Neoway Tecnologia Integrada Assessoria e Negócios S.A. (B3SA3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the audio conference call to discuss B3's acquisition of Neoway. [Operator Instructions] As a reminder, this conference is being recorded and broadcast live via webcast. The replay will be available after the event is concluded. I would now like to turn the conference over to Mr. Gilson Finkelsztain, B3's Chief Executive Officer; Daniel Sonder, B3's Chief Financial, Corporate and Investor Relations Officer; and Carlos Eduardo Monguilhott, Neoway's Chief Executive Officer. Please go ahead.

Good morning. This is Gilson here. Welcome, everybody. I think we are very proud and excited to announce a relevant transaction for B3 today. I think we are -- I think since 2017, we have been working to build this great company. And today, I think is an important day that we announce the acquisition of Neoway, a company which is a benchmark in big data and analytics. As we have been saying, this acquisition is part of our strategy to accelerate innovation and growth in areas complementary to our core businesses, consolidating our position, B3's position in the data and analytics market. Our appetite to expand beyond our core business was articulated in '20 from -- in the beginning of 2019 when we did our first and -- we did our first discussion about the post-merger strategic planning. And since then, we have made a lot of investments organically, mainly some inorganically as well, expansions beyond and very close to our core business. I think the main -- the most important one was the continuous development of our core new products, in line with the development of the capital markets in Brazil. But we also invested in businesses such as insurance, insurance registration, in line with the new regulation from SUSEP. Receivables, credit card receivables and -- that we expect to launch very soon. Energy as well as trading screens, we've made a small acquisition of a company called BLK in 2018. And services for bank's financing with the full acquisition of Portal de Documentos. All that, not to mention the -- well, in line with the huge growth of our core businesses, as I mentioned, we continue to develop several new products in the traditional listed segments and OTC. Earlier this year, we have also taken an opportunity -- an important step beyond our core business in our partnership with TOTVS and the creation of Dimensa, which is a company that offers technological solutions for financial markets in Software-as-a-Service products. Now, today, in the transaction with Neoway, we are very certain that we have found a great partner with an exceptional team to significantly expand the presence in the data businesses and bring more innovation and growth to B3. I think this data and analytics market is one of the fastest growing in the technology -- in the tech sector, driven by demand from most diverse sectors for products that support its decision making. Data and analytics products are also a growing source of revenue for stock exchanges around the world. We have seen this in the last 10 years in most of the developed markets. And we believe that this acquisition is highly strategic to us as it brings the know-how to explore this market potential even further and much more quickly than our competitors abroad. I think our main goal in the data and analytics business is that to build capabilities in technology and business over time, whether organically or through partnerships, to allow us to deliver different products and value-added solutions to customers from many industries, not only the financial market, but also from any other business lines through, I mean, a flexible platform that can be easily accessed by our customers. Let me move to Slide 4. I think basically, the common business vision that unites Neoway and B3 is the desire to create value for clients, binding on one hand, the exclusive data that only B3 has about capital, credit, investment markets with many other data sources which Neoway has specialized in capturing, using Neoway's state-of-the-art technology and its ability to transform data into products. We believe that there are our main strategic pillars that motivated the transaction with Neoway. First of all, the attractiveness of the data and analytics industry in Brazil, as I mentioned before, a relevant market of more than BRL 4 billion with a high growth potential for the coming years. This acquisition also brings unique complementary capabilities to B3 in different dimensions, platform, people and also brings to B3 entirely new products and services structured based on big data and artificial intelligence. I think among the products, comprehensive search tools, management and flow of leads, distribution of opportunities in maps and dashboards for target market and competition analysis. Finally, Neoway enables us to anticipate our road map accelerating new product launches and potentially new segments on this business. Moving to Slide 5. Among the capabilities acquired in the transaction, Neoway brings to B3 a very high-quality platform, very difficult to replicate them, with an excellent perception of quality that has been developed and implemented in the last 8 years. Secondly, B3, I think, brings into its ecosystem an agile culture of innovation, customer focus and versatility in solutions. Thirdly, I think we will be able to severely anticipate product launches and new product developments. And also, finally, the transaction will leverage the strategic advantages of companies enhancing the market positioning and growth of both businesses. It brings to B3 Neoway's expert strategic advantage in data, allowing it to offer better and more robust solutions to both clients. It adds value to Neoway's solutions with the expansion of data sources, including data from capital markets, as I have said before, investments, vehicle financing, mortgage and many others that B3 has access to. It will allow also B3 to serve a much wider range of industries with these new products and new services that we will be developing together. All these, obviously, will continue to be based on the pillars that are part of both companies' culture and strategic positioning, the operational robustness, resilience and compliance with LGPD, and also protection of data privacy. I want also to introduce Kadu. Kadu is the CEO of Neoway. We are very happy to having you joining us today here Kadu to B3's family, obviously, subject to the approvals. But you, please -- I think Kadu will get into more details about Neoway's business and the market in which it operates as well as introducing the team and the strategy there. Welcome, Kadu.

