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

Good morning, and welcome to the conference call to disclose the results of Bemobi for Q1 2023. I'm Nicholas, Director of IR; and today are with us Pedro Ripper, CEO; Andre Veloso, CFO; and Joao Stricker, our VP for Operations in Brazil and Latam. This presentation is being recorded and all participants will be able to listen to us and follow the presentation. You can also access the simultaneous translation. For those who don't speak Portuguese, we have an English channel that can be used by pressing the interpretation button on the bottom right corner of your screen and choose the option you wish. I would like to highlight that after the presentation, we will go for the question-and-answer session. And now I move back to Portuguese. Soon after the presentation, we will begin a Q&A session exclusive for analysts and investors. Instructions to make your questions will be provided later. Before proceeding, and as we usually do, we would like to clarify that any forward-looking statements that may be made today relating to Bemobi's business outlook, projections, operational and financial targets are nearly beliefs and assumptions on the part of the company's management and are based on information currently available. They involve risks, uncertainties and assumptions because they refer to future events and therefore, depend on 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 and conduct results which differ materially from those expressed in such forward-looking statements. I now turn the floor over to Pedro Ripper.

Good morning to all. Thank you to the investors and analysts who follow us. We are going to give you the highlights of Q1 and speak about our view of Q1. I'd like to make a brief introduction. And we are a technology company that has a B2B2C model, and we focus on digital journeys with an emphasis on payments, micro finance and digital subscriptions. We have been working with telcos for a long time, and we have been penetrating the financial sector and utilities as well. Historically, we built 4 solution lines. And this is digital subscriptions that we started 15 years ago then digital payments, which has gained traction after an acquisition we made, then microfinancing platform as a Service. This matrix is very simple, but illustrates what I said in my introduction. Originally, we became a B2B solution -- B2B2C solution provider by partnering with telecom providers in Brazil and throughout the world. Today, we have 100 carriers that we work with, and we provide several solutions as B2B or B2B2C, which we built around the telecom industry. More recently, we saw an opportunity to expand and to adapt or revamp some of these solutions and adapt them to other industries, especially utilities. From the point of view of indicators that we share with you, we continue to believe that global exposure is extremely important for us. In terms of growth, we operate in 49 countries now. The geographic expansion is based on partnerships with carriers. And in the mid- to long term, we are going to use our footprint in these countries to expand into other industries. From the point of view of partners, we have relationships with large companies, and this allows us to grow. We have 112 partners, and it allows us not only to grow but also to diversify and this gives us resilience. We have also added one new partner, but we have launched more services in Q1, and we have an addressable user base, which is extremely large. In terms of our 4 types of solutions, we have now one new partner, Intel, and we have one new partner as well, BBVA and the micro finance, specifically in credit scoring. As you remember, this is a relatively new business line. It's been going on for 1, 1.5 years, and it's been growing extremely fast. And we use data that come from the behavior of customers in telco. And we then draw a credit profile of those clients who are not into the bank system. This offering grew in the fintech area, and we now see traditional banks such as BBVA, who see value in this alternative data to create a more effective score for this segment of the population. We have no new partners in operation in Q1 in digital payment, although there are new contracts, and I'm going to talk about it later. And in terms of digital payments, remember that we made the bet that goes beyond payments, but we developed a set of solutions for payments to penetrate a new market in addition to the telco and to the banking sector, we made a bet on utilities, and we focused on the major distributors, on the major concessioners distributing energy. I would like to recap what we did here. We prioritize our efforts first, in the Brazilian market. Major distributors today are extremely concentrated, and this took place after the privatization. There are 6 major private groups, and they serve 75% of the market. So in terms of TPV or the total value transactions by these groups, if we do a proxy in terms of the number of households, this is a similar number. Then we have a second group, which is interesting as well, but we are showing it separately. And these are companies that are still controlled by the Brazilian government, and they have a lower penetration. We began to work with this first group, but there is potential also in the second group. When we look at this market as a whole, the numbers are huge, BRL 250 billion in terms of transaction value. We operate in the residential segment. We are a B2B2C rather than a B2B. So the residential segment is the one to which we can offer better solutions given our portfolio. So we focus on delinquent customers, which are a subset of this huge set of residential customers, BRL 75 billion, at a certain point are overdue. So the digital payment journeys, which we developed for telcos and payment solutions, which are connected with these digital journeys, they were redesigned to enable us to work with this segment. And we have some promising news to share with you. Until the last quarter, we had made achievements in this segment, live and scaling that is contracts that have been signed and for which we have implemented the first phase and they are now organically growing quarter-on-quarter. In this initial snapshot, we had a first partnership with Energisa to penetrate the segment of payments with defaulting clients. And then the regular clients. And we had also shared with you that we had 2 small regions of Equatorial, one in the north and a region in the state of Rio Grande do Sul. And therefore, we had 13 concessioners that allowed us to penetrate 13% of the initial market that I showed you. So we were able to validate many of our investment thesis, the economics, the potential for growth. We did that in Q1. And this is what we have communicated to you. But the news, the good news is that we have won new deals in the last 90 days. Equatorial because of the initial success of this partnership carried out 2 bids, one specifically