Zenvia Q2 2024 Earnings Call Transcript

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September 6, 2024

There are 6 speakers on the call.

Operator

Good morning, and thank you for standing by. Welcome to Zenvia's Q2 2024 Earnings Conference Call. Today's speakers are Mr. Kasia Bobcin, XANVIA's Founder and CEO and Shai Shor, CFO and Investor Relations Officer. Please be advised that today's conference is being recorded and a replay will be available on the company's IR website where you can also access today's presentation.

Operator

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 question via the Q and A icon at the bottom of your screen. Your name will then be announced and will be able to ask your question live. At this point, a request to activate your microphone will appear on your screen.

Operator

If you do not want to open your microphone live, please write 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. Cassio Bobcin, Founder and CEO. Sir, the floor is yours.

Speaker 1

Hello, everyone, and thank you for joining us at Sanjay's Q2 2024 Earnings Call. I'm Kasia Babson, Founder and CEO. Thank you all for being with us today. Let me start by sharing with you that this quarter has been a significant one for us as we have been laser focused on rolling out our Zendesk customer cloud solution. And I'm pleased to report that the response from our clients has been extremely positive with healthy levels of recurring revenue churn and cross adoption.

Speaker 1

We have also introduced in June our GenAI chatbot solution. This cutting edge innovation delivers substantial value to our customers as it is so simple that a chatbot can be built in just under 6 minutes. I'm happy to share in these 2 months since its launch, about 100 companies across 8 industries in Latin America build their chatbots. We are confident this number will keep increasing. Chatbots are moving more and more and are expected to become the primary customer service channel for at least 25% of all global businesses by 2027 according to Gartner.

Speaker 1

This shift represents not just a simple automation, but a significant enhancement of the customer experience. Here at Sandia, our long term vision is to revolutionize customer service and business processes automation with the smarter and more intuitive chatbots. We're leading this transformation in Latin America, offering fluid and personalized solutions that boost efficiency and enhance the customers' experience, and they're more profitable to us. In terms of next steps, additional features of our GN and I chatbot will include real time sentiment analysis, continuous learning from past interactions and seamless integration with multiple systems. We're unlocking endless possibilities for the future of customer experience, all with the help of AI.

Speaker 1

These advancements highlight the tremendous opportunities ahead and reinforce our commitment to driving growth and solidifying our relationship position in the market. The dedication of our team and the enthusiastic feedback from our clients attest our confidence in the transformative potential of these solutions. We're committed to continuing this momentum and exceeding expectations as we move forward. Now I'll hand it over to Shay to cover our performance in the quarter.

Speaker 2

Thank you, Casio. Good morning, everyone. Let's start on Slide 5. Here's a snapshot of our performance in the Q2 and first half of twenty twenty four compared to the same periods of last year. As you can see, we are happy to report solid numbers in both periods.

Speaker 2

The Q2 2024 results came again in line with our expectations, combining strong revenue growth and strict expense control that resulted in an EBITDA of almost BRL34 1,000,000 in the quarter and BRL57 1,000,000 in the first half. When looking at the last 12 months, our EBITDA totals BRL110 1,000,000, allowing us to reaffirm our BRL120 million to BRL140 million full year guidance for 2024. Our revenues grew by 20% year over year in the Q2 of 2024, reaching BRL231 1,000,000. This growth was matched by a 20% increase in adjusted gross profit for the same period, while our adjusted gross margin remained stable at 43.3%. This is right in the middle of our 2024 guidance range.

Speaker 2

Our EBITDA figures also showed significant strength, with both periods recording more than double the EBITDA compared to the same period of last year, attesting our continued operational efficiency and growth. Let's now dive deeper to understand these results. Both SaaS and CPaaS kept expanding by 2 digits in the Q2 and 1st half of twenty twenty four, with the revenue increase driven mainly by Large Enterprise in both segments. In the CPaaS business, the performance keeps reflecting our ability to grow while maintaining profitability at healthy levels, leveraging on better cost structure. CPaaS revenues grew 22% in the 2nd quarter after growing 23% in the Q1 and 30% in the Q4 of last year.

