Totvs SA
BOVESPA:TOTS3
US |
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
|
US |
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
|
US |
Bank of America Corp
NYSE:BAC
|
Banking
|
|
US |
Mastercard Inc
NYSE:MA
|
Technology
|
|
US |
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
|
US |
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
|
US |
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
|
US |
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
|
US |
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
|
US |
Visa Inc
NYSE:V
|
Technology
|
|
CN |
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
|
US |
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
|
US |
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
|
US |
Coca-Cola Co
NYSE:KO
|
Beverages
|
|
US |
Walmart Inc
NYSE:WMT
|
Retail
|
|
US |
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
52 Week Range |
26.46
34.42
|
Price Target |
|
We'll email you a reminder when the closing price reaches BRL.
Choose the stock you wish to monitor with a price alert.
Johnson & Johnson
NYSE:JNJ
|
US | |
Berkshire Hathaway Inc
NYSE:BRK.A
|
US | |
Bank of America Corp
NYSE:BAC
|
US | |
Mastercard Inc
NYSE:MA
|
US | |
UnitedHealth Group Inc
NYSE:UNH
|
US | |
Exxon Mobil Corp
NYSE:XOM
|
US | |
Pfizer Inc
NYSE:PFE
|
US | |
Palantir Technologies Inc
NYSE:PLTR
|
US | |
Nike Inc
NYSE:NKE
|
US | |
Visa Inc
NYSE:V
|
US | |
Alibaba Group Holding Ltd
NYSE:BABA
|
CN | |
3M Co
NYSE:MMM
|
US | |
JPMorgan Chase & Co
NYSE:JPM
|
US | |
Coca-Cola Co
NYSE:KO
|
US | |
Walmart Inc
NYSE:WMT
|
US | |
Verizon Communications Inc
NYSE:VZ
|
US |
This alert will be permanently deleted.
Good morning, and welcome to the TOTVS conference call to discuss the results of the third quarter of 2018.
With us today, we have Gilsomar Maia, CFO; Juliano Tubino, Vice President of Business and Digital Strategy; and SĂ©rgio Serio, Investor Relations Manager. [Operator Instructions]
The audio is being simultaneously webcast at ri.totvs.com.br.
Before proceeding, we wish to clarify that any forward-looking statements that may be made during the conference call related to the business outlook, operational and financial projections and targets of TOTVS are based on beliefs and assumptions of the company's management as well as information currently available.
Forward-looking statements are not guarantee of future performance. They involve risks, uncertainties and assumptions as they refer to future events, and hence, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors could affect the future performance of TOTVS and could lead results to differ materially from those mentioned in such forward-looking statements.
I will now turn the call over to Mr. Tubino, who will begin the presentation. Please go ahead.
Good morning, everyone. Thank you for participating in our earnings conference call. I will begin the presentation by commenting on the main recent events, starting on Slide 3.
Taking one more step forward in the Bemacash strategy that we started last year was a project that involves smart device design, software innovation and integration with means of payment. In October, we launched the Bemacash Smart POS.
Using the same software platform already available in the Bemacash tablet, the Bemacash Smart POS is a complete solution for point of sale that contains cloud-based financial management software with sales inventory and accounts receivable control, artificial intelligence solution that help the business owner in pricing, sales forecast and other business insights as well as receipt printing and integration with means of payments.
Developed with the micro and small business in mind, the combination of management technology and means of payment enable control of sales and management of the business from end to end, from anywhere or any device, including smartphones. Following the same distribution model of other Bemacash solutions, the entire Bemacash Smart POS sales process will be supported by TOTVS Store. Whether the customer buys directly or through the Bemacash channel, we will be providing a 100% digital purchase experience for them. With that, we want to provide small business, beside the solution that integrates smart devices, POS software and means of payments. We also want to offer business management and artificial intelligence solutions. Therefore, broadening the access to technologies that until were only available to large enterprises.
Moving to Slide 4. We are also celebrating iDEXO 1 year of operations. With an operating model focused on connecting startups, entrepreneurs and developers to customers in the pursuit of innovative business solutions, iDEXO already has 30 startups, actively engaged with those in business developments, integrating to our portfolio solutions from fintechs, such as payments, receivables, collection and digital currencies; and also, Industry 4.0; retailtechs; and back office. We will be increasing our ability to take innovative solutions to our base customers.