for a concession that they bought from another group. And in all the other regions, 4 major regions served by Equatorial. They went through a second bidding process. And Bemobi was awarded as the winner, and Bemobi is now going to operate in 100% of the regions operated by Equatorial and we are going to replicate the solutions we developed for the first 2 regions. This is very promising. And then now Energisa, the largest group in Brazil in terms of TPV, also carried out a bidding process. We won nearly 40% of the bids. And our expectation is that we may grow this percentage next year. And last but not least, we have signed a commercial agreement. We have had the green light, but we have another major group in terms of market percentage, and we have had the green light from them. So we are beginning to implement projects within this large group. So when we look at this and when we look at our target customers, this allows us to draw some conclusions. So although it is a small-scale business as we compare it to our business as a whole, the fees developed a year ago is becoming more concrete. We are seeing margins, we are seeing results in line of our expectations. Then we see that what we propose solves the problems that the market has. That seems to be the case. We have been able to find a solution to reduce defaulting to digitize the relationships of these large clients with the customers. So this ratifies our ideas. And on a more tactical level, it creates a growth engine that allows us not only to diversify our business, which is extremely important in B2B2C. But this growth engine will be extremely important as we head towards the end of the year, and this ramps up and gain scale. And in 2024, we may double or even triple the business volume of this year. So this is an indicator, and this is a leading indicator of the revenue and new business. And then the fact that we are able to penetrate a new sector by leveraging the solutions that we already had allows us to think in terms of scaling up our operations. That means we are able to grow revenue and contribution margin without necessarily increasing our fixed costs. We can build on the platforms and the teams. Of course, we will have to strengthen the teams, but there is an economy of scale and scope that is enabled by this achievement. So this was the highlight of the quarter for us. And then in terms of B2B2C, we all share 3 indicators to try to give you a little bit more color about what happens with the end user. We are going to give you some more visibility here, some more granularity. There was an external effect, the effect of Oi. But before going into Oi, I would like to highlight these 3 indicators. The number of subscribers at the end of the quarter was, on average, 34 million subscribers, slight reduction relative to Q1 2022. The positive highlight was in the micro finance market through granting of microcredit for voice, data and top-up and specialty scoring, it grew 11% relative to Q1 2022. And then we had a reduction by 9% year-on-year on the digital payment TPV. So where do these figures come from? We have to think here about the gradual phasing out of oil from the Brazilian market and the assets have been transferred to the 3 buyers, the 3 or the large telcos TIM, Claro and Vivo. So for us to see what happened here, we have Oi subscribers who left the base as Oi Movel no longer exists. And we kept a part of this. So there is a slightly negative effect. The same happened in TPV, Oi trends towards 0, in Q2, this is going to be 0. And part of this value is recaptured by our operations with other carriers. So there is a net negative effect, which is gradually offset by the organic growth that we see in the other three carriers. I'm not giving formal guidance, but I'm going to give you an indication of what we see. TPV here in Q2 indicates growth in absolute values vis-a-vis Q1. And in a scenario where Oi is virtually 0, the other carriers continue to grow at a very healthy rate. We will talk a little bit more when we talk about revenue. So with this, organic growth year-on-year has been flattened. And despite that, the growth was 1.5%. If you look at the breakdown per region and per family of services, you see that there is a consistency between Q1 2023 and Q1 2022. There was a small retraction in payments. But if you exclude Oi, this has been growing more than the other business units and microfinance has been growing its share. In terms of International in Brazil, it's stable, but International could have grown a little bit more if we normalize it for the Oi effect, the effect there is felt for approximately a year. When we look at the top line, this illustrates what I've tried to explain before. We see nonrecurring effects that we want to make very clear. We had the FX impact, which is small is going to exist and may favor for us because the currencies we deal with may appreciate or depreciate against the Real, there was an adverse effect of BRL 0.5 million year-on-year. This is the second quarter where the effect of the war in Ukraine will have an impact. January, February and March last year -- in last year, Ukraine was not in war, but this effect is going to disappear in time. In the comparison year-on-year, the negative highlight is offset by organic growth, which was quite robust. This is a semester of transition. When we look year-on-year, we see a negative effect by BRL 9.5 million. And I'll explain how we interpret that. This is the net effect that is part of the revenue of Oi, which was larger than that has disappeared. But part of this revenue comes now from the services we provide to the other carriers. And that gives us this net effect of BRL 9.5 million. So this allows you to see the organic growth of the business by excluding those effects, which are external and nonrecurring. If we do that, the growth was actually 12%. And at the end of Q1, our revenue was BRL 137 million. So what can we expect for the next few quarters? The quarter-on-quarter effect of Oi, and let's look at Q2. We are halfway through, the absolute effect quarter-on-quarter, 19%, 95% have been incorporated in Q1 given that the transition has already happened. So when we compare quarter-on-quarter, the impact of Oi is going to be very small. Year-on-year, this effect is still substantial because in Q1 and Q2 Oi was too very relevant for us. So this allows you to understand that we still have sound organic growth. We are growing in the other carriers. And the new growth drivers in utilities are doing well as well. So for some periods, you will see that year-on-year. This is going to be seen whereas in Q3, you're going to see a 0 effect of Oi in absolute values. We will continue to show you that. And then at a certain point, these 2 variables are going to disappear, and you will be able to see the organic growth of the company. And with this, I turn the floor over to our CFO, Andre Veloso, who is going to explain the lines below the top line.

