Zenvia Q1 2023 Earnings Call Transcript

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May 18, 2023

There are 6 speakers on the call.

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 via the Q and A icon at the bottom of your screen. Your name will then be announced, and you will be able to ask your question 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 your speakers for today, Mr. Kassel Bobzin, Founder and CEO.

Operator

Sir, the floor is yours.

Speaker 1

Hello, everyone, and thank you for joining us at Zendesk Q1 'twenty three earnings call. I'm Kasia Babsim, Founder and CEO. Thank you all for being with us today. Our results for the Q1 showed growing momentum for Zenith as we continue to focus on profitability. 3 out of the 4 companies we acquired in the last couple of 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 benefit from one single platform.

Speaker 1

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 opportunity, mostly from LLMs such as Chat QPT It will clearly benefit companies' productivity and customer experiences overall. On the CPaaS business, we saw a recovery of volumes, Mailing from large clients with sustained margins, a testament to 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 business. Our focus moving forward will remain on profitability and capturing cross selling opportunities. I'll hand the call over to Shay to go into more detail

Speaker 2

Thank you, Casio. Hello, everyone, and thanks for being with us today. Let's start on Slide 5. In this Q1 of 'twenty three, We remain focused on our strategy to improve profitability while executing on our savings plan since the Q3 of last year, all in the face of a challenging economic environment. As we did in Q4 'twenty two, we continued to operate in Q1 'twenty three With the correct balance between revenue growth and profitability, which coupled with cost efficiencies, led to an EBITDA of BRL24 million, making 2 quarters in a row of positive EBITDA.

Speaker 2

Also, it's important to highlight a very strong cash generation as a result of a strict working capital management. And again, we did this despite the challenging and more competitive environment that we continue to successfully navigate. Even though our total revenues dropped 9% year over year as a result of our focus in a profitable CPaaS business, the SaaS business continues to be our growth engine, With the top line for form expansion, when excluding the consulting business, of 32% comparing Q1 'twenty three to Q1 'twenty two. Our gross profit grew by 38%, adding 18 percentage points to our adjusted gross margin that reached 52%, which attests our full commitment and path towards profitability. Let's take a look at how each of our businesses is contributing to profitability.

Speaker 2

Here on Slide 6, you can see the breakdown of our gross profit and margin mix by SaaS and CPaaS for the Q1 of 'twenty three compared to the same period of last year. We can see good performances in both businesses with increased margins, which means that our focus on profitability is paying off. Our SaaS business reached the mark of BRL46.4 million in gross profit this quarter, A nearly 40% increase compared to the Q1 of 'twenty two, reaching a gross margin of 68%, up 4 percentage points compared to the Q1 of 'twenty two. The CPaaS, in turn, delivered a solid 38% increase in gross profit when compared to the Q1 of 2022, reaching a gross margin of 42%, up almost 19 percentage points. Let's now look at this data in terms of weight in our financial metrics.

Speaker 2

We are well on our way toward transforming Xevia into a full SaaS company, and we continue to gain momentum on this front. Our SaaS business reached an annual recurring revenue of R59 $1,000,000 in the Q1, which annualized totals almost R240 $1,000,000 Net revenue expansion in the SaaS business remained healthy at above the 120% level. Our SaaS services represented 38% of the total revenue in terms of gross And we had a fifty-fifty result this quarter. We continue to explore the possibilities of generative AI to enhance our asset solutions portfolio, Building off the integration of chat GPT with Xevia Attraction, which we announced in February. In March, we hosted our first ever Hackabot, An internal hackathon for humans to develop solutions for the end customer based on the Chat GPT 3.52.

Speaker 2

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. And earlier this month, We announced the integration of Chat GPT into Xavi's chatbot, 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 2. This integrated chatbot is already in use by a major Brazilian insurance company. Let's now move to the next slide on gross margins. On this slide, we can see the evolution of our gross margin from the Q1 of 'twenty one until today.

Speaker 2

We keep delivering on the promises made during our IPO. We continue to expand our margins and have shown a 19 percentage point expansion from the IPO in Q2 2019 through the Q1 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. Looking ahead, it is worth noting Here, 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 'twenty two.

Speaker 2

Moving on to the next slide. On this slide, we detail the progress towards cost reduction initiatives, which we started implementing in the Q3 last year. Following the downsizing of our corporate structure in the Q4, combined with reducing non personnel G and A expenses, Such as consulting and travel, we recorded a 9.5% reduction in G and A expenses compared to the Q1 of 'twenty two, Reaching just over R31 $1,000,000 compared to almost R35 $1,000,000 in the same quarter of last year. 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. We made good progress in Q1, Thanks to our savings plan and restructuring, but it doesn't really reflect all impacts yet.

Speaker 2

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. In this slide, we detail our EBITDA growth Since the Q1 of 'twenty two, which is a direct result of the decision to pivot saving to a SaaS company and bringing our performance back to the profitability path. It has not been easy, especially given the complex micro environment. But as you can see, our focus on profitability is paying off.

