Positivo Tecnologia SA

BOVESPA:POSI3

Earnings Call Transcript 2022-Q3

[Unknown Executive]

Good afternoon, everyone and welcome to Positivo Tecnologia Q3 2022 earnings video conference call. My name is [ Luis Alvarez ], I am Director of Investor Relations, and it's a great pleasure to be here with you. Joining us today Hélio Rotenberg, the CEO of the company; and Caio Goncalves Moraes, CFO and RI. I would like to inform that this video conference is being recorded, and it will be made available at our RI website where the slide deck is also available.

We will later open for a Q&A session. We kindly ask you to send us your questions using the Q&A icon at the bottom of your screen. Should you want to ask a question live just inform us using the Q&A icon, and we will announce your name.

With that, I'd like to turn it over to Hélio so that we can start our presentation.

[Helium Rotenberg, executive]

Good afternoon, everyone. It's a great pleasure to be here with the you, And I'd say we have achieved good results considering all the challenges that we face. And I'm sure the diversification played a very important role that allowed us to achieve significant results in our new areas, and we are very happy, and we are sure that our strategy is the right one.

We have achieved a record considering our gross revenue, BRL 1.3 billion, EBITDA of BRL 123 million this quarter and BRL 434 million in the first nine months and adjusted net profit of BRL 51 million in this quarter. What we see is that we see a decrease in our leverage ratio. We know that the debt increased because we grew. And with that, we also had an increase in our working capital. Our capital cycle is high. Our ROIC was very good, 27.6%. That allows us to say that our guidance to achieve between BRL 5.5 billion, BRL 6.5 billion as our gross revenue are maintained. We are sure that we are going to be within that range.

Now let me talk to you once again about our strategy on how actually we share our results. We have commerce or commercial which includes public and private organizations, B2B, B2C, and we separate a special project that is required so that you understand what is something that does not happen every single quarter.

So we had this special project of electronic ballots this year. And we're also going to have that next year, but we don't know whether that's going to be something permanent. So what do we sell in commercial? Server solutions, tablets, technology for education, services, payment solutions, hardware as a service and PC. PCs, which are our core business, which is present since we were established.

And in consumer, we sell tablets, smart homes, smartphones, accessories and PCs, particularly notebooks. I'd say that virtually 100% of the market now is represented by notebooks. And you can see that only 17% of our revenue came from consumers, and we will explain why. Later on.

Now you can see how things have progressed. So in this third quarter, you can say 2021, we see that presence by 45%, consumers not doing well. So the market for individuals is not really doing well in Brazil. But thanks to diversification of products and channels, we are able to offset that drop. And you can see now that only 17% came from Consumer in the first nine months of this year and 63% from Commercial.

Now let me talk a little bit about Commercial where we are increasing our market share. And what we see is that, that trend is also true for the market. So a large number of companies being served and 40% of sales came from new customers. As for Payment Solutions, significant results. We launched the new smart payment solution and this SmartPOS L400, a very innovative device, which was approved by one of Brazil's major acquirers. As for our servers, we see also an increase in this third quarter as well as in this nine months. So we see an increase by 261.

We are also increasing or expanding rather this area. As far as services, 64% of growth in this year-over-year, BRL 195 million in the first nine months. Tax Services, we also see significant increase with a very good sales pipeline. And although the numbers are not that high, we have already signed many robust contracts. And the revenue coming from this area from private organizations indicate also a growth of year-over-year and 133% in the first nine months.

As for public institutions and we actually separate them so that we have a good modeling. Although low sales are very similar, same products are sold to both markets. We also see a robust growth 97% growth year-over-year and 99% comparing the first nine months.

Just to mention a few, we have the education departments of Minas Gerais, Goiás, Santa Catarina, the prefecture of Salvador, and we have a very strong pipeline. We already have future purchase by public institutions totaling BRL 7.7 billion. And we participate in these tenders, and it seems that -- we will be able to benefit from these funds coming from the federal government to public schools, primarily elementary public schools. And this excludes the numbers coming from electronic ballots. I'm just mentioning or addressing those items that we have year round.

