Zenvia Q3 2023 Earnings Call Transcript

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November 17, 2023

There are 4 speakers on the call.

Operator

Good morning, and thank you for standing by. Welcome to Zenvia's Q3 2023 Earnings Conference Call. Today's speakers are Mr. Kasia Bobsim, Zenvia's Founder and CEO and Mr. Shai Shor, CFO and Investor Relations Officer.

Operator

Please be advised that today's conference is being recorded and a replay will be available at the company's IR website where you can also access today's presentation. At this time, all participants are in listen only mode. After the prepared remarks, there will be a question and answer session. For the Q and A session, we ask you to write down your questions via the Q and A icon at the bottom of your screen. Your name will then be announced and you'll be able to ask your questions live.

Operator

At this point, a request to activate your microphone will appear on your screen. If you do not want to open your microphone live, Please write down no microphone at the end of your question. In this case, our operator will read your question aloud. Now I would like to welcome one of our speakers for today, Mr. Kasio Babson, Founder and CEO.

Operator

Sir, the floor is yours.

Speaker 1

Hello, everyone, and thank you for joining us at Senvieve's Q3 2023 Earnings Call. Thank you all for being with us today. Our results for the 3rd quarter showed the consistency of Stemjet's strategy as we continue to balance growth and profitability. During this quarter, We were able to accelerate revenue growth, especially in the CPaaS business, while maintaining healthy profitability levels. This stack of recent results adapt to our ability to quickly adapt to various market scenarios, While continuing to invest in new technologies such as generative AI to strengthen Zyngia platform and exceed expectations for our customers.

Speaker 1

We completed the integration of Movidast in the Q2 and recently began the integration of Sensitivea's team and processes, which we expect to complete throughout 2024. Our strategic acquisitions are allowing us not only to expand our portfolio and market presence, Also to bring more value to our customers who are starting to benefit from our end to end solutions being deeply integrated and bundled. That lead us to our OneData vision, which we briefly shared last quarter. That is to combine all of our solutions, tools and technologies into a unified customer experience platform, enabling all of our customers to provide Fluid personal and engaging experiences for its end customers. We'll benefit from our regional leadership on the CPaaS market and its new technological advances with the power of our CEIX solutions coming both from R and D and M and A initiatives into a unified offering that is expected to be rolled out throughout 2024.

Speaker 1

As I mentioned, the CPaaS market continues to advance as demonstrated by our partnership with Google for the launch of Google Messages or SaaS or Rich Communication Service. We're incredibly excited by the potential of RCF as a natural evolution of some apps, bringing rich interactive content that boosts marketing campaign results as compared to traditional Asavas. By the end of 2023, Google expects to reach 1,000,000,000 RCS users, making it an opportunity that we must capitalize on. We are highly motivated by the ongoing evolution of our platform and its potential as we look forward to sharing more information with you in the coming months. Now I'll hand it over to Shay to cover our performance in the Q3.

Speaker 2

Thank you, Casio. Hello, everyone, and thanks for being with us today. Let's turn on Slide 5. I'll start by saying that the 3rd quarter results attest to the consistency of our strategy to balance revenue growth and profitability despite the complex macroeconomic climate in Brazil. During this quarter, we delivered double digit top line growth in both SaaS and CPaaS, while maintaining healthy margins.

Speaker 2

Specifically in CPaaS, we saw an opportunity to gain market share with certain large enterprise customers. We believe this move is instrumental to set the foundation that will allow us to cross sell our SaaS products in the near future, evolving from bundled packages to 1 single unified offering. This is what we're calling OneXenvia. Now looking into the numbers, total revenue increased 21% year over year to BRL219 1,000,000 from a fairly stable client base of 13.6 1,000 clients. We registered growth in our SaaS business across all customer profiles, while the growth in our CPaaS business was mainly driven by the expanded SMS volumes with large enterprise customers as I just explained.

Speaker 2

Gross profit reached BRL83.9 million, down 3.1 percent year over year with gross margin decreasing 9.6 percentage points to 38.4 percent due to lower margins in both segments. In the SaaS segments, the lower profitability is a result of the still complex macroeconomic environment, which is mainly affecting our consulting businesses. While our large enterprise customer remain cautious on their investment decision during this quarter, we have already seen early signs of improvement in Q3, but the higher impact will be seen in Q4 2023. In the CPaaS business, as I just mentioned, we saw an opportunity to accelerate revenues and gain market with strategic large enterprise customers, while keeping profitability at healthy levels. To attest our strategy to balance top line growth and profitability is paying off, We delivered an EBITDA of BRL16.5 million in the quarter, up from BRL9.9 million in Q2 of 2022, marking the 5th quarter in a row of positive EBITDA.

