Totvs Earnings: Validating a Resilient Revenues Model

By Michel

Totvs (BM&FBovespa: TOTS3) is the leader in the development of integrated enterprise management software, business and technology platforms across Brazil and other Latin American countries, with a Brazilian market share of more than 50%.

Last week, Totvs announced its 2014 fourth quarter results. The following day, after announcing the company didnt meet its goals for either revenues or EBITDA marginthe stock dropped 4%. However, since then the stock was up more than 10%. Lets take a look at the latest results from Totvs and understand how they were able to deliver growth both in revenue, net income and cash generation, despite a challenging year in Brazil.

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Revenues keep coming with high recurrence and renewal rate

Total sales during the fourth quarter increased 6%, to R$455.7 million, versus R$431.7 million in the fourth quarter of 2013. Faria Lima analysts were on average forecasting R$1.8 billion in sales for 2014, exactly what the company has delivered.

Recurring revenues increased 13% year over year, to R$270.2 million from R$238.8 million. That accounts for almost 60% of total revenue. Recurring revenues were generated mainly from maintenance services, but the combination of management initiatives with the demand for subscription solutions (Software as a Service, or SaaS) tended to increase the relevance of recurring revenues on the following quarters.

Number of new clients decreased 5% in the quarter, from 970 to 923. However, when considering existing clients, active customers have increased 42%, to 8,339 from 5,855 during the prior quarter. Even during a challenging period in Brazil, Totvs continued delivering revenues growth through a combination of customer acquisitions and retention.

Adverse economic scenario and migration to subscription model will put margins under pressure

Although a mismatch between cost inflation and inflation index used to adjust recurring revenues, EBITDA margin was almost flat versus a year ago, around 23% of sales.

Totvs is actively investing to achieve a high degree of specialization by industry sector and to offer technological platforms innovation services to its customers. An important way to achieve these goals is having good and engaged employees. About 50% of total operating costs comes from personnel costs, and there was negative implication to this line coming from (i) increase in headcount, (ii) average salary increase of 7% -- resulting from collective bargaining agreements -- slightly higher than inflation-adjusted price increases, and (iii) additional expenses in the last quarter due to layoffs and team restructuring.

Management was able to compensate the increase in personnel costs by reducing sales, general and administrative (SG&A) expenses. In essence, SG&A expenses decreased from 28.7% of net revenues during the fourth quarter of 2013, to 26,6% on the last quarter.

Earnings per share (EPS) were R$0.43 during the quarter. 2014 EPS were R$1.61, slightly worse than forecast from financial analysts, as they were on average expecting R$1.74.

A strong balance sheet may become the best resource for an uncertain year

Totvs ended last quarter with R$700 million in cash and cash equivalents. Thats very strong position to be in as 2015 begins. This is a year that most economists predict wont be easy to Brazil, as the country faces many macroeconomic adjustments in order to revive growth and control inflation.

Management still believes in the potential of the Brazilian market and its entrepreneurs. They see Totvs as a key element to enhance more productivity and competitiveness for their customers, something really important in days like these. In this sense, management decided to amplify sales efforts in subscription models during 2015.

Investors also have reason to feel secure with Totvs. Company offers a payout of almost 65%, what represents a dividend yield of 3% on current stock price. Management has bought back some stock during 2014 -- although the movement was shy so far (less than 1% of outstanding stocks), I believe that management could be more aggressive this year.

All in all, Totvs seems to have a clear and sustainable strategy for 2015.

The article Totvs Earnings: Validating a Resilient Revenues Model originally appeared on

Michel Glezer has no position in any stocks mentioned.

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