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spk03: Good morning, everyone, and welcome to Semantics' third quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. To remove yourself from the queue, simply press star 1-1 again. As a reminder, today's call will be recorded. Now I'd like to turn the program over to Augusto Villela, Semantics Head of Investor Relations and
spk02: Please go ahead, Sarah. Thank you. Good morning, everyone, and thanks for joining our third quarter 2033 earnings conference call. Joining me on the call today is Leonardo Santos, our CEO, founder, 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 the risk factors outlined in our 20F filed with the SEC. Also during this call, we will discuss certain no-gap financial measures. These non-GAAP measures are not intended to be a substitute of our GAAP results. Please refer to our earned utilities on our investment relations website for reconciliations of GAAP to non-GAAP financial measures, as well as additional context on our operating metrics. And finally, this call is being webcast from our investment relations website at ir.semantics.ai. And another replay will be available on the website in a few hours. With that, I'd like to turn the call over to Leo. Leo, good morning.
spk06: Thank you, Augusto, and thank you all for joining us today. I'm excited to talk about the progress we made in the third quarter and continued innovation across our platform. In Key3, we observed significant year-over-year growth in revenue from AI, particularly in our priority verticals, such as agro, finance, and health. We remain optimistic about the further growth opportunities. Notably, our proprietary size revenue saw an impressive 41% year-over-year growth, largely driven by the success of our AI application. I'm glad to announce that 53% of our total required revenue comes from the Semantic's intellectual property. which means proprietary products and consulting AI services, up from 29% in the same period last year. This shift reflects our ability to execute against our strategy, solving client challenges along the way. This improved revenue mixed toward highly quality income, combined with our strategy cost-saving initiatives, It's positively impacting our gross margin, driving into our impressive record high of the 62%, reaching a remarked 14% point increase from the same period last year. It's giving us confidence on our strategy of pursuing sustainable growth on proprietary products and accelerating our path to operational cash break-even. In this contest, as Adriano will elaborate on, I'm pleased to announce our goal of achieving operation cash generation in the full year of 2024. We are observing a growing attraction and customer demand for AI-based business solution. And for this reason, we have already identified new opportunities for launch AI applications. In the current quarter, we unveiled an innovative retail application with the user-friendly, no-code, touch-free interface and a seamless integrated, ready-to-use solution. These initiative models are available now. in especially designed to elevate the customer experience through the SAMLAS integration, data collectives, and analyzing across both physical and digital customer touchpoints. This is empower retailers with the invaluable insights delivered from their data, enable real-time decision making, and providing them with the competitive edge in understand customer behavior and stand up to date to involving market trends. In the current quarter, we introduced Chatfarm, a cutting-edge application that serves as a GAI layer with a farm application. This is a revolutionary feature in power from a sales team industry executives to the semis engage with the semantics unique health data set using generative AI. As a result, it enables them to efficiently access available insights, complete with the dynamical regenerate tables and charts, thanks to our multi-generative AI technology. This is advanced significantly, emphasizes their capacity to expand strategies and design effective to the go-to-market strategies. We have the SAMLabs integrated for powerful AI algorithms into our health application. And they are already making a positive impact within hospital operation, generating substantial value from our customers. I'm especially proud of this because we can go beyond our proposed of impacting lives and actually contribute to the health system and save people's lives. These algorithms were successfully implemented during the third quarter, resulting in a significant boost to the competitiveness of the Semanticist products, all achievements with minimal cost implications. Semanticist has expanded its JNAR hub with the addition of several specialized LLMs, reaffirming its position as a truly multi-generative AI platform. These LLM models are tailored for various tasks, ranging from source code generation to the natural language understanding, among others. By combining these models, Semantics enables the creation of agents that labor with unique abilities. In addition to the product appeal across all industries, this development not only benefits Semantics customers, but it also accelerates the company's AI application development process. Semantics is actively engaged in a multiple application development and testing projects in collaboration with the valued clients. We then and often identify opportunities to scale sustainable and efficiently while keeping costs under control. Our multi-LLM management layer emphasizes security for business, insurance data privacy, and control. Customers don't need to worry about the data leaks as the concern is the integrated within. There are all infrastructure providing complete control, auditability, and maximum security. Our technology allow us to extract the best feature from each LLMs, whether they come from the partners, open sources, or private sources. I would like to highlight a few keys to win from the quarter. We have secured new clients across various industries with a strong presence in the finance, agribusiness, and health sectors. For instance, we have worked in a use case for exporting companies on a comprehensive solution that includes intelligent stock control, asset management, risky calculation modeling, and more. This specific application also simplifies stock exchange operations, enhancing efficiency and cost control. In the financial market, similar to the Quasar model reported on the last quarter, we have created a data architecture for a large Brazilian asset management company, enabling to efficiently improve operations capabilities. eliminating weeks-long delays in some workflows. In the pharmaceutical sector, we have a structured platform support strategy due to market planning and monitoring of the market, demonstrating how Semanticys is well-positioned in this market. We recently signed a contract with the Global Laboratory to enhance the management of oncology patients in the Brazil public health system with a focus breast cancer. In summary, our AI-focused strategy is wielding positive results. We have helping our clients extract intelligent through AI, all while maintaining the cost efficiently and accelerating our AI application development process. With that, I will pass the call to the Semantic CFO, Adriano Caldi.
