Bemobi Mobile Tech S.A. (BMOB3) Earnings Call Transcript & Summary

Ladies and gentlemen, and welcome -- good morning. Welcome to the video conference of Bemobi to disclose the results of the second quarter of 2022. I'm Nicholas Baines, the new IRO of the company. And today, we have with us Pedro Ripper, CEO; Andre Veloso, CFO; and Joao Stricker VP of Operations in Brazil and Latin America. We inform that this presentation is being recorded and that all participants will be able to listen to us during the conference. Participants may also access the simultaneous translation in English. Just click on the interpretation button and select the language. For those who don't speak Portuguese, we have an English channel that can be used by pressing the interaction button on the bottom right corner and choose the option English. After the presentation, we will have a Q&A session. The Q&A session is exclusive for analysts and investors when further instructions will be given. Before proceeding, we would like to clarify that any forward statements that may be made during this conference call relating to Bemobi's business outlook, projections, operational and financial targets are based on beliefs and premises on the part of the company's management and on information currently available. They involve risks, uncertainties and premises as they have to do with future events, which depend on it circumstances that may or may not materialize. Investors should understand that general economic conditions, industry conditions and other operational factors may affect the future performance of Bemobi thus conduct into results, which differ materially from those expressed in such forward-looking statements. I now turn the floor over to Mr. Ripper.

