Positivo Tecnologia SA

BOVESPA:POSI3

Earnings Call Transcript 2022-Q2

[Rafaella Nolli;Investor Relations Manager, executive]

Good morning, everyone, and welcome to Positivo Tecnologia Q2 2022 Earnings Release Video Conference. My name is Rafaella. I am the IR manager, and it's a pleasure to be here with you this morning. Introducing the team, here with us today, Hélio Rotenberg, Positivo's CEO; Caio Goncalves Moraes, CFO and IRO; Rodrigo Guercio, Corporate VP; and Norberto Maraschin, Consumer VP.

We'd like to inform you that this video conference is being recorded and will be made available on the company's IR website. For the Q&A session, we suggest that you send us your questions using the Q&A icon in the bottom of your screen. If you want to ask your question live, just let us know, using the Q&A icon, and your name will be announced. At this point, a prompt to activate your microphone will appear on your screen.

Now over to Hélio who'll start the presentation.

[Helium Rotenberg, executive]

Good morning, everyone. We are really happy, I'd say proud, that's how we feel because this strategy that we started to design back in 2018, 2019 is now bearing fruits, proving that we were right. Some segments are doing better than others. And this is our strategy in which diversification is the key role - diversification of products, of market segments, and we were right.

We are achieving record results in this quarter and in the first half of the year; gross revenue of BRL 1.9 billion in the second quarter, BRL 3.1 billion in the first half of 2022. We have already increased our guidance to now BRL 5.5 billion to BRL 6.5 billion. So if, in the first quarter, that was BRL 3.1 billion, we are telling [ already ] that it will reach BRL 5.5 billion to BRL 6.5 billion year round.

What's important is that our revenue graph changed, and it's interesting to see what happened over time. 59% comes from what we call Commercial, 20% of what we call Consumer and 21% that we really made sure to allocate separately is the Special - the ballot boxes, electronic ballot boxes, which is different. So it's not a recurrent revenue, although we have already won the bid for next year, but you can see what happens really in our day-to-day.

Can we go back to the first slide please? So our EBITDA is also aligned to what I just told you and aligned to revenue, BRL 300 million in the first half, BRL 185 million in this quarter, and a LTM EBITDA of BRL 492 million. When we also compare the second half of last year, first half of this year, adjusted net income was BRL 90 million, BRL 119 million, the first half.

Some highlights, Commercial that accounted 59%, 60% of our revenue. That came mostly from Payment Solutions, BRL 131 million, much higher than what we had last year. And that's why we have Norberto with us today, so that he can address this issue.

As for Service revenue, HaaS and Tech Services, we also saw an increase. We have opened a new center in Sao Paulo in order to meet the needs of these new contracts. Also, for multi-label computers, we see HaaS increasing in many companies.

Server revenue has also grown. We have many servers that will be used to develop the largest server, and we also have the 5G arriving in the country. And that's why we also have Guercio to talk about these specific issues.

Our ROIC also increased, and this is increasing our EBITDA, is increasing our ROIC and also our net income. So we are very happy with the results we have achieved.

So, as I mentioned, if we can go back, I'd like just to stress what Commerce is, what we're calling Commercial. When we talk about Consumer, we're talking about goods for households, be it directly or indirectly, be it direct sales by sellers, retailers. So this is how the market defines Consumer. And Commercial is everything else; what we sell to companies, public institutions, private organizations, and what we sell to them. Commercial PCs has payment solutions, tech services, education, technology, servers, storage, and tablets. As for Consumer, PCs, accessories, smartphone, feature phones, tablets, smart home devices. And as I mentioned, we also have the Special Project separated.

Then let's go over what happened with the segments and that we do not depend on the Consumer segment. I'm not saying that Consumer is not important. On the contrary, we have a strong presence in Consumer. We have also increased our results in the second quarter, compared to the first quarter of 2022. We have introduced INFINIX, which gave us many opportunities with regard to smartphone. So the target market was BRL 7 billion, now to BRL 55 billion. So because we have to consider the entry level, mid-level and high level, and INFINIX really was accepted by consumers.

And as for Corporate, or selling to small, midsize and large companies, we are doing well, just as we're doing well for public institutions, so you can see the progress in this segment. And you can see that for Commercial, it has achieved now 59%.

Some highlights I have already mentioned, but just to clarify, we are increasing mainly in large companies by selling servers, computers. So new accounts, 161% increase in sales to large companies; and also 52% in sales to small, midsize business. You can see this is for the last 12 months, 50% of sales are to new customers. So we are increasing our market share.