Speaker 2

This attests to Zambia quality and market leadership. Our SaaS business grew almost 16% in the Q2 compared to the same period of last year. The expansion came primarily from large enterprise customers, especially in the consulting business that has a low comparison base in Q2 'twenty three. Looking ahead, we expect SMB clients to be the main growth driver of our new Xevia Customer Cloud. When we look for the figures of the semester in the graph on the right of the slide, we see mostly the same picture, with growth variations that are very similar to the quality numbers.

Speaker 2

Let's now take a better look on how this expansion has translated into a balanced and profitable portfolio mix. We continue to pursue and convert revenue opportunities in the CPaaS business. Particularly in the Q2, we gained some volumes with unusually high margins from certain large enterprises, expanding CPaaS contribution to our revenue mix. The 2nd quarter numbers show SaaS reaching 34% of net revenues and 42% of gross profit, while CPaaS made 66% of net revenues and 58% of gross profit. In the same quarter last year, we had just a little bit more of SaaS revenues, 35% versus 65% of CPaaS, that translated into a fifty-fifty participation in the gross profit mix.

Speaker 2

As you know, a higher CPaaS participation in the revenue mix impacts our margins. But I would highlight that the focus here was again on capturing volumes in CPaaS that are converted directly to EBITDA, given that we do not need the initial G and A to generate that revenue. Here on Slide 8, you can see exactly what I just explained. As our growth this quarter was mainly driven by large enterprises in both segments and with a much higher CPaaS participation, we were expecting some decrease in margins. We recorded almost 38% CPaaS margins and 54% SaaS margin in Q2 'twenty four.

Speaker 2

For the half year, the margin numbers were very similar. The lower SaaS margins are related to the mix of large enterprises with lower margins. This decrease was totally offset by the higher than expected CPaaS margins that we do not expect to be repeated going forward. The performance of both segments drove our consolidated margins. The adjusted gross margin remains stable when we compare the quarters.

Speaker 2

Worth noting here that we are reporting margins that are well within the guidance range, all according to our plan. And more importantly, looking at the margins as percentage, we highlighted gross profit expanded 20% year over year or BRL 17,000,000, which is one of the drivers for our EBITDA more than doubling. The other driver for EBITDA expansion is our discipline on G and A execution, as you can see in the next slide. As I mentioned at the beginning of my remarks, we remain laser focused on keeping costs strictly under control. We have been growing the top line by double digits without adding additional G and A, which enabled us to more than double our EBITDA in both periods.

Speaker 2

In fact, we are doing this while bringing down our G and A as a result of increased productivity. This led the G and A as a percentage of revenues to decrease to 14.4 percent in Q2 'twenty four from 19.4 percent in Q2 'twenty three, representing a 500 basis points drop, the lowest level since our pre IPO years and a key factor positively impacting our EBITDA. When we compare the semesters, the drop was 400 basis points, reaching 14.5 percent of revenues. Obviously, we are very happy with our EBITDA expansion that we just discussed. But we cannot lose sight of how this EBITDA is converted into cash.

Speaker 2

So here we have a view of EBITDA minus CapEx. In the first half of last year, when we deducted the CapEx from our EBITDA, we still saw a negative figure. Small but negative. This year, we generated a positive R24 $1,000,000 from the EBITDA minus CapEx. Also, if we consider the midpoint of our EBITDA guidance of R130 $1,000,000 for the year and that our expected CapEx should be around R50 $1,000,000 this index is projected to be positive at R80 $1,000,000 for 20.24.

Speaker 2

EBITDA minus CapEx is a crucial metric for assessing our ability to generate cash flow from our core operations after accounting for the necessary investment in the business. These metrics not only highlight our operational efficiency, but also helps understand how well we are positioning ourselves to deleverage, fund future growth, maintain financial flexibility and reward shareholders. Since we expect that our EBITDA will increase at a faster pace than our CapEx, as it has been the case for the last few years, we believe we will be able to start deleveraging our balance sheet by H2 of 2025. Until there, we are working to obtain more flexibility in our cash flow through new debt to our equity. On slide 11, we are reiterating our guidance for the full year 2024.

Speaker 2

Our revenue growth of 19% in the first half of the year is tracking at the high end of our 15% to 20% full year guidance. In terms of margins, we are forecasting gross margin in line with 23 figures, between 42% 45%, and our first half results of 43.7 percent tracked slightly above the midpoint of the range. And finally, in terms of EBITDA, our first half of the year came in line with our expectations, including the seasonally weak Q1. Considering second half seasonality, especially in Q4, we are confident in rate to rate our EBITDA guidance of between BRL120 million and BRL140 million. To wrap up, let's talk about the next steps that we have been discussing with our Board.