Just to emphasize recurrence, you can see that we sell to different types of organizations. Now we have the state administrations and also the PPP and other organizations also justice departments by many desktops and laptops. There was a tender coming from the Minister of Economy in which we gained 3 out of 5 lots and also for municipalities.

Let me talk to you about Consumer. Performance was poor with a drop by 50% of revenue, both year-over-year and also in the first nine months. But first, let me talk to you about Infinix. We are selling it now to some other retailers. We are now present in 30 retailers, and we have the potential of achieving 7,000 points of sales, brick-and-mortar points of sales. And what we see is an increase in sales of Infinix every single day. And I believe that we are on the right path. But why do we see this drop in consumer despite the increase of sales with Infinix.

While smartphone sales, we saw a drop by 20% year-over-year that happened all over the world. It seems that consumers are not really replacing previous cell phone as they did. And the same trend we see in notebooks and desktops, especially durable goods, projects that cost more and which and that require funding.

So we have the credit issue. And with that, we see this enhancement of this drop. So for computers, 20% drop. But selling is more affected because selling is when we sell to retailers because retailers decide to reduce their inventories.

So they go from 110 days to 70, 75 days. So besides a low and constant sellout, we see that retailers are working with a very low inventory level. Besides that, we see that there is a drop in the purchase of laptops and notebooks by consumers. In Eastern Europe, in war, it seems that, that decrease is even higher in that region. And that's why entry level products that were not sold to other countries are now brought to Brazil. So we have a very fierce competition of retailers.

And as I mentioned, the decrease in their inventory levels and a decrease in sellout because of credit issues and also increase in interest rates. With that, I'd say that the most affected market is entry level, where we have a very good market share.

So with this decrease in the market is -- overall market, we also are affected, especially when we compare to last year. But thanks to our diversification strategy, we were able to offset that drive.

Now let me turn it over to Caio. He will address the numbers, financial highlights.

[Caio Moraes, executive]

[indiscernible] If you go over the numbers, just as Hélio mentioned, it's important to say that the company's revenue is increasing. In 2020, we saw an increase, thanks to Consumers than 2021. We also see -- we started to bear fruits of diversification and Consumer was still a very good segment. Now for this quarter, Consumer was strongly affected, but we delivered strong sales to government organizations, and that allowed us to actually increase our revenue.

And Corporate, we see an increase by 1.5. Out of the first nine months, the picture is very similar. Commercial representing 63% of our consolidated revenue. And that is also part of this 61% growth in the first nine months.

As for EBITDA, you can see continuous increase when we compare year-over-year. And that happens because of the mix that we offer. So we have a healthier margins in Commercial and for Consumers although margins are lower just as in other parts of the world, also better, improved operating leverage. And when we think about financial highlights, we see the positive impact of EBITDA. So we can see these numbers demonstrating that.

s for net profit for this quarter, mild drop by 6%, owing to financial expenses in order to support a 60% growth. And we know that interest rates are much higher today than last year and for the first nine months increased by 29%. And although we had an increase in price of input and that started in the second quarter of 2021. And we have the hedging to protect this.

Now let me talk to you about ROIC. We also see continuous increase in this number, although we see a drop compared to this year-over-year. But that is due to the working capital. So we had now some products that were already invoiced, and we will start to receive them, our payment in the first year. We always expect to have a very good fourth quarter, especially considering our guidance. And we know that we will be able to deliver this project. So we see this drop and that's related to EBITDA and also our debt. But by delivering these new projects, we will see an improvement in our net debt.

Now I'd like to turn it over to Hélio for his final comments.

[Helium Rotenberg, executive]

Well, first of all, we'd like to reassure you about our guidance. We are very close to the end of the year, and we know that we will be able to reach our guidance. Also, I already talked to you about government organizations, and we already have BRL 2 billion as revenues for 2022, not to mention what came from the electronic ballot and the pipeline of BRL 7.7 billion. We also see a continuous increase of revenue in corporate market, be it coming from increasing our market share, increased demand that has or increased offer of services.

