Linx S.A. (LINX) Q3 2020 Earnings Call Transcript

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Linx S.A. (LINX)
Q3 2020 Earnings Call
Nov 10, 2020, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Linx conference call to present the earnings result of the third quarter of 2020. Today with us are Alberto Menache, Linx's CEO; Ramatis Rodrigues, CFO and IRO; and Carolina Pontes, investor relations director. We also have the Linx vice president, Gilsinei Hansen from Linx Core; Jean Klaumann from Linx Digital; Denis Piovezan from Linx Pay; and Flavio Menezes from marketing and people. We would like to inform that this event is being recorded and simultaneously translated in English.

[Operator instructions] This event is also being broadcast simultaneously over the Internet via webcast through ri.linx.com.br, where the presentation is available. Slides will be controlled by participants. And the replay of this event will be available shortly after its closure. Before proceeding, we would like to clarify that remarks made regarding business prospects, projections, operating and financial goals are the beliefs and assumptions of Linx's management, as well as information currently available to the company.

Future remarks are not a guarantee of performance and involve risks, uncertainties and assumptions as they refer to future events and therefore depend on circumstances that may or may not occur. Investors and analysts should understand that macroeconomic, industry and other operating factors may affect Linx's future results and may lead to results that differ materially from those expressed in such future considerations. Now I give the floor to Alberto Menache who will start the presentation. Please, Alberto, go ahead.

Alberto Menache -- Chief Executive Officer

Good morning. And thank you very much for your interest and trust in Linx. Despite the numerous impacts of the pandemic, we are seeing a recovery in the retail market. According to the most recent monthly survey of commerce from the IBGE, the month of August of 2020 presented a growth of 6% vis-a-vis August of 2019, making it the fourth consecutive month in retail growth since the beginning of the pandemic.

According to the Webshoppers survey by e-bit/Nielsen, e-commerce has registered BRL 39 billion in sales during the first semester of 2020. This is 47% above the first six months of 2019. And of course we are also following the gradual opening hours of malls and stores. Within this scenario, Linx has been capturing a number of opportunities in the market, leveraging the growth of Linx Digital and Linx Pay, which now represents 16 and 14% of the total recurring revenue of the third quarter of 2020.

As we have already discussed in previous calls, our intense investment in R&D and the recently signed partnerships have allowed the growth of these two areas even in a very challenging scenario for retailers, such as the one we are experiencing. The proof of this is that the GMV of the e-commerce platform more than doubled when comparing the third quarter of 2020 to the same period last year. This volume is above the pre-pandemic level. I would also like to highlight the accelerated adoption of solutions such as Payment Link, Gateway and QR Code.

And it is important to say that we are already ready for the interest of Pix. In September we bought Humanus, which is a payroll and HCM, human capital management, software company. And that serves midsize companies in different sectors of the company. As a result, we have strengthened our portfolio of back office solutions on our end-to-end platform since retail is highly labor-intensive, and there is a growing demand for people management tools.

All of this contributed to the results we released yesterday. Our recurring revenue growing 19% year over year, a net revenue of BRL 221 million with an organic growth of 7.5% and an EBITDA margin of 26%. In other words, even in this adverse environment, we are growing robustly and sustainably. As expected however, we had a sequential increase in provision for loan losses.

Something that Ramatis will comment. It is important to know that we continue with no significant impacts on churn despite the retail sensitivity in the current scenario. This is due to the differentiated profile of our customer base in our portfolio in addition to the low representativeness of monthly fees charged on retailers' billings. Finally, I want to say that our Opportunity Committee, formerly called Crisis Committee, remains active in monitoring the impacts of COVID-19.

And in addition to the various measures that have already been discussed in our conversation, it only guided us to return to the office in 2021 when the situation will be reassessed. With that we reaffirm our commitment to the long-term, guaranteeing the safety of our teams to service customers and suppliers, and consequently shareholders and the business. Before we proceed with the call, I would like to stress that next Tuesday, on the 17th, at 2 p.m. we will hold an EGM, exclusively virtual, to deliberate on the STNE proposal for the incorporation of all Linx shares in addition to other matters.

You may find more details in Subsequent Events section of the earnings release. And I emphasize that all documents related to the subject are available on our IR website. It is very important that all shareholders participate since as we are a dispersed capital company, and without defined controllers the decision of the minority shareholders in the meeting is sovereign. Well now I would like to give the floor to Ramatis to talk about the results of the third quarter of 2020.

Ramatis, please go on.

Ramatis Rodrigues -- Chief Financial Officer and Investor Relations Officer

Thank you, Alberto, and good morning to everyone. Piggybacking on Alberto's comment, I will start talking about the provision for loan losses which reached a 2.8% level over the net revenue of the quarter, that is BRL 6 million. Despite this, at the end of September, about 96% of the invoice with an extended term were up to date, a much higher percent than the 87% that we had at the end of June. It is important to remember that we have a comfortable cash position, BRL 245 million in net cash.

And excluding the gross debt, the amount linked to the lease resulting from the IFRS16 and the net earn out for accounts payable for acquisition, the adjusted net cash of Linx would be BRL 413 million in the third quarter of 2020. Now on Slide 3 we have the main highlights of Linx Core. Core's recurring revenue grew 3% year over year. Neemo Delivery App tripled its recurring revenue when compared to the third quarter of 2019, closing September with 4,000 active customers.

Hiper had a 51% increase in the customer base vis-a-vis September 2019. And its total recurring revenue increased 50% year-to-date compared to the same period of 2019. Millennium recorded a 41% increase in recurring revenues in the year, accelerating the integration of its solution with Linx OMS customers. The fashion vertical had a sequential increase of 68% in the level of signing new contracts, with 200% greater activation of customers compared to the second quarter of 2020.

