Totvs SA

BOVESPA:TOTS3

Earnings Call Analysis

Record revenue growth and promising future for TOTVS

TOTVS reported a strong second quarter with net revenue growth accelerating to 20%. SaaS and cloud segments, particularly driven by Agora's consolidation, saw a 33% annual growth. Adjusted EBITDA rose by 15% to BRL 296 million, with a margin of 22.2%. Despite some inflation-related margin pressures, the company remains optimistic, expecting continued growth in its ARR and Techfin segments, which posted notable gains. With a positive economic outlook, TOTVS plans further innovations and a new brand campaign aimed at driving future performance.

A Remarkable Quarter: TOTVS' Growth Story

In the second quarter of 2024, TOTVS achieved a notable momentum, ending with a consolidated net revenue growth of 20%, up from 17% in the previous quarter. This surge reflects strong advancements across three major revenue streams: SaaS management, business performance, and Techfin. Collectively, these segments accounted for 50% of total revenue and contributed an impressive 78% of year-on-year net revenue growth.

Financial Performance: EBITDA and Margins

The adjusted EBITDA for the quarter reached BRL 296 million, marking a 15% increase compared to Q2 2023. However, the EBITDA margin contracted to 22.2%, down 100 basis points from the previous year, primarily due to a predictable reduction in management margins. Despite this, the overall performance indicates resilience amid challenging economic conditions.

SaaS Management: A Driving Force

TOTVS’ recurring revenue crossed BRL 1 billion, showcasing significant growth in the SaaS sector, which saw an annual growth rate acceleration from 27% in Q1 to 33% in Q2. This noteworthy increase was bolstered by strong performance from the recently acquired Agora business, which added BRL 496 million to revenue. Furthermore, the Annual Recurring Revenue (ARR) management exceeded BRL 47 billion, underscoring the company's robust sales volume and operational efficiencies.

Business Performance: Expanding Offerings

The business performance segment demonstrated a remarkable 39% growth year-over-year, driven by significant new customer acquisitions and the successful RD Station Conversas product. The adjusted EBITDA for this segment stood at BRL 77 million, corresponding to a strong margin of 56%. This highlights the structural advantages of this segment compared to others.

Techfin: A Promising Outlook

In the Techfin area, net revenue reached BRL 70 million, up 11% from Q1 2024 and 47% year-over-year. This growth is mainly attributed to favorable credit production trends that, despite seasonal challenges, indicate resilience and a strong recovery path moving forward. The forecast for operational expenditures in Techfin is set between BRL 20 million and BRL 30 million, signifying a controlled investment plan for the future.

Significant Strategic Initiatives: ESG and AI Integration

During the quarter, TOTVS made strides in their ESG commitments, issuing BRL 1.5 billion in debentures aimed at improving their debt profile. The firm recognized the increasing relevance of AI in their offerings and highlighted ongoing needs for customers to adapt and maximize this potential. As AI becomes integrated into their product offerings, TOTVS anticipates enhanced operational efficiencies and additional revenue avenues.

Looking Ahead: Continued Growth and Opportunity

The management team expressed confidence in continued positive growth trajectory for the remainder of 2024 and into 2025. Key indicators suggest that the outlook remains robust, especially as TOTVS adapts its offerings based on customer needs. The recurring revenue model coupled with a keen focus on expanding market share, particularly in SaaS and cloud solutions, establishes a strong foundation for sustained performance.

Market Positioning: Driving Innovation and Efficiency

As TOTVS continues to enhance its software capabilities and integrate new technologies, the company aims to maintain its competitive edge in the market. The positive dynamics around cross-selling between business performance and management units are expected to yield further growth. Moreover, the company remains vigilant regarding operational costs and inflationary pressures, ensuring a balanced approach to profitability.

Earnings Call Transcript 2024-Q2

[Sérgio Serio, executive]

Good morning, everyone, and welcome to our Second Quarter of 2024 Earnings Video Conference. I am Sergio Serio, Head of Investor Relations. And with me today are Dennis, CEO and Maia, our CFO. As expected in the first part, we will present the key highlights of Q2 2024 results, and then we will have a Q&A session.

