Totvs SA

BOVESPA:TOTS3

Earnings Call Transcript 2023-Q2

[Sergio Serio, executive]

Good morning, everyone. Welcome to our second quarter 2023 earnings conference call. I'm Sergio, IR Head, and joining me today are the CEO, Dennis; CFO, Maia; and Eduardo Neubern, Techfin's CEO.This quarter, taking advantage of the recently announced closing of TOTVS Techfin JV in this first session, in addition to sharing the most important highlights about the quarter, we'll also make a brief presentation on the operations of TOTVS Techfin and at the end, we'll have a Q&A session. If you want to pose a question live, please raise your hands by pressing the button on Zoom's toolbar. If you prefer to submit your question in writing, please use the Q&A button. We will try to answer the questions here live or later via our IR team.Before proceeding, we would like to clarify that any forward-looking statements that may be made during this call regarding the company's business prospects, projections and operation and financial targets are based on beliefs and assumptions of the company's management and on information currently available. Forward-looking statements are no 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 in the future. Investors should understand the general economic conditions, industry conditions and other operating factors may affect the future performance of TOTVS and may lead to results that differ materially from those expressed in such forward-looking statements.Now, I turn the floor over to Dennis who will get started on Slide 3, and I'll be back for the Q&A session.

[Dennis Herszkowicz, executive]

Thank you, Sergio. Good morning, everyone. Thank you for joining us for our earnings conference call. I would like to start by thanking all TOTVS partners and our customers spread across Brazil and Latin America who participated in the TOTVS' Universe event at the end of June, which had over 12,000 attendees in 2 days. I would also like to thank the analysts and investors who participated in our Investor Day held for the second consecutive year as part of the TOTVS Universe.With regard to the results of the quarter again, we had important advances and have set some record, always focusing on growth with profitability. I would like to highlight that 2/3 increase of our consolidated revenue growth boosted by SaaS Management and Business Performance and also -- and a faster year-on-year growth of our recurring revenue. On the other hand, the lower credit and revenue production in Techfin led to a decrease in the EBITDA margin.As you can see on the Slide 5, consolidated net revenue grew by more than 17% year-over-year. A positive highlight was the 31% growth of SaaS Management and 34% growth of the Business Performance revenue, which exceeded the BRL 100 million mark for the first time. It's also worth highlighting the result of the consolidated ARR on the right-hand side which closed the quarter with a consolidated organic net add of BRL 178 million and a new increase in the representativeness of the volume in Management component and valid in the organic net addition in Business Performance.On Slide 6, about profitability, we continued to deliver consistent margins. Here you can see a highlight of our Management contribution margin up 20% year-over-year. In Business Performance, up 37% year-over-year. As for adjusted EBITDA, after 2 years we returned to a historical seasonal behavior in the consolidated numbers though EBITDA margins in Q2 was lower than in Q1 given the strong contribution of the increase in License Revenue from the Corporate Model which more than offset the collective bargaining agreements that we had at the beginning of the year leading to a higher consolidated EBITDA margins in Q1.Finally, in addition to this seasonal EBITDA behavior, the slight negative variation of cash profit against Q1 is linked to the higher volume of depreciation and amortization of cloud software licenses, an operation that has been consistently growing above 30% and had another new zone that has been made available recently.On the last chart on the right-hand side, the advanced cash profit against the second quarter of '22 shows the growth of our adjusted EBITDA. These are results that put TOTVS in a unique position and allow us to continue to invest in building competitive advantages, always seeking the best balance between growth and profitability.Now, I'd like to turn the floor over to Maia who is going to give you the details about our management results. Over to you, Maia.