Finally, we added 47 Linx franchises to our base, totaling 381 franchises in September, responsible for 35% of new activations in the quarter, reinforcing our cross-selling strategy. Still on Slide 3. We have the main highlights of Linx Pay that presented an important growth of 72% in total recurring revenue with -- where there was a decrease in the representativeness of EFT, which now accounts for 44% of total recurring revenue, while other solutions such as Payment Link, Gateway and QR Codes showed a significant growth in the third quarter of 2020. Here we also have an update of the POS, which was five times higher in nine months of 2020 compared to last year.

Now going to Slide 4. We have the highlights of Linx Digital where the total recurring revenue grew 55% in the quarter when we compare it to last year. The e-commerce platform and GMV doubled in size compared to the third quarter of 2019, with volume above pre-pandemic levels. Linx Impulse solutions represented 66% of the total Digital recurring revenue, growing 19% in the third quarter of 2020 versus the second quarter of 2020.

And the volume of ADS was 204% higher when we compare to the third quarter of 2019. Omni OMS ended the quarter with 20 customers and 6,800 rollout stores. In the same period, 326 retailers published their stocks on Linx partner marketplace, and we reached approval of 24 branches in the quarter for the sale of our Linx Digital Solution. Now I give the floor to Carol, Linx's IR director, to continue with the presentation.

Carol Pontes -- Investor Relations Manager

Thank you, Ramatis, and good morning to everyone. On Slide 5, we see that recurring revenue reached BRL 216 million, representing 85% of the gross revenue, 19% higher than the third quarter of 2019 and 4% higher than the second quarter of 2020. In this quarter Linx Core represented 70% of total recurring revenue; Linx Digital, 16%; and Linx Pay, 14%. This variation is explained by the constant growth in demand for digitization solutions that started in the last quarter due to the impacts of COVID-19.

Now on Slide 6. We can see a growth of 12% in net revenue compared to the third quarter of 2019, and 4% compared to the second quarter of 2020. Moving to Slide 7. We show that the adjusted EBITDA totaled BRL 57 million in the quarter, 22% higher than the third quarter of 2019 with an adjusted EBITDA margin of 26% in the third quarter of 2020.

210 bps is higher in the year-on-year comparison. Finally, on Slide 8, we show that nonrecurring expenses for the quarter which totaled BRL 13 million. This amount is mainly composed of legal and financial advisory expenses arising from Linx' proposal by STNE and Linx's stock option plan, the impact of revenue from prepayment of receivables offered by Linx Pay Hub allocated to the financial result, and expenses related to due diligence process and acquire companies, and net earnout reversal involving a company acquired by Linx in 2019. Thank you for your attention.

And now we will go to our Q&A session on the quarter's results.

Questions & Answers:

Operator

[Operator instructions] We would like to remind you by the EGM of November 17th can be carried out subsequently to the IR department of the company. Our first question from Daniel Federle, Credit Suisse. You may proceed.

Daniel Federle -- Credit Suisse -- Analyst

Thank you for taking my question. The first one would be regarding Pix. Do you have a way to monetize the Pix? And can Linx receive this in a digital account? Has this been authorized by the Central Bank? And is Pix is at the same level as the acquirers? And I didn't understand if we can pose a question regarding EGM. I would like to know about the scenario of receiving a second advantage proposal.

OK. Can you -- or if you receive a good proposal, will you postpone this? Do you have this flexibility if you have -- if you receive an offering between today and the EGM?

Alberto Menache -- Chief Executive Officer

Daniel, this is Alberto speaking. Thank you very much for your question. As we mentioned in the beginning, when we spoke about the EGM, we are not going to answer questions on the EGM. We are going to focus our Q&A on the company's results on our strategies.

And our IR is at your disposal to answer any questions regarding the EGM. I will give the floor now to Denis so he can answer your question about Pix. And thank you for your question.

Denis Piovezan -- Linx Pay -- Analsyt

Daniel, thank you for the question. Now regarding the Pix monetization, yes, we will monetize according to the limits established by the Central Bank. We have a strategy for each one of our verticals. We are working with the Linx Core team for this offering.

We have a significant amount of customers that adhere to our solution together with the PDV, the POS. There is an advantage, and it is simple when we compare it to a nonintegrated solution that comes from other competitors there. So we do have a solution where we will monetize, and it will be better integrated than the competition. We are very optimistic, and we are ready to start as of the 6th.

Daniel Federle -- Credit Suisse -- Analyst

Very clear, your answer. Thank you very much.

Operator

[Operator instructions] As we have no further questions, we will bring our Q&A session to an end. I would like to give the floor to Mr. Alberto Menache for his final remarks. Mr.

Alberto, you have the floor.

Alberto Menache -- Chief Executive Officer

Once again I would like to thank all of you for your attention. Our results has given us great satisfaction because we have a team that is highly committed. Therefore, I thank my team because they have worked exceptionally. I thank all of our shareholders and I strength and the invitation so that everyone can participate in the EGM on the 17th that will deliberate on the orders of the day.

Thank you very much and until -- and see you on our next earnings result call.

Operator

[Operator signoff]

Duration: 22 minutes

Call participants:

Alberto Menache -- Chief Executive Officer

Ramatis Rodrigues -- Chief Financial Officer and Investor Relations Officer

Carol Pontes -- Investor Relations Manager

Daniel Federle -- Credit Suisse -- Analyst

Denis Piovezan -- Linx Pay -- Analsyt

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