Zenvia Inc. (NASDAQ:ZENV) Q3 2022 Earnings Call Transcript

Zenvia Inc. (NASDAQ:ZENV) Q3 2022 Earnings Call Transcript November 17, 2022

Operator: Good morning, and thank you for standing by. Welcome to Zenvia’s Q3 2022 Earnings Conference Call. Today’s speakers are Mr. Shay Chor, Zenvia’s Founder and CEO; and Shay Chor, CFO and Investor Relations Officer. 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. . Now I would like to welcome one of our speakers for today Mr. Cassio Bobsin, Founder and CEO. Sir, the floor is yours.

Cassio Bobsin : Hello, everyone and welcome to Zenvia’s earning call. I’m Cassio Bobsin Founder and CEO. Today we’re going to review our performance for the third quarter and nine month period of 2022. Let’s start with slide four. Since our IPO, we have been delivering on our promise to expand gross margin and increase profitability. I’m very proud to report that we registered the best profitability metrics recorded as a listed company for a quarter, including posting free cash flow. This is a direct result of a better revenue mix, backed by the expansion of our SaaS business, together with the implementation of a strict cost control plan. As we are seeing a very competitive environment in the CPaaS business with strong pricing pressure, we have been taking a series of measures to reduce overall expenses, putting Zenvia on a clear path to profitability.

Also given the challenging global environment at tech companies management is now very much focused in improving the company’s capital structure and maximizing cash flow. Therefore, we recently announced two important initiatives. First, we have significantly reduced our funding gap until the end of 2023 by renegotiating the earn out terms with D1 and Movidesk. Second, we implemented several cost cutting initiatives, which included downsizing of our corporate structure as announced last week. Shay will cover both initiatives in more detail during his remarks. Also new this quarter, and as part of the guidance we provide to the market, we are introducing a full year EBITDA guidance. With it we’re also adjusting revenue guidance down and adjusting up our gross profit margin.

Let’s now take a look at our performance during this quarter. We’re reporting first evolutions on all our key metrics, net revenues, adjusted gross profit and adjusted gross margin. As you can see, we were able to increase the profitability of our operations, and more importantly, convert gross profit into EBITDA and free cash flow. We did this despite the challenging and more competitive environment, like we lived in this quarter. Net revenues were up 10% while adjusted gross profit jumped 50% adding 12.7 percentage points to our adjusted gross margin, which attests our commitment and path towards profitability. On the next slide, and looking specifically at our gross margins, we can see the evolution of our gross profit margin since the first quarter of 2021 and the IPO until today.

We have delivered on the promises made during our IPO. We have expanded our margin significantly, a double digit expansion, whether it is since the IPO or on a year-over-year basis. In the nine month period, we recorded a gross margin of almost 40% as you can see in the orange bars to the right, which is close to the top range of our updated guidance for the full year of 2022. This is yet another proof that we’re walking the talk in our path to profitability. Looking ahead, we intend to accelerate the integration of our SaaS products and strengthen our cross hiring. In the CPaaS business our plan is to continue to pursue balance between volumes and profitability to maximize gross profit. We have already been changing the customer experience of more than 300 million humans in Latin America with our CX platform by improving the way in which brands communicate with customers.

The good results have followed these initiatives and now the innovation we’re bringing to the market are already reflected in our profitability. However, there’s still a huge whitespace opportunity in this market and have just began to tap it. There is a promising future ahead, and we’re ready to take the opportunities. We will be doing all these diligently and with a strict focus on cost control and cash preservation. We aim to continue increasing our profitability and maximizing our returns. I will now turn the floor to Shay for his remarks. I’ll be back after that for the Q&A.

Shay Chor : Thank you, Cassio. Hello everyone and thanks for being with us today. I would like to start by breaking down our revenue and adjusted gross profit mix by SaaS and CPaaS. As we started to report like this only in Q2, we decided to present Q3 numbers compared sequentially so that you can all fully understand our path to profitability. When we analyze the performance of our revenues, on the chart to the left, you can see the sequential drop in revenues of 11.5% which was mainly due to a 22% decline in CPaaS. This decline reflects our decision to focus on profitability, which led to lower volumes given the much more competitive environment with strong pricing pressure. On the other hand, our SaaS revenues went up almost 12% sequentially, and contributed to offset part of this decline.