Speaker 2

So EBITDA in Q1, 'twenty three was a solid BRL24 million compared to a negative BRL8 million in Q1, 'twenty two and positive BRL23 million last quarter. It puts us on track to deliver in the top range of the guidance of the year. Zevia's history of delivering profitable operation 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. This slide is very important to us as it shows that we have been able to convert EBITDA into cash.

Speaker 2

While EBITDA minus CapEx was already enough to generate a positive BRL13 1,000,000, Total operating cash flow reached R95 $1,000,000 this quarter. This is a result of better working capital management, especially due to higher anticipations from clients And renegotiations with SMS provide us to more flexible payment terms. This working capital improvement, coupled with the extended earn out payments, It's enabling us to pay down debt and reduce our funding gap for 2023. 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. But this solid working capital is actually enabling us to gain time and negotiate better transactions for all stakeholders.

Speaker 2

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 To finish, we have already discussed this in our last earnings call, but I would like just to emphasize our EBITDA guidance for 2023 R3 of between R70 $90,000,000 R90 $1,000,000 Given the EBITDA numbers we delivered in both Q4 'twenty two and Q1 'twenty three of BRL23 1,000,000 and BRL24 1,000,000 respectively. We are confident in our ability to deliver this solid EBITDA in BRL23 1,000,000, which is putting us on track to deliver the

Operator

We will now begin the question and answer session. Once again, for this 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 you will be able to ask your question live. At this point, a request to activate your microphone and 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.

Operator

Our first question comes from Marco Nardini, sell side analysts from XP. Marco, we are now opening the audio so that you can ask your question live. Please go ahead.

Speaker 3

Hello, good morning. Thank you for taking my question. I actually have 2 here on my side. The first one is a quick follow-up regarding the top Line Dynamics on CPaaS. 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 3

And can you also give us a little bit more color on the competition this Q1, please? And the second one It's regarding the quarter over quarter drop in adjusted gross margin in the SaaS business and the increase in the down sell. Should we see more margin drop in these segments for the year? Thank you.

Speaker 4

I'll start with the competitive dynamics and Overall understanding of how things are doing and the CPaaS and then Shay, if I can complement on the numbers. So we're looking at Q1 and we have observing less Predatory competition, which means less subsidizing on pricing amongst our competitors on the space, Which is helping us since 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. Hence, we had a bit of decrease on the revenues as we shifted this focus to achieving profitability with each customer, especially big ones. And we expect as we are being serving these dynamics to get back to our Profile of growth in terms of volumes that translates revenues.

Speaker 4

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 in the space with customers that have that bring a bit less, I mean, less margins That will kind of achieve margins a bit lower. That's why we project over the year not Yes, the same kind of level in the gross margin spot, trying to reach the revenue growth that we expect to. Now I think you guys can complement me on the numbers.

Speaker 5

Yes, Casio. Still regarding CPaaS, what we can expect is Because we lost some volume, as Casio said, in the second half of twenty twenty two, we expect a growth on this This is live on the second half of the year when you compare to 2022. Talking about SaaS, The quarter over quarter performance was impacted especially including the consulting part of the business because it's Related to the large clients and the pipeline in Q4 due to the macroeconomic environment didn't perform as we expected. The sales cycle is longer due to the size of the client. But we're already seeing on Q1 This pipeline is very performing, so better performance.

Speaker 5

So for the rest of the year, we expect the recovery for this Specific business line that is focused on large clients. And also regarding the gross margin that you saw quarter over quarter Fine. It's a revenue mix. There's not loss of profitability in FASK. So and we are in line with our guidance.

Speaker 5

So no words here. I don't know, Shay, if you want to come to the room.

Speaker 3

No, that's it. Perfect, guys. Thank you.

Operator

Again, if you have a question, please use the Q and A icon at the bottom of your Please write down at the end of your question, and our operator will read your question aloud.

Speaker 2

Eric, I have a A couple of questions here. Let me start with them on the web. And so first question on funding gap here. Still have some payments on the earnouts until the end of 'twenty six. With this profitability improvement, how are you looking into this?

Speaker 2

Do you Do you plan to issue more debt? So the question here is, we acknowledge that there is still funding gap, not only for Some funding effort this year, but probably until the end of next year. As of second half of twenty twenty 4 and first half of twenty twenty five, we believe that our cash generation will be enough 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've been doing that is buying us time to find the best solution for us 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?

Speaker 2

How should we look at these numbers going forward? 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 to Elio into a working capital Transaction last in Q3 of 'twenty two, in which Tugilio is anticipating us Some couple of months in revenue, so paying in advance.

Speaker 2

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.

Speaker 2

We created More recently, a procurement team that is renegotiated 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, But in any ways, we are continuing to work and we should expect working capital to continue helping us positively going forward, But obviously not in the same magnitude that we saw in this quarter. Let me see what else we have here. Two questions regarding AI.

