Description

Zenvia is the cheapest enterprise software company in the world with revenue over $100M. This is a case of good business bad balance sheet, except in this case it's not so much the balance sheet it's the earn-out liabilities (basically founders waiting to get paid) that is causing investors to price Zenvia as if it were going bankrupt. Zenvia has already renegotiated their earn-out liabilities by extending them and they can continue to do so. 

Company Overview

Zenvia started as a CPaaS company and now is both a CPaaS and SaaS company. They are the Twilio/Salesforce/Zendesk of Brazil. As the CPaaS market became more competitive, Zenvia went on an acquisition spree for SaaS companies in 2021 and 2022 and incurred significant earn-out liabilities. Zenvia planned on doing a follow-on post IPO but the capital markets shut in 2022 for fast growing tech companies. In 2022, investors feared that Zenvia would go bankrupt because of their significant earn-out liabilities creating a “funding gap” existential issue. The stock went from $750M market cap to $50M market cap now making Zenvia the cheapest enterprise software company in the world with over $100M in revenue.

Zenvia was founded in Brazil 19 years ago as a bootstrapped startup in a garage serving businesses with complex networking infrastructures through Zenvia’s platform of APIs for SMS messaging connectivity. As Zenvia continued to grow, they scaled their business by adding new CX communication SaaS, tools and channels to their platform, making it more flexible, versatile and comprehensive in order to capitalize on the market opportunity to serve customers along their end-consumer’s lifecycle.

Zenvia’s CX SaaS platform allows companies to digitally interact with their end-consumers in a personalized and highly contextualized way, with the support of artificial intelligence along with a human touch throughout the end-consumer journey. Zenvia’s unified end-to-end CX SaaS platform provides a combination of Zenvia’s (i) SaaS portfolio, which includes Zenvia Attraction, Zenvia Conversion, Zenvia Service, and Zenvia Success and (ii) CPaaS solutions, such as SMS, Voice, WhatsApp, Instagram and Webchat, all such applications being orchestrated and automated by chatbots, single customer view, journey designer, documents composer and authentication. Moreover, Zenvia’s platform allows the integration with legacy systems and has native integrations with software such as Customer Relationship Management (CRM), Enterprise Resource Planning (ERP) and others.

From small family-owned businesses to large corporations, Zenvia’s customers use the platform to attract, convert, serve and nurture their end-consumers. Businesses use Zenvia’s platform to frequently and more seamlessly connect with their end-consumers while also offering new mobile application experiences. Also, the use of Zenvia’s platform brings opportunities to digitalize communications that were previously sent through offline traditional methods, such printing hardcopies of documents, generating time efficiency and a positive contribution to the environment, by helping a variety of businesses adopt paperless communications.

Zenvia has evolved its product portfolio organically and through acquisitions. As a result, Zenvia’s platform now provides four SaaS solutions (Zenvia Attraction, Zenvia Conversion, Zenvia Service and Zenvia Success) and Consulting designed for each phase of the customers’ journey, allowing a continuous relationship with the Zenvia brand.

The SaaS segment carries higher gross margins compared to Zenvia’s other products and we believe SaaS will bring the most growth in the future. Zenvia’s SaaS solutions already represents more than half of total Gross Profit, which was almost nonexistent nearly three years ago. In the year ended December 31, 2022, 59.8% of total gross profit originated from Zenvia’s SaaS segment, while 40.2% of total gross profit originated from Zenvia’s CPaaS segment.

Zenvia’s SaaS business model revenues is derived from subscriptions and project implementation services, while their CPaas business model is based primarily on interactions volume, which means Zenvia’s revenues scale as their customers increase their usage of Zenvia’s platform. Zenvia’s Net Revenue Expansion (NRE) rate was 108%, 122% and 113% for the years ended December 31, 2022, 2021 and 2020, respectively.

