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Edited Transcript of LINX3.SA earnings conference call or presentation 14-Nov-19 2:00pm GMT

Q3 2019 Linx SA Earnings Call

Sao Paulo Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Linx SA earnings conference call or presentation Thursday, November 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alberto Menache

Linx S.A. - CEO & Vice Chairman of the Board

* Alexandre Kelemen

Linx S.A. - IR Officer

* Antonio Ramatis Fernandes Rodrigues

Linx S.A. - VP of Finance

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Conference Call Participants

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* Carlos Eduardo Palhares Sequeira

Banco BTG Pactual S.A., Research Division - Head of Research & Analysis and Brazil Strategist

* Daniel Federle

Crédit Suisse AG, Research Division - Research Analyst

* Diego M. Aragão

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Guilherme Haguiara

Banco Bradesco BBI S.A., Research Division - Research Analyst

* Leonardo Olmos

BofA Merrill Lynch, Research Division - Research Analyst

* Marcelo Peev dos Santos

JP Morgan Chase & Co, Research Division - Senior Analyst

* Susana Salaru

Itaú Corretora de Valores S.A., Research Division - Sector Head, Telecommunications, Media & Technology

* Vinicius Serrão Ribeiro

UBS Investment Bank, Research Division - Associate Analyst

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Presentation

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Operator [1]

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[Interpreted] Good morning, ladies and gentlemen, and thank you for waiting. Welcome to Linx' Third Quarter 2019 Results Conference Call. With us here today are Mr. Alberto Menache, CEO of Linx; Ramatis Rodrigues, CFO; and Alexandre Kelemen, Investor Relations Officer.

We would like to inform that this event is being recorded and simultaneously translated into English. (Operator Instructions)

This event is also being broadcast live via webcast and may be accessed through Linx' website at ir.linx.com.br, where the presentation is also available for download. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded.

Before proceeding, let me mention that any forward-looking statements about future events, business outlook, projections, operating and financial results are based on beliefs and assumptions of Linx management in addition to information currently available to the company. Future considerations are not guarantee of performance as they relate to future events and, therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that conditions related to macroeconomic conditions, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements.

Now I will turn the floor to Mr. Alberto Menache who will start the presentation. You may proceed, sir.

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Alberto Menache, Linx S.A. - CEO & Vice Chairman of the Board [2]

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[Interpreted] Good morning, everyone. Thank you so much for your interest in Linx. I would like to start by talking about a study publicized for the first time by IDC about the e-commerce market. And as presented in Slide 3, Linx reached 12.2% market share, according to that study, growing 450 basis points when compared to the year of 2017, occupying a solid position as the second largest player in the market. In our opinion, these figures stem from our investment efforts at Linx Digital.

In the last 5 years, we invested over BRL 280 million between acquisitions and R&D to develop digital services natively integrated to our end-to-end platform. With that, we enable the digitalization process of our clients through our e-commerce platform, giving them a personalized purchasing experience through Linx Impulse, which the search, recommendations and targeting, in addition to engaging retailers in OmniChannel once they hire OMS.

Still on Slide 3, I would like to highlight the acquisition of SetaDigital that also occurred in October. They're a reference in ERP and POS for the footwear industry, and this reemphasized the fashion vertical, allowing us to do cross-sell between Linx Pay Hub and Linx Digital to its base of approximately 2,100 customers.

And now before getting into the results for the third quarter, I would like to introduce to you Ramatis. Ramatis is our new CFO, and I would like to invite him to introduce himself to you.

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Antonio Ramatis Fernandes Rodrigues, Linx S.A. - VP of Finance [3]

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[Interpreted] Thank you, Alberto, and good morning to you all. First of all, I'd like to take this opportunity to introduce myself. My name is Ramatis Rodrigues. I have 30 years of experience in this market. And before joining Linx, I worked for large retailers like Grupo Pão de Açúcar, Carrefour and C&A.

I'm highly motivated by the challenges ahead of me at Linx because Linx is a leading technology company for the retail industry. And I also had the opportunity in several other occasions to have contact with Linx throughout my professional career in retail.

One of the major goals of the company is to enhance the progress of the governance processes, including the implementation of SAP, which is mandatory after our listing at the New York Securities Exchange. In addition, another important point is that the company went through a transformation process, and that adds a lot of complexity to the company. We work in 3 different [forms] of operation, and we have several growth drivers. Therefore, I believe I have a lot to contribute in terms of strategic planning and my know-how and extensive experience in retail.

And finally, I am at your disposal, and I hope to have the opportunity to meet you in person during our Linx Day.

And now I'll turn the floor to Alexandre.

