Totvs SA

BOVESPA:TOTS3

Earnings Call Analysis

Improved Revenue with Mixed Profitability

In Q4, the company's net revenue rose to BRL 1.2 billion, a 16% increase, bolstered by growths of 26% in SaaS and 46% in business performance revenue. While the annual recurring revenue (ARR) added considerably, profitability suffered due to seasonal factors and strategic changes, resulting in a momentary dip with an EBITDA margin below 5%. The company is expanding with acquisitions and reshuffling management to enter new verticals. Despite seasonal impacts, the overall annual net revenue grew 18%, surpassing BRL 4.6 billion. The company also held a successful event, doubling its reach, and transformed its platform to enhance its ecosystem, significantly growing its customer base. ESG initiatives advanced, reflecting the company's commitment to sustainability and governance, contributing to its recognition in several rankings. Overall, while pursuing growth and operational excellence, the company experienced volatility affecting short-term profitability but remains committed to its strategic 3D ecosystem expansion.

A Year of Advances and Challenges with a Look Towards 2024

The company reflected on both its achievements and the challenges faced in 2023. There was significant growth with an 18% increase in recurring revenue, showing strong sales performance and customer retention which bodes well for the company's stability. However, issues such as a drop in profitability due to operational changes, and a spike in expenses were highlighted as areas impacting short-term results. The management dimension, which anchors the company's SaaS offerings, saw a remarkable ability to pass through inflation and maintain low churn rates, an encouraging sign for predictable revenue streams. Additionally, acquisitions have been crucial in expanding verticals and supporting growth, most notably with Dimensa's transition aiming to reinforce operations.

Broadening Horizons in Business Performance and Techfin

In business performance, the company has rapidly expanded, especially in RD Converters with a growth of more than 400% year-on-year. This expansion reflects a conscious effort to diversify the product portfolio which could attract a wider clientele. Techfin, albeit smaller and still in the developing phase, also saw growth in its loan portfolio, though its predictability is still maturing, with hints that 2024 might bring more stability after a volatile season. Investments in Techfin's portfolio development led to reduced EBITDA, an aspect that demands careful attention moving forward.

Solidifying ESG Commitments and Operational Efficiency

The company has made sustainable strides by conducting greenhouse gas emissions inventories and actively contributing to social educational programs, which are increasingly important in modern corporate governance. Financially, their consolidated net revenue grew by 18%, surpassing BRL 4.6 billion, and operational efficiency was noted with an operating cash flow of BRL 1.4 billion, emphasizing robustness and resilience in the company's financial health. These achievements, along with the ESG progress, could significantly bolster investor confidence in the company's sustainability and long-term vision.

Anticipating Changes in the First Half of 2024

It was acknowledged that the latter half of the year historically sets a lower benchmark for comparison. Thus, looking into 2024, investors were cautioned that the preceding year's first-half performance may not serve as the best predictor for the upcoming results, particularly for the supplier division. This prudent stance may hint at expected fluctuations or plans for substantial changes that could impact the company's financials in the short term.

Earnings Call Transcript 2023-Q4

[Operator]

Morning, everybody, and welcome to our fourth quarter 23 conference call. I am Sergio Pauperio, IR Head. And with us, we have all the Vice Presidents. Before anything, I would like to wish all of you a 2024 full of achievement. As usual, in the first part, we're going to present the most important results of the last quarter and the year 2023, included by a Q&A session with our entire group of directors. [Operator Instructions]. Forward-looking statements made during this conference referring to financial and operational goals and forecasts are based on the assumptions and information of the company. These forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions because it depends on circumstances that may or may not occur. Investors should understand that overall conditions, sectoral conditions could impact the results and lead to results that differ materially from those expressed in the forward-looking statements. I would now like to give the floor to Dennis, who will begin the presentation on Slide 3.

[Dennis Herszkowicz, executive]