Thank you very much, Nicholas. Let's start with the presentation. Good morning to all. It's very good to be here with you again and to share our results for Q2 and the consolidated results for the first half of the year. I apologize for those who already know about our business, but I would just like to give you an overview about our business model. We are a tech company. Our business model is B2B2C. That is we work with large companies, that has millions of clients, and we provide technology solutions in four formats, digital subscriptions, micro finance and payments or Software-as-a-Service. This model has been the same since Bemobi was founded, but we have been expanding to different business lines. We also work preferably with emerging countries. On the next slide, you see how we divide our business lines, practically all the disclosure and the breakout of information that we give, it is done these 4 pillars. This includes our financial information and also performance indicators. We have Digital Subscription Services. And it's a take rate type of revenue share where we share the revenue we get from the services. Then we have micro finance and two different lines, Nanocredits which we give to telecom users and it's a percentage of the success rate that is credit granted, less any bad debt. And then we have a scoring model where we use the same base of information on telecom clients, but then it's a different business model. We anonymize data and sell them for scoring for those companies that are extending credit to end users, typically fintechs and credit card companies. Then we have digital payment solutions. These are the solutions that came from the acquisition of M4U and this focuses on payment solutions for the telecom industry, and we are beginning to expand that to other sectors. And then we have a take rate model where we take a small percentage of the total value transaction. And then we have a business line, which is the software-as-a-service and the business model is not a take rate, but it's licensing usually linked to a physical activity number of messages sent, number of clients managed. So 100% of the revenue of Bemobi comes from these 4 groups. And now let's move to the highlights of the quarter. So very broadly speaking, we continue to expand geographically and we work with emerging countries where the nature of problems is very similar to what we see in Brazil. These are countries that have challenges in line with the solutions that we can offer. We are now operating in Morocco and Tajikistan. We have increased the number of partner companies in B2B2C. We added 6 partners in Q2. And we continue to expand our penetration through these partners. On the next slide, I'll give you a breakdown of our new partnerships in terms of digital subscriptions, and this is our orders business line. We have a great penetration and a greater breadth of partners. We now have 85 partners, mostly telephone carriers with some exceptions in the fintech business. And we have added 4 new mobile carriers. And we have increased our addressable market and our potential for growth in that line of business. In terms of microfinance, we added 2 new partners. In terms of micro credit, 2 new partners, specifically in Mexico, which are now using our scoring as a decision-making tool to grant credit. In terms of digital payment in Q2, we maintain the same 5 partners in Brazil and in telecom, mostly, but I'm going to tell you about the next 2 partners, which are going to be included in Q3. And these are our first partners outside the telecom space. And then in terms of PaaS, platforms-as-a-service. We have 2 numbers. Our channel platform, Loop is the one that enables the sale of other services. it's an enabler that allows us to sell more digital services, micro finance and digital payments. It does not have a revenue on its own, but it generates revenue through other services. We now have 27 partners in Loop of which 3 new ones, which we acquired in this or not acquired, which we added in this quarter. And an important element for the growth of our business. Last year, we had 1 or 2 launches. And this year, we are accelerating. This makes us very excited and makes us very optimistic in terms of increasing and making this channel more prominent. And then in terms of our B2C metrics, in terms of digital subscriptions, this is a more mature line of business. And in the last 2 quarters, the growth has been very considerable. Year-on-year and quarter-on-quarter, we grew. And we had a bit of a surprise here. We faced headwinds in Russia and Ukraine where we had a medium to large operation, but the upside was that Brazil had a good performance in the period and also Southeast Asia as well. So we had good results despite the troubles in Russia and Ukraine. We will talk a little bit more about this later. As for micro finance, there is a small seasonality. We are now back to the levels of Q4, which is our best performing quarter and a strong growth year-on-year driven by an acquisition made at the end of last year, Tiaxa and then the digital payment, the metric we use there is the total volume of transactions, the total payment volume, TPV, and it's a very, very solid number, which also had the contribution by M4U. We bought this company with a turnaround intent, and some indicators are now performing better. And in terms of past, the metrics are different. So it doesn't make much sense to include this under B2C, as PaaS is mostly a B2B business line. Now speaking about our solutions, we have been thinking that a lot of what we do in terms of B2B2C, be it digital subscription, be it payment, be it scoring, we always thought that this model could be expanded to other industries. Originally, Bemobi concentrated on telecom, which serves billions of customers worldwide. Two quarters ago, we started our first experiences with fintechs, either offering scoring or distributing apps through partnerships. And now we want to penetrate other sectors further. We have been working with utilities for some months now. And we focused on energy distribution which is the one that has the largest transaction of values. And where there is a good match between their model and the offerings we have and the privatization in Brazil is quite advanced. The major players are private companies and some are owned both privately and by the state. There are many similarities in terms of the life cycle when we speak of utilities, especially energy, and there are many similarities with what happened to telecom some years ago. So both these sectors have millions of clients, recurring billings, accounts with variable amounts. And the challenge is to digitize the relationship with the clients. They have to deal with defaulting costs for charging clients, and they all want to have a closer relationship with customers. In utilities, there is a deregulation and current distributors want to know more about their clients. This may seem basic, but it's a big challenge. And digitization can play a very important role. So we created an offering based on 2 of our competencies. Bemobi in terms of digitization was a good partner of telcos to create digital channels to bring customers from the brick-and-mortar world to the digital world. And this adds convenience and lowers costs. And then we also have a lot of experience in creating digital payment solutions. So we can take clients from more expensive channels such as lottery shops and offer them other modes of payment. So we want to adapt this experience, this journey that we offer to the telecom industry. And we have been working with many companies, our 2 first partners, Energisa and Voltz, it's fintech. We have been identifying this points of pain to identify better ways to offer a better journey to the customer. And also, we have been working with Equatorial, a large energy group in the country who shares our vision in terms of the power of a digital transformation. We can offer a white label solution just as we do with other partners, B2B2C. So the end customers, Energisa and Equatorial as the business that provide service. And then we add a platform to improve the payment journey for clients in general, especially the defaulting clients. So there are creative mode of payment with payments and installments, and we can provide a better balance of risk and return to the energy companies. We have been working on the services and we expect that by the end of Q3, the beginning of Q4, this services should come online on stream for these 2 partners. And then we will be able to expand these services to other companies in Brazil and globally, just as we did with telecom. The last highlight maybe that from the point of view of TPV of this market, although telecom is a huge industry, the TPV here in Brazil is 3x higher than telecom. And in other countries, it's more or less the same correlation. So it's a long journey, but a very promising journey that allows us to build on our strengths, and we start really well with these 2 companies that joined us in this journey. So we're going to have more news on that. Moving on to the financial part. I'm going to talk about revenue before we passed -- before I pass the floor over to our CFO. In terms of revenue, it was a very strong quarter in absolute terms, but we had 2 adverse effects. We last quarter had the effect of 1 month of the conflict between Russia and Ukraine. We were affected only in March. But in Q2, we had the full impact of that conflict in the whole quarter. And this obviously affects these 2 geographies, which historically accounted for 5% of our revenue. And also because a lot of our business revenue comes from the international market, we had a fluctuation, a negative effect of the exchange rate year-on-year and quarter-on-quarter. And then here you see that there was an impact of BRL 4 million because of the exchange rate. You see that from the dollar went to BRL 490 per dollar. And this estimated effect had an effect on EBITDA as well. It is very easy to see. We have just one service, and many of the carriers just shut down the billings during the war. So it's easy to estimate. The operation of the business in general, grew 83.5%, and this was because of the acquisitions that had not happened, but there was also organic growth quarter-on-quarter. The last point that I would like to highlight here were that -- was that growth in the semester was robust. There was a slight reduction in the international share. And this rather international, and this has to do with the purchase of M4U and we will see the full effect this quarter and also the impact of the exchange rate, there was a small effect here. But overall, we have a very relevant exposure internationally, and we want this -- our business to grow internationally. When we look in terms of the mix of revenue we see that the company is more balanced in terms of different business lines, which are complementary, thus mitigating against volatility for us to zoom in. I would like to share with you some data which we find very useful to share every semester. B2B2C helps the company scale up faster to work in a symbiotic way with other partners that have other competencies. The challenge for B2B2C is that you have a codependence. If you have a small number of partners and if there is a concentration of partners. So this can present problems for the companies. So we offer diversification in terms of offering a number of partners, and this is an indicator of the health and resilience of the business. So as you can see here, diversification grew our revenues are distributed in a more diversified way, and the intent is to look for this diversification. We want to penetrate new countries, with new partners, and we want to look for resilience to mitigate against the volatility of the business. And now I turn the floor over to Andre, who's going to talk about the financial aspects.