Speaker 2

Do you see the investments in AI GPT-four powered Features impacting our margin and profitability in the near term. Do you expect Checkatrade AI related features to drive higher messaging volumes accelerating the CPaaS revenue stream? Kaso, I guess you can talk about AI and how you see this impacting us.

Speaker 4

Sure. We've been applying LLMs such as RTPT into the product and different parts of the product. These are usually to accelerate the usability and productivity Of both managers, so there is software or even sales reps or customer service agents that will get boost on productivity. We expect that to be scaled across the next couple of quarters. It's yet a bit it's a little 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.

Speaker 4

We're working in some mostly with a beta A phase for some customers on these different features. And we don't see like a really impacting near term Change and the margins, we do expect that over time that will Bringing 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 set of the platform. And looking at the CPaaS space, of course, as we go into more automation and we reduce costs for companies and they're 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 all this evolution in the AI space, especially on other lamps, will bring for us, a That is focused on CX, a lot of different levers to pull in order to bring more customers, more adoption and more efficiency when using our platform to improve customer experiences.

Speaker 2

Thanks, Casio. Another one here. What is the organic growth of SaaS for this quarter? Caio, I think you can take that.

Speaker 5

Yes. Excluding the consuming part of the SaaS business, as I said earlier, that impact [SPEAKER RAMON ALVAREZ PEDROSA:] In Q1, what you see in the other business lines is over 30% pro form a basis growth. So still in the 30% Growth on a pro form a basis, excluding again the consuming part of this that was impacted due to the pipeline, as I said earlier, but we are already Seeing a better pipeline performance in Q1, but the sales cycle is longer. So that's the impact.

Speaker 2

What is the average financing cost of working capital financing? Our most of The revenue anticipation transaction is about 12% a year. So it's 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. And what is the annualized interest cost Post Q1 with better financing option.

Speaker 2

Look, we will continue to spend about and to your next question here, trying to get a sense of free cash flow 23. So we let's start with EBITDA and help you guys navigate through 23 expectations, right? So we guided for EBITDA of BRL70 1,000,000 to BRL90 1,000,000. Let's use The top end of the range, which is BRL90 million given that in the last two quarters, we delivered close to BRL24 million. So it's Better to look from a top end of the range.

Speaker 2

So assuming EBITDA of BRL90 million for this year, we will have to pay approximately R40 $1,000,000 in capex, and then we'll have, give or take, R40 $1,000,000 R45 $1,000,000 in Financing cost. So that gives you a sense of our free cash flow, dollars 90,000,000 in EBITDA, dollars 40,000,000 in CapEx And $40,000,000 $45,000,000 in finance costs. I'll keep going here. On SG and A, you said you still have to capture. What level should we expect going forward compared to this almost 18% you had in Q1?

Speaker 2

I guess Caio, you can help us here.

Speaker 5

Yes. Because of the growth of the revenue, the amount of we don't expect the growth as in terms of amount of [SPEAKER PIERRE YVES LESAICHERRE:] Expenses, but in terms of growth ahead of the revenue, we expect to be around 14% of the net revenue, to G and A expenses.

Speaker 2

Thank you, Kyle. I have one more here. Guidance for the year, especially EBITDA, feels low or Compared to Q1, can you elaborate on that? So when we look into EBITDA trailing 12 months, So we are close to BRL55 1,000,000 that compares to our guidance of BRL70 1,000,000 to 9. Obviously, if we annualize both Q4 or Q1, we are tracking at probably closer to BRL100 1,000,000 In EBITDA, so we are very confident that we will be delivering the NOK70 tonight, which is the guidance and probably And as all management should aim, we'll continue trying to do better than what we guided, but it's It's still too early in the year, right?

Speaker 2

Only 1 quarter. So at this time, we reiterate our guidance. But again, I would like to emphasize that we'll work very hard to continue with the same level of EBITDA that we delivered in the past 2 quarters and deliver more than the guidance if it's the case. And those are the questions here. Eric, can you just repost to see if anyone has additional questions?

Operator

Perfect. 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'll open your microphone. If you prefer not to open your microphone, please write down on microphone at the end of your question, And our operator will read your question aloud.

Speaker 2

So 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, 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 timings 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 the strong cash flow that we generate this quarter buys us Time to evaluate the best alternatives at the shorter period of time possible.

Operator

Yes. This concludes our question and answer session. I'd like to turn the conference back over to Mr. Castro Babson for his closing remarks.

Speaker 4

Thank you very much everybody for joining Our conference call, we are very excited with the results we've been delivering. And looking at the year ahead, we still got A lot to happen, and we are very happy to be on track with our guidance. And we expect to have some more good news on the next So, see you guys next time. Thank you.

Operator

Perfect. So, the conference has now been concluded. Zambia's IR 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.

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Zenvia Q1 2023
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