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spk01: Good morning, everyone, and welcome to Symantec's second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, we will conduct a question-and-answer session. As a reminder, this call is being recorded. I would now like to turn the call over to Augusto Vilela, Symantec's Head of Investment Relations and M&A. Please go ahead.
spk06: Thank you.
spk03: Good morning, everyone, and thanks for joining our second quarter 2023 earnings conference call. Joining me on the call today is Leonardo Santos, our CEO, founder, and chairman, and Adriano Caldi, our CFO. By now, everyone should have access to our earnings announcement. This announcement is also on our Investor Relations website. During this call, we will make forward-looking statements, including statements about our business outlook, strategies, and long-term goals. These comments are based on our plans, predictions, and expectations of today, which may change over time. Our actual results could differ materially due to a number of risks and uncertainties, including risk factors outlined in our 20-F file with the SEC. Also during this call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not intended to be substitutes of our GAAP results. Please refer to our earnings release on our Investor Relations website for a reconciliation of GAAP to non-GAAP financial measures, as well as additional context on our key operating metrics. And finally, this call in its entirety is being webcast from our Investor Relations website at ir.tematis.ai. And another replay will be available on the site in a few hours. With that, I'd like to turn the call over to Leo. Leo, good morning.
spk04: Thank you, Augusto, and thank you, everyone, for joining us today. I'm excited to talk about the progress we made in the second quarter and continued innovation across our platform. Going direct to our results, in the second quarter, we delivered total net revenue of 48 million reais, representing a 4% increase year over year. We continue to see benefits of our transition to the proprietary SaaS which grew 47% year-over-year. Gross margin saw another material year-over-year expansion, increasing 15 percentage points from the same period last year. And I am pleased to report that we are tracking toward achieving our objective of positive adjusted EBITDA in the 40 quarter. As awareness and demand for AI-driven applications has increased, we are seeing the customers increasingly turn to the semantics for unique value propositions that address a wide range of business and data challenges. Semantics has long held the belief that data is the raw material for AI. This belief has informed how we are building and innovating every day, and we have maintained a rapid pace of development of new generative AI features over the last several quarters to capture this accelerated demand. With a growing portfolio that now covers multiple solutions, we are organizing our products into the sets of ready-to-use AI applications. designed to specific industry use case, all of which run on our AI platform. Indeed, our proprietary highly scalable end-to-end data and enterprise AI platform was designed to enable organizations to extract value from data in a time efficient way. This platform is comprised of the multiple models which we have organized into a data analytics hub to efficiently process large development in a scalable manager, a developer-friendly integration hub, a GenAI hub that allows the creation of the complete AI solutions, and an ML hub that facilitates the development and management of machine learning models and LLM. We continue to leverage an agile and design-based approach across our AI platform. And we plan to accelerate product development, leverage our deep bench of engineer talent, complemented by selective M&A. I would also like to share a few key wins from the quarter and highlights after the commercial partnerships that significantly contribute to our proprietary software. distribution by combined semantics products with department technology. The first win I would like to highlight is Quasar, an asset management with the 2.7 billion reais in asset management that is a pioneer and directly lending in the result. Quasar chose semantics platform to build intelligent process and systems, including the consolidation of over 15 data sources into a unified sources of truth. In addition, we are structuring a Delta Lake, organizing analytical, environment, and development models for anti-fraud, credit analysis, asset pricing, and cash flow management. Our comprehensive engagement with the Quasar will culminate in generating a TDI application that will not only automate the Quasar internal process for information extraction and reporting generation, but will also serve as a customer-facing service, providing clarity and customized reports to all stakeholders. Overall, our partnership with Quasar is illustrative of Symantec's ability to address highly complex and scalable deployments, accelerating Quasar's entry to the machine learning and AI world, while driving efficiency and excellence in their operations. Next, a larger Brazilian bank and existing Semanticist customer selected us to build data analytics across several internal departments, ultimately enabling the bank to leverage AI and generative AI. This material upsell is reflecting our successfully landing and expanding strategy. and we are looking forward to expanding our partnership and across-sell additional AI applications. In the healthcare segment, we are excited to announce a new initiative with our existing customers, which is one of Brazil's largest healthcare providers, achieving both insurance and care. Together, we are developing a comprehensive generative AI solution aimed at simplifying the management of the hospital operation and health insurance costs. The initial version of the solution has successfully completed testing, and our near-term focus lies on enhancing the algorithm's contextual understanding. This includes generating insights from the standardized data sets, industry business alerts, and recommending action plans aligned with the best practice. Likewise, with the pharma sector, we are preparing for the launch of the vertical, specifically generative AI interface. This interface is built in our current public data set and sophisticated epidemiologic analysis This will enable data-driven insights into the strategy, pharmaceutical, economic inquiries. This innovation empowers the pharma industry to optimize their market and sales strategy with the high-tech efficiency. Moving to commercial partnerships, during this quarter, we signed a partnership with the Elastic and Neo4j in conjunction with the Google Cloud. This partnership will empower Semantic to offer a broader range of solutions to customers, integrating not only our own products, but also complementary offerings from these providers. This collaborative approach enables us to cater to the wider range of customer needs, while also extending the customer reach of both Semantic and our partners. By joining forces, we will be able to immediately expand our cross-sell opportunities, connect with the more diverse segments, and provide holistic solutions that resonate across industries. This synergy is not only enhancing our customer base, but also strengthening our partners' visibility, fostering and mutually beneficial exchanges in customer reach and market presence. In summary, we had a strong quarter, having passed our first year as a public company. I'm incredibly proud of what the Semantic team has accomplished in such a short time. I'm confident that we are better positioned to deliver sustainable growth while driving improving leverage in our model. With that, I'd like to turn the call over to Semantic CFO Adriano Caldi, please.