As for Services, Tech Services, we see an increase in growth. We started to sign large multi-brand contracts. Also, we have acquirers and sub-acquirers with regards to payment services, and we also offer a unique technical support. As for HaaS, once again, relevant numbers, 364% increase comparing to the first half of second year, 227% in this quarter. As for servers, also hybrid cloud, multi-cloud, we are also achieving very good results. So Positive Solutions is a brand that's being now recognized by the market. With that, we see this increase and out of that pizza chart, out of those 59%, virtually half of that is for private companies.

So Payment Solutions, I am not going to go over that because I'm going to ask Norberto to talk about that. Over to you, Norberto.

He's going to talk later. As for public institutions, the government buys a great deal from us, as well as secretariats of education, but just to give an idea, we have sold to more than 290 different customers and to federal, state, municipal administrations, and also other branches of the government.

The market is reacting. And with that, we have already almost BRL 2 billion that we have already won. And if you go over the pipeline of acquisitions by public institutions, you can see that it went from BRL 5.5 billion in 2021 to BRL 8.5 billion in 2022. And when I talk about pipeline, I'm talking about deals that will be probably closed in the next months.

Next, as for consumers, as I mentioned, the sellout of retailers to consumers lie on the same level, but as we know, the inventories in the first quarter was very high at retailers, not only of computers, but of every single good. Now we have the normalization of inventory, so selling increases, and that really matters, the level of sellout that we have. So now we are reintroducing INFINIX because we just had a pilot last year and we started to deliver this product in May. And this product is being sold at retailers and it was sold only at Via Varejo and Vivo. And now we are also expanding the number of sellers so we are doing good with INFINIX.

As far as smart homes, we are launching new products in order to master some areas. We are leaders in lamps, and we are also - we did very good at Amazon Day now we have launched the smart lock. So for those of you who are listening to us, check the smart lock, you can install it by yourself. And we actually ran a survey of what we already had in the market in order to innovate as well. The same goes for the robot vacuum cleaner.

Now I'd like to turn you over to Caio and he will discuss the financial highlights.

[Caio Moraes, executive]

Thank you very much Hélio. Well, good morning, everyone. So first slide is about gross revenue. We have already mentioned, we already talked about this new classification of segments, but what we see is an expressive growth, both in this quarter as well as in the first half of the year, 78.2%. And these are based by the increasing Commercial segment, which accounts for, as we know, virtually 60% of our revenue. So I'd like to highlight the increase of selling servers, also increase in Payment Solutions, BRL 3.8 million against BRL 1.8 million last year. Also HaaS and Tech services, 126% up compared to last year. And also we saw an increase of other segments. Also strong sales to public institutions, 141% this quarter, not to mention electronic ballots that account for BRL 836 million. Also the recovery of Consumer segment, retail, that accounts for 24% of our gross revenue. In the first quarter, it accounted for 13%, this quarter 24%, particularly with the launch of INFINIX.

Next slide, EBITDA. As for recurring EBITDA, I'd like to highlight the quarterly numbers, BRL 341 million, a record, and also for the first half of the year, BRL 311 million. And you can see that this really is very close to what we had in 2021. So for the second quarter, was BRL 185 million. And as for margin, there was a retraction, you can see, by 1.6 percentage points, especially because of Consumer segment. In last year, we had increased sales and also we need to consider the interest rate that is now high, and also what really turned into revenue. As for the inventory levels at retailers, we also believe that we will see improve in the margin. Just as in Commercial, margins are higher, and that's why we achieved this double-digit margin, 11.4% for this quarter.

Next slide, adjusted net income. Once again, I'd like to highlight the record that we achieved for the second quarter, BRL 90 million, and BRL 119 million for the first half of the year. We also see that we had increased expenses, BRL 34 million in the second quarter of 2021 and the higher level of this year, as well as the CDI rate that also increased to 12.2% in 2022. So that translates into a lower net income. And also, as for FX, when we go over this quarter and last year's quarter, we see that we were also writing our policy regarding FX. And also we see that when we compare the levels, you can see that we also have adjusted the mark-to-market numbers.

Next, we talk about the ROIC. I'd like just to highlight how we have evolved on that, especially if we compare to the first quarter, and you can see that there is a retraction compared to last year, considering capital invested in order to have a very strong second half of the year. And as we have already mentioned, we still have high inventory levels by the end of June and that will start to decrease by delivering to corporations and public institutions starting in the third quarter. And that will mean cash, especially in the third and more specifically in the fourth quarter. This will also lead to a better financial leverage. And in June, that achieved the highest level. We had already anticipated that. Although this is 2.1 times higher, this had already been expected.

