Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Linx S.A. (NYSE:LINX)
Q2 2020 Earnings Call
Aug 12, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Alberto Menache

Good morning, and thank you very much for your interest and trust in Linx. As you know, this was certainly the most intense social distancing period in Brazil so far. In an attempt to halt the spread of COVID-19, several nonessential commercial businesses were shut down, and this had an impact on a large portion of our customer base. But we turned this into an opportunity.

With technologies provided through our end-to-end platform, we are able to offer solutions that allow retailers to proceed with their activities, mainly through Linx Digital offerings, but also for — through the restaurant apps. And all this becomes apparent when we look at the strong acceleration of the digital transformation process of the last month. We strengthened our partnerships with the most relevant marketplaces in the country. We launched Linx Commerce for pharmacies, opening the possibility for integration with B2W marketplace.

Also, the Neemu app experienced a significant demand growth, which is the app delivery, and we were able to double the number of customers of the payment link in June versus May. Also this quarter, we invested in the functional evolution of the e-commerce platform with omni capabilities to extend our services to Brazilian midsized retailers. And we are currently running a pilot project in the fashion segment. And of course, as we always say in our calls and other conversations with you, all of that is only possible because we have innovation as part of our DNA.

And to support all that, we are deeply committed to investing in R&D. In the second quarter, we were able to post a significant growth due to our Software as a service business model and also the unique profile of our customer base. As a result, Linx had no significant impacts in churn during the period. However, there was an impact on provisions for loan losses with the postponement of payment terms, something that Ramatis will elaborate further.

Despite a challenging scenario that we are currently experiencing, we posted solid results in the quarter, with recurring revenues growing 17% year on year, and 340 basis points of adjusted EBITDA margin, reaching 28.2% in the second-quarter 2020. Therefore, I want to assure you that we continue to operate business as usual, caring for our people, our customers and suppliers and focusing on the long-term sustainability of our business. We also continue to fulfill our social role. And in addition to the several ESG initiatives that are being detailed in our annual sustainability report of last June, Linx donated BRL 1 billion to the Salvando Vidas' BNDES program for the purchase of individual protection equipment to the healthcare professionals working in the front line to fight the pandemic of the new coronavirus.

And before giving the floor to Ramatis, I would like to express a special thanks to the entire Linx team who had an outstanding performance and demonstrated total committed commitment during this challenging period. As you can tell from the notices and releases, we maintained our absolute leading position in the POS and ERP market in Brazil, with 45.6% market share in the retail segment. And we stood out as the player with the highest growth in e-commerce solutions in 2019. We are also very honored with the acknowledgment from the Institutional Investor survey that placed Linx at the podium in several categories of the technology industry among companies in Latin America and in the general ranking.

And therefore, we ranked first among small caps. So once again, my deepest thanks to all of our teams at Linx and our customers, analysts and investors and also our entire RR team who believed and trusted in our business. Thank you very much. Now I'll give the floor to Ramatis to talk about the results related to the second quarter of 2020.

Ramatis, you may proceed.

Ramatis Rodrigues -- Chief Financial Officer

Thank you, Alberto, and good morning, everyone. Still on the current situation, I would like to emphasize that the crisis committee set up in mid-March continues to operate and follow the developments of COVID-19 implications. In addition to all the measures to protect our employees and internal awareness campaigns, Linx adopted several initiatives to preserve its cash, which had a positive impact on the quarterly evolution of costs and expenses and in the EBITDA margin expansion that reached its highest level since the fourth quarter of 2014. As Alberto said, we negotiated with our customers related to payment of invoices on a case-by-case basis, resulting in a total postponement of payments of BRL 54 million until June, of which only 13% are still in the renegotiation phase and 87% are paying the negotiated amount on time.

As a result, our provision for loan losses was BRL 5 million in the quarter, accounting for 2.4% of net revenue, 80 basis points higher than the previous quarter. It's also worth mentioning that Linx has a robust net cash balance. In second Q '20, we posted BRL 213 million. And excluding leasing from the gross debt due to IFRS 16 and net earn-out of accounts payable for acquisitions, the adjusted net cash would be BRL 400 million in the quarter.