We request participants who wish to ask a live question to raise their hands by pressing the button at the bottom of the Zoom platform. If you prefer to send your questions in writing, use the Zoom Q&A button and we will try to answer it live or later through our IR team.

Before proceeding, we would like to clarify that statements made during this video conference regarding business prospects, projections and operations, and financial goals of TOTVS are beliefs and assumptions of the management and are based on currently available information. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions as they pertain to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors may affect TOTVS' future performance and may lead to results that differ materially from those forward-looking statements.

Now, I will hand it over to Dennis for his opening remarks, and then we will have our Q&A session.

[Dennis Herszkowicz, executive]

Thank you, Sergio. Good morning to everyone joining us on this conference call. We ended the first half of 2024 with the largest and most successful TOTVS Universe in our history along with the investor day. These events, in addition to strengthening our bonds with our various stakeholders, create a dynamic environment that fosters our extensive portfolio and a number of innovations, particularly highlighting the significant advancements in AI, which is already a reality at TOTVS.

In terms of results, the highlight was the acceleration of consolidated net revenue year-on-year, which increased from 17% in Q1 to 20% in this current quarter. This performance reflects continuous progress across all 3 dimensions, especially in SaaS management, business performance and Techfin revenue lines, which together accounted for 50% of the total revenue and contributed 78% of year-on-year net revenue growth, an additional record. These metrics demonstrate TOTVS capacity for innovation as these revenues result from the latest efforts to expand the addressable market and change the business model.

The adjusted EBITDA of the quarter was BRL 296 million, a 15% increase vis-a-vis 2Q of 2023 with an EBITDA margin of 22.2%, which is 100 basis points compared to 2Q of 2023 primarily due to the expected reduction of 90 basis points in the management dimensions margin. This will be discussed subsequently.

Now, I will hand it over to Maia to comment on the results of the 3 dimensions starting with management on Slide 4, and I will be back with you at the end of the presentation. Maia, to you.

[Gilsomar Sebastião, executive]

Well, thank you to everyone. Good morning to everyone. Starting with our management, the recurring revenue showed significant year-on-year growth acceleration increasing from 17% in Q1 to 20% in Q2, surpassing BRL 1 billion with a strong performance in SaaS and cloud, along with the consolidation of Agora's results in SaaS.

This continuous positive sales performance, combined with Agora, led to BRL 496 million in revenue. In cloud, the demand for T-Cloud solutions that would be past Platform as a Service continues to accelerate the revenue, which grew over 30% year-on-year. These combined results accelerated SaaS's annual growth from 27% on Q1 to 33% in Q2.

The ARR management maintained its strong performance from the recent quarters surpassing BRL 47 billion with an organic net addition of BRL 149 million. The performance directly reflects another quarter of advances in sales volume setting a new quarterly record. The sustainability of good performance in sales volume vis-a-vis recent inflation index behavior made the volume component of the last 12 months in ARR addition remain above 80% and growth rates of management dimensions continue to be driven by new sales to the base and new clients as a result of continuous improvements. In product quality perception, the Net Promoter Score advanced, along with portfolio expansion and reduction of total cost of ownership associated with productivity improvements in distribution.

Now, adjusted EBITDA management on Slide 5 closed Q2 at BRL 288 million, a 13% uptick compared to the same period last year with an adjusted EBITDA margin of 24.9%, representing a 90 basis point drop from Q2. This year-on-year margin reduction is mainly related to the mismatch between the inflation passed through in revenue, which has approximately half of its base linked to the IGP-M index that remain negative in the recent quarters and the impact of inflation on personnel cost and expenses and inflation, which has high correlation with the IPCA index that remained positive during this period.

In comparison to the IGP additionally, it's worthwhile to mention recent acquisitions that have profitability below the average and the fluctuation in the provisions of contingency and expected losses, which have greater quarterly volatility but have been reducing their representativeness over revenue in the recent year. When we compare quarter-on-quarter, the adjusted EBITDA margin registered a drop of 170 basis points. It's important to note that the seasonal decline between Q1 and Q2 this year was 50 basis points better than in 2023, even with the higher investments this year in the TOTVS Universe event and the new advertising campaigning focused on the brand building launched in June.