And we also have a very good capital structure for our businesses. So we have improved the profile and also the quality of our indebtedness. Today, 56% of our debt is considered long-term debt and approximately 50% of total debt is in the capital market. And we also see also an increase in agreements with some funding agencies. And as we generate more cash over the next quarters, we will also improve our capital structure. By doing that, being able to allocate more resources and also returning more to our shareholders.

Now I'd like to turn it over to Hélio again.

[Helium Rotenberg, executive]

Wouldn't it be better if we turn it over to our colleagues, to Commercial? Then let's start with Rodrigo Guercio, the Corporate VP.

[Rodrigo Teixeira, executive]

Good morning, everyone. Thank you. Thank you, Hélio. Thank you, Caio. I'd like to highlight some points and also to give you more flavor on top of what Hélio already told us on how we are positioning ourselves and that we expect to increase in Specialized Solutions. That certainly helps us also to bring the environment of integrators and also increasing revenue recurrence. More specifically, I'd like to talk about Specialized Solutions.

We are targeting IOT, high performance computing, AI in trying to capture all these markets because we know that this will happen, and also considering what 5G will bring to us. By doing that, we see that there is a need – there will be an increase in services and also, companies will need to decentralize their processing that right now is being done at centralized data center. This is a global trend that's not going to be different in Brazil. And our portfolio is very comprehensive in order to target and meet all these needs.

And finally, as for Services, which is something very important to us, we're talking about a market that - we have an addressable market of BRL 4 billion to BRL 5 billion, including POS. We still have a lot to grow and we have already won many contracts in the first half. We won contracts with private organizations and oftentimes, Positivo is not the owner of the installed base. What do I mean? These are organizations that do not necessarily buy our hardware. So what I'm trying to say is that we don't need to sell the hardware first and then offer services. We can certainly take advantage of services by offering them to any company.

Well, this is what I had to share with you. Now, let me turn it over to Norberto.

[Unknown]

Good morning, everyone. So let me talk to you about Payment Solutions. I'll try to be pragmatic and share some key aspects regarding this segment and why do we believe we are doing good. This market is a market of BRL 4 billion to BRL 4.5 billion. So when we talk about selling hardware, we say that in Brazil, we have a market that is a BRL 4 billion to BRL 4.5 billion. And we go beyond the POS. There will always be a hardware, there will always be a solution, and we will be present in order to provide you with the most innovative solution.

And still with regard to addressable market, we also have Services, which is part of Tech Services, but just to give an idea, this addressable market immediately by Positivo is BRL 350 million. And it's directly related to hardware with regard to Payment Solutions, so the hardware that we have built in.

So let me give one example, POS from Cielo or Stone, which are major acquirers. So they stay in the market for 3 to 5 years, and every year, all these devices should generate BRL 350-400 million only in where Positivo is already present and selling. So this is a recurring revenue, and this is what is really great about Payment Solutions. Once we sell Payment Solutions, well, this is a highly technical sale in which security is key. And we believe that today, Positivo has the best team with regards to the development of security solutions in Latin America. And we started our contracts 10 years ago, but we then started to also becoming more and more specialized so that we could offer unique solutions. And this technical sales also represents an entry barrier, so that means this is not a market to everyone. This is very interesting for Positivo and Positivo should achieve a very relevant position, both selling hardware and recurring services.

We are carrying out negotiations. So you may ask, well, why don't you tell us who you have already closed deals with? There is an issue of confidentiality, we cannot expose strategies from our customers. And that's why we have to keep this information in house, but you will start to see Positivo in large acquirers, sub-acquirers and fintechs present nationwide.

I believe that the key message is this technological differentiation that we present and we believe that our capacity, our abilities will also bring very pleasant news. So these are the key messages I'd like to share, and I'll be available should you have any questions.

Now, I'd like to turn it over to you, Hélio and Caio.

[Helium Rotenberg, executive]

Okay. So before we open to questions, I already mentioned that we are increasing our guidance by BRL 500 million. In the past, it was BRL 5 million to BRL 6 million, and now we are switching to BRL 5.5 million to BRL 6.5 million. We see that Corporate is increasing. We have a very strong pipeline. We have already signed contracts that are important as well with public institutions. We have already gained BRL 800 million with electronic ballots, but - and we also have still a very strong presence and contracts with both the public and the private sector. As for Services, we are also doing very good. Norberto talked about Payment Solutions and we'll have good news by year end. We are also having - achieving good results in house. So this is the new guidance for 2022, BRL 5.5 billion to BRL 6.5 billion.

