Totvs SA

BOVESPA:TOTS3

Earnings Call Analysis

Earnings Call Transcript 2024-Q3

[Sérgio Paupério Sério, executive]

[Interpreted] Good morning, everyone. You're welcome to our conference for the third quarter of '24. I am Sergio Serio, Head of IR; and Dennis, our CEO; and Maia, our CFO, are here with me today. As usual, we're going to start with the most important highlights of the third quarter of '24, and then we will have the Q&A session. [Operator Instructions] Before proceeding, we'd like to clarify that any projections and expectations based in the conferences regarding TOTVS future performances are based on current beliefs and assumptions available at the moment. It is important to note that these projections involve uncertainties and risks, factors such as general economic conditions, industry dynamics and other operational variables, which can impact the company's results, leading to material deviations from the expectations here. I now turn over to Dennis, who will open and I will return at the end for the Q&A session.

[Dennis Herszkowicz, executive]

[Interpreted] Thank you, Sergio. Have a great day you all. The company's growth in recent years has been exceptional, reaching 22 consecutive quarters of double-digit recurring revenue. And considering our addition, the 23rd seems right around the corner. In terms of management, market, which was incorrectly seen by some as mature with high penetration. In this quarter, consolidated net revenue reached BRL 1.4 billion, 15% above the third quarter of '23 and 4.2% above the second quarter of '24. SaaS management, business performance and tech fee revenues remain as the main drivers of this growth, along with -- actually, they together account for more than half of consolidated revenue and almost 80% of the year-over-year growth.

In the previous quarter, we talked about our confidence in recovering profitability from the second half of '24, and this is exactly what we see now. The company has gained margin steadily since the fourth quarter of '23. The EBITDA margin was 200 basis points above the second quarter of '24 and 20 points above the first quarter of '24. And this is great since the first quarter usually has the highest margin of the year. This evolution is also seen in the adjusted net income. which grew an impressive 55% over the second quarter of '24 in addition to the free cash flow, which also grew 55% over the third quarter of '23, 16% over the second quarter of '24 and 19% year-to-date. I now turn over to Maia to comment on the results of the 3 dimensions, starting with management on Slide 4. I'll come back with you at the end of the presentation. Maia, it's your turn.

[Gilsomar Sebastião, executive]

[Interpreted] Thank you, Dennis. Good morning, everyone. TOTVS focus on recurring revenues is reflected in this representation of 89% of this quarter's net management revenue with a growth of 20% year-over-year. The performance of SaaS management continues as a highlight, surpassing the BRL 500 million mark in the quarter, growing 31% year-over-year. And here, it is worth mentioning that the continuous demand for T-Cloud PaaS platform as a Service solutions. These cloud subscription offers allow greater scalability, flexibility and efficiency in the delivery of their solutions, facilitating up and cross-selling in addition to optimizing the process and use of products by our customers. We see cloud as a giant growth opportunity for many, many years as more than half of management's customer base is still on-premise with migration presenting low operational risk, high added value, resulting in growing cloud consumption.

We have even observed a new assessment of foreign stock markets in relation to the world's large ERP companies precisely due to a review of the potential for revenue and profitability growth arising from the migration to the cloud. TOTVS has benefited from this movement for a long time. We believe that this assessment fully applies to our case. ARR management reached BRL 4.8 billion with organic net addition of BRL 155 million, 19% above the addition in the third quarter of '23 with solid sales volume representing 87% of this addition. Management EBITDA shown on Slide 5, exceeded the BRL 300 million mark, surpassing the second quarter by 9% and the first one by 5%. EBITDA margin was only 60 basis points below Q1, which has been the quarter with the highest margin in recent years, given that it counts on the seasonal contribution of revenue from corporate model licenses.