Thank you, Gilson. Good morning, everyone. Thank you for being here. I'm going to go over Slide #6 or Slide #7. Neoway was founded in 2002. Neoway is one of the largest data analytics and artificial intelligence companies in Latin America. Our main platform was launched in 2012. It's basically a data core platform that serves 5 product verticals within 20 industries in the market. Here, you'll see some of the leadership. Unfortunately, this slide wasn't big enough to accommodate everyone that's committed to the project. And along with the few people that you see here, we had 450 employees in Sao Paulo and Florianópolis mainly composed of a young, diverse and highly motivated team, with a high density of data engineers. As I said, Neoway's data core platform, more than 3,000 data sources that's served to our customers through a Platform-as-a-Service subscription. We have -- on Slide #8, we have more than 500 customers. You'll see the revenue breakdown, 60% of sales and marketing and then what we call the stack of loss prevention products, risk and compliance, legal analysis, fraud prevention and credit management, composing around 40% of our revenues. Slide #9 is -- Gilson mentioned a little bit the high market potential and high penetrated data market in Brazil. We have a total addressable market of around BRL 4 billion and more than 36,000 companies for us to explore and gain space and consolidate this market. Moving to Slide #10 -- or sorry, Slide number -- that's right, Slide #10. I will -- with everything I said, it's up to Gilson to move on with the presentation, talk about the clear opportunities to be captured. I'll move on to you, Gilson.

Let's read together. I think one of the main drivers of the transaction is that we believe we can do much more rather than separately. So I think the idea we want to emphasize, the 2 aspects. First, I was mentioning we will be accelerating new product launches and revenue through an efficient platform that has already been tested and approved by Neoway clients. And this is particularly explained by B3's exclusive data and Neoway's experience in creating, testing and monetizing products that are using their platforms. Also, the strength of the B3 name and the expansion of the product portfolio can contribute to increase the prospection of -- for new clients, new customers, reduce churn and also expand opportunities for upsell and increase wallet share -- share of wallet of current clients. So I think the idea is summarized in this slide, increasing client retention, client penetration, development of products and accelerating Neoway plans to grow. I think Daniel will talk about the financial aspect of this acquisition, and then we move to the Q&A.

Yes. Hi, everyone. I just wanted to wrap up the presentation here by mentioning that this is a 100% cash acquisition of a total amount of BRL 1.8 billion. As you have seen from our previous statements and recent financings, we have ample cash in hand to finance this transaction. This is a transaction that pre-synergies has an implied multiple of 9.5x revenue for 2022. The key senior staff of Neoway has committed to stay on board and lead this new phase of the company alongside B3 for the next 5 years, and we're very excited about that. We wanted to thank everyone in the team for their commitment, for their understanding of our strategy and the several common points that we have in terms of culture and where we want to take this. We also have committed to invest up to BRL 200 million, additionally, in Neoway over the next 5 years. We think that's a commitment that will help support the strategy, support the team and make sure that we can capture all the benefits that we envision for this transaction. The transaction is subject to an EGM, an extraordinary general meeting of the shareholders of B3, which our Board will be calling in the next few days. This is the necessary step according to Brazilian corporate law. And we also have the customary conditions precedent for closing, which include, among other, the approval of our regulator, the CVM, and the antitrust body of Brazil, CADE. So we're very happy about this day. I want to salute the entire B3 team who worked very hard on this from several different business areas and support functions in the company and also thank the Neoway team for their trust for wanting to be partners with us and for believing in the amazing project that we have ahead. So with that, I'll stop, and we can take your questions, please.