Here are some example use cases of Zenvia’s platform:

·       Financial institutions who use our platform for SMS transaction confirmation alerts, security tokens and marketing campaigns;

·       Service providers who use our platform to manage outbound voice calls integrated with their customer relationship management platforms, or CRMs;

·       Universities who use our platform to support students on multiple communication channels such as WhatsApp and Website;

·       Medical and dental clinics and hospitals who use our SMS platform to confirm and reschedule appointments as well as send appointment reminders to patients;

·       Retailers who use our WhatsApp solution to support their sales teams to manage sales and our SMS platform to inform customers about new products and promotions and to track the status of deliveries;

·       Insurance companies who use D1 platform to orchestrate communication journeys with end-customers; and

·       Consumer goods and staples companies that use SenseData to nurture the relationship with its consumer to avoid churn or/and improve sales and get insights.

Investment Overview

Zenvia is the cheapest enterprise software company in the world with over $140M of revenue. Zenvia trades at 0.2x NTM Revenue and 3.3x NTM EBITDA.

Concerns over Zenvia’s funding gap are overblown. As Zenvia continues to renegotiate and extend their earn-out liabilities, as the market normalizes, and as Zenvia executes on its business plans and generates significant FCF, shares should re-rate significantly higher.

Funding gap will be resolved

While the market continues to fear that Zenvia’s significant earn-out liabilities will bankrupt the company, Zenvia has consistently renegotiated and extended their earn-out liabilities without any dilution. Most of the remaining earn-out liabilities are from the Movidesk acquisition which should make negotiations simpler since the obligations only belong to the founding team at Movidesk. There is less risk of a holdout.

There is significantly less incentive for Zenvia’s creditors to push the company into bankruptcy because Brazilian bankruptcy proceedings are less creditor friendly. The United States has strong creditor rights and protections, including a well-established priority system for the distribution of assets. Creditors often have a say in the bankruptcy process and may recover more of their debts. In Brazil, the process can be more challenging for creditors. The priority system is not as well-defined, and the court has more discretion in determining how assets are distributed. This can make it riskier for creditors in some cases. Bankruptcy proceedings in the US can be relatively swift, with many cases resolved within a few months to a few years. Bankruptcy proceedings in Brazil can be protracted and often take much longer to reach a resolution, which can be frustrating for creditors. Therefore, for Zenvia’s potential creditors (earn-out holders, banks, telcos), it’s a better risk/reward for them to work with Zenvia to delay their payments (with interest) but still be made whole.

Our conversations with Oria Capital (Brazilian tech PE/VC firm), a long-time backer/investor of Zenvia, current shareholder and board member, indicate that while Zenvia entertained discussion with distressed hedge funds in 2022 when the situation looked dire, that is no longer the case as Zenvia has a lot more visibility on its business and FCF generation and there is line of sight towards resolving its funding gap once and for all.

The telcos should also be more accommodating because Zenvia is the largest SMS purchaser in Brazil. Zenvia and Twilio account for 60% of total SMS purchases in Brazil and Twilio is an investor in Zenvia. On July 29, 2021, Zenvia sold to Twilio, 3,846,153 Class A common shares in a private placement at a price per Class A common share of US$13.00, which was equal to the price per Class A common share in Zenvia’s initial public offering. Zenvia and Twilio also entered into commercial agreements that establish complementary initiatives to strengthen their respective businesses by leveraging each other’s communications network – Zenvia contributing its CX communications platform focused on empowering businesses across Latin America, and Twilio with its cloud communications platform focused on empowering developers to improve communications globally. Under the terms of these agreements, for a period of three years, Zenvia agreed to process and route A2P messages and voice calls originating from Twilio’s customers and Twilio reciprocally agreed to process and route A2P messages and voice calls originating from Zenvias customers. Twilio is incentivized to make sure that Zenvia does not file for bankruptcy because they don’t want to lose their strategic ownership of Zenvia and see their equity wiped out. We see evidence of this already – Twilio has offered Zenvia very attractive payment terms which has helped Zenvia’s operating working capital and boosted its FCF.

The CEO and Founder Cassio Bobsin owns 25% of the company so a dilutive equity raise is unlikely.