Good morning, everybody. For those who have joined us in this video conference and especially morning to the team. I would like to start by wishing you a year of great health and success. 2023 was a year of many advances, the management dimension [indiscernible] its leadership, strengthening its competitive position and its differentials, always combining above-market growth and high profitability. Business performance is building the biggest, best and most integrated portfolio of solutions, maintaining super accelerated growth and increased profitability. The Techfin, the joint venture changed the dynamic, bringing and funding expertise and, of course, increasing the likelihood of success. Finally, 2023 was a year of progress in the convergence of 3G ecosystem with the creation of the customer journey by presence. With regard to financial and operating results, the quarterly analysis is always important for a listed company. Sometimes we need to take a longer look to see the trends and what is happening because of the amount of changes that we have seen and the volatility that this may bring about in quarterly results. I think with time to add this longer view. In the fourth quarter in general, we had a good performance in revenue. However, profitability was impacted by specific elements, seasonal ones generating a decrease in short-term results. Beginning with a top line consolidated net revenue ended the fourth quarter at BRL 1.2 billion, 16% above the fourth quarter 22 due to a 26% growth in the SaaS management revenue and 46% growth in business performance revenue. The addition of ARR remains fast in management and business performance, and the suppliers' credit production returned to its healthy normalcy. On the profitability side the elements that reduced the short-term results totaled BRL 34 million. In management, the main reduction was at Dimensa, which has entered a new stage in the corporate journey, aiming for another cycle of expansion and consolidation of operations. We even announced the important acquisition of waver entering a new vertical. We made a complete change in the management team, including a new market CEO and adjustments in the financial and operational dynamic of some products. These changes to the team, internal processes and procedures resulted in a weak quarter of results with an EBITDA margin below 5%. In management, we had occasional fluctuations in the line of contingencies and the healthy problem of the increase in the cost of ILP, long-term incentive. In business performance, we had a very successful R&D summit with this company's main marketing investment quite as large as in 2022, and which included a series of innovations for RD Station and the entire ecosystem. In Techfin, we had the combination of historical seasonal aspects due to the agricultural harvest and some beneficial adjustments, but that could also have oscillations in this phase of construction. These one-off elements added to those of historical seasonality led to an adjusted EBITDA of BRL 258 million with an EBITDA margin of 21%, 350 basis points below the third quarter, 23 890 basis points below the fourth quarter 22. -- presentation over to Marcelo to speak about the management dimension starting on Slide 4.

[Marcelo Eduardo Cosentino, executive]

Well, thank you, Dennis, and good morning, everyone. The management dimension closed 2023 with an 18% growth in recurring revenue, representing more than 85% of the dimension's total revenue. This result is linked to the performance of sales, which reached historic levels and also the maintenance of the renewal rate. These 2 elements together have been offsetting the inflationary indices applied to contract readjustment, especially in the second half of the year. Quarter-on-quarter, the 16-year % increase in recurring revenue mainly reflects the SaaS revenue, which grew 26% and that had as its main levers, the 34% growth in cloud revenue and 34% increase in new sales, which maintained good levels in the new logos. Management ARR ended the fourth quarter with an organic net addition of BRL 164 million, a result explained by the maintenance of a good sales pace and the increase of more than 100% in the price component compared to the previous quarter. And because of the readjustment carried out in the SaaS and cloud contracts to cope with the increase in the cost of cloud infrastructure. As a result, the volume component over the last 12 months went from 88% to 86%. It is worth noting, as mentioned in the previous quarters that the Dimensa greater consultation of generates a more volatile profile in the renewal rate. It stood at 98.7% for the quarter. We go to the box to the right of the slide, and it is a very clear way of verifying TOTVS' historical ability to generate high lifetime value in its customer base in the analysis of cohorts. Most companies with relationship with their customers, including the most recent companies see a decreae in value. This is due to a combination of churn and the difficulty of passing over prices over the years and the lack of opportunity for additional sales. In the case of TOTVS' we can see in the graph, we have the incredible inverse relationship. The enormous capacity for additional sales combined with automatic inflation pass-through and very low churn, which means that each cohort grows strongly, making the lifetime value and incalculable customer base. A fundamental part of this success is linked to the breadth of our customer base. We have vertical and specialized areas that show the different areas of specialty with the client and bring us closer to their end activities and, of course, helps us to capture new opportunities. We also have horizontal solutions that address the opportunities of back office, the financial parts, human resources, among others. And HR is one of the focus for organic and inorganic investments at TOTVS. And to take the -- make the best of this movement we acquired Agora. And on Slide #5, we will hear from Gustavo Bastos.

[Gustavo Bastos, executive]

And well, the topic of HR and companies has become more sophisticated in recent years because we have the mandatory routines. We're thinking in a more strategic way, and we're oriented towards results. Companies are engaged in the first wave of digitalization and automation through HR software and no global player is focusing on Latin America, where we have a growing workforce of 350 million people, almost half of whom are in Brazil. In this context, TOTVS has been adding its experience and agility to the expertise in organic software and, of course, the creation of partnership. And we have carried out strategic acquisitions, which is the case of [Indiscernible] and more recently, Agora that focuses on the control of journeys. And us in an all in Texan way, we can cater to the needs of our customers. Our HXM,Human experience management works with a journey, a fueling capital and companies in a digital and integrated way to sell our customers as trusted by this procurement capital. We have a broad coverage of the markets in which we act. Our goal with this is to offer the best practices that formally were adopted only by large companies. We're taking this to SMB companies. This journey comprises the stages that go from attraction, hiring and onboarding to the performance of evaluation, training performance, training development and engagement. To speak about EBITDA on Slide 6, as Dennis remarked, the behavior of management adjusted EBITDA relates to the aforementioned one-off effect, which totaled BRL 24 million impact in the period. If we disregard these effects in management adjusted EBITDA margin ended at 25.8%, 70 basis points lower than the third quarter 23. When the SaaS model was implemented, the fourth quarter margin has been seasonably lower than the third quarter. The management adjusted EBITDA surpassed the EUR 1 billion mark, growing 18% over 2022. The adjusted EBITDA margin of 26%, representing an advance of 20 basis points over 2022 and is at one of its highest tetability levels in history, which reflects the scalability of the dimension recurrence model. Juliano Tubino is going to speak about the results of business.

