Zenvia Inc. Q1 2023 Earnings Call
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Speaker 1: Now, I would like to welcome one of your speakers for today, Mr. Kastriil Bobzin, founder and CEO .
Speaker 1: Sir, the floor is yours.
Speaker 2: Hello everyone and thank you for joining us at CineSci 123 Ernest's Call. I'm Casio Babcim, founder and CEO . Thank you all for being with us today. Our results for the first quarter showed growing momentum for Zendyep as he continued to focus on profitability.
Speaker 2: 3 out of the 4 companies we acquired in the last couple years are fully integrated from an organizational structure perspective and we are advancing on the integration of its systems and platforms, which will allow our SaaS business to fully capture synergies and benefits from one single platform.
Speaker 2: Customers are beginning to realize the competitive advantages of our unified CX SaaS platform to transform their customer journeys into digital. We are very excited with the continuous evolution of our Quantum platform and its solutions, that are now starting to leverage the massive generative AI present-
Speaker 2: our ability to execute on this mature business and demonstrating its potential to generate cash which is instrumental to fund the expansion of our SaaS bids.
Speaker 2: Our focus moving forward will remain on profitability and capturing cross-selling opportunities. I'll hand the call over to Shai to go into more detail on our performance. I'll be back after that for the Q&A.
Speaker 3: Thank you, Casio. Hello, everyone, and thanks for being with us today. Let's start on slide 5.
Speaker 3: In this first quarter of 23, we remain focused on our strategy to improve profitability while executing on our savings plan since the third quarter of last year, all in the face of a challenging economic environment.
Speaker 3: As we did in Q4'22, we continued to operate in Q1'23 with the correct balance between revenue growth and profitability, which coupled with cost efficiencies led to an EBITDA of 24 million REI's making two quarters in a row of positive EBITDA.
Speaker 3: Also, it's important to highlight a very strong cash generation as a result of a strict working capital management.
Speaker 3: And again, we did this despite the challenging and more competitive environment that we continue to successfully navigate. Even though our total revenues drop 9% year over year as a result of our focus in a profitable SIPA business.
Speaker 3: the SAS business continues to be our growth engine with the top line for form expansion when excluding the consulting business of 32% comparing Q123 to Q122.
Speaker 3: Our gross profit grew by 38% adding 18 percentage points to our adjusted gross margin that reached 52% which attached our full commitment and path towards profitability.
Speaker 3: Let's take a look at how each of our businesses is contributing to profitability.
Speaker 3: Here on slide 6 you can see the breakdown of our gross profit and margin mix by SAS and CPAS for the first quarter of 23 compared to the same period of last year.
Speaker 3: We can see good performances in both businesses with increased margins, which means that our focus on profitability is paying off.
Speaker 3: Our SaaS business reached the mark of 46.4 million reais in gross profit this quarter, a nearly 40% increase compared to the first quarter of 2022, reaching a gross margin of 68% up 4 percentage points compared to the first quarter of 2022.
Speaker 3: The CPES in turn delivered a solid 38% increase in gross profit when compared to the first goal of 22.
Speaker 3: reaching a gross margin of 42% up almost
Speaker 3: Let's now look at this data in terms of weight in our financial metrics.
Speaker 3: We are well on our way toward transforming Zendia into a full SaaS company and we continue to gain momentum on this front. Our SaaS business reached an annual recovery revenue of 59 million REIs in the first quarter, which annualized totals almost 240 million REIs.
Speaker 3: Net revenue expansion in the SAS business remains healthy at above the 120% level.
Speaker 3: Our SaaS services represented 38% of the total revenue in terms of gross profit and we had a 50-50 result this quarter.
Speaker 3: We continue to explore the possibilities of generative AI to enhance our SaaS solutions portfolio, building off the integration of chat GPT with Xavier attraction which we announced in February .
Speaker 3: In March, we hosted our first ever Hackabot, an internal hackathon for humans to develop solutions for the end customer based on the chatgpt 3.52.
Speaker 3: The solution developed during the Hackabot already being tested for potential integration with our suite of CX solutions, with developments including improved context analysis of the conversation, grammar evaluation, and customer sentiment analysis.
Speaker 3: and earlier this month we announced the integration of ChatGPT into Zendesk Chatbot.
Speaker 3: which can now be trained to search through and reuse documents already created within the company, enabling a wider variety of questions to have automated answers and opening many more doors for the future of the two.