spk05: Thank you, Leo, and thank you all for being with us today. Let's jump into our third quarter results and provide some insights into our 2023 outlook. But first, let's briefly review what we discussed in our previous call. We emphasized our strong commitment to financial sustainability and our strategy to improve profit margins. especially with our larger third-party software contracts. During the third quarter, we proactively obtained ways to further reduce our cash outflows and move closer to our goal of achieving operational cash breakeven in 2024, as Leo just mentioned. In August and September, we reviewed our workforce and made strategic adjustments to prioritize our investments and strike a better balance between growth and profitability. As a result, we managed to reduce our annual total cost and expenses by a solid 30% compared to the analyzed numbers from June 2023, excluding costs related to third-party software. Now let's talk about the impact of these initiatives on third-quarter results. We reported net revenue of 40 million reais, which, due to the strategic move of not renewing some low-margin third-party contracts, is down 51% year-over-year and 17% compared to our previous quarter. Therefore, as expected, we saw significant improvement in our revenue mix. Our proprietary assets revenues grew by 41% year-over-year, making up 37% of our total revenues in Q3 2023, up from 13% in the same quarter last year. On the other hand, revenues from third-party software decreased by 67% year-over-year and represented 47% of our total revenues. down from 71% in the same period in the prior year due to the context I just mentioned. As predictable, these changes had a meaningful impact on our gross margin. The combination of a better revenue mix and improved third-party soft revenue quality pushed our gross margin to a historic high of 62%, marking a 14% point increase year-over-year. Now, moving to the operating expenses, we are still seeing material amounts associated with our restructuring efforts, mainly termination costs. We anticipate that the full benefits of our efficient improvement will be noticeable in the coming quarters. Our non-GAAP SG&E expenses, which exclude murder-related costs, and stock-based compensation decreased by 5% year-over-year in the third quarter, mainly due to the restructuring efforts mentioned above. Our adjusted EBITDA for the third quarter of 2023 showed a loss of R$17 million, resulting in an adjusted margin of negative 43%. As of September 3rd, we had R$111 million in cash and cash equivalents. It's important to note that during the third quarter, we paid a total amount of R$9 million in bank loans. As for the near-term business environment, we are still navigating the microeconomic headwinds affecting IT expansion. Customer and prospects are taking more time to make purchase decisions, often requiring additional layers of approval in their budgeting process. We are fully aware of these challenges and have factored them into our outlook for the rest of the year. Nonetheless, we are committed to innovation and strategic investments while keeping a close eye on our expenses to improve profitability. Looking ahead to 2023, we have been closely monitoring market conditions and have recalibrated our strategic priorities towards sustainable growth. In this context, we have decided not to provide the specific revenue guidance for the rest of the year. Our focus remained on achieving a balance between growth and profitability and operational cash generation in 2024, emphasizing the importance of managing our financials wisely. In conclusion, while we acknowledge the industry dynamics and the evolving landscape, we are enthusiastic about the opportunities ahead. We are dedicated to prudent financial management and delivering values to our shareholders. With that, I'd like to turn the call back to Léo for some closing remarks. Léo, the floor is yours. Thank you.
spk06: Thank you, Adriano. This quarter, we maintained a strong focus on our business strategy for AI, aligning the calls only with our customers' needs while accelerating our AI application development process. As Adriano mentioned, we are also very mindful of balancing growth and profitability. I'm very proud of the collective support from customers, partners, semantic team, and investors on this journey of the shift to the company toward proprietary SaaS products. Our product roadmap keeps advancing with a strong emphasis of developing AI together with our customers. I'd like to thank you, 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 Q&A session. Thank you.
spk03: Certainly. Ladies and gentlemen, as a reminder, if you have a question at this time, please press star 11 on your telephone.
spk01: One moment for our first question.