As said by Pedro, this was yet one more quarter with very sound results, which reflects the consistency of our strategy. And beginning with the indicators on the left-hand side, you see the gross margin. And in Q2 2022, the gross margin was BRL 97 million. Growth by 132% relative to the same period in 2021. And in the accumulated for the last 6 months, BRL 192 million, a growth by 129%. In both cases, the margin grew relative to last year by 3 percentage points, which reflects the new mix of revenues of the company. It is a more balanced mix and more concentrated in new business lines where the margins are better, such as digital payment pass and microfinances. And speaking of administrative expenses in this quarter, they rose by 181% and were BRL 52 million. And in the accumulated for the year, BRL 105 million. And this had to do with the consolidation of the 2 companies we acquired in the second half of last year, Tiaxa and M4U, which brought some very important structures to allow us to execute our strategy. However, these business units have a lower EBITDA relative to Bemobi as a stand-alone company. And as a consequence, the adjusted EBITDA was BRL 45 million, a 92% increase relative to the second quarter of 2021. And in the accumulated for the year, BRL 87 million an 84% increase relative to the first 6 months of 2021. In this case, because of the comments I made about units that we brought on board, the margin relative to 2021 is slightly lower, but we were able to see an expansion by 1.3 percentage points relative to the first quarter of 2022, which reflects the new situation of the company. And this has to do with efforts, focusing on gaining efficiency and especially in renegotiation of hosting contracts and optimization in our personnel structure. And with this, we expect to have better news in terms of recovering these margins. Moving on to the next slide. We explained the adjusted net income for the period, which was BRL 8.6 million, a 43% reduction relative to Q2 to '21. Basically, the net income was affected by the marking-to-market of the swap operation for the buyback of shares. This has no cash effect as this operation matures at the fourth quarter of 2022. And this affected the net income for the quarter by BRL 18 million in the accumulated for the year, the impact was for BRL 15 million. This worried not for that. The adjusted income for Q3 would be BRL 23 million, growth by 74%, driven by a larger financial income in the period. And this was also offset by the amortizations of the allocated goodwill and financial expenses having to do with the payment of earn-outs. Moving to the right-hand side, you see our proxy for operational cash flow. So that would be adjusted EBITDA minus CapEx in the second quarter of 2022. This was BRL 33 million, a 61% increase relative to Q1 2021. And in the accumulated for the year, BRL 63.4 million, a 72% growth. In both cases, the cash conversion was extremely sound, 73%. And this gives us comfort in terms of our ability to generate cash. Specifically in this quarter, there were some disbursements -- one-off disbursements. So you can see here on the lower part of the slide, the variation of the cash balance as compared with the first quarter of 2022. So although 2022 we have generated cash in this quarter, we disbursed the first now Tiaxa for BRL 30 million than in Q2, we paid out BRL 18 million in dividends. And then the buyback of shares, which in the quarter consumed BRL 8 million. Specifically in this quarter, we also burned cash with working capital, which can be justified by 3 major factors. One of them is the renewal of some contracts and we were unable to issue the invoices to customers. This will be regularized in Q3. Then we had payments of PLR. And specifically, for the reasons Pedro referred to, we were impacted by the Russia and Ukraine conflict. We had to extend deadlines in our accounts receivable, which we are now recomposing. So all of these negative factors have been partially offset by the financial revenue with a cash impact, and that was about BRL 10 million. So at the end of the quarter, we had BRL 493 million in cash, a very robust position that makes us comfortable to continue to look for new targets for M&A. And with this, I turn the floor over to Pedro, who's going to make his final remarks.

Thank you very much, Andre. So just to be brief, yet another quarter with sound results, not only in the financial front, our cash position has grown, and we have been able to face the conflict in Ukraine we have an operation there. Our people there are doing well. So we are happy with these new partners that came on board is extremely important indicators that help us predict the future, be it our partner in Apps or Loop or mobile scoring highlight, and this has to do with the last 9 months in which we have worked with the utilities is our decision to penetrate a new industry, it's never easy. And obviously, we have to adapt our solutions. This is a very important milestone that could be even more important for us in the future. We were able to do all of this. And we have been able to maintain the margin. So there is a nice balance between investing in new business lines, which will bear fruit in 2023 and 2024, whilst maintaining the profitability of the current business. As Andre said, we want to have a strong cash position and to allocate cash in an intelligent manner. So we believe that we have to be responsible and disciplined in terms of M&A. And I'm stressing this because equity of all listed companies is under pressure. So this creates a pressure towards buying companies that have values in line with what we believe is right. So we are actively looking for assets that can add to our performance just as Tiaxa and M4U. Having said that, Nicholas, maybe we can remove the presentation from the screen and open the Q&A session.