[Juliano Tubino, executive]

Well, good morning, everybody. The business performance I mentioned had a year of a revenue acceleration, 46% year-on-year in the fourth quarter. This reflects a shift to a multiproduct portfolio that is being supported by the pace of growth of RDCRM, RD digital marketing and especially RD Converters by Palo. RD converters, for example, had a growth of more than 400% year-on-year supported by market ecosystem, the brand and the way that we do our business. In 2023, the dimensions net revenue grew 41% because of organic net additions of ARR. And because of the acquisitions made in the first half of the year. Organic ARR net additions totaled BRL 29 million, 71% higher than the fourth quarter 22, leading to the fourth quarter ARR to grow 45% year-on-year and reached BRL 478 million. For the first time we held RD Summit in Sao Paulo with several innovations and with a very broad product portfolio for RD Summit and for business performance. This move to Sao Paulo has expanded our reach, doubling the number of participants and consolidating the event as Brazil's main digital marketing meeting. We had more than 20,000 people in a 3-day event with a diversified program for all audiences. We had the opportunity to speak about our platform and opportunities for clients, which you will see on Slide 8. We show you here the journey of evolution from a single to multi-product, reinforcing that concept of a trusted adviser. In '23 we had a transformation of the RD station into the SoCs, which will build the best largest and most integrated business performance ecosystem in Brazil with a portfolio that already includes RD marketing, RD converters, RD mentor. And it reached over 3,000 companies, the exact sales, Lexus partnership with Shopify. And then in the first year, we were able to deliver not only an accelerated growth of improvements in profitability but also an expressive growth in share, both in absolute numbers, where we surpassed 50,000 customers. And then in the mix of these customers rapidly growing the revenue from customers with multi-products, reaching 37% of revenue from customers of more than 1 project. In Slide 9, the performance for the fourth quarter is seasonally affected by the holding of the RD Summit. If the effect of the large additional investment made this year, the EBITDA of the dimension would be BRL 9.8 million. And I turn over to Maia, who will talk about TechFin. Starting in Slide 10, Maia your turn.

[Maia, executive]

Good morning, everyone, and thank you to be. Techfin ended the fourth quarter of 2013 with a net funding revenue of BRL 73 million, impacted by some seasonal aspects related to the agroharvest, which mainly reduced the average production term and then also some effects such as BRL 4.4 million in funding costs related to the anticipation of receivables made to a supplier affiliated. The end of the third quarter commented last quarter and also the change in the funding mix by the beginning of suppliers FIDC2 and the settlement of financing lines 4131. FIDC 2 is the one with an exclusive senior quota Vito with a lower funding cost. And also shorter windows to adjust the available capital, which gives more flexibility and also efficiency to the funding structure. And as we can see in the chart, the cash is also impacted by this. These structural adjustments to the suppliers' funding costs are part of the diversification and optimization of the funding structure. They are extremely beneficial to the business but when combined with the already known quarterly seasonal effects on credit production, they generate more volatility and make the predictability of the funding revenue a little more difficult, especially in the beginning of the JV. We do believe that with these new funding structures that have been established, and this volatility will decrease over 24%. The loan portfolio, net of the provision for expected loss grew 14% year-over-year with an average term of 68 days, which is 12.5% above the average term of the same period in '22 and with the same growth or even with the growth of the portfolio, suppliers default, it follows a trend towards decrease ending the quarter with the level of the default above 90 days of the supplier, 260 basis points below the Brazilian average for this segment. In Slide 11, Techfin ended the quarter with EBITDA of BRL 2.3 million and a margin of 3.1%, a reduction when compared to the third quarter of '23, mainly due to lower net funding revenue. In the year, the reduction in the EBITDA is directly associated with increases in investments in the development of Techfin's new portfolio. In the case of supplier, the EBITDA margin was 35.8% in the quarter and 21% in the year, both above the same period of the previous year, demonstrating that the operation is very healthy, and there is a separate trend when we compare it to what is happening in Techfin. Now I turn over to Vivian, who will talk about ESG and human capital highlights.

