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7% NET REVENUES
22nd CONSECUTIVE QUARTER OF DOUBLE DIGIT REVENUE GROWTH
So Paulo, July 27, 2011 - TOTVS S.A. (BM&FBOVESPA: TOTS3), the leader in developing and marketing integrated enterprise management software and provision of related services in Brazil, today announces its results for the second quarter of 2011 (2Q11). The Companys consolidated financial statements are prepared in accordance with the accounting practices adopted in Brazil, which are in consonance with the International Financial Reporting Standards (IFRS). To enable comparison (organic growth view considering the main transactions in the period), data prior to 2009 in this report was pro forma (unaudited) as it includes the numbers for RM and Logocenter, as well as those announced in the quarterly releases of Datasul S.A. since January 2005.
IR Contacts
Jos Rogrio Luiz
Executive Vice-President, Chief Financial and Investor Relations Officer
Portuguese
12:00 p.m. (Braslia) Webcast: www.totvs.com/ri Phone: +55 (11) 2188-0155 Access code: TOTVS Replay: +55 (11) 2188-0155, available until 08/04/11, or website: www.totvs.com/ri
2Q11 Earnings
Recent Events
TOTVS is part of IBrX
Since May 1, 2011, TOTVS has been part of the Brazil Index (IBrX), which measures the return on a theoretical portfolio of 100 shares selected from among the most traded on the BM&FBOVESPA, both in number of trades and financial volume, and is evaluated every four th months. TOTVS joined the index as the 64 most representative share in the portfolio for the period between May and August 2011.
The presentations made at the event are available at TOTVS Investor Relations website: www.totvs.com/ri.
2Q11 Earnings
Management Changes
On June 27, 2011, the Company announced that Mr. Jos Rogrio Luiz will leave the Executive Vice-Presidency, Chief Financial and Investor Relations Officer on July 31, 2011. Due to his resignation from said positions motivated by personal reasons, he will join the Companys Strategy Committee (see the Subsequent Events section). Starting August 1, the CEO Larcio Cosentino will temporarily hold the positions held by Mr. Jos Rogrio Luiz to enable a broader selection process for a replacement and ensure a smooth transition. In the same notice, the Company announced the following changes, with effect from July 1, 2011: Chief Services and Relationship Officer Mr. Rodrigo Caserta, the Chief Strategy and Consulting Officer, took over as the Chief Services and Relationship Officer, replacing Mr. Wilson de Godoy Soares Junior, strengthening the TOTVS SMB (Small and Medium Business), TOTVS Private and TOTVS Consulting operations with the mission of providing clients with greater competitive edge and capturing the Brazilian Growth. Chief Development Officer Mr. Wilson de Godoy Soares Junior, the Chief Services and Relationship Officer, returns to the position of Chief Development Officer, replacing Mr. Marcelo Monteiro, who is now responsible for the South Regional in the international market. International Operations In order to drive the international operations to a new level of growth and profitability, and underlining the Companys commitment to the international market, Mr. Marcelo Monteiro, the Chief Software Development Officer, is now responsible for the Regional South, which covers TOTVS operations in South America, except Brazil; and Mr. Claudio Bessa, the International Market Officer, is now responsible for the Regional North, which covers TOTVS operations in Mexico, Central America and Portuguese-speaking countries, in addition to the position of Alliances Officer. Human Relations Department - Mr. Alexandre Mafra, the Administrative and Finance
Officer, holds now additional charge of Human Resources, where he will intend to replicate his experience in process implementation gained at the Companys Shared Services Center.
2Q11 Earnings
Market Update
TOTVS gains market share in Brazil and Latin America
The International Data Corporation (IDC), in its study entitled Latin America Semiannual ERM Applications Tracker 2010 Data, has confirmed the growth in TOTVS share in the Brazil and Latin America markets between 2009 and 2010. TOTVS market share grew 3.9 percentage points in the period - the highest among the companies surveyed climbing from 42.5% to 46.4% of the total market in Brazil (including Micro, Small, Medium and Large Companies, Government and Education), retaining its absolute leadership. Among the small and medium companies in Brazil, the Companys market share rose to 68.9%, from 66.1% in the same period in 2009. TOTVS increased its share in Latin America by 4.9 percentage points, climbing from 21.2% to 26.1%. Considering all the statistics, TOTVS was the company that gained the highest market share in the period.
