Start Time: 08:30 January 1, 0000 8:56 AM ET
Semantix, Inc. (NASDAQ:STIX)
Q3 2023 Earnings Conference Call
November 08, 2023, 08:30 AM ET
Company Participants
Leonardo Santos – CEO, Founder and Chairman
Adriano Alcalde – CFO
Augusto Vilela – Head of IR
Conference Call Participants
Rudy Kessinger – D.A. Davidson
Operator
Good morning, everyone. And welcome to Semantix’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. As a reminder, today’s call will be recorded.
Now, I’d like to turn the program over to Augusto Vilela, Semantix’s Head of Investor Relations and M&A. Please go ahead, sir.
Augusto Vilela
Thank you. Good morning everyone and thanks for joining our third quarter 2023 earnings conference call. Joining me on the call today is Leonardo Santos, our CEO, Founder and Chairman; and Adriano Alcalde, 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 20-F filed with the SEC.
Also, during this call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not intended to be a substitute 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 operating metrics. And finally, this call is being webcast from our Investor Relations website at ir.semantix.ai. And an audio replay will be available on the website in a few hours.
With that, I would like to turn the call over to Leo. Leo, good morning.
Leonardo Santos
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 Q3, we observed significant year-over-year growth in revenues from AI, particularly in our priority verticals, such as agro, finance and health. We remain optimistic about further growth opportunities.
Notably, our proprietary SaaS revenue saw an impressive 41% year-over-year growth, largely driven by the success of our AI applications. I am glad to announce that 53% of our total quarterly revenue came from Semantix’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 our clients’ challenges along the way.
This improved revenue mix towards higher quality income, combined with our strategic cost saving initiatives, is positively impacting our gross margin, driving it to an impressive record high of 62%, reaching a remarkable 14 percentage points increase from the same period last year. This gives us confidence on our strategy of pursuing sustainable growth on proprietary products and accelerating our path to operational cash breakeven.
In this context, as Adriano will elaborate on, I am pleased to announce our goal of achieving operational cash generation in the full year of 2024. We are observing a growing attraction and customer demand for AI-based business solutions, and for this reason, we have already identified new opportunities for launching AI applications.
In the current quarter, we unveiled an innovative retail application with a user-friendly, no code, touch-free interface, and a seamless integrated ready-to-use solution. These initial modules are available now, specially designed to elevate the customer’s experience through seamless integration, data collecting and analyzing across both physical and digital customer touch points. This empowers retailers within valuable insights delivery from their data, enable real-time decision making and providing them with a competitive edge in understanding customer behavior and staying up to date to evolving market trends.
In the current quarter, we introduced ChatPharma, a cutting-edge application that serves as a GenAI layer within our Pharma application. This revolutionary feature empowers pharmaceutical industry executives to seamlessly engage with Semantix’s unique health data set using generative AI. As a result, it enables them to efficiently access valuable insights, complete with dynamically generated tables and charts, thanks to our multi-generative AI technology. This advancement significantly emphasizes our capacity to expediently strategize and design effective go-to-market strategies.
We have seamlessly integrated four powerful AI algorithms into our health applications, and they are already making a positive impact within hospital operations, generating substantial value for our customers. I am especially proud of this because we can go beyond our purpose of impacting lives and actually contribute to the health system on saving people’s lives. These algorithms were successfully implemented during the third quarter, resulting in a significant boost to the competitiveness of Semantix’s products, all achieved with minimal cost implications.
Semantix has expanded its GenAI 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 natural language understanding, among others. By combining these models, Semantix enables the creation of agents that leverage with unique abilities.
In addition to the product appeal across all industries, this development not only benefits Semantix’s customers but it also accelerates the company’s AI application development process. Semantix is actively engaged in multiple application development and testing projects in collaboration with its valued clients, with the aim of identifying opportunities to scale sustainably and efficiently while keeping costs under control.
Our multi-LLM management layer emphasizes security for businesses, ensuring data privacy and control. Customers don’t need to worry about data leaks, as this concern is integrated within their own infrastructure, providing complete control, auditability, and maximum security. Our technology allows us to extract the best features from each LLM, whether they come from partners, open source, or private sources.
I’d like to highlight a few key wins from the quarter. We secured new clients across various industries, with a strong presence in the financial, agribusiness, and health sectors. For instance, we’re working in a use case for exporting companies on a comprehensive solution that includes intelligent stock control, asset management, risk 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 we reported on the last quarter, we’re creating a data architecture for a large Brazilian asset management company, enabling them to efficiently improve operational capabilities, eliminating weeks-long delays in some workflows.
In the pharmaceutical sector, we have structured platforms to support strategy, go-to-market planning, and monitoring of the market. Demonstrating how Semantix is well positioned in this market, we recently signed a contract with a global laboratory to enhance the management of oncology patients in Brazil’s public health system, with a focus on breast cancer.
In summary, our AI-focused strategy is yielding positive results. We are helping our clients extract intelligence through AI, all while maintaining cost efficiency and accelerating our AI application development process.
