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CONFERENCE CALL - ENGLISH: November 4, 2016, 12:00 p.m. (Brasília)
Webcast: click here | Telephone: US Toll Free +1(888) 700-0802 / International +1(786) 924-6977 / Brazil +55 (11) 3193-1001 or +55 (11)
2820-4001 (access code: TOTVS) | Replay: +55 (11) 3193-1012 or +55 (11) 2820-4012 (access code: 2580298#) until November 10, 2016 or
at ir.totvs.com
CONFERENCE CALL - PORTUGUESE: November 4, 2016, 10:30 a.m. (Brasília)
Webcast: click here | Telephone: +55 (11) 3193-1001 or +55 (11) 2820-4001 (access code: TOTVS) | Replay: +55 (11) 3193-1012 or +55
(11) 2820-4012 (access code: 4893249#) until November 10, 2016 or at ri.totvs.com.br
São Paulo, November 3, 2016 – TOTVS S.A. (BM&FBOVESPA: TOTS3), the leading developer of business solutions in Brazil and Latin America,
announces today its results of the third quarter of 2016 (3Q16). The Company’s consolidated financial statements were prepared in accordance
with the accounting practices adopted in Brazil, which are in consonance with the International Financial Reporting Standards (IFRS). To facilitate
comparison, we have presented the pro forma (unaudited) consolidated results that combine the results of TOTVS and Bematech corresponding to
three months for 3Q15 and corresponding to 12 months for 12M-3Q16 and 12M-3Q15.
IR CONTACTS
Gilsomar Maia (CFO/IRO)
Tel.: +55 (11) 2099-7105
Douglas Furlan (IR)
Tel.: +55 (11) 2099-7773/7097/7089
3Q16 - EARNINGS RELEASE
Net Revenue: R$537.5 million in 3Q16 (-6.9% vs. 3Q15 pro-forma and -1.4% vs. 2Q16) and R$2,205.2 million in LTM-3Q16
pro-forma (-2.5% vs. LTM-3Q15 pro-forma).
Recurring Revenue: R$334.8 million in 3Q16 (+5.8% vs. 3Q15 pro-forma and -0.4% vs. 2Q16) and R$1,328.7 million in
LTM-3Q16 pro-forma (+7.7% vs. LTM-3Q15 pro-forma).
Software Annual Recurring Revenue: R$1,253.7 million in 3Q16 (+9.0% vs. 3Q15 pro-forma and +3.7% vs. 2Q16).
Subscription Revenue: R$58.8 million in 3Q16 (+22.6% vs. 3Q15 pro-forma and +8.2% vs. 2Q16) and R$214.9 million
in LTM-3Q16 pro-forma (+18.9% vs. LTM-3Q15 pro-forma).
Annual Recurring Revenue from Subscription: R$234.9 million in 3Q16 (+25.2% vs. 3Q15 pro-forma and
+9.8% vs. 2Q16).
Adjusted EBITDA: R$86.5 million in 3Q16 (-26.1% vs. 3Q15 pro-forma and -10.7% vs. 2Q16) and R$383.0 million in
LTM-3Q16 pro-forma (-23.9% vs. LTM-3Q15 pro-forma).
Adjusted Net Income R$44.9 million in 3Q16 (-43.1% vs. 3Q15 pro-forma and +18.9% vs. 2Q16) and R$181.9 million in
LTM-3Q16 pro-forma (-42.2% vs. LTM-3Q15 pro-forma).
2
RECENT EVENTS
FLY01 START INTEGRATION WITH CIELO LIO AND SMARTREDE
In October 2016, TOTVS concluded the integration of Fly01 Start application with the smart POS Cielo LIO,
provided by Cielo, and SmartRede, provided by Rede. Fly01 Start is an agnostic app that is part of the small and
medium business solutions of TOTVS and plays the role of a POS solution already integrated with the new
generation of payment terminals. Besides having the features of a point of sale, the solution also comprises back
office features in the cloud to register products and access business management information, such as sales per
product, inventory control and receivables.
