Zenvia Reduces Guidance As Macro Slowdown Looms

Summary

• Zenvia recently reported its Q3 2022 financial results.
• The firm provides a variety of customer communications and experience software to companies in Latin America.
• ZENV has instituted cost-cutting measures and materially reduced its forward guidance.
• I'm on Hold for ZENV until it can reignite growth while making a meaningful move toward operating breakeven.
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A Quick Take On Zenvia

Zenvia (NASDAQ:ZENV) reported its Q3 2022 financial results on November 16, 2022, producing lower sequential revenue and higher loss per share.

The company provides businesses in Latin America with a modern customer experience software and services platform.

With a significant potential for worsening net results due to an economic slowdown, I’m on Hold for ZENV for the near term.

Zenvia Overview

São Paulo, Brazil,-based Zenvia was founded to develop a customer communications system for companies to digitally interact with their customers and prospective customers across the entire customer journey.

Management is headed by founder and Chief Executive Officer Cassio Bobsin, who was previously the founder of WOW Accelerator, a large independent accelerator in Brazil.

The company’s primary offerings include:

• Marketing campaigns

• Sales communication

• Customer service

• Client engagement

• APIs, chatbots and other tools

• Customer communication channels

The firm pursues a "land and expand" approach to gaining enterprise clients, which is common for enterprise software firms providing a SaaS solution.

Zenvia’s Market and Competition

According to a 2018 market research report by Research and Markets, the global customer experience management market is projected to grow to $21.3 billion by 2024.

This represents a forecast CAGR of 22% from 2018 to 2024.

The main drivers for this expected growth are the growing needs of customers for a personalized customer experience throughout their purchase journey.

Also, experience management helps enterprises grow their brands, increase customer loyalty, reduce client attrition and improve their operations.

Major competitive or other industry participants include:

• Infobip

• Sinch

• Twilio

• MessageBird

• Zendesk

• Salesforce

• Take

• Yalo

• Qualtrics

• Others

Zenvia’s Recent Financial Performance

• Total revenue by quarter has followed the trajectory shown below:

9 Quarter Total Revenue (Seeking Alpha)

• Gross profit margin by quarter has risen in the most recent quarter:

9 Quarter Gross Profit Margin (Seeking Alpha)

• Selling, G&A expenses as a percentage of total revenue by quarter have been increasing in recent quarters:

9 Quarter Selling, G&A % Of Revenue (Seeking Alpha)

• Operating losses by quarter have been significant, as the chart shows below:

9 Quarter Operating Income (Seeking Alpha)

• Earnings per share (Diluted) have worsened sharply into negative territory in Q3 2022:

9 Quarter Earnings Per Share (Seeking Alpha)

(All data in above charts is GAAP)

In the past 12 months, ZENV’s stock price has fallen 82.8% vs. the U.S. S&P 500 index’ drop of around 16.6%, as the chart below indicates:

52 Week Stock Price (Seeking Alpha)

Valuation And Other Metrics For Zenvia

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]	Amount
Enterprise Value / Sales	0.6
Enterprise Value / EBITDA	0.0
Revenue Growth Rate	50.4%
Net Income Margin	-9.3%
GAAP EBITDA %	-14.0%
Market Capitalization	$72,630,000
Enterprise Value	$88,570,000
Operating Cash Flow	-$11,140,000
Earnings Per Share (Fully Diluted)	$0.54

Click to enlarge

(Source - Seeking Alpha)

As a reference, a relevant partial public comparable would be Sprinklr (CXM). Shown below is a comparison of their primary valuation metrics:

Metric [TTM]	Sprinklr	Zenvia	Variance
Enterprise Value / Sales	3.1	0.6	-80.3%
Revenue Growth Rate	29.8%	50.4%	69.1%
Net Income Margin	-20.4%	-9.3%	-54.4%
Operating Cash Flow	-$13,090,000	-$11,140,000	-14.9%

Click to enlarge

(Source - Seeking Alpha)

A full comparison of the two companies’ performance metrics may be viewed here.

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

ZENV’s most recent GAAP Rule of 40 calculation was 36.4% as of Q3 2022, so the firm performed reasonably well for this metric, per the table below:

Rule of 40 - GAAP	Calculation
Recent Rev. Growth %	50.4%
GAAP EBITDA %	-14.0%
Total	36.4%

Click to enlarge

(Source - Seeking Alpha)

Commentary On Zenvia

In its last earnings release (Source - Seeking Alpha), covering Q3 2022’s results, management highlighted the expected reductions in headcount and related expenses as the firm seeks to cut costs.

Additionally, management has renegotiated earn-out payment timelines related to its acquisitions of D1 and Movidesk, in order to conserve cash in the near term.

The firm believes a global slowdown of economic activity is underway and aims to streamline its corporate structure in response.

As to its financial results, total revenue rose by 14.2% year-over-year while gross profit margin increased impressively, to 41% on a GAAP basis.

Management did not disclose any retention rate figures, a critical piece of information about the health of the business, its product/market fit and sales & marketing efficiency.

ZENV’s Rule of 40 results were 36.4%, so the company has performed well for this important metric.

SG&A expenses rose sequentially while operating losses came closer to breakeven.

Earnings per share worsened markedly into negative territory

For the balance sheet, the firm finished the quarter with approximately $21.8 million in cash and equivalents and $32.1 million in loans and borrowings.

Over the trailing nine months, operating cash flow was approximately $14.7 million.

Looking ahead, management sharply reduced its FY 2022 revenue guidance, from a previously expected 47% at the midpoint of the range to a new 26.5% at the midpoint.

Regarding valuation, the market is valuing ZENV at an EV/Sales multiple of around 0.6x.

The SaaS Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.8x at Oct. 31, 2022, as the chart shows here:

SaaS Capital Index (SaaS Capital)

So, by comparison, ZENV is currently valued by the market at a large discount to the broader SaaS Capital Index, at least as of Oct. 31, 2022.

The primary risk to the company’s outlook is an expected macroeconomic slowdown or recession, which will produce slower sales cycles and reduce its revenue growth trajectory.

An upside catalyst would be a recession or slowdown that is "short and shallow."

However, the market continues to punish ZENV with a further reduced valuation multiple.

With the high potential for worsening net results due to an economic slowdown, I’m on Hold for ZENV for the near term.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.