Now moving to Slide 3 of the presentation. I would like to highlight the 11% growth of Linx Core recurring revenue and the main drivers of the quarter. The delivery app, which is Neemu Solution, doubled its revenue in the year. Also reinforcing Linx's cross-selling strategy.

At the end of June, we had 334 franchisees that already responded for 30% of all new activations in the second quarter of '20. Another highlight is the Millennium revenue that grew 75% when compared to second Q '19, with 43% more projects vis-à-vis the previous quarter. Hiper's performance was also relevant, with the total recurring revenue growing 43% year on year. Furthermore, Linx Pay total recurring revenue grew 10% year on year, and TEF accounts for 55% of the total revenue of Linx Pay.

Linx Payment Link, on the other hand side, saw its customer base double in size between May and June 2020, and we already have 2,500 customers using our solution that was recently launched. And finally, Linx QR Code increased its customer base by twofolds when compared to December 2020. Now moving to Slide 4. Here, we have the main highlights of Linx Digital that posted a 29% increase in total recurring revenue when compared to Q2 '19 in this landscape of expediting the digital transformation process.

The total recurring revenue of Linx Commerce doubled this year with a historical record of GMV in June 2020. Linx Impulse total recurring revenue was up almost 30% in the year, accounting for 63% of Linx Digital total revenue. What also grew was the number of retailers posting their inventories in marketplaces in partnership with Linx, and we initiated the certification of branches to sell Linx Digital Solutions, something that we intend to enhance in the following months. Now I'll give the floor to Carol, Linx IR manager, to continue with the presentation.

Carol Pontes -- Investor Relations Manager

Thank you, Ramatis, and good morning to you all. Moving to Slide 5, we show that the recurring revenue totaled BRL 208 million, accounting for 84% of the gross revenue, growing 17% year on year and up 6% vis-à-vis first quarter of 2020. In the second quarter of '20, Linx Core accounted for 72.5% of total recurring revenue, whereas Linx Digital accounted for 14.3%, and Linx Pay 13.1%. In the previous quarter, Linx Digital accounted for 11.1% and Linx Pay 13.9%.

This variation is attributed to a higher demand for new digital solutions due to the temporary shutdown of stores in the quarter caused by the COVID-19 pandemic. On Slide 6, we show that net revenue was 11% higher vis-à-vis second quarter of '19 and 2% higher quarter on quarter. Moving to Slide 7. We highlight that adjusted EBITDA was BRL 60 million in the quarter, up 26% when compared to the second quarter of '19, with an adjusted EBITDA margin of 28.2% in the quarter, 340 basis points higher when compared to the second quarter of '19.

And finally, on Slide 8, we present the nonrecurring expenses in the quarter that came up to BRL 11 million. This amount consists mainly of initiatives related to head count adjustments, to Linx stock options plan, to the impact on revenue from prepayment of receivables allocated in the financial result and the net earn-out reversal involving nets. Thank you for your attention, and I will move to our Q&A session.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Daniel Federle from Credit Suisse.

Daniel Federle -- Credit Suisse -- Analyst

Good morning, everyone, and thank you for taking my question. And first of all, congratulations for the results of the quarter. And my first question relates to that because it seems to me that Linx planted many seeds and invested in many areas that are very promising, like Linx channel, Linx Pay and the digital bank. So I just want to understand what were the risks that existed that led the company to make these investments? This is my first question.

And the second question relates to sales synergies of payments and softwares to large retailers. What are indeed the synergies? And what kind of advantages that large retailers have once they find the same solutions with the same vendor rather than choosing the best prices in different areas of the market? So if you could elaborate a little on why Linx was not able to sell this integrated solution to small and midsized retailers.

Alberto Menache

This is Alberto. Thank you for your question. Well, first of all, whenever we talk about risks, I don't think it is so much a matter of risk, but I think it has to do with scale. [Audio gap] Stone is a company that stem from the payment industry and then it evolved into other areas, but they have a much higher scale when compared to ours.