With that, I’ll pass the call to Semantix’s CFO, Adriano Alcalde.
Adriano Alcalde
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 costs and expenses by a solid 30% compared to the annualized numbers from June 2023, excluding costs related to third party software.
Now, let’s talk about the impact of these initiatives on our third quarter results. We reported net revenue of R$40 million, which is 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 a significant improvement in our revenue mix.
Our proprietary SaaS 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 software revenue quality pushed our gross margin to a historic high of 62%, marking a 14 percentage point increase year-over-year.
Now, moving to operating expenses, we are still seeing material amounts associated with our restructuring efforts, mainly termination costs. We anticipate that the full benefits of our efficiency improvements will be noticeable in the coming quarters.
Our non-GAAP SG&A expenses, which exclude merger-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 30, 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 macroeconomic headwinds affecting IT spending. Customers 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 specific revenue guidance for the rest of the year. Our focus remains on achieving a balance between growth and profitability and operational cash generation in 2024, emphasizing the importance of managing our finances 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 value to our shareholders.
With that, I’d like to turn the call back to Leo for some closing remarks. Leo, the floor is yours. Thank you.
Leonardo Santos
Thank you, Adriano. This quarter, we maintained a strong focus on our business strategy for AI, aligning it closely 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 am very proud of the collective support from customers, partners, Semantix’s team and investors on this journey of shifting the company towards proprietary SaaS products. Our product roadmap keeps advancing with a strong emphasis on developing AI together with our customers.
I would like to thank our team and our valued 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.
Question-and-Answer Session
Operator
Certainly. [Operator Instructions]. And our first question comes from the line of Rudy Kessinger from D.A. Davidson. Your question, please.
Rudy Kessinger
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 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?
Adriano Alcalde
Hi, Rudy. Thanks for the question. We have the same level we are expecting for — 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.
Rudy Kessinger
Okay.
Leonardo Santos
Leo here. The focus is on proprietary software. You saw the numbers in terms of the change in the shift to the company for the margin. It is very important for the profitability, ratability in the future for the company. Because of that, of course, 100% of the focus what you’re seeing here is standard proprietary software. You saw the pipeline is going up. You saw the margins going up. You saw the ratability going up, because of that we announcement to generation cash flow in a full year 2024. Restating that I think in the best way in terms of the execution strategy and of course for collective, amazing opportunity in terms of AI in the front. There’s so much pieces in the front of this journey in terms of AI, especially in Latin America, in the future in my opinion and vision here is amazing. The numbers talk about that, just from complementing here, Rudy.
Rudy Kessinger
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 SaaS revenue Q3 to Q4 this year?
Adriano Alcalde
Rudy, as we highlighted, we are seeing attraction 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. And on the other hand, we are very, very careful on sales renewal. But we cannot say exactly and cannot give this guidance for the proprietary sizes, as Leo said. We have a strong pipeline, but we cannot predict the level of that. Okay.
Rudy Kessinger
Okay, that’s helpful. And I know the prior target was EBITDA breakeven in Q4, it seems like that certainly pushed out to some point next year. But I guess I want to be clear. At the cash flow breakeven target on operating cash flow, is that by some point in 2024 or are you trying to be cash flow breakeven for the balance of the full year in 2023?
Adriano Alcalde
Yes, Rudy, this is for full year. But the restructuring process and changes we are currently making at Semantix is aiming to focus on proprietary SaaS and operational cash breakeven by 2024, any decline or 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 impacting our expectation to short term. However, this same decision will drive less to more sustainable growth in health financials in the future with a material positive effect on working capital to accelerate the best operational cash breakeven in 2024. Okay.
Rudy Kessinger
Okay. And just lastly for me on the balance sheet and the cash is I know you’re making cost cut that’s going to take some time to flow through. So like where should we expect cash at the bottom and what is your capacity to borrow? Do you have any outstanding revolver, so you haven’t tapped anything that you could tap if you needed to?
Adriano Alcalde
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 factor 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 what we have for that.
Leonardo Santos
Just for [indiscernible] here is that Q3 in the last year, we had no recurring — Q4 sorry, no recurring revenue in terms of the line, in terms of the sales. I don’t have this clearing for these repeat for this year. But it’s — the pipeline is going up, convert rate is going up. In terms of the cash, the expectation is generating a cultural imbalance in culture full year for 2024. We are very confident to take control in this year, of course, in Q3 right now. We reduced 30% of the disbursement [ph]. The plan, of course, is [indiscernible] is growing codes, not people and that will continue that we are looking for Q4 here and our cash flow in here is in the cultural is very confident about that.
Rudy Kessinger
Okay, got it. Thanks for taking my questions.
Operator
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.
Leonardo Santos
Okay. Thank you all for joining us today. We strongly reaffirm our commitment to excellence and continued pursuit of a profitability company. So I’m very excited to continue the hard work together with our team and client 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, everybody.
Operator
Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.
