Investor Presentaiton

Totvs Adapting to this new digital certification environment requires a substantial investment in equipment and person- nel. The process of analyzing and updating databases and files, upgrading telecommunications and IT infrastructures, redefining operating and accounting processes to enable them to be reflected in integrated systems, training teams to fill out, verify, and validate the electronic files, are but some of the preparatory tasks involved. Thanks to the huge simplifica- tion in manual routines, personnel cost reductions, lessened "physical" bureaucracy, diminished volumes of paper, etc., the resulting benefits will most certainly materialize in due course. When fully implemented, the system will become increasingly efficient and reliable and is also expected to eventually reduce expenses incurred on tax assessments and fines. If such a positive result will be attainable for SPED users only over a certain period of time, the opportunity is already knocking at the doors of the software companies. Totvs is a Brazilian market leader in developing and marketing ERP (Enterprise Resource Planning) software, with a base in excess of 23 thousand far-ranging and diversified customers. It also boasts a wide scope distribution listing of more than 103 channels (including representatives and fran- chises). Thanks to a successful policy of integrating several acquisitions over the years, the company is ideally positioned to benefit from the momentum that the electronic tax program could represent for its own business model. Dynamo has been monitoring and investing in the IT sector since 2001. This area has benefited from the count- less transformations in the Brazilian economy and in the country's business environment over the last twenty years, among them: the end of two-digit inflation, increased trade opening, privatization, increased competition, the end of the IT market reserve, greater professionalization (sophistication) of companies management in general, reduced IT product prices, and telecommunications advances. These changes encourage and facilitate corporate investments in IT tools focusing on companies' increased productivity, management efficiency, internal control levels, and effective planning. Totvs has consistently taken advantage of this favorable environment, and has grown steadily via both acquisitions and organic means. In addition to its product quality develop- ment, a major success ingredient has been the structure of its distribution channel and the competence of its services. The Totvs business model is based on its widely distributed sales force and, particularly, on the technical support it provides throughout the process of implementing a system, a critical stage in assuring the customer's acceptance of the respective product. And this is a particularly interesting competitive edge since its target market is small and medium companies, which presupposes some scale in supplying services, and also it requires a nuclear familiarity with its clients' potential base, features that new market entrants would have difficulty in replicating. Initially, it would seem that training and maintaining a team of special- ists to monitor every step of the implementation process would represent an increment in customer acquisition costs. But this rapidly is transformed into increased client base fidelity and, thus, represents a growth of the maintenance fee revenues (recurring revenues), a higher margin business. This reinforces the principle that Totvs offers a product deemed a "utility of low churn", since software management is increasingly a "critical element for the operational stability of clients". In Totvs' more systemic corporate model approach, SPED does not represent an isolated opportunity to including a new functionality in a software license sales package. It is actually a movement with wider and longer lasting impacts, one that expedites the irreversible path towards informatization for a huge spectrum of small and medium companies hovering on the verge of digital life. And even in the case of already IT user companies, further ERP software investments will be crucial to achieve increased operating efficiency, and also to comply with specific tax authority requirements. And here, Totvs has taken some less obvious strategic action such as its recent launch of an institutional brand promotion campaign, together with an announcement of a significant R&D expenditure (approximately R$100 million). Thanks to its sharp growth over the last few years, Totvs has reached a point where it can offer quality products with all the essential functionalities, at a cost compatible with the budget constraints of its target market, still relatively untouched by ERP. This operating leverage can also be observed in the company's increased margins. During this first quarter, Totvs' EBITDA margin rose by 26.2%, five percentage points over the same quarter last year and four points above the last quarter of 2008. At a time when many sectors of the economy are still suffering from the financial crisis, Totvs has recorded increased revenues in the region of 20% per quarter, continues to hire people, and has added close to five hundred clients per quarter to its base. Naturally, this speed of growth imposes additional strains on the company's work capacity. A variety of brands, increased numbers of products, international expansion, and maximization of its R&D expenses are but some of the areas requiring close monitoring. Moreover, it can be expected that, over time, Totvs will encounter increased competition in its target market. This is likely to put pressure on the cost of the company's qualified personnel, already a scarce resource in its market. However, in our view, none of this will undermine the company's rapid ascent. There is no doubt that the requirements for improving the electronic tax environment have leveraged the ERP software 3

View entire presentation