CSU Digital S.A. (CSUD3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to CSU Digital's video conference to discuss the results relating to the third quarter of 2022. This video conference is being recorded and may be replayed from the company's website where the presentation is available for download. [Operator Instructions] We would like to remind you that the content presented will be presented in Portuguese with simultaneous translation into English. For those of you who want to watch and listen to the audio in English, you can choose to do so by pressing on Interpretation on the lower part of the platform. Before proceeding, we clarify that any forward-looking statements are based on beliefs and assumptions on the part of the company's management and on information currently available. Such statements may involve risks and uncertainties and have to do with the future events, which depend on circumstances that may or may not occur. Investors, analysts and journalists should take into account those events relating to the macroeconomic environment, to the industry and to other factors, which may make results materially different to those expressed in such forward-looking statements. Today with us are Mr. Pedro Alvarenga, IRO; and Mr. Guilherme Rocha, CFO, in addition to the IR team. I now would like to turn the floor over to Mr. Alvarenga, who will begin the presentation. You may proceed, sir.

Good morning to all. It's wonderful to be here today again to speak about the results relating to the third quarter of 2022. On the first slide, I would like to highlight that CSU is a Brazilian company, a leading provider of technology for payment means, Banking as a Service, loyalty and rewards and customer experience. We have been around for more than 30 years since the foundation of company in 1992, and we were the first company to work with the major international brands simultaneously. We helped to transform the credit card business in Brazil. And we have brought in different services such as loyalty and customer experience, enabling companies in different segments to operate in this market in a fast manner, with no need to make major investments. This is what led us to be the largest credit card processor in the Latin America. We are seeing a transformation, and we made significant investments in different fronts, in technology, in terms of developing solutions, and we now provide a full service platform, end-to-end, in terms of financial services. We have new products, digital cards, virtual cards, wearables, Pix, credit pix for installments and new fronts, which are now maturing, with initiatives in middle office and Banking as a Service, which are going to come on stream very shortly. In the last year, we worked to change the brand. Our ticket is now CSUD3, and we have worked also on our visual identity and branding to give a clear signal about this new phase of the company. On this slide, I'm going to recap our portfolio as a whole. Given that, as I said, the company has undergone through transformation. So speaking of each one of these initiatives in terms of means of payment. On the left-hand side of the slide, this is under our Pays vertical. We have a full service platform for the operation of cards, and we have added different components relating to digital transactions. In terms of Banking as a Service, you see a pizza graph. This is very close to coming on stream, and we have technology for digital accounts and specific financial services via API or through white label apps for those clients who have not developed this kind of solution and this allows us to offer a complete product. Then loyalty and incentives. This is 100% operational, and we guarantee the infrastructure for the management of loyalty programs with points or cash back. And then on the right-hand side of the slide, you see the Digital Experience vertical, DX. The first part is customer experience, and this is how we have developed support in our operations to serve cards, the card business, which requires services when clients want an upgrade for a card, for example. So the credit card business requires a lot of relationship with the clients, and we ensure that our customers have the means to operate with different fronts. And we are now penetrating middle office and related operations, which has to do with all of this new universe. We know that once this comes on stream, the demand for services, having to do with fraud prevention, exchange and data analysis is going to increase. There is a demand for payment means, and we are structuring the middle office services, and this is going to come on stream shortly. On the next slide, you see maybe our main competence. We live in an environment from a regulatory standpoint, from a political standpoint, nationally and internationally. We are seeing major changes happening in the financial sector. So you have Pix, Pix for installments, open finance. There is huge transformation happening in our market at an incredible speed. Digitization