TOTVS S.A. (TOTS3) Earnings Call Transcript

Good morning. Welcome to TOTVS' Second Quarter 2025 Earnings Video Conference. I'm Sergio Serio. I'm pleased to be here today with Dennis, our CEO; and Maia, our CFO. As usual, we'll present the main highlights of the quarter. And at the end, we'll open for Q&A. [Operator Instructions] The IR Relations team will address written questions afterwards. And before continuing, it's important to note that forward-looking statements regarding TOTVS' future performance are based on current information and assumptions. They involve risks and uncertainties and may cause -- many factors actually may cause results to differ from those expressed here. Now I turn over to Dennis.

Thank you very much, Sergio. Good morning, everyone. We've been using this opening message to spark reflections that go beyond the numbers. This time, we chose to write about an illusion that sophistication and simplicity don't go hand in hand. But in reality, as Leonardo Da Vinci said, arguably the most famous polymath in history once said simplicity is the ultimate sophistication. We believe so strongly in this that we've defined our strategy in a single sentence. We want to increase our relevance to our clients. That may sound complex, expanding the ecosystem year after year with an increasingly comprehensive portfolio. But in practice, it's very simple to remain trusted adviser for SMBS. We're now living through a moment when practicing the sophisticated simplicity is especially important to our clients, the tax reform for companies over the next few years, it will bring added complexity to the business environment and require more investment in digitalization, and we will benefit with more efficient management and greater technology readiness. For TOTVS, this means greater proximity to clients, more competitive differentiation and a new cycle of growth. On July 22, we announced the acquisition of Linx. We've always believed that its place was here at TOTVS. And we've always said we would remain disciplined. We see many opportunities in a company that will fit very well. TOTVS is everything, everyone. That's why we welcome Linx with open arms. Moving on to the results. Slide 4 shows a strong second quarter. And once again, ARR additions were solid, growing 25% year-over-year, driving the accelerated growth of management SaaS revenue and RD. This resulted in recurring revenue, our most valuable and profitable revenue, accounting for over 91% of total consolidated revenue. Looking at operations efficiency, our numbers continue to improve robustly. The 23% year-over-year EBITDA growth with a 120 basis point margin and an impressive over 50% growth in adjusted net income are clear examples of our disciplined execution and operational leverage. Another example is the 350 basis point year-over-year increase in ROIC. And now I turn over to Maia. He will comment on the different business units, starting on Slide [indiscernible].

Good morning, everyone. The ARR for the management unit reached BRL 5.4 billion in Q2 with net additions of BRL 191 million, 30% higher than the second quarter of '24 and once again, driven by strong new sales volume to both existing and new clients. In addition to high NPS levels and TCO optimization, portfolio expansion continues to be one of the main drivers of sales growth. This quarter, we launched TOTVS Tax Intelligence, a cloud-based solution that helps companies identify potential impacts of the tax reform on their operations and also plan management. This new solution contributed approximately BRL 20 million to the net ARR additions for the quarter, and this is a first step in TOTVS by TOTVS in supporting its clients on topic of tax reform. Recurring revenue for the quarter grew 20% year-over-year, driving a 17% increase in net revenue from management unit over the same period. And once again, we highlight the combined demand for SAS and TCloud solutions, which led to a 25% increase revenue this quarter. The operational leverage resulting from this revenue growth led to a 20% increase in EBITDA and a 7 basis point year-over-year expansion in the EBITDA margin, which closed the quarter at 26%. And now moving to RD Station on Slide 6. The 19% year-over-year growth in net revenue reflects, for the most part, ARR additions from recent quarters, which continue to be driven primarily by strong sales performance. This progress in our strategy to migrate to a more robust multiproduct model has shown promise and was reflected in the rebound in retention rate this quarter. This is the first positive result for this new approach, which is likely to lead a structural and sustained improvement in future periods. Quarterly EBITDA more than doubled year-over-year, representing a significant gain in operational efficiency with a 560 basis point expansion in EBITDA margin. This performance mainly reflects this calling gains from revenue growth as well as progress in integrating acquired operations with TOTVS itself. Moving on to Techfin on Slide 7. This year-over-year growth in net funding revenue is mainly tied to the performance of credit production, which grew 60% over the same period. On the other hand, the increase in funding cost above revenue growth is mainly due to the higher share of third-party capital in the funding structure as part of the ongoing optimization process. In Q3, Techfin will take another step in optimizing its funding structure by settling suppliers original FIDC and replacing it with a new private FIDC. Along with the exclusive FIDC with Itau and other instruments, this will provide Techfin with a more flexible and optimized funding structure to support its growth. Adjusted net income in Q2 '25 was 2.8x higher than in the second quarter of '24 for the YTD and it was 4.5x higher than the first half of '24. This performance was driven primarily by revenue growth and reinforces the consistent pathway of improved profitability even as we continue investing in building new offerings. Now I turn over to Sergio for the Q&A session.