[Operator Instructions] We have someone who would like to speak, Bernardo.

Thank you for allowing me to ask 2 questions. The first one is about the new contracts with the energy sector. You have 2 large contracts with a very relevant client base. So what is the curve you are projecting for the revenue of this -- from these contracts? When should this gain traction in terms of results and income? And what happens with the take rate? Is it -- is going to be similar to what you have in telecom? And Stricker, if I could ask you a question about opportunities in payments in telecom, what is the potential for growth in terms of top-up and digital plans with carriers?

I'm going to take the first part of your question, and then I'll turn the floor over to Stricker. So as regards what we can expect from these 2 contracts and what our expectation is going forward. We haven't started operating those contracts yet. So this is a caveat, but we believe that there will be no effect on Q3, and we are going to see the effects in a gradual manner in Q4 from one of the partners and then at the end of Q4 with the other partner. So this is going to be a gradual curve. It's not going to be a big ban. We gradually open the tap, so to speak, as things work. The other one, as I said, is going to start at the end of this year. And as we create this digital behavior that is a change of behavior on the part of customers, and this might take time. This is for Energisa. But with Equatorial, we are going to start in three regions, one in the North, one in the South and it's the same rationale. If everything goes well, we want to expand this type of offering for two other places. So we believe Bernardo that the effect for 2022 will be very small. We are not counting on that. But in 2023, yes, we're going to see a material impact from Energisa and Equatorial. And we also expect we will be working with other energy providers. In terms of take rate, I can say more about that in -- after 2 quarters going to be in line with what we get in telecoms in some lines, better orders worse, but roughly the same. Operations for default clients are riskier, but with a better margin of return. So there should be a better margin there. And for the regular clients, because the ticket is higher, there is a greater discount. So once you add all of these vectors, this looks like if we achieve the same scale as telecom, which is totally feasible in the medium to long term. We should have a contribution to the gross margin, which is very similar, but with a higher EBITDA because in practice, there is an intersection of platforms. So there is a material gain of scale as well, which is what we want when we grow services. And as we evolve, we are going to give you a little bit more color about this industry. And I'll turn it over to Joao now.

Thank you, Bernardo, for the question. Great question because these are fronts where we see a great potential for the medium term and medium term because these are fronts that require a change in behavior, so it takes a bit until we achieve scale, but we are working to make that happen. And speaking of digital plans, the basis for carriers in postpaid and control. These are plans where an invoice is issued. So this is a legacy method for more traditional services industries, but new subscription industries tend to use credit cards or digital payment for the clients. And we see that interest grow within customers and within the carriers for the customers. It is a digital experience, it's simplicity, convenience to control your payments. It's a habit. So you have your services charged to credit cards or other types of digital payments. And for the carrier, there is a reduction in collecting costs, operational costs, so that's the direction the market is going to. And Bemobi specializes on that. We are able to integrate different payment means channel intelligence with Loop and other communication channels, and this is essential to ensure the recurring payments of these clients. So our expectation is very high. We have been working with the carriers very strongly to make that even better. In terms of top-up, top-up is increasingly digital. 60%, 70% of the customers top-up digitally, and this was accelerated during the pandemic. So customers moved to the digital world, and a lot of this market was captured by fintechs, wallets, digital banks, and they used top-up to capture clients to win over clients to their base. And in this case, carriers are interested in using the top-up strategy. The fact that the customer has to establish a relationship when they want to top-up their mobile phones to digitize the relationship with the clients. So it's a very strong movement towards bringing customers to white label that is they are branded with the carriers branding. And again, Bemobi is very well positioned. We operate white label channels for different carriers. From the first contract to try to encourage customers to go to the channel to the green light. So we have been working with the operators with the carriers to add intelligence, to have better journeys and to offer better benefits for customers so that we can also grow. So these are 2 elements which are very well structured. It's in the interest of the carriers to make it happen. So it's going to take some time for customers to change their behavior and use these channels, these new forms of payment so that they have a better journey throughout.

We have another question, Pedro from Andre Danielson, which is very similar to Bernardo's. And how long will these customers take -- this new clients take to start generating revenue?

Yes, that has been answered. But again, there are 2 drivers penetrate new geographies of those existing clients and then penetrate new clients so that we can gradually digitize the operations. It's very similar to what we did in telecom. So you have to win new customers and then work with to develop the digital channel. You don't need a new client to grow. There is a gravity there. There is an inertia there. And we are able to serve clients better.