is happening not only means of payment but also in terms of commercial relations between end users and companies. And CSU plays a vital role in terms of ensuring that the technology and operational infrastructure is there to serve our companies, our clients, that is the companies that want to ensure frictionless service to the end users. So our platform today is known in the market as one of the most robust. We meet all the requirements for data protection and security with a high degree of availability as well. This makes us a company that has the attributes that companies look for. We stand out, and this makes us able not only to bring and expand our portfolio but also to capture more and more business from those companies that want to operate in our market. And this can be seen when we think in terms of the clients that we have won this year. 2022 was a very special year. We have improved and increased our portfolio of customers. Our commercial area enabled us to move from 32 to 40 clients, 8 new clients just this year, and in Q3, I would like to highlight our new operations with Heineken. It's one of the largest breweries in the world and Foxbit a very well-established company in the crypto-currency space. This reinforces our positioning and all the gains that we have been capturing. All the technologies that we have implemented are now bearing fruit. And speaking now about each business unit. I would like to say that we made major achievements in the quarter, and we are seeing records in all operational and financial indicators. We have achieved a record number of 34 million units in our platform, 18% above last year. The number of units billed -- of cards billed is now over 20 million, and this has to do with the continuous expansion of our Pays vertical, which is now our strategic priority. Most of the investments made in the last 3 years were made in this front, and we have achieved BRL 83.4 million in net revenue, a 4% expansion or rather 11% expansion relative to the same period last year, a very relevant growth, we are talking about 2 digits. And this is in line with our strategy in terms of accelerating growth in this vertical. Also in operational terms, we have been achieving very expressive targets in the last 12 months. In terms of volume of transactions, we have achieved nearly 850 million transactions, and the TPV is very close to BRL 260 billion in the last 12 months. And of course, we are working on different important fronts in terms of our marketplace. For example, we serve with loyalty, Banking as a Service, means of payment. Today, we have more than 100 partners connected to our marketplace and over 500,000 products, which are available for redemption and cash back. And this has been growing not only in terms of revenue but also in terms of profitability. We have been achieving very expressive numbers. We have over BRL 44 million in gross income, which is a significant growth relative to the same period last year. But what I would like to highlight here is that this is growing faster than the revenue, and this reflects the capture of the gains of efficiency in the digitization of processes and the acceleration of the demand for digital products coming from our clients. On the next slide, I'm going to talk about our digital experience operation. This is a business unit that is changing very fast to enhance the results that we are achieving. It's a very important unit given the synergy with the first vertical in the platform. In the last quarter, we have managed 3.5 million interactions, and most of these interactions, as you will see, happens mostly in a digital way through digitization and self-service solutions. The natural consequence of the digitization of the vertical is extremely important and investors should bear that in mind. We are creating efficiency gains for the production chain. And naturally, our revenue doesn't vary as much because we are replacing less efficient revenue with more efficient revenue and we are having material gains from the point of view of profit and profitability in this operation. So we had BRL 9.2 million in gross income, but our margin has grown by many percentage points when we compare with the same period last year, nearly 2 percentage points of variation, which attests to the importance and the right decision we made in terms of increasing digitization when we speak about digital experience. There has been a major transformation already, but there will be new waves of transformation where we will deepen our relationship with our clients, and we work with their business processes, in terms of data analysis and others, thus guaranteeing the execution of the activities as customers demand. So we are investing to transform this unit in terms of digital tracking. We are going to work not only in the front office, on service, but also we are going to coordinate the business processes of our clients. I'll now turn the floor over to Guilherme, who's going to talk about the consolidated results of the company.