The next few quarters tend to benefit from the integration of recent acquisitions, which initially brought below average profitability and also from the convergence of IGPM to the IPCA, which is reflected on adjustments passed on to contracts as they complete a new 12-month period. To better illustrate what we're referring to here, we brought on Slide 6, an exercise on how inflation has impacted the margin of this dimension. And as commented in previous quarters, management revenue adjustments have a different dynamic from salary adjustments, the collective bargaining and/or collective bargaining -- due to the formats, anniversary of the contracts and above all the indices having divergent behavior at times. Thus, the mismatch of IGPM and IPCA can contribute as a tailwind, impacting the gain in profitability when IGPM is above the IPCA or impacting as a headwind.

The yellow line represents the difference in the quarter as if the results were adjusted by the IPC and accumulated in the management margin. And in the first quarter of 2020 until the second quarter of '22, the green area in the graph IGPM was above the IPCA with the EBITDA margin benefiting accumulating 420 basis points above in the second quarter of '22. This benefit was reversed in the third quarter of '22 until the curve shift the direction from the fourth quarter of '22, the blue area when the IGP-M started to remain below the IPCA. As a result, there was an opposite cumulative effect, which accumulated 250 basis points in the third quarter of '24.

In September '24, the IGP-M for the last 12 months was once again above the IPCA. And although the sequential effect on the EBITDA margin is still not positive, it is likely to be reserved soon after more than 2 years, another important remark. Disregarding the undesirable effect of 110 basis points accumulated from the third quarter of '23 to the third quarter of '24, the management EBITDA margin, which decreased by 50 basis points in this period would actually show a growth of 60 basis points year-over-year. And now I move on to business performance on Slide 7.

Business performance is a reality right now. The dimension already has an ARR not far from BRL 600 million, which makes it one of the largest SaaS businesses in Brazil. The strategy in this business dimension combines the change from single to multiproduct, bringing cross-selling within the dimension as a new avenue of growth and the addition of a new go-to-market via cross-sell with management clients using the existing field sales distribution structure in a base with a slightly larger profiles with a strong presence in different sectors of the economy. The objective is to reinforce the advantages of Pure SaaS with light unit economics and scalability in growth, also bringing some of the main advantages of the management model, in particular, stickiness and predictability.

The net addition of ARR for this quarter totaled BRL 23 million, de-accelerating quarter-over-quarter. I remind you that especially in this dimension, these indicators reflect the short-term dynamics of the market and may suffer quarterly fluctuations without representing structural changes, which we understand to be the case this time. The net addition of ARR for this quarter totaled BRL 23 million, decelerating quarter-over-quarter. I also remind that especially in this dimension, these indicators more quickly reflect the short-term dynamics of the market and may suffer quarterly fluctuations without representing structural changes.

Slide 9, Techfin. The third quarter has a historical behavior of greater concentration of credit production in agribusiness. We had good volume this year and production was 5.6% higher year-over-year. EBITDA ended the quarter at BRL 8.6 million with strong seasonal margin expansion which went from 0.5 in the second quarter to 10.9% in the third quarter.

[Dennis Herszkowicz, executive]

[Interpreted] Now we close the second quarter with important recognitions in our ESG agenda. Number one, TOTVS won the 11th place in the category of companies between 1,000 and 10,000 employees in the '24 edition of the GPTW ranking, and we were recognized as the -- for the fourth consecutive year in the transparency trophy, consolidating our position as a reference in the preparation of transparent financial statements. Yesterday, to maximize shareholder value, our Board approved a new buyback program of up to 80 million shares with the termination of the program approved 1 year ago and the cancellation of the almost 18 million shares repurchased at an average price of BRL 28.32.

Now moving to my final message on Slide 11. The third quarter represents a kind of to turn the corner in relation to TOTVS's ability to demonstrate operating leverage, both in EBITDA and in the bottom line. In management, the fourth quarter will benefit strongly from the latest additions of ARR. Additionally, as seen in the chart that Maia showed, the inversion between IGP-M and IPCA may have come to an end since in September, the IGP-M of the last 12 months was once again above the IPCA. And despite the sequential impact on the EBITDA margins being still not positive, it is likely that after more than 2 years, it will be reversed soon. In business performance, the margin gain was higher than expected by the company, demonstrating the quality of its unit economics.

