Totvs SA

BOVESPA:TOTS3

Earnings Call Analysis

TOTVS Reports Solid Growth and Margin Expansion

TOTVS revealed consistent growth in their latest quarterly earnings call. Recurring revenues for the management dimension grew 18% YoY, lifting overall net revenue by 16%. Significant operational cash flow, reaching 134% over EBITDA, allowed a 29% YoY increase in cash profit and continuous investment in competitive advantages. Adjusted EBITDA rose by 18% YoY with a margin expansion to 26.6%. The business performance dimension soared with a 38% rise in net revenue, driven by multi-product strategy executions and ARR rising to BRL 462 million, marking 40% YoY growth. Techfin's funding net revenue impressively grew by 106% QoQ and 35% YoY, with a notable reduction in funding costs. Despite being slightly short in guidance, management maintains their guidance and expects to adhere to the projected range over time.

Strong Revenue Growth and Cost Reductions in Techfin

Techfin's funding net revenue saw impressive growth, increasing by 106% quarter-over-quarter and 35% year-over-year. This leap can be attributed to a 53% growth in Techfin revenue and a significant 7.5% decrease in funding costs. The growth is particularly tied to a 16% quarter-over-quarter increase in credit production, largely driven by the Agribusiness segment which experienced an extension in average production terms compared to previous quarters.

Improvements in Delinquency and Default Rates

Delinquency in the loan portfolio showed marked improvement across all ranges from 1 to 90 days. This consistent performance in past quarters led to a 30 basis points reduction in default rates for delinquencies above 90 days, indicating a strengthening of portfolio quality.

Techfin EBITDA Margin Surges

Techfin's EBITDA performance also turned a corner, reaching BRL 24.2 million, which is a 31% year-over-year growth. This reversed a previously negative trend. A notable cause of this improvement was the supplier segment of Techfin, which jumped from a 17.4% EBITDA margin in the previous quarter to an impressive 43.8% in the current quarter.

Market Opportunity and Business Model Confidence

Management expressed strong optimism about market opportunities, especially in Brazil where they see potential for significant investment growth in IT and software. They are confident in TOTVS's ability to capitalize on these opportunities and in the robustness of their business model.

Guidance Reiteration

Despite a slight shortfall from guidance in revenue, management maintains their existing forecasts. They expect to operate within their guided range moving forward, attributing the shortfall to contracting pace which they anticipate will normalize in future periods.

Franchise Network Adjustment

There have been specific actions related to TOTVS's franchise model, often described as a key driver of the company's success. According to management, these actions don't represent a change in their overall strategy but are seen as tactical efforts to optimize regional performance. Adjustments, including buying or selling regions, are common and are carried out to maintain the relevant national footprint of franchises, which remains unchanged as a strategic asset.

Cash Generation Strength Supports Share Buyback

TOTVS's strong cash generation, surpassing their EBITDA, has enabled them to announce a significant share buyback program. The program, the largest in company history, is meant to add shareholder value without compromising their ability to perform M&As, which remains a part of their strategic outlook.

Robust Gross Margins in Business Performance

Management highlighted that gross margins in their business performance segment are structurally higher than those in management, standing at around 80%. This is largely due to the recurring revenue nature of this segment, where products are sold without the need for significant deployment. This structure affords the segment a superior margin profile.

Earnings Call Transcript 2023-Q3

[Sergio Serio, executive]

Good morning, everyone. Welcome to our video conference for the third quarter of 2023 results. I'm Sergio Serio, Head of IR. And with me are CEO, Dennis; CFO, Maia; Apendino, VP of Customer Service and Relationship.As usual, in the first part, we will present the most important highlights of the last quarter's results, and then we will begin the Q&A session.[Operator Instructions] Before we proceed, we would like to clarify that statements made during this video conference regarding TOTVS's business outlook, projections and operational and financial goals I believe and assumptions of the company's management as well as information currently available, future considerations are not guarantees of performance. They involve risks, uncertainties and assumptions as they relate to future events and therefore depend on circumstance and may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors may affect TOTVS's future performance and may lead to results that differ materially from those expected in such future considerations.Dennis will start now from Slide 3, and I will return during the Q&A session.