Thank you, Pedro. It's a pleasure to be here in this video conference. And I would like to talk a little bit more about the numbers, the consolidated numbers for both business units. In time, we have had consistent growth. If you have a look at the left-hand side here, I would like to draw your attention to one thing specifically. When we look at the CAGR in the last few years and especially when we look at the growth from 2018, when the company focused on digital transformation more strongly, you can see that the CAGR was in the region of 7% year-on-year. And I would like to highlight the digital transformation process. And this has to do not only with the experience of the end user but it's also something deeply embedded in processes. And when we talk about the efficiency of processes, oftentimes, there is a decrease in costs which is shared with our clients and this makes players more competitive, all those players who are with us. And the impact is that sometimes the variation in the company's revenue does not reflect so well or so accurately the quantum of business that the company has developed in the period. But regardless, we still see growth, a CAGR of 7%. And when we look at the results for this 9 months of 2022 relative to the 9 months of 2021, we can see that there was an expansion in the region of 3.5% and this took us to BRL 400 million in net revenue in the period. When we look at the right-hand side of the graph and compare the growth in Q3 and Q2, the expansion was by 4%, nearly 4%. And something else I would like to highlight is the improvement of pace and the operational results. The mix, the share between the 2 business verticals has changed. So Pays has an increasing share of our business, and this has to do with 2 very relevant aspects. Firstly, strategic direction. So we are focusing on this business division or the business division of payment means and also because transformation in DX happened less fast than in Pays. In DX, we are still focusing on expansion. The fact is that we have a share of revenue for Pays that is in excess of 60% of our revenues. And when we look at this in terms of our bottom line you can see the gains of efficiency that we have captured in time. And this is a key word, efficiency because, in fact, the process of digital transformation changes the life of end users and also brings operational efficiency, which is then translated into very healthy results, a very healthy bottom line. On the left-hand side of the chart, you see that in gross income, EBITDA and net income, you see the variation when we compare 2021 and 2018. There was a huge expansion, 64% in gross income, and then EBITDA and net income as well, over 80% growth. And so this is why we focus so much on efficiency. When we look at the CAGR in that period, we are talking about an 18% growth in gross income and EBITDA and net income as well, growth in excess of 22%. This can be further seen on the right-hand side, where we see the last few quarters, and you see the variation of Q3 2022 to Q3 2021, over 25% in gross income and over 10% in EBITDA and 15% in net income. So it's not only the nominal results but the profitability. If you look at the profitability of 3T versus 2T, net income was nearly 40% relative to 37%, an expansion of 2% in terms of EBITDA and 1.5% in terms of net income. And the result is that we have a very sound cash position with low leverage. And I would like to focus on the right-hand side on the lower part of the graph, generation of cash in the quarter was BRL 35 million, which is a very good position and consistent with the EBITDA of the period, and the net balance is nearly BRL 87 million, net balance in cash. This systematic and robust cash generation results in what you can see on the left-hand side on the upper part of the chart. Net debt and net debt over EBITDA has been dropping and is now close to 0, with 0 leverage. When we make a further comparison and when we talk about net debt, this is in line with IFRS 16, and it includes also the lease contracts. When we isolate that and we take into account only the onerous debt of the company, the company has BRL 70 million in net cash, which reflects consistent results, 13 quarters of record in terms of bottom line. And just to end, if we look at the gross debt, you can see that there is no concentration in the amortization for the debt. It is diluted in time and the amortization schedule is very comfortable when we look at it. This very healthy cash position allows us to maintain our investments. As Pedro said, and now giving you a little bit more color in the last 3 years, we invested over BRL 130 million in technology. And in this year, in the 9 months, today, we have invested over BRL 41 million in technology. And this investment strategy supports the digital transformation of the company. This has been sustained by very strong cash generation, which allows us not only to continue to invest but also reduce total debt and distribute dividends and interest on equity capital. So this is a good return for the shareholders. We have distributed interest over nearly BRL 16 million, BRL 6.5 million in the last quarter in terms of interest on equity capital. So that's a 20% payout. And the company has been distributing income and dividends to 50% -- to the region of 50%. And now moving on to our final remarks, I would like to highlight our history of good results with relevant gains in all the main financial metrics, and this has been going on for 13 quarters in terms of revenue, gross income, EBITDA, net income, the company has been presenting very consistent and robust results. This allows us to have a very sound position in terms of leverage and cash generation, which, in turn, allows us to accelerate investments and support this new business cycle. Also, our balance sheet allows us to focus on different growth strategies, not only in terms of investments, which are more strategic and these are technology activities but also we have room for inorganic growth. We have been also improving our portfolio of products and financial services in a modular and integrated way and to meet our clients' needs and this creates new avenues for growth. Something that I would like to highlight is the company's ability to capture market trends. This is something that we have been doing for a long time and has proven to be driver for the company's commercial strategy, and this is supported by scalability, safety, security of our technology and a proven capacity for executing. You have to identify the trends and deliver to the customers. Also, when we win new clients, we are able to maintain a very good relationship with our clients. We reaffirm our commitment towards our investors to increase return on investments, and we maintain a capital structure, which can support growth and allow us to make substantial distributions in terms of dividends or interest on equity capital. And finally, after a period of instability, volatility, especially in the tech industry, the company is now being traded at 3.8x EV over EBITDA. This is a low multiple, especially when we compare the company to players in Brazil and abroad, which trade at multiples up to 6x. So what we see is that there is a potential upside that can be captured. These are our considerations, our comments, I would like to thank you all again for attending our call, and we can now move to the Q&A session.