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Alexandre Kelemen, Linx S.A. - IR Officer [4]

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[Interpreted] Thank you, Ramatis, and welcome. In Q3, we realized that cross-selling of financial services, Linx Pay Hub and Linx Digital, both natively integrated to our end-to-end platform, remained being the main growth driver of the company, which partially compensated for the net store shutdown that is still pressing our customer base due to the current macroeconomic landscape in the country. In the quarter, we reached 13 clients at different deployment stages of OmniChannel when we signed with Vivara and InBrands. And we also enhanced our platform differential by partnering with Delivery Center, which, as of the end of the project, allow retailers to deliver orders within 1 hour. Additionally, Linx Pay Hub offerings continue to grow and adding value to our clients through strategic partnerships as the ones signed this quarter with Mercado Pago and AME to reinforce QR Linx.

Also, I would like to take this opportunity to highlight that we are very proud because of an award from AFRAC, the Brazilian Trade Automation Association, and acknowledged the companies that operate in retail technology providers, and we stood out for our innovation. And we won in 5 categories: foodservice software, apparel software, ERP software, pharmacy software and also retail start-up through Hiper, the company we acquired in April 2019.

Now moving to Slide 2 -- Slide 4. Recurring revenue was $182 million, accounting for 80% of gross revenue, up 14% vis-à-vis Q3 '18 and up 2% when compared to second quarter of '19.

Now Slide 5. Our adjusted EBITDA was BRL 47 million in the quarter, up 13% when compared to adjusted EBITDA in Q3 '18. Adjusted EBITDA margin was 24% in the quarter, up 10 basis points in relation to Q3 '18, and this was mainly attributed to the adoption of IFRS 16, the operating deleveraging from investments in acquisitions from previous quarters in Linx Pay Hub and Linx Digital that continue to grow their addressable market in new markets and geographies.

And as a result of the company's IPO on the New York Stock Exchange related costs and the write-off of Synthesis Brasil, both purely accounting events and nonrecurring, which we have acquired in 2017, Linx posted accounting loss in the period. Having said that, net income adjusted to these nonrecurring events was BRL 19.8 million, 38.5% higher when compared to the same period of the year before.

And to conclude, as in any quarter, I would like to invite you all to our Investor Day that will have presentations from all of our team levels to be held on December 5 in São Paulo. It will be in the JK Iguatemi Shopping Mall. The event will be -- I mean the link for the participation is on our IR website. The event will have simultaneous translation live and over the web as well.

And without giving any spoiler, the team is preparing several surprises for you this year, and I recommend that you shouldn't miss it.

I would like to thank you for your attention, and now we're available to take your questions. Thank you.

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Questions and Answers

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Operator [1]

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[Interpreted] (Operator Instructions) Our first question comes from Mr. Samad Samana from Jefferies.

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Unidentified Analyst, [2]

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This is [Anu] on for Samad. First, I guess on the retail environment in Brazil, could you just add some more color to that? Like are these store closures that you're seeing, are these accelerating versus your expectations? Are they limited to maybe certain areas within retail? And now that we are in November, into 4Q, how is that looking now? Any color you can provide would be very helpful.

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Unidentified Company Representative, [3]

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[Interpreted] Brazil's economy, I mean, we had an expectation as now, we expect that next year, Brazil's economy should grow over 2% early on this year. And at the end of last year, we believed that this year, Brazil's economy (inaudible) the growth to be over 2%. But -- so unfortunately, our economy is taking some time to react. We now begin to see some statistical signs of increased consumption. But that doesn't necessarily mean that this increased consumption, right at first, will be translated into opening of stores because what we've seen on the part of our clients is that they are -- I mean they are preferring to probably look -- stabilize their current stores through omnichannels. Therefore, we continue to grow in terms of capturing more clients. But more particularly, in regards to this recent moment, there is a company called [Pass Money]. Pass Money used to represent the Gap Company in Brazil together with Luigi Bertolli, a local brand, and this company ended its activities in the country. It needs to be -- so a quite sizable company in Brazil, but they ceased their activity. And at the same time, throughout this year, there were companies from the book segment in Brazil, they are now under a reorganization plan like Livraria Cultura and Saraiva. These are just 2 examples -- more significant examples of companies that are now in reorganization plan.

So -- but in effect, a very short time. I mean we haven't seen any substantial or net opening of stores. But we see a growing same-store sales on the part of clients that are deploying OmniChannel. So all in all, the trend in a short one is not that of a rebound in terms of net opening of stores. All right?

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Unidentified Analyst, [4]

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Okay. Just a follow-up on that. So you mentioned you don't expect the stores to, I guess, grow in the short term. But on the OmniChannel side, you believe you're still on track with your earlier expectations. I believe you mentioned to be live in 3,000 stores by this year-end, 8,000 by next year-end. So has anything changed on that end?

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Unidentified Company Representative, [5]

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[Interpreted] OmniChannel remains performing quite well. We still -- we're still waiting for this number, close to 3,000 stores. And next year, in fact, the remaining stores that have been higher. We are updating the figures today, and we are already talking to Vivara and InBrands of approximately 10,000 stores tied with OmniChannel.