spk05: Thank you, Leo, and thanks everyone for joining us. I will start by reviewing our second quarter results and then move on to providing guidance for 2023. In the second quarter, we delivered net revenue of R$ 48 million, representing growth of 4% year-over-year and 21% quarter-over-quarter. Our growth was driven by proprietary SaaS revenue, which increased 47% year over year, with a strong contribution from our AI application products. Overall, proprietary SaaS and services revenues increased to 50% of total revenue from 44% in the year-ago period, increasing the amount of revenue generated by Symantec's intellectual property in the quarter. Gross and higher margin proprietary assets and improved cost efficiency drove meaningful improvements to our gross profit, which increased 51% year-over-year. We delivered gross margin of 47% and increased of 15 percentage points year-over-year. Moving to our operating expenses, we remain focused on improving the leverage in our business while investing for growth. Non-GAAP SG&A, which is net of merger-related costs and stock-based compensation and other non-operational expenses, grew 33% year-over-year in the second quarter. The increase in SG&A was due mostly to higher level of expenses related to sales and marketing as we have been enhancing our proprietary sales go-to-market emotions. The increase in R&D was due to ongoing investment in our proprietary platform and technology. Adjusted EBITDA loss for the second quarter of 2023 was R$ 26 million, reflecting an adjusted margin of negative 54%. As of June 3rd, we had cash and cash equivalents of R$ 151 million. Note that during the second quarter we paid a total amount of 20 million reais in banking loans and executed 12 million reais in share repurchases. We are actively monitoring and concurrently implementing measures aimed at enhancing profitability and reduce cash consumption. I'm glad to report that during the quarter we identified additional opportunities for efficiency in both fronts. As a result, we have reduced our cash disbursements by approximately 20% on an annualized basis. The majority of these efficient gains were on contracts such as insurance, cloud, and other vendors. And we also reduced headcount based on employees' performance. We expect these changes to be further realized over the next 12 months starting in July 2023. With regard to the near-term environment, we are continuing to see the impact of microeconomic headwinds affecting broader IT expenditures. Consistent with our commentary in the last quarter, many customers and prospects are taking longer with their purchase decisions and require an extra layer of approval in budgeting processes. We remain extremely mindful of these dynamics and have considered them closer in our outlook for the remainder of the year. That said, we remain committed to innovating and investing for the larger portfolio ahead while managing expense levels to improve our profitability. Turning to the forecast for the full year 2023, we are reaffirming our guidance for proprietary SaaS revenue. As we have highlighted, we are introducing several new features that are already impacting our pipeline. As a result, we anticipate gaining significant momentum in proprietary SaaS revenue in the second half of this year. Our approach to proprietary SaaS is undergoing a deliberate shift, prompting us to channel our sales and marketing efforts accordingly. and we are realigning our financial objectives to prioritize improved profit margins and revenue quality. In this context, we are no longer guided for full-year revenue, aligned with our long-standing strategy on focusing on proprietary sales growth. As a reminder, third-party revenue has been hard to predict, and we may choose not to sell or renew certain high-tech third-party contracts with low profit margins. Finally, reflecting the margin benefits from increased mix of proprietary assets throughout the year and the full impact from recent cost saving initiatives, we reiterate our goal of reaching the milestone of positive adjusted EBITDA in the fourth quarter of this year. As we look ahead to the balance of 2023, while micro-industry dynamics remain a factor, We remain focused on the significant opportunity ahead of us and are committed to fiscal discipline and driving compelling returns for our shareholders. With that, I'd like to turn the call back to Léo for some closing remarks.
spk04: Léo? Thank you, Adriano. Our operation initiative and dedication to our car business are yielding tangible results. as evident by our exceptional second quarter performance. I am very proud of the collective support from the customer, partners, semantic team, and investors on this journey, shifting the company toward proprietary SaaS products. We are actively engaging with our customers through the various channels, including the new established advisor board that commences its meeting in T2. This customer-centric approach has brought about this important evolution in our go-to-market strategy and product positioning. Our product roadmap is advancing with a strong emphasis on deploying AI applications together with our customers. We are embracing a building partnering or acquiring approach, a strategy reflected in the successful partnership we have made this quarter. I would like to thank our team and our value investors. Your support has been instrumental in our journey. To all those who have joined us, we extend our gratitude. Now we can start our Q&A session. Thank you so much.