And in Techfin, the operation continues its self-sufficiency trajectory with the profitability of the current portfolio being more than enough to finance the development of the new portfolio. There are more than BRL 35 million in accumulated EBITDA since the creation of the JV, I sorry. Finally, TOTVS wants to lead in everything it operates. The acquisition of Varejo Online gives us another important asset to build our leadership in retail. Sergio, we will now move on to the Q&A session.

[Sérgio Paupério Sério, executive]

[Interpreted] Thank you, Dennis. Thank you very much. Just remembering the guidelines at the beginning of the conference. [Operator Instructions] So we're going to refer to the IR team. So let's start with Bernardo from XP.

[Bernardo Guttmann, analyst]

[Interpreted] My first question is on profitability. This was the main highlight. You had a great sequential evolvement. It was a great surprise in business performance. Can you provide a little bit more color of what allowed the profitability of business performance? You mentioned about commercial leverage after the acquisitions. How can we think about this trajectory for the next quarters? And the next question on business performance is about the new go-to-market, the one you mentioned in the release for the management customers. Can you mention a little bit more about the lessons learned, the adjustments that you made to try to extract more synergy in different dimensions?

[Dennis Herszkowicz, executive]

[Interpreted] Thank you, Bernardo. Well, on profitability, on business performance, it was a little bit of what I have been talking before. The business of SaaS in its essence, it has an operational and scalability that is exceptional from the perspective of portfolio of research and development and also from the perspective of distribution when we talk about inbound go-to-market. And we have benefited from all those elements. As this dimension gains scale, we are approaching our ARR of BRL 600 million. Those effects are not linear. Sometimes they are not proportionate. So we understand that this profitability is here to stay in business performance. We understand that this is a profitability that is intrinsic to this business model. So once again, we have the elements here in our hands, so we can make of business performance something of increasingly better performance. I also would like to remind you that in fourth quarter, we have the RB Summit that started yesterday. So remember, the fourth quarter has this additional cost. Having said that, structurally speaking, the profitability of business performance changed its level.

Your second question, Bernardo, on the new go-to-market, we are talking about cross-sell of business performance products for management clients used sales of management. We see a great opportunity here. We have been working in a test scale for a long time with this go-to-market. And all feedback we received so far are the best as possible. This year, I had the opportunity of interacting with more than 100 clients. And honestly, I had not one meeting in which the clients did not failed to show interest in the portfolio of business performance. So those are offers that make a lot of sense to our management clients regardless of the sector, size, geography. Of course, we are always going to have clients at different states of maturity when you are talking about digital. But when you talk about the RD market, RD conversas, CRM, e-commerce, those are all topics that make a lot of sense to management client. So, we see a market fee. We have a great fit. And on the other side, we see a structure of distribution of field sales that is comparable. But of course, we have adjustments that need to be made, as you said. So what are they? So average ticket, not necessarily field sales has the same economics of sales of go-to-market that is inbound. So maybe we need an adjustment to have bundled offers.

In field sales, you have the remuneration of the channel. So, you need some adjustments in the remuneration format of this channel. You also have issues related to post sales, customer success. So those are topics we have been working for a while. And as you said, we are learning from them. And throughout 2024, we have had a performance that is better and better. So it makes us believe that next year, the go-to-market is going to be more and more relevant. And at the end of the day, this has an additional effect. So somehow, we are embracing a client in a broader sense. And the more we do that, the better is our renewal rates with those clients. So that reinforces the client relationship. So again, business performance is in a new dynamic, a dynamic that we were already expecting. But definitely, we are in a new dynamic, both in terms of profitability, diversification, portfolio and go-to-market.

[Sérgio Paupério Sério, executive]

[Interpreted] Thiago Kapulskis from Itaú.