By the year-end, the community will have 45 high-growth startups under a revenue share model. Also note that all the startups in iDEXO community will have their solutions sold directly by top stores. Therefore, increasing our portfolio of solutions that will be purchased and contracted digitally.
Evolution of iDEXO operation will enable the institute to increasingly become a major incubator of the new corporate venture model in Brazil, especially for TOTVS, expanding the company's capacity in its future initiatives that are focused on innovation, business and product developments.
Now I will hand over the presentation to SĂ©rgio Serio, who will comment on revenue performance in the quarter, starting from Slide 5. SĂ©rgio, please go ahead.
Thanks, Tubino, and good morning, everyone.
Software revenue was the key driver of growth in total net revenue, both for the 2.6% quarter-on-quarter growth and the 4.8% year-on-year growth.
As you can see on Slide 6, the quarter-on-quarter growth in software revenue was mainly driven by the 21.8% growth in license revenue. This growth is essentially associated with the higher share of sales to large clients in the period. Positively impacted by the increase in the IGP-M, an inflation index, in the last 12 months, the growth in maintenance revenue was one more factor that contribute to the growth of software revenue in the period.
In the year-on-year comparison, it's worth highlighting that 26.7% growth in subscription's revenue that, combined with license and maintenance revenue's growth, drove the 4.8% growth in software revenue during the period. Note that this quarter, for the first time, subscription's revenue surpassed the barrier of BRL 100 million. This is an important milestone for the company as it transitions to the subscription model.
As shown in the graph on the left in Slide 7, despite the growth in license and maintenance's revenue, represented by the blue bars in the graph, subscription's revenue has consistently increased its share of software revenue over the quarters and has already reached 25% of this revenue line. In third quarter '18, thanks to the higher number of client addition, especially in the TOTVS Intera model, subscription's revenue grew 2.9%, surpassing the BRL 97.2 million in the previous quarter, reaching the BRL 100 million already mentioned.
Annualized recurring revenue from subscription, shown on the right chart of the slide, totaled BRL 444.9 million, a 4.5% quarter-on-quarter and 33.2% year-on-year, and essentially due to the higher volume of sales of products with lower average ticket related to the strategies of management and business open platforms, such as Fluig and GoodData, and the cancellations of Bemacash due to defaults on the units sold before second quarter '18, when the sales model was changed.
Moving to Slide 8. The year-on-year reduction in adjusted contribution margin from software is due to ramp-up in research and development, reflecting the new investments in innovation and the FX rate impact on TOTVS Labs' structure, the additional support costs to meet higher demand from new clients added in the period and new regulations that took effect in 2018, such as e-Social whose compliance deadline was extended and the increase in software costs due to the increase in sales of partners' solutions. The quarter-on-quarter reduction in adjusted contribution margin from software is mainly due to the increase in R&D, which apart from the reasons mentioned above also reflects the salary adjustments resulting from collective bargaining agreements in several regions where TOTVS operates, which represents around 20% of the total R&D payroll.
Regarding services on Slide 9. Adjusted contribution margin from services grew 110 basis points compared to third quarter '17. As mentioned in previous quarters, the growth in services revenue continues to reflect the higher pace of sales of services registered in recent quarters.
If we take the last 12 months as the base for comparison, the 1.8% decline in cost of services is due to the restructuring carried out during the second half of 2017. This reduction, coupled with sales, leads to a margin of 5.8% in the last 12 months of 2018, which is 320 basis points higher than in the same period last year.
Moving now to hardware on Slide 10. Adjusted contribution margin from hardware decreased by 300 basis points in third quarter '18 from third quarter '17 and by 470 basis points quarter-on-quarter. As already reported in previous quarters, this reduction reflects the lower pace of fiscal printer sales, whose margin had higher due to the change in the tax law in several Brazilian states, replacing the fiscal printer with other solutions, such as S@T in SĂŁo Paulo and electronic invoice in other states.