[Gilsomar Sebastião, executive]

Thank you, Dennis. The Management dimension continues on its solid and consistent trajectory with net revenue advancing 18% compared to the second quarter of '22, both due to the 19% growth in recurring revenue and 11% growth in non-recurring revenue. The non-recurring revenue growth came mainly from SaaS revenue, which advanced 31% in the period, as you can see on the chart on the left. Here, we have 2 main highlights.First, the 32% increase in new signings and the 38% increase in additional cloud revenue, which surpassed the BRL 100 million mark in Q2. In the center of the slide, you can see the addition of BRL 148 million and the renewal rate of 98.3%, which led the management ARR to exceed the BRL 3.9 billion mark this quarter. And as you can see on the chart on the right-hand side of the slide, this addition represented organic growth over the BRL 130 million added in Q1.Such organic growth was due to the increase in volume of new signings and renewal rate even with a decrease of approximately 40% in the price component, which translates in the application of inflation adjustments to contract that were automatically renewed in the quarter. As a result, the volume component went from 82% in the previous quarter to 85% of the growth ARR addition for the last 12 months.On our Investor Day this year, we emphasized the importance of portfolio expansion, TCO reduction and NPS increase in new signings. Some examples were given of how the commercial productivity has been increased with the use of our Empodera platform, which uses data intelligence and our Management Maturity Index, IMG, to provide our distribution in cross-sell, such as with white space and attach rate insights and in upsell via telemetry of solution usage and take rate in customers.Moving on to Slide #9. The management adjusted contribution margin exceeded by 20% the amount of the second quarter of 2022, reaching 54.8% of this dimension's revenue, the highest level since the beginning of the SaaS model implementation, surpassing by 120 basis points in the second quarter of '22 and 10 basis points in the first quarter of this year, which demonstrates that the performance of recurring revenue more than offset the positive seasonal impact we had last quarter due to the increase in licenses of the corporate model, as we mentioned earlier.Now, moving on to Slide 10 to talk about business performance results, which saw further acceleration this quarter. The business performance ARR registered a new quarterly record of BRL 30 million of organic addition, mainly driven by the sales performance of RD Station and Tallos, in addition to maintaining the renewal rate above 97%. This organic addition added to the inorganic addition of BRL 31 million from the acquisitions of Lexos and Exact Sales led ARR to reach BRL 435 million this quarter and surpassed Q1 by 16%.This ARR performance resulted in a net revenue growth of 10% over Q1 and 34% over Q2 2022, which consequently had an impact on the contribution margin, which achieved 49.5%, as you can see on Slide 11, representing 40 basis points above Q1 and 110 basis points above Q2 2022. Although this dimension is relatively new and focused on accelerating recurring revenue growth, it's already a profitable operation with operational leverage of the SaaS model. This underscores the high-value creation potential of this dimension, given the profile of its robust portfolio, which offers solutions that require fewer implementation services, making this business model very scalable.Now, Eduardo Neubern will comment on the results of the Techfin dimension starting on Slide 12. Over to you, Edu.

[Eduardo Neubern, executive]

