TOTVS S.A. Interim Financial Statements March 31, 2018 and Independent auditor s review report on interim financial information

Transcription

1 TOTVS S.A. Interim Financial Statements March 31, 2018 and Independent auditor s review report on interim financial information Page 1 of 43

2 Contents Management report and comments on company s performance... 3 Independent auditor s report on the review of interim financial information... 5 Financial statements... 7 Statement of financial position... 7 Statement of profit or loss... 8 Statement of comprehensive income... 9 Statements of changes in equity Statements of cash flow Statements of value added Notes to the financial statements The Company and its operations Basis of Preparation and presentation of the financial statements Financial instruments and sensitivity analysis of financial assets and liabilities Cash and cash equivalents Trade accounts receivable Stocks Taxes recoverable Income taxes Related-party balances and transactions Investments Property, plant and equipment Intangible assets Payroll and labor obligations Tax liabilities Loans and financing Debentures Liabilities due to investment acquisition Provision for contingencies related to legal proceedings Possible contingencies Equity Dividends and Interest on Equity Insurance coverage Stock option plan and restrict shares Segment industrial information Earnings per share Gross sales revenue Expenses by nature Finance income and expenses Private pension plan defined contribution Subsequent events...42 Page 2 of 43

3 FINANCIAL PERFORMANCE AND CONSOLIDATED RESULT Net revenue totaled R$562,998 thousand in 1Q18, up 0.5% from 1Q17, resulting from: (i) the Company's initiatives to capture the software market s growth, including the sales of business solutions by industry sector, productivity and collaboration platforms, cloud infrastructure and mobile solutions to its clients; and (ii) the growth of recurring revenues from subscription; Licensing revenue grew 13.9% year on year, mainly reflecting the increase in average ticket resulting from the higher participation of sales to large clients. Maintenance revenue decreased 3.4% year on year in 1Q18 and was negatively affected by: (i) the lower volume of license sales in previous periods; (ii) the increase in client defaults; (iii) the higher volume of partial cancellation of maintenance contracts due to layoffs at clients; and (iv) the decline in the IGP-M index in the last 12 months. Subscription revenue increased 38.3% year on year and totaled R$94,622 thousand in the quarter. This growth is mainly due to the higher share of new sales to small and medium clients, especially under the TOTVS Intera commercial model. Service revenue totaled R$120,635 thousand in the 1Q18, a reduction of 6.2% year on year mainly driven by the 5.7% decrease in services not related to software implementation and the 7.4% decrease in services not related to software implementation, chiefly consulting projects. Hardware revenue decreased 23.3% year-over-year and totaled R$44,009 thousand in 1Q18, mainly due to the seasonality of sales in the period and decline in sales of fiscal printers. The cost of software increased 6.9% in 1Q18, when compared to the same quarter of 2017, reflecting mainly the share of complementary solutions provided by partners in the sales. The cost of support grew 5.8% in the year on year comparison, chiefly explained by wage increases and contracts adjustments with suppliers made in the past 12 months. The cost of services totaled R$115,065 thousand, reduction of 9.9% when compared to 1Q17, despite the collective bargaining agreements settled in the last 12 months, mainly due to the organizational restructuring carried out by the Company in the second half of The cost of hardware, which includes the cost of the equipment and technical assistance services provided by subsidiary Bematech, reduced 18.5% year on year, mainly because mainly due to lower sales in the period. It is worth mentioning that the hardware cost also includes depreciation expenses of R$836 thousand. Research and development expenses grew 6.8% year-over-year. This growth results mainly from the collective wage adjustments made in the period. Advertising and marketing expenses in 1Q18 grew 2.5% year on year, chiefly explained by wage increases and contracts adjustments with suppliers made throughout the year. Selling expenses totaled R$ thousand in 1Q18, a 10.8% reduction over 1Q17, and the commissions expenses grew 13.3% when comparing to the 1Q17, totaling R$42,305 thousand. When taken together, the sum of these expenses increased its share over net revenue, mainly reflecting (i) the change in sales mix between franchises and own branches; and (ii) the higher volume of software sales in the subscription model. Page 3 of 43

4 General and administrative expenses increased 8.0% in 1Q18 to R$54,740 thousand. This variation was affected by the higher level of provision for contingencies and wage adjustments resulting from collective agreements. Management fees decreased 11.2% over 1Q17 mainly as a result of the organizational restructuring and provision for bonus related to the achievement of financial and individual targets of executives in the period. Depreciation and amortization expenses were stable year-over-year, mainly due the combination of the depreciation of assets of the Company's new headquarters in São Paulo and the amortization of intangible assets arising from acquisitions. Allowance for doubtful accounts corresponded to 2.3% in 1Q18, compared to 1.6% in 1Q17. This line was impacted by the new accounting practices (IFRS9) adopted in the quarter, which resulted in a negative effect of R$3,197 thousand. Excluding these effects from IFRS9, the allowance for doubtful accounts represented 1.7% of net revenue, same level as in the previous period. The negative financial result (financial revenues net of financial expenses) was 4.6% lower than the 1Q17 negative financial result, mainly reflecting: (i) the reduction of the indices used for monetary restatement of the provision for contingencies; and (ii) the reduction of interest paid and incurred due to the reduction of net debt in the period. Income Tax and Social Contribution expenses in 1Q18 were 38.8% higher than the expenses recorded in 1Q17, mainly due to: (i) lower utilization of the R&D tax benefit in the period, as a result of collective holidays that lasted until January 2018; and (ii) the subsidy reduction of ICMS in the State of Paraná. EBITDA (*) for the quarter totaled R$96,768 thousand, 7.4% higher than 1Q17 Adjusted EBTIDA, as shown below: 1Q18 1Q17 Change Net Income 34,310 30, % Equity Income Tax and Social Contribution 16,840 12, % Financial result 10,995 11, % Depreciation and amortization 33,658 33, % Depreciation Cost of hardware % EBITDA 96,768 88, % Write-off of fixed assets - 1, % ADJUSTED EBITDA 96,768 90, % This growth is mainly due to the higher results of software and services presented in the period, in spite of the level of delinquency, cancellations and reductions in software maintenance contracts and the level of IGP-M (inflation index used to adjust recurring revenues). EBITDA margin ended the quarter at 17.2%, compared to 16.1% in 1Q17 Adjusted EBITDA margin, due to the events already described in previous comments of each line. (*) EBITDA is a non-accounting measure prepared by the Company and consists of net income for the year, plus income taxes, financial expenses net of financial revenues, and depreciation and amortization. 1Q17 Adjusted EBITDA represents EBITDA, net of extraordinary effects related to write-off of fixed assets. Page 4 of 43