[Operator Instructions] Our first question comes from Mr. Tito Labarta with Goldman Sachs. [Operator Instructions] Our next question comes from Marcelo Telles with Credit Suisse.

I have 2 questions. If you -- looking at the acquisition, I think definitely there is a sort of, like, departure of your, like, core business, right, with the acquisition of Neoway, considering that 50% of the revenues that's generated by outside, let's say, the financial institution space. So can you be a bit more specific on what sort of products and cross-sell opportunities you think this business have with your existing business? And how can you leverage more also the financial institutions side of the business within Neoway? So I think we'll be interested to understand that. And the second question regarding valuation, you're paying a multiple of 9.5x EV to sales 2022, and you mentioned this pre-synergies. I understand from looking in 2020 financials, I think the company had a net loss in 2020 of about BRL 19 million, 1-9. And if you can talk a little bit what sort of synergies we can expect if there is -- if that business you think it can turn into -- be more profitable? I understand maybe there's some R&D expenses probably impacting some of the earnings as well. So if you could help us go through kind of, like, the economics and the synergies potential going forward, that would be great.

Thank you, Marcelo. I will start and ask Kadu's help on the cross-sell opportunities. But basically, Marcelo, I think our strategy of growth is really -- has been really -- we have been very clear that we believe that we wanted to accelerate the growth in data and analytics products. We believe that there is a new growing market that we will be able to penetrate in the coming years. I think we clearly have -- as we've shown, Neoway's main market share is in sales and marketing, of course, in different industries, part of those are related to the financial industry. And of course, those are the most clear cross-sell opportunities when we speak about the financial industry, the insurance industry, the idea of providing clients, the combination of data that we nowadays do not dispose to Neoway in generating new cross-sell opportunities and enhancing existing products. But clearly, we believe that the credit segment is another -- has another enormous potential as well as the compliance business line that is also the second biggest revenue generator from Neoway. And beyond leveraging, I think, the -- let's say, the financial institutions, we have been seeing a very dynamic change in the number and the different new players on the financial markets in Brazil. So clearly, due to the existing regulation, B3 has been in touch with many of those new players that also can be cross-selled through -- I mean, part of -- part to part, Neoway to B3 and B3 to Neoway. And I think this is the, let's say, the most obvious synergy we have. But we will -- I think this is part of our effort in the coming months to really leverage platforms. We -- on top of the 5 business lines that Neoway has, we might evaluate if we have new business lines and segments to explore the existing data businesses that B3 support. Kadu, if you can compliment?

Yes, Marcelo, thank you for the question. Gilson framed it well. Close to 50% of our sales comes from upselling and cross-selling. If you look at the revenue share in which we have 4% coming from credit management, 1% from fraud, 4% from legal analysis and 31% from risk and compliance. Our ability to expand within the customers by creating new products within those product lines is unbelievably great. We have -- we are known as being trusted advisers for our customers. And so there's a clear ability for the 2 companies to increase Neoway's position within already our customer base for those segments that have low revenue penetration within the company.

And moving to your question number 2, I think if we do have cost synergies or about the potential positive EBITDA. Daniel, can you comment on that?