2Q11 Earnings
Operating Performance
The Company ended 1H11 with 9,322 sales to clients, up 5.0% year on year, with general average ticket growing 19.1%. General average ticket grew 22.8% in the quarter, contributing to the 13.0% growth in license fee revenue over 2Q10, despite the 6.0% decline in sales. Its important to mention that the month of June registered the highest monthly revenue from license fees during 2011. Total sales (ticket x number of sales transactions) to base clients grew 29.8% in 1H11; sales volume grew 6.8% and average ticket grew 21.6% over 1H10. Compared to 2Q10, total sales to base clients grew 20.8%, despite the 4.6% drop in the number of sales transactions. In 2Q11, average quarterly ticket on sales to base clients grew 26.7% over 2Q10, reaching a new record. This higher growth of average ticket than the number of sales transactions shows the client willingness to invest more at every purchase opportunity, which is also influenced by the improved perception of the TOTVS brand. This improved perception also helped in sales to clients, whose average ticket grew 19.1% in 1H11, with June accounting for the highest number of new clients added in 2011.
Financial Performance
2Q11 Earnings
Service Revenue
Service revenue grew 13.2% between 2Q10 and 2Q11, more than double the percentage growth between 1Q10 and 1Q11, reaching a quarterly record of R$102.578 million. Compared to 1Q11, service revenue grew 13.8%, showing the impact of the negative seasonality of the first quarter and the continuous improvement in the productivity of the service teams. Value-added and consulting services accounted for 26.9% of total service revenue in 2Q11, compared to 26.7% in 2Q10. The increase shows their growth at a higher rate than that of software implementation services. The Management believes that this growth results from the actions taken in previous quarters to increase the productivity of the value-added and software implementation services.
2Q11 Earnings
Total operating costs and expenses (excluding Depreciation and Amortization) increased 16.7% year-on-year, in the quarterly comparison (2Q10 vs. 2Q11) and 16.9% in the half-yearly comparison (1H10 vs. 1H11). In 2Q11, the Labor Court stipulated a 7.5% wage increase for employees in So Paulo. Since the Company advanced a wage increase of 6.0% in 1Q11, the 1.5 percentage point difference with retrospective effect to 1Q11 was paid in 2Q11, which resulted in an additional non-recurring expense of around R$0.900 million in 2Q11. Between 2Q10 and 2Q11, the wage increase increased personnel costs in So Paulo by 9.0%. Between 1H10 and 1H11, this impact with retrospective effect to 1Q11 is normalized and the increase in cost is 7.5%.
2Q11 Earnings
The higher growth of revenue from services than the cost of services and sales is mainly due to: (i) the Companys efforts to increase the productivity of the software implementation, consulting and value-added services teams; and (ii) the integration of the development franchises, detailed further in the following section on Research and Development.
Advertising Expenses
Advertising expenses increased 5.8% between 2Q11 and 2Q10, and corresponded to 2.2% of total net revenue in 1H11, compared to 2.7% in 1H10. Historically, the advertising campaign has been launched between the end of the first quarter and the beginning of the second quarter, which has led to a higher concentration of advertising expenses in the second quarter of each year.
2Q11 Earnings
Selling Expenses
Selling expenses increased 11.0% between 1Q11 and 2Q11, and by 25.8% between 1H10 and 1H11. These increases higher than net revenue growth reflect the expansion of the Companys sales team through the creation of segmented structures in 1Q11 and the incorporation of sales teams after the consolidation of the distribution channels in 2010.
Commissions
Commission expenses corresponded to 11.3% of net revenue in 2Q11, higher than the 10.2% in 2Q10, reflecting the increase in the franchises share of the sales mix among the distribution channels (own teams and franchises) during the period. Historically, the sales mix varies in the short term, according to the sales performance of the direct and indirect channels. However, it has remained even in the long term. Commission expenses in the last 12 months represented 10.6% of total net revenue, in line with the Company's historical figures.
Management Fees
Management fees totaled R$8.763 million in 2Q11, down 5.9% from 1Q11. Between 1H10 and 1H11, Management fees increased 43.1%, mainly due to the additional provision on account of the two tranches of stock options granted to executives in 2010, in accordance with the International Financial Reporting Standards (IFRS), which represented additional expenses of R$2.8million in the period.
2Q11 Earnings
EBITDA
EBITDA totaled R$73.130 million in 2Q11, up 16.5% on 2Q10. EBITDA in 1H11 was 16.9% higher than in 1H10. Both the periods registered EBITDA growth in line with revenue growth and consequently EBITDA margin was 23.2% in 2Q11 and 23.3% in 1H11. The international operations recorded negative EBITDA of R$6.510 million in 1H11, as against R$8.755 million in 1H10, and negative EBITDA of R$4.158 million in 2Q11, as against R$5.040 million in 2Q10.