5 A free translation from Portuguese into English of Individual and Interim Financial Information prepared in Brazilian currency in accordance with accounting practices adopted in Brazil and in accordance with International Financial Reporting Standards (IFRS), issued by International Accounting Standards Board IASB and consistently with the standards issued by the Brazilian Securities Commission (CVM). Independent auditor s report on the review of interim financial information To the Shareholders, Board of Directors and Officers TOTVS S.A. São Paulo - SP We have reviewed the individual and consolidated interim financial information of TOTVS S.A., ( Company ), contained in the Quarterly Information Form (Informações Trimestrais - ITR) for the quarter ended on March 31, 2018, which comprise the statement of financial position as of March 31, 2018 and the related statements of income, of comprehensive income, of changes in equity and of cash flows for the threemonth period then ended, including other explanatory information. Management is responsible for the preparation of the individual and consolidated interim financial information in accordance with Brazilian Accounting Standard CPC 21 (R1) Interim Financial Reporting (Demonstração Intermediária) issued by CPC (Comitê de Pronunciamentos Contábeis) and with IAS 34 Interim Financial Reporting, issued by the International Accounting Standards Board (IASB), as well as for the presentation of this information in conformity with the standards issued by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) applicable to the preparation of Quarterly Information Form (ITR). Our responsibility is to express a conclusion on this interim financial information based on our review. Scope of review We conducted our review in accordance with Brazilian and International Standards on Review Engagements NBC TR Review of Interim Financial Information Performed by the Independent Auditor of the Entity (Revisão de Informações Intermediárias Executada pelo Auditor da Entidade) and ISRE Review of Interim Financial Information Performed by the Independent Auditor of the Entity, respectively. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with auditing standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion on the individual and consolidated interim financial information Based on our review, nothing has come to our attention that causes us to believe that the individual and consolidated interim financial information included in the Quarterly Information Form (ITR) referred to above was not prepared, in all material respects, in accordance with CPC 21 (R1) and IAS 34 applicable to the preparation of the Quarterly Information Form (ITR), and presented consistently with the rules issued by the Brazilian Securities and Exchange Commission (CVM). Page 5 of 43

6 Other matters Statements of value added We have also reviewed the individual and consolidated interim Statements of Value Added for the three-month period ended on March 31, 2018, prepared under management s responsibility, whose presentation in the interim financial information is required by the rules issued by the Brazilian Securities and Exchange Commission (CVM) applicable to preparation of the Quarterly Information Form (ITR), and as supplementary information under the IFRS, which do not require Statement of Value Added presentation. This statement has been subject to the same review procedures previously described and, based on our review, nothing has come to our attention that causes us to believe that it is not fairly presented, in all material respects, in relation to the overall accompanying individual and consolidated interim financial information. São Paulo, May 04, 2018 ERNST & YOUNG Auditores Independentes S.S. CRC- 2SP034519/O-6 Luiz Carlos Marques Accountant CRC-1SP /O-5 Page 6 of 43

7 TOTVS S.A. Statement of financial position as at March 31, 2018 and December 31, 2017 (In thousands of reais) (A free translation of the original in Portuguese) Assets 3/31/ /31/2017 3/31/ /31/2017 Liabilities and equity 3/31/ /31/2017 3/31/ /31/2017 Current assets 694, ,940 1,038,781 1,038,346 Current liabilities 497, , , ,286 Cash and cash equivalents (Note 4) 281, , , ,169 Payroll and labor obligations (Note 13) 120, , , ,836 Marketable securities (Note 17) 26,671 28,512 49,882 44,615 Trade accounts payable 62,248 66,812 91, ,424 Trade accounts receivable (Note 5) 367, , , ,545 Taxes payable (Note 14) 26,961 20,818 40,465 28,725 Allowance for doubtful accounts (Note 5) (81,741) (73,469) (107,286) (89,032) Commissions payable 38,482 33,798 45,020 39,769 Stocks (Note 6) ,217 44,828 Dividends payable (Note 21) 15,639 18,015 15,972 18,487 Taxes recoverable (Note 7) 52,100 56,571 86,623 93,097 Loans and financing (Note 15) 188, , , ,215 Other assets 48,247 35,502 52,428 42,124 Debentures (Note 16) 356 3, ,841 Liabilities due to investments acquisition (Note 17) 42,915 31,459 87,986 47,561 Other liabilities 2,416 2,547 6,072 3,428 Noncurrent assets 1,627,353 1,626,849 1,426,461 1,455,279 Noncurrent liabilities 539, , , ,762 Marketable securities (Note 17) ,013 Loans and financing (Note 15) 137, , , ,341 Trade accounts receivable (Note 5) 30,748 30,999 31,733 31,901 Debentures (Note 16) 267, , , ,297 Receivables from related parties (Note 9) 5,569 6, Provision for losses on investments (Note 10) 886 1, Taxes recoverable (Note 7) ,752 20,695 Payables to related parties (Note 9) 13,992 13, Deferred income and social contribution taxes (Note 8) 44,965 44,889 97, ,715 Provision for contingencies related to legal proceedings (Note 18) 113, , , ,770 Financial assets (Note 3) ,913 57,645 Liabilities due to investments acquisition (Note 17) - 13,297-41,886 Judicial deposits (Note 18) 48,662 49,207 60,190 61,127 Other liabilities 6,231 5,587 6,193 5,468 Other assets 21,262 21,184 26,834 26,844 Equity (Note 20) 1,284,396 1,261,394 1,284,829 1,261,577 Investments (Note 10) 905, ,688 2,407 2,349 Capital 989, , , ,841 Property, plant and equipment (Note 11) 165, , , ,022 Treasury shares (70,834) (71,495) (70,834) (71,495) Intangible assets (Note 12) 404, , , ,968 Capital reserves 165, , , ,079 Other comprehensive income (2,517) 1,728 (2,517) 1,728 Retained profit reserve 196, , , ,799 Proposed additional dividend 5,442 5,442 5,442 5,442 Noncontrolling interests Total assets 2,321,391 2,339,789 2,465,242 2,493,625 Total liabilities and equity 2,321,391 2,339,789 2,465,242 2,493,625 The accompanying notes are an integral part of these financial statements. Page 7 of 43