[Dennis Herszkowicz, executive]

Thank you, Sergio. Good morning to all of you that join us in this video conference. Before discussing the results, I want to publicly welcome Vivian Broge, who has joined us as VP of HR and Marketing; and Gustavo Avelar, who is with us in the new VP of Customer Journey. In HR and marketing, Vivian will play a role in contributing to the ongoing evolution of our culture and people as well as the TOTVS brand for customers, TOTVERs and other stakeholders. With the VP of Customer Journey, we are taking another step in the execution of our 3D strategy, where Avelar will be responsible for leading the customer journey across the 3 business dimensions, leading the design and the deployment of cross-dimensional offerings.We also completed the acquisition of TOTVS IP franchise, which is part of the ongoing balancing between direct and channel operations in different regions of the country, aiming to accelerate and optimize the capture of growth potential in the 3 business dimensions. It's important to reiterate that franchises are of utmost important for TOTVS strategy and will continue with us as always.Finally, last night, we announced a new share buyback program of 18 million shares, which is 3.5% of our free float. The main goal of this movement is to maximize shareholders' returns. Considering current cash position and strong cash generation, we are confident that the program will promote efficient capital allocation without compromising our ability to execute the extensive M&A pipeline of the company.Now about the results. Well, the third quarter was very good. We made progress in all indicators, even when we compare it to past periods of strong performance, as we will mention as of Slide 4. It's important to note that starting this quarter and pro forma comparative basis are consolidated figures now include the results of Techfin by 50%. As we can see in the chart, we continue improving our results without sacrificing the balance between growth and profitability. The balance also occurs with the dimension where we now share the EBITDA margins of the management and business performance dimensions, which we will discuss further on.Regarding growth, the consolidated net revenue advanced 19% year-over-year and 8.2% quarter-over-quarter, totaling BRL 1.2 billion, even with 12 -- with the GPM accumulated during the last 12 months, remaining negative for the several months, reflecting excellent performance in the 3 dimensions regarding profitability, adjusted consolidated EBITDA with 295% with an adjusted EBITDA of 24.5%, which is 130 basis points higher than the second quarter. The highlights here were the EBITDA of management, a strong recovery which not only closed the quarter with positive EBITDA but also showed year-over-year growth. It is also worth mentioning that we generated BRL 380 million in operating cash during this quarter, which led to the operating cash generation over the EBITDA ratio to reach 134%.Cash profit was BRL 215 million, 29% higher than Q3 of 2022 and 62% in Q2 of this year. This is a special performance that put TOTVS in a differentiated position, allowing us to continue investing and building competitive advantages to capture the opportunities in the Brazilian technology market, which continues to expand positively.Now I'll give it over to Apendino that will talk about management dimensions from Slide 5. Apendino, you have the floor.

[Alexandre Apendino, executive]

Thank you, Dennis, and good morning to everyone. The management dimension recorded another consistent quarter with a 16% increase year-on-year in net revenue. The performance is primarily a result from recurring revenue, which grew by 18% in the same period and represented 86% of the dimensions revenue, which highlights being 34% growth.Cloud revenue and new SaaS signings, management ended the quarter at over BRL 4.1 billion with an organic net addition of BRL 147 million, reflecting mainly the strong sales volume that we have maintained, both with existing customers and new ones. The combination of the sales performance with the sharp reduction in inflation led to the share of the volume component increasing from 85% to 88%. It is also worth noting, maintenance of the renewal rate above 98% and the increase in the recurring revenue and ARR revenue that rose from 87.1% to 88.1%.Slide 6, the adjusted EBITDA ended the quarter at BRL 276 million. This is an 18% growth and a 40 basis point increase year-over-year in margin, which reached 26.6%, mainly due to the 18% year-over-year expansion of recurring revenue. In 9 months, EBITDA margin reached 26.8%, one of the highest levels of our historic series, the highest EBITDA since I joined TOTVS in 2013. This is good.We continue focusing on providing our distribution network with data intelligence throughout our Empodera platform and on reducing the total cost of ownership, whether through better alignment of our solutions with customer needs and through remote implementations and resources sharing among operations. We believe that with these actions, we can further expand our recurring customer base. In this regard the consolidation carried out by our franchises and the constant pursuit of the optimal balance between company-owned and franchised operations have been essential in supporting our growth.Now Maia will talk about business performance and tech dimensions from Slide 7.