spk03: And our first question comes from the line of Rudy Kissinger from DA Davidson. Your question, please.
spk04: Great. Thank you for taking my questions. I want to start on the revenue side of things. On the third-party software revenue, and look, I know you guys aren't giving guidance, but is is I guess the level of revenue in Q3, is that roughly what we should expect in Q4 and going forward, or is there another chunk of that revenue that you intend to non-renew over the near term?
spk05: Hi, Rudy. Thanks for the question. We have the same level we are expecting. We don't give guidance for this, of course, But we have a projection of that similar to what we had in mind for that. But we don't have guidance for this.
spk06: Okay. It's a little in here, implementing here. And the focus is proprietary software. You saw the numbers in terms of the change and the shift to the company for the margins. is very important for the profitability, rentability in the future for the company. Because of that, of course, 100% of the force and the focus for the team here is staying in the proprietary software. You saw the pipeline is going up. You saw the margins growing up. You saw the rentability going up. Because of that, we announcement to generation cash flow in a full year, 2024. We stay in the, I think, in the best way in terms of the execution strategy. And of course, for collective amazing opportunity in terms of the AI in the front. The semantics is in the front of this journey in terms of the AI, especially in Latin America. And the future, in my opinion, and the vision here is amazing. The numbers talk about that. Just for complementing here, would you?
spk04: Okay, that's helpful. And I guess, look, I understand the shift to proprietary SaaS obviously has much higher margins. I think it's beneficial for the company longer term. I'm just trying to think near term and how to calibrate our models. And so I guess, Adriano, a similar question on proprietary SaaS. I know last year from Q3 to Q4, you had very strong sequential growth and there was some, I don't want to call it, I don't know if it was one-time healthcare-related revenue or not, or if that was seasonal revenue that you expect to repeat. But just how should we think about the sequential proprietary SAS revenue Q3 to Q4 this year.
spk05: Hi, everybody. As we highlighted, we are seeing traction and demand for AI applications, and our growth rate will depend on our projections and product development capacity, as we are currently reassessing investment priorities. On the other hand, we are very, very careful on new sales renewals, but we cannot say exactly and cannot give this guidance for the proprietary. As Leo said, we have a strong pipeline, but we cannot predict the level of that.
spk04: Okay, that's helpful. And I know the prior target was EBITDA break-even in Q4. It seems like that's certainly pushed out to some point next year. But I guess I want to be clear. The cash flow break-even target on operating cash flow, is that by some point in 2024, or are you trying to be cash flow break-even for the balance of the full year in 2024? Oh, full year.
spk05: Yeah, Rudy, but the restructuring process and changes we are currently making at Semantic seem to focus on proprietary SaaS and operational cash break even by 2024. And it is applying material changes in our P&L. So our decision not to renew or sell low margin third-party software contracts are considerably reducing our total revenue forecast. and negatively impact on our expectation in the short term. However, this same decision will drive us to more sustainable growth and health financials in the future with a material positive effect on the working capital, accelerate the past operational cash break even in 2024. Okay.
spk04: Okay. And just lastly for me on the balance sheet, I mean, the cash is, I know you're making cost cuts. That's going to take some time to flow through and the So where should we expect cash to bottom and what is your capacity to borrow? Do you have any outstanding revolvers that you haven't tapped or anything that you could tap if you needed to?
spk05: In terms of cash, we had a large operational cash disbursement, which is expected to decrease in the upcoming quarters due to the revenue growth and important facts we had in Q3 related to restructuring expenses. We see a breakdown of it basically in the EBITDA, working capital, and debt repayment. That's it we have for debt.
spk06: Just for complementing here, Egorgy, just for complementing here, in the last year, we have no recurring revenue in terms of the line, in terms of the sales. I don't have this clearing for this is a repeat for this year, but it's, you know, the pipeline is growing up and the convert rate is growing up. In terms of the cash, the expectation is generating a control and balancing control pool year for 2024. We are very confident to take control in this year, of course, in K4 right now. We reduced 30% of the enforcement. The plane, of course, is a shift. It's growing cold, a lot of people. And that will continue. That we're looking for key four in here. And our cash flow in here is in the control. It's very confident about that. Okay, got it.
spk03: Thank you for taking my questions. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to management for any further remarks.
spk06: Okay, thank you all for joining us today. We strongly reaffirm our commitment to excellent and continue pursuit of profitability company. So I'm very excited to continue the hard work together with our team and clients and investors in celebrating more achievement in the near future. We're looking forward to results of this year, and thank you so much for joining us in the call, and have an amazing day for everybody.
spk03: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
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