Let’s now look to the graph on the right. It shows the mix of adjusted gross profit. We see sequential increases in both SaaS and CPaaS margins, which means that our focus on profitability paid off. CPaaS delivered a solid 15 sequential increase, while SaaS grew almost 12% which consolidated into 12.5% total increase in adjusted gross profit. As you know, we have been transforming Zenvia into a SaaS company since our IPO. During this quarter, we can see how our software business already represents 57% of our gross profit, which demonstrates we are effectively more SaaS than CPaaS. On the revenue side, SaaS represented 40% of the total in the quarter, a live sequential improvement from Q2 when SaaS was 29% of total. Important to highlight that the third quarter is the first in which we fully consolidate the D1, SenseData and Movidesk.

Looking ahead long term, we expect SaaS to represent about 70% of our gross profit. And as Cassio said, we are just beginning to tap the huge whitespace in the SaaS market in Latin America. Let’s now address the cost side. We have been implementing cost cutting initiatives throughout the year, especially as we accelerated the integration of the acquired companies and started extracting synergies. This initiative also included reducing non-personnel G&A expenses, such as consulting and travel among many others. Last week, we announced the downsizing of our corporate structure equivalent to 9% of the total workforce in Latin America. We expect this to reduce our personnel expenses by BRL40 million in 2023. In order to execute this, we expect to incur one time expenses of approximately BRL5 million in Q4 ’22 mainly related to severance.

I would like to share with you that we were very transparent with all our humans regarding this process with all communications made individually. We are also supporting affected employees by extending healthcare plans and providing career replacement opportunities. Finally, we also hosted several meetings with all other employees to reaffirm our commitments and expectations going forward. On top of the downsizing, we are implementing a plan to generate non-personnel savings. Altogether, we expect to bring our costs down by BRL70 million raised on a yearly basis as of 2023. Moving on, we are happy to report that all the initiatives implemented made us reach the best profitability metrics recorded for the quarter since our IPO. In this third quarter, we recorded BRL9.9 million normalized EBITDA, which excludes certain non-cash items related to future earn out payments evidencing the profitability of our operations.

This means that we have been able to convert high gross profit into EBITDA and cash flow. This gives us confidence to introduce a new EBITDA guidance for the year, which we’ll discuss in the next slide. In its 19 years of history, Zenvia has built a pattern of sustainable and profitable growth. The decision to become a SaaS company has taken a toll in profitability in the last couple of years. We believe the third quarter is a turning point and we are already returning to positive EBITDA. Therefore, we feel confident to introduce a full year 2022 EBITDA guidance, which we expect to be in the range of BRL10 million to BRL15 million. This is the normalized EBITDA, again, excluding non cash adjustments related to earn outs, and also one time expenses related to the downsizing we have just announced.

Another positive metric of the quarter was the positive free cash flow. This slide shows a normalized free cash flow bridge, which allowed us to generate BRL3.5 million in the quarter. For transparency and to help you understand the recurring cash flow generation this number excludes the working capital instruments that we use in the quarter to ensure a higher level of cash balance. And finally, we announced at the end of October the agreement with D1 and Movidesk in terms of their earn outs, which allowed us to drastically reduce our funding gap. As seen in this slide, we were able to reduce the total amount to be paid by the end of 2023 to approximately BRL30 million from BRL360 million by extending the payment schedule to the fourth quarter of 2026.

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This means we can remain totally focused on continue expanding gross profit and generating positive EBITDA. As you can see, this was indeed an eventful quarter, with a lot of important changes in the market dynamics and also inside our company. All recent initiatives have allowed us to introduce the new full year EBITDA guidance of between BRL10 million and BRL15 million as previously mentioned. Additionally, we’re also updating our full year 2022 guidance with some important changes. We are reducing our revenue guidance, but we’re increasing our adjusted gross margin. In terms of the revenue guidance, the reduction is mainly concentrated in the CPaaS revenues, and it stems from our focus on profitability. The new revenue guidance is projecting for 2020 to a range between BRL740 million and BRL790 million, which implies a year-over-year growth of between 22% and 31%.