[Audio gap] What would take us longer to do, Stone has a lot of things already in place, so they have scale. As for the second part of your question, I think we were very successful in terms of our customer base and portfolio. The only thing is that we didn't want to burn cash because it's apparent, if you look at the results from the acquirers, that there are some acquirers losing money selling with a TEF that is negative, so selling to large customers wouldn't be a problem. But now making intelligent and profitable sales is what matters to us.

So we were looking at our portfolio. Our Linx Pay Hub results are quite solid. We've been growing in the past few months, especially with digitalization. Our margins have a native integration between Linx Pay and Neemu, which is the app delivery.

And with that, we were able to make important advances in terms of penetration. But this synergy can also lead us to another level. And on the other hand, Stone also started to invest in the e-commerce software. But as I said, for us, in terms of payments, we have an advantage.

And the same thing goes for them in terms of software. I see many synergies. They have a large distribution and a lot of capillarity, and we do as well. So at the end of the day, I can say that there is a large distribution synergy.

I mean this is only an example. That's not only it. But just to add, the level of governance of the companies is quite high as they are listed in the New York Exchange.

Daniel Federle -- Credit Suisse -- Analyst

Thank you.

Operator

Our next question in English from Mr. Samad Samana from Jefferies.

Samad Samana -- Jefferies -- Analyst

Hi. Good morning. Thanks for taking my questions. Maybe first one on the growth that you saw with Neemu and some of the more recent acquisitions.

How durable do you think those high-growth rates are versus how much of it is short term because of the crisis, and how that's changed consumer behavior? And then I have one follow-up.

Alberto Menache

Good morning, Samad. Thank you for your question. I think that growth is sustainable in the long run. The penetration of the delivery app was low unlike marketplaces which has a much higher penetration, but the restaurants want to have an alternative to marketplace.

So that's why we launched the delivery app. Therefore, I see a great potential to grow that segment in a very robust way for a long time.

Samad Samana -- Jefferies -- Analyst

Helpful. And then maybe if I could ask a follow-up question on the agreement with Stone. Did the company consider a merger or an acquisition by anybody else? Was it shopped? I guess I'm just — I'd like to better understand maybe how it ultimately came together with Stone specifically versus some of the other companies that could have been potential prospects as well, and if there's a go-shop period for some amount of time?

Alberto Menache

Right now, we have an exclusivity agreement with Stone, which means that we are not going to entertain any other negotiations with other companies. Well, having said that, all of the documentation have been published at the Brazilian CVM and in our Investor Relations website. And the evolution of this process until the General Shareholders Meeting is all published in these locations. So there, I mean the only possibility that there is, is what has been posted in the documents.

But throughout the last, let's say, 15 years, Linx had conversations with other companies about that possibility. And maybe I could say that this has happened quite frequently. But we then believe that Stone was the best company in terms of their culture, in terms of synergies, et cetera, et cetera. There were many things in common.

And they presented a very good proposal to our shareholders as well and, therefore, we decided to go ahead with them. And now we see the possibility of very soon that we will be together.

Samad Samana -- Jefferies -- Analyst

Great. Thank you for taking my questions. Congratulations on the strong quarter and the exciting news.

Alberto Menache

Thank you very much.

Operator

Our next question also in English comes from Cesar Medina from Morgan Stanley.

Cesar Medina -- Morgan Stanley -- Analyst

Hi. Congratulations on the quarter. I have two questions. One, regarding the TEF solution.

If you can give us an indication in terms of where the volumes are today and perhaps a breakdown of who are the acquirers processing those transactions? And then the second question is related to the time line of the proposed transaction. When do you expect the next steps to occur? And then the final approval for the general shareholders meeting? Thank you.

Alberto Menache

Thank you for your questions, Cesar. In relation to the timing of the transaction, it depends on the Brazilian agency, CADE. Therefore, this will probably take a few months. I cannot really tell you what would be the final general shareholders assembly date, but we still have some waiting time ahead of us.

But in terms of your second question, I will give the floor to Denis.

Denis Piovezan -- Vice President, Operations

Good morning. Good morning, everyone, and thank you so much for your question. TEF's penetration remains very robust mainly in the first quarter of the year and in the second quarter because of the pandemic. It slowed down a bit.