And even more than that, every time we look at the market and we look at our opportunities, they -- all of those stores are reinforcing OmniChannel. And then we have the acquisition of SetaDigital. And SetaDigital brings other opportunities through OmniChannel, not only because we have new incoming customers joining OmniChannel, but that we are now catering to footwear companies, they want us to -- I mean, especially those [wholesale] sporting footwear, the OmniChannel platform is also catered for other designer sporting shoes like Nike, for instance.

So despite this landscape of net closing of stores, when we look in the long run or even the mid-range, we have been closing and finding some important and quality projects that create a recurring backlog of revenues. So we are negotiating and looking at the service revenue, and looking at that, it posted a very positive growth. And all of that is either linked to OmniChannel projects or also opening of stores and hiring or signing up with new retailers. All right?

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Unidentified Analyst, [6]

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Yes. That's helpful. One last question, if I may, just on the financial side maybe. Your CapEx and intangible spend on the cash flow statement was lower than what we were looking for. I guess what drove this? What should we expect going forward? And any color on the level of free cash flow in 2020 compared to 2019 would be very helpful.

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Unidentified Company Representative, [7]

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[Interpreted] CapEx for 2020 should be between 8% to 10% of the revenue, net revenue.

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Operator [8]

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[Interpreted] Our next question comes from Leonardo Olmos from Bank of America.

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Leonardo Olmos, BofA Merrill Lynch, Research Division - Research Analyst [9]

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[Interpreted] My first question is addressed to Ramatis. I know you haven't been there long, but I think you're already seeing some short-term opportunities that can be captured. Maybe customers that Linx is not going after but they probably need the service or some new products that have been in the horizon. So I would just like you to comment on your first impression of the company.

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Antonio Ramatis Fernandes Rodrigues, Linx S.A. - VP of Finance [10]

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[Interpreted] Leonardo, my first impression, I would tell you, is quite positive. But within my scope of responsibility, I'm not an expert in the commercial side. But from my experience, and I've been constantly talking to the VPs of the 3 verticals, and we've been looking at some important growth opportunity. Even though the vast majority is already in our pipeline, we already have a strategic planning to make things more concrete, and we are already detailing everything in our strategic plan so as to ensure all the necessary levers that will allow us to increase our penetration in the market and, therefore, increase our market share.

Linx portfolio has everything a retailer needs because today, if you open a retail store, they have a full OmniChannel solution to help you operate your business. You don't need any other system. With Linx products alone, you can manage -- your products and your financial collections. Therefore, Linx is very well structured and positioned.

Certainly, there are some other opportunities that may come up as projects advance. I was a Linx customer in different occasions in apparel, and Linx really simplify the life of the retailer because when you talk about retail, the main concern is to purchase well and sell well. You don't have to be concerned in developing systems. And when you find a company like Linx that can offer you an OmniChannel and full and complete solution, this will certainly help retailers to grow even more.

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Leonardo Olmos, BofA Merrill Lynch, Research Division - Research Analyst [11]

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[Interpreted] Great. Another question, maybe a bit more specific. Linx Pay Hub, I mean, we have the impression that the third quarter seasonality was not favorable. The retail segment was a bit slow in the period. So considering this impact from acquisition, which also did not collaborate with the revenue mix of Linx Pay Hub, how do you see the fourth quarter? So my question is what will be the mix of Linx Pay Hub in the fourth quarter? And what will be the mix at the end of the year as a percentage of the revenue?

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Alberto Menache, Linx S.A. - CEO & Vice Chairman of the Board [12]

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[Interpreted] This is Alberto, and thank you for your question. About Linx Pay Hub, I think the first thing is that we've shift the focus a bit because once there was a price war, we were more concerned in introducing differentials and creating new offerings, catering to new markets. And this was also due to the acquisition of Hiper. And if you could look at their website, hiper.com.br, you will see that they already suggest a combined offering, Hiper plus Linx Pay.

So today, retailers can hire Hiper system together with payment, and that includes our ETF and our acquiring business. We can also have a much higher take rate with Hiper, so prices are published in our website. So even though we have almost BRL 3 billion of annualized GPV, meaning a very good growth, profitability up to now has been lower than what we would have if were not for the price war.

So now when you look at smaller clients with differentiation in strategics, we believe that we will be able to pass significant margins. But looking towards the fourth quarter, we don't have anything very specific to say. I mean this third quarter, we had 12% of Linx Pay Hub and 12% of Linx Digital over total revenue. And in the fourth quarter, I don't think we will see any significant variations in our revenue mix. All right?

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Operator [13]

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[Interpreted] Our next question from Vinicius Ribeiro, UBS.

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Vinicius Serrão Ribeiro, UBS Investment Bank, Research Division - Associate Analyst [14]

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[Interpreted] First of all, Alberto, you just talked about GPV. This GPV of BRL 3 billion on an annual basis was at the end of the third quarter or not? And my second question related to Linx Pay. Given the investments that you mentioned during your release that it was a bit related to Linx Pay, how do you see the likelihood of your people towards new acquisitions? What I want to understand here is how much you can -- how much more you can expedite the sales margins of Linx Pay through investments in the commercial area?