[Gilsomar Sebastião, executive]

Thank you, Apendino. Good morning, everyone. Let's begin with business performance. The net revenue of this dimension was up 38% year-over-year and 14% quarter-over-quarter. This strong increase in revenue is directly connected to the evolution of the ARR that reached BRL 462 million, accounting for a 6% growth over the second quarter and 40% over the third quarter 2022. Once again, CRM sales and conversational sales grew significantly above the dimensions average and are materializing the strategy transition of RD Station from single product to multiproduct strategy.As we see on the chart to your right-hand side, when we disconsider the TAIL, which is not part of this stack multiproduct from RD Station, the organic net addition of this dimension added to BRL 34 million in this quarter, the largest amount of the historical series of this dimension in business performance. As we mentioned in previous quarters, TAIL is an operation that's still concentrated in key accounts, which brings about more volatility to the outcomes besides the fact that the go-to-market strategy is more similar to the management strategy. That's why reassessing our positioning and our strategy for TAIL in this operation.On Slide #8, we can see that even though we're growing in an accelerated pace and having added default operations, this dimension is and has been a profitable business, which is uncommon in the market that we see in Brazil, which is still fragmented. Under this context, TOTVS is one of the main players, and we've been setting ourselves apart since we're building a full stack multiproduct at RD Station to cater to the needs of the digitization of SMB.Now I'll talk about the results of the Techfin dimension on Slide #9. Before we begin, it's important to remember the structure and the dynamics of this dimension after we closed the JV. As stated in the second quarter's earnings release, the Techfin dimension is made of 2 business with different characteristics and maturity levels. The first one is made by Supplier, a company that's been in the market for 20 years under a consistent business model with low exposure to credit risk and high profitability. However, the main cost is the funding cost to which the average term has been higher as compared to the credit portfolio, which is shorter than a quarter. However, that's positive because that reduces the liquidity risk of the operation. On the other hand, variations in production because of the 6-month seasonality may result in variability in profitability since the funding cost for 1 quarter is given. As we see with the JV, there is an important improvement in these dynamics between the portfolio origination and the funding once the availability of funding has significantly increased, which allows us to increase and have a better and more efficient cash management practice. And therefore, the final funding cost is lower.The second business is what we call internally the organic Techfin. It has been built inside TOTVS 3 years ago with a huge addressable market. On top of which, we're building unique competitive differentials with investments so as to create a wider portfolio in the JV. Understanding this dynamic is essential so we can really comprehend what the dimension is about. Having said that, let's look at the results.Number one, the funding net revenue for Techfin grew by 106% in this quarter-over-quarter and 35% year-over-year. This increase was leveraged by the advance of 53% of the Techfin revenue, along with the reduction of 7.5% in our funding cost. The strong performance in revenue is associated to credit production that increased by 16% quarter-over-quarter connected to the Agribusiness segment that increased the average production term by about 11 days as compared to the second quarter and by about 4 days as compared to the third quarter 2022. The funding cost reduction is mainly associated to some benefits that we already see in the JV. Number one, as we see on the slide in the lower part, the lower proportion of the portfolio carried by the supplier using our own funding mechanisms with a lower cost as compared to the FIDC rate; and B, the better efficiency in the use of the supplier, cash and FIDC as we see in the lower left-hand side of the slide.All delinquency ranges of the portfolio from 1 to 90 days saw a reduction. This low delinquency levels behavior from 30 to 90 days has been underpinned in previous quarters, which resulted in this quarter of a reduction of 30 basis points in default rates above 90 days. We can also see in the chart on your right-hand side that the increase in the overall delinquency rate in the financial system with micro small and medium-sized companies has had a reduced impact in the supplier operation since the difference between the Brazilian average and supplier average in this segment has gone from 200 basis points in the second quarter to 240 basis points in the third quarter 2023.On Slide #10, we see that the Techfin EBITDA ended the quarter at BRL 24.2 million, a 31% growth year-over-year and changing the trend of negative EBITDA in the previous quarter. This advance year-over-year and quarter-over-quarter happened because of the performance in supplier that moved from 17.4% of EBITDA margin in second quarter to 43.8% in the third quarter, as you see on the chart.Remember, in the second quarter, aside from the Agribusiness segment seasonality, we saw a negative change or variation, especially in the steel chain industry that added to the negative environment in the B2B credit market, reduced production, and therefore, the profitability in the operation. In the third quarter, we saw a normalization of this production and recovery of profitability in the operations of supplier.With that, I'll bring the floor back to Dennis, who will talk about the highlights of ESG on Slide #11. Over to you, Dennis.