spk01: Thank you. If you would like to ask a question, please press star 1-1. If your question hasn't answered and you'd like to remove yourself from the queue, please press star 1-1 again. One moment for questions. Our first question comes from Rudy Kessinger with DA Davidson. Your line is open.
spk02: Hey, guys. Thank you for taking my questions. on the SAS revenue growth, just, you know, the last couple of quarters, it's obviously it was, I think, 24 million rials in Q4 down to 10.4 in Q1, and then a nice jump sequentially here to 15.2 million. So I guess maybe just one, could you, could you share maybe a little bit more insight into how much of the proprietary SAS revenue is pure consumption based in a quarter, as opposed to a fixed contract with, with straight line rev rec. And then secondly, um, Just what drove the strong growth quarter-over-quarter from Q1 to Q2?
spk05: Hey, Rudy. This is Adriano. Thank you very much for your question. Great question. Yes, we had a small part of the proprietary SaaS revenue in Q2 refers to fees related to a higher consumption for our customers. However, it's a low level when compared to Q4 2022.
spk02: Okay. And then, so should we expect that seasonality that we saw last year with Q4, you know, being the much higher share of, I guess, proprietary SaaS revenue for the year? Should that typical seasonality play out again this year, i.e., you know, Q3 is maybe up a bit from Q2, but really we'll see most of the growth in Q4 for SAS?
spk05: Yeah, we expect it to be similar from what we saw in the Q2022. It's a similar movement. OK.
spk04: Got it. That's helpful. Just complimentary here, Roger. How are you doing? So the strategy to execution and expanding in technology in here in the GDP, especially in Brazil, in the key three and key four. We have right now is a great pipeline, building a great pipeline to convert in the key three and key four.
spk02: Got it. Okay. And then, Adriano, on the gross margin front, Very good improvement year-over-year. I mean, 1,500 basis points. That's very impressive. How should we think about how gross margins should trend, you know, Q3, or excuse me, Q2 to Q3 and Q3 to Q4?
spk04: Yeah, we maintain the guidance because this is reflective for the strategy to execution the proprietary and the migration for the platform.
spk05: Just complementing, Rudy. Yeah, thank you for your words. We are pleased with the proprietary SaaS margin we deliver in the Q2. And based on our pipeline and our projections for the second half, we are confident in meeting the profitability target.
spk04: Okay, and then... Consistently, Rudy, you remember in the P4, P1, P2, the company execution, the plan for your strategy proprietary. That's the reflect for the amazing teamwork.
spk02: Is there a... I guess I'm curious, what have you seen to date in terms of migrations from your third-party software customers to proprietary SaaS? And going forward, I know you're narrowing the guidance you're giving, but just more focus on proprietary SaaS as opposed to the whole business. Do you envision more migration from third-party software customers to SaaS? Or what is your game plan there with that base of third-party customers?
spk04: Yeah, 100% for the go-to-market strategy for the company is a proprietary software. So we have a lot of opportunities in terms of the migration because the AI consumes many, many areas and many, many segments in the industry. For example, the company launched an agribusiness segment here. Just to reflect, 25% of GDP in Brazil represents the agribusiness. That's amazing and a great opportunity for us to consume and to deliver products to proprietors product for this segment, for example. We saw this in the next few quarters, especially in AI application, really. So right now, it's a buzzword in terms of AI, but of course, the company in semantics is born to use AI. And of course, many new customers enter to generate a new lead, and the team here has a commitment to convert these leads in this key three and key four.
spk05: Just to complement Leo's speech, Rudy, we are fully dedicating our sales team on proprietary SaaS go-to-market, complementing the answer here, and we are closing relevant contracts, as Leo said, with important customers. About the third party, we will sell third party when it makes sense from the point of view of our land expense sales motion. setting us to cross-sell proprietary products especially, with special consideration given to margins, okay, and long-term customer relationships. So we are very focused on profitability regarding 234.
spk02: Okay, and then just lastly, I know you're still targeting positive EBITDA margins in Q4. Is that one of the same, you're targeting positive free cash flow margins as well in Q4, or no?
spk05: and and and also i guess where do you envision cash bottoming on the balance sheet before you turn free cash flow positive well we are not expecting okay uh as we discussed there is a seasonal concentration of third-party sales revenue in q4 uh this revenue line dynamic implies some working capital consumptions preventing us from generating cash in the q4
spk06: Okay, got it. That's helpful. That's it for me for now. Thank you. Thank you, Roger, for your question.
spk01: Thank you. There are no further questions at this time. I'll turn the call back over to Mr. Santos for closing remarks.
spk04: Thank you. Thank you for your question. My team and I are dedicated to our execution, our customer-centric and proprietary product strategy. We are happy to see that 60% of our revenue is already semantics intellectual property. However, we are also mindful of our responsibility to our customers and profitable and quality products. Thank you all for joining us, and we are still at your disposal through our investor relations contacts. Thank you.
spk01: Thank you for your participation. You may now disconnect.
spk04: Everyone, have a great day.
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