But now we see a very strong rebound. It is now about 40%. And it continues to grow and to grow its recurring revenue and penetration. And I would say the same for the other solutions of Linx Pay.

Cesar Medina -- Morgan Stanley -- Analyst

But can you give more color in terms of the TPV that you're managing on that solution? And who is processing that? Like which acquirers and what percentage of that?

Denis Piovezan -- Vice President, Operations

It seems like we don't have an update on that figure, Cesar.

Cesar Medina -- Morgan Stanley -- Analyst

OK. Thank you very much.

Operator

Our next question from Fred Mendes from Bradesco BBI.

Fred Mendes -- Banco Bradesco -- Analyst

Good morning, and thank you for taking my question. I have two questions. I think your two main strategies, I think Alberto already talked about some of them. But how do you see the integration of these two cultures? So I think it may be too soon, but what kind of challenges you anticipate in terms of promoting that integration? And the second question is probably a bit more strategic.

In terms of Linx Digital, how do you see Linx Digital and this new partnership? Whether you expect some kind of changes in your strategy or whether you will continue with business as usual?

Alberto Menache

Fred, good morning. Thank you for your question. About the integration, integration is always a challenge, but Linx has developed this integration capacity because we have acquired more than 30 companies throughout our 11 years of history. Therefore, Linx's culture involves embracing several cultures, and also not only we embrace but we accommodate being embraced.

That's why I don't see any difficulties. And once again, I reiterate that it's always a challenge when we have to integrate. But together with our HR department and together with Stone, Stone is also a company that has acquired several other companies, is a very dynamic and young company. Therefore, I'm very optimistic about the integration.

Now in relation to the integration with Linx Digital, we see a lot of opportunities. Our digital segment is posting a significant growth. And our penetration, as I said before, is very important through our delivery app. Most of our new customers come from the delivery app.

But in terms of Linx Commerce and the Payment Link, penetration is still low. And why do I say that? Because our gateway is a very recent product, so it still needs to be more mature in order to grow penetration. Therefore, I see a lot of opportunities looking forward. And now I will ask Jean to tell us more about it.

Jean Klaumann -- Vice Presidente Digital and Omni Commerce -- Analyst

Good morning, Fred. I think that the market change and the motivation for all of those that are entering, this is the new e-commerce platform that is always motivating us to create more than a credit path to make things happen like it did happen with the pharma example. And we want to have another end-to-end solution. And this is what we already did for Linx Core and Linx Digital.

And now we are just reinforcing that. And I know that our solutions will be even more robust. Connections will be easier. And this also brings about important cross-selling opportunities.

I don't see any disruptive changes in the short run, but on the contrary, lots of good opportunities to capture synergies between our different distribution channels.

Fred Mendes -- Banco Bradesco -- Analyst

Perfect, Jean. Jean and Alberto, thank you very much. And yes, this is our last call. I mean it's been a pleasure to work with you and to be with you in the last few years.

Alberto Menache

Thank you, Fred. So I think that you will have some more work ahead of you. So that's what I hope for. Thank you.

Thank you. Thank you very much, and thank you for cheering for us. We were just able to get the numbers that Cesar asked for, so let's go for it. In the last quarter, we had around BRL 20 billion with TEF — with an outstanding leadership, and we were quite ahead of the second company, Cielo, and we are operating very close to getnet.

So Linx Pay, about BRL 20 million. Our position now is around BRL 100 million. I think that's it, Cesar.

Operator

[Operator instructions] Our next question from Susana Salaru from Itaú.

Susana Salaru -- Itau BBA -- Analyst

Good morning. Thank you for taking my question and congratulations for all this trajectory. I have two questions. The first about Linx Pay.

Linx Pay accounts for 13% of your recurring revenue. Out of this amount, how much is transactional and how much of that 13% is TEF? And my second question is more related to e-commerce. Do you — are you thinking about developing an e-commerce solution for each of the verticals or this will be a more generalized solution that could be deployed anywhere, and as such, will generate higher scale?