[Dennis Herszkowicz, executive]

Thank you, Maia. We ended the third quarter with the important acknowledgments for our ESG agenda. Number one, TOTVS and RD Station are ranked amongst the 150 best companies to work for in Brazil in the GPTW list. TOTVS was ranked 45 for companies that have between 1,000 and 10,000 employees. And RD Station was ranked 9 amongst companies that have 100 to 1,000 employees. TOTVS was still amongst the 15 better positions in the IDIVERSA Index comprising 75 companies. This index was created by B3 to promote representation of underrepresented groups and underpin the ESG agenda.Finally, it's worth mentioning that TOTVS achieved the Transparency Trophy ANEFAC for the third consecutive year. This trophy awards companies that provide the best earnings release of their financial statements.With that, I'll move on to the final slide, #12, where we'll share some updates on the enterprise application software market over the past 10 years. They show that the market has grown above the GDP rate and fast-tracked space in the past years, both in terms of management as well as in terms of business performance.TOTVS has been growing above the average pace of these markets, which resulted in 120 basis points in market share gain in management and 480 basis points gain in market share for business performance. Aside from history data, we see with regards to the current market, we also have up-to-date data in potential market on Slide 13. When we look at the management and business performance markets in Brazil, it's clear that we're talking about markets that's still far from maturity levels. However, for Techfin market, we can see that this is a huge market that combined with a differentiated journey and portfolio can be seen as an opportunity for growth that's quite relevant for the company.This data altogether show that we see a huge market opportunity. Brazil has what it takes for a long journey in terms of investments with relatively low expenses in IT and software TOTVS is well positioned to capture this expansion, and we're confident that we've got a solid business model, and we also trust the trusted adviser position we hold along with our customers.With that, we'll move on to the Q&A session that's going to be mediated by Sergio.

[Sergio Serio, executive]

[Operator Instructions] With that, we'll begin with Bernardo from XP. Bernardo, over to you.

[Bernardo Guttmann, analyst]

Good morning. Congratulations for your results. I have 2 questions regarding the Techfin. One, the credit production that was highly relevant if the growth in the revenue was a positive surprise in the quarter, especially in the context of change with the JV starting now. You talked about the agro contribution that presents an important seasonality during the second semester. I would like more color regarding the relevance of the segment, trying to understand the recurrence, thinking about the upcoming quarter and cost in Techfin. Apparently, you're spending less than your guidance. Is there something contained here for the fourth quarter? Are there -- will you review the cost of your JV? If you could also elaborate on the funding cost, the recurrence of this lower -- because you had high efficiency during this quarter. It would be interesting to understand this trend for the upcoming periods.

[Dennis Herszkowicz, executive]

Okay. So let's start. Starting by your first question, when you ask about agro and supplier, well, yes, agro is highly relevant when we analyze the year as a whole. I believe that agro represents 1/4 of the total credit production of supplier. Nonetheless, as you have the seasonality element that is strong, especially in agro, when you see, for example, Q3, even Q4, the representation of agro, there's an uptick, and as agro has another element is the average term is longer. Well, with this from the revenue generation point of view and profit point of view, yes, agro is really important for a supplier.Now from the recurrence point of view, the importance of agro has already existed for many years in supplier, and we don't see this changing in the upcoming years. And this means that it is a recurrent industry in credit production and supplier origination. It's important to highlight this is a sector that from the supplier point of view has a lot of seasonalities. The first semester is extremely -- is much weaker in terms of agro. Q3 is generally the strongest, Q4 is still an important quarter for agro. But as the harvest is shipped, there is less origination. This why the first 2Qs are lower. And the average term, although it's longer, according -- as the second semester goes by, the first semester loses its relevance in the agro portfolio. This is a historic dynamic, and we see no significant changes at least in the short run.Now, OpEx, Maia, perhaps you would like to add something, if you wish. Our guidance is a guidance of the organic OpEx. It is not a guidance that includes supplier. This is one thing you have to note. Number 2, is that we already had this organic operation up and running here in our guide, although it's not mature. It already exists for 3 years. So we have an OpEx, up and running. OpEx try to give us a longer visibility until the end of next year regarding the expectation of the increase of investment in order to build a new product portfolio. Of course, you will always have a certain level of unpredictability between -- from one quarter to another, you will not always be assertive regarding the values, especially when we're talking about expenses. This being said, no, there is no investment postponement. The only thing is that once again, we gave you a range, there can be a quarter where this value will be slightly short. Well, perhaps in another one, it will be higher. Well, the intention of the guidance isn't to hit the bullseye. It's just to give you guidance. And in terms of guidance, I believe that the OpEx of Q3 is a good indicator.Now to finalize, in terms of our funding efficiency, yes, we do believe that this improvement is here to stay. So it is not something as specific from Q3. We have caused with new funding instruments, loader than the original FDIC of supplier. And we also have efficiency. These are the windows to adjust our funding and this is -- this has already been applied structurally. We always try to improve our efficiency. We always try to have instruments that drop the total funding costs. But what you've seen on Q3 is something structural for this operation.