Speaker 2

Let's now take a look at our key financials for the 1st 9 months of 2023. Looking at the 1st 9 months of 2023 makes it even easier to understand our decision to accelerate revenue growth in the quarter, while maintaining profitability at healthy levels. Revenue growth in the quarter led to a catch up in the 1st 9 months of the year when compared to the same period of 2022. And at the same time, we saw strong margins across the business lines that led to a gross profit growth of 13% year over year and gross margins growth of 4.5 percentage points to 44.1%. Moreover, Normalized EBITDA in the 1st 9 months of 'twenty 3 reached almost BRL56 million compared to 0 in the same period of last year.

Speaker 2

On a reported basis, our EBITDA was BRL55 million, an improvement of BRL80 million when compared to the negative BRL24.9 million reported in the 1st 9 months of 2022. We'll talk about EBITDA in more detail soon. Our stronger EBITDA and better working capital management led to solid operating cash flow of almost BRL124 1,000,000 in the 9 months period. Now, let's compare the Q3 of 'twenty three to the Q2 of the year, which shows our continued progress in growing revenues. Here on this slide, we can see that sequentially, We grew consolidated revenues by 13.3 percent with double digit increase in both segments.

Speaker 2

This was driven by the recovery in profitable SMS volumes from some CPaaS large enterprise clients, but also due to the growth of our SaaS business. It is all important to remind you that our CPaaS is a mature business And our strategy is to have the cash generation from the CPaaS business, funding the expansion of our SaaS business. Despite that, We may come across with opportunities to gain market share at healthy profitable levels, which was the case in the Q3. While this may create some volatility in the contribution of CPaaS to the revenue line, it does not affect the trend of having SaaS increasing as a percentage of gross profit, as you can see in the next slide. As you can see here, while the CPaaS contribution to the top line was higher in the Q3 when compared to 9 months results, The trend on gross profit is the other way around.

Speaker 2

While we continue to be the undisputed leader in CPaaS in the region, It is important to remind you that CPaaS is a volume based business and therefore volatile in nature. The reason why we decided to pivot the business to add value to the channels in the first place. In terms of size, our CPaaS business ended September with an annual recovery revenue of BRL232 1,000,000. On the negative side, the down sales in large enterprise in our consulting business pulled net revenue expansion down to 102% compared to 120% in Q2 of 'twenty two. As I explained earlier, we have already seen early signs of improvement in the conversion of our sales cycle to large enterprise customers in Q3, but we expect most of the impact to positively impact revenues in Q4.

Speaker 2

Let's now see how our margins performed within this strategy. On this slide, we can see the performance of both businesses in terms of profitability in the 1st 9 months of 2023 compared to the same period of last year. If we isolate the Q3 of 'twenty three, our gross profit for both businesses went down year over year, mainly due to lower gross profit from Live Enterprise customers and CPaaS. However, when we look at the results accumulated in the 1st 9 months of the year, we see solid performance in both businesses with increased margins, demonstrating our ability to navigate this dynamic competitive environment without losing focus on the medium and long term profitability. The performance of our CPaaS business in the 1st 9 months of the year has been above our expectations.

Speaker 2

Given our leadership in the Brazilian SMS market and the more balanced market dynamics, We have been able to leverage a more efficient cost structure to gain market share with certain strategic which led to the strong recovery in SMS volumes with healthy profitability levels. CPaaS also delivered a solid 13% increase in gross profit when compared to the 1st 9 months of 2022, reaching a gross margin of 33.2%, up 5 percentage points. We are confident that this strategy will help us improve our relationship with these customers, allowing us to capitalize on cross selling and up selling opportunities. Also, our SaaS business, despite facing the down sell in large enterprise on our consulting business, reached R134 $1,000,000 in gross profit in the 1st 9 months of the year, a 13% increase compared to the 1st 9 months of 2022, and reaching a gross margin of nearly 64%. This is mainly related to revenue growth and the consolidation of MovieDesk.

Speaker 2

Moving to the next slide, We highlight our EBITDA evolution in the Q2 of 2022, which is a direct result of the decision to pivot saving to a SaaS company and focused

Operator

on improving profitability.