We actually have a new division called Tech Services, and they start now to bring benefits to the company. We started also a big project of cross-sell and upsell. So POS machines, we start to deliver services. Also, when we sell tablets and PCs, we start now to manage the bulk of these devices and that also allows us to sell some other products to the education sector.

We know that we have many channels and products that allows us to grow and cross-sell and upsell. Also, we see an increase in revenues coming from payment solutions and the growth of Infinix penetration, as I mentioned, now present in more than 30 retailers. And what we see is that it's becoming more present different parts of the country.

Thank you very much. Now we are open for questions.

[Unknown Executive]

So let's start our Q&A session. [Operator Instructions] We have Marco from XP Investment. He wants to ask us his question live.

[Marco Nardini, analyst]

I actually have two questions. First is about EBITDA margin. Can you please give us some color? And what can we expect for the next quarters? I understand that, that margin was achieved, thanks to the mix between corporate and public or government organizations. But second, please elaborate on that? And also what are your expectations regarding Black Friday?

And also my second question is about the leverage. We see that you were able to decrease debt ratio to 1.9 but cash is still BRL 22 million, which is still low. And especially because you need a high level of working capital. So looking to the future, what do you expect for the next quarters? With regard to leverage, do you see that falling? These are my two questions.

[Helium Rotenberg, executive]

Okay. thank you, Marco. I will answer the easy question. As for Black Friday, we have already closed our negotiations with retailers, and we are starting to deliver. We are very optimistic and the retailers are optimistic too. Although they are really down to earth, they are optimistic because we know that we have Black Friday and Christmas. And this is already happening.

So we closed many deals with retailers, and we are already delivering our products. So we expect a very strong Black Friday. So we are delivering to retailers so that they can achieve a good profit.

Now I'll ask Caio to talk to you about the EBITDA margin and leverage.

[Caio Moraes, executive]

Thank you, Marco. Well, with regard to EBITDA margin, just as you mentioned, we are increasing in commercial. As for commercial margins, I'd say that they are similar to consumer. The issue is that this year, considering the high competitiveness and also increased number of products available in the market, especially considering the increase in interest rate and also all the international scenario. So we have products coming from other countries to Brazil. So with that, we see the very margins that are lower, but we expect to achieve good EBITDA margin.

And what we expect to see for next year especially a decrease in interest rates so that people can start to buy again. With that, we will see an improvement in Consumer segment but we don't see a drop in commercial. They're still very healthy. And that should allow us to keep EBITDA margin on the same level.

As for leverage, as you mentioned, we started the process in order to reduce that and related to EBITDA. But we still have a high inventory, especially considering the projects that we took on be it electronic ballot or a number of servers or many other big projects for the Brazilian government.

So you need to deliver that in order to be paid. So that will happen, especially in the fourth quarter and also at the beginning of 2023. Another important factor is that we saw an increase by 50%, two years in a row. And especially when you compare, for example, the first nine months of 2022 year-over-year. So we do not expect that growth for the next years. If we see an increase of growth, it will be lower. So we will not need to finance working capital just as much as we need today. So that's how we are going to manage that.

[Unknown Executive]

We also have a request from Andres Salles with UBS. He also wants to ask his question live. .

[Andre Salles, analyst]

Congrats on the results achieved. I have two. When we go over the backlog for government organizations, this BRL 8 million, we do you expect to be realized?

Can you give us any idea, at least some ballpark numbers?

And also talking about Infinix, can you please give us more color regarding the cell phone market and what you expect for sales of Infinix for the next month?

[Helium Rotenberg, executive]

Let me start by answering your question about Infinix. Infinix just increased. What we saw was decrease in Positivo tablet and Positivo brand. As for Infinix, we saw just an increase. If we were able to share a chart, we are very happy. I follow that every single day, and I just see the numbers going up. And we believe that it will achieve a very good level in activations, in sellout. And selling is also happening.