[Operator Instructions] Our first question comes from Mr. Matheus Guimarães from XP.

Congratulations for the results. In the last few quarters, there was massive layoffs in startups and in large tech companies. How does this affect you?

Thank you for your question. This is a very relevant question and has a lot to do with how we look at the tech industry, the start-ups, and the industry where we operate, oftentimes the company, sometimes in a mistaken way, is placed within a bucket that includes players with very different behaviors as we made clear. For 13 quarters, we have been presenting consistent results. We are not a case of efficiency. Now we have been efficient for a long time. And we take a lot of pride in terms of our financial management, of our processes and efficient processes, but we base all of our management in efficiency. So this movement we see in different players in the tech industry has a lot to do with those players trying to adapt to a scenario where there is less liquidity, where infinite cash burn is no longer possible. But when you look at CSU, we are in a different position because unlike many in that segment, we have been presenting very robust results with cash generation and not cash burn. EBITDA also is very robust. So if we take this scenario as a whole into account, I think we are in a very comfortable and privileged position. We can take advantage of opportunities that come up because players might not be able to continue to operate in the way they are. They will have to clean their operations, so to speak, which is something that we do regularly and see the results of. We have a net cash position and a very privileged position in terms of having access to capital markets. So we look at this with a lot of attention because opportunities may come up. Pedro, would you like to add anything?

I think this is a very unique moment for CSU. We today have a very large portfolio that meets 100% of the demands of our major clients. Our situation in terms of capital places us in a prominent position and allows us to continue to invest. And you see many of the companies are having to shrink investments. And more than that, there was a lot of recognition. For our infrastructure, we have been operating for over 30 years with a high degree of availability and security. And many clients come to us looking for a partner that can provide secure and reliable operations. This is not just a sale. We are talking about monetary financial transactions. So a sound infrastructure, data protection, availability of the system. Can you imagine, if on Black Friday, the platform crashes, I mean, millions in losses. So what we see is that clients are coming to us, and we can only say that we are going to capture the opportunities that will come up in this kind of scenario. Startups and large companies that made initiatives in the means of payment, they were good because they shook the market and we shook the market as well. But now companies, you will see a segregation between those companies that have a sound position, they're going to be able to consolidate their positions and gain more relevance. And others, unfortunately, we are sure that we made good investments that the return is seen already in the result -- can be seen in the result, and we expect the trend to continue moving forward.

Our next question comes from Mr. [ Victor Kitzman from Small Caps ].

Congratulations for the results. I have 2 questions. I can see that there was a drop in revenue on an annual basis. And then the market is trying to understand whether you are a growth company or a dividend company. How would you like to be seen going forward?

I'll take the first part and you take the second part. Very good question. And this has to do with something that we said before, and I would like to go back to that. DX, I believe you are referring to DX and its revenue. DX because of the characteristics of the services and the sector started the digital transformation a bit later and this process, all this results in efficiency gains. So we have to understand that the variation in revenue oftentimes is not the best way to look at how this business is being managed. Efficiency gains oftentimes depress the top line but increases profitability. So we'll highlight that because it's a process that we see, as you, within that segment in terms of customer experience. The segment of service itself is increasingly more automated and relies less on staff. And oftentimes, we give up revenue whilst capturing more results, quality, efficiency in the process. So this is something that we saw more intensely in Pays, and we are going to see that on DX as well. We believe that this is healthy and is in line with our strategy, with the company's strategy, to focus on more complex processes, where technology plays a more relevant role and a deeper role and this allows us to have more consistent results, more profitability in time. This is what we expect from this process at DX.