Speaker 2

It has not been easy, particularly given the complex macro environment, but as you can see, Our strategy is paying off with the Q3 of 2023 marking the 5th consecutive quarter of positive EBITDA. EBITDA was positive R16.5 million dollars in the quarter, up from R9.9 million dollars a year ago and R15 million dollars in Q2 of 2023. The stronger EBITDA is mainly related to the gross profit expansion I just explained, coupled with the execution of our savings plan initiated in July 22. The disciplined execution of this efficiency plan led to an 8.4% drop in nominal G and A expenses, reducing the ratio of G and A as a percentage of revenue to 16.7% in 9 months of 'twenty 3 from 18.5% in 9 months of 'twenty 2. Also in Q3 2023, we had a BRL0.6 million impact from non cash earnout expense related to Senestera.

Speaker 2

Year to date, our EBITDA already totals R55.7 million dollars on track to meet the guidance for the full year. In fact, our last 12 months EBITDA of BRL79 million is already within the guidance range. In terms of cash flow, we ended September 23 with a solid cash balance of nearly BRL120 1,000,000, in line with the previous quarter and a direct result of our focus in cash preservation without jeopardizing sustainable growth. The combination of stronger EBITDA and a stricter control of working capital was enough to pay for capital expenditure and debt service accumulated in the year. Now let's discuss our guidance for 2023.

Speaker 2

To finish, I would just like to reiterate the guidance we previously set for 2023 as we are confident with our performance so far And we are expecting a good Q4, which normally boosts our revenue and will positively impact our EBITDA, which as I just said, is already on track to meeting the guidance. With this, we conclude our prepared remarks, and we are ready to take your questions.

Operator

We will now begin the question and answer session. Once again, for this Q and A session, we ask you to write down a question via the and A icon at the bottom of your screen. Your name will then be announced and you'll be able to ask your question live. At this point, a request to activate your microphone will appear on your screen. If you prefer not to open your microphone live, Please write down no microphone at the end of your question and our operator will read your question aloud.

Speaker 2

Hugo, I'll get one here on the webcast. Can you comment on your consulting business and why it has been so difficult to make it work?

Speaker 1

We got to take this one. So when we are addressing the enterprise Mark, this year has been a tough year, a tough environment, which means decision Making cycles are taking longer than expected. That's why even though we're bringing new enterprise customers, especially to our SaaS offerings, It is taking longer than expected to ramp up their revenues. As we expect in the next Couple of quarters to get this on track, especially as we're seeing new logos coming and new projects being under Launch phase, it's still not appearing in our results, but we expect in the next couple of quarters to have Higher flow of enterprise customers coming in back to our revenues.

Speaker 2

Thanks, Casio. So I'll keep going here. We saw an acceleration of CPaaS in the 3rd quarter, Seems completely different from H2 of last year. Can you comment on this different dynamic?

Speaker 1

Sure. Last year, we had a very tough competition on the CPaaS Space has been talked about that in the last couple of quarters. We were able to get back with a more competitive approach This year, so that's why we're getting back our market share and also advancing more than we had in the past and with profitability. So we're being able to combine more aggressiveness On the market with positive flow of cash coming from this business, we see the market, even though it is a mature business, It still has lots of opportunities for us, considering we are the largest players in the region. So We're able to being able to benefit from that position in the market to bring Especially big customers that are driving their growth on the space with Zendia.

Speaker 1

These same customers, we're exploring new opportunities with them to also transform into the solution side, which means the SaaS Revenues between the same customers. So we're getting more presence on the CPaaS space and expect that in the short to mid term to also benefit us on the SaaS market as well.

Speaker 2

Thanks, Casio. Can you give us an update on earn outs due next year? Have you been able to Structuring more of those, are you trying to restructure some of your debt? So I'll take this one. Yes.

Speaker 2

As we've been discussing with you since Q2 of this year, we've been discussing with All our creditors, banks and including the sellers' finance to restructure continue restructure as we did. This is an ongoing conversation. We have time helping us here because markets Seem to be improving somewhat in terms of credit and funding alternatives. And due to our Effort in generating EBITDA, but also having a very strict control of working capital, we've been able to push Our cash and our liquidity to put us in a better position to renegotiate that. So we hope to have to give you news on this sooner than later, but we continue being with the timing of those renegotiations.

Speaker 2

Another one for you here, Castillo. We saw a hype with HTTP and AI. Following that hype, what has changed or evolved? What trends are you seeing?