Comparing the last 12 months, apart from the aforementioned reduction in hardware revenue caused by the decline in sales of fiscal solutions, the decrease of 580 basis points in adjusted hardware margin was due to the increase in R&D expenses in the period. This increase is related to the effect of FX rate in relation to the R&D teams based outside Brazil and investments in the development of the new BemaGo platform designed for the smart device for the Internet of Things.
Moreover, in the third quarter '18, Bemacash sales totaled 672 units compared to 691 units in second quarter '18. The maintenance of Bemacash sales volume is due to the change made in the sales model in the second quarter '18 to simplify the purchase process and reduce defaults inherent to this market segment. Also worth noting that since April 2018, purchase using the Brazilian taxpayers ID number, CPF, are made exclusively with credit cards through the TOTVS Store.
I now hand over the presentation to Maia, who will comment on selling and administrative expenses on Slide 10 (sic) [ Slide 11 ].
Thank you, SĂ©rgio. Good morning, everyone. The 0.2 percentage point variation in selling and commission expense in the quarter is mainly associated with the performance of license sales in the period. Year-on-year, this expense went from 17.3% to 16.2%, mainly due to the reduction of recurring personnel costs in Q4 '17 and the dilution by the growth of software revenue and also by the deferral of variable compensation as a result of IFRS 15. It's important to note that the level of these expenses in the quarter is lower than that observed in the last 12 months, which also dropped comparing to the same previous period.
Regarding general and administrative expense, management fees and other expense, the reduction of 0.8 percentage point from second quarter '18 is related to the integration of Bematech's administrative operations concluded in Q4 '17 and the lower Provisions for Contingencies this quarter due to the progress of lawsuits in the period.
Here, it's also worth mentioning that in the last 12 months, this line of expense fell 1 percentage point, illustrating the focus on cost control.
And concluding with the allowance for doubtful accounts, which remained at 2% of net revenue, the same level as in second quarter and in the last 12 months. This quarter, the still high level of defaults was worsened by a large account that entered in judicial reorganization.
Now to talk about EBITDA. Please go to Slide 11 (sic) [ Slide 12 ]. As can be seen in the charts, the quarter-on-quarter growth in EBITDA was due to the increase in software result net of selling expense and combined with the decreasing hardware results and the administrative expense
[Audio Gap]
comparison, adjusted EBITDA grew 43.7%, passing from BRL 62.3 million to BRL 89.5 million due to the increase in software result and the decrease in selling and administrative expenses in the period. In the last 12 months, apart from the factors just mentioned, it's worth noting the growth in services result. In this period, adjusted EBITDA totaled BRL 341 million, a 15.6% growth, and margin was 14.9%, representing an increase of 160 basis points from the same previous period.
Moving now to Slide 13. The performance of EBITDA combined with the reduction in depreciation and amortization expense and a lower effective tax rate led to 39% growth quarter-on-quarter in net income. In the year-on-year comparison, the 83.5% growth in net income was driven by EBITDA growth, since the reduction of amortization expense related to intangible assets arising from M&As was more than offset by the effective tax rate.
I'll now move to Slide 14 for comments on cash flow and debt. Free cash flow generation grew 52% year-on-year, mainly due to the 215% increase in EBIT and the reduction in working capital.
Quarter-on-quarter, free cash flow grew 27.3%, due to the reduction in working capital and accounts receivable and tax recordable and the lower income tax and social contribution paid. Moreover, despite a payment of dividend and interest on equity this quarter, reflected in financing activities, net debt declined more than 70% year-on-year and 51% quarter-on-quarter. This decrease led to a net debt-to-adjusted EBITDA ratio of 0.3x in the last 12 months, the lowest since the merger of Bematech in Q4 '15.
Moving now to the Slide 15 for the closing remarks. During today's presentation, we saw that 3 years after we started the migration process to the subscription model, in spite of an economic scenario still in a recovery stage, the results show that the company has reached a turning point with growth acceleration, revenue and EBITDA margin increase. The last 12 months' view makes this trend even clearer. Adjustments made to the cost structure combined with the growth in software revenue, especially by a 32.5% growth in subscription, led to a 15.6% growth in adjusted EBITDA. In addition, the financial position has also presented significant improvement with free cash flow generation 52% higher led to net debt declining by 1/2 year-on-year, reaching 0.3x EBITDA, the lowest level since the transition process has started. To sum up, TOTVS is increasingly better prepared for a new growth cycle.