8 TOTVS S.A. Statements of profit or loss For the three-months periods ended March 31, 2018 and 2017 (In thousands of reais, except by the earnings per share) (A free translation of the original in Portuguese) 3/31/2018 3/31/2017 3/31/2018 3/31/2017 Licensing fees 45,062 41,206 56,060 49,240 Maintenance 202, , , ,485 Subscriptions 62,807 41,500 94,622 68,418 Services 91, , , ,645 Hardware ,009 57,345 Net revenue from services and sales (Note 26) 402, , , ,133 Cost of software (19,145) (17,949) (22,274) (20,834) Cost of support (21,522) (20,510) (34,319) (32,451) Cost of services (102,324) (104,080) (115,065) (127,699) Cost of hardware - - (29,252) (35,898) Gross profit 259, , , ,251 Operating income (expenses) Research and development (67,408) (62,438) (91,804) (85,922) Advertising expenses (9,019) (7,888) (9,504) (9,268) Selling expenses (34,187) (36,880) (52,275) (58,603) Commissions (Note 27) (38,550) (32,804) (42,305) (37,327) General and administrative expenses (44,367) (37,499) (54,740) (50,677) Management fees (Note 9) (4,717) (5,255) (5,238) (5,898) Depreciation and amortization (Notes 11 and 12) (24,812) (20,922) (33,658) (33,560) Allowances for doubtful accounts (Note 5) (6,939) (5,792) (12,691) (8,833) Government subsidy - - 1,639 2,637 Other net operating income (expenses) 921 (1,015) 762 (1,972) Income before financial effects and equity pickup 30,070 47,492 62,274 53,828 Financial income (Note 28) 6,410 8,675 8,798 13,302 Financial expenses (Note 28) (17,156) (19,075) (19,793) (24,833) Equity pickup (Note 10) 18,533 1,366 (129) - Income before income tax and social contribution 37,857 38,458 51,150 42,297 Income tax and social contribution - current - (14,967) (10,743) (20,870) Income tax and social contribution - deferred (3,873) 6,478 (6,097) 8,735 Total of Income tax and social contribution (Note 8) (3,873) (8,489) (16,840) (12,135) Net income for the year 33,984 29,969 34,310 30,162 Net income attributable to the owners of company 33,984 29,969 33,984 29,969 Net income attributable to non-controlling interest Basic earnings per thousand shares (in Reais) Diluted earnings per thousand shares (in Reais) The accompanying notes are an integral part of these financial statements. Page 8 of 43

9 TOTVS S.A. Statements of comprehensive income For the three-months periods ended March 31, 2018 and 2017 (In thousands of Reais ) 3/31/2018 3/31/2017 Net income for the year 33,984 29,969 Cumulative adjustment for currency exchange (6,432) (4,445) Deferred income tax 2,187 1,512 Cumulative adjustment for currency exchange, net of tax effects (4,245) (2,933) Comprehensive income for the year 29,739 27,036 3/31/2018 3/31/2017 Net income for the year 34,310 30,162 Cumulative adjustment for currency exchange (6,432) (4,445) Deferred income tax 2,187 1,512 Cumulative adjustment for currency exchange, net of taxes effects (4,245) (2,933) Comprehensive income for the year 30,065 27,229 Net income for the year attributable to controlling shareholders 29,739 27,036 Attributable to non-controlling interest The accompanying notes are an integral part of these financial statements. Page 9 of 43

10 TOTVS S.A. Statements of changes in equity For the three-months periods ended March 31, 2018 and 2017 (In thousands of reais) (A free translation of the original in Portuguese) Capital Premium on purchase from noncontrolling Capital Reserves Legal Retained profits Share Treasury Other Comprehensive Income Retained earnings Proposed additional dividend Equity Non- Controlling Equity Balance at December 31, ,374 (25,518) 187,542 79, ,703 (73,443) 1,785-7,375 1,221,188 (272) 1,220,916 Capital transactions with partners Capital increase 448, (448,467) Stock option plan - - 4, ,003-5,003 Dividends of previous year (7,375) (7,375) (120) (7,495) Dividends (5,442) 5, Interest on equity distributed (50,346) - (50,346) - (50,346) Treasury shares - - (1,895) - - 1, Total comprehensive income ,649 32,544 - (57) 55,788-92, ,201 Net income for the year ,981-92, ,258 Cumulative adjustment for currency exchange (57) - - (57) - (57) Reserves set up ,649 32, (37,193) Balance at December 31, ,841 (25,518) 190,597 84,019 86,780 (71,495) 1,728-5,442 1,261, ,261,577 Capital transactions with partners Opening balance of CPC 47 e CPC (7,968) - (7,968) (15) (7,983) Capital increase Stock option plan - - 1, ,231-1,231 Dividends of previous year (211) (211) Treasury shares - - (661) Total comprehensive income (4,245) 33,984 29, ,065 Net income for the year ,984 33, ,310 Cumulative adjustment for currency exchange (4,245) - - (4,245) - (4,245) Reserves set up Balance at March 31, ,841 (25,518) 191,167 84,019 86,780 (70,834) (2,517) 26,016 5,442 1,284, ,284,829 The accompanying notes are an integral part of these financial statements. Page 10 of 43