[Thiago Kapulskis, analyst]

[Interpreted] I also have 2 questions. The first one, I have to mention M&A. Every day, we see headline and every day, we receive questions about that. But I think that the main question in this regard is the following. I remember that during our interactions, valuation and discipline on this point of view was something you were always repeating. So, I'd like to understand from you. Do you still have this mind? And what can we expect? Is there an expectation of more meaningful M&As or not? The M&A that you mentioned that was small this time.

The second question is about cloud. This topic is coming to the conversation every time, and I don't believe people understand about it totally. Those strategic movements of the company, but how that changed the company's drivers. This is relevant, having almost 50% of clients. So could you mention in simple words about this movement to the cloud. How is that going to be improvement? Do we have more revenue to client? Return on invested capital may increase throughout time? Could you think about a similar transition to what SAP did? So can you give us a little bit of color about that.

[Dennis Herszkowicz, executive]

[Interpreted] Thank you, Thiago. I will start, and I believe Maia will complement on something. So we're starting from your first question. We have no doubt. We kept the same mind. We didn't change, and we are not going to. So having discipline in M&A is essential. I believe in another opportunity, I mentioned that. Personally, I have 15-16 years of execution of M&As in the sector. And there were dozens of transactions. And I can tell you that despite many factors account for the success of an M&A. There's one factor that is the most important one that is price discipline. If you are performing that well enough, the chances of you not having a statutory return on M&A is significantly reduced. So based on a concrete history that we, as a company and myself as a CEO have, I can assure you we are not going to change our behavior in any kind of M&A, may it be small, larger, strategic, no strategic. This discipline is the base where our execution of M&A is based.

And now answering your second question, Thiago. I thank you for the question because cloud, as you said, this is a topic that is essential. And in my opinion, it is a topic that the market as a whole here in Brazil does not understand pretty well. And for this reason, you see a performance of a company as SAP, as you mentioned, that is completely different from the performance of TOTVS from the shareholder performance. But from the perspective of benefits and the size of the opportunity, -- it's no hard to say that TOTVS is at least at the same situation, probably in a better situation than SAP. We started migrating to the cloud earlier, meaning that our learning here in cloud is at a stage that is extremely advanced already. And we also chose an option, Thiago, that is strategic, and it has been proven right because we wanted to build our own cloud. They are not all technology business that are able to do so.

I'll just give you one example internally here, RFP and business in SaaS. It has not this possibility. In practice, it was not possible for them to have their own cloud. But with the size and leadership TOTVS have and with a product as critical as ARP, yes, it makes sense. And after many years of that decision, it has been proven to be fantastic to say the least. So, in one side, we have an increase that is quite relevant of the revenue generated with the client, and this is easily explained. So, let's say, -- for example, the client has our management app, the ERP, HR, Vertical apps, they have to run this application in a certain environment. It may be the cloud mine or third parties or in most cases, on-premises. This environment has a certain cost that is not small. If you think about the maintenance of this cost, even if it's premises in OpEx or CapEx, this has a-- it may be as the same cost similar or the same cost of the application itself. So, in practice, what you're doing you are getting this additional addressable market and you are transforming that into revenue to the company, to TOTVS. So there's a relevant increase in revenue on one side.

And also, you enable several other services that will be increasingly easier to be sold. So if you ask us, why have you changed level in the addition of ARR? Why cross-sell, upsell has been surprisingly better and better, I can answer that. A great deal of this is due to cloud to the penetration in cloud increasing and the client. If you ask me why our total cost volume sheet has been decreased? I answered that, as cloud is gaining space, we are able to manage an environment that while it is on-premise is an environment that is hostile. I do not know it properly. When I bring this environment to my cloud, this environment is well known. It is standardized. This environment is extremely more efficient. So when we have the cloud internally, we have 2 other advantages. You can create a logical logic layer of the application with the hard part of the cloud. And if you are in a public cloud, you will not be able to replicate. So that has, again, a yield for the client that is quite relevant. And also, you have cost. You start absorbing all the gain of scale and efficiency that you have as the critical mass of this operation is expanding itself.