Now we go to business performance on Slide 6. Net revenue grew 39% vis-a-vis Q2 of 2023 and 52% vis-a-vis Q1 2024. This result mainly reflects the organic net addition of BRLs 30 million of ARR, driven by sales of RD Station Conversas that this quarter ARR was above BRL 60 million. We have CRM RD marketing solutions and the advancements of the multi-product strategy. For our new customers, the multi-product approach is a complete diversified offering of products that meets a number of differences. Now this strategy focuses in cross and upsell. Here we have complementary products and upgrades which are more appealing. TOTVS has a great experience here.

As we can see on Slide 7, the adjusted EBITDA business performance closed BRL 77 million more than the margin of 56%, representing 180 basis points. It's worth noting that the unit economics of these dimensions are structurally superior to those of management, which contribute to the dynamic margin growth. An example is the RD Station operation when seen isolatedly had a margin above 20% in terms of EBITDA. ARR is significantly lower than what we have in our management, therefore the combination of the 100% SaaS model with simpler go-to-market provides high scalability.

Now when we see Techfin on Slide 8, here the net revenue from funding closed a quarter of BRL 70 million, 11% above Q1 of 2024 and 47% Q2 of 2023. This is mainly associated with the performance of credit production which surpassed Q1 despite the negative seasonality of agribusiness in Q2. Moreover, the level of default remained at a low level, remaining 300 basis points below the Brazilian average despite the seasonal reduction in gross credit portfolio that increases the percentage of delinquency as a total of the portfolio.

Now on Slide 8, the progress in the integration of supplier and Techfin operation has enabled operational efficiency gains, and this is to build our new solutions. This factor, together with profitability, especially funding cost, allowed the Techfin EBITDA to end in the black at 0.3%. In this sense, the company's quarter revised financial projection for Techfin OpEx to range between BRL 20 million and BRL 30 million. Now the historical production of credit and results of the dimension point to profitability advances in the second half.

Now, I will turn the presentation back to Dennis, who will talk about the ESG highlights.

[Dennis Herszkowicz, executive]

We closed the second quarter with important achievements in our ESG agenda. In first place, we issued debentures totaling BRL 1.5 billion, aimed primarily at lengthening the gross debt profile. Two, we approved, together with the Board of Directors, the payment of BRLs 137 million of interest on equity. Three, we were recognized as the most honored company in the institutional investors ranking among mid-caps TMT Latin. Four, we published the eighth edition of our integrated report and an important voluntary initiative for accountability and communication on sustainability and ESG performance to our stakeholders.

Moving to my final message on Slide 11, we can summarize our business strategy on 1 simple phrase, increasing TOTVS's relevance to clients. We have been doing this for decades with a value proposition to improve company's results by taking on a trusted advisor position and building a 3D ecosystem that is 1 of the most significant innovations in the global management software market in recent years. With this, we have delivered financial and operational results for 21 consecutive quarters at the highest levels. When compared to any global publicly-traded peers, we are very confident about the second half performance in management. The IGP-M index has already turned to positive territory and should accelerate in the coming months favoring H2.

We see clear signs in the different accelerations year-on-year and quarter-on-quarter like the new record of ARR volume addition in the period. We should also talk about Techfin, which is moving towards a more normalized scenario compared to previous years marked by the pandemic, post-pandemic, Selic rate hike cycle crisis among other typical factors in addition to positive seasonality and credit production in H2. As we showed in our Investor Day, when we analyzed the recent behavior of software market and TOTVS, we clearly see the conditions to maintain the company's positive performance for an even longer period. This is because the management market has grown approximately twice the nominal GDP over the past 5 and 10 years. While the business performance market has grown approximately 4x the nominal GDP in the same period, and TOTVS has consistently outgrown both markets in both periods.

This proves 2 theses that the management market is far from its maturity and that TOTVS has potential and hard to replicate competitive differentiators. Additionally, we can say that we have embarked in a rapidly expanding business performance market with an already consolidated leadership and a gigantic Techfin market with a disruptive approach and the strongest possible ally.

I will close by reminding that we also launched a new brand building campaign which, with significant investments, now Brazil gets things done with TOTVS. This is our motto, summarizing our vision of believing that everyone can grow and that investing in technology is of utmost importance to turn challenges into opportunities.