And just to add, in terms of being a growth or dividend company, I think the market still perceives the way we are changing and the way we are growing. The company has digitized, has gone digital. So there is a swap of revenue. And we have the type of revenue that is more aligned with the company and in a more sustainable way. So from the point of view of Pays, where we have more digital cards, there are less costs associated with emission, printing of cards, et cetera. And in fact, we now have wearable, digital cards, NFC. It's a completely different world from what we saw before. So this might be a smaller revenue per unit, but with a better margin for both parties. So it's an oxygenation, let's put it like that, of that Pays. So we see growth happening and you look at the operational indicators. Growth has been at 18%, 20%, depending on the metric. But it's this process of replacing and this oxygenation is happening on DX and Pays, and the indicators, the operational and financial indicators, are going to be more aligned. But when we look at the strategy, we made a lot of investment to accelerate investment in Pays, and this happened. It's been growing above 2 digits. It is a relevant growth, consolidated quarter after quarter. And we have many initiatives in place, which are going to influence those indicators. It was a good strategy. Growth is coming. Our CAGR is 7% a year. It's not small at all. But if you isolate the effects, the growth is extremely high, and there's going to be a convergence with the financial indicators, which is going to endorse our growth initiatives. As regards to dividends, I think CSU, as Guilherme said, CSU is efficient. Efficiency has always been embedded in our routine, the discipline of looking at expenses, at costs and try to improve the profitability of our business lines. This is something that is always on our mind. We are going to continue like that. There's a lot of space for us to continue to grow at that pace or even more, whilst maintaining investments and dividends, so that our shareholders are remunerated. We don't see any reason why we should change what we have been doing in terms of dividends unless there is an opportunity in the market, which would warrant us not distributing dividends, but if we can make the investments that we have been making, and we have been investing more than BRL 50 million in the last 3 years, if we can pay out dividends and continue to grow? Why not. There is no reason for us to do things differently. But it is a company that grows strongly, and there is a lot -- there are a lot of opportunities to capture.

[Operator Instructions] Our next question is from Mr. Anderson Wedges.

Congratulations for the results. What are the prospects for maintaining this growth with the new contracts? When do you see the beginning of Banking as a Service as a service that will give revenues? Is it going to be at breakeven?

Speaking in terms of the growth of the results, we have been winning new contracts, 8 only this year, as I said, there is a period in which we have to implement the solutions needed under each contract. Many of them are already generating revenue, but small revenue, but these operations should mature in the next few quarters. There is revenue coming from these new contracts and products and this should gain traction. Then you asked about Banking as a Service. It's at a very interesting stage. We are doing internal tests. The app is installed in the mobile phones or friends and family, we can do transactions between our colleagues and control groups, and we expect that this should come on stream very shortly. I don't like to say when. I wouldn't like to say when. Whenever you are developing a solution, there is a timing for things to happen. We are on track in terms of what we committed to do. I cannot give you any more details, but I think that we will see developments very shortly. On whether it's going to start at breakeven point or not, most of the structure we have for Pays will be used for Banking as a Service because these are converging services. There is an overlap there. So this operation will add revenue, incremental revenue, to what we already have in terms of payment means. So we will start with some profitability in that operation.

[Operator Instructions] Our next question comes from Mr. [ Pene Diaz ].

With the permanence, how can high inflation impact the business units? And when are we going to see the pass-through of inflation to the revenue?

