CSU Digital S.A. (CSUD3) Earnings Call Transcript

Good evening, ladies and gentlemen. Welcome to CSU Digital's Conference Call to discuss the results of the Third Quarter '25. This call is being recorded, and a replay will be available on the company's website, ri.csu.com.br. The presentation is also available for download. [Operator Instructions] Please note that this presentation will be conducted in Portuguese with simultaneous translation into English. [Operator Instructions] Before I proceed, I would like to emphasize that forward-looking statements are based on CS2 Digital's management beliefs and assumptions as well as information currently available to the company. These statements involve risks and uncertainties as they refer to future events that may or may not occur. Investors, analysts and journalists should be aware that macroeconomic conditions, industry-specific factors and other variables may actually cause results to differ materially from those expressed in forward-looking statements. Joining us today are Mr. Pedro Alvarenga, CFO and IRO; Fabiano Droguetti, CEO; and the Investor Relations team. With that, I'll now hand it over to Mr. Alvarenga to begin the presentation. Mr. Alvarenga, you may go on.

Good morning, everyone. It's a pleasure to be once again in a conference call this time to talk about the results of the third quarter and the first months of the year of '25. Talking a bit about our year of 2025 as a whole, I would like to recap our operation model. which the company calls full service. It is important to resume this concept a bit because it explains the results dynamic along '25 and how historically our behavior in terms of performance, operational and financial has been. For those that do not know the company so well, CSU is a company that operates in the tech segment for financial services. We offer a myriad of solutions, both in payments, banking, so the major value proposition of the company is to ensure that any company that wants to operate in the banking sector can do so with small investment through our tech platforms. But we are not only that. In generally, the companies that are our competitors will stop at the left side of our slide. But CSU goes beyond. We believe that there are daily challenges to provide services to customers, engage them, have support, ensure that there are no frauds in transactions. So CSU indeed creates a complete ecosystem with solutions that are end-to-end, creating a 100% digital journey in the sector. So this is our positioning that we reinforced strongly when we talk to the market because it is this that ensures continuous growth of our business units. In practice, this model generates on the day-to-day, the following to our operations. That is by offering a myriad of services and solutions and actually working end-to-end. We have a very appealing portfolio to each of the companies that want to operate the sector. So solutions can be contracted as a full solution that is the company can provide it all or clients can opt for some of them. So we open new markets where we can operate by offering those strategy. So when I start attracting new markets, new clients, with the new clients, I have a large base of users that starts to access and consume each one of these products, payment, credit, financial services as a whole. Access to products that can be bought or resumed in the marketplace, so we can be present in each one of these stages. And perhaps this is one of the main points in terms of leverage of results. The more contact points I have with users, the more I can expand the number and types of transactions we have, the more I can generate businesses to our clients and to the company itself. So as of here, we can work with the number of contact points, but also create mechanics of incentives for users to use more and more our options. So we start to adopt a strategy that is quite important in terms of data application and AI to really increase this base more and more. And that creates a continue of growth that the company has been showing year after year. We also work with customer loyalty for us not to have churn, and that obviously translates in more transactions when we have more transactions, higher revenue, so both for clients and CSU. So it is a greater predictability of each one of these flows, lower fluctuation regardless of the economic cycle we are in. And consequently, because of the use of technology, we can have operational leverage that is generate more profitability and more cash. That has been the company's virtuous cycle. And this is where we are working quarter-on-quarter to continue the same movement. Talking about results for those of you that have been following what's going on in Brazilian economy as a whole. We are living a very challenging scenario in 2025. Inflation is quite pressured, high interest rates, delinquency rates in credit, in consumption are growing. And that, in theory, should generate more pressure to company's results. But because of our approach and our full service model, we can balance each one of these dynamics with access to different products. So not necessarily the client that uses credit cards, but perhaps they are using PIX, which generates more results. The company that was focused on accelerated expansion may be working with DX that brings efficiency to purchases. So bringing numbers, the company continues to grow despite what's going on in the economy, we are substantially increasing our customer base. Today, we have 37.7 million users registered in our database, 24.2 million active users, which is 11% above the same period last year, which leads us to an activation rate of 64%, way above the market, which is about 40% to 42% historically. So as I mentioned, we can grow our base, attract new customers and expand our user base on the day-to-day because of the evolution of businesses with our clients, but also the strengthening of activation strategies. In terms of transactions, we are also growing at a constant pace. We are talking about 16% a year. The last nine months, we had a slightly less accelerated expansion, about 2% and financial volume, again, with an ongoing pace of expansion. In terms of DX, as I mentioned before, if the level of transactions was not that strong, when we take a look at DX, we see this vertical accelerating in terms of performance, very much anchored on the new products of the company, process automation that massively uses AI. So we closed the third quarter with a volume of interactions of 3.9 million with the user base -- million interactions with the user base, which is 20% higher than the same period last year, which shows the strength of this vertical based on new products, functionalities and functions. And in addition to the growing number of interactions, we are more and more concentrating the interactions in the digital