Net Income
Consolidated net income in 2Q11 grew 4.2% despite the additional financial expense due to the appraisal at fair value of the debentures in accordance with IFRS. Adjusted net income in 2Q11 totaled R$48.733 million, 6.5% higher than in 2Q10. The lower growth than EBITDA is mainly due to the additional provision on account of the stock options granted to executives (see "Management Fees"),which are not deductible for the calculation of Income and Social Contribution Taxes, increasing the Companys effective tax rate.
Net Debt
On June 30, 2011, the Companys cash position was R$201.712 million, while gross debt, consisting of loans, financings and debentures, was R$412.694 million, resulting in net debt of R$210.982 million, equivalent to 0.7x EBITDA in the 12 months ended June 2011. Considering the short-term receivables of R$302.476 million, the Companys net cash was R$91.494 million.
2Q11 Earnings
Subsequent Events
Strategy Committee Composition
On July 22, 2011, the Company announced to the market the initial composition of the Strategy Committee: Mr. Rogerio Marcos Martins de Oliveira, independent Board member, will represent the Board of Directors as chairman of the Committee. Mr. Jason Greenberg, specialist in the technology sector and in structuring capital operations, based out of New York, as the external member. Mr. Jos Rogrio Luiz, Executive Vice-President, Chief Financial and Investor Relations Officer until July 31, 2011, as external member in the future. Mr. Gilsinei Valcir Hansen, Business Officer, as the Executive Boards representative in the Committee.
Capital Markets
Ownership Breakdown
On June 30, 2011, free float totaled 120,122,390 shares, equivalent to 76.2% of the total 157,556,860 shares. The remaining shares are held by the Companys administrators, including related persons and companies controlled by them (18.5%) as well as by BNDES Participaes S/A (5.26%).
TOTS3s Performance
The shares of TOTVS (BM&FBOVESPA: TOTS3) depreciated 8.1% in 2Q11 compared to 1Q11, opening the quarter at R$31.35 and closing at R$28.80. During this period, the Ibovespa index dropped 9.0%. In the 12-month period, TOTS3 appreciated 7.5%, compared to the Ibovespas 2.4%. The average daily trading volume in the quarter was R$11.3 million, with an average of 689 trades per day, resulting in a theoretical trading index of 88,297 points, 48.0% higher than the 59,656 in the same period the previous year, when the average daily trading volume was R$15.4 million and daily trades averaged 231. The improvement in the trading index was chiefly due to the increase in the number of trades after the stock split approved in 1Q11.
2Q11 Earnings
Upcoming Events
GLOSSARY
License Fees / User License
License fees include the license to use the Company's software, sale of third-party software and royalties.
Maintenance
Maintenance refers to the delivery of new versions, upgrade of the Companys software, containing adjustments related to technological, functional or legal enhancements, as well as the provision of help-desk services.
Traditional Model
The traditional model consists of licensing the rights of use, through payment of a specified amount, which could be in installments. The license is granted on a firm and non-exclusive basis. The license price is defined per user and the client pays the license amount for the number of users he wishes to acquire. The number of users acquired is the maximum number of personnel that may simultaneously access the system.
Corporate Model
In the corporate model, the client acquires the license for unlimited rights of use in his operating segment, without restriction on the number of simultaneous users, by paying (fully or in installments) the license amount at the time of contracting the service and additional annual payments according to a growth metric pertaining to his operating segment. The objective of this model is to increase recurring revenues and strengthen client loyalty.
EBITDA
EBITDA is defined by CVM Circular 1/2005 as earnings before net financial expenses, income tax and social contribution.
2Q11 Earnings
income is impacted by the amortization of intangible assets and by R&D expenses, the Company uses Adjusted Net Income, excluding the legal reserve, as the basis for calculating dividends.