Fly01 Start runs stand alone, but also comes fully integrated with Bemacash, and then can be used as an
additional point of sale in the mom-and-pop shops. The application can also be integrated with other acquires
solutions.
This initiative is another example of joint work between the teams of TOTVS and Bematech, which made possible
the entrance of the Company in the market of mom-and-pop shops that only use the Pin Pad as technological
support to their businesses.
OPERATING AND FINANCIAL PERFORMANCE
The consolidated results of 3Q16 presented in the Quarterly Information Report (ITR) include Bematech’s results
for the period. To facilitate comparison, we have presented the pro-forma (unaudited) consolidated results that
combine the results of TOTVS and Bematech corresponding to three months for 3Q15 and to 12 months for
LTM-3Q16 and LTM-3Q15.
The reconciliation between the pro-forma numbers of 3Q15 and those in the ITR is shown in Attachment IV to this
document. The quarterly financial information of TOTVS, Bematech and the pro-forma information relating to 2014
and 2015 is available in the section “Financial Information > Interactive Spreadsheets” at the TOTVS Investor
Relations website (ir.totvs.com).
Note that in August 2016 TOTVS sold 100% of its interest in TOTVS Resultados em Outsourcing Ltda. (“TOTVS
RO”), a company that provides BPO (Business Process Outsourcing) services in human resources, to Propay S.A.
With the sale, the 3Q16 results only included TOTVS RO results for July, as well as the revenue of R$9.209
million from the sale, booked under "Other Revenues (Expenses)".
NET REVENUE
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Net revenue totaled R$537.498 million in 3Q16, as against R$577.066 million in 3Q15, with recurring revenue
growing by a notable 5.8% year on year to R$334.774 million, corresponding to 62.3% of net revenue, as
against 54.8% in 3Q15 and 61.7% in 2Q16. In the last 12 months, net revenue dropped 2.5% to R$2,205.195
million, driven by the 7.7% growth in recurring revenue and the 14.7% drop in non-recurring revenue.
Despite the 5.8% increase in recurring revenue, software revenue decreased 1.4% from 3Q15 to R$345.152
million, mainly reflecting the 36.7% decrease in non-recurring revenue from license fees, which accounted for
17.0% of software revenue in 3Q15, compared to 10.9% in 3Q16.
As mentioned in previous quarters, the decline in the number of licenses sold has mainly been due to: (i) the
downturn in economic activity in Brazil, which resulted in a longer period of conversion of the sales pipeline,
especially among large clients; and (ii) the migration of a part of the sales pipeline of new clients to the subscription
model, especially among smaller clients. The migration of a part of the sales pipeline of new small clients to the
subscription model was even more significant in 3Q16, leading to an increase of 22.4% in the average ticket
compared to the previous quarter and 4.1% compared to the same period of 2015.
Software recurring revenue increased by 5.8% in 3Q16 compared to 3Q15, and corresponded to 89.1% of total
software revenue in the quarter, compared to 83.0% in 3Q15. In the last 12 months, the software recurring
revenue totaled R$1,211.080 million and increased its share of total net revenue to 86.9%, an increase of 6.2
percentage points from the same period last year. The Software Annual Recurring Revenue increased 9.0%
year-on-year to reach R$1,253.720 million.
Annual Recurring Revenue (ARR) is a broadly used
metric in the SaaS (Software as a Service) model to
measure the evolution of recurring revenue over the next
12 months from contracts already signed until the end of
the current period, excluding contract cancellations
already requested.
The growth in recurring revenue from software in both the
quarter and the last 12 months was mainly driven by
subscription revenue, which grew 22.6% year on year
4
and 18.9% in the last 12 months. In 3Q16, subscription revenue accounted for 17.0% of software net
revenue.
The growth in subscription revenue was due to the higher share of sales to new small and medium clients,
especially under the TOTVS Intera model, which helped to increase the average monthly subscription by
87.6%. TOTVS Intera is the subscription model launched in June 2015 in which clients define and manage the
number of identities they will be enabled to gain unrestricted and simultaneous access to all the management,
productivity and collaboration software solutions from TOTVS. This model allows clients to use the solutions in any
of the clouds approved by TOTVS or, if more convenient, in their own infrastructure (on premises).