SaaS revenues should be in the range of BRL250 million and BRL275 million, already including six months of Movidesk, while CPaaS revenues should be in the range of BRL490 million and BRL515 million. Our adjusted gross margin is projected to be higher reaching between 38% and 40% on a 5.7 to 7.7 percentage points expansion from ’21. This figure is taking into account the five percentage points increase in the CPaaS adjusted gross margin to 27%, with the SaaS adjusted gross margin remained at 65%. With this, we conclude our prepared remarks and we are ready to take your questions.

Q&A Session

Operator: We will now begin the question-and-answer session. . Now let’s go on now to our first question. It comes from Lucas Chaves sell side analyst with Zenvia. Lucas, the floor is yours. The mic is open. Go ahead, sir.

Lucas Chaves: Thanks for having my question. So I have two questions here. The first one is could you enter in more details in what’s expected in terms of organic or inorganic revenues going forward after the 10% increase we had this quarter? And if I may a second question, I’d like to know more about the cross selling opportunities that you mentioned and if you could enter in more details into that? Thank you.

Shay Chor : Thank you, Lucas. I’ll let Cassio start with your second question on your cross selling and revenue opportunities, and then I’ll come back to the organic versus inorganic growth.

Cassio Bobsin : Lucas, thank you for the question. We’ve been working over the last couple of quarters integrating our portfolio and part of these operations that we did in terms of earn outs was actually to accelerate integration so we can benefit from all the expansion that we do in terms of technology solutions to our customers. And we’re starting to get the first structure of combining products and making a go-to-market of these products combined. So we have our customers that have been operating during this quarter on this new go-to-market initiatives that combines different products, so they can benefit from this evolution that we’ve been doing. Hence, we expect this and the next couple of quarters to be really important in terms of growth, as we see that most of our customers that are using one product are targets for our other products. And as we integrate these solutions we are able to address that big opportunity that we have within our same customers.

Shay Chor : And on your question on organic versus inorganic. So let’s separate the discussion between SaaS and CPaaS. So the SaaS business is growing at 40%, 45% pro forma pace. So this is all organic, right. And this trend continues to be true. It was true in Q3, and we continue to see that pace going forward. The CPaaS Business has been very competitive. The environment has been very aggressive in terms of pricing. And this is the reason why in Q3, we decided that we should not go for those specific deals that were with negative margins. And the dynamics of this CPaaS market is very flexible and accelerated meaning our clients can move from us to another player, very short and back to us. So essentially we keep monitoring how aggressive prices are, and will continue pursuing the balance between revenue and profitability.

So if we see opportunities to accelerate volumes, again at decent profitability, we’ll do that. So the organic growth of the CPaaS business will depend essentially on how aggressive the market is. I don’t know Cassio to add anything on this competitive environment on the CPaaS.

Cassio Bobsin : I think you explained the most broad dynamics that were seen terms of the market. So we see that there’s some players in the market subsidizing customers, focusing more on top line growth. And we don’t see that as something that is sustainable on the mid to long term. Therefore, we expect the market to be naturally adjusted to more sustainable pricing for large volumes in CPaaS.

Operator: Okay our next question comes from Vitor Tomita, sell side analysts with Goldman Sachs. Vitor, we’re opening the mic for you. Go ahead, sir, ask your question, please.

Vitor Tomita: Hello, good afternoon, everyone. And thanks for taking our questions. Two quick questions from our side. The first one is if you could give us some more color on how you are seeing the sales cycle amid a more uncertain macroeconomic scenario. And our second question would be, I know you provided already updated full year guidance, but from a more qualitative sense, how should we think about seasonality for Zenvia in Q4, given seasonally higher retail volumes and the usual seasonality of CPaaS revenue and margins? Thank you.

Shay Chor : So looking at more understanding of the seasonality in Q4, and what we are seeing more qualitative basis, yes, we do have some Q4 effects of Black Friday in the promotional calendar, that do affect some of the volume-based revenues. And so we’re expecting to have some of that being captured on the fourth quarter. Looking at the macroeconomic environment and how we expect that to affect our projections for 2023, we’re seeing that companies are more cautious when they’re making their ’23 budgets. Therefore, we expect some deceleration on IT spending growth, which is something that occurs, mean we also will always have growth on IT spending, but we expect that to have a bit of deceleration. And that could affect our top line growth next year, as there are still lots of uncertainty, not only in Brazil, but also all over Latin America and globally, as this turbulence kind of ceases and companies are again, more safe to apply their resources into technology, we expect this to get back to a normal trend of continuous growth that comes from digital transformation, of all these processes and specially on the customer experience where we are leading this space.