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Alberto Menache, Linx S.A. - CEO & Vice Chairman of the Board [15]

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[Interpreted] Vinicius, thank you for your question. It's not difficult to accelerate. The thing is we have to accelerate and make money. What we've seen that there are players in the market that are losing money, and we do not want to go through that route. So if you don't have a very clear view of monetization, I would rather have a lower volume but where -- something that I will make money rather than the other way around.

In terms of our commercial strengths, we are using Linx' commercial strength and (inaudible) channels and Linx channels, and we are not doing any major effort in terms of having a dedicated commercial task force for acquiring. What we have are people that support our account managers. The structure of Linx Pay Hub has some dedicated commercial strength, but it hasn't increased that much because we just want to take advantage of our customer and geographic coverage.

I just want to take the opportunity now to clarify 2 points. First of all, our financial service strategy is based on acquiring our Linx Pay. But in fact, the idea is to provide a value proposition with a platform, and this is what is becoming more clear to you because we have digital accounts, [We Linx], Hiper Pay, Hiper ETF for the long tail. And this is clearly demonstrated in our results. I think you've seen that, that you -- that we had a change of expenses that were capitalized that were -- that belong to Linx Pay. And this means this is the proof of concept that the products are commercially feasible. When you look at the digital account and some other products that are not yet disclosed, but they are no longer capitalized. And that means that they are being commercialized, meaning, again, that they are already proved to be feasible.

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Vinicius Serrão Ribeiro, UBS Investment Bank, Research Division - Associate Analyst [16]

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[Interpreted] Could you please clarify the issue of BRL 3 billion, whether it was at the end of the quarter or during the quarter?

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Alberto Menache, Linx S.A. - CEO & Vice Chairman of the Board [17]

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[Interpreted] The end of the quarter, yes. The end of the quarter.

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Operator [18]

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[Interpreted] Next question from Fred Mendes from Bradesco BBI.

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Guilherme Haguiara, Banco Bradesco BBI S.A., Research Division - Research Analyst [19]

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[Interpreted] This is Guilherme Haguiara, in fact. First of all, about your top line, I think you mentioned that you don't see any reversal in terms of store openings in the short run, and it is probably here by cross-selling at the base. But now looking forward towards 2020, what do you see in terms of a rebound curve in terms of store openings to support sales together with cross-selling? And now referring more specifically to the third quarter, whether you could give us an idea about organic growth of recurring revenue.

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Alberto Menache, Linx S.A. - CEO & Vice Chairman of the Board [20]

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[Interpreted] I think the question came from Guilherme rather than Fred, I think, and thank you for your question. About store openings, honestly, I would rather be more conservative because our economists in Brazil have taken probably the opposite approach because we usually start with an expectation, which is higher than reality because then it has changed throughout the months. So I would rather not considering external factors, but just looking at what we are doing, all the differentials. We are introducing cross-selling and all of our innovations in order for us to continue growing.

Now trying to be more objective, I don't believe that this rebound will occur in the beginning of 2020. I think that net store openings should occur, if it occurs in the second half of next year, and there's a reason for that. Many of the openings at the end -- they occur at the end of the year because that's the period when sales are better because usually the second half is better than the first half. Therefore, people wait until the second half to open new stores.

Now in regards to organic growth, our organic growth on an annual basis, I mean, I'll ask Alexandre to answer that part.

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Alexandre Kelemen, Linx S.A. - IR Officer [21]

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[Interpreted] Organic growth, when we look at the growing offering is above 8%, so looking at the entire growth. But because of the net store closings, our organic growth in the quarter was slightly above the breakeven when compared to the previous quarter.

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Guilherme Haguiara, Banco Bradesco BBI S.A., Research Division - Research Analyst [22]

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[Interpreted] Perfect. My next question is that we saw a significant acceleration of cost of services rendered when compared to the first quarter. And so if you could give us more details, what were the main factors that impacted R&D and all of the other lines in addition to impacting research and development that impacted Linx Pay? What could you expect further on? And in terms of OpEx, whether you could give us some more details. And what is the magnitude of the provisions write-off in the quarter?

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Alexandre Kelemen, Linx S.A. - IR Officer [23]

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[Interpreted] Okay. This is Alexandre again. Okay. About capitalized R&D, what we had was about BRL 2.5 million of capitalized R&D related to Linx Pay, which was an expense, I said, digital account and some other things that are still running on pilot mode. And there are 2 other projects that were still also capitalized R&D. One is what we call pharma cloud, which is the management software for small pharmaceutical chains, and it's an alignment to look at the retail segment. But it's not cater to pharmacies for us to (inaudible). And so for these 3 segments, we have a segmented offering for pharmacies.

And then also we have our new system for car dealers, which needs to be 100% on-premise, and it's now migrated into the cloud. That's why when we put them together, you have an additional BRL 1.5 million. And on top of that, we have the consolidation of new (inaudible) about [ULP] that was reversed. This is in keeping with the growth of recurring revenue, slightly below our expectations, which does not mean that we will be like that, but -- and we do not want to refer to the magnitude of that or the impact of that.