world, which brings more quality, more accuracy and efficiency, both to us and to our clients. So we closed 3Q with 74% of interactions being managed through digital platforms. As I mentioned before, we have been very successful commercially with CSU DX in recent years. So when we talk about new contracts and clients, we get to the end of 3Q '25 with nine new contracts in CSU DX, seven implemented. And on this quarter, specifically two new contracts signed this quarter. Again, two completely new clients to CSU. That's very important. HAS has brought a dynamics of us accessing new industries, new markets, markets that were not accessed by us before. So we are talking about -- we are used to banks, insurance companies, retails, but we are expanding our dynamics based on HAS. So today, we have companies in the segments I mentioned before, but also telecom, high-tech, benefits companies. So we are able to bring more plural accesses to industries because of HAS. And this is the case. The two new contracts have to do with a company in the benefit sector and the other with payments in the transportation world. And as I mentioned, because of this dynamics of a virtuous cycle of growth due to this multiple products, we are accelerating our pace of growth. We closed the first nine months at 9% growth in consolidated net revenue, very much strengthened by the growth in DX that I mentioned before. If historically, the pace is a clockwork movement going from 15% to 17% a year. DX had an important cycle of transformation. And then since HAS launched, it started to accelerate growth. So we closed the first nine months in DX with almost BRL 171 million in revenue, 17% above last year. HAS, as I mentioned, in the range that we are used, which is standard in the segment, so about 5% with an average to 9% that I mentioned before. What I wanted to reinforce on this slide is that much of this expansion is still going to be strengthened by new contracts that are being signed by the company. Specifically this quarter, we signed six new contracts that will translate in our results as of 4Q. And in DX, many of the contracts have been recently deployed and the other two that we signed have not even been deployed yet. So we still have a lot to explore in terms of avenues of growth that were built this year. The beauty of our business model is that because we use technology, not as support, but as the core of our business, we have a capacity to escalate each one of our lines of revenue along time, gaining productivity and excellence as we evolve and mature each one of the contracts and products that we have with us. So when you talk about growth of 4%, 5%, we got to 9% in growth in revenue this year. And in the future, we are thinking of more than 12% growth. We are growing profitability, growing efficiency along time. So when we look back, we were below 40% and now we have a margin above 50%. And that is very much supported by the evolution that we had in our platforms that are becoming more and more digital and DX that run at levels of 10% and then improved until mid-'24 based on the digitalization of processes and now leveraged by HAS penetration. We are above 20% of margin. So we are talking about a 38% growth in gross profit in this unit along '25. And again, the more we are able to bring relevance to HAS as a whole the more DX margins are going to grow. This indicator is extremely important, and we are repeating it once again. That is the more consistent of our performance, our operational performance, the more capacity I have to invest in new initiatives. Fabiano is going to talk about some of them, the main ones to which we are dedicating a lot of efforts and investments in recent months that are going to be our context to where we are growing from now on. So this is an extremely important indicator because it is this indicator that encourages us to allocate investments in each of these initiatives. As you see, the company has had high discipline in getting the surplus results that have been generated in terms of operating margins to allocate investments in the new fronts that have to do with the hiring of better engineering people, specialized in AI, better compliance and cybersecurity areas, more robust commercial teams, teams to support our international attraction, seeking new partners that can help us on our journey in terms of technology, security, market access. So all this has been gradually allocated in terms of investments in the different initiatives. And that results in the maintenance of our EBITDA levels close to historical levels. We are bringing at this as a point of reference and a point of monitoring of our results. So we closed the first nine months very close to our record historical EBITDA level. That was a commitment of the company. We are delivering quarter after quarter. And when we talk about net income, we are working very hard to keep our operating results and EBITDA, but also improving our capital structure, becoming more efficient in terms of use of tax credits, which has enabled us to continue growing our net income even with all the investments that we are making. This quarter, we closed with almost BRL 24 million of net income, which is quite substantial given all the investments that I've mentioned. CSU is a company that does not have a catchment between results and cash, which is a very important parameter for you to monitor in the market. We generate cash in the quarter and especially in '25 we even had an acceleration of generation. We generally generate 80% of EBITDA converted into operational cash. And in the last 12 months, we got to 98%. And we are working with several liquidity strategies, especially when you talk about working capital. So this quarter, we generated BRL 60.6 million in operational cash, which is what matters the most at the end of the day when you're talking about financial management of the company. It's no use generating income and not cash. So if you have a challenge for the company, you have to have the cash. So we are balancing the situation very well. And today, the company is net cash. We have no debt, nothing burdensome in the company, which enables us to invest more and more. You see our CapEx continues to grow quarter after quarter. We continue to have a very good dividend payout to shareholders. Basically, 50% of net income is paid as dividends. This year alone, we already paid out BRL 21 million in dividends, 5% more than last year. And even with all these efforts in terms of investments and dividend payout, the company has been able to accrue cash. So we closed the quarter with more than BRL 100 million of cash, BRL 74 million free for consumption and use in company investments. Well, this is what I had to tell you in terms of results. Now let's go to the more interesting part of the presentation, which is to talk about future. Fabiano?