And after this brief introduction, after sharing our optimism, our, really, happiness in sharing these results, we will open for questions.

[Rafaella Nolli;Investor Relations Manager, executive]

[Operator Instructions] We have a question from Bernardo Guttmann from XP.

[Unknown]

Can you hear me?

[Helium Rotenberg, executive]

Yes, we can, Bernardo.

[Unknown]

I have 2 questions. First, it's about consumer dynamics. Electronic retail segment had a relevant drop in the first quarter. So I'd like to understand the level of inventory at retailers, what we can expect for the second half.

Second question is about the cash flow, considering also new capital. You have entered new segments in which you also have a demand of increasing working capital. With this in the second half, we see that you will have an increase in your cash. So can we say that the leverage peak took place now in the second quarter? And if you can talk about your capital structure and leverage.

[Helium Rotenberg, executive]

With regard to Consumer, what happened was the following. We had high inventory levels at the turn of the year, so in the first quarter, it was very - the selling was very tough. Selling was lower than sellout. Now we had the normalization of inventories at the end of March, beginning of April. So the second quarter was better because we had the selling level equal to sellout. And that's what we expect to see. So inventory levels at retailers are, I'd say, balanced despite the drop in income. We may have some retailers with higher inventories. We also have some inventory, but that is why we also have this indebtedness, although that does not account for most of it. But right now, we have selling balanced to sellout.

And what we see is that sellout is 15%, 20% lower than last year, but still higher than 2021. So we expect that to continue. We don't know how the government support, financial support to the population is going to help us. We also need to consider seasonality, Black Friday, Christmas, but we believe that we'll stay on the same levels regarding sellout matching selling.

As for indebtedness, I'll talk about it very briefly, and then I'll ask Caio to go over it. We delivered a great deal in the second quarter, but we have not been paid yet and that's why the indebtedness level is higher. But I will ask Caio to give more color to it.

[Caio Moraes, executive]

Exactly. As I had already anticipated, the leverage peak will take place in June, especially considering inventory levels and also the timeline for being paid. We delivered servers, we delivered the projects to the government, but at the beginning of the third quarter, we'll start to deliver and we'll start to be paid at the end of the third quarter and the fourth quarter. We will also see an [ improve ] in our capital structure. And if you go over our plan, you will see that it's much better. So we will see lower leverage in the second half of the year with increased capacity to also pay our gross debt.

[Rafaella Nolli;Investor Relations Manager, executive]

We have a question from [ Lilian Oliveira ]. What are the unique aspects that you'd like to highlight regarding Tech Services? What makes Positivo an appealing option to customers?' I'd like to ask Guercio to answer that question.

[Rodrigo Teixeira, executive]

Thank you very much for your question. Well, I usually say that it's very important that everybody knows that historically Positivo has a presence, a reach to serve our customers, which is also a unique offer. So what I like to highlight is that we have a unique capacity considering decentralization on how we render services, on how our logistics is implemented in order to serve this continental country, so decentralized support. And that was really designed in order to also increase our competitive advantage.

The second point I'd like to highlight is that usually the service segment, particularly Commercial, it's based on products. And there is this trend in adapting solutions that come from other countries and other continents, but Positivo has also a unique capacity of understanding and adapting to meet the needs and demands of Brazilian customers that oftentimes present needs that are different from US and European consumers.

Let's bear in mind that if you travel 150 kilometers from the capitals of Brazil, you already start to face challenges, not only regarding logistics, but also regarding connectivity. And that really requires services that can be adapted in order to meet that need. And that's something we do. Thank you very much Rafa.

[Unknown]

Thank you Guercio. Now we have 2 questions, one from [ Vagner Silva ] and from one another participant about INFINIX. Can you please talk about the increased penetration of INFINIX, the scale and some other aspects, please?

[Unknown Executive]

With regard to the penetration INFINIX, as I mentioned, we have a larger potential market in the mid-level. So everybody buys a smartphone that costs between BRL 1,000 to BRL 3,000. We started with Via Varejo and Vivo. And today we expanding that to other retailers, so selling to other retailers. We also have a program to strengthen this brand in Brazil, and we are very optimistic that it will really increase its penetration and gain very relevant market share.