Speaker 3: This integrated chatbot is already in use by a major Brazilian insurance company.
Speaker 3: Let's now move to the next slide on gross margins.
Speaker 3: On this slide we can see the evolution of our gross margin from the first quarter of 2021 until today.
Speaker 3: We continue to expand our margins and have shown a 19% point expansion from the IPO in Q2 2021 through the first quarter.
Speaker 3: and an 18 percentage point expansion compared to the same quarter of last year. We reached a gross margin of 52% in Q1 with our consistent results proving that we are walking the talk on our path to profitability.
Speaker 3: Looking ahead, it is worth noting here that we don't expect the gross profit for the full year to remain in the same level that we had in Q1. As for our guidance for the year, our gross margins should remain at a similar level compared to Q22.
Speaker 3: Moving on to the next slide. On this slide we detail the progress towards cost reduction initiatives, which started implementing the third quarter last year.
Speaker 3: Following the downsides of our corporate structure in the fourth quarter, combined with reducing non-personnel G&A expenses, such as consulting and travel, we recorded a 9.5% reduction in G&A expenses compared to the first quarter of 2022.
Speaker 3: reaching just over 31 million reais compared with almost 35 million in the same quarter last year.
Speaker 3: On the graph to the right we can also see the sequential improvement in our cost reduction efforts in terms of percentage of net revenue.
Speaker 3: We make good progress in Q1 thanks to our savings plan and restructuring, but it doesn't really reflect all impacts yet. We expect an acceleration in the capture of savings in the following quarters leading to a lower ratio of expense as a percentage of revenues.
Speaker 3: thanks to our savings plan and restructuring. But it doesn't really reflect all impacts yet. We expect an acceleration in the capture of savings in the following quarters leading to a lower ratio of expense as a percentage of revenues. Let's move to the next slide.
Speaker 3: In this slide we detail our EBITDA growth since the first quarter of 2022.
Speaker 3: which is a direct result of the decision to pivot same way to assess company and bringing our performance back to the profitability path.
Speaker 3: It has not been easy, especially given the complex micro environment, but as you can see our focus on profitability is paying off.
Speaker 3: So, Ubi 10- Q1 -23 was a solid 24 million REI's compared to a negative 8 million in Q1-22 and positive 23 million last quarter.
Speaker 3: It puts us on track to deliver on the top range of the guidance of the year.
Speaker 3: XAML's history of delivering profitable operations makes us confident in our capacity to deliver a solid EBITDA expansion 23 as we'll discuss in a minute. Let's move to the next slide.
Speaker 3: This slide is very important to us as it shows that we have been able to convert EBITDA into cache.
Speaker 3: While EBITDA minus CAPEX was already enough to generate a positive 13 million reais, total operating cash flow reached 95 million reais this quarter.
Speaker 3: This is a result of better working capital management, especially due to higher anticipations from clients and renegotiations with SMS providers to more flexible payment terms.
Speaker 3: This working capital improvement, coupled with the extended earn-out payments, is enabling us to pay down debt and reduce our funding opportunity.
Speaker 3: I acknowledge we said in the last two conference calls that we are working on a solution for our funding gap for the first half of this year and we are indeed.
Speaker 3: But this solid working capital is actually enabling us to gain time and negotiate better transactions for all stakeholders.
Speaker 3: We would like to emphasize that we don't see any additional difficulties, we are still working on options that include debt and equity amongst others, but we are also in a better position given how we have been managing our cash flow.
Speaker 3: To finish, we have already discussed this in our last earnings call, but I would like just to emphasize our EBITDA guidance for 23 of between 70 and 90 million REIs.
Speaker 3: Given the EBITDA numbers we delivered in both Q422 and Q123 of 23 and 24 million REI's respectively, we are confident in our ability to deliver this solid EBITDA in 23, which is putting us on track to deliver the 15% EBITDA margin mid to long term level we presented in our 22 investor day.
Speaker 3: With this, we conclude our prepared remarks and we are ready to take your questions.
Speaker 1: We will now begin the question and answer session.
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Speaker 1: Our first question comes from Marco Nardini.
Speaker 1: Felside analyst from Xt.