[Gilsomar Sebastião, executive]

Just an add-on regarding the second question regarding the guidance, we have been slightly short from our guidance in terms of our range, and we mentioned this in the release. The pace of contracting was slightly slower. So we believe -- we maintain our guidance, but we believe that we will be able to operate within the range throughout time, and we will normalize this pace and this will be seen in the future interval.

[Sergio Serio, executive]

Next question from Itau. Thiago, you can pose your question.

[Thiago Kapulskis, analyst]

I also have 2 questions. I believe that the first one, I apologize to ask more details about the Techfin, but this is what -- this is the point that people last night wanted to know more about. This is more the gross -- the gross revenue of funding. When you see origination year-on-year, it is similar, but the growth of revenue was extremely high. And the ratio that was used, was we would divide the revenue by origination by the average portfolio. And here, you could see an improvement in this line year-over-year where the agro factor shouldn't be the main reason. Although we're talking about seasonality, here the average portfolio is part of this ratio. But this is not clear for me. I don't know if you could elaborate a little bit more on the reason for this strong revenue. My main question is because we want to understand how much we can transfer our spreadsheets for the future, not at this level actually, but perhaps, I don't know the -- we can have an expansion in revenue in the next quarters.And the next question would be regarding the recent acquisitions, franchises and Dennis is here. So as we're talking about too, in a relatively short period, we question if there is going to be a change in strategy, how you see distribution, will you consolidate your franchises of yours, you see this as opportunistic moments? I don't know, could you give us more details regarding these acquisitions and what to expect in the future?

[Dennis Herszkowicz, executive]

Okay. I am going to start by your second question, that would be regarding franchises. And then I can give it to my colleagues to talk more about Techfin. No, nothing has changed in our strategy regarding our franchises. We insisted in including this in our current release. So the relevance of our franchises is still the same. Our franchises are part of the life and the success of TOTVS, not only life, but the success of TOTVS. So when we work with SMB, this demand from us, great capillarity and the level of coverage and presence and relevance in each one of the corners of this country, and each minimally relevant city in this country, and we're absolutely sure that we will not be able to do this alone. So these 2 actions in Rio Grande do Sul and TOTVS IP. These are specific actions that will not change our strategy and the relevance of the franchises. Every now and then we will make adjustments. And because one day you buy, then the next day, you can sell a region. This is a constant tactic effort where you try to find the best adjustment and the best balancing in each one of our regions. Nonetheless, our strategy continues the same.I totally agree with you what we have done, we have consolidated our franchises, and we don't publish this. We had Cascavel. There was a consolidation in Parana to consolidate our franchise network. With this, we can expand in nearby countries. So it is something very specific. We had cases in the past where we sold territories to the franchises. This isn't published. This is a tactic. Of course, the franchises are a driver and this will take place every now and then, according to the opportunities.

[Gilsomar Sebastião, executive]

All right. Regarding our revenue, you are right. The first reason -- well, the first motive is the average term, as production was similar from last year and the average range was different. So we also have the portfolio breakout, the part of supplier and the part of FIDC. So if you pay attention, there has been an increase throughout the quarters. And during this quarter, there was more relevance in the supplier portfolio and the flexibility of Techfin and supplier, what -- here we can use their cash and supplier can carry more portfolio. So revenue recognition is different from the one that we do at the FIDC throughout time. So yes, there are 2 elements, and this is important for you because many of you follow the monthly reports from FDIC. So as the supplier portfolio gains more relevance, FDIC loses its relevance as a consequence, only following up FDIC in situations, well, doesn't allow you to have a complete view throughout the quarter. This is an important point that we have to highlight. As we have access to different funding modalities that are even cheaper and more efficient with the JVs, the follow-up of the monthly report of FDIC gives you less ability to follow up in an anticipated fashion, what will be the performance of supplier. So it is extremely important for you to be aware of this. I'm not saying that you don't have to -- that you shouldn't follow FDIC. But it will -- but less and less, it will give you the visibility of what happens in the Techfin.

[Sergio Serio, executive]

Next question, Fred Mendes from Bank of America.

[Frederico Mendes, analyst]

I've got 2 questions. Congratulations on the amazing results once again. First question, I mean, I apologize, but I wanted to insist on franchises because there's been a consolidation from 52% to 15%. And as far as we understand, that would already bring about a higher financial capacity for these franchises to expand and to invest. I think Apendino talked about that. He talked about branding. But it seems to me that this is a contrary movement when we look at the main competitive edge of TOTVS, which is distribution. What we consider is that if you have these franchises in your hands, that would be a good test to increase our cross-selling for business performance products or something along those lines. I wanted to understand what changes on a commercial level when you purchase the franchises.And the second question is with regards to management. Thank you for sharing the margins, by the way. That is very helpful. What should we understand that these margins should be for the next years? Is there room for growth? I mean, we're concerned about the negative rate of IGPM. But is there room to increase these margins since the IGPM ratio is now normalized?

