Description

Zenvia is a newly public company which has seen its shares come under significant pressure in recent months. Zenvia is a leading provider of customer experience and engagement software solutions in Latin America. I am typically not a huge fan of simplifying companies to the X of Y, but in this case I think it is an apt comparison. Zenvia is the Twilio of Brazil. I see this as a high-quality founder-owned and operated communications software player that has high strategic importance to the broader CPaaS ecosystem. I also see the CEO embarking on a similar product development roadmap to Twilio in the United States. At 2.1x ’22 revenue I believe that ZENV is not getting the credit it deserves for its revenue growth/margin expansion prospects or the compelling product roadmap.   

Businesses around the world are quickly adopting new standards for digital customer engagement. We have seen companies like Twilio build massive multi-billion dollar revenue streams tied to the delivery of SMS, email, voice and video messages. Twilio provides access to these core communication channels via a set of APIs leveraged by developers to build seamless digital customer engagement touch points into their own apps and services. This trend is levered to the growth of the digital economy and has been accelerated by the pandemic which has forced companies to find new ways to engage with their customers. In order to provide these APIs, Twilio needs to broker relationships with various telephony providers and carriers around the world. In many markets the carriers all centralize the exchange SMS messages via an intermediary aggregator business like Syniverse in the United States, which Twilio then leverages to deliver their CPaaS APIs to developers. In international geographies, these SMS aggregation businesses exist as well. SMS aggregators typically secure tight relationships and integrations (often exclusive) with local telecom providers and then act as a single throat-to-choke / gatekeeper for CPaaS companies looking to offer SMS termination in that geography via their APIs. Through partnerships with local telecom providers, Zenvia has emerged as one of these key aggregators in Brazil.

In addition to partnering with outside CPaaS vendors (including Twilio) for access to SMS termination in Brazil, Zenvia has built its own comprehensive CPaaS platform to serve domestic customers in Brazil. After founding and bootstrapping the business in 2004, CEO Cassio Bobsin has managed to move Zenvia up the stack from the core SMS termination services to higher-level digital engagement orchestration software tools targeted at both developers and non-technical users. Today, Zenvia offers a set of APIs to allow software developers to compose and deliver personalized engagement messages to consumers over all major channels (SMS, voice, video, email, WhatsApp, Instagram, etc.). Additionally, Zenvia provides a set of easy-to-use low-code interfaces to allow non-technical sales teams, marketers, and customer support reps to build the same functionality with drag-and-drop interfaces. The platform aims to serve use cases around marketing campaigns, chat bots, customer acquisition/on-boarding, fraud detection and authentication workflows, and customer service. These CPaaS tools and value-add solutions allow businesses to build seamless end-customer journeys which are personalized with data collected about the consumer. Demand for these higher-margin tools have outstripped the demand for Zenvia’s core SMS delivery services. 

In 2021, ZENV should generate R$600 million of revenue which represents growth of 40% (closer to 30% organic growth). Zenvia generates the vast majority of its revenue from Brazil, although it has expanded to Mexico and Argentina in recent years. Today, Zenvia serves over 14,000 customers (+24% year-on-year organic growth) including most of the major retail, banking, and healthcare companies in Brazil. The company generally lands with its APIs or low-code SaaS offering and then expands over time with usage and increased utilization of the higher-margin workflow tools (authentication, chat bots, customer support tools, marketing campaign design, etc.). This leads to ~120% net revenue retention and has driven the percent of customers using 2 or more solutions to grow from 10% at the end of 2020 to over 15% today. Revenues from non-SMS termination services account for 32% of revenue today, vs. less than 15% in 2020. This change in the business mix has driven a large increase in gross margins which have expanded from 26% in 2020 to 35% in the most recent quarter. Zenvia now generates 60% of its gross profit dollars from non-SMS termination revenues.