Thank you, Maia. Starting with the 2 charts at the top of the slide, you can see that the dimension's net revenue fell 8.5% year-on-year due to the 6.2% reduction in Supplier's Credit Production compared to Q1. In addition to the lower volume, the reduction of almost 5 days in the average credit production term resulted in a 13% drop in net revenue. This reduction in production compared to Q1 reflects the off-season in the Agribusiness segment, which can be observed in the shorter average production period.In comparison with Q2 2022, the reduction in volume is associated with the economic slowdown in some segments such as the steel chain, which has recorded a drop in both volume and price in the challenging moment of the credit market throughout the first half of the year, which is represented by the red line on the chart on the right-hand side of the slide, showing an increase in general average default of financial systems with micro, small and medium-sized companies.The increase in delinquency percentage of the supplier's portfolio above 90 days, represented by the blue line in the chart is mainly associated with the seasonal reduction of the credit portfolio. So the denominator affected the carryover of overdue amounts from previous periods as the difference between the market average as suppliers went from 190 basis points in Q1 to 200 basis points this quarter.Additionally, the provision for expected loss represented 0.37% of the gross portfolio, which is 4 basis points lower than in Q2 '22 and first Q '23. This reduction reflects an improvement in delinquencies in the most recent ranges, especially in the 31 days to 90 days in arrears. In fact, it is important to reiterate that even in more challenging times, we do not give up the quality of credit originated even if this translates into a reduction in production and portfolio.To close this slide, it is worth highlighting the cross-sell of the Mais Negocios product in the TOTVS' customer base, which is already accounts for 70% of the new affiliates in prospecting and 67% of affiliates in implementation, highlighting the potential of this solution with customers.On Slide 13, we see the reduction in production and therefore, net revenue, combined with a primarily fixed OpEx structure driving dimensions EBITDA into the negative this quarter. At this point, it is important to mention that the supplier individually is a very profitable operation. And even in the market scenario that I just described, it ended the quarter with a positive EBITDA margin of 17.4%. Thus, the consolidated negative result of the dimension came entirely from the organic operation, which accounted approximately BRL 13.5 million of OpEx in the second quarter, which will increase due to investments for the development of the complete portfolio after closing the JV that I will comment later.I now turn to Slide 15, precisely to talk about this new moment of the Techfin dimension post-closing. I'll start by recapping the objective of creating TOTVS Techfin which is to build a digital financial services platform for SMEs by integrating a full range of financial services. The closing of the transaction between TOTVS and Itau marks the beginning of a unique and autonomous operation focused on the development and distribution of these financial services.With transformational potential, TOTVS Techfin will have access to TOTVS' expertise and management and data systems, and Itau's financial expertise combining data science, integration with ERPs and distribution with access to efficient, abundant and competitive funding to create a light, agile and intelligent business model with a lower level of regulation compared to banks, optimization of returns and better risk management. With a large addressable market, it will be focused on the SMB B2B market. That is a focus in exploring TOTVS' customers. That's why we call it TOTVS-centric model benefiting SMEs throughout the country's production chain.With the closing, the joint venture with Itau will materialize in the TOTVS Techfin S.A. co-controlled by 50-50 by TOTVS and Itau as presented on Slide 16. TOTVS Techfin holds among other assets, the control of 100% of the supply in our Direct Credit Society, SCD of the subordinated quotas of suppliers, FIDC and it will hold other vehicles and entities that we may have in the dimension to enable the sustainable growth of the JV portfolio. Thus, the JV is now called TOTVS Techfin and is made up by 2 operations; Techfin, the organic operation with a sustainable growth mandate and the supplier with a profitability and efficiency mandate.Slide 17. We see that the organizational structure is a Board of Directors are made up of 3 TOTVS executives, Dennis, Maia and Gustavo Bastos, and by 3 Itau executives, Flavio Souza, Marcio Domingues and Marcos Cavagnoli. Techfin is led by me as a CEO and it has an experienced, focused and differentiated team of executives who combine the necessary complementary expertise in management systems, data and financial services with operational autonomy to manage the business strategy. Supplier continues to be led by CEO, Mauro Wulkan, keeping its operational independence.On Slide 18, we have the vision of TOTVS Techfin's product portfolio, an intelligent portfolio that may be integrated or not to the ERP, and that will have a hybrid and flexible approach to having a differentiated UX, both for the simplicity, efficiency and hiring and use as well as in the relevance of operating personalized services based on ERP data and that can be consumed directly at the touch points of management software.The concept will call ERP concept in a product-led growth model. The credit analysis will use cyber data from the European from public information being the first credit model in this type in the market. With this, we'll have the right offer for the right customer at the right price and at the right time. In addition, the portfolio will seek to combine scope, frequency and relevance to generate principality to customers with products related to digital accounts, working capital and B2B2C credit as initial priorities.I now return the presentation to Dennis to comment on the ESG highlights on Slide 20 and then to close the presentation with a final message. Dennis, it's up to you.

[Dennis Herszkowicz, executive]

Thanks, Edu. We closed the first semester with important achievements in our ESG agenda. First, we had the elevation of our score from A to AA by MSCI with positions TOTVS within a select group of global companies. And secondly, for the fourth consecutive year, we had an excellent result in the Institutional Investor ranking, ranking first in all categories among the TMT LATAM MidCaps.Finally, I should, of course, mention last night's publication of the seventh edition of our integrated report, an important voluntary initiative for accountability and reporting on sustainability and ESG performance to our stakeholders. These advances demonstrate the consistency of our journey in the recent years and motivate us to continue innovating, seeking to strengthen our ESG initiatives across all our operations.Moving now to my final message on Slide 22. I'd like to say that investing in technology is key to drive results and transforming companies. In this context, Brazil still has a long journey in terms of technology investments and TOTVS is there to provide innovative solutions that help our customers in this growth path. We do this by building an innovative 3D ecosystem that is constantly evolving.In Management, we followed the same term for many quarters with solid performance of recurring revenue growth followed by consistent contribution margin as well as organic growth of our net add even with the strong reduction of inflation. Highlights was the business performance dimension, a business that already has more than BRL 430 million of ARR, and that has been accelerating growth and has been very profitable. I see here an excellent opportunity in a little-penetrated addressable market with great potential in which we have leadership, a team with deep expertise and an expanding portfolio but which is already the most complete in the market.And lastly, in the Techfin dimension, we have important messages. Of course, the greatest highlight is the closing of the JV starting this unique and autonomous operation focused on the development and distribution of B2B financial services and with a light and intelligent business model. This is the beginning of a journey with transformational potential for TOTVS. And it is with this innovative spirit present in our DNA that we've opened the second semester, expanding the use of big data, artificial intelligence and ESG to deliver solutions that improve the results of companies and thus, evolve consistently to become even more the trusted advisor of our customers.Now, we are available for the Q&A session, which will be led, as usual, by Sergio.