[Alexandre Apendino, executive]

Thank you, Fred. Thank you for your questions. With regards to franchises, once again, there is no change in our strategy, none whatsoever. Franchises still play the same role. They are still as important as they were before. And let me tell you, the franchise's performance over the past 2 years has been quite strong. I mean, very, very good. I remember, I said this in other opportunities, maybe 3, 4 or maybe 5 years ago that there was a gap in performance between the units we owned and the franchises. Our units performed better in different efficiency indicators, productivity indicators and so forth. And we worked quite hard so as to evolve the franchises. And the peak of that was the consolidation. And the results that we achieved because of that work came quite fast. They came about actually faster than we imagined. So we believe franchises will still be as relevant as they were before in terms of coverage, in terms of production, in terms of how close we are to our customers, nothing changed. So there is no reason to change our strategy.Now having said that, since franchisees do not compete with other franchises and with our units depending on the situation, let me talk about TOTVS IP. As an example, we're talking about the countryside of Sao Paulo comprising important regions of the state. While the state of Sao Paulo is quite large and quite important, so we do not have only one franchise. We're talking about TOTVS countryside of Sao Paulo, but there are other franchises that cover other regions of the state. Now for TOTVS IP, let's look at the Campinas, Jundiai and Sorocaba regions. These are the 3 main clusters for TOTVS IP. This region spread are quite closely located to the metropolitan region of Sao Paulo. So they're close to our headquarters.Now what we've realized in past years is that when we are close to the headquarters or to a very relevant capital city, then our own operations show more advantages. May that happen because we work with larger customers or maybe because we can count on the support of our headquarters. And of course, because of other elements, too, that are not worth mentioning right now. Now the decision we made of acquiring TOTVS IP was a tactical decision for that specific region. We came to the conclusion that it made sense for this region to be on board with us, but maybe in 1, 2 or maybe 10 years we can reverse this decision. There's no dogma here. What we try to do is to act as pragmatically as possible. If we come to the conclusion that any franchise is not performing as they should or that we could have a better performance for that particular region, then we'll try to make a tactical movement again. And the opposite may also happen if things do not prove right. So once again, I have no concerns in that regard.And to wrap up, cross-selling is a strategy for TOTVS, not for our own operations. The franchises are absolutely prepared. And to be honest with you, sometimes they are even more prepared as compared to our own operations. Let me give you some concrete examples of that. When we partnered up with VTEX, that was the beginning of our journey in business performance back in 2019, the first units that really invested to be ready for cross-selling approaches with VTEX, were the franchises. I'm not sure you remember that, for many of the franchises bought agencies of deployment and sales for VTEX. No unit of ours did that. We didn't buy any VTEX agency. So no, there is no change in that regard. Once again, the franchises are absolutely prepared and enabled. And not only that, they actually sell more business performance than our own units.

[Gilsomar Sebastião, executive]

Now let's touch on the management margins. Fred, the answer is yes. I think there is still room for improvement for our management margins. As Apendino said, as a coincidence, this is the highest margin of the past 10 years since he joined us. But of course, there is room for improvement. The IGPM rate, like you said, has been negative for a while. That means our agreements have not been readjusted, but there is still adjustment in our total cost for payroll. So there is room for improvement. But of course, on the other hand, there are many investments we're looking into. AI is gaining force, becoming more important. If we are to extract all the efficiency gains we can bring about with AI for all internal processes and include that to our product, so our customers can also make the most of it. Of course, there are investments have been made. But again, from a structural standpoint, there is still room for us to improve our management margins.

[Sergio Serio, executive]

Next question by Leo Olmos from UBS.

[Leonardo Olmos, analyst]

Congratulations on your results. I have 2 questions. One is on strategy and another one is on this quarter's results. The first one is with regards to capital allocation. You announced a very big program. Can you please give us some color on how that interacts with your major capital generation at TOTVS and what your strategies are to allocate this exceeding flow that you have aside from repurchase? The repurchase program can be something continuous and can even grow. I can ask the second question later.

