Totvs stakes growth on SMEs, faces challenges to expand abroad

Thursday, January 27, 2011

Growth prospects for Brazilian software development group Totvs (Bovespa: TOTS3) remain strong as the country's SME sector increasingly seeks local Enterprise Resource Planning (ERP) solutions, according to executives and independent industry analysts.

SMEs, defined as businesses with between US$15mn and US$2bn in revenues, account for some 80% of Totvs' revenues, and the company has about 68% of the SME market in Brazil, executive vice-president José Rogério Luiz told BNamericas.

Totvs closed 2009 as the world's seventh-largest ERP provider in terms of market share and the leader in both Brazil and Latin America, ahead of multinational competitors like SAP (NYSE: SAP) and Oracle (Nasdaq: ORCL). In the third quarter of 2010, the last period for which data is available, Totvs amassed net revenues of 303mn reais (US$182mn), or 20% more than in 3Q09, and expects to have finished 2010 with double-digit growth.

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Luiz likened Totvs' success, particularly among SMEs, to haberdashers at Hong Kong airport.

"You can have your measurements taken when you step foot off the plane and have a personalized suit within hours," he said. "Are they creating your suit from scratch? No, they are adjusting templates to fit customers. We are doing the same with software solutions, instead of like the bigger guys, trying to force everyone into the same size."


IT consultancy Gartner, meanwhile, estimates 65% of Brazilian SMEs seeking ERP solutions will look locally first between 2011 and 2014. Gartner analysts Chad Eschinger and Robert Anderson this month produced a strength, weakness, opportunity and threat (SWOT) report on Totvs, and also predicted the domestic market for ERP applications will yield five-year compound annual growth of 9.7%.

Larger global vendors are increasingly setting sights on Brazil's SME sector and could eventually present challenges for Totvs on its home turf, Eschinger said. SAP, for example, recently invested nearly US$20mn in research and development in Brazil. Acquisitions could be another avenue for multinationals seeking a bigger piece of the market, the Gartner analyst added.

"Brazil is a very fragmented market for enterprise applications with a lot of small players operating on a state level," he said. "Multinational companies might come in and look for companies familiar with the local landscape."

Totvs has done a solid job of securing its position atop the Brazilian ERP market with buyouts in recent years, according to Gartner. In 2008, the company merged with its biggest domestic competitor Datasul. Other strategic purchases in the region have helped to develop both Totvs' product line and distribution channel.

The Gartner report, however, advised Totvs to settle on two or three flagship products, instead of continuing to develop all of the solutions now under its umbrella.

Overseas, Totvs could be hindered by linguistic, cultural and macroeconomic obstacles, Eschinger said.

"Regrettably, to date, Totvs has yet to find the formula for success to drive significant [market] share growth outside Brazil," the SWOT report authors wrote. "Meanwhile, other more globally astute competitors understand how to market and organize across multiple regions and countries."

Still, the Gartner analyst sees potential for Totvs among SMEs in the South American, Portuguese, Angolan and US Latino markets, among others.

The task of selling Totvs products worldwide, Luiz said, is much like marketing Brazilian fruit jabuticaba internationally.

"You can do everything with jabuticaba, from just eating it to making juices and cakes, but it's still only available for the most part in Brazil," he said.


A key to conquering the SME market, Luiz added, is understanding that small companies' requirements can rival, if not exceed, those of major corporations. Luiz said his company's early recognition of cloud computing and software as a service (SaaS) solutions, for example, have helped Totvs offer the flexibility that SMEs demand.

"A US$300mn company has the same tax compliance needs as a multi-billion dollar company," he said. "The smaller company just has to do the same with less of a budget and fewer staff members."

The Brazilian government's heightened regulations on financial reporting have been a major impetus for increased consumption of Totvs' software among various verticals, from education and health to construction and agribusiness, according to the company executive. By 2014, the country's treasury department will compel about 3.5mn businesses to do their bookkeeping digitally, as opposed to 180,000 in 2010.

"I've always said there's no better salesman for software than the government," Luiz said.