Totvs: Software company finds lucrative niche

Brazil is not known for its software industry, which makes the success of Totvs, a company that might appear less out of place on the IT-heavy Bombay Stock Exchange than on Brazil’s Bovespa, all the more surprising.

Totvs produces enterprise resource planning (ERP) software for small and medium-sized companies, focusing on firms with up to $2bn in revenues. It has sustained fast growth with little volatility in its home market and is increasingly expanding overseas. In the past eight years alone, Totvs has grown revenues 10 times to some 1.05bn reais, says José Rogerio Luiz, CFO. That makes it the largest in the ERP space in emerging markets and the eighth most important such company in the world. In its home market, Totvs has seen off the challenge from giants such as SAP and Oracle, Mr Luiz asserts.

The secret has been its niche: Totvs is the king of ERP for small and medium companies and develops a close relationship with all its clients, offering a product that Mr Luiz says is as essential as electricity or telephony.

The company has several features that help distinguish it for cost-conscious consumers, thinks Carlos Sequeira, analyst at UBS Pactual. Totvs’ products tend to be cheaper and require less energy than solutions provided by competitors. It blends third party software with its own, relatively basic proprietary language. That keeps costs to a minimum by reducing development spend and yet avoiding the paying of licenses. And Totvs feels local wherever it goes by establishing exclusive franchises rather than using the industry standard of employing third party vendors.

Careful not to expand too fast outside Brazil, the company has instead focused on developing a dominant share of the domestic market before looking overseas. It has grown domestically through a judicious blend of organic growth and acquisition. Recently, it received approval from the Brazilian anti-trust agency, CADE, to absorb its chief rival in the Brazilian market, Datasul. Totvs acquires rivals where the target helps to fill out its product offering and penetrate new client bases. Growth of the mining, oil and gas sectors, alongside hosting the World Cup in 2014 means the country remains attractive for further expansion, Mr Luiz says.

At the same time, Totvs is already geographically diverse. It is present in 26 markets and has offices in three. Nevertheless, it emphasises caution in its expansion plans for foreign markets. “It’s like Napoleon and the invasion of Russia. You have to be strong in your home market before you attempt to conquer another,” Mr Luiz says. That is partly because of the time it takes to make a product fit the local market, a process that can take up to three years.

In addition to Latin America, especially Mexico, the firm sees opportunities in Africa and India. Mr Luiz insists that despite the number of software companies in India, many are third-party providers and those focusing on servicing domestic companies do not focus on ERP software. “As soon as I got back from India two years ago, I realised that it is a huge and historic opportunity and one that we cannot pass up,” he says.

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