LatAm’s biggest software firm talks M&As, tax and macroeconomics

Brazil’s Totvs, the largest corporate software company in Latin America, lost last year a fierce bidding process with electronic payments company Stone for the purchase of rival Linx.

Only a few months later, however, the company was back to shopping, and with a sound comeback investment: in the largest acquisition in its history and the largest transaction in the software sector in Brazil, Totvs bought in March for almost 2bn reais (US$355mn) CRM and digital marketing firm RD Station. Other acquisitions are in the pipeline for this year.

The muscle-flexing comes as macroeconomic conditions, bottlenecks, the pandemic and growth prospects for the Brazilian economy all worsened, even though the software sector is expected to continue riding the digital transformation wave. 

BNamericas spoke to Totvs CEO Dennis Herszkowicz about macroeconomic perspectives, taxation in Brazil, acquisitions and more.

BNamericas: The acquisition of RD Station was the largest in Totvs’ history and the first since the bid for Linx. Is Totvs back to shopping? Can we expect new acquisitions for this year? And what is the strategy?

Herszkowicz: In December 2020, we also acquired Tail Target, a data engineering company which comes to add and strengthen our business performance pillar.

The M&A strategy is and will continue to be an important focus for Totvs.

The company has a history of more than 40 mergers and acquisitions in the Brazilian market and, with our latest follow-on share offering, carried out in 2019, more than 1bn reais was raised to back up and further accelerate this strategy.

Our growth through mergers and acquisitions is based on four pillars: reinforcing the company’s core business, represented by ERP software; deepening participation in key segments for the company; strengthening the capacity of cross-selling; and expanding the capacity to operate in new markets, with a particular focus on financial services and business performance.

BNamericas: The macroeconomic outlook and the worsening pandemic have altered the prospects for 2021. Can we get an idea of what 2021 will be like or is it all uncertain? What is Totvs’ perspective?

Herszkowicz: We believe that, as seen in 2020, technology is the main path for improving the Brazilian economy and society. 

More than maintaining, it is necessary to expand digitization so we can overcome the challenges imposed by the current macroeconomic scenario. 

Technological innovations applied at different levels of management continue to be fundamental to increase productivity, generate new opportunities and meet the needs of the entire production and consumer chain. 

And this applies not only to sectors with great technological maturity, such as industry, services and agribusiness, but mainly to those that are still going through the digitization process, such as health, education, hospitality and multichannel retail.

BNamericas: Still on the macroeconomic aspect, IT taxation plays a key role and is especially complex for the industry in the country. What is the company’s view of the Brazilian tax context?

Herszkowicz: Brazil needs a [business] environment and tax legislation that is modern, intelligent and that contributes to the country’s competitiveness. That’s how we will be able to have economic growth with legal certainty and that brings greater prosperity to civil society. 

This needs to be focused on the pillars of, one, a transversal tax exemption for [payroll] jobs to enable competitiveness with the generation of quality occupations, as well as to attract and retain talent, especially with the legacy of remote working the pandemic will leave.

Secondly, a reduction in the costs of telecommunications and energy is needed, as they are basic inputs for a digital society addressing the challenges of modernity. 

Thirdly, a reduction in the size of the state is needed, so it is more efficient and accelerates the implementation of the digital transformation strategy.

And, finally, [we need] a tax system that is more levelled and fairer to the entire society, individuals and companies.

BNamericas: Were the supreme court’s rulings regarding software taxation satisfactory? 

[The court ruled only municipalities are allowed to tax software, with the ISS. Previously, states also levied the tax on the circulation of goods and services (ICMS), leading to a double-taxation of software]

Herszkowicz: Regarding the software’s double taxation agenda, the decision ended a discussion that had dragged on for the past 20 years. This decision brings an enormous legal security to the private sector. 

The court defined that ISS, and not ICMS, is the tax that should apply to software licensing operations, regardless of the type of commercialization.

Besides, through a technique called “modulation of effects,” the decision also applies to periods before the trial. 

That means that, in accordance with the criteria set by the court, the decision recognizes the validity of tax payments made by companies in the sector, whether ISS or ICMS, in the periods prior to the date of the ruling, protecting taxpayers from new collections or court battles.

The ruling made retroactive tax collection by states and municipalities impossible, and vetoed possible initiatives by taxpayers to recover taxes paid in the past. It’s a great deal.

BNamericas: It is widely accepted that the pandemic accelerated digital transformation. In what sense does this apply to management software, which is Totvs’s flagship product? What are corporations looking for the most?

Herszkowicz: In 2020, we kept a solid growth in management systems. The company saw an 8% increase in this segment’s net revenue and 13% in annualized recurring revenue. 

One of the highlights in the recurrence model – which already represents 79.8% of the segment’s quarterly net revenues – was the increase in revenues obtained with cloud: the SaaS (software-as-a-service) model, which grew by 21% in 2020 and accounted for 65% of new sales in the fourth quarter.

But we continued to see a positive pace in other segments too, meeting demands the scenario imposed during the year. 

We created new solutions from our fintech unit, such as TOTVS Mais Negócios, which organizes cashflow and helps companies giving additional credit lines to their customers. 

Also, we created Totvs Mais Prazo which allows companies to postpone the payment date of slips, Totvs Antecipa, which allows clients to receive programmed payments in advance, in addition to the Totvs Painel Financeiro, which is a financial management dashboard integrated with our ERP to help companies monitor their cashflow in real time, making predictive analyses. 

In COVID-19 times, all these analyses are even more valuable in keeping companies’ cashflow healthy.

In addition to financial solutions in the fintech area, we also launched a medical call center solution, integration of food service systems with delivery apps, systems for the communication of educational institutions and students, among many others.