Speaker 2

The conclusion of our liability management in the Q1, which included both capital raise and debt refinance, was an important step to better align our cash flow from operations to the financial requirements we have. With greater financial flexibility, we can focus on executing our strategic planning, accelerating profitable growth and deleveraging the balance sheet. As we roll out Xevia Customer Cloud that Caso mentioned in his prepared remarks, we become even more confident that it will accelerate our organic growth. We are also preparing to expand organically outside Brazil, with a focus on Argentina and Mexico, where we already have operations and where we see high growth potential. Once again, we appreciate your continued trust as we move ahead.

Speaker 2

We are committed to building a profitable and exciting future for Zenvia, maximizing value to our shareholders. With this, we conclude our prepared remarks and 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 Q and A icon at the bottom of your screen. Your name will then be announced and will be able to ask a question live. At this point, a request to activate a microphone will appear on your screen. If you prefer not to open your microphone live, please write no microphone at the end of a question and our operator will read your question aloud.

Operator

Our first question comes from Gustavo Farias, sell side analyst from UDS. Gustavo, we are now opening the audio so that you can ask your question live. Please go ahead.

Speaker 3

Hi, guys. Hi, guys. Can you guys hear me?

Speaker 2

We can.

Speaker 3

Hi, everyone. Thank you for taking my questions. Two questions from my end. The first one regarding the migration of the client base to Xavier's consumer cloud. I'd like to know if you could put more color on how's the feedback from clients, what kinds of clients you expect to have going forward in terms of large enterprise versus SMB?

Speaker 3

Just to confirm our understanding, your focus will be on SMB. Just like to confirm that. And the second one, it's regarding the client based cleanup that you mentioned this quarter on

Speaker 2

the support.

Speaker 3

I'd like to know if it's already over or should we expect some more basically not for next quarters? That'll be it. Thank you.

Speaker 4

All right. I'll take the first part of the question and then Shay will take the second part. So talking about migration of customers to Zenvik Customer Cloud. We first started with launching these new platform for new customers. So we have the cohorts of new customers coming from a portion of our demand generation already using this new platform.

Speaker 4

And we are seeing a very interesting increase in the usage, in retention and cross adoption and deep adoption, which is translating into a very, very healthy profile of these cohorts comparing to what we had on the standalone solutions before CMIC Customer Cloud. We've been rolling out the migration of these of all of our products to become a part of the Customer Cloud. So this is a project that is being rolled out. We expect to finish that in terms of migration of products up to Q4 this year and a little bit up to Q1 next year. And at the same time, we are migrating customers from our former solutions to this new platform that is also being rolled out.

Speaker 4

We're still in the early days of that, but we're already seeing that we have a very good reception from these customers because they are able to have access to more features, usually paying the same amount in the beginning. I mean, they migrate and they pay the same but have access to more features, and as they keep using more, then we benefit from this usage with the volume based business model that we have that make these customers be more monetized as they grow their usage. So as we're rolling out this migration of customers, we expect that this will increase both customer retention and also customer expansion. That's what you are already seeing in the courts of new customers. And about customer size and profile for these new solutions, we're seeing adoption from small, medium and large companies.

Speaker 4

We have, of course, as we launched, we launched more towards SMBs. But as we are approaching our enterprise customers with this new platform, we're having adoption of huge customers of this new platform. And we are very happy and glad that they're already seeing value in this new platform. And we expect as we roll out to all of our customers this platform, to have improvement in both SMBs and enterprise in terms of both retention and expansion. And Shay, I think you can now handle the second part of the question about cleaning up the customer base.

Speaker 2

Thanks, Casio. So Gustavo, pretty simple. We understand that most of what we needed to do was already done. So we don't expect anything relevant going forward. Hugo, I see some questions here on the web.

Speaker 2

I'll take them. I'll read them, and then we report to see if we have live questions again. So congrats on the progress, particularly in resolving the earnings gap. Two questions. First on margins and the other one on working capital.