Thank you, Pedro. Good morning to all. I think it's important to highlight the benefits brought by the resilience and diversification of our business model. As you will see, these characteristics allow us to mitigate against these external effects mentioned by Pedro. And one of the highlights of the quarter was the improvement in our relative profitability indicators. And I'll start on the left-hand side, the gross margin in the first quarter of this year, it was over BRL 100 million with an expansion of slightly more than 300 base points. And this was because of efficiency gains, especially in the payments vertical. And when we look at the OpEx chart, you see an increase by 8% relative to Q1 2022. And this has to do with the personnel and staff because in addition to the effect of the collective bargaining, we brought more people in for products and utilities to deal and drive all the initiatives mentioned by Pedro. So when we look at adjusted EBITDA , it was over BRL 43.5 million in the quarter, a 3% growth relative to Q1 2022, with a small growth in the relative margin of 0.5%. We believe that as the commercial initiatives bear fruit, as we have said in the last few calls, this margin should expand in the next quarters, given the operational leverage of our business. Moving on to the next slide. You see the adjusted net income. And if we exclude the repurchase of swap, which has had no definitive effect on our results. We see a growth by 15% and adjusted net income was BRL 22 million in the quarter, and this was because of the better operational results and the better financial results as well. When we look at the proxy for cash generation using adjusted EBITDA less CapEx. This is slightly lower than the value you saw a year ago but that includes the one-off effect of CapEx for the setting up of our offices in Rio and Sao Paulo, and that was for BRL 3 million. And these are one-off effects. So they are an increase relative to last year. And therefore, the conversion indicator was above 74%. And finally, when we look at our cash position, at March 31, 2023. This was BRL 575 million, a slight reduction relative to the end of 2022. And this has to do with 2 one-off effects. The first one has to do with working capital. We used working capital above what we normally saw in this -- in our operation. And within this EUR 30 million, EUR 18 million had to do with the closing of the operation of Oi. 6 of these million will be recovered by the beginning of the second semester of this year. And the second effect has to do with taxes. We paid taxes when we redeemed financial investments. So basically, these 2 effects explain the variation in terms of our cash position. As Pedro said, just as we saw last year, especially in the second semester, we should see strong cash generation, which will place in a very good -- place us in a very good position for us to focus actively on M&A. Thank you so much for attending our conference call. And I'll now turn the floor back to Pedro.