About TOTVS
TOTVS is Latin America's largest developer of application software, the world's 6th biggest ERP developer and the leader in emerging markets. It is the absolute leader in Brazil and Latin America. TOTVS was the first IT company in Latin America to go public and its shares are listed on the Novo Mercado segment of the BM&FBOVESPA. Its ERP operations are complemented by a broad portfolio of vertical solutions, as well as value-added services such as consulting, infrastructure and BPO. For further information, visit www.totvs.com
This report contains forward-looking statements that are based on the beliefs and expectations of TOTVS management. The words "anticipate", "desire", expect", "foresee", "intend", "plan", "predict", "project", aim and similar words are intended to identify statements that, necessarily, involve known and unknown risks. Known risks include uncertainties that are not limited to the impact of price and product competitiveness, acceptance of products by the market, the market performance of the Company's products and that of its competitors, regulatory approval, currency fluctuations, supply and production difficulties and changes in product sales, among others. This report also contains certain pro forma statements, prepared by the Company exclusively for informational and reference purposes and are therefore unaudited. This report is updated to the present date and TOTVS is under no obligation to update it further to include new information and/or future occurrences.
2Q11 Earnings
Financial Statements
CONSOLIDATED BALANCE SHEET (In thousand R$) ASSETS Current assets Cash and cash equivalents Marketable securities Accounts receivable Allowance for doubtful accounts Income tax and social contribution deferred Recoverable taxes Other current assets Non-current assets Long-term assets Accounts receivable Marketable securities Income tax and social contribution deferred Judicial deposits Other receivables Permanent assets Investiments Equipment Intangible TOTAL ASSETS LIABILITIES Current liabilities Suppliers Loans and financing Debentures Current obligation under capital leases Taxes payable Salaries and social charges payable Commissions payable Dividends payable Obligation relating to acquisitions Other payable Non-current liabilities Loans and financing Debentures Current obligation under capital leases Income tax and social contribution deferred Provision for contingencies Obligation relating to acquisitions Other liabilities Shareholders' equity Capital Capital reserve Income reserve Ajuste de avaliao patrimonial Minority interests Jun-11 Jun-10 Change (2Q11/2Q10) Change Mar-11 (2Q11/1Q11)
24.1% 204.7% 507.0% -72.1% -2.2% -100.0% 40.8% 0.9% 26.8% 19.2%
1,393,512
15,602 53,316 47,122 619 5,907 84,773 45,467 719 16,902 4,777 275,204 137,027 162,516 109 114,774 4,400 55,216 2,341 476,383 408,833 65,191 170,009 (2,598) 490 641,925 1,393,512
20,663 8,461 7,197 3,239 5,907 65,049 35,206 745 11,547 2,159 160,173 209,095 216,413 761 11,392 21,093 4,589 463,343 376,493 50,822 113,387 (1,668) 6,705 545,739 1,169,255
-24.5% 530.1% 554.7% -80.9% 0.0% 30.3% 29.1% -3.5% 46.4% 121.3% 71.8% -34.5% -24.9% -85.7% -61.4% 161.8% -49.0% 2.8% 8.6% 28.3% 49.9% 55.8% -92.7% 17.6% 19.2%
17,841 31,475 13,736 1,214 5,016 67,734 44,217 24,771 60,457 3,225 269,686 156,636 190,201 64 117,536 6,012 60,777 2,408 533,634 406,535 62,842 133,858 (1,977) 409 601,667 1,404,987
-12.5% 69.4% 243.1% -49.0% 17.8% 25.2% 2.8% -97.1% -72.0% 48.1% 2.0% -12.5% -14.6% 70.3% -2.3% -26.8% -9.1% -2.8% -10.7% 0.6% 3.7% 27.0% 31.4% 19.8% 6.7% -0.8%
2Q11 Earnings
