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LINX S.A. (NYSE:LINX)
Q4 2019 Earnings Call
Mar 31, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and thank you for attending today's conference call to discuss the Results for the Fourth Quarter of 2019.

At this moment, we have here with us Alberto Menache, CEO; Ramatis Rodrigues, CFO; and Carol Fong Chu [Phonetic], Investor Relations Officer of the company.

I would like to remind you that this event is being recorded and simultaneously translated into English. All participants will be in listen-only mode during the company's presentation. [Operator Instructions].

This event is simultaneously being broadcast via webcast and it can be accessed at the address ir.linx.com.br, where the presentation is available for download. Participants may view the slides in any order they wish. The replay will be available right after the event is concluded.

Before concluding and proceeding, let me mention that any forward-looking statements about future events, operating or financial results are based on beliefs and assumptions of Linx and on information currently available to the company. Future considerations or forward-looking statements are not guarantee of performance as they involve risks and on circumstances that may or may not occur. Investors and analysts should understand that macro-economic conditions and other operating factors may affect the results; and therefore, results may materially differ from those expressed in such forward-looking statements.

Now, I'll turn the floor to Alberto Menache, who will initiate the presentation. Alberto, you may proceed.

Alberto Menache -- Chief Executive Officer

Good morning. Thank you very much for your interest and trust in Linx. I would like to start by talking about this unusual moment we're experiencing with the dissemination of the coronavirus that poses a very challenging and worrisome scenario in all areas.

Two weeks ago, Linx put in place some necessary preventive measures to minimize the effects of the pandemic. And with the introduction of a crisis committee, the company has assigned the guidelines for work from home for all employees. We put on hold or paused some domestic and international business travel, and at the same time has been discussing and monitoring several other topics on a daily basis.

At this time, a large portion of our customers are facing a very adverse situation that includes temporary shutdown of shops, and a severe downfall in consumption, mainly of items not related to food, drugs, and hygiene.

Having digital solutions like e commerce and the delivery app, are gaining momentum of what alternatives to ensure at least a portion of the revenue of these retailers during this period. Due to the uncertainties related to how the outbreak will leave all its impact on the economy and the measures to be adopted in Brazil and in other Latin American countries where the company operates, it becomes impossible to predict right now what the total impact on the global economy will be, and by the same token what that means for our business as well.

So far, Linx hasn't experienced any tangible impact stemming from the spread of the virus and continues to monitor delinquency levels and churn from closing of stores. Moreover, I would like to emphasize that Linx has a significant net cash balance.

In the 4Q19, we posted BRL561 million. And excluding the leasing growth there resulting from IFRS 16 and the net earnout of acquisitions accounts payable, the company's adjusted net cash would have been BRL735 million in the quarter.

We continue to operate business as usual and reaffirm our commitment to the safety of our employees, while at the same time, we ensure services to our clients and suppliers; and as a result, we remain committed to the business.

Now, I'll give the floor to Ramatis, who will talk about the results of the fourth quarter 2019. Ramatis, please proceed.

Antonio Ramatis Fernandes Rodrigues -- Antonio Ramatis Fernandes Rodrigues

Thank you, Alberto, and good morning, everyone. 2019 was a very important year for Linx. That's when we solidified our position as a natural choice when it comes to omni retail technology. We also strengthened our end-to-end platform with the launch of new technologies, partnerships for Linx Digital and Linx Pay Hub, in addition to making strategic acquisitions throughout the year.

In June 2019, we had our IPO, allowing us to become the first Brazilian software company to be listed in the New York Stock Exchange. Furthermore, we reinforced our commercial footprint with the growth of franchisees and training of the teams, focused on customer success and satisfaction. On that same note, those serve as cross-selling strategy of our end-to-end platform was our main growth driver. This position allowed us to acquire new customers through Linx' multiple entry platforms, leading to a total year-end transaction volume of approximately BRL300 billion.

In the fourth quarter 2019, we signed new agreements to integrate retailers, online and offline channels through OMS, totaling approximately 16 clients in different deployment stages, reinstating our leadership in omnichannel. We signed new partnerships with important marketplaces to support our clients in their digital transformation journey, in addition to promoting a more fluid relationship with their consumers.