Before moving to the last slide, I just wanted to stress 2 topics in terms of the outlook. This one-off effect in terms of working capital and cash conversion. When we look at the quarter -- at this quarter, we see that cash conversion is slightly better than historical levels. And just to give you a bit of predictability, these one-off effects were really one-off. And in terms of profitability, our initiatives to make adjustments to optimize costs, and if we exclude this one-off in terms of the working capital, we see that the metrics will be consistent with what we've seen before. We are in a quarter that is a quarter of transition, the B2B2C model has many advantages as it allows us to grow in an asset-light way and generate cash, and this allows us to have strong and healthy profitability. But on the other hand, we are linked to the destiny of our partners, and we mitigate against that by having many partners from preferably from different industries, and this allows us to be resilient. The other way to do it is to provide a cyclic solutions, which create a natural hedge between them. And not coincidentally, this has been a priority since the IPO, that is slightly over 2 years ago. The mergers and acquisitions also were made to ensure that. And when we think about this strategy, it allows us to mitigate against the discontinuity of a partner. We were able to have growth, have profitability, although a historic partner was undergoing a very strong transition. For this B2B2C model to be promising, we will continue to look for balancing our solutions, our partnerships, looking for synergy, so that we can reduce our exposure to a single partner or a single line of business. So this process we're going through now illustrates why the diversification is so important. And we continued very optimistic about the company because we saw a 12% growth if we exclude those effects that creates a lot of noise. The second message is that it's not quite obvious that a company that specialized in a major industry should be able to transfer its solutions to new industries. But we are looking for large clients and this will give color and context to our ability. And this opens many avenues ahead of us. We can take this to different countries, and we can also grow in different industries. So this is also a major highlight for us that approves our assumptions and thesis relative to reality. And then the third highlight is that we have always been very disciplined in terms of contribution margin, expenses and costs. And for some time now, we have been saying that we wouldn't be very aggressive in terms of acquisitions. But that as we gain comfort, we could optimize costs, and this has been happening. We will see this in the next few quarters in terms of maintaining and improving profitability in percentage terms of the business that we have and the new business we engage in. And then we had the IPO 2 years ago. We have recovered our cash position, and it's now very close to the level we had when we did the IPO, but we now have a company that is twice the size and the company is much more diversified, which is a very important indicator in terms of B2B2C because it ensures resilience. Two years ago, we had a greater exposure to a certain industry, whereas today, we have doubled in size, but we have a smaller exposure to risk, and we have a comfortable cash position for us to continue to grow organically, and that is a very important driver of growth. We are persuaded that we can venture in new industries and that we can have the opportunity to allocate capital in good M&As to maintain the economy in terms of scope and to allow us to grow. And now, we are going to move to the Q&A session.