Speaker 1: Marco, we are now opening the audio so that you can ask your question live. Please go ahead. •
Speaker 4: Hello, good morning. Thank you for taking my question. I actually have two here on my side. The first one is a quick follow-up regarding the top-line dynamics on CPAS. When do you expect to report top-line growth in this quarter, together with this positive trend that you have on adjusted gross margin?
Speaker 4: Can you also give us a little bit more color on the competition this first quarter, please? The second one is regarding the quarter over quarter drop in adjusted gross margin in the SaaS business and the increase in the downsell. Should we see more margin drop in this segment for the year? Thank you. I'll start with the competitive dynamics and overall understanding.
Speaker 2: competitors on the space, which is helping us in Q4 to reach better margins. We've been working very hard into eliminating any kind of negotiation that could damage our gross margins in that sense.
Speaker 2: Hence, we had a bit of decrease in the revenues as we shifted the sockets to achieving profitability with each customer, especially the big ones. And we expect, as we are being served in this dynamics, to get back to our
Speaker 2: profile of growth in terms of volumes that translates revenues. Hence, we don't imagine that we're going to be able to keep the same gross margins as we go into a higher volumes, which means higher revenues. So there's this kind of balance between growing and the space with customers that bring a bit less.
Speaker 2: Now I think you guys can compliment me on the numbers.
Speaker 5: Yes, Casio. Still regarding CPAS, what we can expect is because we lost some of the volume as Casio said in the second half of 2022, we expect a growth on this business to lie on the second half of the year when compared to 2022.
Speaker 5: Talking about fast, the quarter over quarter performance was in fact especially including the consulting part of the business because it's related to the large clients and the pipeline EQ4 due to the macroeconomic environment didn't perform as we expected. The sales cycle is longer due to the size of the client.
Speaker 5: the gross margin there you saw caught over current decline is it's a revenue mix there's not some loss of profitability in fact so and we are in line with our guidance so no words here i don't know shy if you want to come up with
Speaker 1: No, that's it. Perfect, guys. Thank you. Again, if you have a question, please use the Q&A icon at the bottom of your screen to write it down and we'll open your microphone. If you prefer not to open your microphone, please use the Q&A icon at the bottom of your screen.
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Speaker 3: Eric, I have a couple of questions here. Let me start with them on the web.
Speaker 3: So first question on funding gap here. Still have some payments on the RNLs until the end of 26. With this profitability improvement how are you looking into this? Do you plan to issue more debt?
Speaker 3: So, the question here is, we acknowledge that there is still a funding gap, not only for some funding gap for this year, but probably until the end of next year. As of the second half of 2024 and first half of 2025, we believe that our cash generation will be enough.
Speaker 3: to pay for the earnouts that we have out there. So we are, as we mentioned in our prepared remarks, we are working hard and taking advantage of the very strong working capital management that we have been doing.
Speaker 3: that is buying us time to find the best solution for us to...
Speaker 3: to solve the short-term and medium-term funding gap. Second question here is, could you please enter in more detail regarding working capital we saw in the quarter, and should we look at these numbers going forward?
Speaker 3: So we've been working very hard to change the way we look. We always looked into working capital and these are the positives of going through all the difficulties that tech companies have been going with access to funding.
So, we've been improving a lot our processes focusing on both DSO and DPO and this specifically we entered with Tuilio into a working capital transaction last in Q3 of 22 in which Tuilio is offering this up to account, more importantly and that all external Rainforest devices are coming into things like Anthony's workload. You can't thwart these.
anticipating us some couple of months in revenue so paying in advance. This provides us with very good working capital and obviously more financial flexibility. We've been rolling this and we believe that we'll keep rolling this and kicking the can down the road.
So you shouldn't expect any outflows out of this working capital, so you should continue at healthy levels. And on the other side, we've been negotiating with providers, we created more recently a procurement team.
that is renegotiate with all suppliers that we have, including SMS providers. And we've been very successful in managing better our DPO and this is behind. So this business is usually not a business with intensive in working capital.
positively going forward but obviously not in the same magnitude that we saw in this squatter.
two questions regarding AI. Do you see the investments in AI GPT-4 powered features impacting our margin profitability in the near term? Do you expect chat TPAI related features to drive higher messaging volumes, accelerate in the CPS revenue stream?
Casa, I guess you can talk about AI and how you see this impacting us.
