Totvs SA

BOVESPA:TOTS3

Earnings Call Transcript 2022-Q3

[Sergio Serio;HeadofIR, executive]

Good morning. You're welcome to our results conference for the third quarter of 2022. I am Sergio Serio, Head of IR. And here with me today we have our CEO; Maia, our CFO; Alexandre Apendino, our VP of Customer Service and Relationship. We will make our presentation based on the most important highlights and then proceed to the Q&A session. [Operator Instructions]

Before proceeding, we would like to clarify that any statements that may be made during this videoconference regarding TOTVS business prospects, projections and operation and financial goals constitute beliefs and assumptions of the company's Executive Board as well as information currently available. Future considerations are not a guarantee of performance, and they involve risks, uncertainties and assumptions as they refer to future events and therefore depend on circumstances that may or not occur. Investors should understand that general economic conditions, industry conditions and other operating factors may affect TOTVS future performance and lead to results that differ materially from those expressed in such future considerations.

I now turn it over to Dennis, who will start the presentation from Slide 1.

[Dennis Herszkowicz, executive]

Thank you, Sergio, and Good morning to those joining this videoconference. I hope you're all doing well. I want to start by recording that we have exceeded BRL 1 billion of net revenue in the quarter and almost BRL 1 billion of consolidated EBITDA in the last 12 months, striking numbers for our history. This result reflects the rare balance between growth and profitability of the company's business model. On the revenue side, growth of 26% year-over-year was once again driven by the combination of strong growth in the 3 dimensions.

In profitability, in addition to closing the quarter with an increase of 100 bp in the EBITDA margins, the cash profit reached BRL 169 billion in the quarter, growing 52% year-over-year and net operating cash generation advanced 64% quarter-over-quarter, reaching BRL 303 million. The unique combination of a loyal and satisfied customer base, unengaged and happy team, an innovative strategy and a winning culture are largely responsible for this performance.

I, therefore, take this opportunity to thank each and every one of those who are part of this journey with us. Our history is marked by innovation and pioneering spirit. Our way of thinking directly reflects TOTVS weight being the same while being different at all times. From the TOTVS franchise system going through the first technology IPO to the first acquisitions, we have never stopped leading and taking advantage of the fact that our global and intergalatic headquarters are located in Brazil, giving our touch of innovation.

In recent years, we developed a whole variety of innovations. The 3D ecosystem is a unique strategy as well as the value proposition to help SMB improve its results through technology and thus become trusted advisors to our customers. TOTVS is the first management software company in the world to develop this strategy. We are very proud of this pioneering spirit. And we will remain the same, while being different at all times.

Moving on now to the main highlights of the quarter. In revenues, on Slide 5, the year-over-year growth of 28% in recurring revenue from management, driven again by SaaS revenue, which grew 38%. The acceleration of year-over-year growth in net revenue from business performance to 33%, also highlighting the 34% growth in recurring revenue and also the Techfin funding net revenue of 51% year-over-year and 40% quarter-over-quarter. As shown in the graph to the right of the slide, the behavior, the business performance and Techfin dimensions, combined to the management SaaS represented 44% of total revenue in the third quarter and approximately 60% of revenue growth year-over-year.

As shown in Slide 6, this revenue result was once again followed by advances in profitability with highlights for the 33% increase in EBITDA when compared to the 3 quarter of 2021. This performance was driven by the 115% increase in Techfin EBITDA, the 43% increase in the business performance contribution margin and the 29% increase in consolidated EBITDA of management and business performance.

It is also worth highlighting, number one, the conversion of adjusted EBITDA into operating cash generation, reaching 164% in the period. And as noted in the graph to the right of the slide, the advanced in cash profit, which ended the quarter with a margin of 16.1%, 303 basis points higher than when compared to the same period last year.

I will now turn over to Apendino to comment our results of the management dimension on Slide 8.

[Alexandre Apendino, executive]

Thank you, Dennis. Good morning to everyone watching us this morning. In the management, I mentioned, net revenue grew 24% year-over-year. The highlight here is the 28% growth in recurring revenue, again, driven by SaaS revenue, which broke the BRL 300 million mark, 38% year-over-year. This advance in SaaS was mainly due to the growth of 34% of new signatures and 47% of cloud.