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Operator [24]

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[Interpreted] Next question from Marcelo Santos from JPMorgan.

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Marcelo Peev dos Santos, JP Morgan Chase & Co, Research Division - Senior Analyst [25]

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[Interpreted] I would like to look at the IDC study because you talked about the e-commerce market. What can you tell us about this market as a whole? What has been the growth rate of this segment? And what is your view looking forward? Now what do you think would be the evolution of this segment? And another question about digital and OmniChannel. How many stores were active and generating revenue on Q3, whether it's close to the figure or that still have some way to go looking towards the fourth quarter? Would you say that looking at the total revenue, that there -- it is proportional to the store?

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Alberto Menache, Linx S.A. - CEO & Vice Chairman of the Board [26]

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[Interpreted] Marcelo, this is Alberto again. Thank you for your question. I think that the first thing about the IDC study that is worth mentioning is that 5 years ago, Linx Share was 0. So in 5 years' time, we managed to be #2 with a relatively small investment. Looking at the size of the opportunity, BRL 280 million invested in that period of time for something that could be, let's see, a growing market, so looking at retail share as a whole.

And so this is something that Linx deserves a lot. And we fully believe that we will continue as well in a very consistent way. Today, in Brazil, I think according to last year's figure, e-commerce accounted for approximately 5% of total retail sales. And in other markets, e-commerce accounted for 20% of retail sales. So once again, I can't say whether there will be store openings or many other things. But what I can certainly and absolutely tell you is that e-commerce is gaining share. And for that, we are quite well positioned.

Now in terms of OmniChannel. At the end of the quarter, we had approximately 2,000 active stores, and it's, yes, correct to say that our revenue is related to the number of active stores. But an active store does not achieve its full potential because it may be activated, which is a few (inaudible). It could be activated with a small transaction volume. And as consumers and Linx clients get used to the operation and learn how to operate the system, that percentage increases, and this also generates additional revenue growth to Linx. That's why the number -- I say that the number of stores is related to our revenue.

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Marcelo Peev dos Santos, JP Morgan Chase & Co, Research Division - Senior Analyst [27]

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[Interpreted] I just want to clarify something about your first question. When you say that your share is 12.2%, this number is based on what? It's on your software revenue, e-commerce or over the revenue when you serve customers that have 20% or 12% of e-commerce. I just want to understand a bit more.

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Alberto Menache, Linx S.A. - CEO & Vice Chairman of the Board [28]

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[Interpreted] IDC figures are based on the supply side, the formation of technology providers of e-commerce in Brazil. In the case of e-commerce, there is another study that talks about Linx' share in ERP and PVD software for retail, and this figure is higher than 40%. So basically, we just add up all suppliers in that segment; in the case of e-commerce, all technology providers for e-commerce. And Linx has slightly over 12% of share in that e-commerce software technology segment.

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Marcelo Peev dos Santos, JP Morgan Chase & Co, Research Division - Senior Analyst [29]

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[Interpreted] Now what is Linx' share when we look at e-commerce as a whole?

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Alberto Menache, Linx S.A. - CEO & Vice Chairman of the Board [30]

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[Interpreted] We have Linx Impulse for search, personalization and retargeting. This suite of products have a share that is above 50% according to our estimates, also because some marketplace clients with us. So it will vary by product in terms of penetration per product.

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Operator [31]

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[Interpreted] Next question from Susana Salaru from Itaú.

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Susana Salaru, Itaú Corretora de Valores S.A., Research Division - Sector Head, Telecommunications, Media & Technology [32]

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[Interpreted] First of all, I would like to go back to OMS. So you can tell me about the transition of processes. I mean by throughout 2020, the projects will be concluded, and they will go from the nonrecurring line to the recurring line. How are you going to do that migration? That would be my first question.

My second question is whether it will be reasonable for us to expect some margin recovery. First, like I said, the OMS revenue will be recurring, so the margins would be better. And secondly, because there will be a higher participation of Linx Pay Hub in your revenue mix, which will take margins upwards.

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Alberto Menache, Linx S.A. - CEO & Vice Chairman of the Board [33]

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[Interpreted] Susana, first of all -- and thank you for your question. This is Alberto. Yes, the nonrecurring revenue will generate recurring revenue in the OmniChannel projects or OMS projects. So your statement is correct. But also, we expect to continue to sell well. Therefore, we will continue to have a good volume of service revenues. However, recurring revenue will turn out to be more relevant. And 3 years ago, the recurring revenue was 0. We only had fee income, which was a part of that, what we recently launched. But from now on, things are more balanced until at a given moment when recurring revenue will supersede fee income of service revenue because of the activation of stores.