11 TOTVS S.A. Statement of cash flow For the three-months periods ended March 31, 2018 and 2017 (In thousands of Reais) 3/31/2018 3/31/2017 3/31/2018 3/31/2017 Cash flow from operating activities Profit before taxation income and social contribution 37,857 38,458 51,150 42,297 Adjustments for: Depreciation and amortization ( Notes 11 and 12) 24,812 20,922 34,494 34,416 Share-based payments (Note 23) 1, , Losses (gains) on disposal of fixed assets (522) 1,873 (557) 1,888 Allowance for doubtful accounts (Note 5) 6,939 5,792 12,691 8,833 Equity pickup (Note 10) (18,533) (1,366) Provision for contingencies (Note 18) 13,672 4,304 14,149 3,944 Provision for (reversal of) other obligations and others (147) 1,897 (148) 1,897 Interest and monetary and exchange variations, net 15,550 15,649 15,749 15,051 Changes in operating assets and liabilities: Trade accounts receivable (11,744) (5,009) (25,821) (4,085) Stocks - - 3,611 (4,752) Other assets (13,003) (3,428) (10,222) (849) Judicial deposits 993 (353) 1,385 (885) Labor and social security liabilities 16,646 17,083 13,181 19,484 Taxes recoverable (9,501) (9,479) (9,126) (7,537) Suppliers (1,721) (2,987) (14,302) 4,310 Commissions payable 1,904 3,373 2,466 2,877 Taxes payable 9,471 (6,861) 8,446 (11,807) Other accounts payable (13,309) (223) (11,066) (5,312) Cash flow provided by operations 60,595 80,435 87, ,560 Interest paid (14,310) (9,663) (14,725) (13,563) Income tax and social contributions paid (2,629) (9,600) (6,547) (12,631) Net cash provided by operating activities 43,656 61,172 66,168 74,366 Cash flow provided by investment activities Capital increase in subsidiaries (Note 10) (4,939) (1,514) - - Dividends received Purchases of intangible assets (Note 12) (4,532) (3,397) (4,754) (4,710) Value of sales of fixed assets Purchases of property, plant and equipment (Note 11) (13,527) (9,303) (17,286) (10,031) Net cash used in investment activities (21,673) (13,857) (21,168) (14,364) Cash flow from financing activities Payment of principal on loans and financing (42,285) (41,906) (45,135) (44,990) Payment of principal on debentures (5,004) Payment of financial leasing (6,174) (3,667) (6,190) (3,676) Receivables from related companies 1,716 1,107 - Dividends and interest on equity paid - (5,441) (139) (5,458) Net cash used in financing activities (46,743) (49,907) (51,464) (59,128) Increase (decrease) in cash and cash equivalents (24,760) (2,592) (6,464) 874 Cash and cash equivalents at beginning of year 305, , , ,772 Cash and cash equivalents at the end of the year 281, , , ,646 The accompanying notes are an integral part of these financial statements. Page 11 of 43

12 TOTVS S.A. Statement of Value Added For the three-months periods ended March 31, 2018 and 2017 (In thousands of Reais) 3/31/2018 3/31/2017 3/31/2018 3/31/ REVENUES 445, , , , Sales of goods, products and services 451, , , , Other revenue 846 (1,016) 2, Allowance for doubtful accounts recording (6,939) (5,792) (12,691) (8,833) 2 - RAW MATERIALS ACQUIRED FROM THIRD-PARTIES (includes ICMS and IPI taxes) (147,221) (133,547) (205,002) (204,401) 2.1 Cost of goods and services sold (19,145) (17,949) (50,327) (21,616) 2.2 Materials, energy, outsourced services and other (128,076) (115,598) (154,675) (182,785) 3 - GROSS VALUE ADDED (1-2) 298, , , , DEPRECIATION AND AMORTIZATION (24,812) (20,922) (34,494) (34,416) 5 - NET VALUE ADDED PRODUCED BY THE ENTITY (3-4) 273, , , , VALUE ADDED RECEIVED THROUGH TRANSFERS 24,943 10,041 8,669 13, Equity pick-up 18,533 1,366 (129) Financial income 6,410 8,675 8,798 13, TOTAL VALUE ADDED TO DISTRIBUTE (5+6) 298, , , , VALUE ADDED DISTRIBUTION 298, , , , Personnel 176, , , , Direct Compensation 143, , , , Benefits 20,341 18,529 26,471 24, FGTS (worker s severance pay fund) 12,698 10,922 15,682 14, Taxes and contributions 62,380 66, ,602 99, Federal 50,781 55,885 81,663 84, State 9 5 3,861 1, Local 11,590 10,675 15,078 13, Interest and rent 25,896 26,240 31,585 35, Interest 17,157 19,075 19,794 24, Rents 8,739 7,165 11,791 10, Others Equity remuneration 33,984 29,969 34,310 30, Retained profit / loss for the year 33,984 29,969 33,984 29, Minority interest in retained profts The accompanying notes are an integral part of these financial statements. Page 12 of 43