When we annualize SaaS revenue, we have already reached close to BRL 1.2 billion. In other words, if SaaS [indiscernible] or SaaS-Management were a company, it would be the second largest software company in Brazil, only behind TOTVS itself and growing 38%. As you can see on the right side, the volume component went from 70% in the previous quarter to 75% of the gross ARR addition in the last 12 months. This increase in volume relevance is directly linked to the reduction in inflation rates and the maintenance of the lowest annual churn level we have ever reached. Important to remember that if inflation continues to fall, it's only natural that we can have a nominal reduction in the net addition of ARR and consequently the increase in relevance of the volume versus price components.

Now in Slide 9, we bring the 3 main components that have contributed to this increase in sales volume. The potential software market, as already mentioned in other opportunities, is a market that is still far from maturity. Furthermore, we continue to expand our portfolio to solutions to increasingly enlarge the take rate and strengthen our cross-sell. The acquisition of Feedz is an example of the expansion of our portfolio solutions aimed at human capital, consolidating TOTVS as a platform capable of meeting the needs of our customers digitally in an integrated way. The same can be said about [indiscernible] which has an enormous cross-sell potential at the base with its cash and treasury management solutions.

Another example is the leverage of our PIX solution within multiple payment solutions in various segments. Today, thousands of companies use the TOTVS instant payment solution that has already processed almost BRL 0.5 billion in volume [ TVP ] in the last quarter, 10x more than the third quarter of 2021.

In the distribution platform, we have a presence in the most economically relevant cities, recurrence oriented business incentives based on what we call recurring revenue and expansion of new names in our sales teams in all units. Distribution channels see the potential of new dimension offerings such as digital commerce and RD station. The strengthening of the distribution platforms begins a transformation into a single player in SMB due to the broad and differentiated portfolio. This is a way without return. The last component is linked to the reduction of the total cost of ownership. Since we are constantly evolving our products so that deliveries are increasingly simple. Remote deployments, which accounted for more than 90% of our deployment have made it possible to create delivery centers of excellence in strategic regions. Finally, the sum of these and other factors have added ARR volume more than doubled actually year after year.

Moving on to Slide 10. The management contribution margin reached the level of BRL 476 million in the third quarter, driven by the consistent growth of recurring revenue, as I mentioned earlier. The slight increase in the contribution margin on the revenue from management is linked especially to investments in cloud and impacts of collective agreements on the operations of [ Bellow Resonto ] Rio de Janeiro and [indiscernible].

And I now turn over to Maia, who will comment on the results of the business performance and Techfin dimensions from Slide 11.

[Gilsomar Sebastião, executive]

Thank you, Apendino. Good morning, everyone. In the business performance I mentioned, we've had new advances in revenue and growth margin. The net revenue and the dimension went from a year-over-year growth of 30% in the second quarter to 33% in the third quarter. In the quarter-over-quarter revenue grew 10% compared to 8.2% in the second quarter. This was due to recurring revenue, which grew 34% year-over-year, representing 98% of the revenue of the dimension. This growth is essentially related to advances in sales volume, which have been observed at the RD station over the last few quarters.

The ARR of business performance exceeded BRL 330 million in the quarter, an increase of 31% over the third quarter of '21 and 8.2% over the second quarter this year with the net addition of BRL 19 million organic and another BRL 6 million in organic BRLs related to the acquisition of Tallos as seen in the middle of the slide. The lower net addition of organic ARR compared to the second quarter mainly reflects the performance of the new signatures, which brings more volatility. And we continued advancing entry level and cross-selling of CRM in RD's customer base.

It's worth mentioning that with Tallos conversational commerce solution, a cross-selling path in CX customer experience is also open, which is 1 of the 3 sub-segments of the dimension, along with digital marketing and digital sales. Another element worth mentioning is the evolution of the annualized GMV of the digital commerce offer, which has already reached the level of BRL 400 million, representing an increase of 103% over the same period of the last year.

Even though it is a dimension focused on growth, we will continue to seek a healthy balance between growth and profitability, which can be seen on Slide 12 in the contribution margin, which reached 50.8%, representing 3.6 percentage points above the third quarter of '21 and only 2.6 percentage points below the management dimension demonstrating the scalability of this business, even if the size of the Brazilian market is still at an early stage of maturity. This profitability performance is the result of a revenue growth in cost management efficiency, especially in the optimization of the cloud structure, as already mentioned in the previous quarters now.