Now we are available for the Q&A session.
[Operator Instructions] Our first question comes from Eric Wolff with Hawk Ridge.
A quick question. I think there might be a problem with the line because I can't hear any response. But I was curious if you could talk to us a little bit -- if you could clarify the effective tax rate going forward.
Okay. This is Maia speaking, Eric. Thanks for the question. Actually, in this quarter, the effective tax rate was really affected by the interest on equity we paid. On an annualized base, our effective tax rate is running about 26%, if I'm not wrong. It's -- comparing to our historical rates, we see that this ratio of 26% is a little bit like -- is like above our recent results in previous years. We still have the second half results that could be part of these interest on equity calculation, and as a consequence, it could complement -- it can complement our dividend payout for the full year figures. And as a consequence, it can provoke some incremental reduction in our effective tax rate for the year. In the long run, we don't have a guidance of effective tax rate. And that's, probably the statutory rate in Brazil is about 24%. So we see the company still by far from that level, especially taking into consideration the benefit from these interest on equity. And also the benefit we have as a kind of tax shield from our research and development investments. Am I clear in my explanation?
Yes. So to be clear, the 26% is the year-to-date effective tax rate. And there is a possibility it drops lower based on the various factors affecting Q4. Is that -- or 26% was your thought of what it would be for the full year?
Yes. That's right.
Okay. Got it. Switching gears. I don't know if these are some things discussed before, but especially given it sounds like your outlook for the business -- we're past the elections. You're almost in a net cash position at this point. Any thoughts? And given the valuation, which has been discussed as well below, kind of anything and just about any other geography that exists in software. Any thoughts on potentially deploying capital for share buybacks?
Eric, in terms of markets, you're right. So this pre-election period that came up to the end of October was a very tense moment in the whole country. And it made businesspeople in general to hold most of their actions in terms of investment plans. And so far, we haven't seen a significant change comparing to these figures we are presenting this third quarter. Personally, we have some positive expectations for the end of this year and more especially for the beginning of next year. So it seems to have a positive expectation about the next government. Of course, it has to be converted into reality based on the practical measures of the new government. But it seems that the business environment is a little bit more optimistic for the near future. It can be favorable for our performance, in general, and then being more objective to your question about buy back shares. It's always a possibility. Considering the tax legislation in Brazil, I confessed that it's never the first one because we understand based on the tax shield provoked by the interest on equity. And secondly, dividends, they are not taxable in Brazil. We have, as a higher priority, the payment of the interest on equity and dividends, and then we can see share buyback as a clear alternative.
Got it. Okay. I mean, I know you discussed this as well, but ADR, given just the continuing drumbeat of valuations that Brazilian companies listed in the U.S. seem to get, I know there are different levels of ADR, and to do kind of a Level 3, or the ones that more complicated is maybe difficult. But any further thoughts on that as a way to make it easier for foreign investors to purchase shares?
Yes. So it's a subject we have assessed some years ago. Of course, you now know the context here, regionally. So Brazil was in a much better shape at the time. And we are reassessing that possibility. You are right. So when we compare companies involving a very similar process, we are pressing to have here, they are -- they have a relevant spread in terms of multiple comparing to our current multiples of valuation. It's a clear alternative we have here, especially when we take into consideration our free float. So almost 90% of our free float is formed by foreigners, institutional investors based out of Brazil. And personally, I see as a very good possibility to work in the direction of an ADR in a certain moment.
[Operator Instructions] I would like to turn the floor back over to Mr. Gilsomar Maia for his closing remarks.
So I'd like to thank you, everyone, again, for participating in our conference call today and remind everyone that we are here available, our IR team is always available to help you in any question you have additionally to those made here. And I really wish to everyone a very good day. Thank you very much. Bye-bye.
That does conclude the TOTVS conference call for today. Thank you very much for your participating. Have a nice day, and thank you for using Chorus Call.