Speaker 1

We're seeing that what we had at the beginning, which is the beginning of the hype curve is I thought that it would dramatically change everything in a very short term As every new technology does just initial hype, what we are seeing is that The benefits and the use of Genprive AI into our solutions is coming and it's Starting to get traction within our products. We had a handful of different initiatives being tested with customers. Now we're starting to deploy them and have them scaled to customers and this comes from this goes from Simple understanding of what is the next best answer for the customer up to insights On what is going on with customer support or sales, so there are some improvements that are very useful for customers. And in the midterm, we expect that the way companies Build their processes and when they make these processes available on conversational interface such as WhatsApp or Google or SaaS that generative AIs will The mix with structured natural language understanding processes, which like the Watson technology did before. So we're seeing these 2 technologies being mixed, So they can provide a reliable service for customers, of course, and also Good in terms of conversation.

Speaker 1

So it can be more fluid than Watson based chatbots. So that's starting to occur and we expect that next year will be the year that these generative AI technologies will be fully deployed to most of our customers.

Speaker 2

This one for me here. You're the cheapest enterprise software company in the world valuation wise. When can we start to consider stock buybacks? So we are not against stock buybacks. It's just a matter of Timing and use of capital and capital preservation, right?

Speaker 2

We're still, as I previously answered one of the questions about Our funding gap and liquidity, so that is a priority now over share buyback. Once The funding gap and our liquidity situation is behind us, then we can discuss all sorts of how to return to accelerate Capital return to shareholders. One here for you, Caio. Can you elaborate more on the RCS that you mentioned in your prepared remarks? How is that different from SMS?

Speaker 2

Any idea of potential market size versus SMS cannibalization?

Speaker 1

Sure. RCS is a technology that's been evolving For about a decade, it's part of GSM protocol. And Since Google started pushing that technology a couple of years ago, it was up to this year Not yet deployed within carriers. This year, 2023, is the year that carriers arranged and deployed the technology. So that's the year Things started ramping up, so we partnered with Google to bring that to the market.

Speaker 1

And what basically RCS does Is that is a smooth transition from SMS to more rich communication model with customers, which means you have 100 percent coverage when you're sending a message Because it is the fallback goes over SMS, but for those end users That have, I have said, compatible with RCF. You have a much richer experience. That's nowadays available not to the majority of end users, even though we cover 100% of the data from a fallback. And over the next 2 or 3 years, we expect that 60% to 80% of users will be RCS compatible. And that means in terms of business that from XENVIA perspective creates lots of opportunities for upsell Kas, when a user receives a rich message, it brings more interactions with that message, which means better conversion rates, Possibly conversation over the message, which leverages all of our conversational platform and AI And also the message itself from the simplest message up to the rich message brings more revenues Talking only at the pure messaging side.

Speaker 1

So for us, and that's why we're leading that transition from SMS to Arceas, brings lots of different opportunities for upsell and of course better experiences for end users and better results for our customers.

Speaker 2

Another one here. Can you provide Color on why the number of customers in your SaaS business was lower quarter over quarter and why your net retention keeps going lower? Caio, can you address that one?

Speaker 1

Yes, of course.

Speaker 3

So talking first about the net revenue expansion, as Shay said, that impact is related to the consulting part of the business, where we So some revenue churn come from clients huge clients from last year because on the revenue Last 12 months as basis, but we already see recovery in Q3, the pipeline recovery. And in Q4, we expect Increase on also the net revenue expansion. Regarding the number of clients, the clients that We lost between quarters. It's not relevant in terms of revenue. And as we saw, we increased our revenue quarter over quarter in the SaaS business.

Speaker 3

And we still have a lot of opportunity in the cross selling basis. That's why We are focused a lot on Onexentia because we have a huge client base with low cross selling. That's a huge opportunity for us. So It doesn't it's not a huge it's not some issue for us losing clients, especially Number of Fine Special because of their small revenues.

Speaker 2

Hugo, can you re prompt to see if we have Live questions?

Operator

And we will open your microphone. If you prefer not to open your microphone, please write down no microphone at the end of your question And our operator will read your question aloud.

Speaker 2

We have no more questions here, Hugo, on the webcast as well.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Kasio Babson for his closing remarks.

Speaker 1

Thank you, everyone, for joining us today. We're very excited with this year and especially next year coming. We expect to have you guys on our next call. Thank you very much.

Operator

To answer any additional questions. Thank you for attending today's presentation. You may now disconnect. Have a nice day.

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Earnings Conference Call
Zenvia Q3 2023
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