So once again, I think it's curious because that nowadays, this new assessment of opportunities of ERP and management software have with the adoption of the cloud, and it does not necessarily is recognized in a company as TOTVS. We have took advantage of this for a while. We have been leveraging that, and we see there's still a huge room of opportunity for that to keep continue for many, many years. That's why I believe that we will keep on surprising the market in terms of growth.

[Sérgio Paupério Sério, executive]

[Interpreted] Gabriel Gusan

[Gabriel Gusan, analyst]

[Interpreted] I have two questions. The first on capital allocation. The company is once again in the net debt as opposed to the net cash, the exclusion of D and making large acquisitions. So, I wanted to know what your expectation is from now on. And also, I would like to ask a little bit more about Dimensa and what your expectations are. And now there's some cash. So what do you think is going to happen in the future?

[Gilsomar Sebastião, executive]

[Interpreted] Thank you for your question. As to capital allocation, yes, I think we remain with very strong cash generation, as you can see in this quarter and special, the free cash flow is strong. And as the company grows and it expands its activity, the cash is doing really well. The cash generation has allowed us, as you mentioned, to have the M&As that we need and also to have an important turn in terms of payback and dividends. And so we can move on with this strategy. The program is as big as the last one, as Dennis mentioned, where we carried out the program in full. So the idea is to try to pursue a little bit more efficiency in the capital structure and also to be able to optimize. We believe we can do both without having any impacts on our program and M&A.

[Dennis Herszkowicz, executive]

[Interpreted] On your second question about Dimensa. Dimensa is following its own trajectory. Last year, we had some changes in the operation. Profitability suffered in the fourth quarter. But throughout this year, as we had already mentioned in the fourth quarter, the performance has been better quarter-over-quarter. Profitability is coming back. They continued having M&A. And of course, the size of their M&A is very different, but it had a relevant M&A with Clever started working in a totally different market. And the results have been quite satisfactory. We can see Dimensa following its normal business path resuming profitability as it was before the adjustments we made with a capacity to perform M&A which is very good. So what we can expect to see is Dimensa with improved results following with its own M&A plan.

[Gilsomar Sebastião, executive]

[Interpreted] I would like to add in the case of Dimensa, that, number one, the evolution of the recurring revenue since the changes we had at the end of last year until now, the relevance of these revenues have been very significant. And of course, initially, it affects the operation. We recover profitability as we move on. And it adds predictability because this is something that was lower in Dimensa than in the rest of the management.

[Sérgio Paupério Sério, executive]

[Interpreted] Next question, Leonardo Olmos, UBS.

[Leonardo Olmos, analyst]

[Interpreted] I'll ask two. Number one, could you discuss a little bit the decrease of the retention rate in business performance, which has been contact when you evaluate the graph has decreased quarter-over-quarter. You also had a very nice IGPM graph. What impact do you see on revenues and then margin looking at the future quarters and eventually to 1 or 2 years ahead for TOTVS.

[Dennis Herszkowicz, executive]

[Interpreted] Well, thank you, Leo. On business performance retention, perhaps the most important message is that business performance is a fantastic business, as we just mentioned, the unit economics, scalability, operational leveraging and the fact that the clients have shown a huge interest in the solutions. But having said all this, this business when compared to business in a direct comparison with management, it has a more impactful discretionary factor. And I'm talking about management. So nothing is less discretionary than RPs in this area. But when you get business performance, it is a little bit more discretionary. And this, of course, will give you some level of variation and fluctuation than what you're used to or even than what we are used to seeing in management. But once again, this is absolutely normal.

When we have a process of acquisitions and we had different acquisitions and business performance, this transition of what we call single to multiproduct, the creation of go-to-market with a new client profile, different sectors of the economy using sales and business performance as a whole, they were not aware of. And when you have a business which is a little bit more discretionary, it seems absolutely normal that fluctuation is a little bit higher in this renewal rate or even in the addition of AR without having any changes in the structure in the essence. What I can tell you today is there is nothing structural there. Maybe I will tell you something different in a while. But we understand that this is normal in a business that is growing fast. We are diversifying product portfolio, client profile and go-to-market.