[Vivian, executive]

Thank you, Maia, and good morning, everyone, here with us. Today, I will bring you a summary of our main ESG results and human capital in 2023. For the environmental pillar, we carried out our second inventory of the greenhouse gas emissions, advancing in the inclusion of international market operations, RD Station and supplier. We also took a first step to incorporate data related to Scope 3. In the social pillar, we continue to consolidate our efforts in the education agenda, contributing to the training and employability of youth in situations of social vulnerability through the Institute of Social Ppportunity and also our StarTek program. In '23, IOS taught over -- or almost 3,000 youths and 70% of the -- of these students graduated our best result after the pandemic. Also, we have iDiversity B3, the index in Latin America focused on diversity, which helped us implement a diversity and inclusion policy. We also launched a new addition of the Speech to Hero program, focusing on the training of disabled individuals to work in our business force. We also celebrate our entry in the ranking of the 150 best companies to work for in addition to remaining in the ranking of the best in technology. In the Pillar G for governance, we highlight our efforts in information security, data protection and privacy initiatives. We also won for the third year in a row, the transparency trophy of [Indiscernible]-- which acknowledge TOTVS among the companies that best present the financial disclosures. Furthermore, our MSCI score evolved from A to AA positioning the company in a select group of differentiated global companies. And then finally, we seal the period with the approval of TOTVS sustainability in ESG agenda for the 3-year period going from 24% to 26%. I would like to highlight the receipt of the --, granted by the office of the Controller General. It ratifies the relevance and effectiveness of the company's integrity program in all its pillars and reflects our commitment to the ESG agenda as well as demonstrating in practice that ethics is a nonnegotiable value for us in the development of a better future, which is very important for us. I would like to thank each and every one of you for your commitment and dedication. Together, we will continue working to build an increasingly sustainable, ethical and socially responsible company. All is a unique place that people are proud to be part of. Dennis, I turn over to you.

[Dennis Herszkowicz, executive]

Well, in '23, we had a consolidated net revenue growing 18% when compared to 22%, surpassing BRL 4.6 billion, with an emphasis on the 17% growth in net management revenue even with a negative IGPM for most of the year and the growth above 40% in Business percent. This revenue performance and operational efficiency allowed us to maintain the consistent operation of operating cash of BRL 1.4 billion, 13% above 22% and representing 127% of adjusted EBITDA. And of course, without failing to make the necessary investments to continue advancing the execution of our 3D ecosystem. Our differentials combined with a recurring business model and high levels of renewal as a result of the relevance and quality of our services, make management an extremely solid dimesion. And within these new dimensions, which have significantly increased our addressable market, we have become the trusted adviser of SMB. In our strategic kickoff held in early January, the topic was 3 dimensions, a single destination, which reflects what we want to achieve. The team's energy and confidence in this event was super important and gives us a reassurance that we are building a unique and essential company for doctors, customers, partners and, of course, investors. We are now available for the Q&A session, which will be conducted as usual by Sergio.

[Operator]

[Operator Instructions] And the first question is from Bernardo from XP.

[Bernardo Guttmann, analyst]

I have 2 questions to begin with the first question is about management. Your core business is doing well with a very solid volume additions of ARR at a good price. But I wanted to better understand the client profile in the verticals that are encouraging new services and how you see the evolution of ARR. Also you had recently M&A, and I would like to call your attention to it. There were recent changes in management, which was mentioned in the beginning of your presentation that it's -- it would be nice to better understand how this process is going on and also the margin looking ahead.

[Dennis Herszkowicz, executive]

Well, thank you, Bernardo. It is a pleasure to talk to you. I will start. And of course, if anybody wants to complement, please do so. The profile for ARR has, for a long time, followed a very stable standard from the point of view of segment, which seems to be very good news for us. It means that we have diversification, significant diversification and, of course, diversification makes us confident that we'll be able to grow more. If we had a single segment, driving this performance in ARR and sales production as we usually say internally, if this segment eventually had any fluctuations, we could have problems. But as we have a lot of diversity, Agro is doing well, manufacturing services, all these surprises us. And we have segments of services. I will give you a practical example. Perhaps 2 or 3 years ago, what we call the sub segment of rentals. It's something that we never had in the past. Today, we already have a huge volume of clients. This segment grows really well. We also have companies that have been developed and are rising. That's really amazing. These segments are doing well. In terms of client size, we have a very interesting performance. Some of you know, even with the total D&A, we have an area that we internally call large enterprise, representing 1/3 of the companies that are listed in Bovis are our clients. And we've been able to have a very good and healthy performance for all sizes of clients. All of the changes we made in our business structure, both in our own units and in our affiliates have provided very important results for each one of the regions in the country. Our portfolio is very diversified. And at the end of the day, this means that nothing indicates that our ARR performance this year is going to be different from what we've had lately. At least, this is the visibility we have today. In the case of Dimensa, Bernardo, I think you were absolutely correct. We have a very good potential. We've seen, for example, what we had with Cinzia, and it seemed very interesting. It clearly shows how big the opportunity is for Dimensa's market. It is a large market. It is a very scattered and includes so many companies, so many smaller companies that are segmented. And so we see a very positive opportunity. Because of this... Yes, Dimensa is a new company, and we have spoken about the operation within TOTVS, we did not have sufficient attention to this company. And of course, it's going through different stages, new stages in its journey. This is what we have identified during 2023. We have made the necessary changes and adjustments that we deemed to be necessary. And we're now entering a completely new stage with a new team and with a significant focus on recurring revenue. This is very important for Dimensa.