And now, we go to our Q&A session that will be conducted by Sergio.

[Sérgio Serio, executive]

So I'd like to remind you that, according to what I mentioned in the beginning of the conference, if you'd like to ask a question, please click on the raise-hand icon on the bottom of your Zoom screen. If you rather submit your question in writing, you can do that on Zoom, and then we can ask that live or afterwards through the IR team.

So now to begin the Q&A session, the first question is from Vitor Tomita from Goldman Sachs.

[Vitor Tomita, analyst]

I have 2 quick questions on our side. So the first one is, can you give us some more favor on how the integration process of the new acquisitions have been evolving, and if there's an advantage in margin or back office? So we'll talk about the synergies. The second question is about R&D expenses in the quarter. We can see that you were able to dilute that a little. So we'd like to know if there's room for more of that and maintaining that trend to a certain point moving forward.

[Dennis Herszkowicz, executive]

I'll start, and afterwards, Maia, you can add if you wish. So, in terms of the integration of the M&A, I would say that we are on the right path. Most of the recent acquisitions that we made are acquisitions of companies that fall into the dimensions that we already operate. That means that we already have a reasonable level of knowledge of those businesses. If you consider Agora, the last one, they have a portfolio for HR Solutions and [ HN ], so we really know that business. Therefore, the synergies that we will obtain through the integration, that moves faster. And when I say faster, it doesn't mean that's going to happen in a month, but we should expect some gains and evolution based on the cost synergies, but especially synergies in revenues this year.

About R&D in management, yes, for some years now, we have obtained some level of dilution in operating leverage, and that's the path that we're going to follow. We believe that our revenues, and especially the recurring revenues, will continue to grow, and that's what's happening for 21 consecutive quarters with a 2-digit growth. So we should have or maintain that dilution level in R&D, but not only in that, but we can pretty much have a dilution in all of the lines as we grow the recurring revenues at the same rate that it has been growing in the past years.

[Sérgio Serio, executive]

The next question is from Itau, Thiago Kapulskis.

[Thiago Kapulskis, analyst]

I also have 2 questions on my side. So, about the ARR dynamics, I believe that's the main question we have about that topic. I know that it varies in some quarters. A lot of things may happen. But maybe you could give us them a flavor of what you see at the end in new sales, any perspective, what's the outlook for the rest of the year? And I know it's kind of early to talk about 2025, but anything that you can mention on that would be great.

And the second question is about Techfin. I think the main surprise for us was how you expedited credit origination. So I'd like to hear the factors behind that and how much that would be sustained moving forward in that growth.

[Dennis Herszkowicz, executive]

Thiago, let me just ask -- I missed a part of your question, so let me just confirm if this is what you're asking.

[Thiago Kapulskis, analyst]

So, first, you're talking about ARR for management and business performance, is that correct? And for Techfin, you want to understand the surprise, so to speak, the positive surprise on the results, especially in terms of revenues, is that correct?

[Dennis Herszkowicz, executive]

Yes. Actually, ARR, if you'd like to focus more on management, that would be more interesting. But yes, that's it. So starting with ARR, the dynamics were really good in the second quarter, especially in terms of volume. We are still doing great in cross-selling as well as at the base and also getting new accounts. We also had a quarter that, in my opinion, as far as I remember, was the best in terms of getting good accounts, that we're using solutions from the global competition. So that really made a difference to our bottom line.

And the outlook for the second half of the year, and even looking forward, looking at 2025, at least based on the current information available, the outlook continues good, still good. So, I always like to say that a sales cycle in the management market is a longer cycle. And we rarely see a case where a company wakes up in the morning and says, oh, I'm going to buy an extra module. I'm going to switch my ERP. Usually, these negotiations take months to happen. So that means that in sales, our pipeline, our funnel of opportunity is very long. And we rank these opportunities in different stages of maturity in terms of where they're at in the negotiation.

And then, we consider different percentages of the likelihood of closing these deals in time. And at the end of the day, that means that we have reasonable visibility. Obviously it's not perfect. Like you mentioned, it's always subject to any potential changes in the scenario. But since we're not really seeing any major changes in the scenario, that pipeline, that funnel does give us reasonable visibility. And what I can say at this time is that we are really confident that we will continue to deliver good ARR adds in the upcoming quarters.