Thanks, Pedro. Thanks, everyone, for joining us today. Thanks for your time. As Pedro mentioned, we work in scenario that is challenging, but we have tools to make it happen. And more than that, bringing demands of our clients, understanding the pains of our prospects, and we transform all that into levers to really take a leading role in the experience of financial services in the clients of operational efficiency. Just as a reminder, we have talked about our strategy before, which is our driver, our north in terms of growth. So we are obviously working with the main market technologies to try to bring the results that Pedro mentioned. So when we talk about payments, on our most important track, the most relevant track of our company. AI has been bringing to us possibilities to implement customer experience, making the customer experience more fluid to bring means of payments and services as the main driver for our clients. On the other side, we have the last bullet, thinking of automation to bring efficiency and quality of services, provide professional services and a better experience in terms that end consumers are serviced fast. Their demands are met and day-to-day problems are solved efficiency. And in the middle, we still create another lever to try to help not only the coming of new clients, but also to be complementary to our services. When we are talking about embedded finance, we are talking about a solution that is integrated to others. So when the customer has any type of need, we are able to provide a good offer and also a very nice user experience. And obviously, with all this, we have opened the possibility of operating in different geographies. I am here in Miami today, supporting this demand that is starting the work in a good way. And later on, we are going to show you our developments in terms of our international agenda. Commercially speaking, Pedro did mention the investments that we are making for the opening of new growth fronts. Some are already yielding results. Others are on the way, too. When we talk about payments, embedded finance, loyalty, these are things that we have been working before. Now we have the strong support of commercial teams that bring us a very robust offer, a clear strategy in terms of pipeline. You take a look at comparisons of 3Q '25 vis-a-vis 1Q '25, and you see a strong evolution compared to before. Of course, we have a long cycle. We have to attract and convince the market, but that is becoming more and more robust, especially when you consider the future. We also have an important avenue, which is the acquisition business. We have been working with acquirers and sub-acquirers before, and now we are reinforcing the position. We invested in a new technology to make this work front more dynamic and working with other components of our portfolio that gives us strength in some markets like retail, insurance company benefits. So this component can be isolated in a way that we provide a very specific service, but it can also be integrated to other items in the portfolio, bringing a unique solution in the Brazilian market. Even in the America market, there is no player that brings the full experience. So as our strategy, we defined the most important targets in terms of verticals of operation. So the team is dividing its forces to encompass each one of these targets in addition to the traditional segments, banks, agribusiness, cooperatives, we are working with other fronts. And we are starting to see portfolio demands that we did not detect before, which is also a lever of growth as the consigned credit, the offer of consigned credit has been growing in Brazil. Legislators are helping that. The regulation is more flexible. And again, this brings another avenue of possibilities, the sector of benefits, the international initiative with a globe card and our operations in the U.S. So we see new fronts being built others that have been reinforced, and that has been translated in the evolution of our pipeline that has been very positive. Talking about our favorite subject in technology, people talk about this all the time, and it is very relevant. And not for nothing, it's really a huge revolution. This morning, I was reading an article saying that AI is a psychologist to people, long people talking to AI to feel welcome. Here, we use AI in a more practical manner that is having the AI tools available to address two fronts: customer experience, and automation, security and efficiency. So these two work fronts are where we are focusing our efforts. When we talk about working with our customers, we invested a lot on that. We are already having good results in client activation. We have an activation rate that is way above the market, and that's not for nothing. And we are working with these work fronts to have more activation and that the products of our customers are more relevant in the portfolios of their customers. On the other hand, a more personal experience in terms of support, we call AI advisor, almost like a concierge that helps customers in their requests, help customers in how to use the different means of payments, credit limits, day-to-day activities, clear or block a card, ask for a second bill. So a more fluid experience. So this is a work front that is very well developed. And when we talk about authorizations, also, we want to have smart authorizations for transactions. Sometimes the customer is a good payer, has a long history with the issuer of the card or means of payment, whatever it is. And then he has denied a transaction because of a few riyal. So having the intelligence of getting the information and then based on artificial intelligence, be able to authorize something special for a special situation for you not to lose the customer without increasing the company's credit risk. I think that is the balance that technology can help and can bring better results to us all. When we talk about security, Pedro did mention our investments in the area, both internally for us to have a controlled environment, robust governance in terms of compliance, auditing tools and practices in information security, respecting the rules and demands of our clients and also the country's regulations. So we have AI as an important framework for our day-to-day. So investments always looking at helping our customers and clients to reduce the amount of lost transactions due to fraud. Brazil unfortunately has a set record of being one of the world's champions in terms of electronic fraud. So we did focus our intelligent efforts and development efforts on this to try and help our clients to have a fraud loss ratio that is lower than the market, and we are very happy to have achieved so This is a summary of everything that we have been doing CSU DX, Pedro already talked about the advanced growth, which brings us opportunities to implement new use cases for us. So this is a multi-sector multi-process platform that enables us to bring very interesting benefits to customers. These are real numbers of processes implemented in production at the bottom of our slide. But what we have seen in practice is a lot more than numbers and results, but there is an intangible result which is the quality perceived by the end consumer. The solution of a problem they had, the challenge of a purchase, an error that they detected or when they were trying