Moving on to the dimension Techfin on Slide 13. The EBITDA -- the revenue net of funding grew 51% year-on-year. And this was mainly because of the increase in the contribution margin, but also revenue a consequence of the reduction in the remuneration of the senior quarter of FIDC as of August. Credit production reached a historic quarterly record of BRL 2.9 million driven by the greater seasonal participation of agribusiness, which contributed to the increase of 1.5 days in the average term of credit [indiscernible]. Over the last 12 months, the production of credit reached BRL 10.7 billion as shown in the chart to the right of the slide.

In addition today, the solution of the chain served by the supplier, part of this growth has occurred through cross-selling of the product, [indiscernible] with TOTVS customers representing 59% of new prospect affiliates and 57% of the affiliates implemented in the quarter, showing the cross-selling potential of this solution in TOTVS management's client base. As shown that the middle -- in the bottom middle of the slide, the increase in production has not been fully reflected in the increase in the credit portfolio as the seasonal production of agribusiness concentrated in the months of August and September and will probably have more impact on the credit portfolio in the fourth quarter.

Now when we look at the bottom left chart of the slide, we observe a default rate above 90 days showed a lower increase in the market average in the same rate. Please see that the aging of the [indiscernible] was higher in quarter 1, which was duly addressed by the suppliers team and it doesn't credit criteria.

So to conclude the Techfin comments on Slide 14. We move on to the contribution margin, which ended the quarter at 67%, showing an improvement of 3.9 percentage points over the past quarter and 15.5 percentage points over quarter 1, it was due quarter-on-quarter increase was mainly due to 40% increase in net revenue from funding and the consequent dilution of operating costs allowed by this business model.

I will now turn the presentation to Dennis so that he can comment on our ESG actions starting on Slide 16.

[Dennis Herszkowicz, executive]

Thank you, Maia. When we speak of social issues, the Social Opportunity Institute or IOS founded in 1998 by TOTVS was ranked among the World 200 top SGOs prepared by the [ DoD ], Swiss media organization, which evaluates the social organizations with the best practices and innovation impact and governance. As for governance, TOTVS won for the second consecutive year, the ANEFAC Transparency Trophy, an award given to the companies that present the best financial disclosures. I would like to take this opportunity to thank the whole team involved in these achievements.

Moving on to Slide 17 for our final message. These were our main achievements. Management, we continue with the continuous growth of recurring revenue driven by the powerful combination of new signings of SaaS, cloud and low churn business performance. We continue to advance with a focus on growth without losing a good balance with profitability. And Techfin, we have a positive seasonality in credit production associated with the low growth of the SELIC rate in the period.

It's also important to force that our joint venture with Itau has been approved by the Brazil agency CADE without any restriction and has also been approved by the Brazilian Central Bank. TOTVS is a unique company. We have a robust balance sheet, cash generation, market leadership and DNA of innovation and pioneering spirit. Our way of thinking to be the same, always being different, it's not just a sentence. It represents a culture that governs our actions and our ecosystem. It's what drives us and motivates us to continue evolving.

As proof this recognition, we have received for the third consecutive year the award of the Brazilian software company that does the most open innovation with startups by ranking 100 open startups. This is a recognition of the work done by [ Idexo TOTVS ] in the open innovation fronts to increase connection between startups and our ecosystem. At TOTVS, we remain optimistic and confident in Brazil and Brazilians. We believe more than ever in the Brazil that makes things happen.

We are now open for the Q&A session, which will be conducted by Sergio.

[Sergio Serio;HeadofIR, executive]

[Operator Instructions] Bernardo, the floor is open for your first question.

[Bernardo Guttmann, analyst]

Bernardo speaking. I really enjoyed this new videoconference format. I have 2 questions. One is the core business of management. You showed another quarter of consistent growth with increase in ARR, which was expected due to the inflation. But I want to see the matter of volume increase for the following quarters. Is there a segment that can grow these sales? That is my first question.

And my second question is the Business Performance segment. You had a strong acceleration in RD. I would like to understand if this growth is more from a standalone perspective or if there's a synergy with revenue?