Furthermore, Linx Pay Hub offerings remain supported by the adoption of TEF, and the continuous expansion of our portfolio of differentiated solutions natively integrated to Linx platform. With a constant focus on the profitability of our business, we also engaged on the strategic partnerships to promote the integration of wallets and further strengthened QR code Linx and the Digital Account.

One year after the launch of Linx Pay and we already have the fourth largest financial volume among acquirers using our TEF for their transactions. Now, I'll give the floor to Carol [Phonetic], Linx' IR office, to proceed with the presentation. You may proceed.

Carol Fong Chu -- Investor Relations Officer

Thank you, Ramatis. Moving to Slide 3, the highlight is the buyback program initiated in early March. Linx will be able to acquire up to 8.8 million ordinary shares until September 9, 2021. However, the program will be carefully executed. Bear in mind that in a moment like this, it is crucial to maintain an efficient cash manage approach to deal with this uncertain landscape as Alberto mentioned. Also, I would like to highlight our two recent acquisitions; PinPag, a fintech specialized in electronic means of payment with personalized and disruptive solutions for installment payments for the retail market.

And also, we have another solution for personalized delivery, which integrates the merchant's delivery after the e-commerce platform. The first one has been an important tool for retailers in times of greater demand for digitalization.

As you can see on Slide 4, recurring revenue reached BRL196 million, accounting for 76% of gross revenue, plus 15% over Q418 and up 8% vis-a-vis Q319. In the 4Q19, Linx Digital and Linx Pay Hub represented individually, approximately 13% and 12% of total recurring revenue, respectively. It's also important to mention that the acquisition of SetaDigital in October 2019 was allocated as part of Linx Core, reinforcing its stake in the recurring revenue.

Slide 5. Here we show that net income was 22% higher when compared to Q418 and up 13% year-to-date versus 2018.

Moving to Slide 6. Adjusted EBITDA was BRL53 million in the quarter, up 17% when compared to adjusted EBITDA in Q418. When comparing 2018 to 2019, there was a 16% increase, with an adjusted EBITDA margin of 24.7% in the year.

Thank you very much for your attention, and now we will initiate the Q&A session.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Tito Ferraz from Itau BBA.

Tito Ferraz -- Itau BBA -- Analyst

Good morning. Good morning, Alberto, Ramatis and Carol. My first question is about Linx Pay, whether you have any visibility about the end of 2019 and the final position about December. So, this will help us take a look at 2020. And what was the level that the product reached at the end of last year?

And my second question is about the deployment of OMS. What is your expectation now that we have COVID-19? What will be the impact in terms of delivery and deployment throughout the year of 2020? Thank you.

Alberto Menache -- Chief Executive Officer

Good morning, Tito. This is Alberto. I hope you are well. First of all, in terms of OMS, we do not expect any changes in terms of how the projects will evolve. But much to the contrary, because our team and the teams of our clients, they are now more readily available. But what -- would have some impact and in terms -- is in terms of new closings, because the retail market is still trying to understand what would be the next steps after the crisis, how things will evolve with the pandemic? So, new closings or new closings of deals may be postponed.

Now, in terms of TPV of Linx Pay, the situation is a follow. First of all, I think it's important to reinstate what we've been saying before that that projection of reaching BRL100 billion in the future, that was the expectation. This is no longer on the table. We are trying to concentrate our efforts in assets that have better quality rather than just quantity. We want to operate with products that can give us a better margin. And then, that's why we are becoming more aligned with that in such a way, that so far, we do not intend to look at the total TPV number. Just to give you an idea, PinPag to deliver its revenue, it has more than BRL1 billion of annual TPV.

With all of these changes in the scenario, it's very difficult to estimate right now what would be the TPV for Linx Pay, for the year. We were looking at an annual TPV prior to the crisis of around BRL5 billion. But as of now, everything will have to be revisited.

Tito Ferraz -- Itau BBA -- Analyst

Okay. Okay, thank you. And I hope you are all doing well. Thank you and take care.

Operator

Our next question is from Maria Tereza from Santander Bank.

Maria Tereza Azevedo -- Santander Bank -- Analyst

Good morning. I hope you are well and thank you for this call. Do you have any expectation or any preliminary data that you're able to collect in terms of how much your customers have been impacted by the situation? And on the other hand, what is the trend related to e-commerce? Can you see any acceleration in e-commerce?