We are also bringing Infinix to more retailers. We are also holding a very strong campaign. And Infinix targets a population, 18 to 35 years of age and from the socioeconomic classes for the low-income brackets.

So if you take the subway in Sao Paulo, you will be able to see our campaign also online. And we are very present in many cities in Brazil. We also have a marketing project addressing the brand and point of sale. So when consumers go to a point of sales, we will have a representative supporting that consumer. That is working. We see an increased day after day, and we are very optimistic. So what was the next question about pipeline for the government.

Well, when you talk about BRL 7.7 billion, that's an estimate. 70% to 90% of that will happen between today and June. Some will take a little bit longer until we close a deal.

So when we think about what we have to date till June, July, I'd say that 70% will be invoiced in 2023 and some still to be delivered on new invoice in 2024. And just to remind that we participate in many public tenders and that we gained some 45% of them.

[Unknown Executive]

I have a question sent by our chat from Tulo Schwartzman. HaaS, do you expect with regard to its growth and what about that for the profitability of the company.

[Helium Rotenberg, executive]

HaaS is another segment that is increasing compared to 2021. This year, we had a very big project. We don't know whether we will have a big project next year, but we hope so, and we expect that to be a recurring purchase. So we expect to see increasing HaaS. Approximately 45% of our delivery of our computers to midsized and large companies are also based on HaaS. So we expect to see that ranging from 40% to 50%, which is a world trend.

So what we also have is that our share is increasing in this industry. And we also have HaaS for education, and we are also expanding that for some smaller companies. So we expect to see an increase next year.

So for the company balance sheet, obviously, that will be important, although we don't receive that as quickly, although we have high margins, and the impact is still relevant to the company, considering payment terms.

[Unknown Executive]

We have another question from Silvio González. HaaS and/or RHaaS can you please explain how these two business interact?

[Helium Rotenberg, executive]

Yes. Well, if -- for those of you who do not know, R is for refurbished. So machines that come back are refurbished and they are reallocated. So this is RHaaS. So we have a contract that lasts 36 months and after that, a company may buy the machines or they can also ramp them for another 12 or 24 months. So we have amortization of these machines. And after that, we provide maintenance, we may increase memory. We may replace the processors.

And then they are once again sent to the market for another three years. So they are strongly related. So RHaaS is [ induces ] HaaS and vice versa. And the environment also thanks us for doing that.

[Unknown Executive]

We have another question from [indiscernible] about smartphones. Smartphones still account for a low market share. But what do you expect? And what about the value proposition for the company?

[Helium Rotenberg, executive]

It's true. It doesn't account for much when you talk about our revenue, but we have 800,000 customers. So using, for example, our app, our smart house. So the market is increasing, although now, it's a very fierce competition in this segment, always on the do it yourself. And we always consider the do it for me as a continuity for this business. We are very happy with smart homes, with regard to our customer base and also our revenue.

[Unknown Executive]

Is the company considering M&A?

[Helium Rotenberg, executive]

Well, a company always do that. We have already acquired the companies of servers. And now we are examining some other M&A opportunities. But always considering that it should be part of our core business always part of our strategy in order to leverage growth or to expedite growth.

This is how we examine in. And we also have some of start-ups with our funding in R&D. We now should invest in another six start-ups, adding to the eight to which we have already invested. So our Board also believes in that.

[Unknown Executive]

Well, with that, we close our Q&A session. Now I'd like to turn it over to you, Hélio, for your final remarks.

[Helium Rotenberg, executive]

Thank you, Luis. Thank you, Caio. Thank you all for joining us this afternoon. We are now going through a very good moment as a company. We are very happy with the results achieved by the company with this increase in revenue, with a very motivated team, all the senior management, everybody very, very excited and really engaged in working so that we can grow. Thank you very much.

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