Yes. Marcelo, thank you. So Neoway is a high-growth company. We really believe in additional opportunities for it in its existing business. So as Kadu was articulating, they still have a lot of room to do more of what they already do. And we believe that with the power of B3's committing its brand and our alignment, this will certainly be even easier to accomplish. But obviously, they have a very successful track record of having built an incredible growth trajectory thus far. So we are very confident on the growth prospects of the business as it is, which is what supported the valuation analysis that we did. We also think there are, indeed, synergy opportunities. And as my colleagues just described, we have our own internal studies on that. We are not ready to share those at this point. We are still going to do significant work with the teams on both sides, obviously, respecting the constraints of the regulatory approvals that we still need to wait for. But after we can work together as a team, we'll certainly explore those revenue opportunities. So we believe that the company is in a very, very strong position to generate positive financial results over time. But also importantly is the fact that it really unleashes or unlocks some of the ideas that we've been having at B3 how to best use our own internal data and analytics assets and how to turn that into product. So we think it's a very nice fit that with time, we'll most certainly return the investment that we're making right now.

If you allow me, just to follow up one question now regarding the retention of 5 years. I understand I think the acquisition is being paid in cash. So is there kind of installments in terms of payment, all happens at the same time. So how is the 5-year lock or retention being guaranteed?

Right. So the transaction will be paid fully in cash upon closing to the selling shareholders of the company, which include a number of investors and to a very limited extent, some of the current executives and leaders of the company. So there will be a cash payment that will be obviously, as well, accounts and other mechanisms that are traditional to this structure. In addition to that, we have on both sides made commitments to stay -- the team to stay on and lead the company. And with that, we have traditional long-term incentive packages and retention packages, which ensure that everyone is aligned and motivated to continue to drive the business forward. So that's the formula. There's no payment in installments or deferred payments of the purchase price but rather a one-off payment to most of the financial investors that were the shareholders of this company and are complemented with an additional retention package for the team.

Our next question comes from Tito Labarta with Goldman Sachs.

But just, I guess, one follow-up question in terms of the revenue growth outlook. You mentioned growing revenue pretty quickly. Any color you can give on how the revenues have been growing and how they could continue to go forward or another way to think of it is roughly around 2% of your revenues today, how much of your revenues could this contribute over time? Just the revenue specifics, just kind of general color on some of that revenue growth trajectory?

Tito, unfortunately, we could not hear you well. Not sure -- can you maybe repeat it louder? We are not hearing you well from the room here?

Sure. I'll try to repeat it louder. Sorry about that. I think I have a bad connection. But just any color you can give on the revenue growth outlook or either how the revenues have been growing the last few years and how they might grow going forward or another way to think of it, like, what percent of revenues could eventually come from Neoway for B3?

So maybe Kadu can talk about growth from here -- from the beginning until now.

Yes, we're looking at a company that is on average, looking at the commercial business growing at 30% rate on the commercial business.

Yes. And going forward, Tito, again, we're now going to go into the planning phase of this. We obviously have some estimates. We've been provided with the business plans of the company, as is customary in this type of transactions, but now we're going to drill it further and also add our own expectations for what the revenue synergies might be from the transaction. So as you are familiar with us, we don't typically give guidance for our revenues going forward. But as soon as we have a little bit more color on what the opportunities are and how to try to get our arms around it, we'll share with the investors.

Our next question comes from Ian White with Autonomous Research.

Just 3 questions from me, please. First of all, on the financials, it looks to me like Neoway's revenue may have declined in 2020. I just wondered what has caused the step change towards significant growth that's embedded within your guidance for 2022 or if 2020 was kind of the exceptional year? If you can just kind of give me some color around that, please, that would be really helpful. Secondly, just on the deal process. I'm interested if you could just explain a bit about B3 came to be involved in the discussions to acquire Neoway originally. Were the existing owners looking to sell? For example, was it a competitive auction process for the business? Any color you can give around that. And just finally, can you help us to understand the BRL 1.8 billion valuation for the business. Are there any sort of kind of return on capital targets or reference to listed peers, for example, that helped to inform that, that that was a fair valuation for the company, please?

Ian, this is Kadu, speaking. I'll take the first question. Last year, we actually grew the commercial business, the private sector business, by 12%. Obviously, the pandemic was something that affected the business, but we decreased significantly our share of the public sector. When you look at this year already, we're growing at close to 30% of the commercial business, and also not increasing the public sector accounts. So pandemic plus focus on the private business was -- were the reasons for last year's different growth.