Speaker 2

On margins, the company's margins for both CPaaS and SaaS vary considerably a bit quarter to quarter over the past 3 years. CPaaS margins have been as low as 20% s and high as 40%, while SaaS has been as low as 40% s and as high as 60%. Beyond customer size, what is the best way to think about the long term margin profile of Xandr, especially as it scales? Kas, I don't know if you want to go on a more helicopter view and then I can go

Speaker 4

Yeah, sure. We've been investing a lot on the integration of the SaaS solutions and expect that these investments over the last 2 years are now starting to leverage the growth of SaaS as we expect this to happen in the next couple of quarters in a higher pace than CPaaS, which will naturally bring our margins a bit higher in terms of revenue mix. And the variation of margins on CPaaS, it's mainly customer mix. There's this variation of different customer profiles over time as it is mostly volume based depending on seasonality and depending of negotiations, especially on high volume, low margin customers. Sometimes we have some boost on high volume customers with lower margins, and this creates a fluctuation of CPaaS margins.

Speaker 4

Looking at SaaS, it's mostly about the revenue mix of different products in the portfolio as we acquired companies and we combine that with our R and D solutions. Each has its own profile of cost structure. Sometimes, what we see in the terms of variation is that one solution is growing at a faster pace and carries different margins. We expect that our margin at the long term, as we have been as we gave in our IPO, our long term range will probably be beyond 50% on long term as we have expected the SaaS portion of the business to become a long term majority of our revenues. But this, of course, is always be combined with some of the CPaaS volumes going on that will, at some point, vary the margin profile of the company.

Speaker 2

Yes. Thanks, Kasur. The only thing I would add here is as we move more and more all the businesses to the new model on the Xynga customer cloud, then it becomes on a similar to SaaS, right? So it's a monthly subscription. It tends to soften, especially on the pure channel side as well.

Speaker 2

So that's the only thing I would end here. On the second part of the question here on leverage, what is the best way to think about the negative working capital? I assume there's a significant amount from telcos that continue to be pushed out since Slide 22. Would be useful to understand if there is any liquidity gap related to this or does the company have agreements in place to keep extending this out? So that's a good question.

Speaker 2

We've been focusing a lot on managing our working capital since mid of 'twenty mid of 'twenty two. By nature, this business does not have negative working capital. We usually receive from our clients before or at the same time that we have most of our costs, which is the SMS that we acquire from the telcos. So there's no negative working capital by nature on this business. Obviously, that we'll always do the effort as we've been doing since mid of 2022 to improve our both our DSO and DPO.

Speaker 2

And we'll keep negotiating every time that we see room for that to postpone the payments for the telcos or to anticipate or to do deals that we can have prepaid from clients at interesting cost. So it's a matter of analyzing opportunities versus cost of issuing short term debt. So as simple as that. There's no specific agreement with the telcos, but we understand that our relationship with the telcos is very symbiotic. They depend on us.

Speaker 2

We depend on them. So it's been a healthy relationship from this perspective. Another question here. FX losses are up significantly in this quarter. What was the driver for the increase?

Speaker 2

The main reason for these effects is that it has no cash impact. So just to make it clear, basically, we have some clients that we invoice them abroad outside of Brazil. So what happens is that we incur the cost in local currency in BRL. We then invoice them. And the timing between the day that we invoice them and register the invoice on our balance sheet and the day we are paid, there could be some differences.

Speaker 2

But again, since the cost is in BRL and we end up receiving in BRL, it's just a matter of accounting these effects. It's related to the operations in Brazil, not outside Brazil. Another one here. Congratulations on great set of numbers. Two questions.

Speaker 2

How is the funding gap for the next year? Does Enviva need additional capital in the near term? How is Xenvion progressing with the integration of companies? And what is the work left here? Kaso, I don't know if you want to talk about the integration of the companies and then I'll go on the funding app.

Speaker 4

Yes, sure. About integration of these companies, we have this project we disclosed, which we called OneSenthien, and that is basically the project that finishes all these integrations. We are very advanced on that project. Some of these integrations are already finished. And we and what we mean as finished is now making these products, these former products, standalone products that were originated from these acquired companies to become part of Samehia Customer Cloud.

Speaker 4

That's the end game of this of all integration process. We expect now these to be finished. The majority will be finished within the year, and we'll have some components still to be finished on Q1 and Q2 next year. But we are very proud to say that we are now in this end phase of integrations. Hence, we are already seeing some of the benefits in terms of efficiency already being translated in G and A reduction, and we expect up to the next year to still have more benefits of these integrations into our cost structure and our that will, of course, be reflected in the profitability of the company.