[Sergio Serio, executive]

As a reminder, if you wish to pose a question live, please click on the Raise Your Hand button. You can also click on the Q&A button to send us your questions in writing. We'll try to answer most of your questions, but if we cannot answer all of them today during this live session, our IR team will answer them later.So the first question comes from Itau, Thiago Kapulskis.

[Thiago Kapulskis, analyst]

Can you hear me? Can you hear me now?

[Dennis Herszkowicz, executive]

Just a second, please. We have some technical problems. Apparently, everyone can hear Thiago but us. Thiago, can you please repeat your question? We had some technical problems here in the room.

[Thiago Kapulskis, analyst]

Great. Can you hear me now?

[Dennis Herszkowicz, executive]

Yes, we can hear you now.

[Thiago Kapulskis, analyst]

It was great to hear from all of you - Dennis, Maia, Sergio and Eduardo. And Eduardo, by the way, welcome to the team. I have 2 questions here on my side. The first question is the following: last evening, we heard many questions about margins. It was a harder quarter to read the results but you did a great job showing us what is Techfin, what is supplier, what is investment mandate. So when we look at the margins ex-Techfin, so excluding Techfin, Management plus Business Performance, that is there was a slight reduction but many people believe that these margins will grow in the future in the longer run. So can you give us further details about what you expect when it comes to those margins? Do you think you'll still need to invest a lot to foster the investment in the score?And my second question is about Techfin. We saw the closing of the JV with Itau. You talked a lot about that. There were many slides on that, but I'd like to hear a bit more about what you are taking from TOTVS and Itau, the best of both worlds. I know a lot about Itau because I work here but I believe the rest of the market doesn't know as much. What can you expect in the longer run?

[Dennis Herszkowicz, executive]

Thiago, can you hear us now? Can you see us?

[Thiago Kapulskis, analyst]

Yes, I can hear you, but I cannot see you.

[Dennis Herszkowicz, executive]

But yes, we can hear you. Okay. So let's move on. We apologize for the connection problem. It took us a while to come back, but let's move on with our Q&A session. So Thiago, can you repeat the last part of your question?

[Thiago Kapulskis, analyst]

Sure. So my first question was about the margins. Let me know if I have to repeat it. Now about the Techfin company, we heard about the JV closing with Itau. Can you tell us about the teams? I know some people because I work here, but I think that the rest of the market doesn't know them. So can you tell us what TOTVS is adding in terms of skills and what Itau is adding to the company and also about the pipeline of products, what you're planning for the coming quarters, what we can expect in qualitative terms?

[Dennis Herszkowicz, executive]