Sure, we've been applying LLM such as GPT into the product and different parts of the product. These are usually to accelerate the usability and productivity of both managers, software or even a software.
sales reps or customer service agents that will get most on productivity. We expect that to be scaled across the next couple of quarters. It's yet a bit soon to understand what will be like the real effects on that as we are not yet into a scale.
kind of phase so we can really measure. We're working mostly with a beta phase for some customers on these different features. And we don't see a really impacting near term.
change and the margins. We do expect that over time that will bring lots of interest in the usage, especially on the automation side of our platform, which helps companies to reduce costs and bring more efficiency.
which of course everybody is looking for that in their operations. Hence we expect this to drive more adoption, especially going deeper into using our different features of the platform.
Looking at the CTAZ space, of course, as we go into automation, we reduce costs for companies and they are able to leverage more skill. Although it's not yet possible to measure that impact, that's something that we expect in the mid to long term. That's why we're betting that.
these all these evolution and the AI space especially on other lamps would will bring for us a company that is focused on CX a lots of different levers to pull in order to bring more customers more adoption and more efficiency when using our platform to improve customer experiences. Thanks, Casio.
perform a basis growth, so stealing the 30%.
growth on a performer basis, excluding again the consulting part of this that was impacted due to the pipeline, as I said earlier, but we we already seen a better pipeline performance in Cuba, but the sales cycle is longer, so that's the impact.
What is the average financing cost of working capital financing? Most of the revenue anticipation transaction is about 12% a year so is considerably cheaper.
then our bank loans which are approximately CDI plus 6% which is now close to 20% a year. So the working capital financing is really attractive in terms of cost to us.
What is the annualized interest cost post Q1 with better financing option? Look, we will continue to spend about and to your next question here trying to get a sense of free cash flow estimation 23.
let's start with EBITDA and help you guys navigate through 23 expectations. So we guided for EBITDA of 70 to 90 million REI's, let's use the top end of the range which is 90 million REI's given that
in the last two quarters we delivered close to 24, so it's better to look from a top end of the range. So assuming EBITDA of 90 million REIs for this year, we'll have to pay approximately 40 million REIs in CAPEX and then we'll have give or take 40-45 million REIs in in
in financing cost. So that gives you a sense of our free cash flow, 90 million in EBITDA, 40 million in CapEx and 40-45 million in finance costs.
I'll keep going here.
On SG&A you said you still have to capture what level should we expect going forward compared to this almost 18% you had in Q1?
I guess Caio you can help us here. Yes, because of the growth of the revenue, the amount of, we don't expect the growth as in terms of amount of expenses, but in terms of growth ahead of the revenue, we expect to be around 14% of the net revenue.
can help us here. Yes, because of the growth of the revenue, we don't expect the growth in terms of amount of expenses, but in terms of growth ahead of the revenue, we expect to be around 14% of the net revenue to G&A expenses.
Thank you, Kyle. I have one more here.
guidance for the year especially EBITA feels low or conservative compared to Q1 can you elaborate on that?
When we look into EBITDA trailing 12 months, we are close to 55 million REI's. That compares to our guidance of 70 to 90. Obviously, if we annualize both Q4 or Q1, we are tracking it probably closer to 100 million REI's.
in IBITA. So we are very confident that we will be delivering the 72.9 which is the guidance and probably as all management should aim will continue.
trying to do better than what we guided but it's still too early in the year, right? Only one quarter, so at this time we reiterate our guidance but again I would like to emphasize that we work very hard to continue with the same level of EBITDA that we deliver in the past two quarters and deliver more than the guidance if it's the case. And those are the questions here, Eric.
There's one more question here Eric, what is hindering you guys from doing a pro rata increase for all investors? So as we've been saying right we are not
excluding any alternative to help us with the funding gap. We are working with all options that we have including debt, including equity, all of them, all alternatives have their own process and times.
and we are working with them to with all these options to come up with the best solutions for all stakeholders. So again, the good working capital management and a strong cash flow that will generate this quarter gives us time to evaluate the best alternatives at this shorter period of time.
Thank you very much everybody for joining our conference call. We are very excited with the results of being delivering and looking at the year ahead. We still have a lot to happen and we are very happy to be on track with our guidance.
and with that we have some more good news on the next couple quarters. So, see you guys next time. Thank you. Perfect. So, the conference has now been concluded. The NBSIR area is at your disposal to answer any additional questions. Thank you for attending today's presentation. You may now disconnect and have a nice day.