to exchange points. So different situations in which HAS has contributed to improve the final experience. And that's why we are having more visibility of having invested well and continue to invest on this platform when you think of next steps. So we certainly bring here a view with different sectors with concrete cases and benefits captured by our clients. The other day, we're talking to a client about the potential benefits they could have in terms of complaint rates in the Reclameaqui, which is a consumer protection electronic agency. The others complaints at the Central Bank of Brazil, which is a very important metric. So the speed of solution that we are able to bring with HAS is an indirect benefit in addition to the real proven benefits that we have here. When we say a reduction in time of 80% to resolve a client request, that translates into the final experience, the increase of activation, the higher use of cards. So it is a whole chain of actions that make sense. And we want to be on the top of the wave, really leading the transformation with our clients. People talked a lot about digital transformation. Now everything is digital, most of it. Now we have to make these interactions even better. And for that, we are going to be with stand-of-the-art technology to provide the best service possible. And talking about evolution, we started with the strategy of having an automation platform, tools to automate internal processes. That's how we started. Using well-established technologies in the market structured on DPM, RPAs, robot automation tools. Then we went to machine learning, AI techniques to implement and enhance processes, move operations from human beings to automation. Now we are escalating AI technology to interact with the end customer in some transactions to make the process even more automated for it to be a bit more fluid with higher quality in deployment. And the next stage that we are looking into and working to understand the technology and the use of the technology applied to our clients are specialized AI agents to provide specific services. So I have an agent being tested for a positive identification of customers, collect information to challenge an expense. So you explore technology for specific activities to increase automation and the quality and to decrease your margin of errors to have the best technology in the market for the benefit of the client and expanding possibilities. It's not just automating a process. It's not just making a process more fluid and with less errors, but we also strive to bring insights within the execution of this process to reduce customer churn, to increase the sale of complementary products within a certain offer to be able to understand the performance of a product could be better because I have too many complaints of a specific feature. So I bring this to my client for them to revisit their product policy. So again, it's a broad range of possibilities. It's not just automating the process, but bringing the experience for sales and for efficiency. Well, as a whole, as Pedro mentioned, when we talk about integrated broader services as deep as possible in terms of the different applications, the idea is to have the markets that we are providing services to very well catered to. We talk to our clients. We know their pains when we talk to them, and we want to bring different solutions, different from how the market operates. Generally, the market is very much focused on technology. Technology is important. But alone, customers are going to be more -- will have more difficulty in getting results. And we can add to customer services because of our scale, because of our experience, the people, the services we provide, very well tested. And when we want to use a new technology, the technology has to meet its role. Respecting security, confidentiality, the whole ecosystem that we have been working on for so many years. One thing that draws my attention and it's quite interesting, perhaps we don't have this view in Brazil, but integration, systemic integration, people are talking about APIs here, they will make it easier to integrate systems. And yes, indeed, you can do that. But when you bring a platform that is fully integrated with specialized services, but integrated in such a way that there is no breaking experience, no breaking process, that makes a difference. and we have been seeing that in faster interactions in product tests, we can integrate a product -- a new product to the customers' portfolio very smoothly. And I'm highlighting the topic because this is something people always ask me about, integration with client systems. Sometimes you have to have some kind of integration with the clients, CRM, ERP, the front end that is used an app or some other front-end device. So the possibilities of integration have brought a very important competitive edge to our company because of our experience, because of our expertise, because we have an architecture thinking about this. And therefore, the situation that sometimes is a problem. In our case, it is a competitive advantage. With regards to the project in the U.S., we already have the platforms implemented in the digital environment, certifications to be able to have credit and debit transactions. We are just completing the process with Mastercard and this year and with Visa in January. So the conditions for us to start operating in the North American market are already completed within the schedule that we had proposed. So we expect a launch very soon. And our first conversations with American players have been very interesting because, again, they voice their difficulties and pains, and we have a well-developed solution to be able to provide those services. And that has been very valid. Obviously, the strategy is not only to provide services to Brazilians, also to Americans. We have a huge market in America. We are talking about credit co-ops, regional banks, fintechs that have been very successful in the American market. So the possibilities are huge. So we start with credit card management products, debit card management projects with the right partnerships to be successful. So if the customer needs to issue a physical card, we already have a partnership for this card to be delivered, the payment of bills to be processed. So all the experience that we have in Brazil will be brought to American clients. So we'll also have Brazilians that want to have an American issued card, but the focus is to grow in the American market. And here, we see some items of our initial thesis being improved. We work with purchases installments in Brazil for a long time. And this is relatively new in the U.S. I was talking to someone the other day here in the U.S., and they said that's a very nice conversation to be able to pay installments, which is relatively new for the retail reality in the U.S. And for us, this is just business as usual. So talking about an over limit that is an additional limit preapproved for a client if they have a transaction to be approved. So a bit of an extra credit, some flexibility for the American market in which we are already experienced in the Brazilian market. And also the basics, opening a current account, drawing money using a digital portfolio that is -- we are ready to provide all the services to the market. Pedro, do you want to close?