Zenvia is also generating significant FCF. Gross margins have increased from 33.8% to 51.6% in the most recent quarter driven by product mix shift towards SaaS as well as an improvement in CPaaS gross margins from 22.9% to 41.7%. CPaaS gross margins improvement was driven by volume recovery from large clients. 50% of gross profit is now coming from Zenvia’s higher margin SaaS business. Zenvia has also had three quarters in a row of positive EBITDA. Working capital has also contributed significantly towards positive operating FCF as Zenvia successfully renegotiated with SMS providers to provide more flexible payment terms and received more favorable treatment from Twilio regarding accounts receivables.   

Secular growth story & strong market position

CPaaS and SaaS benefit from structural growth tailwinds in LATAM.

Communication is critical for the operation and innovation of businesses of all sizes. With unprecedented customer dependence on smartphones and the proliferation of mobile applications, communications have become a major focus for businesses of all sizes. As a result, businesses are integrating mission-critical communications functions in their products and services. In order to provide real-time value to their end-consumers across a myriad of devices, businesses are seeking to effectively operate and innovate to create a “connected” experience. Communication and the focus on customer experience are transforming interactions between businesses and their end-consumers. Mobile channel connections between businesses and their end-consumers have been at the forefront of change in the way businesses communicate with their end-consumers and there is a need for a more comprehensive platforms to manage such communications.

We believe the Latin American market has significant growth potential as it is in the early stage of digital transformation and adoption of technology. For example, current business spending on information technology in Latin America remains relatively low compared to spending in developed markets (2.8% in Latin America compared to 4.6% in the United States in terms of percentage of GDP as of 2021, according to data from ABES and the World Bank).

Zenvia is the top CPaaS player in Latin America with 13% of market share and one of the bigger home-grown SaaS players in Brazil (#8 in market share), despite having only a 2% market share. Zenvia’s dominant position in CPaaS enables Zenvia to negotiate better rates with telcos as higher volumes drive better pricing.  

Zenvia has a long runway for growth because they are levered to Brazilian SMBs and large enterprises going through digitalization. Zenvia should be able to grow their revenue 15%-20% for the foreseeable future.  

Business model shift & cross-selling opportunity

Zenvia started as a pure CPaaS company (the Twilio of Brazil) and as competition intensified Zenvia sought to diversify into SaaS. The SaaS model is significantly higher margin and has more visibility into their revenue (120% net revenue expansion). CPaaS remains a slower growing but highly FCF generative business and management is using the FCF from their CPaaS business to invest in their SaaS business. Cross-selling & bundling of solutions has also become a priority and Zenvia is starting to see traction there. Zenvia’s scale advantages in CPaaS means that Zenvia can offer customers competitive pricing while also offering more services. Zenvia’s platform offers complete and integrated communication solutions focusing on customers’ specific needs.

Valuation

We forecast Zenvia growing revenue 15%-20% driven by Zenvia’s dominant position in Brazil, the secular growth tailwinds around CPaaS and SaaS adoption, and the market normalizing. We have EBITDA expanding from 8% in the most recent quarter to 18.5% in 2027 which is higher than their all-time high EBITDA margin of 17% in 2018. The margin expansion is driven by Zenvia’s product-mix shift towards higher margin SaaS, cross-selling, market normalizing, continued benefits of scale, and a greater focus on sustainable, profitable growth.

Through our conversations with those closer to the company, we have learned that given the bootstrapped nature of Zenvia, their natural mindset is to operate lean. Unlike most SaaS companies that have SBC expense at 15%-20% of revenue, Zenvia has de minimis SBC expenses and has been EBITDA positive every year except for 2022. Therefore, we have confidence in our EBITDA margin projections and if anything they are conservative.

15x 2027 EBITDA results in 1,901% upside for a 95% IRR. 5x 2027 Revenue results in 3,605% upside for a 123% IRR. Again, Zenvia is currently priced for bankruptcy. 

Catalyst

Funding gap resolution: Zenvia can continue to extend earn-out payments with additional interest and/or tap into the private credit markets. Continued FCF inflection will also help.