

[Helium Rotenberg, executive]

We are already improving. We had a poor margin last year, still this year, it improved a little at the end of the last quarter. I wouldn't say that there are healthy margins now. We still have high priced stocks, but there are a lot better than what they were in the recent past.

[Rafaella Nolli, executive]

[indiscernible] also has a question. You had BRL 3.3 billion in revenue in public institutions, including special projects, what is expectation for the recurring level in the public segment?

[Helium Rotenberg, executive]

Well, we can't give a very precise guidance, but out of those BRL 3.3 billion, we had around BRL 1 billion in ballot boxes. In this year, as I said, we are not going to have the 20%, but we will do almost 80% of the ballot boxes delivery. So we believe it's going to be similar to next year. We have 1.2 in short and 4.8 in the pipeline. We are not certain what will be the concrete result, but these are the numbers we are working with now.

[Rafaella Nolli, executive]

We have [indiscernible] investment and he talks about working capital. Can you talk a little bit about working capital for this quarter and the next one. We see that there was a decrease in receivables, but stocks did not decrease that much, and there was a bit of an offsetting with suppliers. How -- what is the expectation for the future.

[Caio Moraes, executive]

As I said, we had a stock reduction at the end of last year. It became accounts receivable. It's been received and it generated cash. We do still have older stocks with older prices. And we're gradually generating cash within. We hope to finish with the stock by the end of the first half of this year and thus generate cash. As we said, this year, we will probably maintain stable revenue. We are not expecting revenue growth. It's more of a consolidation of what we have already earned. So this helps with indebtedness, we don't need to deliver growth as we did in the past year. So we believe we will have better working capital dynamics.

Of course, this may vary between the quarters. We are going now to start financing the ballot boxes, so that does require working capital. But we believe in generating more cash and using less working capital.

[Rafaella Nolli, executive]

We have one last question from [ Thiago Gregor ]. How do you see the reflexes of a possible reduction in interest rates and the recovery of the Brazilian economy?

[Helium Rotenberg, executive]

Well, we are optimistic that the interest rates will go down because they are very high, but we can't really know what will happen. Hopefully, at the next meeting, we will see this decrease because that happens, that means its profit for us, if we're paying less interest, we have costs and that results in better profits for us. I think all business people in Brazil are looking forward to that increase. And you'll have an increase in consumption. Would you have lower interest rates with the most of the population needs to finance the purchase of our assets due to their prices of BRL 2,000 to BRL 3,000. So with a lower interest rate that helps with an increase in consumption. So we are really hoping that in the next meeting, we will see that interest rate going down.

[Rafaella Nolli, executive]

There's one more question here regarding Payment Solutions. Regarding payment solution, did you see any reduction in demand due to the increase of the PIX payment model in Brazil. In addition to the terminals, is Positivo working on new models, including mobile solutions?

[Helium Rotenberg, executive]

Yes. we actually see a growth in this market. All the research institutions show that this market will continue to grow over the next 5 years. It's hard to predict over -- after these 5 years, but we also see an increase in the market share of smart machines, and that's our strong point. It's android machines where you can install apps and it can do things more than just payment itself. So we intend to continue doing well and launch more products in this segment and not in the low-end segment.

[Rafaella Nolli, executive]

Thank you,Helium. Thank you, Caio. We have no further question. So without, we end our video conference, Helium, over to you.

[Helium Rotenberg, executive]

I want to thank everyone. We know the numbers of this quarter are lower than last years, but in a comparative basis, they are better, but it is aligned with our expectations. So we reiterate our guidance. We are very optimistic, and thank you, everyone.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]