Now in terms of the margin, Susana, we want to invest to continue to grow through a balanced portfolio. And we have many different ideas about what are the other things we can do to our client. So once again, if we look at the frozen margin, our margin is quite high, but we invested to -- invested in Linx Pay Hub to create our future so that Linx can continue to be a relevant player and continue to grow in a sustainable fashion. We'll look at M&A, which is going to -- I mean there are many companies -- I mean companies that only operate in traditional trade, and these companies in general are not growing much because they were not able to renew themselves. So we certainly believe that renewal and investments in CapEx and OpEx. Therefore, we cannot certainly say that will be -- that there will be any significant change in the margins.

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Operator [34]

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[Interpreted] Next question from Diego Aragão from Goldman Sachs.

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Diego M. Aragão, Goldman Sachs Group Inc., Research Division - Equity Analyst [35]

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[Interpreted] In fact, I have 2 follow-ups from previous questions. First of all, could you elaborate on your organic performance? Just -- I am calculating an organic growth between 5% to 7% in the quarter when compared to approximately 9% of the first quarter. So what is the reason behind that deceleration or whether there is any factor that I am not taking into account? This is my first question.

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Alberto Menache, Linx S.A. - CEO & Vice Chairman of the Board [36]

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[Interpreted] Diego, this is Alberto again. Thank you for your question. Now it's just like we said, basically, it is due to store closings and some clients that terminated their operations in the period. So this is the main reason.

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Diego M. Aragão, Goldman Sachs Group Inc., Research Division - Equity Analyst [37]

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[Interpreted] Alberto, so my assumption of deceleration between 5% to 7%, does it make sense, this was the organic growth in the quarter?

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Alexandre Kelemen, Linx S.A. - IR Officer [38]

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[Interpreted] Organic growth, as I said before, was 8%, looking at the numbers that we posted -- I mean year-to-date. And as Alberto said in the previous answer, what we see is that, on the one hand, cross-selling is performing quite well. New offerings are gaining critical mass, and that's -- and working both in Digital and Linx Pay Hub. But the macroeconomic landscape with the shutting down of non-lucrative stores have offset that effect. So for the time being, we don't see any further deceleration. So it should be around 8% and 10% of organic growth.

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Diego M. Aragão, Goldman Sachs Group Inc., Research Division - Equity Analyst [39]

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[Interpreted] Perfect. Alexandre, just a quick follow-up. This 8%, when you say it's year-to-date, it will be the 9 months of 2019, right?

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Alexandre Kelemen, Linx S.A. - IR Officer [40]

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[Interpreted] Yes, you're right.

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Diego M. Aragão, Goldman Sachs Group Inc., Research Division - Equity Analyst [41]

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[Interpreted] Okay. Perfect. And my second question relates to new businesses, so Pay Hub and Digital. Assuming that 12% in the quarter, 14% in the previous quarter, this also implies a deceleration. I just want to understand that seasonality that you mentioned. And what should be the performance of these 2 businesses throughout the quarters? And whether you could share with us your mid- to long-term expectation, both for Digital and Pay Hub. I think this would be nice and important.

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Unidentified Company Representative, [42]

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[Interpreted] Fine. Okay. In the third quarter, I mean, we have school vacations, there is no special celebration date. And the existing products in Linx Pay Hub and Digital products both are charged based on the percentage of the customer invoicing or billing. So if the client's performance was lower or if there were lapsed searches on the website or if there was lower acquiring in the store, this is reflected in the revenue of both areas. And then the expectation for the next quarter, I mean, we have Black Friday and Christmas, but it also depends on consumption pickup.

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Diego M. Aragão, Goldman Sachs Group Inc., Research Division - Equity Analyst [43]

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[Interpreted] Understood. And then just to get a better understanding about the behavior of these businesses looking at a longer period of time, let's say, 2, 3 years, how do you see the ramp-up?

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Unidentified Company Representative, [44]

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[Interpreted] I think in terms of digital, it's clearer because as you deliver and your -- deploy that OMS base, you -- we begin to see some recurring revenue from that service.

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Diego M. Aragão, Goldman Sachs Group Inc., Research Division - Equity Analyst [45]

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[Interpreted] But how do you see payment in this -- the performance, if I'm not mistaken, of the competition? And how does that affect the targets set up by the company for the medium and long term?

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Alberto Menache, Linx S.A. - CEO & Vice Chairman of the Board [46]

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[Interpreted] Diego, this is Alberto again. We will continue to grow based on our targets, but we may not deliver the traditional way. We will deliver it with innovation, and innovation takes some time to mature. It takes some time until everything runs smoothly.

So if you look at Hiper's website, there is no other offering like that in the market of a management system that comes together. I mean we simplify it to the customer. That comes together with the POS machine, together with GF and everything integrated, reconciliation and everything in the same ERP. I mean if you were to ask me that in December 2018, this didn't exist because we didn't operate with small retailers. We haven't acquired Hiper. So certainly, we build momentum every day. It is important to say that our team has worked around the clock really hard on new launches, and launches are happening. We see that things make sense. Partnerships with digital wallets, QR code links, and there are other things that are happening in the quarter. But we do not want to disclose because they are commercial secrets, and that's why we are not going to anticipate anything.