[Bernardo Guttmann, analyst]

Can I have remarks on this at other times that Dimensa has a greater concentration of larger clients and it has a contractual relationship with these clients, which is not the same relationship that we have with the RP clients. For example, the format for the renewal of their contract, the breakdown between recurring and nonrecurring revenues and automatic adjustment due to inflation.

[Dennis Herszkowicz, executive]

All of these are topics of the utmost importance, and we see the opportunity to evolve with them within Dimensa. Everything that we did at the end of 2023 was geared towards creating a framework, a more solid framework for Dimensa enabling the company to explore the organic opportunities on the one hand and through M&As on the other hand. I have no doubt whatsoever that after the changes and adjustments in Dimensa at the end of 2023 in 2024 going forward it will have a very robust performance and doubtlessly will help us to sustain the growth and sustainability of TOTVS, was very clear.

[Bernardo Guttmann, analyst]

Dennis if I could ask or carry out a follow-up on Dimensa, and you spoke about Cinzia, which is your vision of the competitive environment? Has there been any change with the sale of Cinzia?

[Dennis Herszkowicz, executive]

For the time being, we haven't detected any relevant changes in the market. As mentioned, this is a highly fragmented market with a very large number of companies, enormous [Indiscernible] companies. The one that we have just acquired Quiver is a fabulous company, but this exclusively on technologies for insurance companies. And you have a huge number of companies very similar to this one in each sector and each subsegment of the financial market. Sometimes you have 3, 4 very good companies, but that base difficulties of having a decent expansion, what we have observed even before the movement with Cinzia is that the Dimensa was in a very favorable position for an M&A. It was a highly profitable company with the exception of the fourth quarter, of course, but not only a profitable company, but one that generates cash. And when we entered into B3, we carried out significant contributions in this company. Therefore, the availability of resources to carry out M&A there parts of any other company in that segment. And this continues to be true after the acquisition of Quiver, which was an important acquisition in terms of size for Dimensa.

[Operator]

The next question comes from Freddie from Bank of America.

[Freddie, analyst]

And I have 2 questions at my end. First of all, I would like to understand the price dynamic because of cloud infrastructure, perhaps the clients have higher expenses, and you simply pass on this cost. Do you have the opportunity of more aggressive price hikes for growth? And if the on-cloud clients tend to spend more than the on-premise clients. This is my first question. The second question, referring to Techfin, we understand the seasonality of the results. It always has great oscillation. What drove the tension was a 10% growth during the year. This isn't guidelines. But besides the new businesses, which is the great expectation of JV and focusing on supplier only. What would be more sustainable? Would it be that level simply to be able to work with modeling from an internal outlook?

[Maia, executive]