Alberto Menache

Susana, thank you for your question. Our idea is to have unique platforms for each vertical. We have always believed in the specialization in the Core business. So fashion segment has its own needs, the pharmacy segment has its own peculiar needs and so on and so forth.

It's not the same thing to have — I mean it's one thing to have different platforms for different segments, but that doesn't mean that the technology cannot be shared because, in most cases, it could. There are several common components to the technology. And as such, we have lots of synergies between the different platforms. Now about the mix of the transactional revenue of TEF, I will give the floor to Denis because this quarter we already have a full consolidation of PinPag.

So we already included PinPag in those figures. So Denis, if you can help us shed some more light?

Denis Piovezan -- Vice President, Operations

Sure. Susana, thank you for your question. Here, what we have in terms of recurrent is about 35% and transactional 45%. So these are — transactional is growing.

So out of the 13%, the recurring revenue is like — almost half is transactional and the other half is the rest. Yes.

Susana Salaru -- Itau BBA -- Analyst

I just have a follow-up of another question from last night. Maybe you can help me with that. We received a question from an investor related to the fact that you will receive a percentage in cash and the other percentage of the transaction will be paid off in shares from Stone. But the discussion — well, this is such a nice deal and well accepted.

So why don't you receive more stocks and less cash in terms of how the payment will be done?

Alberto Menache

Susana, I cannot give you any further details about that at the moment, but — because at the end, to pay a certain premium for Linx's shares, it's a significant premium whenever we talk about the average price of the last 30 days. So that was the deal we arrived at. But I mean I cannot give you any further details.

Susana Salaru -- Itau BBA -- Analyst

OK. That's fine. And again, once again, congratulations for your trajectory because we have the opportunity to be with you from the very beginning, from day 1.

Alberto Menache

Thank you, Susana. Thank you for your dedication in covering us.

Operator

Next question is from Maria Tereza Azevedo from Santander.

Maria Tereza Azevedo -- Banco Santander -- Analyst

Hi. Thank you for taking my question. Congratulations for your transaction. I am also very hopeful that everything will be approved.

I have two questions. The first is whether you can talk about your contract with [Inaudible], whether there is any kind of penalty that will be incurred? And how are you going to make that transition from [Inaudible] to Stone so that you can capture synergies? And my second question is about the OMS projects. How is the rollout of that? And whether you added projects or you reduced the number of projects, and how do you see the competitive environment for e-commerce solutions? And congratulations once again.

Alberto Menache

Thank you for your question, Maria Tereza. In terms of our contracts with [Inaudible], unfortunately, I cannot give you any details about that. But we do not want to have any disruption, vis-à-vis Linx client. And in terms of OMS, I will let Jean answer that part.

Jean Klaumann -- Vice Presidente Digital and Omni Commerce -- Analyst

Good morning, Maria Tereza. Thank you for your question. The go-live of our first project should occur in Q4. We are finalizing the functionalities and we are working together with Linx Pay because we are also making available another concept that will include Omni and a whole network of franchisees.

So it's a very democratic product. But at the same time, it will serve franchisees right from the start. In terms of the competitive environment, we are growing our sales volume. We've been growing the sales volume in these past months.

We have about 50 new — we are adding 50 new customers per platform every month. And the average ticket is growing also in terms of signing new contracts. And this shows not only the quality of sales but through the volume, the sales volume that is growing that indicates that we are on the right track.

Maria Tereza Azevedo -- Banco Santander -- Analyst

Perfect. Thank you very much to both of you.

Operator

[Operator instructions] Our next question from Diego Aragão from Goldman Sachs.

Diego Aragao -- Goldman Sachs -- Analyst

Good morning and thank you for taking my question. Could you please comment on total GMV of clients? And correct me if I'm wrong, but Stone talked about BRL 300 billion of current GMV. Could you just elaborate a little about the performance of that? If we could compare it to last year or the pre-pandemic volume? And what is the behavior now during the pandemic period? So this is my first question.

Alberto Menache

Good morning, Diego. Thank you for your question. Those BRL 300 billion refer to everything that goes through our platform, meaning through our softwares -- what is invoiced by customers through our softwares. Volumes dropped substantially on the onset of the pandemic.