That said, I'd like to add with another point. And we mentioned that during the opening remark, which is the IGP-M indicator. So when you look at the percentage of volume and the total of ARR added to management, that percentage has been growing fast in the last quarters. It was approximately 60%, 60-some-percent, and it reached almost 90% 1 or 2 quarters ago. So as the IGP-M gets positive, and it will, and it probably will in the upcoming months, even if we maintain good volume, the percentage -- the price percentage would probably increase. So once again, we do have a positive expectation and a reasonable confidence level about the upcoming quarters.

And now about Techfin. Well, Thiago, it's moving the way we want it. We have new products that are being tested. And I always like to remind people that the pilot project, especially connected to credit, they have a longer learning curve. Yes, nobody is like really jumping, just simply jumping into the credit market. So we do -- we are very cautious when we do that. But I would say that the level of integration that we can already see in Techfin is a very good integration level. So we can maintain investment with higher cost snergies. And that's why we obviously had an adjustment to our OpEx guidance.

So that means that we're going to do the same things with lower investment. So that said, we also have a more normalized dynamic in terms of credit production and consequently the credit portfolio, as well as net revenues, which at the end of the day translates into better profitability. So, unfortunately in the past 3 or 4 years, every year we had an atypical different dynamic that impacted the credit business, which, based on its own nature, is more agitated, so to speak. And even with Techfin with a medium term, so you have a medium term, and so that means that every 60 days you're pretty much replenishing the entire portfolio. And if the scenario changes, like we've seen in the past years, obviously you're not going to have the same ability to replenish that portfolio.

So now this year, the dynamics are a bit more normalized, and that's why you see the growth in net revenues and funding and production and the portfolio growth, and consequently much better profitability. And I'd like to -- and finally, H2. In the case of Techfin, it's stronger than H1. So this year -- excuse me, the first -- the second half is better than the first half of the year. So we will have a second quarter that's more similar to the historical seasonality of the Techfin business and credit.

[Sérgio Serio, executive]

Our question is from Leo Olmos from UBS.

[Leonardo Olmos, analyst]

I have 2 questions. One is for the short term and the other 1 long-term, structural side of the business. So we can see that we had good expense dilution in the quarter, but once again, the gross margin had some pressure year-over-year, a bit higher than the previous quarters. So, should we look at gross margin or is it more important to look at EBITDA because it's more important at the end of the day? Or if we should look at gross margin, should we consider the levels where it's going to become stable? And the long-term structural question is, in Kapulskis' question you talked about long sales cycle negotiations are going well. So, is there a driver for AI in Brazilian corporations or still looking for BI, digitization, did the demand for ERP grow or moving to the cloud? I'd like more information about that.

[Gilsomar Sebastião, executive]

Leo, this is Maia speaking. So, about gross margin, I believe that yes, that's correct. It is a metric that should be considered. But like most of the metrics in our results, at quarter, when you look at it alone, it usually doesn't say much. So we should look at a metric like this one with a long-term perspective, especially after the changes that we made, the inorganic changes, bringing in operations that add cost in an unproportional manner. Besides that, there's also the element that Dennis mentioned and I mentioned before the Q&A, which is the inflation mismatch, because obviously the cost has also influenced because of inflation, different than revenues.

So, Dennis talked about the M&A. As the M&As advance and we also advance in progression of operations to intensify recurring sales, be it in other operations where we have more synergies after the integrations and operations, it's natural to imagine that that margin could have a behavior that's more similar to what we've seen in the past years. So, I believe that this is more of a oneoff thing, but anyway, it is a metric that should be monitored.

[Dennis Herszkowicz, executive]

Now, regarding AI, yes, we see a certain level of ever-growing interest from our customers. I believe that the proof was Universal TOTVS, where we basically, during our keynote speech, we only spoke about AI. My presentation was that AI is a reality at TOTVS. I provided 7 -- a solid example of solutions running in our customers. Yes, this is an ever-growing interest, and this comes from 100% of our customers. This being said, interest is 1 thing. How to extract value is a different story altogether. So, we are still within a stage where there is major interest, but mostly this is scattered where the customer really doesn't know exactly what AI can do for them. And precisely, this is the role that we want to fulfill, this space of a trusted advisor of someone that will be able to help the customer to navigate within their needs. They can be operational, they can be financial, in order to see where to apply AI with the best possible return.