Okay. Thank you, Thiago. We apologize once again for the technical problems. I hope you're all still connected here. So I will start, and then I'll turn the floor over to Edu to talk about Techfin. About margins, Thiago. It's what you said earlier. Historically speaking, the second quarter of the year is usually the quarter with the lowest margins in the year. That's the historical seasonal behavior of results here at TOTVS. That was lost during the pandemic and the post-pandemic period mainly due to uncommon variations related to inflation rates which were very low one year and very high the other year. So that impacted this dynamic. But this year, we see this behavior happening once again.So with regards to margins, we don't have the revenue of licenses in Q2 as we usually have in Q1. That leads to much higher margins in Q1. And in Q2, historically speaking, we also have the TOTVS Universe, Universo TOTVS event happening. This year, it was the largest event ever held by TOTVS and that's the largest marketing investment that we make. So that accounts for a representative amount. If you look at the line for marketing expenses, the greatest increase is due to that, either if you compare to Q1 or to Q2 2022 because the event this year was even larger than the event last year and also from time to time, we usually face something that is really hard to predict, which are variations in contingency lines and provision for bad debt.So these are lines that we should look at in the longer run and not focusing only on the quarter at stake. So when we do that, we realize that in terms of margins, excluding Techfin operations of course, margins for Management and Business Performance were quite healthy, robust and within the expected pattern. We'll certainly have a third quarter with growing margins as compared to the second quarter. That's the pattern we expect and there is nothing that is signing to any type of change when it comes to this pattern.So Edu, about the Techfin?

[Eduardo Neubern, executive]

Thank you, Thiago, for your question. So first, talking about the teams. That was the first part of your question about the Techfin. So I think that we have a lot to add to each other. At the Board, we have Dennis, Maia and Gustavo. Flavio Souza, the President of Itau BBA is the Chairman and Dennis is the Vice Chairman of the Board. And we also have Marcos Cavagnoli with great expertise in products, which is key for us to have this great management and Marcio Domingues, which is the Head of Commercial Banking at Itau BBA.So at the Board, we can see that these skills complement each other. Gustavo is TOTVS' platform VP. He has the expertise of data and integration, which are differential -- competitive differentials at the JV. At Supplier, we have Mauro Wulkan. So that's the structure of the Supplier. And for Techfin business organically, we have Flavio Kamada as my leader. He used to be in Itau BBA and he also worked in other major banks. He's been looking at credit for midsized companies for 27 years. So he has a vast experience because we don't want any type of improvisation. We want someone who has a solid experience to lead our credit and collection team at the Techfin company. And we also have Mario Rodrigues who were already working at Techfin. We worked at Serasa. He has this expertise in data and analytics, another competitive differential for JV.And Tupi, who is now the CFO of the JV. He worked at Itau BBA for a long time. He has great experience in this market. He can add a lot with his funding skill, which is key for this JV's success. And we also have Carol, Ana Carolina, who also worked at Itau BBA and at Safra, which is a bank that focuses on midsize company. She also worked in a fintech working in a similar segment and she already had 2 years of experience working at the Techfin before the JV.And also Gerson Teixeira, who worked in the financial market, Itau, Porto Seguro, Santander, and he also came from Serasa. So we wanted to have this data engineering perspective as part of our team because we believe this is key for our success. So this is basically the org chart that you saw on Slide 17 of the presentation.And now about the second part of your question, which is our road map. In this first wave, we have a product build that is shared between TOTVS and Itau. In the first wave, we're going to prioritize working capital because of the coverage this product has. This is the most widely consumed product by small- and medium-sized companies in Brazil. And we're going to prioritize, therefore, working capital because of the penetration this product has and the high demand. And we believe that with access to data, we can have a very good credit management in order to make decisions related to working capital.We're also working on a digital account, the first market digital account that is integrated to ERP. That solved a major pain that we had consolidation, which was done manually. Our customers are still using 3 to 4 banks on average, each one of them. So integrating all that will lead to productivity and efficiency in a process that they do several times a day. So the differential of our digital account is the integration to ERP.And finally, B2B2C credit. As we mentioned earlier because of the footprint and the strength of TOTVS in the HR market with over 10 million leads processed a month, as part of our strategy, we want to focus on our HR paint point as well. And now, we have our own B2B2C credit solution to offer them. This is the business that we learned how to distribute, activate and engage, and we have a platform running to automate the lives of HR professionals in order to focus on productivity and efficiency.These are our top 3 priorities. You saw on the slide, the magnitude of our ambition, which is with time to build a complete portfolio of middle products, which is the focus of our work here, both in cash management and credit, either B2B or B2C, and additional solutions as we mentioned earlier such as foreign exchange and insurance, which are part of our JV's roadmap.

[Sergio Serio, executive]

Our next question is by Bernardo with XP.