[Unknown Executive]

Thank you, Bernardo, for your question. And thank you for the compliment on this format. We are really enjoying it as well. We think it's more interactive and I am going to start answering your question and the others may jump in at any moment.

As for the ARR, as we've mentioned before, it is still the case that the evolution is well-distributed. So every quarter, you have a segment that is a bit higher than the rest. But with few exceptions, all our segments are progressing well. Maybe in the beginning of last year throughout 2021, we had some that were a bit slower because of the pandemics, especially micro and small businesses, but even these segments have showed a very good growth rate this year. So in terms of segment, I would say that there is no perspective for a certain segment to be the main driver. And we think that's positive because it allows for better distribution and sustainability of this acceleration.

I think it's worth mentioning 2 other things. The first is to reinforce the issue of the inflation. Inflation is going down. This past quarter, we've had, I think, 2 months of the inflation. So it's natural and healthy for the inflation rates to go down and so our expansion rate and nominal ARR will decrease as well and volume will increase.

The other comment that I would like to make is about the visibility that we like to give. Regarding the closing of the third quarter, we had the Brazilian elections happening right at the change of the quarter, which is very important for the closing of deals. We know that many clients wait until the last week or even the last day to close deals. And so we had this first election happening precisely at the turn of the quarter, certainly had an impact. We believe that larger deals may have been pushed forward. And that's an important message for us to say that although we had a very good ARR in this third quarter, especially with regard to volume, this last month, which is usually the strongest month in the quarter, we had this impact of the elections and it was not as great as we imagined.

It was not a brilliant month, although it was a good month. So we still will have to see what is the impact of the fact that the elections fell on the last day of the third quarter. As for your second question regarding RD's acceleration, I would say that the increase with this cross-sell effort and the client base, it's still small. RD has a very relevant ARR base. So I would say that there's not a significant contribution of this cross-sell yet. And that's actually good. It shows that even in the standalone aspect, RD still performing in a very positive and healthy manner. And we have this opportunity throughout the next months and years to build an additional path to growth through these cross-sell with our management basis.

[Sergio Serio;HeadofIR, executive]

Next question, Marcelo Santos, JPMorgan.

[Marcelo Santos, analyst]

I would like to speak about franchise consolidation. There was a strong movement in the sense. How much have you captured of the external gains? How much is the system operating in what is considered an ideal efficiency? And there's a slide that you speak of total cost of ownership. You said that 90% of implementations were virtual. Can you give us an idea how much a client spends to implement TOTVS? Not the financial value, but how this compares to 10 or 5 years ago? So now they're spending 80% or 70% of what they were spending given these improvements.

[Alexandre Apendino, executive]

Okay. Thank you for your question. As for the consolidation of the franchises, that's a continuous process. We've had major advance in this consolidation process last year and there was opportunity for us to explore that expansion and we are still reaping the gains. This is a more sophisticated channel, more robust financially. So we are certainly reaping the benefits. As we've mentioned, we are opening offices in smaller cities where there's a lot of economic potential and less competition. So it's still an ongoing process.

We have regions that are gaining a lot from this consolidation. So it's an ongoing process. We still have some consolidations to do, small ones, but all of this sophistication in this model still have gains that will appear in the future now that we're going to these operations that were as sophisticated.

Maia, do you have anything to add or Dennis?

[Marcelo Santos, analyst]

Let me just add a question. When you speak of opening offices, are those your own offices?

[Unknown Executive]

No. These are offices to be opened by the franchisees. So in smaller cities, cities with about 200,000, 150,000 residents we have. Brazil is a very huge country. Sometimes it takes about 1,500 kilometers to reach an economic active city. And so our franchisees have the economic capacity to open these offices, and they use the TOTVS name. They are exclusive. They represent TOTVS in that region. And in Brazil, personal relationship is very important. So that's why it's key to have these franchise offices in these smaller cities and these other geographic piece.

[Unknown Executive]

Yes. of course, this allows us to scale this expansion to smaller cities. It's not just one structure, but several different structures that are spread throughout the whole country. And so it's important for us not to have the direct risk of this investment and this risk is taken by the franchisees. And once again, this makes it easier for us when expanding. And this is something that other companies can't do most of the time.