When compared to the previous quarter, new client additions
decreased 6.0%, mainly due to Bemacash sales, which did not
affect the number of clients added and the subscription
revenue in the quarter.
Bemacash is a solution that combines TOTVS’ management
software for microenterprises (Fly01), contracted under the
subscription model, and the automation and tax hardware solutions
from Bematech.
Since 1Q16, new clients of Bemacash become clients of the software on the 8 th month of contracting the solution,
when they start paying software subscription. In 3Q16, TOTVS sold 998 new units of Bemacash, compared to
440 in 2Q16, which tends to result in additional subscription revenue of approximately R$0.6 million per
quarter.
Annual Recurring Revenue (ARR) from Subscription,
which also comprises the Software Annual Recurring
Revenue, increased 25.2% in 3Q16 from 3Q15 and
reached R$234.910 million. In the quarter, the net
additions Annual Recurring Revenue from
Subscription was R$21.0 million, compared to net
addition of R$7.7 million in 2Q16. This increase was
mainly due to subscription sales under the Intera model in
the period.
Maintenance revenue grew 2.5% in the quarter compared
to the same period last year and 4.6% in the last 12 months, lower than the average increase in the IGP-M (inflation
index used in most maintenance agreements) in these periods. This revenue line has been adversely affected by:
(i) the lower volume of license sales in previous periods; (ii) the suspension of maintenance due to increased client
defaults; and (iii) the partial cancellation of maintenance due to layoffs at clients, especially large clients. In the
quarter, maintenance was also impacted by the migration of 27 clients to the Intera subscription model,
which reduced the maintenance revenue by approximately R$0.5 million in the period.
5
Service revenue decreased 15.9% year-on-year and 5.2% in the last 12 months. The year-on-year variation in
3Q16 was mainly due to: (i) the 7.6% decline in software implementation services in the period, chiefly due to the
slower pace of sales in recent quarters; and (ii) the 29.3% decrease in services not related to software
implementation, which accounted for 32.1% of total service revenue in 3Q16, compared to 37.9% in 2Q16.
Specifically in Rio de Janeiro, service revenue was also adversely impacted by the high number of holidays on
account of the Olympic Games.
The reduction in services not related to software implementation mainly reflects: (i) the decrease in revenue from
consulting services, especially due to the conclusion of non-recurring projects in the period; and (ii) the sale of
TOTVS RO, a company that provides BPO services in human resources, in August 2016. Excluding revenue from
TOTVS RO in 3Q16 (related to July) and in 3Q15 (related to July, August and September), the decrease in service
revenue year-on-year was 14.2%.
Hardware revenue fell by 13.6% in 3Q16 compared to 3Q15 and by 5.9% in the last 12 months, mainly due to: (i)
the downturn in economic activity in Brazil; and (ii) the changes in tax legislation, especially in the state of São
Paulo, where fiscal printers were replaced by S@T fiscal equipment, which has a lower unit value. In the quarter-
on-quarter comparison, the 1.7% increase is also mainly due to the seasonal effect on sales in the period.
It is important to remember that tax legislation in Brazil is being amended in several states, which has resulted in
the transition from a model based on sales of tax solutions, which was earlier exclusively non-recurring, to a model
based on higher recurring revenue, thus creating significant opportunities to increase the Company’s recurring
revenue.
CONTRIBUTION MARGIN BY BUSINESS
Software contribution margin decreased year on year and reached 62.1% in 3Q16. This change in software
contribution margin was chiefly due to: (i) the maintenance of investments in innovation, including the non-
capitalization of expenses with research and development of Bematech software in 3Q16, as against the
capitalization of R$1.908 million in 3Q15; (i) the decline in software revenue, as commented in the “Net Revenue”
section; and (iii) investments made in the customer service and support process, involving adjustments to service
routines, teams and systems.