[Rafaella Nolli;Investor Relations Manager, executive]

Great. Thank you very much. We have another question from [ Marcos Rebeiro ]. 'You mentioned hybrid IT. Do you believe that this is a trend? How can Positivo better benefit from that? What value can positive deliver to customers?' This is a question for Guercio.

[Rodrigo Teixeira, executive]

Thank you, thank you Hélio. Well, first of all, that's a trend. And why do I say that it's a trend? Historically speaking, with the public cloud, we had this large movement in 2016, 2017 in which there was this run towards public clouds. I'd say that today, this is much more balanced when we talk about hybrid IT. When you look at companies that are very successful in Commercial, they have adopted a strategy that I usually say that is the best of the 2 worlds, hybrid IT in which you have on-premises, all the recurring transactions or whatever is strategic. So when you use them, what is left, for example, if you want to develop a solution to support your business, kept at a public cloud. That's where we see increased resilience and increased capacity to meet the demand of businesses by the digitization of businesses.

This adds great value because for many time, for a long time, IT was considered a department that really put the brakes on development. But once you have a hybrid IT, when you need to increase your agility, when you really need technology resources in order to expedite everything to an immediate level, and also to stop doing that once you no longer need it. So hybrid IT is a global trend, it's not only in Brazil, and you should use the best of the hybrid environment, so public and private clouds.

[Rafaella Nolli;Investor Relations Manager, executive]

Great. Thank you very much. We have another question from Vagner Silva. He says, I hold high expectations with your pilot Education product. So the 4.0 in which the company's education is part of it. Can you also give us more flavor regarding future outlook?

[Helium Rotenberg, executive]

Well, there are 2 addressable markets when we talk about Education or Education 4.0, we have our education technology and then we also have our hardware. And we see an increasing hardware for education, both in the public and private segments. HaaS for education has also increased. We see great level of sales and obviously, we have schools that are renting that. With that we can increase our part. So HaaS is doing very good.

On the other hand, we have education technology, which does not account for a large portion of our revenue, but is increasing and it will increase this year. So we are providing technologies, robotics, just for - just as Lego for education or Micro:bit for educating students. And we also want to be the one-stop shop for Brazilian education. To date, besides our products that we keep on developing and enhancing, we also see the products of startups. The tech startup - the number of tech startups has increased, but without that robust sales possibilities. So this one-stop shop will allow us by having aggregated reports, not only by us, but also third parties, we will be able to present a whole solution to schools.

[Rafaella Nolli;Investor Relations Manager, executive]

Great. Thank you Hélio. We have one more question from [ Poise Dorado ]. He's an analyst by [indiscernible]. He says, good morning. Can you please provide us more details about expansion and investment in the server segment? And can you also talk about the margins of this business?

[Unknown Executive]

Well, I'll answer that very briefly, [indiscernible]. With regard to investment, we are investing our servers, also not only on portfolio, but also working capital. So we see this strong presence and also strong diversification for [ broader ] computing. We are well prepared for this portfolio. As for servers' margins, they are very similar to what we have for Corporate. There is not much difference between them.

[Rafaella Nolli;Investor Relations Manager, executive]

Great, thank you very much. We have another question from [ Danielle Vierra ]. The net margin of the first half was lower against 2021. The same goes for the financial expenses. So to what level do you expect to deliver your net margin compared to 2021?

[Unknown Executive]

Financial cost has increased, that's true. And that's why the net margin decreases a little, but we are very optimistic in order to really match what we delivered last year. So we are working in order to achieve that.

[Rafaella Nolli;Investor Relations Manager, executive]

Great. Vagner Silva has another question. 'So the company has successfully closed the electronic ballot project. So what can we expect regarding projects as big as that?

[Unknown Executive]

Well, we already have the 2024 - electronic ballots for 2024 that will be delivered in 2023. So the gross revenue account for BRL 1.2 billion, so 176,000 ballots, and we are pursuing looking for other projects, but they're still in our pipeline and we cannot comment on them till we close them. We also have a very strong engineering project. We are also prospecting this area and we believe that we will also bear fruits, good fruits in this segment. Thank you.

[Rafaella Nolli;Investor Relations Manager, executive]

Great. Well, I don't see any other questions in the Q&A, so I'd like to turn it over to Hélio for his final remarks.

[Helium Rotenberg, executive]

Well, I'd like to thank you all for joining us and I hope I always come to you to give you good news just as I did today. Thank you very much.

[Rafaella Nolli;Investor Relations Manager, executive]

Thank you everyone. And have a great day.

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