So why not anticipate it? Because if you do not anticipate, we probably have an advantage. Let me give you an example of [We Linx] today as an integrator of digital wallet. We are the only one that provides that, no competitors or even the integrator to do that. But we will be way ahead in the game in terms of deployment. And when we look at Linx customers, the advantage is even greater because the integrator, the Linx management system only works with our QR code.

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Operator [47]

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[Interpreted] Next question from Daniel Federle from Crédit Suisse.

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Daniel Federle, Crédit Suisse AG, Research Division - Research Analyst [48]

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[Interpreted] My first question is about potential growth. We see that the company is incubating or in the initial stage of several initiatives that could be very significant to your mid- and long term like QR code, digital bank, Linx Pay and even OmniChannel, which is still ahead. But my question is about new solutions. When will they actually contribute to your results? How far are we from that day? Because maybe this could probably impact the macro result. And whether -- in the midrange, whether there is anything that Linx could do to deliver a better result that is not so dependent on the opening or closing of stores. That's my first question.

My second question is about Linx Pay, whether this BRL 3 billion of GPV, whether you're managing to do prepayments and if prepayments gives you an interest in margin.

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Alberto Menache, Linx S.A. - CEO & Vice Chairman of the Board [49]

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[Interpreted] Well, thank you for your question. First of all, what we launched 3 years ago, we are already benefiting from that launching. But what we launched today will still -- it will still take some time until we reap the benefits. Nobody can tell you right now what will be the relevance of QR code in Brazil. I hear everything. I hear people will say that there's -- there will be a demand for that in the market, and there are others who say that this will be totally irrelevant because the payment service -- its payment services in Brazil not quite developed. But time will tell, I cannot answer that right now. What I can say is that we are well positioned to capture this opportunity.

Now in terms of other initiatives, I mean, our payment gateway is known as -- that is known as ETF, (inaudible), physical stores. It's amazing to see what we're able to capture throughout the years. This was a very small product, a marginal product, and today, it's quite relevant.

Now, in fact, in technology, things may take some time. Churn in our -- churn is low, and renewal rate is high. And so naturally, this creates impediments or difficulties to create information. I will give you a practical example. When we talk about OmniChannel, the OmniChannel approach, the result is very clear. We just go into any of our listed customers, we see the results because they are published, and the results are good. But how come nobody ventures into OmniChannel overnight, as an obvious question, because in practice, you have to deal with your internal processes, you'll have to introduce that OmniChannel culture because companies in the last few years, they created an e-commerce channel that was totally separate from that brick-and-mortar channel. So you'll have to ask about how you are going to pay your store team and e-commerce team. You have to review your agreement with shopping malls. And there are a whole list of other things, just to mention a few examples.

Therefore, things naturally take time to mature. When we will see the results, results are already here. I mean we probably don't see them in the consolidated numbers of Linx because we are also looking at other initiatives (inaudible) in an isolated fashion. You see that things are performing quite well when we look at consolidated figures. But you may have the impression that the margin is not moving, but there are other important issues. And I would just like to take this opportunity to talk about them.

I often say that a company that delivers a gigantic margin because it stopped investing is a company that is going to disappear, simply because it's just reaping the benefits from what it did in the past but it's not getting prepared for the future. Linx is a company that through investments, technology and the understanding of changes in consumer behavior, the company is investing so that it can continue to grow sustainably. This growth may at some point be lower and other times be higher, but we want to continue growing.

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Daniel Federle, Crédit Suisse AG, Research Division - Research Analyst [50]

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[Interpreted] Perfect. In terms of prepayment, Alberto, can you elaborate on that?

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Alberto Menache, Linx S.A. - CEO & Vice Chairman of the Board [51]

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[Interpreted] Yes. Okay. Sorry, I forgot. Prepayment, that has been quite relevant. And if I'm not mistaken, it's around 30% of the credit volume that is traded through Linx Pay. Approximately 30% is what I can give you now.

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Unidentified Company Representative, [52]

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[Interpreted] If you allow me to add something, prepayment revenue, it's so very small because our volume in total is small. But it is in our line of financial revenue. It does not appear as EBITDA or operating margin.

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Operator [53]

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[Interpreted] Our next question from Marcelo Santos, JPMorgan.

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Marcelo Peev dos Santos, JP Morgan Chase & Co, Research Division - Senior Analyst [54]

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[Interpreted] Going back to OmniChannel, you said 1,000 stores in Q3 and more in 4Q, you have a percentage of your revenue already. I mean it means that the acceleration is quite substantial. But I didn't feel that to your answers. What is wrong with my reasoning? Or maybe throughout next year, we would be able to see a more perceivable evolution or a few percentage points. This is what a simple math indicates. And now speaking about organic growth, and I'm getting a lot of questions about the subject, I mean, 8% is year-to-date growth -- organic growth. That excludes -- excluding the closing of stores or not? And simply what it is, 8% in first 9 months of '19 versus 9 months of '18, right?