In the quarter-on-quarter comparison, the decrease in software contribution margin was mainly due to the increase
of 5.8% in expenses with research and development, mostly reflecting: (i) the wage increases in 3Q16, as well as
their effects on provisions for vacation pay and Christmas bonus on account of collective bargaining agreements in
the regions of Belo Horizonte and Rio de Janeiro; and (ii) alignment of the cost classification criterion of Bematech
and its subsidiaries with that of TOTVS.
In the 12-month period, the reduction in software contribution margin is mainly due to: (i) the lower growth of
software revenue, as commented in the “Net Revenue” section, especially due to the transition from the licensing
6
model to the subscription model; (ii) the 39.7% decrease in the incremental licenses from the corporate model
charged in 1Q16 compared to 1Q15; (iii) the capitalization of software research and development expenses of
Bematech until October 2015, in the amount of R$5.687 million; and (iv) the additional costs with layoffs on
account of the costs and expenses structure adjustment carried out by the Company during the second half of
2015.
Service contribution margin decreased when compared to 3Q15, mainly due to the lower allocation of
implementation and consulting professionals due to the slower pace of software sales, and the conclusion of non-
recurring consulting projects, as commented in section “Net Revenue”. In addition, the cost of services in 3Q16 was
impacted by wage increases, as well as their effects on provisions for vacation pay and Christmas bonus on
account of collective bargaining agreements in the regions of Belo Horizonte, Rio de Janeiro and Recife.
In the last 12 months, the decrease of 330 basis points is not only due to the aforementioned factors seen in the
quarter, but also the additional costs with layoffs on account of the costs and expenses structure adjustment carried
out by the Company during the second half of 2015.
Compared to the previous quarter, the contribution margin dropped 170 basis points, mainly due to the non-
recurring expense of R$2.376 million related to an adjustment to the calculation of the average cost of inventories.
Excluding this adjustment, the hardware increased 7.5%, and the contribution margin reached 35.1% in 3Q16,
up 230 basis points from 2Q16, particularly driven by the sales mix during the period.
In the last 12 months, hardware result decreased 32.6%. The main factors behind this reduction were: (i) the
decline in net revenue from hardware, as commented in the “Net Revenue” section; (ii) the increase in hardware
costs due to the appreciation of the U.S. dollar against the Brazilian real in 2015, which was not fully passed on to
prices; (iii) the decrease in tax subsidies established in September 2015 by the State Government of Paraná; and
(iv) the capitalization of expenses with hardware research and development until September 2015, namely R$2.136
million in 3Q15 and R$5.694 million in 9M15.
7
OTHER OPERATING EXPENSES
Selling expenses and commissions jointly increased their share of net revenue in 3Q16 by 10 basis points year-on-
year, mainly due to the increase of 2.8% in selling expenses. This increase in selling expenses, despite the
reduction in software revenue in the period, mainly reflects: (i) the change in sales mix between franchises and own
units; and (ii) the higher volume of software sales in the subscription model in the quarter.
Compared to 2Q16, selling expenses decreased 6.9%, despite the wage increases in 3Q16, which also affected
provisions for vacation pay and Christmas bonus on account of collective agreements in the regions of Belo
Horizonte, Rio de Janeiro and Recife. This decrease is mainly the result of additional expenses in the first half of
2016 to adjust the compensation model of the sales team with the key objective of aligning commercial incentives
related to the subscription model, which tends not to reduce the increase in selling expenses on account of the
transition from the licensing model to subscription model.
Commission expenses dropped 16.7% year-on-year, mainly due to: (i) the lower volume of license sales through
franchises; (ii) the change in the sales mix between franchises and own units; and (iii) the recent adjustments to the
sales team's compensation model, as mentioned on selling expenses.
Allowance for doubtful accounts corresponded to 4.8% of net revenue in 3Q16, compared to 1.5% in 3Q15 and
1.6% in the last 12 months. The increase in this provision in the quarter is mainly due to the additional provision of
R$17.221 million related to the credit risk increase of a large client in the Service segment. Excluding this additional
provision, allowance for doubtful accounts corresponded to 1.6% of net revenue, remaining stable in the last 12
months.