Yes. Well, I think that overall, I would like to reinforce that the company continues to work very hard in its operations in Brazil, very much focused on its business. We have the pipeline that Fabiano brought. We have opportunities to keep a very strong pace of growth at DX and start to enjoy other opportunities in the PACE market, consigned purchases, so much going on. So we are very much confident in the continuity of solid results for the coming quarters. We are very much focused on the company's new cycle of expansion, new opportunities in the American market, both with solutions for Brazilian companies and to American companies per se. We believe our product portfolio is very much suitable to the new market reality and the new challenges of the industry. We understand that using artificial intelligence is going to be a watershed for the industry to have better solutions, be closer to end consumers, understand behaviors and use a right offer of products and services. And the companies that are not well organized internally in their back office are going to lose competitiveness. And we indeed want to have a leading role in this market. I think this will challenge discussions for the future and especially when we're talking about the financial market, this becoming even more relevant. Our balance sheet is stronger every quarter. We are able to generate cash in a very steady way. That's again a differential for the company. This is a sector that companies do not generate cash. We want to have cash to self-invest in our operations, which has enabled us to bring good results to our -- good results and compensations to our shareholders with a payout of 50%. And I cannot fail to mention that the stock market has specific challenges, specifically in Brazil. Today, we have a company that is very healthy, generating results, cash growth, and it is valued at 1.1x revenue, less than 4x EBITDA, which is way below what we have in the industry, both in Brazil and abroad, almost a 5x difference. This is it. I'm going to open for your questions now.