And moving on to the second question, Leo. And once again, I will comment this, and I imagine that Maia might want to complement. I was talking to Sergio a little bit before we started. And I thought this was very interesting because the graph that we included in the release seems very nice. And perhaps in the past year, in '24, we had an important number of questions in sell sites and buy sides, but especially in buy sites on thing where TOTVS continues surprising us in top line, but it was not translated in profitability gain. Maia, Sergio and I have been explaining that this mismatch between IGPM and EPCA, even though it happens quite frequently. Perhaps in the past decade, there was never such an intense mismatch and in such a long period as the past 4 years. We have not been able to put it in a graph and quantify what the actual impact of the mismatch was in the past 4 years.

This graph helped us with this explanation to help confirm. So quarter after quarter, we can see the lifting between 2020, mid-2020 to 2022 because the IGPM was very much above the IPCA. And this is something that we see after the second quarter of '22, where this margin started going down. And now, of course, as the 2 indices meet again in IGPM probably once again surpass IPCA, it is to be expected that this effect, which has taken our margins down will be over and eventually in future quarters, we will have a positive effect on our margin. This graph was the nicest thing we included in this release. And it will -- or it should explain a lot of the questions we had in the past quarters about this growth performance and profitability as well.

[Gilsomar Sebastião, executive]

[Interpreted] Basically, this exercise was based on the contract basis updated by IGPM. When IGPM was above IPCA, how much did it add to the revenues and margins? And how much not having an update, which is at least equivalent to IPCA when IGP-M was below IPCA removed in terms of margins from the company and revenue as well. This exercise was focused on IGPM. When we brought the indicators, we can compare one to the other. And if you look at the graph where IGPM is running below IPCA, you can see that the areas we highlighted are the areas where we did not apply the negative indicator. And so there is no reduction. The adjustment was upwards.

[Leonardo Olmos, analyst]

[Interpreted] And it is applicable to cost, right?

[Gilsomar Sebastião, executive]

[Interpreted] Yes.

[Sérgio Paupério Sério, executive]

[Interpreted] Next question Vitor Tomita, Goldman Sachs.

[Vitor Tomita, analyst]

[Interpreted] Just two questions, more related to some initiatives that are not in the core. One is about the purchase of Varejonline -- can you explain a little bit more about what is the vision that you have for the future for people-- Varejonline already have ambition and it complements the portfolio of retail? And are there another area in retail that you are interested in that could be a strategy for M&A? Second question, on the tech things, could you explain how the initiative evolved with Itaú in terms of the pipeline of new products and internal organization in the quarter? They have a new CEO there.

[Dennis Herszkowicz, executive]

[Interpreted] Okay. Starting with Varejo Line. We understand that despite it is acquisition that is relatively small, it has a value that is important to all of us. As you know, retail is the only sector in the economics where TOTVS is not a leader in. We are a leader in some subsegments of retail, just like supermarkets. So yes, we are -- we have a lot of interest in it since retail is important for the economy, and we are interested to be able to, over time, be leader in retail, just as like we are a leader in other sectors. So Varejonline is specifically included in the subsegment of franchises. When you talk about management software for retail in particular, each subsegment of retail demands a specialized solution. So drugstores, they need a specific software, gas stations, another one and so on and so forth. And franchise is a subsegment that demands a solution that is quite specialized.

Varejonline is a company founded in 2018, if I'm not wrong. So, it's a company for management software. And it is fantastic. They are really new. They are quite modern. They are based on the cloud, on the SaaS model, and it was founded by former important executives of Microvix, which was the leader company in this sector more than 10 years ago. And it was purchased by Linx. So again, from the strategic point of view, this is crucial to us. And considering that franchises, they have a diversified geographic coverage in Brazil. When you have this product in the commercial distribution that is spread out, we are able to accelerate the growth in a quite significant way.