[Gilsomar Sebastião, executive]

Well, Leo, the buyback program has to do with our cash position, of course, but of course, also connected to our cash generation capacity. Over the past 12 months, our cash generation has been quite strong, above our EBITDA during this period. So I think that gives us the confidence we need to announce this buyback program. It's the largest program the company has ever announced. And that does not mean the company will have less power to execute M&As. We think this is very important. We're still working on this pipeline, and this is quite critical to execute our 3D strategy. I think Dennis mentioned this in the previous quarter or 2 quarters ago that, of course, you don't have visibility on our M&A pipeline because we can only see that after M&As are announced, but a lot has been done for this pipeline. And of course, unfortunately, we're the only ones who can have access to this pipeline. But we're still confident that there is a great myriad of opportunities to work with if we do it properly. So that does not jeopardize what we do. The resources we allocate and generate still have the same destination. It's a combination of the levels we've been working on a historical level and exceeding cash that is targeted at M&A specifically. For this particular case, what we saw is that considering the market circumstances, considering the performance of the company over the past years, there is a mismatch between the price behavior and the operational behavior in the company that opened up a whole new type of situation. When we look at the shareholders' perspective, there is a possibility of generating additional value, which can be quite interesting. I think that's it. Well, one last point differently or unlike the previous buyback programs. I'm sure you've noticed this, in general terms, our programs are focused to support our long-term incentives that are shared based for the company. Now this buyback program will not be tackling that specifically. This program will be targeting returns to shareholders.

[Leonardo Olmos, analyst]

Great. That's a great message. Now the second question has to do with your cash flow during this quarter. When we look at the operating cash flow and investments and when we don't consider capital coming from Itau, it seems to us that there was no cash gains during this semester. I probably saw this wrong because you just mentioned that TOTVS generates a lot of cash every quarter. Was there something different during this quarter?

[Gilsomar Sebastião, executive]

There was not. Capital from Itau came to our investment flow. Of course, traditionally, this is negative because these are investments made by the company. But in this particular situation, as we had the close of the JV, this number was positive because resources came from Itau, BRL 410 million positive in our investment flow. In the operating flow, that's not the case. There is no impact to that, but there is consequence of our investments, but that does not translate in any kind of change or any particular change. Even if we don't consider the results of our investments, our cash flow was still above our EBITDA during this quarter. So there was nothing extraordinary here that would identify something specific of this quarter. If you look at the same metrics in the previous quarter, well, it was already running above 120% of our EBITDA.

[Leonardo Olmos, analyst]

Perfect. So the question was straight to the point. So TOTVS generated cash, right?

[Gilsomar Sebastião, executive]

Of course, yes, we generated cash. So thank you very much.

[Sergio Serio, executive]

Our next question from Marcelo Santos, JPMorgan.

[Marcelo Santos, analyst]

I also have 2 questions. Number one, I apologize for touching the Techfin, but investors are asking this, and I want to clarify this. Could you elaborate on the credit seasonality production be greater than in past years. You've given us some explanation, but could you explain this even further. Number 2, I want to also congratulate the company for the margin disclosure, and as you gave us the margin of the business performance because it's in an accelerated growth. How can we see the long-term margin in this segment, which are the structural elements that we have to consider in order to think about long-term projection?

[Dennis Herszkowicz, executive]

So thank you, Marcelo. Well, this year, you are right, there is an additional element, which is not extremely relevant, but it does have a certain relevance. So you have the harvest at the end of the second quarter. This year, we didn't see this, for instance, due to a number of reasons. We affiliated in agro and supplier, and this is verified in the entire market, but there was a certain delay in certain transactions. So this resulted in elevating the volume at the end of Q2, beginning of Q3. Once again, this wasn't something significant. What happened was that we had a strong recovery, not only from the agro sector. During Q2, as it was mentioned, there were a number of matters in other important segments for supplier like the steel sector. Pulp and paper also during Q2 had presented dynamics, therefore the production and the origination of Q2 was way below what we expected. So what happened on Q3 was a quick recovery basically in all of these segments and not only in the agro sector. This being said, our business performance margin and structural margins regarding the behavior of this margin, well, we feel confident with this operation because on one side, it's new and the market is much newer than the management market. It is an extremely fragmented market, which means that our play is consolidation, it's to build a portfolio. It would be a multi-product thing, especially for our customers' profile that is SMB and the fit is excellent. The match is excellent. On one side, we have a positive market. On the other side, we have TOTVS competitive position extremely positive and the unit economics that is extremely favorable. When we see the gross margin of this segment, in this dimension, it is higher than the gross margin of the management dimension. Here, we're talking about a gross margin of around 80%. And why? Because basically, all the revenue from this dimension is recurrent as all SaaS products -- as all products are sold with no relevant deployment necessity. Therefore, the gross margin dynamic is structurally much better in this business, but it doesn't stop here. There are other elements that allow us to have a very good unit economics. You have the simplicity of R&D that is greater. And as these products started from the get go, they were totally in cloud and SaaS, it's easier to standardize them. And therefore, you have a cost structure that throughout the time provides you scalability and operational leverage, which is greater. In addition to this, we have an additional element that is not connected to the market or our competitive position and neither unit economics that can also generate a plus from the margin point of view. That is as the time goes by, all the business performance has its own sales dynamic and cross-selling dynamics. Within the business performance dynamic, we are still crawling when we see cross-selling and we -- convergence business performance, but the rest of TOTVS, especially the management that I mentioned, we're just starting the representation of cross-selling of ARB to business performance and management, it is still marginal. And as all cross-sell the contribution margin of the cross-sell is positive. So we are using a structure that is up and running and you're adding an additional revenue with a marginal cost that is proportionally lower. So once again, my answer is that we feel reassured that the margin of this business in the long run because this is still a smaller -- much smaller than management. It is a business with a positive structural margin.