This is Maia. Well, about cloud to begin with your first question more specifically. The idea that we have here is to leverage growth precisely. We have detected interesting opportunities, and we have learned our homework. We're close to 40% of clients operating in this round. These are clients that truly count upon TOTVS to carry out this transition and we have a relationship of enormous trust with these clients. And the idea of a price adjustment was simply to readjust because of the behavior of prices in the market and the increase of prices in public clouds. And this is a reality that encompasses the entire market, not only TOTVS, I think TOTVS has the skill of working with these issues. We have several clouds that we're working with, and we have a technological platform that grants us what you could call portability if you allow me to use this term. This is at least my vision. It allows TOTVS to manure navigate through this issue with greater ease and to work with all of these infrastructures. So the price transfer is linked to the price behavior in the market. And our mindset is to work with clients in that segment and help them in their transition. And I believe TOTVS has been very important in the growth that we observed. To answer the second part of your first question, part of that positive evolution that we showed you in the recurrent cohort is also linked to that flow of the clients that are migrating to the cloud. Not that the clients are spending more only on cloud or cloud services. It's a very constructive relationship of TOTVS for the long term, and we grow jointly with the clients. This creation of cohorts, I think, are a proof of this. And cloud has contributed a great deal to them. What I would like to add is not to be repetitive, yet in your question, you asked if we percieve a greater consumption of our solutions, to help the client in their digitization agenda. Yes. They don't need to be concerned about the agenda for infrastructure, and it enables the clients, the ability to open up new fronts and to more rapidly consume other solutions in our portfolio. We have TCloud, which is our management platform for moving and it helps the clients in this journey, allowing the client to consume new services without having to carry out a consultation. It becomes like a service marketplace that they can consume on their own in an autonomous fashion. Now the second part of the second question, I believe, linked to Techfin, Techfin is a market that is very linked to the financial market. In 2023, it was a difficult market because of credit in general, especially corporate credit. Well, 1 year ago, there were enormous complications in this field. And we had extremely steep interest rate has improved during the year and the focus of Techfin and supplier is on the quality of this credit. And when we look at the graph of the behavior of default, I think that we can see what is happening with supplier vis-a-vis the market behavior. And there's a bit of these 2 things that focus on credit quality. The growth will come about naturally after the quality of what has been originated. This is our initial goal of course, we do want to grow. And for the quality, well, what is in the first place is the quality of credit origination. Of course, we look upon the declining interest rate. And I think we have gone over that more difficult phase in the credit market. And we have a positive outlook when we look at 2024. However, this is a process that will be gradual throughout the year. The outlook, therefore, is possible for Techfin as a whole for supplier. The funding structure that has been created will offer more instruments for Techfin to be able to work better and make the most of opportunities. And of course, the credit market can only benefit from this thread simply to complement this.

[Freddie, analyst]

You mentioned and we know how important this is for you. From the viewpoint of modeling the year of 2020 for most specifically the first half of the year, as Maia reminded you.

[Dennis Herszkowicz, executive]

It's a difficult semester, the second half of the year, reminded us a bit of what the pandemic was that it's on start and of course, it was very difficult for us in the first half of 2023. But we said a pretty low far for the comparison of results because of this. It is important to keep in mind that the first half of last year, very possibly is not the best guide when we think about which will be the result of supplier more specifically in the first half of 2024.

[Operator]

The next question is from Marcelo Santos from JPMorgan.

[Marcelo Santos, analyst]

I would like to ask more about Dimensa led to having this low margin because the nature of these effects seems to be something more transient. How can we understand the improvement of margins, how can Dimensa recover profitability? How do things take place? The second question refers to cloud -- to go back to what you told, we have seen the growth in cloud. Which should be the behavior of this and your revenues in cloud in your CapEx when you have growing revenues? Or doesn't it even go through CapEx? How will cloud impact your cash flow and your P&L in general?

[Dennis Herszkowicz, executive]

I'm going to begin speaking about Dimensa, and then I will give the floor to Maia to refer to dimensions, I have to speak about amount. When it comes to Dimensa Marcelo by far, any change in the profile of profitability -- we're speaking about business were in the face of a business that is not a watch and we can't offer guarantees with provision quarter-on-quarter. But with the information that we have at hand nowadays with the visibility that we have presently. Visibility is good. And the fourth quarter in Dimensa should not repeat itself. So this fourth quarter has in changes, which, of course, generate immediate short-term impact, and we also had impact because of the change of our strategy that rupture between recurring and nonrecurring revenues. And if you look at it, we really have an impact on nonrecurring revenue in the fourth quarter, and it's relevant. Once again, we do not have enough elements today, demonstrating that this is going to be repeated in the next quarters. And so we understand that Dimensa's profitability is relatively fast or is moving towards fast recovery. And then regarding growth, I would say that it is a little bit more difficult to anticipate. As mentioned before in other opportunities and now with the previous question, the profile of clients of Dimensa is a little bit different from the management profile of RP. RP has a wonderful diversification with hundreds of clients, the sales cycle is relatively long. But as you have many opportunities, you have a constant flow, almost as if you went on a diet. So things take a little bit faster, but you already have something diversified that will give you this flow. In the case of Dimensa because the number of clients is smaller. This is not as stable. And so Dimensa's contribution from the point of view of ARR addition tends to be even more erratic. And as we evolve with more recurrence and so on and so forth, we want this flow to be less erratic than it is today. And this is why for the first time ever, we included a breakdown of Dimensa's ARR. So that you can see the impact in figures. In the case of growth, more specifically, I do believe that Dimensa still has a way to go before it develops a more recurring flow and the foreseeable future. But definitely, what we've seen in the fourth quarter is not going to be repeated at least with the level of visibility we have today.