Vitor Tomita: Very clear. Thank you very much.

Operator: . So I’ll take your question here in the web. We welcome your focus on profitability. Can you detail more what are you doing for 2023 on top of the layoffs to cut costs?

Shay Chor : Cassio, do you want to take that?

Shay Chor : Yeah, yeah, of course. First of all, as we are reducing our structure, we have some costs related directly to that, expenses that we can reduce. So that also reflect not in people expense but in systems, for example, license and everything. Also we are reviewing now our budget for travel and consulting. And also some expense that we decided as a team that is not the priority right now, and not — and will not impact growth for the year. So some of those package of expenses and all the work that we are doing with the team with more detail looking every expense that we have, so we can deliver those additional BRL30 million reduction for 2023.

Operator: Another one here from the web. Can you tell us how is your funding gap looking? And what are — would be the next steps?

Cassio Bobsin : So let me take that one. As we’ve been doing since middle — of end of June, beginning of July, we’ve been assessing and negotiating different instruments. So the renegotiations of the earn outs, the payment terms of the earn out for D1 and Movidesk are an example. We’ve been negotiating directly with banks to extend the maturity, to provide us with some grace period and those things takes time. So we will be announcing them as we close those deals. But we are confident that all the instruments and tools that we have available to us and we’ve been discussing and negotiating will help us navigating through this time of difficulties to find credit. Operator, can you re-prompt to see if we have any more questions.

Operator: Re-prompt, okay.

Shay Chor : I’ll take another one here. Good afternoon, can you please comment on the growth of new clients in SaaS? How can we see the growth of the new clients looking forward? Cassio, I think you can take that one?

Cassio Bobsin : Yeah, definitely. We’ve been working on all the go-to-market for these different solutions that we have, especially as we integrate the — finish integration of Sirena. And we just concluded the acceleration of integration that now starts as a project for us to get the benefit of that over Movidesk. We are able then to combine both solutions of traction conversion service and success. So we can benefit not only from the standalone go-to-market, which is something that we have been capturing over the last couple of quarters, but also to add cross sell to our customers. That’s — we expect them to add this new stream of customer growth, which means selling same products — selling other products to the same customers.

And that of course, creates a continuous cycle of enriching our presence in the same customers, and looking after the same combination of products. We are able then to serve them for new customers, as well as a bundle. So we can achieve markets that were not able to be served with the standalone solutions. Now we open up for customers that require the adoption of more than one of our solutions, so they can address their demands or their use cases. So we see that even though we were being facing an economic environment that is not like the best for growth we say that there is this continuous demand for our solutions. We see that the continuous flow of new customers, and we’re able to capture that in terms of customer base growth now combined with integration level solutions.

We expect that to drive a very healthy growth for our SaaS business over the next couple of quarters.

Shay Chor : I don’t see any further questions here on this system. So

Operator: Okay, well, then, let me just check the Q&A session, column here. Hold on just a second. We don’t seem to have any more questions. So now I would say that this concludes our Q&A session. Questions-and-answers are over. And I would like now to turn the conference back over to Mr. Cassio Bobsin for his closing remarks. Mr. Bobsin, please, you have the floor.

Cassio Bobsin : Thank you very much for your time to get to know how we’re being implementing all this strategy towards profitability. This has been our whole history. It’s combining growth with a profitable operation. So we’re very proud to get back to that historical trajectory. And as we see the next couple of quarters, especially next year, we expect to even go even stronger, in that profitability trajectory so we can combine that all that strategies that have been working in terms of expansion of the platform with a sustainable company for the future. So thank you very much for your time, and see you in the next month.

Operator: Thank you all. The conference has now concluded. Zenvia’s IR area is at your disposal to answer any additional questions you might have. Thank you for attending today’s presentation. You may now disconnect. Have a nice day everyone. Thank you so much.