[Unknown Executive]

Can I move on to the second question, Marcelo? The second question is something that Sergio provoked to me about yesterday. He wanted me to include numbers in the report. We have evolved a lot in this direction in terms of implementation cost reduction. We keep the log in, which is important in SaaS, which are easy to onboard and to exchange. And so this makeup solutions that add value, combined to a faster implementation, that's something that we've been developing over the years.

And this advance we obtained in the remote implementation was magic to us. It was really wonderful. We have a Solution A and then a Solution B and the excellent center gains productivity year-over-year. So in terms of -- we have products and services. And as I commented, this is a long-term journey, and we've been improving. It will be cheaper, more accessible, and we can take more innovation, more recurring revenue and not only the implementation revenue.

And in the past, we had this division. In our operations as opposed to the operations of other technology companies, sales and services walk side-by-side. This provides synergies and makes a lot of difference.

[Unknown Executive]

Well, Marcelo, anyway, I'm going to give you an idea of numbers. We're seeing that if we can standardize the way we look at things, which is very difficult because we have different segments, client size and so on and so forth. But if we could standardize it more, I would say that in the past year, we had a reduction of about 50% in terms of the implementation cost, combining all of the elements that Apendino mentioned. Be it by means of a simpler product or a more simplified product or a more standardized implementation technology, which is more product-based and also remote implementation.

With that, the cost of transportation is significantly lower, always keeping in mind that Brazil is a huge country. So all of these elements combined they lead to a decrease of about 50% for our average client in terms of implementation.

[Sergio Serio;HeadofIR, executive]

Okay. So let's move to the next question. We now have a question from Leo Olmos, [ NVS ].

[Leonardo Olmos, analyst]

I have 2 questions. The first one is about management and the other one about Techfin. The first question, we've seen that ARR was very strong, even though we had a deflation in 2 months. But the conversion of ARR into recurring revenue was a little bit worse than what we expected. I know that this does not change much. In the midterm, this conversion of revenue will it go back to the previous pace? Or shall we project something different? This is question #1.

And the second question is about Techfin. In the third quarter, as Dennis mentioned, there was a seasonal impact, but it was a lot stronger than what we expected. So taking into account that what we're having from Itau in the next quarters, what should we expect? The growth has been very strong with TOTVS and standalone, but are we going to have another increase in terms of margins? And also, could you update us on the approval of the JV?

[Unknown Executive]

Can you start and I will wrap up?

[Unknown Executive]

Well, regarding the conversion of ARR into recurring revenue, I don't see any significant changes for the half of the year looking ahead. So I would not look at the third quarter as a proxy for the other quarters. In general, we always look at a 12-month period because it helps us normalize certain behaviors. And it also allows us to remove these ups and downs, which happen. And in the second quarter, it may capture one side more than the other side.

In terms of credit production the credit production was very strong indeed. We had already commented about this. So the evolution of the first to the second quarter is not usually very strong. For the third quarter, it was very strong in terms of production. And in terms of Itau it provides us a guarantee of availability. It also brings in expertise. It's a bank with a large tradition and experience and it also provides us with commercial capacity.

Our commercial capacity has been confirmed in terms of management and software. But we still have a lot to develop and improve. And having Itau as a partner will undoubtedly add a lot to us in terms of how we can have a more effective business approach. The only thing I'd add here, Maia, is that an essential aspect of Itau is the fact that we're going to have the largest financial cluster in Latin America, which will allow us as a tax supplier to transform the business potentially at least. And of course, we're going to work in that direction. It's not a promise, but we will make our efforts that this aspect will be larger even than the supplier.

So the supplier itself will have the advantage of accessible funding in expense, which is available and practically unlimited, which in itself is already very valuable. We will have the support of expertise of people but much more important than the benefit that we're going to have will be the potential benefit that the Techfin ex-supplier will have. And this benefit and this potential, as I've mentioned, is something that we are very careful about because we do not want to generate undue expectations at inappropriate times. But if there is something that can be radically changed with the arrival of Itau is Techfin ex-supplier.

I'd like to add and reinforce something important in terms of suppliers. We have shared it with the market. When you evaluate the seasonal behavior you're analyzing the historical behavior. So in the release, we share it with you. If you look at the curve for this year, you can see that it mirrors 2019 and 2018. In 2020, we had COVID. And then 2021, we had a recovery. But we are resuming our historical behavior.