Advertising and marketing expenses increased R$2.258 million in 3Q16 from 2Q16, chiefly due to the higher
concentration of investments in marketing in 3Q16 with the launching of the new advertising campaign. In the year-
on-year comparison, advertising and marketing expenses decreased 12.2%, mainly due to the revision of the
Company's general marketing plan and the integration of marketing activities of both TOTVS and Bematech.
General and administrative expenses increased their share of net revenue by 80 basis points in 3Q16 compared to
the previous quarter, mainly due to: (i) the decline in the Company’s net revenue in the period, as commented in
the “Net Revenue” section; (ii) additional expenses related to the assisted operation contracted after the migration
of internal systems to version 12 of the TOTVS management systems; and (iii) additional expenses with attorney
fees in the quarter.
8
Management fees declined 42.2% year on year, primarily due to the optimization of the Company's administrative
structure during the 1H16 and the integration of Bematech. The amount registered as other operating income is
mostly related to the R$9.209 million revenues from the sale of TOTVS RO, in August 2016.
In 3Q16, expenses with depreciation and amortization increased 15.8% year on year, mainly due to the
amortization of intangible assets resulting from the corporate reorganization with Bematech. In the quarter-on-
quarter comparison, this increase was mainly due to the beginning of the amortization and depreciation of the
management solutions (TOTVS 12), customer services and cloud infrastructure solutions.
EBITDA AND NET INCOME
Adjusted EBITDA in 3Q16 totaled R$86.484 million, down 26.1% from 3Q15 and 10.7% from 2Q16. Adjusted
EBITDA margin in the quarter totaled 16.1%, compared to 20.3% in 3Q15 and 17.8% in 2Q16. The year-on-year
decline in Adjusted EBITDA was mainly due to: (i) the decrease in license fee revenue; and (ii) the decline in
hardware and service results, as commented in the “Contribution Margin by Business” section.
The quarter-on-quarter decline in Adjusted EBITDA was mainly due to: (i) the decline in service result, as
commented in the "Net Revenue" and “Contribution Margin by Business” sections. (ii) the increase in general and
administrative expenses, as commented in the "Other Operating Expenses" section; and (iii) the decrease in
software result, mainly due to the contraction in revenue from licensing fees and the increase in research and
development expenses, as commented in the "Net Revenue" and "Contribution Margin by Business” sections.
9
The steeper decrease in Adjusted Net Income year on year and in the last 12 months compared to the decline in
EBITDA in the periods was mainly due to the negative financial result in 3Q16 and in the last 12 months, resulting
from the change in the Company's capital structure, which went from a net cash position in 3Q15 to net debt in
3Q16 due to the payment of R$473.585 million on the corporate reorganization of Bematech in 4Q15; and (ii) the
gain from the sale of minority interest in ZeroPaper in 1Q15.
CASH FLOW AND DEBT
Gross Cash decreased by R$79.251 million in the quarter, mainly due to:
(i) Net Income, excluding items that do not affect cash, of R$76.418 million in the quarter;
(ii) The net investment in fixed assets in the amount of R$19.770 million, of which R$5.838 million is related to
investments made in the new headquarters. It is important to highlight that the total investment estimated by
the Company in the headquarters until its delivery, originally of R$90.0 million, is now R$80.0 million, of
which around 50% to be financed in at least 3 years.
(iii) The net investment of R$11.812 million related to the increase in intangible assets, mainly related to
investments for the creation of TOTVS Digital, a new integrated digital environment for interaction between
TOTVS, channels, partners, salespeople, clients and potential clients, to be launched in 1Q17;
10
(iv) Payment of interest on equity for the first half of 2016 in the amount of R$43.605 million;
(v) Partial amortization of principal amount of the loan taken by TOTVS from BNDES in 2013; and
(vi) Amortization of R$48.000 million referring to the balance remaining of the principal amount of debentures
issued by the Company in 2008.
Net Debt totaled R$478.445 million in 3Q16, equivalent to 1.2 x pro-forma Adjusted EBITDA in the last 12 months.