13 TOTVS S.A. Notes to the financial statements (In thousands of Reais, unless otherwise stated) 1. The Company and its operations a) General Information TOTVS S.A. ( TOTVS, or Company ) is a publicly held corporation headquartered at Av. Braz Leme, 1000, in the city and state of São Paulo, whose shares are traded on the Novo Mercado of BM&FBOVESPA - Securities, Commodities and Futures Exchange. b) Operations The Company s business purpose is to provide business solutions for companies of all sizes, through the development and sale of management software, productivity and collaboration platform, as well as the provision of implementation, consulting, assistance and maintenance services. hrough its subsidiaries, the Company also has hardware manufacturing and sale activities, combining specialized solutions for system management, point of sale (POS), commercial automation, tax solutions, e-commerce, mobility and payment methods. The solutions developed by the Company and its subsidiaries are segmented according to the diverse sectors of the economy, resulting in greater importance of the solutions in our clients business. 2. Basis of preparation and presentation of the financial statements 2.1. Compliance statement The individual and consolidated interim financial information were prepared and are presented in accordance with the accounting practices adopted in Brazil, which comprise Brazilian Securities and Exchange Commission (CVM) deliberations and Brazilian Accounting Pronouncements Committee (CPC) pronouncements, guidance and interpretations issued by the International Financial Reporting Standards (IFRS),, which are in conformity with the standards and procedures of the International Accounting Standards Board (IASB). All significant information in the individual and consolidated interim financial information, and solely such information, are disclosed and correspond to that used by Company management Basis of presentation All amounts presented in these interim financial statements are expressed in thousands of reais, unless otherwise indicated. TOTVS s individual and consolidated Interim Financial Information were approved at Board of Directors Meeting held on May 4, 2018, after a recommendation by the Audit Committee at a meeting held on April 26, Page 13 of 43

14 Non-financial data included in this report, such as the number of clients, average tickets, market share, among others, were not reviewed by our independent auditors. Significant accounting policies applied in preparing this interim financial information have been consistently applied to the years presented. This interim financial information does not include all of the information required for annual or complete financial statements, and therefore should be read together with the Company s complete financial statements for the year ended December 31, Basis of preparation The individual and consolidated Interim financial information were prepared using the historical cost as the base value, except for the valuation of certain assets and liabilities, such as business combination and financial instruments, which were measured at their fair value. (a) interim financial information The consolidated interim financial information was prepared in accordance with CPC 21 - R1 (IAS 34), which are applicable to the preparation of interim financial information, and in a manner consistent with accounting practices adopted in Brazil, including the standards issued by the CVM applicable to ITRs (Quarterly Information). (b) Individual interim financial information The individual interim financial information was prepared in accordance with CPC 21(R1), applicable to the preparation of interim financial information, and in a manner consistent with the standards issued by the CVM applicable to ITRs, and is disclosed in conjunction with the consolidated financial information. (c) Changes in accounting policies and disclosure The following are the new standards and changes issued by the IASB and CPC effective as of January 1, 2018 and their impact on the Company: IFRS 9/CPC48 Financial Instruments, addresses the classification, measurement and recognition of financial assets and liabilities. The complete version of IFRS 9 was published in July 2014, to come into force on January 1, 2018, and replaces IAS 39 guidelines on the classification and measurement of financial instruments. The main changes introduced by IFRS 9 were: (i) new criteria for classifying financial assets; (ii) new impairment model for financial assets, combination of expected and incurred losses, replacing the current model of losses incurred; and (iii) flexibility of requirements to adopt hedge accounting. IFRS 15/CPC47 - Revenue from Contracts with Customers. The standard sets a new model containing five steps that must be applied to revenues from contracts with customers. According to IFRS 15/CPC47, revenues are recognized in an amount that reflects the consideration to which an entity expects to be entitled in exchange for the transfer of goods or services to a client. The new standard replaces IAS 18 Revenue, IAS 11 Construction Contracts and the corresponding interpretations. The Company adopted the new standard on January 1, 2018 through the modified retrospective method. Page 14 of 43

15 The reconciliation of the effects by the new standards between the statement of financial position accounts for the year ended December 31, 2017 and the opening balance, as of January 1, 2018, is shown below: ASSETS Note Financial Statements disclosed at 12/31/2017 Effects about first adoption of IFRS15/CPC47 and IFRS9/CPC48 Financial Statements at 1/1/2018 CURRENT ASSETS 1,038,346 (8,288) 1,030,058 Cash and cash equivalents 387, ,169 Marketable securities 44,615 44,615 Trade accounts receivable (i) 515,545 (542) 515,003 Allowance for doubtful accounts (iii) (89,032) (10,967) (99,999) Stocks 44,828 44,828 Taxes recoverable 93,097 93,097 Other assets (ii) 42,124 3,221 45,345 NON-CURRENT ASSETS 1,455,279 3,467 1,458,746 Deferred income and social contribution taxes (iv) 104,715 3, ,182 Other non-current assets 1,350,564 1,350,564 Total assets 2,493,625 (4,821) 2,488,804 LIABILITIES AND EQUITY CURRENT LIABILITIES 619,286 3, ,448 Taxes payable (i) 28, ,102 Commissions payable (i) 39,769 2,785 42,554 Other liabilities 550, ,792 NON-CURRENT LIABILITIES 612, ,762 EQUITY 1,261,577 (7,983) 1,253,594 Total liabilities and equity 2,493,625 (4,821) 2,488,804 For purposes of comparability, we present below the reconciliation of impacts on consolidated statement of profit or loss for the period ended March 31, 2018 without the effects of the new standards: Note Statements of profit or loss at 3/31/2018 Page 15 of 43 Effects about first adoption of IFRS15/CPC47 and IFRS9/CPC48 Statements of Profit or loss at 3/31/2018 without IFRS/CPC effects Licensing fees 56,060-56,060 Maintenance (i) 247,672 (365) 248,037 Subscriptions (i) 94,622 2,552 92,070 Services (i) 120,635 3, ,873 Hardware 44,009-44,009 Net revenue from services and sales 562,998 5, ,049 (-) Total costs (200,910) - (200,910) Gross profit 362,088 5, ,139 Operating income (expenses) Other net operating income (expenses) (192,543) - (192,543) Selling expenses (ii) (52,275) 783 (53,058) Commissions (i) (42,305) (514) (41,791) Allowances for doubtful accounts (iii) (12,691) (3,197) (9,494) Income before financial effects and equity pickup 62,274 3,021 59,253 Financial effects and equity pickup (11,124) - (11,124) Total of Income tax and social contribution (iv) (16,840) (1,027) (15,813) Net income for the period 34,310 1,994 32,316