Well, I think that this is the last part of Leo's question regarding Itau. We had the approval of CADE on November 1. The process is now under the evaluation of the Central Bank, the process is moving as expected, but it's very difficult for us to have a prognosis. And if it is the other way around we will continue pursuing all of the approval expansions. And this is as expected.

[Unknown Executive]

Well, anyway, the approval by CADE without any restrictions gives us some freedom. So even though we haven't closed the deal yet, it already allows us to plan and discuss, which is quite significant, and I wanted to share this message with you that since the approval by CADE, we have intensified and accelerated this activity. And so we are really working hard to prepare the company and all of the structures for this moment when we are ready to close and move on.

[Leonardo Olmos, analyst]

Okay. That was very clear. And I'd like to compliment the disclosure. So congratulations on your work.

[Sergio Serio;HeadofIR, executive]

Next question, Fred, Bank of America.

[Frederico Mendes, analyst]

I have 2 questions. One is actually a follow-up from Marcelo's question. I'd like to understand the minimum revenue of clients and management and also how this has evolved over the past 2-3 years. We always wonder how it's growing and how management is growing so much to understand. And now regarding distribution, if you can speak a little bit of the difficulty of placing a new product, I think it's easier for them to sell RD, which they've been selling for many years. When they look at the cross-selling opportunities, where do you believe are the main opportunities? Is it with the CRM? Is it in Techfin? So this view of those that are on the floor dealing with this day-to-day.

[Unknown Executive]

Well, Apendino is someone that does cross it. So he's really fit to answer all your questions. So I had just make this joke here with Apendino. But going to your question regarding average revenue. First, I'd like to thank you, Fred, for this question.

I would say that the minimal average -- sorry, the minimum revenue, when we speak of RD, I would say, it's about BRL 1,500 per month, below that lot can't sell. It just doesn't add up. And the salesperson doesn't have the proper incentive to sell that to the client. So I would say that it's about BRL 1,500 is the minimum. So when we compare that in today's currency would be around BRL 3,000, BRL 3,500 about 3 years ago.

As for the reduction of the implementation cost that I answered in Marcelo's question, it also applies here when we speak of the RD product to clients. And this is game changing for us because it on a whole avenue of smaller clients that would have to wait for a longer period of time to become TOTVS' clients and it's certainly a different magnitude than what we were used to.

[Unknown Executive]

With regard to distribution, of course, software is easier to distribute. That's what we do as part of our routine distributing software. Of course, when we have solutions to certain areas such as marketing, there's a learning curve and opening so that the client can see TOTVS as someone that operates in that area as well. So it's easy for TOTVS to insert itself in the distribution channel.

But [ BUs ] are [indiscernible] to leverage this. We have continued with our events and person events as soon as the pandemic allowed them to come back. We have a lot of in-person events in smaller cities and when we have an event and we're able to take a business person or an executive to that event, we present our whole portfolio. So we have this evangelization process of clients. Core software is simpler, but we have now our new supplier affiliates and the results show that most of them are in the distribution channel.

We learned how to show the Techfin solution but these solutions that could help us sell work out there. So we have events, we have a local presence. We have executives talking to clients frequently and the results and certain solutions show that we've had surprising results.

[Unknown Executive]

I would like to remember that the whole e-commerce portfolio, for example, has actually shorter or perspective at Techfin. We see that the e-commerce solutions fits well with distribution and this has been proven. Yes, all the e-commerce sales are done through the traditional distribution.

[Sergio Serio;HeadofIR, executive]

The next question, Thiago from Itau.

[Thiago Kapulskis, analyst]

I would like to congratulate you on your results. And I actually had 2 questions. And I know this is something that you already talked about a lot, but I would like to go back to the ARR. From what I understand there has been certain effects in the quarter maybe due to the elections that may slide the results to Q4. And Q4 has its own issues such as the World Cup. But I would say that the environment is still healthy and we can believe in continuity. It's not about numbers.

I want to understand of what you see as the trend? And also of these new sales and these smaller clients, these are the ones that would feel any macro difficulties. So -- and if there are any messages for 2023, what are you feeling right now? I know it's still a bit far ahead. But we leave this call working already towards 2023. So it would be nice to have that message.