[Bernardo Guttmann, analyst]

I have 2 questions about Techfin. The first about the guidance that you gave for the second half of the year. It helps us to set the expectations related to cost at this moment in which the JV is being set up. But what can we expect of revenue being boosted by these initial investments? We want to understand the margin dynamic for the second half of the year.Now my second question is about the portfolio. The slide that you showed us showing the new products and products under development was great. It shows a very robust pipeline, but I see that you're also focusing on a new niche. Edu was talking about that, which is something more focused on B2B2C. This seems like a new growth avenue, which sounds quite interesting, focusing on your customers' employees. So I have a specific question about the customer journey. Maybe this -- are all points of contact going to happen through RD or are you also going to launch new apps? Can you comment on this new front? That would be nice.

[Dennis Herszkowicz, executive]

Thank you, Bernado. I'm going to start and then Edu and Maia can complement. As to the guidance, no, we are not signaling specific revenue numbers of the Techfin. Obviously, the supplier is a business that already has a long history and naturally allows you to model and estimating. In this Techfin-specific case, the business model is still in the very beginning. And since the investment cycle changes in terms of its level, we'd rather now focus as we've done on the formal guidance on the OpEx, which is what we actually are able to control quite a lot.Again, any questions that you have regarding the guidance, we're open to clarify them. We try to give as much visibility as we can and I hope it's been made clear that we're talking about till the end of next year until 2024. And obviously, as it is required from us, we -- over the quarters, we give the follow-up as to how this is running. We understand that this is a quite important point, and that is totally consistent to everything we've been saying since April last year as we signed this operation.We said off the bat that what could be expected was the J curve in which we would have a relevant increase of investments in this business. Relevant to this dimension from the standpoint of the TOTVS consolidated results, you understand that the fact is negligible, not very relevant. But with this dimension, no doubt. On the other hand, the supplier would have a great benefit. Secondly, a benefit from the standpoint of funding costs and consequently, a improvement in profitability. Unfortunately, we cannot yet see that now because of the fact that the first and second quarters were quarters in which the credit market as a whole was doing poorly. And our focus, as we said, was preserving the credit track record and not production of revenue even though the operation is still very profitable. But again, revenue is not something that we will go over at the moment.In other portfolio, before I turn over to Edu, we certainly have some assets in our hands that can be used. They have been used, actually. So you know very well the app of My Fluig, My HR. So this approach of B2B2C getting to our clients, it is an important asset that will be more frequently used. As to are having other apps, it is, of course, a possibility. It's not something that we would discuss. Edu, I don't know if you would like to add.

[Eduardo Neubern, executive]

Just on the part of OpEx, the highlight of this investment is to strengthen the differentials we mentioned of the JV. Priority here is on data, a lot of data science, data engineering, products. The very mandala is the focus of such investments. In marketing products, we are sure about awareness, product growth and actually the teams, which was part of the previous question. To strengthen the teams, to complement them, we're creating a new company here, and this is the use and the priority aim of those investments.As to portfolio, a slight note, we already operated the business of B2B2C for private payroll loans. What we're doing here is doubling the bet, considering our learnings, the deal that we've seen and the assets as Dennis mentioned. So this is a portfolio that is made up by several aspects. So we have -- this is a product hired by HR and TOTVS has a huge footprint. And the go-to-market of this product invariably goes over HRs and TOTVS has several negotiations in products and a large portfolio of products.So we have great commercial synergy. And then the last part of the chain, well, the users of the product and associates. As Dennis mentioned in HR, we have a vision of the HR strategy, is to start with the payroll loan, the B2B2C credit. So it would not be restricted to that. We want to generate value to this compound portfolio to HR, but also to associates as we see, and we call it here chain vision. We have supplier client and client of the client in this vision of the whole TOTVS ecosystem. So the associates are a key part. So in the strategic context is where we have this our B2B2C strategy.And important that is worth highlighting for our guidance. As Dennis mentioned, this is something that is very relevant within the building of this operation that we call it more organic of the Techfin, which we move from a level in the Q2 to another level in Q3. On the other hand, it's worth reminding that the -- after the closing, the reflects of that is half on our bottom line. When we see the total number of OpEx and the Techfin and thinking that half of that is reflects the bottom line of TOTVS. So even with this growth, half of that, considering what was 100% before the closing, also does not have such drastic change in terms of results.So of course, the result of the supplier is reflected by half in the TOTVS' bottom line looking from the viewpoint of investment TOTVS was making and we'll continue making accounting for half of these investments. So this is not something so drastic.