Once again, today we have a great amount of specific apps of AI running in a number of customers. And I do believe that this is going to be an extremely important driver of additional investment of systems. I always stress that our vertical applications, these applications, these platforms are positively affected by any horizontal technology. When cloud emerges, this can benefit RP. When AI emerges, this benefits RP. Any technology that provides new possibility, that changes the way of doing business, everything stems to what? To more sophistication in the back office and more investments of the companies. And precisely, this is where our systems make a difference, and this is that. This is why I've been saying for a number of years that the management market is far from its maturity. AI is here to enable. No, the only thing is, it's going to extend the point of maturity.

[Sérgio Serio, executive]

Well, our next question is here, [ Livia ] from JP Morgan.

[Unknown Analyst]

I have 2 on my side. Number one, could you update on your cross-selling initiatives between business performance and management? If this is according to your expectations, what would be -- could you give us an update regarding these strategies? And 2, Techfin, as we have a lower seasonality during Q2, could you allow us to identify which drivers will accelerate this element in the upcoming quarters? Is there something in addition to Agro? And in Techfin, we've seen the use of own resources in terms of funding. Is this a oneoff of this quarter? Is this a trend for the future?

[Dennis Herszkowicz, executive]

I thought that we had passed, no, it was passed known. So, I'm going to start with cross-selling. Management and business performance, everything is in progress here. I always step backwards. I would like to remind you that naturally the volume of cross-sale within the dimensions, management within management, and business performance and business performance has greater representativeness. But cross-selling amongst these two dimensions when we sell business performance products to management customers using the go-to-market, the distribution platform of management, that is a distribution platform based on field sales different from the normal performance business platform that is inbound, this dynamic has improved month on month.

We already have a fit of product like RD Converse, the [ Pasteuros ] in our e-commerce suite with Shopify, with Agilent, with Lexus, which is excellent. Last week I mentioned in a meeting that today I have an interaction with my customers, better interaction. I reserve more space in my schedule to find customers from different segments, sizes, and geographies, and it is incredible. 100% of the meetings, I'm not being far-fetched, 100% of my meetings with customers raise interest in business performance products. Okay. I'm talking about management products, a 100%. It doesn't matter if it's a law office, if it's an industry, if it's a university, if it's health insurance. In all the meetings I have seen fit and interest of products with RD Converse is like the suite of e-commerce and even digital marketing platform.

My view is that the growth of business performance offering and management customers through our distribution of field sales is an avenue of growth that will consolidate itself in the upcoming months and quarter. What we still do not do, but this is something that we can take into account, is the reverse pathway the other way around, to use apps, to use management solutions that present an interesting dynamic and fit in an inbound distribution platform, and we can offer this to business performance customers.

[Unknown Analyst]

Well, this is not a reality, this is not a priority, but you never know. It may become -- it might become a priority in the future. Can you say something about Techfin? In terms of seasonality, Techfin seasonality, what explains stronger performance on second semester?

[Dennis Herszkowicz, executive]

Well, we have the seasonality of the agro harvest. This is an element that strongly influences the second semester. Let's say that the second quarter is the in-between crops. We also have the level of economic activity that is stronger during the second semester, and this is a business based on transactional model with more transaction in our chains. Well, in this dimension, they will result in greater origination, and greater credit and the level of economic activity that generally is stronger during the second semester, and this creates a general seasonality.

Now, regarding the use of floating, that was the second part of your question. This is connected to the optimization of our funding structure done by the Treasury team from Techfin. This is a resource that is available. And as the Techfin team brought in the funding sources and even optimizing, this creates better conditions so that Techfin can use a higher level of the floating resources without going into risk. So, this is part of the Techfin tactic that is to optimize this. I believe that the levels that have been adopted, floating and funding something that in my take will continue growing.

[Sérgio Serio, executive]

Marco Nardini from XP.