16 (i) (ii) (iii) (iv) The standard was applied to all existing contracts and generated the following impacts: Some contracts with customers offer joint hardware and software solutions, notably Bemacash. However, the Company concluded that the sale of these products reflects two distinct performance obligations, since the customer is benefiting from both products offered separately, since the products are offered separately and the control of both is transferred to the customer in different moments and proportions. Therefore, the Company concluded a positive adjustment to trade accounts receivable of R$5,781 at January 1, 2018 and R$1,185 to Subscription revenue for the three month period ended at March 31,2018. The recurrent contracts with customers may include discounts subject to a certain grace period. Considering the probability of a significant reversal in the amount of revenues not occurring, the Company estimated and concluded a positive impact of R$832 on trade accounts receivable from January 1, 2018 and impact on revenue of R$1,367 in subscription, R$365 in maintenance and R$261 in services in the three-month period ended March 31, Software implementation and customization services are sold separately in contracts with clients and may be obtained from other suppliers, therefore the Company concluded that these services are differ from other services offered. According to IFRS 15/CPC 47, the Company concluded that revenues from the implementation and customization services contracts are recognized over time and adopted the input method of measurement with the requirements of the standard and determined a negative impact on trade accounts receivable of R$7,155 in January 1, 2018 and in the result of the three-month period ended March 31, 2018 of R$3,501 in services revenue. The effects applied to customer contracts generated an increase in commissions of R$2,785 in the opening balance of January 1, 2018 and R$514 in the three-month period ended March 31, Assets for incremental costs related to the variable remuneration paid in the sale of software subscription with impact of R$3,221 on January 1, 2018 and R$783 on the Statement of profit or loss in Selling expenses in the three-month period ended March 31, The Company and its subsidiaries, in accordance with the impairment of financial assets requirements of IFRS9/CPC48, applied the simplified approach to the prospective expected losses model. These changes generated an impact of R$10,967 on equity at the January 01, 2018 and R$3,917 in the Income of Statement of the three-month period ended March 31, 2018 under Allowance for doubtful accounts. The impacts mentioned above related to the application of IFRS15/CPC47 and IFRS9/CPC48 resulted in an equity impact of R$3,467 in the Deferred income and social contribution taxes and R$377 in the tax liabilities on January 01, For the three-month period ended March 31, 2018 the impact was R$1,027 in the deferred income and social contribution taxes. Page 16 of 43

17 2.4. Consolidation basis The consolidated interim financial information includes the operations of the Company and the following subsidiaries and associate companies. The percentages of the interests held by the Company on the statement of financial position date are summarized below: Direct interest: % Interest Corporate Name Head office Name used Note 3/31/ /31/2017 TOTVS Serviços Ltda. BRA TOTVS Serviços TOTVS Nordeste Software Ltda. BRA TOTVS Nordeste TOTVS Brasília Software Ltda. BRA TOTVS Brasília TQTVD Software Ltda. BRA TQTVD TOTVS Ventures Participações Ltda. BRA TOTVS Ventures TOTVS Argentina S.A. ARG TOTVS Argentina Datasul Argentina S.A. ARG Datasul Argentina TOTVS México S.A. MEX TOTVS México Datasul S.A. de CV. MEX Datasul México TOTVS Corporation BVI TOTVS Corporation TOTVS Incorporation USA TOTVS Inc Virtual Age Soluções em Tecnologia Ltda. BRA Virtual Age Neolog Consultoria e Sistemas S.A. BRA Neolog Ciashop - Soluções para Comércio Eletrônico S.A. BRA Ciashop Bematech S.A. BRA Bematech TFS Soluções em software Ltda. BRA TFS Indirect Interest: % interest Corporate Name Head office Name used Investor 3/31/ /31/2017 DTS Consulting Partner, SA de CV MEX Partner TOTVS México RMS Software S.A. BRA RMS TOTVS Nordeste Webstrategie Software Ltda. BRA Webstrategie RMS Kerina Software Ltda. BRA Kerina TQTVD Bematech Hardware Ltda. BRA Bematech Hardware Bematech S.A Bematech Ásia Co.Ltd. TWN Bematech Ásia Bematech S.A Bematech Argentina S.A. ARG Bematech Argentina Bematech S.A. e Bematech Inter. Corp CMNet Soluções em Informática e Agência de Viagens e Turismo S.A. BRA CMNet Soluções Bematech S.A Bematech Internacional Corp. EUA BIC Bematech S.A Logic Controls, Inc EUA Logic Controls BIC FICE - Bematech Foshan Shunde Ltd. CHN FICE Logic Controls, Inc CMNet Participações S.A. BRA CMNet Participações Bematech S.A CM Soluciones Argentina ARG CMNet Argentina CMNet Participações CMDIR - Soluções Informática, Lda - Portugal PRT CMNet Portugal CMNet Participações CM Soluciones Chile CHL CMNet Chile CMNet Participações CMNet España ESP CMNet Espanha CMDIR - Soluções RJ Participações S.A. BRA RJ Participações Bematech S.A R.J. Consultores en Sistemas de Información S.C. MEX RJ México RJ Participações R.J. Consultores e Informática Ltda. BRA RJ Consultores RJ Participações National Computer Corporation (associate) RUS JV Russia TOTVS México All intercompany balances and transactions were eliminated in consolidation. Page 17 of 43