CONSOLIDATED INCOME STATEMENT (In thousand R$) Gross revenue License fee Services Maintenance Deductions from revenue Cancellation of services and sales Taxes Net revenue Licensing costs Cost of services Gross income Operating expenses Research and development Advertising expenses Selling exepenses Commisions expenses General and administrative expenses Management fees Depreciation and amortization Provision for doubtful accounts Other expenses (revenues) Operating profit (EBIT) Financial result Financial revenues Financial expenses Income before taxes Income and social contribution taxes Current Deferred Net income (Consolidated) Minority interest Net income (Parent Company) EBITDA
2Q11
2Q10
Change (2Q11/2Q10) 13.0% 13.2% 16.3% 14.6% -38.8% 8.7% 16.7% 23.2% 6.2% 21.6% 23.0% 5.8% 36.5% 29.5% -5.1% 14.5% 11.6% 30.7% -103.9% 22.6% 18.7% 48.7% 28.3% 7.5% 20.5%
1Q11
Change (2Q11/1Q11) -8.2% 13.8% 5.4% 4.1% 76.8% 5.2% 3.3% 10.6% 4.8% 2.4% 4.4% 127.4% 11.0% -2.1% -11.2% -5.9% 8.2% -44.9% 281.1% 3.1% 0.3% -12.9% -17.6% -23.5% 4.8%
1H11
1H10
Change (1H11/1H10) 23.9% 9.7% 13.3% 14.7% -48.7% 10.0% 16.9% 37.0% 2.3% 23.7% 25.1% -8.1% 25.8% 41.9% -0.2% 43.1% 7.1% 94.6% -104.5% 24.5% 21.3% 63.9% 26.2% -2.9% 26.4%
79,471 102,578 159,844 341,893 (5,210) (21,487) 315,196 (8,544) (92,404) 214,248 (44,518) (9,281) (22,632) (35,571) (16,991) (8,763) (21,424) (3,221) (141) (162,542) 51,706 8,727 (14,963) (6,236) 45,470
70,316 90,588 137,497 298,401 (8,508) (19,765) 270,128 (6,933) (87,028) 176,167 (36,186) (8,770) (16,576) (27,468) (17,911) (7,653) (19,200) (2,464) 3,608 (132,620) 43,547 5,867 (11,666) (5,799) 37,748
86,539 90,135 151,714 328,388 (2,947) (20,423) 305,018 (7,726) (88,158) 209,134 (42,651) (4,081) (20,390) (36,325) (19,136) (9,313) (19,806) (5,850) (37) (157,589) 51,545 10,018 (18,170) (8,152) 43,393
166,010 192,713 311,558 670,281 (8,157) (41,910) 620,214 (16,270) (180,562) 423,382 (87,169) (13,362) (43,022) (71,896) (36,127) (18,076) (41,230) (9,071) (178) (320,131) 103,251 18,745 (33,133) (14,388) 88,863
133,988 175,684 274,885 584,557 (15,902) (38,105) 530,550 (11,878) (176,460) 342,212 (69,660) (14,535) (34,212) (50,663) (36,183) (12,635) (38,483) (4,661) 3,923 (257,109) 85,103 11,438 (26,256) (14,818) 70,285
2Q11 Earnings
CONSOLIDATED CASH FLOW (In thousand R$) Net Cash from operating activities EBIT Depreciation and Amortization EBITDA Cash Items after EBITDA Financial Result Income Tax and Social Contr. - Current Non-Cash Items after EBITDA Allowance for doubtful accounts Provision for contingencies Share-based payment Changes in Working Capital Accounts receivable, net of commissions Suppliers Salaries and charges payable Taxes payable Other assets and liabilities Cash flows from investment activities Acquisition of equipment Intangible Sales of Permanent Assets Cash flows from financing activities Bank loans and Debentures Increase of lease obligations Dividends paid Paid-in capital Increase of cash and cash equivalents Cash and equivalents at the beginning Cash and banks at the end of the year
2Q11 51,706 21,424 73,130 (8,768) 1,697 (10,465) 3,958 3,221 (1,612) 2,349 533 (15,485) (2,239) 17,039 1,118 100 68,853 (9,165) (9,977) (19,142) (550) (59,738) 2,298 (57,990) (8,279) 209,991 201,712
2Q10 43,547 19,200 62,747 (5,239) 1,056 (6,295) 6,645 2,464 3,102 1,079 (15,805) (13,986) 532 10,007 (1,638) (10,720) 48,348 (3,435) (2) 2 (3,435) (1,206) (49,097) (50,303) (5,390) 188,453 183,063
Change (2Q11/2Q10) 18.7% 11.6% 16.5% 67.4% 60.7% 66.2% -40.4% 30.7% -152.0% 117.7% -103.4% 10.7% -520.9% 70.3% -168.3% -100.9% 42.4% 0.0% 166.8% 498750.0% -100.0% 457.3% 0.0% -54.4% 21.7% 15.3% 53.6% 11.4% 10.2%
1Q11 51,545 19,806 71,351 (7,895) 4,162 (12,057) 8,422 5,850 136 2,436 (4,622) (10,028) 478 (1,338) 5,936 330 67,256 (10,051) (14,404) (24,455) (36,475) (759) (28,130) 46 (65,318) (22,517) 232,508 209,991
Change (2Q11/1Q11) 0.3% 8.2% 2.5% 11.1% -59.2% -13.2% -53.0% -44.9% -1285.3% -3.6% -111.5% 54.4% -568.4% -1373.5% -81.2% -69.7% 2.4% 0.0% -8.8% -30.7% -21.7% -100.0% -27.5% 112.4% 4895.7% -11.2% -63.2% -9.7% -3.9%
2Q11 Earnings