[Sergio Serio, executive]

Next question, Marcelo Santos from JP.

[Marcelo Santos, analyst]

I have 2 questions. The first is regarding Business Performance. You highlighted this size of potential market. Dennis mentioned in his comments, with the parts that you have positioned, the assets that you have, how much can you embrace of this potential market and how much do you need to fill in terms of this mandala? This is the first question. And what would be, so the great parts that are still missing?And the second question is a follow-up on Thiago's question. You mentioned that the margin for second half of the year should be higher than Q2. TOTVS has been showing margin growth year-over-year. Can we expect this behavior of growth in the second half of the year or will it be in a period of investment vis-a-vis last year? These are my 2 questions.

[Eduardo Neubern, executive]

Wonderful, Marcelo. Thank you, as always, for your questions. I'm going to take the BP and I'll turn over to Maia to talk about the H2 market. On BP, we have -- we consider that we have a portfolio that is very solid, but it's not yet complete, okay? We also have an additional challenge. Not only are we going to bring more solutions, ultimately, but we're still starting to work on the integrated journey of these solutions. A great part of them have reached TOTVS last -- less than 6 months ago.So when you think about Tallos, Shopify, Ashley, when you think about Exact Sales and Lexos, the very tail being integrated now in the chassis of our R&D being transformed into the heart of Business Performance. We still have this work of building the journey within Business Performance that is major. What gives us great trust is that we are able to speed up the results of business performance based on any metrics that you assess. The speed that we had in Q1 and specifically in Q2 is very powerful, even still being in the beginning of this process.We've grown -- if I'm not mistaken, we've grown 10% quarter-over-quarter in terms of business performance. It's very strong growth. And part of it, quite relevant one, is deriving from what we call multiproduct, okay, Marcelo? And this multiproduct is precisely where we have greater potential for extracting value in this building of this integrated journey that we have ahead of us.So we have great room for growth. Maturity of the business performance market as a whole in our view, it's still low. We do not see many other companies with this approach that is so complete, so broad as ours, which gives us possibly an ability to compete, that is quite special. But just to end, there are 2 parts that we want to bring and those parts are going to complement all the 3 major macro themes that we have in terms of business performance. On one hand marketing, on the other hand sales tools where we include e-commerce and marketplaces, for example, and customer experience.And on all 3 major fronts of business performance, we understand there is still a lot of room for us to complement this portfolio. Adding to margin, actually connecting with the steam of business performance, I think there is an aspect that we haven't actually addressed in the earnings release even. And I thought we're making here. I don't know if it will be possible in the next quarter, but actually we've been working here to try to exercise the opening of a EBITDA between management and business performance. And actually, considering all the acquisitions that have been made that Dennis has just mentioned, you can imagine that there are operations that individually have lower margins considering the very ERG.So as we bring those companies, at the start, it creates some additional challenge in terms of margin expansion. As you integrate and create an integrated journey in terms of business performance, so we gain operational leverage. Anyhow, as to the business margin as a whole and specifically business performance and management margin for the second half, well Dennis' comment looks at the history of the company, its operations, its historical behavior of the operations. It's shown to us that over the year, in second half, this benefited from the operational leverage and the dilution of collective bargaining, especially in Sao Paulo. They are heavier and they have it in beginning of January date as a basis.So as Dennis mentioned, in the very opening, it has benefited from the increase of the corporate license that has a very fast response in terms of bottom line, almost instantaneous to the bottom line. This has offset the collective bargaining. In the second quarter, we don't have this chunk in terms of licenses. In terms of dilution, you still have an effect that is not totally diluted of the collective bargaining of the Q2.As you go to Q4 or Q3 and Q4, so the -- we have more dilution. So the adjustment in contracts contribute to that. We look at it more historically. This is what leads us to be more confident looking at the first half of this year vis-a-vis first half of last year, we take this effective behavior of the quarter first and second. We see an advance of 10 basis points in the EBITDA margin of business performance and management jointly together. But we have to be careful in this viewpoint of the quarter and have a broader view and more retrospective view. Of course, our mind is of gaining margin because the software business itself especially recurring should lead to expansion of margin over time for our operational leverage. Over the quarters, this follows a natural logic of development of the business.