And my second question; I mean, Carol mentioned the cash position, but how do you see the M&A strategy for 2020 and 2021? Maybe there might be some opportunities down the road. Thank you.

Alberto Menache -- Chief Executive Officer

Thank you for the question. First of all, impacts to our customers; it's been very similar to what has been announced in the media related to the general impact to the market. There hasn't been any significant changes, vis-a-vis everything that we've been seeing and hearing, some segments have been -- most segments were negatively impacted, a few segments right at the beginning of the crisis were positively impact; like pharmacies, we saw some growth in that segment because most consumers ran to the pharmacies to buy medication and maybe the lack of medication. I mean, some medication that were announced that could cure COVID-19 just disappeared and then we saw some growth. But when we look at the general picture, all of that shopping mall mix and everything we find in a shopping mall, all of that was more impacted because revenues came close to zero because most shops are closed.

But now, when we look at the general average and we are talking about a drop of 50% in sales, there is -- you have another segment that was probably less affected but they also experienced a downfall, not as much as other segments, is service gas stations. There was a drop, but not as significantly as in other segments of the economy.

Now, when we look at foodservice, they've been significantly affected. But there are also some good news as well. As much as possible, we can see some good pockets of good news. The acquisition of Neemu with the delivery part earlier this year was very timely. So, Neemu sales, just to give you an idea, were multiplied by 4 times to 5 times. And at Linx homepage, we have a Neemu offering as well. And why? Because this is a way of helping our clients to survive and overcome this period of crisis.

E-commerce, in general, depending on the segment, was less affected. In terms of fashion, there was some drop but not very significant. But we have a good demand for new projects. We are developing e-commerce opportunities. And on the pharmacy sector, fashion, we were also able to upload the sites maybe at a lower speed when compared to normal, but we nevertheless are putting in place a lot of actions to expedite e-commerce and digitalization.

In terms of M&A, we are still waiting. There were a few things that were under way. But at this time, we are focusing on preserving our cash. We have a very sound cash position. Because the possibility of when the crisis will end is still low. We will just get a feeling of what things will or how things will evolve once the shopping malls reopen. And then, we may go back to that time when the crisis was not present yet. So, that's why we are very cautious and we are now even more cautious with the situation.

Maria Tereza Azevedo -- Santander Bank -- Analyst

Okay, perfect. Thank you very much.

Operator

Next question from Marcelo Santos from JPMorgan.

Marcelo Santos -- JPMorgan -- Analyst

Good morning and thank you for taking my question. My first question is to get more information about this period of social isolation. What about your deployment services, what can be done remotely? How many services can be rendered remotely and what cannot be rendered remotely? And that's my first question. And my second question is whether you could give me an idea about your recurring organic growth?

Alberto Menache -- Chief Executive Officer

Marcelo, thank you for your question. The first answer is that almost all services can be provided remotely. Throughout the years, we were developing that capability. We have a lot of things available online and available to customers. We have been offering that for quite some time; allocation services, etc. That was something that was part of our run-of-the-mill operation. This was part of our know-how. But even due to some cultural reasons, some of our clients wanted us to go to their facilities. They wanted an on-premise presence, but we managed to do something very amazing. Because from the onset of the crisis, we put the entire company in WFH or work from home, almost our 4,000 employees.

If we look back to early last week, we had approximately 10 employees working in one of Linx' offices. And in the week before that, there was still a lot of people working from home. So, we just came up with a new way of working. We sometimes say that if we knew that from before, we would have done it differently. We wouldn't have invested in so many physical offices.

Therefore, there is no problem for us in terms of rendering remote services. It's working quite well. What may occur, at least in a lower scale, is that there will be a reduction in the demand for these services. So, this is the first issue.

Now, in terms of our recurring revenue, organic growth, it was 9% in 2019. But it's also important to say that there was an acceleration in the fourth quarter when compared to the quarter before that. And despite the fact, we didn't see any net opening of stores in 2019, we were able to accelerate through digital initiatives, that organic growth.