So, Ian, on the -- I mean we have been clients from Neoway since 2014. Always been impressed with their capabilities of supporting data and with their platforms as well as based on feedbacks -- positive feedbacks from many of our clients as well that have shared with us the good experience they had with their products. We -- I mean, it was a competitive process throughout this second and third quarter. And in the last 45 days, we had exclusivity to negotiate and reach this final agreement.

Ian. So yes, regarding the valuation. We used the traditional metrics for valuing the business. We looked at the -- we looked at the projections that were provided to us. We tested them. We spoke to clients. We challenged some of the assumptions of the model. And then we looked at some of the companies in the space. If you look at Thomson Reuters, for example, Barra Risk Analytics, FactSet, even S&P Global. So some of these companies that are in the data and analytics space that we have followed and have tried to understand the business. And they do trade at significant multiples to revenues, which is a metric that is used for this. Also, if you look at their fair value to EBITDA multiples, it's usually above -- it's in the mid-20s, above 20x. And for revenues, it's usually around 10x, sometimes a little bit lower, sometimes a little bit higher. So again, we feel comfortable with the valuation. This is a very unique asset, very priced. I think that the view among clients and people in the market here is very positive about the quality of the business, the strength of the business and the immense opportunity ahead. This is a space that is in its infancy in Brazil, and we think there is an incredible room for growth. And if we add the capabilities of Neoway and the unique data assets of B3, we are fairly confident that we're going to materialize a significant value for our shareholders.

Our next question comes from Carlos Gomez with HSBC.

I think it's fair to say that I think the business is new to many of us, and it will take us some time to understand it. You -- in your presentation, you referred to a TAM of BRL 4 billion, given that the company expects to have a revenue of BRL 190 million, that would mean that you already have about a 5% market share? Can you -- actually, you show 4%. Can you tell us what the market position is of the company relative to its possible competitors? And what the evolution of this TAM in the coming years should be expected? Second, how do you expect to account for the company? Will this be a new line of business or be included in one of the existing lines?

Carlos, this is Kadu from Neoway. I'll take the first question. As regards to market share, Neoway being the leader in this market actually developed the data analytics market in Brazil, a highly untapped market. So we believe that having 5% means that we're the leaders in the market. And we obviously continue to believe that with the strategy that we've developed -- we're developing with B3, will definitely increase the market as the market gets even more mature, and we'll continue our leadership in terms of market share in this market. But the percentage that's not captured by us, it's not necessarily captured by other players in the market. It's a new market under development in Brazil, and we're developing it.

Carlos, on your second question, we plan to keep the -- Neoway as a separate entity, with a lot of independence to its team. It's a team of 400 brilliant people that have really built this business up to now, and we want to encourage them to maintain their culture of innovation and creativity to push the business. In terms of how we're going to consolidate this. It will likely go into our data and IT services lines. So we still haven't made a final determination on this, but it's most likely where we would report that.

Okay. And just to confirm. I imagine that the equity is not particularly large in the case of the company. So should we assume you will have something like BRL 1.8 billion in goodwill to amortize over the coming years? And over what period would you expect to do that?

That's roughly correct. The equity is very small. Most of the purchase price will be goodwill and intangibles for B3, and we're going to make a decision how we're going to capture the potential benefits of that if and when we do it.

This concludes today's question-and-answer session. I would like to invite Mr. Gilson Finkelsztain to proceed with his closing statements.

Well, thank you, everybody. As I mentioned in the beginning. I think we are very excited with this acquisition, definitely, I think, in line with the strategy of B3 of growing its businesses around our core businesses. And we believe that we, in the next couple of months, will get this approved with shareholders and regulators to really develop further our capabilities in data and analytics. Thank you very much for joining us today. Thanks.

This concludes B3's audio conference for today. Thank You very much for your participation. Have a good day, and thank you for using Chorus Call Brazil.