[Sergio Serio, executive]

I'm going to open to the last question to reinstating that the questions that we have in the Q&A. The queue or the IR team will address all the questions individually. But I'm going to open up to [ Luca ] Bank of America for the last question, and then I'll turn over to Dennis's final remarks.

[Unknown Analyst]

I have 2 questions on my side. I'd like to understand better regarding the ARR evolution for the second half in business performance and management. In Management, there was a great development in terms of sales volume. I'd like to understand whether this should be kept for the second half. If there's an expansion, how we should think about that? And for the Business Performance, there's been great speedup level that was close to that was close to 30%. Is this something new in the quarter or should we think about a similar level or higher for the next quarters? That was the first question.The second question, regarding the conversion gap from ARR to recurring revenue. It was going up in the past quarter, and now it seems to be stabilizing. I'd like to understand whether this gap should continue to close now or how should we think about the time for this to stabilize and start declining.

[Dennis Herszkowicz, executive]

I'm going to start and then Maia will take the part of the gap. As to adding to ARR, I'm going to start from the end. In terms of Business Performance, there has not been any runoff. In terms of Business Performance, basically, we do not have this component of one-off because that Business Performance is very pulverized. It's even more pulverized than the Management business that is very much pulverized. So it is actually an increase in terms of volume. The market seems to be booming. There was an adjustment last year. Because of the end of the pandemic, things were a bit out of the pattern. But in this first half, we see a great recovery. And on the other hand, I believe that we also have this -- our execution that is quite important. So the combination of both things is what leads us to think that the trend should continue looking ahead.With regards to Management, we have always been showing that the elements that led us to change our level in the -- addition to ARR, they are actually varied. There's not a single pillar that sustained this improvement over the past 2, 3 years. There are many pillars and there are pillars that are quite deep. We're talking about improvement of product quality that translated into record NPS. We're talking about improvement in the efficiency and productivity of the commercial structure.We're talking about renewing the brand and we're talking about several elements, TCO reductions that open up a new front for customer entrants. So there are elements that once they are created and established, it's very unlikely that can be broken overnight which means that we have a belief that we are able to actually have a positive behavior in the addition of ARR in the forthcoming semesters when we look at the volume component. The price component is just automatic transfer of inflation. This is where passengers when it's sped up or when it is slowed down, which is what's happening now. In terms of volume, note that we prefer the best of volume. We have TOTVS' ability to influence with our execution.Maia?

[Gilsomar Sebastião, executive]

Now about the correlation between ARR through accounting recurring revenue, what have we noticed? If you look at the quarter-over-quarter growth of recurring revenue, it was actually higher than the ARR itself quarter-on-quarter. ARR grew by 3.9% or 3.8% and recurring revenue, 1% growth quarter-on-quarter. So if recurring revenue grows faster than ARR, the gap closes. And of course, we look at this on a contract-by-contract basis. And of course, it's much harder to compare one metric to another.In our IR modeling, we're trying to emulate what you do on the buy side, what we do is to try and establish this correlation in the last 2 quarters to the revenue of the quarter at stake. So we're actually talking about adding this exercise to our core of indicators starting next quarter. And I think this will make it easier for you as well so that you can see that we also do this exercise internally in the IR Team. So based on this exercise, what we see is a certain stability, as you mentioned. In recent quarters, we saw that this gap was getting larger, but now it's getting smaller. So we saw a stability during the quarter. But if we look at the gap month over month, there has been a reduction of the gap, and this gap might be closed in the coming quarters.

[Sergio Serio, executive]

Okay. Now, we're closing our Q&A session. I would like to thank you all for joining. Now I'd like to turn the floor over to Dennis to close the call of the day.

[Dennis Herszkowicz, executive]

Once again, I'd like to apologize for the technical problems we had in the beginning of the call and I would like to thank you all for joining us. Thank you for your patience. I hope you have all been able to remain in the call and had no connection issues. And if you have any further questions, just get in touch. We'll answer them later. We hope that the details that we have shared with you help you to run the best possible analysis of our results. Thank you very much and have a great week.