[Sergio Serio, executive]

Now to bring our Q&A session to an end, we have our last question from Osni from BTG.

[Osni Carfi, analyst]

It would be good to give us more color regarding the results of business performance that has grown year-over-year. The last quarter, you spoke about this operation. Also, the TAIL operation, could you give us granularity regarding the business performance.

[Dennis Herszkowicz, executive]

Thank you, Osni. Well, what you just mentioned, we saw strong results and the results from Q2 were strong already. The name of the game here currently is our capacity to initiate the transition from single to multiproduct. The business performance products are part of a journey. And this journey is in the beginning, especially for the small and medium customer to deal with this journey from A to Z provides a lot of value. A smaller company has difficulties in seeing, 3, 4, 5, 10 different suppliers to complete the journey of sales, digital sales, digital marketing, and we still have a fragmented market. Our strategy of placing the different pieces in the jigsaw puzzle and creating this journey from A, and from A to Z to small and medium-sized companies is highly receptive. Now -- and the ARR comes from cross-sell with -- so we are selling with CRM, we sell to marketing customer -- or marketing sold to customers that are from CRM. The e-commerce products also record a better performance. The name of the game again would be to go from single to multiproduct. And in addition, we start -- we are placing in the right places, elements that will allow us throughout next year and throughout 2025 to increase the cross-sell of the -- cross-sell business performance and management. Certainly, when we analyze next year and when we point at 2025, there will be targets within the commercial management structure that become more important, that will be sales of business performance. And this is something that we expect to be an add-on to the ARR production, that is something that we see in the business performance world. Therefore, I believe that the prospects are positive within business performance. And just to end, when we talk about TAIL, this is what we try to show. TAIL is an operation that was acquired in the beginning of 2020 during the beginning of the pandemic. It is an operation that has given us a lot of value in terms of data, in terms of -- in terms of the structure of our database and how we leverage this data, but the dynamic is different. It is focused on major accounts. The tickets here are dozens and sometimes hundreds of thousands of reals. The average ticket business performance is hundreds. There is a difference in average ticket and customer and also the go-to-market is different. The ERP is sold in a consultative basis. You meet 1, 2, 3, 4, you call an expert from this and that the customer wants to talk to 3 or 4 more customers of the product. And after months of negotiation, you're able to close the deal. TAIL has a similar dynamic. It also requires this long time. It also requires experts explaining meetings here and there, the whole 9 miles that is different than inbound SaaS or the model of business performance. So this is why we are discussing if it makes sense to consolidate TAIL in business performance or it's just something that we have to put in size management. We haven't decided anything, but we are discussing this.

[Sergio Serio, executive]

So thank you, Dennis. So thank you. Well, I would like to thank all of you for your participation. And Dennis...?

[Dennis Herszkowicz, executive]

Well, I would just like to invite all of you for all that can. Well, today, we initiated our R&D Summit for the first time. It is organized in Sao Paulo. It goes until the 10th in the Expo Center Norte. It is the greatest digital marketing event in Brazil and in the region, actually. So our expectation is to receive 18,000 attendees per day throughout the 3 days of the event. And obviously, a number of novelties for the ecosystem, for business performance ecosystems. For those that are interested in receiving tickets, you can go to the event through our QR code, and to talk with our RI team. So thank you and until the next quarter, bye-bye.[Statements in English on this transcript were spoken by an interpreter present on the live call.]