18 2.5. Significant accounting judgments, estimates and assumptions Accounting estimates and assumptions are continually assessed, and are based on historical experience and other factors, including expected future events that are considered relevant. Accounting estimates will rarely be equal to the actual results. For the three-month period ended March 31, 2018, there were no changes in estimates and assumptions entailing a significant risk of causing relevant adjustments to the book values of assets and liabilities for the current financial year, in relation to the latest annual financial statements, except for the effects of applying the change in the method of losses incurred to expected in accordance with IFRS 9/CPC Financial instruments and sensitivity analysis of financial assets and liabilities The Company and its subsidiaries evaluated their financial assets and liabilities based on market values using the information available and the appropriate valuation methodologies. The table below shows the class of financial instruments of the Company and its subsidiaries based on IFRS9/CPC48 effective January 1, 2018: Fair Value through profit Assets measured at amortized cost Financial liabilities measured at cost 3/31/2017 1/1/2018 3/31/2017 1/1/2018 3/31/2017 1/1/2018 Cash and cash equivalents , , Investment guarantees ,882 51, Accounts receivable, net , , Financial assets (i) 57,913 57, Financial Instruments Assets 57,913 57, , , Loans and Financing , ,556 Debentures and non-conversion premium , ,138 Accounts payable and suppliers , ,405 Obligation for acquisition of investments 21,680 28, ,306 60,859 Financial liabilities 21,680 28, , ,958 (i) TOTVS maintains investments in companies whose shareholding is indirectly held through venture capital organization and which is measured at fair value through profit or loss Sensitivity analysis of financial assets and liabilities The Company's financial instruments are represented by cash and cash equivalents, accounts receivable, accounts payables, debentures, loans and financing, which are recorded at cost plus income or charges incurred or at fair value when applicable, as at March 31, 2018 and December 31, The main risks related to the Company s operations are linked to the variation in the Brazilian Page 18 of 43

19 Interbank Deposit Rate (CDI) for financial investments and debentures issued in 2017, the variation in the Long-Term Interest Rate (TJLP) and the Extended Consumer Price Index (IPCA), for financing from the Brazilian Development Bank (BNDES) and for debentures issued in previous years. a) Financial assets In order to verify the sensitivity of the index in the financial investments to which Company was exposed as of March 31, 2018, three different scenarios were defined. Based on projections disclosed by financial institutions, the average rate for CDI is 6.39% for 2018, which was defined as a probable scenario (scenario I). Based thereon, variations of 25% (scenario II) and 50% (scenario III) were calculated. For each of these scenarios the gross finance income was estimated, with taxes on investment returns not included. The reference date for the portfolio was March 31, 2018, with a one-year projection to check the sensitivity of CDI to each scenario. Operation Balances in 3/31/2018 Risk Probable Scenario (I) Scenario (II) Scenario (III) Reduction Financial investments R$355,157 CDI (a) 6.39% 4.79% 3.20% Finance income R$22,695 R$17,012 R$11,365 (a) Interbank Deposit Certificates b) Financial liabilities To check the sensitivity of the indexes to which the Company is exposed when estimating the debts as of March 31, 2018, three different scenarios were created. Based on TJLP and the IPCA rates in force as of March 31, 2018, the most probable scenario (scenario I) was determined for 2018 and, from this, variations of 25% (scenario II) and 50% (scenario III) were calculated. For each scenario, the gross financial expense was calculated, not taking into account the tax and the maturity flow for each agreement scheduled for The reference date used for the financing and debentures was March 31, 2018, projecting the rates for one year and checking their sensitivity in each scenario. Operation Balances in 3/31/2018 Risk Probable Scenario I Scenario II Scenario III Increase Financing BNDES R$262,018 TJLP (b) 6.60% 8.25% 9.90% Estimated Finance expense R$ 17,293 R$ 21,616 R$ 25,940 Increase debentures R$ 67,567 IPCA (c) 3.95% 4.94% 5.93% TJLP (b) 6.60% 8.25% 9.90% R$ 200,094 CDI (a) 6.39% 7.99% 9.59% Estimated Finance expense R$ 20,083 R$ 23,639 R$ 27,194 (b) Long-term Interest Rate (c) Brazil s Extended Consumer Price Index Page 19 of 43

20 3.2. Financial assets TOTVS investments in startups are made within a medium-term strategy, with output planned for when the expected financial returns are achieved, and are recognized as financial instruments. The fair value for these investments as of March 31, 2018 was R$57,913 (R$57,645 at December 31, 2017) Changes in the liabilities of financing activities Liabilities arising from financing activities are liabilities for which cash flows were or will be future cash flows classified in the statement of cash flows as cash flows from financing activities. The following is a breakdown of liabilities arising from financing activities for the three-month period ended of March 31, 2018: Cash flow from financing Non-cash items Interest paid New Leases Interest Incurred Others (i) 3/31/ /31/2017 Principal Loans and financing 339,103 (45,135) (5,537) - 5, ,331 Lease 63,453 (6,190) (2,293) - 2,294-57,264 Debentures 269,138 - (6,895) - 5, ,661 Dividends payable and Others 18,487 (139) (2,376) 15,972 Total 690,181 (51,464) (14,725) - 13,612 (2,376) 635,228 (i) Includes deferred income tax credit offset on interest on equity for December Cash and cash equivalents Cash and cash equivalents are maintained for meeting short-term cash requirements and for strategic investment or other purposes, and are redeemable within 90 days from the date of the respective transaction. 3/31/ /31/2017 3/31/ /31/2017 Cash 1,564 16,610 25,548 41,537 Cash equivalents 279, , , ,632 Repurchase agreements 51, ,061 60, ,291 CDB 228, , , , , , , ,169 The Company has financial investment policies, which establish that the investments focus on low risk securities and investments in top-tier financial institutions, and are remunerated substantially, by reference to the CDI variation, which monthly averaged 98.95% of the CDI for the period ended March 31, 2018 (99.07% as of December 31, 2017). Page 20 of 43