Speaker 4

So we're seeing this benefit not only that, but also mainly by providing a better and more complete solution for our customers. So we're happy very happy to see that being finished.

Speaker 2

2nd part here. So on the funding gap, as you know, we announced earlier this year in February a liability management, which included rollover of the bank loans that we had, also renegotiation with extension of the period for payment on the seller's finance related to the M and As and finally, a capital injection by Casio of BRL 50,000,000. One important thing about this is that one of the benefits of the renegotiation, especially in the sellers finance, is that we are able at the discretion of the company to convert up to BRL100 million into equity if needed to accelerate the deleveraging of the balance sheet. So with that said, it's part of our job to continue looking for alternatives, especially in terms of financing and alternatives to continue doing liability management if there are alternatives there. The fact that we are increasing the part of our the mix of our revenues that is subscription versus usage improves a lot the credit profile.

Speaker 2

So it puts us in front of us alternatives that we didn't have in the past. So that's something we've been looking all the time. And in terms of equity, it's we have we need to be opportunistic. So we have an ATM at the market program running. So if there is any investor that needs liquidity, the ATM is there for this reason.

Speaker 2

So we've been very cautious on that to avoid a lot of dilution. But it's an important tool that helps us funding the business. By the end of the day, deleveraging, funding gap, everything will have to come from our capacity to generate EBITDA. Another question here. This is for Casio.

Speaker 2

You already using, as per your comments, a lot of AI. Do you have visibility on what should we expect or next step for features on this front?

Speaker 4

Sure. We have several features being deployed in the customer cloud platform, And they range from, as we already mentioned, GenAI chatbots generation. With these solutions, customers are being able to create chatbots in an average of 6 minutes, and they go live within 6 minutes. And we have lots of customers already benefiting from that up to copiloting, which means helping sales reps or customer service agents to give better contextualized answers to customer demands and thus improving customer, I mean, sales conversion and also improving customer engagement and satisfaction over customer support. And we have different tools being deployed also for customer context analysis, sentiment analysis, and insights from customer behavior for improvement of campaigns.

Speaker 4

And this all is already deployed. And we've been working on some interesting features that utilize not only the conversation with customers, but also data from past customer transaction, I mean, the customer transaction history and what which correlations can be made and with from these transactions, so they can create better journeys that will help customers to buy more, to engage more, to renew, to avoid churn and so forth and so on. So we have lots of interesting things going on. The AI is very practical. We have practical use cases that are easy to understand and to utilize on a daily basis for our customers.

Speaker 4

That's why we're very happy to have this kind of technology now being made available and becoming cheaper and cheaper so we can create value for all of our customers.

Speaker 2

Thanks, Casio. Year 1 for, I guess, Caio can take this one. Congrats on the G and A discipline. Is this the level we should expect going forward? Is the team size you have now enough for future growth?

Speaker 5

Yes. What I expect here is minor adjustments, but what the team, the structure that I have now is announced to support all the growth that we have planned ahead. So all the growth in revenue and gross profit will leverage more G and A that we have in place right now.

Speaker 2

Thanks. And a follow-up here for you, Kyle. On EBITDA, is Q2 the level for the second half?

Speaker 5

As the business what we the business naturally has a seasonality, especially in Q4 due to the Christmas and Black Friday and everything. So what we expect here is if we deliver the same EBITDA, we reach our guidance, but of course, for Yemi, it's higher. So our expectation is that such an analogy of the business will leverage EBITDA.

Speaker 2

Thanks, Kyle. Hugo, we don't have any further questions here. Can you just report to see if anyone has additional questions?

Operator

Of course, I. Again, if you have a question, please use the Q and A icon at the bottom of your screen to write it down, and we will open your microphone. If you prefer not to open your microphone, please write no microphone at the end of a question and our operator will read your question aloud. This concludes our question and answer session. I would like to turn the conference back over to Mr.

Operator

Kasio Babson for his closing remarks.

Speaker 4

Thank you, everyone, for joining us this call. We are very proud and excited about what we achieved in Q2 and hoping that over the course of the year, we're able to keep our projections and our forecast, our guidance for the year. And we're building a very strong foundation for 2025. And so I'm very glad to have all you guys on board with us and see you next call.

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Zenvia Q2 2024
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