Also, this was boosted by the acquisition of Millennium. Millennium continues to have a high demand. What is Millennium? Just to refresh your mind; is a ERP for e-commerce operators, companies that have a physical presence or those that only have a footprint on e-commerce. So, this entire digitalization phase that began to accelerate as of 2016, once you look back in time, the majority of Linx' acquisitions starting in 2016 onwards was on the e-commerce and digital areas. And this helped us to soften the effects of the crisis that we're experiencing right now.

Marcelo Santos -- JPMorgan -- Analyst

Great. Thank you very much.

Operator

Our next question from Leonardo Olmos from Bank of America.

Leonardo Olmos -- Bank of America Merrill Lynch -- Analyst

Hello, good morning. First of all, I would like you to elaborate more on the growth of Linx revenue in terms of what could cause or impact the closing of stores in the first half of 2020 versus what will be the short-term impact in terms of the reduction in the financial volume? Looking at your recurring revenue, how much would be the impact coming from the closing of stores and how much of that would come from financial transactions, not necessarily in terms of figures, but just to give me an idea of how we can do that math, or make ends meet?

Antonio Ramatis Fernandes Rodrigues -- Antonio Ramatis Fernandes Rodrigues

Leonardo, thank you for the question. First of all -- and your question is very good. It's a great question, because this is a good moment when Linx position becomes very clear, especially to companies that only work with means of payment or companies that are exposed to retail, but do not have a business model like ours.

From Linx recurring revenue, which is almost 80% of our total revenue, the vast majority of the revenue, I would even say that 98% of it, comes from subscription or monthly subscription, where clients pay for the use of our systems.

The transactional volume is almost insignificant. Especially, when we talk about Linx Pay Hub, the main initiative comes from TEF subscription, which is a monthly subscription that companies pay to have access to the gateway of their physical stores.

So, when it comes to digital, we have a transactional volume but naturally it's not significantly impacted at first. I think this is what should grow more. So, basically, will have a more relevant impact on TPV or Linx Pay, which is still very small, and it's not so relevant in the consolidated figures of the company. And we should see something coming from digital or maybe another product at Linx Core with the transactional model. We are talking about 15% or less of our total recurring revenue.

Now, in relation to the closing of stores, I would like to say -- what is our major strength? Our major strength is in mid to large-sized clients. Those are more structure companies with a sounder cash position. They have a better management approach to navigate through the crisis and they have more working capital as well.

So, we look back at the 2014 crisis and 2008 and 2009 crisis, and at the end, our clients came out stronger after the crisis, while certainly this is a very different crisis when compared to the other crisis, because the retail industry is the one that is most adversely impacted when compared to other industries. But I'm confident that the impact to our clients is not as significant as the average of the retail industry.

And then with the company we acquired last year, focusing on smaller retailers; I mean, if you have time and if you're interested, you can take a look at the website of Hiper, hiper.com.br, and you will see that there was a repositioning of that product. Hiper is focused on placing smaller retails, allowing them to sell online. We made some changes throughout last year in the period right after the acquisition. So, I think that with Hiper, we will be able to reposition ourselves very quickly to be able to face and navigate through this new scenario.

And having said that, I do believe that we will see the closing of stores throughout the year and then we will have to adjust ourselves to cope with that new situation. We will have to reinvent ourselves constantly as we've been doing throughout the past years, focusing more on digitalization.

Leonardo Olmos -- Bank of America Merrill Lynch -- Analyst

Very good. Thank you. I just have another follow-on question, well, not related. It's about the fourth quarter, but this will help us understand the numbers. So, you said -- I mean, TPV was strong in the quarter, I would like you to elaborate on that. And probably, how do you collect further deployments? We already talked to Carol yesterday and she explained to us quite well. But what should we expect looking forward? Do you expect any spike coming from digital as we experienced last quarter?

Alberto Menache -- Chief Executive Officer

Well, looking forward, I see not so strong service revenue as we had in the fourth quarter of 2019. In this period, we, in fact, singed some OMS in e-commerce projects and agreement. So, I don't think this will be repeated. At this time, there are many companies that are willing to become digital and there was a long list of companies that were going to be listed or to have an IPO. And I think the sector to be most benefited was the retail segment. There was a new wave of IPOs from retail companies and many of these companies, along the lines of what they had in mind, digitalization was one part of the project. So, they were willing to invest in omnichannel.