CEO Cassio Bobsin has managed to grow the business’ product portfolio with both organic internal R&D and with accretive technology acquisitions. In November, Zenvia acquired SenseData which allows companies to track and aggregate data about their customers collected by internal and external data sources. This technology helps to centralize information about the customer to allow for better targeting and personalization of communications. By better understanding all of your business’ digital interactions with a customer, you can more effectively tailor the communications to that customer. The SenseData acquisition rhymes a lot with Twilio’s acquisition of Segment, the leading US-based customer data platform, and helps Zenvia follow Twilio’s innovative product trajectory. By infusing communications with more intelligence about the end-user, the right message can be sent to the right customer at the right time over the right channel. I also believe that this should give both companies (TWLO and ZENV) better pricing power over time as the personalization of a message makes it much more valuable given the higher expected conversion rates. In December, Zenvia made its second acquisition as a public company when it acquired Movidesk, a leading Brazil-focused customer success management platform. Movidesk provides software the optimizes customer service workflows, monitors support tickets, and integrates with communication channels. Movidesk will augment Zenvia’s customer service offering and will provide a set of nearly 3,000 customers to cross-sell Zenvia’s other solutions to over time.

The CPaaS market has been highly acquisitive over recent years as CPaaS vendors have shored up their own supply chains with acquisitions of key aggregator assets. Bandwidth bought Voxbone in October 2020, Sinch acquired SAP’s Digital Interconnect in 2020 and Inteloquent in early 2021 as well as ACL and MessageMedia, InfoBip acquired OpenMarket in 2020 and Anam in 2021, Twilio acquired ValueFirst in March 2021 and made a significant investment in Syniverse. This buying spree has sparked an intense bidding war with each CPaaS player trying to seize assets in the telephony supply chain to secure better strategic footing and raise prices on rival CPaaS players who need access to those aggregators. Zenvia went public in July 2021 at $13/share. The public offering included a private placement investment from Twilio ($50M) which also gave Twilio the right of first refusal to buy all the class B shares. In connection with the private placement, Twilio and Zenvia entered into a broader commercial relationship where they will rely more heavily on each other’s networks. Twilio will send all of its Brazil-bound SMS traffic over Zenvia’s network and Zenvia will send all of its NA-bound and EMEA-bound traffic over Twilio’s network. I believe that as a function of Sinch’s aggressive M&A, Twilio moved to secure its critical relationship with Zenvia. I think this re-affirms the strategic value of the asset and makes it an interesting acquisition target for many of the well capitalized and acquisitive CPaaS vendors who want a foothold in Latin America.

I expect that inclusive of their recent M&A, Zenvia should be able to generate over R$900 million of revenue next year which indicates growth of >50% year-on-year (again closer to 30% organic growth). I believe the continued strength of non-SMS termination revenues as well as the inclusion of the higher gross margin acquisitions (SenseData had 60% standalone gross margins and Movidesk had 70%) should drive overall gross margins to 40% next year which should allow for ~10% Adj. EBITDA margins. The company has committed to mid-term targets of 30-35% revenue growth as well as 45-50% gross margins and 15-20%  Adj. EBITDA margins. Additionally, the company expects NRR to increase towards 130%. I believe that these targets are achievable over the next ~3 years given the secular growth and scale of the opportunity they are going after, the nice expansion dynamics in the existing customer base (usage+new product adoption), and the accretive financial impact of the recent acquisitions.

At $7.67/share today, the company is valued at an enterprise value of $340 million. Using the prevailing exchange rates, I believe the USD revenue can be $160 million in 2022 and $205 million in 2023. Additionally, I believe that Adj. EBITDA can be $18 million in 2022 and $28 million in 2023. The market values the business at 2.1x my ’22 revenue and 1.7x my ’23 revenue. On an Adj. EBITDA basis, the current price implies 12.1x my ’23 Adj. EBITDA. I believe that as the business continues to execute according the Cassio’s plan, the company will be looking at ~$300 million of revenue and ~$60 million of Adj. EBITDA in 2025. I also see potential upside from an acquisition here as there are many natural buyers and we’ve already seen Twilio re-affirm the assets strategic importance.  With that in mind, I believe that at the end of 2024 the company will be worth roughly $1.2 billion (4.0x revenues & 21.0x EBITDA) which equates to a price of ~$27/share and a 50% IRR from here. I view this rate of return as very compelling, even when taking into account the higher risks of investing in emerging markets.

Catalyst

Over the next 4 to 8 quarters the company should deliver on its financial targets and the multiple will re-rate higher. Zenvia is also a potential acquisition target.