GROSS DEBT AMORTIZATION SCHEDULE
Gross Debt (loans + financing + debentures + obligations on acquisition of investments net of marketable
securities) totaled R$694.482 million in 3Q16, versus R$904.095 million in 3Q15. Note that the Company is
obligated to maintain covenants related to loans and financing taken from BNDES and the debentures issued, as
detailed below:
Loans and Financing taken by TOTVS from BNDES: (i) Shareholders’ Equity/Total Assets higher than
40%; and (ii) Net Debt/EBITDA equal to or lower than 1.5. If these indicators are not achieved, the
Company shall provide collateral in an amount equal to at least 130% of the balance due on credit
operations contracted with BNDES that exceed 20% of total assets, or present a bank guarantee
corresponding to the amount exceeding 20% of total assets. If the indicator of Net Debt / EBITDA is greater
than 2.0, the Company shall provide collateral in an amount equal to at least 130% of the financing or debt
arising therefrom, or present a bank guarantee in the amount of the debt.
Loans and Financing taken by Bematech from BNDES: (i) Shareholders’ Equity/Total Assets higher
than 40%; (ii) Net Debt/EBITDA equal to or lower than 2.0; and (iii) Debt Service Coverage Ratio equal to
or greater than 1.75. In the hypothesis of non-achievement, the Company shall provide collateral in an
amount equal to at least 130% of the financing or debt arising therefrom, or present a bank guarantee in
the amount of debt.
Debentures issued by TOTVS: (i) Net Debt/EBITDA equal to or lower than 4.0; (ii) EBITDA/Net Revenue
equal to or higher than 10%; and (iii) EBITDA/Debt Service equal to or higher than 1.0.
11
Debentures issued by Bematech: (i) Net Debt/EBITDA lower than 2.5;
The balance of the Gross Debt of the Company will be amortized by 2020, of which R$194.734 million will be
amortized in the next 12 months.
OWNERSHIP BREAKDOWN
TOTVS closed 3Q16 with capital stock of R$541.374 million, consisting of 165,637,727 common shares and free
float of 66.9%. Free float is calculated as the total number of Company shares, excluding shares owned by
Management and related persons, Fundação Petrobras de Seguridade Social (PETROS) and BNDES
Participações (BNDESPar), and treasury stock. In 3Q16, 98.1% of the free float was held by institutional investors
and 95.2% by foreign investors.
ABOUT TOTVS TOTVS, a provider of business solutions for companies of all sizes and which deals with management software,
productivity and collaboration platforms, hardware and consulting, is the absolute leader in Latin America’s SMB
market. With over 50% market share in Brazil, it was ranked by Interbrand as the 21st most valuable brand in the
country. TOTVS is present in 41 countries, with net revenue of more than R$2 billion. In Brazil, it has 15 branch
offices, 52 franchises, 5,000 distribution channels and 10 development centers. Outside Brazil, it has seven branch
offices and five development centers in the United States, Mexico, China and Taiwan. For further information, visit
www.totvs.com
This report contains forward-looking statements that are based not just on historical facts but reflect the desires and expectations of TOTVS management. Words such as "anticipate", "wish", "expect", "foresee", "intend", "plan", "predict", "project", "desire" and similar terms identify statements that necessarily involve known and unknown risks. Known risks include uncertainties that are not limited to the impact of price and product competitiveness, the acceptance of products by the market, the transitions of the Company’s products and those of its competitors, regulatory approval, currency fluctuations, supply and production difficulties and changes in product sales, among other risks. This report also contains certain pro-forma statements prepared by the Company exclusively for informational and reference purposes and are therefore unaudited. This report is current as of this date and TOTVS is under no obligation to update it further to include new information and/or future developments.
12
ATTACHMENT I - INCOME STATEMENT
13
ATTACHMENT II – BALANCE SHEET
14
ATTACHMENT III – CASH FLOW
15
ATTACHMENT IV - RECONCILIATION OF PRO-FORMA RESULTS OF
THE THIRD QUARTER OF 2015 (3Q15)