[Marco Nardini, analyst]

I have 2 questions here. Number one would be, Dimensa, could you give us a business update on what is the competitive scenario? Has there been a change in the quarter? And in business performance, if you are delivering a strong result in terms of revenue, do you believe that this level of growth is sustainable in the mid and the long run?

[Dennis Herszkowicz, executive]

Now, regarding Dimensa, everything according to what we planned, we adjusted. The team -- and we also conducted adjustments in the model of the operation regarding customer relationship, and we said that this would generate a return. And this is something that we saw in the results of the last year. And we would have to wait for a couple of quarters to achieve the profitability from the past. This is the first quarter was better than Q4 last week. Q2 was better than Q1 this year. So, we acquired Quiver. This was an important acquisition for Dimensa. This opened a new business segment. Quiver proportionally was a relevant acquisition for Dimensa. And Quiver has a profit dynamic, which is very good. So, this also is a positive factor when we think about Dimensa, everything flowing as we had planned when we carried out the changes during Q4.

Now, regarding your second question, the growth in business performance, yes, we see the market dynamic in business performance as something positive. For some time, we've been saying that this is a market with a relatively low penetration level. The adoption level of most of the solutions that we have in our portfolio, I believe that the proportion is lower when we see the adoption of RP. Yes, we do see market conditions on one side and our execution capacity, which is positive. The brand R&D spearheads their business performance in a very strong fashion. As we broaden our single to multi-product portfolio, we increased our capacity to sustain this ever-growing growth in the long run.

[Sérgio Serio, executive]

Now, [ Cadu ], BTG.

[Unknown Analyst]

What a pleasure. My question, it's a brief, straight to the point. You have a comfortable cash position with low indebtedness for the first time in a long period of time. Stone has been publicly said that they are going to sell Linx. Does this make sense for you? You were extremely interested in this asset and I believe that people now have succumbed and want to sell this asset. How do you see this possibility?

[Dennis Herszkowicz, executive]

[ Cadu ], it's a pleasure to talk to you. Well, [ Cadu ], our rationale from 4 years ago, this was in August of 2020, like 4 years ago, the rationale, our strategy from the past continues the same. This means that we are interested in a management software operations that present differentials, that provide things that we don't have. If you see our history in our past acquisitions, we always want to add things that we do not have in our products. We rarely buy something that we already have in order to increase the critical mass. We're always looking for things that we do not have. And in this type of operation, like Linx, there's so many parts that we eventually don't have in our portfolio. So, the simple answer is that the logic or the rationale that we used 4 years ago, it's pretty much the same. Yes, 4 years ago, and maybe 4 years left.

[Sérgio Serio, executive]

Moving on with the Q&A session, next question is from Lucca from Bank of America.

[Lucca Brendim, analyst]

I have 2 on my side. So, first of all, can you mention the performance of the franchises that were acquired in the past quarters? Are they already running at maximum efficiency that you expect? Do you have room to gain more? And will that help the ARR in the upcoming quarters?

And the second, another answer, you said that you were able to win over big customers in this quarter from the global competition. Is that structural? And if it is structural, why are you getting the bigger customers moving on to your solution?

[Dennis Herszkowicz, executive]

Well, about the franchises that were acquired, we have TOTVS Rio Grande do Sul last year, that was maybe a year ago, and recently from the interior of the state of Sao Paulo. So 1 year makes a big difference, a little bit over 6 months, 7, 8 months difference between 1 and the other. So it's natural to imagine that TOTVS Rio Grande do Sul is much ahead when we compare in terms of integration and some changes that we have to make.

The commercial productivity of TOTVS Rio Grande do Sul had a significant advance since then. Obviously, more recently, in this quarter, it was mainly impacted by the flooding in Rio Grande do Sul. And when we look at the operation alone, obviously that will affect us. So, the Rio Grande do Sul economy has suffered overall, and they're still in a recovery process. It will take a while to get back to the point where they were at before the flood. But regardless, when we compare the level of productivity, especially commercial, the evolution that we had is very clear.

And from the interior of Sao Paulo, it's significantly bigger than Rio Grande do Sul. It already had good performance. So in that case, we're already acting on it. We've already seen some differences in the approach and even the commercial performance. There's still a lot to come. So to your point, be it the regional economy in Rio Grande do Sul that could get better and the other, they should contribute to add to our ARR in the upcoming periods. That's correct.