Well, thank you very much, Maia. I would like to remind you of the recommendations we made at the start of the call. [Operator Instructions] So the first question today is from [indiscernible]

I have two questions on Techfin. I wanted to discuss a little bit about the changes in the funding structure as you commented in the beginning. What will be launched, what has been done thus far? Could you comment a little bit more about it? And number two, since we're talking about this, I would like you to comment on new Techfin and launches integration launches.

Starting with the funding structure, I'd like to remind you that since the JV creation, the Techfin team has been working with this optimization. If we go back in time, we will see that with the Techfin creation, this led to greater capacity and flexibility. We have some commitments. And in the case of Itaú, it's also part of Techfin and this has somehow addressed the funding in a more definitive manner and enable Techfin to work with other alternatives that we didn't have in the past. So we have the different windows and there's always some level of mismatch in terms of volume and funding volume for the credits we make. So we have some level of inefficiency. As we became or else we had more access to Itaú's funding, we have more alternatives, and we've discussed different situations that we've been exploring. We have explored specific situations where we anticipated in the end of some periods, and we count on partners from Techfin and now with the [ FDIC ], which has been closed and I think we've been working with it for some 3 years now. We will be working with approximately BRL 1 billion in the original supply. And this will enable us to have better rates and also give more possibilities for Techfin in terms of funding and it also counts on other instruments. We have the floating that results from the receipt date and then the time that we pass it on to our partners and it enables us to optimize our capital. In the third quarter, we will not be able to capture all of our efficiency, but it will become clearer to us all. Wonderful, Gustavo. Regarding the adoption of new products, it's moving very well. We can see growth in these new offers in a very consistent manner with products that were created since the end of last year. As for instance, the interchange and the relaunch of receivables. We've had significant growth and our launching schedule for new products is very intense, especially now in the second half of the year and in '26 as well. Techfin now has an execution plan for the launching of these new products, including digital accounts, and it's all very clear and the level of execution is following everything that we had imagined. It's important to note that the context of the launching of these products is a new one. It is different and the history of the financial panel, for example, it's changed. And what we are developing in terms of these new products includes contextualized journeys, as we call them with a lot more intensity and volume for these journeys. Today, we are very confident that this is the right way to go for the RD banking that we are creating and everything is going fine as anticipated according to what's already been launched.

Next question from Tomita from Sachs.

I have questions regarding RD. This quarter, you had good recovery in the renewal rate of RD, but could you talk a little bit more about it and how the expansion to multichannel is going to take place and how this has evolved? And the second question would be on RD market. How do you see the evolution in terms of general demand, competition? How are you positioned here?

So thank you, Vitor. Let's start. So let's start by the renewal rate. We insisted in highlighting this point. We had two quarters where we saw oscillations in the renewal rates. During the past quarter, we said that although this was not desirable, it was something extracted when you're within a transformation process, which is significant and the RD is undergoing this moment. And we're going towards the best moment. We no longer depend on one product, on one -- the ideal customer profile and unique go-to-market. Therefore one only distribution platform to multiproduct. RD has a great amount of products available for our customers, our customers, our partners' customers, we have over one ICP and one of the new ICPs is the average ICP from TOTVS. And we, in reality, have a new go-to-market that is also based in TOTVS field sale. So this is an extremely robust and prepared RD, and we will grow even more than what it has grown, and it is more sustainable and more profitable. Therefore, I believe that the recovery of the renewal rate, DRR went back to BRL 30 million. This is a good signal actually. Now we may see other fluctuations throughout this process. We insist in saying this is a good signal, but it's just the first signal. We do know that throughout this journey, we may see certain oscillations mainly when we analyze the different quarters, but we are extremely reassured that this is a sound RD and everything that we are building is extremely sound. Now regarding the market, now the market is favorable. We see a low level of penetration of the solutions, the RD market, what was called business performance in the past, everything that is connected to helping the customer to sell more. This is a market that is more fluid than the management market. So changes we take place at a greater pace for the good and for the bad. So what we've seen things that things are going towards the good. We've been able to spearhead something that we call new waves of product development. The conversation waves based on WhatsApp, well, this accelerated growth significantly. So what are we doing? What's the new wave? It's a combination of AI executing tasks for our customers, but also mainly we build journeys within a context like I mentioned -- like I mentioned in Techfin, there's a context according to segments. TOTVS management knows what the dynamics of each segment of the economy are like. We are very savvy in this. This knowledge did not exist within the RD. Today, we're combining the sectorial knowledge with RD portfolio solutions. And in our view, we see a new wave of demand, of growth, and this is very important. So we are extremely reassured and excited. We know that there is a big market and a lot of space to grow within R&D.

Our next question, Silvio Doria from Safra.

First question, if you could elaborate on the expectations of the new product launched during this quarter, TOTVS tax intelligence, the RR expectation. And in the Billcast headline, you spoke about the Dimensa profitability. Could you share with us what is your view regarding this business? This would be -- we would be very thankful.