Thank you for your question. I think this is a very pertinent question and when we see high inflation and if this is persistent, this is not good for any business unit or for the economy as a whole. Stability makes the relationship between all the players, more harmonic and with less conflict, be it in terms of like the pass-through of prices or renegotiation of contracts, et cetera. What we see is that we are in a period when inflation seems to be under -- coming to a scenario of greater control. We see that all economic agents have the same view. And generally speaking, CSU's business units are very protected. All of our contracts with our clients include clauses that allow us to pass-through cost inflation and we also have mechanisms to mitigate against impacts on our cost base. And even if we think in terms of our history, whenever there was a wave or an inflationary shock, the company was able to deal with that in a very efficient manner. The scenario that we see in terms of expectation and the most probable scenario is that inflationary pressures, despite the fact that worldwide inflation is still high, here, in Brazil, the Central Bank started to increase the interest rate before all the countries, and we are seeing the Brazilian inflation be at levels that are less worrisome. So I think the history that we have is that we deal well with this type of scenario, be it by preserving our top line or by not having a cost pressure, I think this is what we are going to see. The prospect is positive. But yes, from our point of view, scenario of stability and inflation within the target is good for the industry as a whole, especially when we talk about payments. In terms of the financial sector as a whole, the financial sector can protect itself with a higher or lower impact in terms of defaulting, and I'm thinking here about individuals, but this is an impact that does not have an impact on our business. It has an impact later on. But our view is that the outlook is good for next year, especially with inflation decreasing as we expect.

Our next question comes from Mr. Henrique Vasconcellos from Nord Research.

Congratulations for the results. I have 3 questions. The first one has to do with the EBITDA margin. For DX, there was a drop by -- there was a drop from the 11% to 9%. There was an increase in SG&A by 25%. Can you give us a little bit more color about what happened and what we can expect for that margin going forward? And then speaking of dividends, do you have any share buyback program going forward? And just one last question, if I may. In terms of new clients, can you give us an idea of all the clients, not of this quarter, but of all the quarters if there are more on the Pays or Dx or where are you serving them?

Thank you, Henrique, for your question. I'd like to highlight something here. When we look at the result and it's segregate it by division, we look at gross income, which reflects better from our point of view, the dynamic of the business and the evolution of the business. And this is because when we think of EBITDA per business division, we will necessarily think in terms of the prorating of expenses, which is not a fair criterion and does not necessarily reflect the financial dynamics of a certain business division. So what we see is that, yes, there was an increase in SG&A and a slight increase in marketing expenses, which are in line with our strategy to be more commercial. The team, the commercial team, now is larger, and they are prospecting more clients. We have a large number of prospects as well. So when we look at these 8 new clients and that brings us to 40 clients, when we look at the number of new clients, the number of new clients is significant for our growth in 2022. Pedro mentioned the fact that these prospects have a growing revenue. So SG&A did not increase that much when you think about the greater commercial strength of the company so much so for SG&A. And in terms of marketing, this has to do with the repositioning of the brand. This repositioning crowns a process that has been happening for some time in terms of the company being marked by digitization, and that's why we are now CSUD3. These 2 factors had an impact on EBITDA. And because the bottom line generated by DX is a bit smaller, there is a distortion in EBITDA. But when you look at gross income, there is no distortion. It's not skewed. That's why we focus more, especially when we separate the results per business division, we focus more on gross income rather than on EBITDA. As regards to the second part of the question, I'm going to turn it over to Pedro.

In terms of buyback, we have not been buying back shares. Some of our executives received shares as part of their remuneration. And we see other opportunities for using this cash that we have available by investing the cash rather than buying back shares. You had a third part of the question. It was about new clients. We have confidentiality agreement, so we cannot tell you what kind of products our clients are using. So I cannot give you any more details. But most of the new clients are in the Pays division. Some clients have hired DX and Pays and some have hired only DX, but most of them have hired us to work in their Pays solutions.

The conference call of CSU Digital is now ended. Thank you all for participating, and have a good day.

Thank you all again for attending. It was a pleasure to be able to explain a little bit more about our performance, our history and talk about the outlook for the future. I hope we have been able to understand a little bit more about the company. And I would like to make our IR team available to clarify any doubts or questions you might have. Thank you very much.

Thank you very much. Good afternoon to all. Thanks for attending our video conference. [Statements in English on this transcript were spoken by an interpreter present on the live call.]