[Gilsomar Sebastião, executive]

About the big customers, yes, TOTVS does have the bread and butter customers. So that is our bread and butter, right, the small and mid-sized customers. But 1/3 of listed companies are TOTVS customers. And that didn't start last week. We've been servicing these big accounts for many years. And our product, when they improve the quality or when they increase the scope or when they increase and improve sophistication, that has a very relevant capacity to increase our revenue and get bigger customers. And that's been happening every quarter. So yes, that is an important front for TOTVS. And not only brings in customers with an average revenue that's much better, but also that helps in terms of reputation and the ability to show that we've evolved in terms of our product. That is very significant.

[Sérgio Serio, executive]

Now moving on to the end of the Q&A session. The last question is from Daniel Federle from Bredesco.

[Daniel Federle, analyst]

Congratulations on your results. I think most of the points this quarter were well addressed. So, I have 2 questions that are mainly structural. We've been seeing good results in forcing [ SaaS ] to move their customers to the cloud and same revenues coming from those customers that are moving to the cloud. So, could TOTVS do something to force the migration to the cloud? And is there a positive indicator in your case?

Second question is about AI. Are there any solutions in your pipeline that would make a customer's HR that needed 5 employees can do the same thing with just 1 employee or accounting instead of having ten employees do that with 2? And how would that impact TOTVS' revenues? Because in the past, the price model was per user. So what would happen if you're enabling your customers to gain more efficiency?

[Dennis Herszkowicz, executive]

Federle, thank you for your question and congratulations on your new challenge. If I'm not mistaken, this is your first conference, right, in the new company. Well, about forcing customers in any type of migration, be it to the cloud or any other kind of solution, to be honest, no, that is not the stance that TOTVS has. At least most of you have been with us in the TOTVS Universe for at least a little more than a month and a half ago. And you were able to see the relationship and you can see how close we are with our customers and how we are close to them and they are close to us. It's a very good relationship and we really value that relationship. It's really important to us. And by far, the biggest asset that we have is that relationship. All of that TLT that even translates into a huge level of trust between us. And the workforce, that really does not fit at least in our vision of the world, it does not fit with that relationship that we have with our customers, with that great relationship that we have with them.

And that said, obviously we are here to let our customers get to a higher level of evolution and sophistication. And moving to the cloud, moving to the latest version of the software and so on, those are things that we fight on a daily basis, so to speak, to achieve but we do not force them. Our work is to convince them on a daily basis, but we do know that customers have their own time to do that. And as we can, we respect that and we try to help our customers shorten that time as much as we can. And about the multiplier, yes, we have an addition. It's not that we have a formula that we apply a multiplier for each migration but I can say that in the last 10 years that we've been working on migration, that leads to an additional recurring revenue that is important and that is a good driver, an important driver for growth that we have.

It's the kind of situation that we call win-win. But given the fact that it is win-win, we don't believe that we have to force our customers to make that happen. So, about AI, it's still early for me to give you any direction in that sense. We always believe, and this is our track record, new technologies will offer more opportunities than threats. Can I guarantee that today? No, I cannot. Management software, as you mentioned, many times it does have the element about number of users to define the price, determine the price, yes, it does, be it through AI or any other element. If that eventually is no longer an important element in pricing, then we'll change the element and adapt our model.

Once again, TOTVS has been in the market for over 40 years. Many technological changes took place during that period, and we were able to found a path to make those changes more about an opportunity than a threat. And I don't see that being any different with AI. I see that much more as an opportunity than a threat, be it through the business model or be it in any other element that we're analyzing.

[Sérgio Serio, executive]

Our Q&A session is now over. I would like to thank everyone for your presence and hand over to Dennis for the closing remarks.

[Dennis Herszkowicz, executive]

Thank you, Sergio. Congratulations to our team, as always. Once again, we had a very important quarter with many achievements and that's why I would like to thank each and every one of the stakeholders at TOTVS, from the employees going through our customers, to our partners. We have many partners and acknowledging that all of them have contributed towards our success. Thank you very much, everyone. Once again, see you next quarter. Thank you.

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