[Operator Instructions] We have Bernardo Guttmann from XP, the floor is yours. Thank you very much.

Good morning, Pedro, Andre, Stricker, Nicholas. I have 2 questions. The first one has to do with utilities. You are moving fast from a commercial point of view, you are becoming relevant for the utilities industry. What were the major lessons learned? What is the kind of acceptance of your products? What about the user experience? Is the adoption curve in line with your expectations? And then in the presentation, it was very clear that this segment should begin to make a bigger contribution towards the end of this year and in 2024. So what are the avenues of growth in 2024? What is the relevance of the utilities sector in terms of the delta growth, so how transformational can this industry be given the size of this market, which is bigger than the telecom actually.

Thank you for your question. It's a topic that requires a lot of our energy. I'm going to tell you a little bit about what we have done and how we expect this to move forward. There are several opportunities once you start to work with customers, whether they are defaulting or nondefaulting and you want to push them to a digital journey. We focused initially on the purely digital channels that is website or the utilities app, and we focused on delinquent customers. We are now starting to have some solutions for those nondelinquent customers and also other channels, for example, for utilities, you have the negotiator and the agent who, in a way, has to negotiate with delinquent customers and has to cut the power supply. So we have now solutions for that as well. We have a digital solution on web, and then we have this smart POS that gives a chance to the customer to pay the accounts and the balance in installments, so as to avoid the cutting of power. We started with the digital part and the adoption curve has been in line with our expectations. In those concessioners where we operate, we can also work with different channels, and we can also offer different solutions. So we can grow in different dimensions by working with new concessioners. So you increase your addressable market. And as you implement these solutions, you grow. This is very much what we did with the telecom. We would sell, top-up or digital plan. And then as we gain access to channels, we gained traction. So yes, the adoption curve is in line with our expectation. We were extremely realistic. It is a gradual process with its peculiarities, these are regulated industries. They have their own characteristics. The learning curve was very steep. But looking ahead, and of course, things may change. We believe that this in 2 or 3 years should grow as much as our telecom payment business in Brazil. Of course, the telecom business can grow on its own. But in terms of the curve, 3 years, telecom grew in 8 to 9 years. If you look at the history of M4U to have this kind of scale. But if we can do the same in 2 or 3 years, that would be great. But I think it is possible in 2 or 3 years to have this business grow. In theory, the utilities business should be greater because the total TPV is a lot bigger, but I want to be realistic. It takes years to use the channels, to gain the trust and so on, omnichannel, 360. We know a lot about this in telecom, but we're just starting in utilities. So I just want to set your expectations in terms of timing, but in 2024, we will see a growth, maybe not in absolute numbers in revenue, but in terms of the delta growth.

Thank you, Pedro. If I could follow that question up just to make sure I understood. So is this your main growth lever today?

At Bemobi Brazil, it is the bigger greenfield growth leverage. And why do I say greenfield? The second biggest leverage, which is overshadowed by the migration of Oi is that the payments business is growing. We have the negative vector of Oi, BRL 9 million year-on-year. So this overshadows an organic growth that is happening. But when we offset everything, you will see that the utilities are going to grow more. In terms of percentage, it's going to be huge because we start with a lower base, but the telecom business in payments when we exclude the Oi effect, the value will be bigger than utilities in the short term because the basis is bigger. And to be very honest about it and clear, the growth internationally came from digital subscriptions. So we still have to focus on the execution for us to take some of the new solutions, especially microfinance, abroad in a more consistent manner. If I had to summarize, I would say that we have three growth engines. One is utilities, which we have talked about, payments in Brazil, in telecom, and we still have the impact of the Oi operation. And then we have international expansion, which in fact has not happened. I'm being cautiously optimistic. I think it is coming, but there is a challenge in terms of execution that has to be addressed. Joao, would you have anything to add?

No, no, I totally agree with you. Totally agree.