The second question is specifically regarding Techfin. We see the strong production, the 3 quarters -- the 3 past quarters, it had been weren't sequenced. So how much is due to the seasonality of agribusiness? And how much continuity of quarter-on-quarter growth could we expect given the initial difficulties at the beginning of the bond? So I would really like to have your answers on these 2 matters.

[Unknown Executive]

Okay, Thiago. I am going to start from the end of your first question. I would say that we have good expectations for 2023. Our business is about recurring business. We have a low churn. So you have a good previous year where you have an addition in ARR in the previous year. So this 2022 we know that a lot of the path that we need to go down 2023 is already being paved. So and last, we have very abrupt changes to one of these elements. What we see is that 2020 will be a good year.

So that being said, when we speak of the ARR addition in the closing of the third quarter. And of course, now we have the fourth quarter. It's precisely what we mentioned and what we've also mentioned. Usually, the last month of the quarter is the strongest production months. I don't know if this is worldwide, but I know this happens in Brazil. And in TOTVS, we see people waiting to close deals in the last week of the last day or the last business hour. So there are certainly operational challenges related to this, but it's what happens traditionally.

And then this year, as we've mentioned, we've had elections on the last day of the month and the lasting of the quarter. So there were certain deals that we were expecting to close that didn't close. And so yes, they split for the next quarter or maybe even further on. And these deals may not fall through. We can't be certain about that.

As you mentioned, this fourth quarter is also a typical quarter. We will have the World Cup, as you mentioned. And we've also had the second runoff of the election, which was also in the second to last day. So regardless of what we think of these elections, they were very polarized. And among our clients, several of them, we could say that had a certain expectation even an emotional expectation, and we're waiting to see the results.

So if you ask me based on the information and visibility that I have today, if the election results will have an impact on our net addition of ARR volume, I would say no. But it's not something that we could answer for sure at this moment.

Yes. And I just want to add to what you've mentioned. This is the historic behavior that we have. We have route 500 deals of transactions that are done on the last day of the month. And we have an average of 2,000 transactions a month. So we can say that 1/4 of them happen on the last day of the month. That's the concentration that we have. So and this volume has shown itself to be consistent. Even having election on the last day of September, the runoff elections now on the last day of October, these are the numbers that we see.

The number of deals have remained with an average deviation, but we've seen more impact of the elections on the larger accounts. They are more influenced by these macro effects. So I do think that's something we need to monitor throughout the months to see how these larger accounts are going to behave as this election impact. And the second question was related to Techfin production. And you want to know how much is seasonal and its connection to agribusiness, that's what you would like to do, right?

Yes, when we look at the last 2 quarters, they were flat. And now we've had a stronger third quarter. So this matter of seasonality is quite important. Well, agribusiness has a concentration. So it impacts we feel in the third quarter and the fourth quarter as well as all those dollar. So there certainly is a seasonality and there are certain chains that anticipate their orders, their purchase orders because of certain promotions such as Black Friday, [indiscernible] Brazil and Christmas. So we see anticipation of retail orders in the third quarter. And some of this slide to the fourth quarter, but I think that the fourth quarter will not be as strong when we look at the seasonality record.

So I have a projection that it is mostly transactional, but we'll have to observe what happens in the fourth quarter. It's a bit more typical and it coincides with the beginning of the World Cup. But looking at the historic seasonality, it helps us, we had 2018, 2019, COVID and it could help us separate what is seasonal or not.

But anyway, just to wrap up. I'd like to remind here that we're going to have some advantage for next year if things remain as they are, which is the fact that SELIC is no longer going up and eventually, it will go down. And this brings in a positive element in terms of profitability. But also credit production will have additional incentives. We know that when nominal rates go up, discourages companies to take credit. And the other way around, of course, happens as well. And we think that for 2023 and in subsequent years, this effect of a nominally decreasing SELIC will help with in terms of credit production.

[Sergio Serio;HeadofIR, executive]

Well, I'm going to take one last question from Diego. Questions that are eventually not addressed in our chat here, you can contact us and we'll try to answer them. And so moving on to the last question, Aragao, Goldman.

[Diego Aragão, analyst]

Actually, while answering to Fred's question, you touched an aspect that I'd like to explore a little bit better. The profile of new clients. When we think about new sales, what is the percent of sales that are originated for new clients when compared to the sales percent for the clients who were already at the base in the last 12 months? This would help us understand this opportunity you see in a greenfield versus cross-sell. And also still about this topic, I don't know whether you can talk anything about this client, Micro-Small versus the average historical client of TOTVS.