[Maia, executive]

Talking about Cloud Marcello, it's very important to talk about CapEx because that is the type of activity that requires investments. In our case, it's not CapEx loan. Our private clouds, but we also have the sectors, the infrastructure that we operate here. And naturally, that requires investment. As the operation grows -- it has to do with CapEx. So as it grows, it naturally requires similar growth. But on the other hand, not in TOTVS alone, but for the whole industry, there is a continued effort to gain density scale with new technologies, new techniques and Gustavo can talk about this a little bit more. But over time, we have all gained efficiency. So over time, I do not see growth with a perfect correlation with CapEx and business growth. But it's natural that we gain more efficiency over time. This has happened, but it's a natural trend. And stores expands its businesses and its performance, there is synergies among them because we can gain scale, and that's very important. It has an impact for the company, but it's beneficial. We have good return. But of course, we do not look at a return of the business alone. Our cloud business is there and special to meet our -- the needs of our primary business. Well to complement these opportunities are things that we follow in parallel. Even at this -- when we have sales growth in the cloud and then that has an impact on our members. We also add our own efforts of optimization, density increases, productivity increases, but also the evolution of the portfolio since the initiative is aimed at the purpose of serving our portfolio. All of the innovations that we do in parallel have some level of positive impact. And I wanted to repeat this.Â

[Operator]

We have a question by Leo.

[Leo, analyst]

I have 2 questions, and they are related to the management margin. The first one has to do with costs and expenses. The cost is very specific, and you already answered it partially. The gross management margin. Since you are restructuring the infra costs in public cloud, could it decreases the annual decrease that was observed in this quarter. So I'm talking about the gross management margin. The other question is about management expenses because we've seen a significant increase in marketing in the past quarter, and it had happened 2 quarters ago as well. You commented about our revenue of licenses that were stronger in the fourth quarter and then there was an increase in the commissions paid. But how do you see this area looking forward? And with the internalization of franchise and the go-to-market, which is always evolving, is it possible that licenses will start growing again and become more relevant since you have a greater need with the franchises.

[Dennis Herszkowicz, executive]

Regarding the gross margin and management costs more specifically, well, we can have fluctuations. And once again, our gross margin is already very high. As we've been saying, the main element that drives this management gross margin is actually revenue. The revenue mix in this sense of gain of relevance of recurring revenue, especially nonrecurring services and the gross margin of nonrecurrings in the order of 50% in nonrecurring services is significantly lower than that as recurring revenue grows faster and looking at a longer period, the natural trend is for the gross margin to gain some bps I do not think that it's going to be 90%, for example, I don't think that it's feasible with more with our current model. But there is room for us to have efficiency gains. Once again, it does not mean that from one quarter to the other or 1 year to the other, you won't have fluctuations. In this specific case, for example, of the cloud, the cloud contracts with our providers are long-term contracts. There are not annual contracts. They are multi-annual contracts. And this is not specific for TOTVS. The practice of these global cloud companies usually have a growth curve, and you pay based on the expectation of growth. If eventually, you have a performance, which is exceptional news as we had, which was much better than anticipated. We grew faster than we imagined 3, 4 years ago when we signed our contract renewals, that's eventually when you have an improvement. You change your level, your margin decreases a little bit. And then as you continue growing or as your business continues growing, this impact is diluted. But what we did in the specific case of the fourth quarter, with the price adjustment, especially in the cloud because we saw an opportunity because of the market context. All of the cloud contracts all over the world were growing. The market is favorable. We had an adjustment with contract renewals, and it seemed like a good moment for us to apply but it only started diluting this change. And then throughout 24, 25 and 26, this dilution will remain. And with the visibility we have today, I think that the growth -- the management gross margin will continue following the same trend. In terms of marketing and sales revenue. I will answer your question, Leo, but I also wanted to mention the goal because -- this is something I wish I've done before. We worked hard here to gather information, and we also have very long history with some clients. It was important for us to calculate these cohorts accurately. And only now do we feel prepared to share it with you. The message here is probably the best message of everything we had in this fourth quarter. Management clients generate value that really cannot be calculated. First, to have a client with us is something exceptional because the amount generated for us continues increasing. And honestly, this is very difficult to see in any other type of company. Even in the modern SaaS company, the amount of the harvest has to do with the journey, which is decreasing over time. But in our case, it grows steadily. And so anything we do in terms of marketing and sales is an investment that is paid off multiple times. And if we look at a longer period of time and do not focus exclusively on the fluctuations from one quarter to the other, the amount generated by these clients is very positive, and we will continue investing what we think is required to increase the client base. And having said that, I would say that no, I do not see the license mix versus the recurring mix changing in favor of licenses because we bought DRS and IP. It's quite the other way around the franchises. It took the franchises a little bit longer to move from license plus maintenance to a SaaS model. And our own units for a series of reasons, including financial health because this move from licenses to subscription is something that requires a certain profitability value. And well, this is something we have surpassed for many years, but the franchises tended to take longer. Therefore, the weight of recurring revenue in these 2 units should increase and will increase quite rapidly. We worked on this in July and the second half of the year was a semester for relevant acceleration of ARR and we do believe the same will happen with IP. Now simply to end this topic, the mix between license testing and recurring revenue is a very relevant factor in our sales expenses, but it's not the only item. Of course, we have several other items that could lead to oscillation in the expenses. Now overall, the expenses of the percentage of revenue should not be very different compared to what they have been in past quarters. We believe that we have reached a very appropriate level of commercial expenses. And in the specific case of the acquisition of the affiliates or franchises, well, this is a benefit that we get for free basically as we no longer have to pay them commissions through time. These expenses, of course, can show some sort of an improvement.