But, now, we don't know when the capital markets will reopen for new IPOs. Therefore, these companies are now postponing their plans or maybe shrinking their plans a bit.

Leonardo Olmos -- Bank of America Merrill Lynch -- Analyst

Okay. Perfect. Thank you very much. Good morning.

Operator

Next question from Freddie Mendes from Bradesco.

Fred Mendes -- Bradesco BBI -- Analyst

Good morning, everyone, and thank you. I have two questions. I just want to get a better understanding, Alberto. When I look at that service revenue and most of it has omni revenue. We saw some similar movement in the second quarter of 2018. But I think -- I mean, the deployment time was a bit longer. But I think that this did not hit the recurring revenue. So, when do you think we should expect -- I mean, within that window of six to nine months of deployment and eventually some period after that, when do you think that this would have a spike in the recurring revenue once the projects are fully deployed? This is my first question.

And my second question is about the reduction. I think, this quarter you posted BRL18 million. I just want to understand whether you think it's a bit more difficult to extract the gains that you expected at first coming from these companies? And eventually, I don't know whether the management changed its point of view, I just want to understand this a bit better, the part related to earn-out.

Alberto Menache -- Chief Executive Officer

Well, thank you for your questions, Freddie. About earnout reversion, I have to explain some of the effects. The largest company that we acquired, I mean, for the [Technical Issues] Synthesis. We had -- the earn-out was denominated in U.S. dollars. That was the only one that was denominated in U.S. dollars. And naturally, all of the goals and pricing as well were denominated in U.S. dollars. So, we had a more significant earnout because it was an ascending curve of projections. So, naturally, a good part of the revenue is Mexico and Argentina and in other Latin American countries. And more particularly, the currency in Argentina was depreciated. And even though most of our contracts were in U.S. dollars, not all of them, but this had a negative impact in the overall revenue, and that's why the goals were not achieved.

Carlos Anino, the founder of Synthesis, remains in the company as we speak, up to now. He had plans to change growth. He was our CEO of Latin America, thus far. And so, from now on, he remains as an Advisory Board Member for Latin America. So, there hasn't been any changes in the management. Our turnover in that Latin America operation was very low in the period. All of the leaderships are there. They are the same people. There hasn't been any changes.

In relation to your second question related to omnichannel recurring revenue and how this should impact our total revenue; the project, as you said, take some six to nine months. I mean, but we cannot roll them out if the stores are closed. Because to roll it out, we depend on the physical store operating etc. We depend on the operation of the stores. There is a ceiling to that revenue and a marginal value for number of orders for transactional volume etc.

So, we will see an increase in that recurring revenue. This is a recurring revenue that grows the most at Linx. But the percentage over the total revenue, it's not yet significant. If we look at the entire math of recurring revenue that we have, this will certainly have a positive impact. But when we look at everything else, I don't know how the economy is, the other recurring revenues, it is possible that the other segments do not perform as expected.

Fred Mendes -- Bradesco BBI -- Analyst

Okay. Perfect. It is very clear. Thank you very much.

Operator

[Operator Instructions] We now conclude the Q&A session. I would like to turn the floor back to Mr. Alberto Menache, for his final remarks. You may proceed, sir.

Alberto Menache -- Chief Executive Officer

I would like to finish this call by thanking you for your trust and the confidence on Linx. I would especially like to thank Linx team, who has been totally dedicated to the company during this adverse period. Our service levels are even better than service levels we had before. I would like to reinstate that our cash position is very sound, our business model likewise is very resilient and we are very optimistic and confident that with God looking over us and science on our side, we will be able to overcome this very soon.

So, please stay home. Take care. And I'll see you later. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

Alberto Menache -- Chief Executive Officer

Antonio Ramatis Fernandes Rodrigues -- Antonio Ramatis Fernandes Rodrigues

Carol Fong Chu -- Investor Relations Officer

Tito Ferraz -- Itau BBA -- Analyst

Maria Tereza Azevedo -- Santander Bank -- Analyst

Marcelo Santos -- JPMorgan -- Analyst

Leonardo Olmos -- Bank of America Merrill Lynch -- Analyst

Fred Mendes -- Bradesco BBI -- Analyst

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