But right now, it's very close to what it was before the pandemic period with the exception of shopping malls because they are still facing some restrictions. But on the other hand, on the e-commerce side, the volume is much higher than it was in the past, but not so significant when we look at the total number of transactions that go through Linx payment.

Diego Aragao -- Goldman Sachs -- Analyst

Perfect. Can you also give me a breakdown of how much of that GMV occurred through physical stores and how much of that occurred online? That would just help me understand a little bit more about the mix of the volume.

Alberto Menache

The majority was through brick-and-mortar stores. The great majority was through physical stores. So we would have to get this entire volume and remove what Jean mentioned before. And with that, we will have the final result.

And I do apologize because I don't have that number from the top of my head.

Diego Aragao -- Goldman Sachs -- Analyst

Perfect. That's not a problem. So once again, thank you so much for this amazing partnership throughout the years. And as Susana said, we had the opportunity to follow your trajectory from day 1.

And once again, I have to congratulate you for this amazing track record and we will see you soon in the future.

Alberto Menache

Diego, I have to thank you because, in fact, even when you were in another company, I noted you've been monitoring us diligently. So thank you so much for your support now during all these years.

Operator

Next question from [Inaudible] from SSA Investments.

Unknown speaker

Hi. Good morning. I would like to talk a little bit about this recent deal between Linx and Stone. I am a founding partner of SSA investments and a Linx shareholder.

And this deal shows the strategic value of the company in addition to the growth potential of Linx. So Stone will be the main software company in retail. It will have robust solutions to cater to their clients. It also will have access to — I mean it has access to an enormous list of clients and they will operate in a segment now that they have low penetration.

So we have BRL 300 billion. In addition to large volumes on TEF, they will be able to offer online solutions to their customers. And so they are one of the leaders in this sector. This is a segment that has a huge growth potential.

Linx has already invested a lot in the last few years. In addition to omnichannel solutions, they have a large growth potential. They invested a lot in the last few years. Therefore, we understand that strategically speaking, this deal makes a lot of sense.

And this seems to be a great deal for Stone. And it's a business that does not contemplate all of this growth potential and the strategic value that I just mentioned before. I just want to understand a little bit of the rationale of this valuation.

Alberto Menache

We are talking about a premium of approximately 40% on the average price of the last period. This is a pricing that is above the targeting for most analysts, if not all of them, in the market. When we look at the earnings multiples and the EBITDA multiples, they are quite interesting. And throughout the years, we talked to several companies, but they never came this close to making a good proposal to us.

And even though things are moving quite well on the payment side, our projections, due to the pricing war that we had and looking at the profile of our customers, our customers and the vast majority are mid and large size, so that price war is very strong in these two market segments. And there is strong pressure from the banks in terms of selling integrated products like credit, acquiring, et cetera. For all of these reasons, we understood that it was a very good proposal and so that we should take it.

Unknown speaker

Thank you.

Operator

[Operator instructions] As there are no further questions, we now conclude the Q&A session. I would like to give the floor to Alberto for his final remarks.

Alberto Menache

I would like to thank you all very much because ever since we had our IPO, you were very diligent in covering us and you dedicated a lot of your time to write your report. So thank you so much, and we'll see you soon. All the best to all of you.

Operator

[Operator signoff]

Duration: 49 minutes

Call participants:

Alberto Menache

Ramatis Rodrigues -- Chief Financial Officer

Carol Pontes -- Investor Relations Manager

Daniel Federle -- Credit Suisse -- Analyst

Samad Samana -- Jefferies -- Analyst

Cesar Medina -- Morgan Stanley -- Analyst

Denis Piovezan -- Vice President, Operations

Fred Mendes -- Banco Bradesco -- Analyst

Jean Klaumann -- Vice Presidente Digital and Omni Commerce -- Analyst

Susana Salaru -- Itau BBA -- Analyst

Maria Tereza Azevedo -- Banco Santander -- Analyst

Diego Aragao -- Goldman Sachs -- Analyst

Diego Arago -- Goldman Sachs -- Analyst

Unknown speaker

More LINX analysis

All earnings call transcripts