[Operator]

The last question is from Cristian Faria from Itau.

[Cristian Faria, analyst]

We have 2 questions here. Dennis, one of them referred to the cohorts. We have seen a movement in 2022, 2023, that differed significantly from previous years. And we would like to better understand the reasons underlying this. Well, inflation in these last 2 years has truly played against our expectations. We hope that this year, all of this will become more normal. But which will be the continuity of cohorts? You mentioned several new functions to identify cross-selling. How are you going to convert with these cohorts as we move forward? And my second question refers to business performance. We had the RD Summit, which was a true surprise because of the investments made in the event it shows your strong commitment now -- what will happen with the growth of this vertical in the mid and long term?

[Dennis Herszkowicz, executive]

Thank you, Cristian. I'm going to begin with the cohort and then perhaps we could speak about the commercial cross-selling and upselling works, which of course is one of the elements that allows the cohort to be as valuable as it is. When we focus on short-term behavior in cohorts, which is what happened in 2022, 2023. Our life with the clients work in a stepwise way. Our product is sophisticated, it's a critical product. And consequently, it will encompass the entire company and the entire client. When we carry out the initial sales to the client, it will take that client some time to gain maturity from the viewpoint of using this solution. So from the viewpoint of the client and the viewpoint of our company to insist on additional sales requires adjustment in this cross-selling and upselling dynamics. Now perhaps the main explanation for this cohort is this. Now we're going to comment on the work we have been doing with crash and upselling.

[Dennis Herszkowicz, executive]

At TOTVS, we have a capacity that differs from most of our competitors, which is that ability to fuse within clients, not only in the field of technology, this is simply the door of entry. We work with other areas with the clients, expanding portfolios. And as we are trusted advisers of the client, a point of contact after a period of implementation. Once we're over that first step, we go from solution A to solution B, and we're able to sell other solutions and the implementation of the solutions will be ever faster -- so initially, the time for the first implementation is broader, more complex. We have to work with human resources and much more. But in secondary stages, we don't even have that implementation service anymore. It's part of the monthly contention. The implementation is very quick with the client, and this reflects on the NPS. The client satisfaction favors more adoption. And this because several areas of TOTVS are integrated. The products become easier to adopt and the set of traction does create a virtuous cycle, facilitating the commercial work and the adoption of the client. The commercial investment that we have with a cohort under acceleration allows us to have long-term gains -- and this is a long period is a true lifetime value. When you think about it, it's difficult to compare this with traditional SaaS companies and to underscore what was said about the summit. Well, the summit has an interesting specificity. It has a concentrated investment during the 3 days in which it is held. But if we think of it as a representation of go-to-market, it makes full sense. We doubled our investments but received much more than double the results. The summit helps us to build the ecosystem. It's an opportunity. We have 20,000 people there. Half of them are part of the ecosystem, their partners and clients and others will buy new products and become new clients. And new business units can show their brands integrated into the system. And we see interesting short-term results, a growth of sales already in October, November, December and January for new business and we have long-term results as well. We communicated our vision of the platform at RD Summit and rebranding Palo is one of the main examples our partnership with Shopify, for example, we doubled the capacity. We doubled the number of people and, of course, increased investments. And this is a strategy we are pursuing to lead from 2 categories: CRM and marketing automation to fiber 6 categories. This was reflected at the Summit is going to continue to expand our portfolio, our results and our presence through strategies, tactics, such as the summit. And at the end of the day, despite the significant investment we made, we did it with the cohorts revenues and significant profitability.

[Operator]

Thank you, Cris, and we're now going to end our conference call. We return the floor to Dennis.

[Dennis Herszkowicz, executive]

TOTVS, our vision has not changed. We believe in a Brazil that does things and with determination, we have begun 2024. We're going to continue to invest to expand our unique 3D ecosystem that is changing the gains of the competitive environment.

[Operator]

Once again, I would like to thank you for your attendance. We hope to see you at the next call.