[Operator Instructions] Our first question comes from Alex Andre.

Is there an expectation of acceleration at CSU pace in the coming quarters? The release mentions a BRL 4 million per quarter revenue loss due to discounts on renewals. When is this effect expected to normalize?

Alex thanks for your question. I would say that CSU pace is almost a Swiss clock. Every quarter, we deliver growth in transactions, in financial volume. And this is a very strong message that our business model is accurate. we accumulate growth on a base of customers and the more interactions, more transactions, the more results. And it was not different this quarter. When we see the operating indicators, the company continues at this pace of growth. We are growing from 10% to 20% for a long time. And this quarter was not different. So we had this one-off effect this quarter to give more discounts to renew contracts. Just to remember you in '22, we had a very intense work of renewals from three to five years. And now we are going back to this agenda three years later to renegotiate renewals. We are renewing the contracts with those clients for a long-term. We have contracts that are very extended. We have more than 11 years together with us on average. Some clients have been with us for 30 years. So the continuity of services is very rewarding. But clients are pressured. The economy is tougher, and we are a strategic partner. So we did provide discounts just to help them and to keep them. But we believe that this is going to be recovered very fast. The volume of transactions, as I mentioned, is growing. New transactions are added to the portfolio. We signed new products and contracts with our clients as an offset of the discount, and there is a lot in terms of pipeline. So I think that very soon, we are going to be performing quite well with very good indicators.

Our next question comes from William [indiscernible].

Congratulations for yet another substantial result. I would like to understand a bit more about your operation in the U.S. What is the specific niche you want to work with? Anything specific about Latin America, Miami? What's the benchmark that we should use? Is it fair benchmarks that would be interesting for us to follow.

Thanks, William, for your question. We have been looking into the Florida market because this is where we are starting the work in the Florida market. We have some directions towards credit co-op, regional banks and fintechs in addition to Brazilian banks, obviously, that we are going to be working with. So I think that's more or less that's the idea. As I mentioned, the initial focus is to have debit and credit cards. Full interaction from the digital onboarding until the final settlement of the invoice. So a whole journey that we are developing with the partners that we mentioned. So this is the direction we are looking into. Competitors, we have many here. We have a lot of competition in Brazil as well. Fiserv this is and other competitors that are giant in the American market. And of course, we are going to compete with them here as well as more niche competitors like Marquera, [indiscernible]. So there are other competitors that also operate in the American market that are more niche competitors, more local, and we are also going to compete with them. So overall, this is what it is.

Our next question comes from Rafael [indiscernible].

With the tax changes that we are going to have soon, does the company consider an extraordinary dividend payout this year?

I'll answer. Rafael, thanks for your question. This is certainly one of the hot topics today when you talk about the company's capital structure. We have been keeping, as I mentioned along the call, a very interesting pace of dividend payout. And even so, if you take a look at our balance sheet, you see that we have a very high profit reserve. So obviously, in a scenario where you have a change of taxes related to payout is something that calls our attention and think of in considering a new buyout, again, based on our reserve. I cannot say if we are going to or not, but this is certainly a possibility we are looking at. We have cash. We have no debt. We have high profit reserve. There is going to be a change in taxes. So this has to be considered. We don't know exactly how much we're going to prioritize investments, M&A possibilities and dividend payout. So this is something that we have to take into consideration, but we are looking into that.

Our next question comes from Andre [indiscernible].

In recent quarters, the company is reporting the pro forma profit margin without investments in expansion. When do you see a normalization of margins?