[Unknown Executive]

Well, thank you, and it's already good afternoon. It's 12:05. I will start, and then I will turn over to Apendino, so he can complement my answer. But the percentage that we use today depending on the month, depending on the quarter, so the 25%, 30% more or less. And this is significantly higher than what we had some years ago. And it's a concrete proof of the improvement of our competitiveness. And there is another aspect that I've mentioned before. And that I think is very interesting. TOTVS has its own size and people are surprised that we can have this volume of clients, especially taking into account that the number of companies in the country does not grow 10% to 20% per year. It grows in very low percentage rates.

But when you look at the turnover of companies in the economy, it is significantly higher than 1%, 2% or 3%, which is the net growth of companies coming into the economy. We could compare it to TOTVS team. Our team will grow 2%, 3% from 1 year to the other, but this 2%, 3% is net. Our turnover is probably 18%, 19% eventually. And therefore, there is a level of activity of new companies, which is much higher than this net amount we see. And because of our capillarity, this reduction at TCO, we have been able to capture a very relevant part of this turnover in the economy.

[Alexandre Apendino, executive]

Well, this is a frequent discussion. It's an ongoing discussion for us. As I commented before, during the call, the amount of new sellers and sellers that we hire to work with new customers or net new customers, these are dedicated salespeople. And that has really increased our distribution network. We have dedicated teams in the different geographies, working with new clients. And this is because of the potential of new clients that we see along with the reduction of TCO and the remote services that we can provide. And the innovation we can take to places where we were not able in the past. So all of this together gives us huge opportunities, and we do believe that we should keep on investing on this dedicated sales team.

The profile is totally different from the profile of those who work with the client base. And sometimes, it's a client who needs a human resource ability. And so we have expanded our portfolio and consequently, we can start working with new areas.

[Diego Aragão, analyst]

Perfect. That is very clear. I don't know whether you could quickly comment about the margin of these clients when compared to the historical clients? And I don't know whether there is a significant difference or not.

[Alexandre Apendino, executive]

Well, the margin -- it's very similar the smaller clients because they need less implementation. And this is, in fact, a client that does not add a lot of margin, we will have more opportunities. But of course, this is a client that generates a lot of external opportunity. We have the management system and we can open a journey over time to capture clients. The history of TOTVS was built upon these facts, smaller clients who are somewhere between micro and small companies. They're based on a platform that will support their company for a longer period of time, we do have amplitude and depth in terms of coverage portfolio, and that generates a lot of cross-sell opportunities. And so this is the optimal case for TOTVS in terms of clients.

Would you like to add anything?

[Unknown Executive]

Well, the client in terms of profile is a client who started working with their own IT team and clients whose accounting is done in-house. So there we're getting close to these 2 thresholds when they are really prepared to be a client of TOTVS' platforms. I think that the market consolidates sooner, increasingly sooner. So it's a combination of different elements. And so our TCO is increasingly smaller. The combination of these effects allow the number of companies to be higher once we go beyond this threshold.

Well, when we talk about IT, it's important to mention in the future that we have a different profile than we did in the past. More in terms of being able to communicate with the company, the team is closer to the business, more relaxed, more capable to support the operation and works more as a provider of a complete solution, a complete end-to-end solution, which is available for the client. And so I think that this aspect is also very interesting. And even though we are in the early stages yet, we can already see a lot of value in this. Yes. And we are now advisers of SMB.

Well, excellent. I would love to continue exploring this topic a little bit more, but I will allow or I will ask Sergio to organize something like that for us to have this discussion. Okay. Well so I'm going to turn over to Dennis for his final considerations, reinforcing that the IR team is available to answer any eventual questions about the results of the third quarter. If you have any other questions as well, we'll be very happy to help and to interact with you. And so Dennis, I turn over to you for your final considerations.

[Dennis Herszkowicz, executive]

Well, Sergio, Maia, Apendino and the team who is here with us today, thank you very much. I would also like to thank those who participated and in special, I would like to thank our TOTVers and all of the other stakeholders for their trust, their cooperation. And I hope to be with you in the fourth quarter conference as well. Thank you very much.