About Techfin, everything is evolving well and as expected. Since the beginning of JV from last year, we had already cleared the convergence of the organic Techfin and supplier. We were working on that. And what we did now was a natural movement to accelerate this integration, this convergence, and we appointed Mauro, who is the founder of supplier and who is with us from the beginning to be the CEO, be the leader of JV as a whole.

In terms of update of products, I can share with you that, as you know, we have working capital -- we have long credit. We are working to have as soon as possible, our offer of digital account available. Our payment portfolio, PIX credit card, has grown a lot. I'm not sure if you noticed, but we adjusted the report of Techfin. And for the first time, we separated what are revenues from credit products and revenues from fee products. That is that business that were already something that we had. But now we combine PIX and credit card. Year-over-year, the growth accounts to about 70%. So, everything is evolving. We continue building our offer of banking, and we are sure we are creating something innovative and disruptive.

[Sérgio Paupério Sério, executive]

[Interpreted] Our next question comes from Silvio from Banco Safra.

[Silvio Doria, analyst]

[Interpreted] I have two questions here. The first one on Techfin. Can you update us on origination of credit and quality of credit at the beginning or almost half of the fourth quarter? And the second question is on R&D. In the release, you mentioned investments in AI in 2 processes, internal processes and application of products. Can you detail that a little bit more those 2 efforts? Are those investments you already have results in the short run? Or are they investments that are still in the phase of testing? Can you add a little bit more to that?

[Gilsomar Sebastião, executive]

[Interpreted] So first of all, talking about Techfin on credit origination and portfolio quality. I think this is the most important topic of all when you talk about credit products. There's always a priority in terms of quality of the originated portfolio. It has kept a healthy percentage of default, you can see. We brought a chart to you comparing this range of market and the profile of market that we work with, with the Brazilian average. And we keep on having a high quality in terms of credit. Obviously, in this quarter, with the increase of agribusiness, it didn't help us as it usually does in the third quarter. And we were kind of expecting a reduction in production because the agribusiness in the third quarter has a great influence. But luckily the origination was offset, and we're able to have an increase. I wouldn't say that it was 100% offset, but the profitability of the agribusiness are really good. So, it's difficult to have something that will perfectly replace that. But as a whole, I would say that we had a good result. If you have had a better quarter, for sure, it would be even better for us in terms of Tech.

[Dennis Herszkowicz, executive]

[Interpreted] On AI, AI has been gaining space at TOTVS. -- we combine a centralized area to develop knowledge, define elementary principles on how to use AI and also to map everything that is happening. And the second approach is to decentralize as much as possible, the execution of AI in those areas. So honestly, if you ask me if everything is mapped here in terms of what is going on here at TOTVS, I would say no because all areas are experimenting in terms of the guidelines that were established. And all departments of the company are testing, piloting different things. So, everything is progressing really well, but we are still not at an industrial scale. We still do not have returns in large scale that I could mention to you. We have a number of applications of AI in our products that generate insights, knowledge and inefficiency as related to specific issues that are being brought by clients or even by our own developments. We are also applying that to the internal processes inside TOTVS. So, in support of clients, we have millions of interactions with clients. Of course, we are testing the creation of a knowledge base that is unified. So we could establish standards and those service provision that could feed our development of R&D in the improvement of products.

We are using AI in our commercial processes. We have millions and millions of opportunities -- business of opportunities inside our CRM. And when you apply AI to establish standards to establish clear trends of what is going to happen. So, we can make your seller a super seller with a level of a higher efficiency level. Well, this is amazing, and we are using that in large scale.

I mentioned before that we had RD Summit. I couldn't be there all day long. But the moment I was there, I could notice that the level of AI use and the tools of business performance is quite impressive. The marketing -- digital marketing platform, for instance, is transforming itself into an AI platform, so to speak. So, AI is already a concrete reality at TOTVS, even though it is still not being used at an industrial scale. It is being used individually in the approaches. But we are using that in number and numerous points of tests.