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Alberto Menache, Linx S.A. - CEO & Vice Chairman of the Board [55]

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[Interpreted] Okay. Let me start with your last question because it's a technical question. 8% includes everything, right? It's 8% year-over-year. So we are talking about excluding or not excluding store shutdowns quarter-on-quarter. If we were to exclude store closings, our organic growth will be positive. But with the net closing of stores, organic growth quarter-on-quarter was close to 10%.

Now OmniChannel. Yes, this year, we should have about 3 new stores. I mean 10,000 is the total pipeline. I cannot really say that this will be finalized until 2020 because there's not -- this is not the plan of Linx, but it depends on our clients. We explained before that the complexity of deploying OmniChannel is greater on the side of the client because for us, the system is ready. What we need is just to set the parameters to fit the clients' standards, but they will have to change the store format, fulfillment of their stores, positioning, the speech of the store, what is the value proposition that they create with OmniChannel. And this takes time, and it's not a low investment. Some clients took 6 months to do that in their first store. And other clients are still, after 1 year, working on the project. What we have is 1,000 stores already higher that could be deployed throughout 2020. But this could also slip to 2021 depending on the timing of our client rather than ours.

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Marcelo Peev dos Santos, JP Morgan Chase & Co, Research Division - Senior Analyst [56]

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[Interpreted] So even it's -- you had 7,000 stores at the end of -- next year, it will be almost twice as much as expected for the end of this year. So how do you transfer that to your recurring revenue? 12% coming from digital, but not all digital is omni. So can you give me an idea of how much we should expect to see?

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Alberto Menache, Linx S.A. - CEO & Vice Chairman of the Board [57]

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[Interpreted] Your math is correct. The point is that, once again, I cannot tell you for sure what would be the schedule of store openings. If I have 100% of the pipeline already in place (inaudible) until the end of the year, OmniChannel should become very relevant within digital revenue. Today, it's not so relevant. The relevance comes from what we call impulse customers, which is retargeting and referrals. But as this does not depend on myself or on the company, but it depends on the customer.

As I said, for the other 7,000 stores, they could be deployed throughout 2020. So probably, it will be more concentrated at the end of the year or this could also spill over 2021. So maybe this year, we will have 3,000; next year, another 3,000; and 2021, 4,000. And maybe this year, we will have 3,000; the next year, 7,000. I cannot say that for certain because most projects are still in their early stages of deployment. We only have 22 customers that have a fully deployed project. There are other 2 or 3 that are in an advanced stage of deployment, but most of them are still in the project stage or pilot stage, okay?

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Operator [58]

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[Interpreted] Our next question from Mr. Carlos Sequeira from BTG Pactual.

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Carlos Eduardo Palhares Sequeira, Banco BTG Pactual S.A., Research Division - Head of Research & Analysis and Brazil Strategist [59]

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[Interpreted] Alberto, the Omni solution is very successful amongst retailers. I know that some of them already hired the service. I think we've discussed that in the past, but I just want to see what is your mindset now. I mean what will be your strategy to turn the Omni solution also interesting for smaller retailers and then scale up the product to your customer base?

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Alberto Menache, Linx S.A. - CEO & Vice Chairman of the Board [60]

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[Interpreted] Carlos, thank you for your question. I think you touched a very important point because this is among many other topics, one of our R&D investments for next year. And that's why we cannot grow our margin. Yes, we do understand and we see that this is a good opportunity, but we have to -- I mean it doesn't mean that we have to start from scratch, but it means that we have to create a much eager offering to deploy or customize. It has to be easier to integrate into midsized customer operations.

Also, we have the opportunity to connect smaller retailers to be Omni of larger retailers or retailers that distribute brands from our clients. They could also become a collection point or a shipping point of our larger customers who are already operating in Omni. And there are other opportunities related to e-commerce that sometimes does not go through Omni, but they are also relevant and we also have the opportunity to connect smaller customers.

So our e-com is a big commerce platform. It is naturally integrated to 20 marketplaces. Our customer, therefore, has one inventory management to the entire marketplace that want to connect and have their products available. And when we look at retail, that we already have a pay tail taking place. We also have opportunities related to marketplaces that could be more enhanced next year, connecting deeper products to marketplace of Linx' partners, allowing them to have an inventory management, more integrated.

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Carlos Eduardo Palhares Sequeira, Banco BTG Pactual S.A., Research Division - Head of Research & Analysis and Brazil Strategist [61]

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I think this is also an opportunity to scale our products, right?

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Alberto Menache, Linx S.A. - CEO & Vice Chairman of the Board [62]

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Yes.

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Operator [63]

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[Interpreted] 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.

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Alberto Menache, Linx S.A. - CEO & Vice Chairman of the Board [64]

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[Interpreted] Thank you all very much. Myself and our IR team are very confident on Linx' future outlook. I would like to reinstate the invitation to our Linx Day. It will be a pleasure to see you there. All the best.

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Operator [65]

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[Interpreted] Linx' conference call is now concluded. Thank you very much for participating. Have a very good afternoon, and thank you for using Chorus Call.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]