21 5. Trade accounts receivable, net The following are the amounts receivable in domestic and foreign markets: 3/31/ /31/2017 3/31/ /31/2017 Domestic market 397, , , ,824 Foreign market ,843 16,622 Gross trade accounts 398, , , ,446 (-) allowances for doubtful (81,741) (73,469) (107,286) (89,032) accounts Net trade accounts 316, , , ,414 Current assets 285, , , ,513 Noncurrent assets (a) 30,748 30,999 31,733 31,901 (a) Long-term accounts receivable refers basically to the sale of software license, software implementation and customization services, and is presented net of adjustment to present value. Below are the receivables in connection with the net amount of allowance for doubtful accounts by aging list as of March 31, 2018 and December 31, 2017: 3/31/ /31/2017 3/31/ /31/2017 Falling due 215, , , ,686 Unbilled 67,494 49,762 81,708 59,986 Overdue 1 to 30 days 13,854 15,370 22,973 24, to 60 days 4,645 5,799 9,854 9, to 90 days 2,648 4,466 4,480 6, to 180 days 3,787 6,984 5,784 10, to 360 days 2,348 2,281 2,687 3,456 more than 360 days 6,457 3,355 8,574 4,172 Net accounts receivable 316, , , ,414 Changes in the allowance for doubtful accounts are as follows: 3/31/2018 Balance at beginning of the period 73,469 89,032 Opening balance of IFRS9/CPC48 5,864 10,967 Additional provision in the period 6,939 12,691 Amounts written off of the provision (4,531) (5,404) Balance at end of period 81, ,286 Management believes that the risk related to trade accounts receivable in general is minimized by the fact that the Company s customer portfolio is diluted, except for the distributor of Bematech Hardware which cumulatively accounted for 4.3% of net accounts receivable in consolidated statements as at March 31, In general, the Company does not require any guarantee on installment sales. Page 21 of 43

22 6. Stocks The breakdown of stocks exclusively set up by Bematech Hardware is as follows: 3/31/ /31/2017 Finished products 6,705 11,684 Raw material 27,097 24,047 Products for resale and others 6,610 8,218 Parts for technical assistance Advances from supplier 954 1,078 (-) Provision for adjustment to realization (961) (963) 41,217 44, Taxes recoverable 3/31/ /31/2017 3/31/ /31/2017 State Goods and Services Tax (ICMS) (a) ,337 42,188 Income tax to offset (b) 32,546 40,332 42,587 50,475 Social contribution tax to offset (b) 19,550 16,177 22,620 19,034 Withholding PIS and COFINS taxes ,102 1,350 Other ,100 56, , ,792 Current 52,100 56,571 86,623 93,097 Noncurrent ,752 20,695 (a) (b) Refer to accumulated ICMS tax credits of Bematech Hardware. These credits arise from the hardware operation, which enjoys benefits for investments granted by the State of Paraná. The Company and its subsidiary are currently conducting joint studies with their legal advisors to realize said credits. Refer to withholding income and social contribution tax credits in the current year and income and social contribution tax credits to offset from previous years, as well as payments of estimated taxes in the current year. 8. Income taxes Current and deferred income and social contribution taxes, were recorded pursuant to the current rates in force. Deferred income tax and social contribution are calculated over accrued tax losses and social contribution tax losses carryforwards, respectively, as well as temporary differences Reconciliation of income and social contribution tax expenses The reconciliation of expenses calculated by applying the Income and Social Contribution Tax rates is as follows: Page 22 of 43

23 3/31/ /31/2017 3/31/ /31/2017 Income before taxes 37,857 38,458 51,150 42,297 Income and social contribution taxes at combined nominal rate of 34% (12,871) (13,076) (17,391) (14,381) Adjustments for the statement of effective rate Equity pickup 7,473 2, Law No 11,196/05 (Incentive for research and development) (a) 1,936 2,948 2,155 3,052 Subsidy for incentives Effect of subsidiaries subject to special rates - - (1,419) (1,433) Management stake (133) (487) (133) (487) Accounts receivable deemed uncollectible - - (7) (50) Workers' Meal Program (PAT) Other (278) (243) (627) (96) Income tax and social contribution expense (3,873) (8,489) (16,840) (12,135) Current income tax and social contribution - (14,967) (10,743) (20,870) Deferred income tax and social contribution (3,873) 6,478 (6,097) 8,735 (3,873) (8,489) (16,840) (12,135) Effective rate 10.2% 22.1% 32.9% 28.7% (a) The Brazilian tax legislation provides a mechanism to encourage the technological development of the country, which grants tax incentives to companies that carry out technological research and development (R&D) Breakdown of deferred income and social contribution taxes 3/31/ /31/2017 3/31/ /31/2017 Tax losses and social contribution tax losses carryforwards ,847 69,826 Deriving from temporary differences: Difference between tax base and book value from goodwill 31,842 36,047 56,007 60,772 Amortization of tax benefit (81,406) (79,151) (121,585) (117,676) Intangible asset allocation (18,394) (20,903) (26,710) (27,668) Allocation of intangible assets after Law nº ,300 9,289 10,300 9,289 Provision for commissions 13,491 11,612 14,352 12,185 Anticipated income or revenues 2,202 5,012 2,260 5,941 Allowance for doubtful accounts 27,792 24,979 31,962 26,303 Provision for contingencies and other liabilities 38,574 37,666 41,015 39,955 Provision for suppliers 7,263 8,012 7,864 8,556 Provision for losses in inventories and guarantees - - 1,720 1,754 Provision for share-based payments 3,981 3,503 3,982 3,513 Present value adjustment 2,984 3,076 4,794 3,092 Other 6,336 5,747 2,031 8,873 Net deferred income and social contribution tax 44,965 44,889 97, ,715 The net deferred income tax and social contribution of the Company and its subsidiaries are presented under noncurrent assets. Page 23 of 43