Linx S.A.
Q2 2020 Earnings Call Transcript

Published: 12 Aug 2020

Operator:

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to Linx's Conference Call to discuss the Results of the Second Quarter 2020. With us here today are Mr. Alberto Menache CEO; Ramatis Rodrigues, CFO; and Carolina Pontes, Investor Relations Officer of the company. This quarter, we also have here Linx's VP, Gilsinei Hansen of Linx Core; Jean Klaumann, Linx Digital; Denis Piovezan, Linx Pay; and Flavio Mambreu from Marketing and People. We would like to inform you that this event is being recorded and simultaneously translated into English. All participants will be on listen-only mode during the company's presentation and after that we will initiate the Q&A session when further instructions will be provided. [Operator Instructions] This event is also being broadcast live via webcast and may be accessed through Linx's website at ir.Linx.com.br where the presentation is also available for download. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Before proceeding, let me mention that forward-looking statements about future events, operating or financial results are based on beliefs and assumptions of Linx management and also on information currently available to the company. Forward-looking statements are no guarantee of performance as they involve risks, uncertainties and assumptions since they refer to future events and therefore depend on circumstances that may or may not occur. Investors and analysts should understand that conditions related to macroeconomic conditions and other operating factors could cause results to differ materially from those expressed in such forward-looking statements. Now, I’ll turn the floor over to Mr. Alberto Menache to start the presentation. You may proceed sir.
Alberto Menache:

Good morning, ladies and gentlemen and thank you for waiting. Welcome to Linx's conference call for the presentation of the results of the second quarter of 2020. Here with us today are Alberto Menache, CEO of Linx; Ramatis Rodrigues, CFO; and Carolina Pontes, Investor Relations Officer. Also here with us are Linx's VP, Gilsinei Hansen of Linx Core; Jean Klaumann, Linx Digital; Denis Piovezan, Linx Pay; and Flavio Mambreu from Marketing and People. We would like to inform you that this event is being recorded and simultaneously translated into English. [Operator Instructions] This event is also being broadcast live via webcast and may be accessed through the, to the website ir.Linx.com.br where the presentation is also available, the replay of this event will be available right after it is concluded. Before proceeding, I would like to clarify that any forward-looking statements about future events, operating or financial results are based on beliefs and assumptions of Linx management and also on information currently available to the company. Forward-looking statements are no guarantee of performance as they involve risks and uncertainties and assumptions as they refer to future events and therefore depend on circumstances that may or may not occur. Investors and analysts should understand that macroeconomic conditions, industry and other factors could cause results to differ materially from those expressed in such forward-looking statements. Now I’ll turn the floor over to Mr. Alberto Menache to start the presentation. You may proceed sir.
Alberto Menache:

Good morning and thank you very much for your interest and trust in Linx. As you know, this was certainly the most intense social distancing period in Brazil so far. In attempts to halt the spread of COVID-19 several non-international commercial businesses were shut down. And this had an impact on a large portion of our customer base. But we turn this into an opportunity. We technologists provided to our end to end platform, we're able to offer solutions that allowed retailers to proceed with their activities mainly through Linx digital offerings, but also for through the restaurant apps. And all this becomes apparent when we look at the strong acceleration of the digital transformation process of the last month. We strengthen our partnerships with the most relevant marketplaces in the country. We launched Linx commerce performances, opening the possibility for immigration with the CW marketplace. Also, the Neemu app experience a significant demand growth, which is the app delivery, and we were able to double the number of customers of the payment link in June versus May. Also this quarter, we invested in the functional evolution of the e-commerce platform with omni capabilities to extend our services to Brazilian midsize retailers. And we are currently running a pilot project in the fashion segment. And of course, as we always say in our calls and other conversations with you. All of that is only possible because we have innovation as part of our D&A. And to support all that, we are deeply committed to investing in R&D. In the second quarter, we were able to post a significant growth due to our software as a service business model, and also the unique profile of our customer base. As a result, Linx had done significant impacts in churn during the period. However, there was an impact on provisions for loan losses with the personas for supplemental payment terms, something that Ramatis will elaborate further. Despite a challenging scenario that we are currently experiencing, we posted solid results in the quarter with recurring revenues growing 17% year-on-year and 340 basis points of adjusted EBITDA margin reaching 28.2% in the second quarter 2020. Therefore, I want to assure you that we continue to operate business as usual caring for our people, our customers and suppliers and focusing on the long term sustainability of our business. We also continue to fulfill our social role and in addition to the several ESG initiatives that are being detailed in our annual sustainability report of last June, Linx donated BRL1 million to the Solvent Aviva's BMDS program for the purchase of individual protection equipment to the health care professionals working in the frontlines to fight the pandemic up and new Coronavirus. And before giving the floor to Ramatis, I would like to express a special thanks to the entire Linx team who had an outstanding performance and demonstrated total commitment during this challenging period. As you can tell from the notices and releases, we maintain our absolute leading positions in the POS in European market and Brazil, with 45.6% market share and the retail segments. And we stood out as the player with the highest growth in e-commerce solutions in 2019. We are also very honored with the acknowledgement from the institutional investor survey. That place Linx at the podium in several categories of the technology industry, among companies in Latin America and in the general ranking. And therefore, we've ranked first amongst small caps. So once again, my deepest thanks to all of our teams at LINX and our customers, analysts and investors, and also our entire IR team who believed and trusted in our business. Thank you very much. Now I'll give the floor to Ramatis to talk about the results related to the second quarter of 2020. Ramatis, you may proceed.
Ramatis Rodrigues:

Thank you all there too, and good morning, everyone. During the current situation, I would like to emphasize that the crisis committee set up in mid-March continues to operate and follow the developments of COVID-19 implications in addition to all the measures to protect our employees and internal awareness campaign, Linx adopted several initiatives to preserve its cash which had a positive impact on the quarterly evolutional costs and expenses and then the EBITDA margin expansion that reached its highest level since the fourth quarter of 2014. As Alberto said we negotiated with our customers related to payment of invoices on a case by case basis, resulting in a total postponement of payments, or BRL54 million until June, of which only 13% are still in the renegotiation phase and 87% are pending the negotiated amounts on time. As a result, our provision for loan losses were BRL5 million in the quarter accounting for 2.4% of net revenue, 80 basis points higher than the previous quarter. It's also worth mentioning the LINX has a robust net cash balance. In 2Q,'20, we posted BRL213 million and excluding leasing from the gross debt due to IFRS 16, and the net earnout of accounts payable for acquisition, the adjusted net cash would be BRL400 million in the quarter. Now moving to Slide 3 of the presentation, I would like to highlight the 11% growth of LINX for recurring revenue and the main drivers of the quarter. The delivery app, which is Neemu Solution, doubled it’s revenue in the year. Also reinforcing LINX's cross selling strategy at the end of June we had 334 franchisees that are ready responded for 30% of all new activations in the second quarter of '20. Another highlights as the millennial revenue that grew 75% when compared to 2Q '19, with 43% more projects vis-à-vis the previous quarter. Hiper's performance was also relevant with a total recurring revenue growing 43% year-on-year. Furthermore, LINX's paid total recurring revenue grew 10% year-on-year, and TF accounts for 55% of the total revenue of LINX's paid. LINX's payment link on the other hand saw its customer base double in size between May and June 2020. And we already have 4500 customers using our solution that was recently launched. And finally, LINX's QR code increase its customer base by two fold when compared to December of 2020. Now moving to Slide 4, here we have the main highlights of LINX digital that posted it’s 29% increase in total recurring revenue when compare to Q2, 2019. In this landscape of expediting the digital transformation process the total recurring revenue of LINX Commerce doubled this with a historical record of GMV in June 2020. Linx's impulse total recurring revenue was up almost 30% in the year accounted for 63% of Linx's digital total revenue. What also grew was the number of retailers posting their inventories the marketplaces in partnership with banks and we initiated the certification of branches to sell Linx Digital Solutions, something that we intend to enhance in the following months. Now I'll give the floor to Caro, Linx's IR Manager to continue with the presentation.
Carolina Pontes:

Thank you, Ramatis, and good morning to you all. Moving to Slide 5, we show that the recurring revenue totaled BRL208 million accounting for 84% of gross revenue, rolling 17% year-on-year and up 6% vis-a-vis first quarter of 2020. And the second quarter of '20, linked quarter accounted for 72.5% of total recurring revenue, whereas Linx Digital accounted for 14.3% of Linx Pay 13.1%. In the previous quarter Linx Digital accounted for 11.1% and Linx Pay 13.9%. This variation is attributed to a higher demand for new digital solutions due to the temporary of shutdown the stores in the quarter caused by the COVID-19 pandemic. On Slide 6, we show that net revenue was 11% higher vis-a-vis second quarter '19 and 2% higher quarter-on-quarter. Moving to Slide 7, we highlight that adjusted EBITDA was BRL60 million in the quarter, up 26%, when compared to the second quarter of '19, with an adjusted EBITDA margin of 28.2% in the quarter 340 basis points higher, when compared to the second quarter of '19. And finally on Slide 8, we present the non-recurring expenses on the quarter, they came up to BRL11 million. This amount consist mainly of initiatives related to headcount adjustments to Linx stock options plan for the impact on revenue from prepayment on receivables are located in your financial result and the net earn out reversal involving that. Thank you for your attention, and I will move to our Q&A session.
Operator:

Ladies and gentlemen, we will now initiate the Q&A session. [Operator Instructions] Our first question comes from Daniel Federle from Credit Suisse.
Daniel Federle:

First of all, congratulations for the results of the quarter. And my first question relates to that, because it seems to me that Linx planted many seeds and invested in many areas that are very promising like Linx Channel, Linx Pay and the digital bank. So I just want to understand what were the risks that existed that let the company to make these investments? This is my first question. And the second question relates to sale synergies, payments and software to large retailers. What are indeed the synergies? And what kind of advantages at large retailers have once they find the same solutions with the same vendor rather than choosing the best prices in different areas of the market? So if you could elaborate a little on why, Linx was not able to sell this integrated solution to smaller and mid-size retailers.
Alberto Menache:

Hi, good morning. This is Alberto, thank you for your question. First of all, whenever we talk about risk, I don't think it is so much a matter of risk, but I think it has to do with scale. So there is a company that stem from the payments industry and that is involve into other areas. But they have a much higher scale when compared to ours. What will take us longer to do, stem has a lot of things already in place. So they have scale. As for the second part of your question, I think, we were successful in terms of our customer base and portfolio, the only thing is that we didn't want to burn cash, because it's apparent if you look at the results from the prior is that there are some acquires losing money, selling with a TF that is negative, so selling to large customers wouldn't be a problem. But now making intelligent and profitable sales is what matters to us. So we were looking at our portfolio our Linx where you have results are quite solid. We've been growing in the past few months, especially with digitalization. Our margins have a native integration between Linx Pay and Neemo which is the app delivery. And with that, we were able to make important advances in terms of penetration. But synergy can also lead us to another level. And on the other hand, stone also started to invest in the ecommerce software, but as I said, for us in terms of payments, we have an advantage in the same thing goes for them in terms of software. I see many synergies, they have a large distribution and a lot of popularity and we do as well. So at the end of the day I can say that there is a large distribution synergy, I mean this is only an example, that's not only if. But just to add, the level of governance of the companies is quite high, because they are listed in the New York exchange.
Operator:

Our next question in English from Mr. Samad Samana from Jefferies.
Samad Samana:

Maybe first one on the growth that you saw with Neemo and some of the more recent acquisitions. How durable do you think those high growth rates are versus how much of it is short-term because of the crisis and how that's changed consumer behavior? And then I have one follow-up.
Alberto Menache:

Good morning from and thank you for your question. I think that growth is sustainable. And -- in the long run, the penetration of the delivery app was slow, unlike marketplaces, which has a much higher penetration, but the restaurants want to have an alternative to marketplace. So that's why we launched the delivery app. Therefore, I see a great potential to grow that segment in a very robust way for a long time.
Samad Samana:

Helpful and maybe if I could ask a follow-up question on the agreement with Stone. Did the company consider a merger or an acquisition by anybody else was it shopped I guess I'm just, I'd like to better understand maybe how it ultimately came together with Stone specifically, versus some of the other companies that could have been potential prospects as well. And if there's a go shop period for for some amount of time?
Alberto Menache:

At -- right now, we have an exclusivity agreement with Stone which means that we are not going to entertain any other negotiations with other companies. Having said that all of the documentation have been published at the resiliency VM and in our Investor Relations website, and the evolution of this process until the General Shareholders Meeting is all published in these locations. So they're -- I mean, the only possibility is that there is, is what has been posted in the documents, but throughout. So last, let's say 15 years, Linx had conversations with other companies about their possibilities. And maybe I could say that this has happened quite frequently. But we then believe that Stone was the best company, in terms of their culture, in terms of synergies, et cetera, et cetera. There were many things in common and they presented a very good proposal to our shareholders as well. And therefore, we decided to go ahead with them and now, we see the possibility of very soon that we will be together.
Operator:

Our next question is also in English, comes from Cesar Medina from Morgan Stanley.
Cesar Medina:

Hi, congratulations on the quarter. I have two question, one regarding the best solution if you can give us an indication in terms of where the volumes are today, and perhaps, at the breakdown of who are -- the acquirers processing those transactions? And then the second question is related to the timeline of the proposed transaction. When do you expect the next step to occur and the final approval for the general shareholders meeting. Thank you.
Alberto Menache:

Thank you for your questions, Caeser. In relation to the timing of the transaction, it depends on the Brazilian agency CADE. Therefore, this will probably take a few months. I cannot really tell you, what would be the final general shareholders assembly date. But we still have some waiting time ahead of us. But in terms of your second question, I will give the floor to Denis.
Denis Piovezan:

Good morning, everyone. And thank you so much for your questions. Test penetration remained very robust in -- mainly in the first quarter of the year, and in the second quarter because of the pandemic, it slowed down a bit. But now we see a very strong rebound. It is now about 40%. And it continues to grow and to grow its recurring revenue and penetration. And I'll say the same for the other solutions of Linx Pay.
Cesar Medina:

But can you give more color in terms of the TPV that you are managing on that solution and who is professing that like which acquires, and what percentage of that?
Denis Piovezan:

It seems like we don't have an update on that figures, Caesar
Operator:

Our next question from fragmented from Fred Mendes from Bradesco BBI.
Fred Mendes:

Good morning. And thank you for taking my question. I have two questions. I think your two main strategies, I think Alberto already talked about some of them. But how do you see the integration of these two cultures? So I think it may be too soon, but what kind of challenges you anticipate in terms of promoting that integration? And the second question is probably a bit more strategic. In terms of Linx Digital, how do you see Linx Digital and this new partnership? Whether you expect some kind of changes in your strategy, or whether you will continue with business as usual?
Alberto Menache:

Hi, good morning. Thank you for your question. About the integration, integration is always a challenge. But Linx has developed this integration capacity because we have acquired more than 30 companies throughout our 11 year history. Therefore, Linx culture involves embracing several cultures and also -- now, not only we embrace but we accommodate. We embrace that. That's why I don't see any difficulties. And once again, I reiterate that it's always a challenge when we have to integrate, but together with our HR department and together with Stone is also a company that has acquired several other companies is a very dynamic and young company. And therefore, I am very optimistic about the integration. Now, in relation to the integration with Linx Digital. We see a lot of opportunities our digital demand is costing a significant growth. And our penetration as I said before is very important through our delivery app, all most of our new customers come from the delivery app, but in terms of Linx Commerce and the payment link. Penetration is too low and why do I say that, because our gateways a very recent product, so it still needs to be more mature in order to grow penetration. Therefore, I see a lot of opportunities looking forward. And now I will ask Jean to tell us more about it.
Jean Klaumann:

Good morning, Fred. I think that the market change and the motivation for all of those that are entering this is the new e-commerce platform that is always motivating as to create more democratic paths to make things happen, like it did happen with a pharma example. And we want to have another into one solution. And this is what we already did for things score and things digital, and now we're just reinforcing that and I know that our solutions will be even more robust connections will be easier and this also brings about important cross-selling opportunities. I don't see any disruptive changes in the short run, but on the contrary, lots of good opportunities to capture synergies between our different distribution channels.
Fred Mendes:

And if this is our last call. I mean, it's been a pleasure to work with you and to be with you in the last few years. Thank you.
Alberto Menache:

So I think that you will have some more work ahead of you. So that's what I hope for. Thank you very much. And thank you for cheering for us. We were just able to get the numbers as user asked for. So let's go for it. In the last quarter, we had around BRL20 billion with test with an outstanding leadership and we were quite ahead of the second company CLO and we're operating very close to get net. So Linx Pay about BRL20 million, our position now is about BRL100 billion. I think that's it either.
Operator:

[Operator Instructions] Our next question from Susana Salaru from Itau.
Susana Salaru:

I have two questions. The first about Linx Pay. Linx Pay accounts for 13% of your recurring revenue. Out of this amount, how much is transactional and how much of that 13% is tough? And my second question is more related to e-commerce. So are you thinking about developing an ecommerce solution for each of the verticals or this will be a more generalized solution that could be deployed anywhere and as such will generate higher scale?
Alberto Menache:

Thank you for your question. Our idea is to have unique platforms for each vertical. We have always believed in the specialization, in the core business. So, fashion segment has its own needs, the pharmacy segment has its own peculiar needs, and so on and so forth. It's not the same thing to have, I mean, it's one thing to have different platforms for different segments, but that doesn't mean that the technology cannot be shared because in most cases because it could. There are several common components to the technology and as such we have lots of synergies between the different platforms. Now about the mix of the transactional revenue of cash, I will give the floor to Denis because this quarter we already have the full consolidation of PinPag. So, we already included PinPag in those figures. So then you see if you can help us set some more light.
Denis Piovezan:

Sure, so that I thank you for your question. There what we have in terms of return is about 35% and transactional 45%. So these are transactional is growing. So out of the 13% their recurring revenue is like almost half as transactional and the other half is the rest. Yes.
Susana Salaru:

I just have a follow-up of another question from last night. Maybe you can help me with that. We receive a question from an investor related to the fact that you will receive a percentage in cash and the other percentage of the transaction will be paid off in shares from Stone. But the discussion, but this is such a nice deal and well accepted. So why don't you receive more stocks and less cash in terms of how the payment will be done?
Alberto Menache:

I cannot give you any further details about that at the moment, but because at the end to pay a certain premium for Linx's shares, if a significant premium whenever we talk about the average price of the last 30 days. So that was the deal. We arrived there, but I mean I cannot give you any further details.
Susana Salaru:

And again once again, congratulations for your trajectory because we had the opportunity to be with you from the very beginning from day one.
Alberto Menache:

Thank you Susanna, thank you for your dedication in covering us.
Operator:

Next question is from Maria Teresa Azevedo from Santander.
Maria Tereza:

Hi, thank you for taking my question. Congratulations for your transaction. I am also very hopeful that everything will be approved. I have two questions. The first is whether you can talk about your contract with Hagey whether there is any kind of penalty that will be incurred and how are you going to make that transition from Hagey to Stone so that you can capture synergies? And my second question is about the OMS projects. How was the rollout of that and whether you added projects or you reduced the number of projects? And how do you see the competitive environment for e-commerce solutions? Thank you and congratulations once again.
Alberto Menache:

Thank you for your question Maria Tereza. In terms of our contracts with Hagey, unfortunately I cannot give you detail, any details about that. But we do not want to have any disruption vis-a-vis Linx find and in terms of OMS, I will let Jean answer that part.
Jean Klaumann:

Good morning Maria Tereza. Thank you for your question. The go-live of our first project should occur in Q4. We are finalizing the functionalities and we are working together with Linx Pay because we are also making available another concept that we will include Omni and our whole network of franchisee so it's a very democratic product but at the same time, it will serve franchisees right from the start. In terms of the competitive environment, we are growing our sales volume -- has been growing the sales volume in these past months. We have about 50 new -- we're adding 50 new customers per platform every month and the average ticket is growing also in terms of signing new contracts and this shows not only the quality of sales but through the volume -- the sales volume that is growing that indicates that we are on the right track.
Operator:

[Operator Instructions] Our next question from Diego Aragao from Goldman Sachs.
Diego Aragao:

Good morning and thank you for taking my question. Could you please comment on total GMV of clients? And correct me if I'm wrong? Stone talks about 300 billion of current GMV. Could you just elaborate a little about the performance of that if we could compare it to last year? Or the pre-pandemic volume? And what is the behavior now during the pandemic period? So this is my first question. Thank you.
Alberto Menache:

Good morning, Diego, thank you for your question. Those 300 billion refer to everything that goes through our platform meaning through our softwares. What is invoice by customers through our softwares. Volumes dropped substantially, and the onset of the pandemic. So right now, it's very close to what it was before the pandemic period with the exception of shopping malls because they are still facing some restrictions. But on the other hand, on the e-commerce side, the volume is much higher than it was in the past, but not so significant when we look at the total number of transactions that goes through Linx Pay.
Diego Aragao:

Perfect. Can you also give me a breakdown of how much of the GMV occurred through physical stores? And how much of that occurred online? That would just help me understand a little bit more about the mix of the volume.
Alberto Menache:

The majority was through brick-and-mortar stores. The great majority was through physical stores. So we would have to get this entire volume. And then we move which mentioned before, and we've had -- we will have the final results. And I do apologize because I don't have that number from the top of my head.
Diego Aragao:

Perfect, that's not a problem. So once again, thank you so much for this amazing partnership throughout the years. And as Susana said, we had the opportunity to follow your trajectory from day one. And once again, I have to congratulate you for this amazing track record. And we will see you soon in the future.
Alberto Menache:

I have to thank you. Because in fact, even when you were in another company, I know that you've been monitoring as diligently. So thank you so much for your support in doing all these years.
Operator:

Next question from [Indiscernible] from SSA Investments.
Unidentified Analyst:

Hi, good morning. I would like to talk a little bit about this recent deal between Linx and Stone. I am a founding partner of SSA Investments and a Linx shareholder. And this still shows that the strategic value of the company in addition to the growth potential of Linx. So Stone will be the main software company in retail it will have robust solutions to cater to the clients. It also will have access to -- it has access to an enormous list of clients. And they will operate in a segment that they have low penetration though. So we have BRL300 million and additions to large volumes on tap. They will be able to offer online solutions to their customers. And so they are one of the leaders in the sector. This is a segment that has a huge growth potential Linx have already invested a lot in the last few years in addition to omni channel solutions. They have a large growth potential. They invested a lot in the last few years. Therefore we understand that is strategically speaking this deal makes a lot of sense. This seems to be a great deal for Stone and is for business does not contemplate all of this growth potential in the strategic value that I just mentioned before. I just want to understand a little bit of the rationale of the valuation.
Alberto Menache:

We are talking about our premium of approximately 48%, the average price also last period. This is a pricing that is above the targeting for most analysts, if not all of them in the market. When we look at the earnings multiples and the EBITDA multiples, they are quite interesting. And throughout the years, we talked to several companies, but they never came, this close to making a good proposal to us. And even though things are moving quite well on the payment side. Our projections due to the pricing war that we had and looking at the profile of our customers, our customers in the vast majority are medium large size. So the price war is very strong in these two market segments. And there is strong pressure from the banks. In terms of selling integrated products like credit, acquiring, etcetera. For all of these reasons, we understood that it was a very difficult. And so that we should take it.
Operator:

[Operator Instructions] And there are no further questions. We now conclude the Q&A session. I would like to give the floor to Alberto for his final remarks.
Alberto Menache:

I would like to thank you all very much, because ever since we had our IPO you were very diligent and covering us and you dedicated a lot of your time to write your reports. So thank you so much and we'll see you soon. All the best to all of you.
Operator:

Linx conference call is now concluded. Thank you very much for participating and have a very good afternoon.

Linx S.A. Q2 2020 Earnings Call Transcript

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Linx S.A.
Q2 2020 Earnings Call Transcript