[Sérgio Paupério Sério, executive]

[Interpreted] Next question from Olivia from JPMorgan.

[Unknown Analyst]

[Interpreted] I have 2 questions. First, I'd like for you to explore the message of the management that was positive for the outlook of 2025. With the growth of revenue coming with an operating leverage in all segments would be reasonable to expect an expansion of margin in all business in 2025? And second question, with regards to the change of precification in the implementation of the model of subscription. Can we explore the time line of this restructuring? Could you talk a little bit more on how this and when this started to be implemented? And can we expect a change in the behavior of the margin? Is there an impact? And when will be the inflection point?

[Dennis Herszkowicz, executive]

[Interpreted] Okay. Olivia, I'll answer the first one, and Maia will answer the second one. As you may imagine, we didn't place the message for nothing. It reflects our feeling. It is not a promise. It is not a guidance as well. I would say that nowadays, we have many elements in the performance of 2024 and also in the interaction that we have with our clients at the end. And we know that 2025 has everything it takes to be a great year. And as we no longer have this headwind of the mismatch of inflation of IGPM and IPCA, I can affirm that we have enough elements to adopt this trust and growth and improvement of profitability for 2025 in all our business units. So again, I think the message here is a message of reliability of trust that is to be relied on.

[Gilsomar Sebastião, executive]

[Interpreted] In terms of precification, this is part of what Dennis mentioned at the beginning of the call. It's an effort the company has been doing for a while to reduce the cost of property of clients, especially at the initial investment. And the implementation of the solution is one of the main initial investments made by clients. So, as we are able to reduce the cost that is taken by the clients at the implementation, it makes easier to have more clients, new clients and to expand the use of the clients who are already with us. So more recently, from half of last year onwards, from the commercial perspective, we have seen a lot of cost reduction, and we have reduced the cost of implementation. This is one of the elements that has brought nonrecurring revenues down. And another thing that we have experienced lately was an offer in which we just charge monthly installments by client. So, the client does not pay for a separate project. From the accounting perspective, in terms of revenue is the same dynamic. So, we say that we acknowledge the service revenues. So, there is a match with the cost of implementation. And obviously, this is -- takes some time to be paid out. That is different from the time of the contract of a client with us. So, I'd like to say that after a certain time, we have already paid it all. We have an upside of recurrence that comes later on.

So just to clarify, we expect in 3 years to completely have the complete payback of the implementation project. If the client stays with us from this moment on, all this excessive will be an upside of sales for us. So, this is the effort the company has been doing on the commercial side. As I said, to reduce the entry cost for the client, either it is a new client or a base client we have that wanted to have new solutions.

[Dennis Herszkowicz, executive]

[Interpreted] Olivia, if I could add something to that. I would say that from the philosophical point of view, it's like we were planting today something that is going to generate a lot of recurring revenue that is always growing because we are transforming this amount of the service into a recurrence that is going to exist throughout the permanence of the client with us. So that creates values for the future for the company that is quite relevant.

[Sérgio Paupério Sério, executive]

[Interpreted] That was our last question. So now I turn the floor to Denis to end the meeting.

[Dennis Herszkowicz, executive]

[Interpreted] I'd like to take the opportunity. I talked about RD Summit. So, I'd like to invite everyone to participate in RD Summit that is taking place in Sao Paulo. It is taking place until tomorrow at Expo Center Norte. It is by far the main event on digital market in Latin America, and it is presenting lots of news in terms of business performance. Also this year, we are given the possibility of following the event online free of charge. So, we are call it RD Summit live show. So, you have the opportunity of seeing the talks of speakers and to have live streaming of some talks as well. So, for everyone who is interested, you can access the website of the event using the QR code that is on Slide 14, or you can get in contact with our IR team. Once again, thank you very much, everyone, and I hope to see you soon in the future, in the next quarter. Bye-bye.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]