StoneCo Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 16, 2023

There are 17 speakers on the call.

Operator

Evening, ladies and gentlemen. Thank you for standing by. Welcome to the StoneCo Second Quarter 2023 Earnings Conference Call. By now, everyone should have access to our earnings release. The company also posted a presentation to go along with its call.

Operator

All material can be found online at investors. Stone.co. Throughout this conference call, The company will be presenting non IFRS financial information, including adjusted net income and adjusted net cash. These are important financial measures for the company, but are not financial measures as defined by IFRS. Finally, before we begin our formal remarks, I would like to remind everyone that today's discussion might include forward looking statements.

Operator

These forward looking statements are not guarantees of future performance and therefore you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the company's expectations. In addition, many of the risks regarding the business are disclosed in the company's Form 20 F filed with the Securities and and Exchange Commission, which is available at www.sec.gov. Please note, this event is being recorded. I would now like to turn the conference over to your host, Pedro Zinner, Chief Executive Officer at StoneCo.

Operator

Please proceed.

Speaker 1

Thank you, operator, and good evening, everyone. Joining me today on the call is our Chief Financial Officer and Investor Relations, Thank you, sir. Matthew O'Shere our Chief Strategy Officer, Lia Matus and our Head of IR, Roberto Norens. I will start today's call by giving you some of my thoughts on the Q2 and then I will turn it over to the team To walk through our results in more detail, overall, I was pleased with our performance in the Q2. Externally, from a commercial perspective, we generated strong growth by continuing to win in the areas we want to prioritize.

Speaker 1

Internally, within the company, we made progress across a broad range of initiatives to make our services and operations better and more efficient. And financially, we produce results above our expectations as we continue to ramp our profitability and accumulated more cash firepower. As I evaluated the quarter, I also looked at In the Q2, I think we met our objectives by generating strong top line growth We have a significant improvement in our profitability. Our total revenue reached R3 1,000,000,000, An increase of 28% year over year and exceeding our guidance by 3%. Coupled with the top line improvement, adjusted EBT surpassed guidance by 19%, reaching R447 The highest mark for quarterly adjusted EBIT in our history.

Speaker 1

As a result, Adjusted net income grew 5.8 times year over year, reaching R322 1,000,000 and yielding a net margin of 10.9% in the quarter. Our second priority was to generate cash. Adjusted net cash increased R1.6 billion dollars year over year and R3 38 quarter over quarter to reach R4.3 billion dollars This increase was mostly driven by the consistent cash flow generation of the business, While we continue to invest in client growth and product and technology development. Our 3rd priority consisted on focusing the expansion of our Financial Services business. The Financial Services segment presented healthy TPV and client based growth and showed improvements in monetization from clients.

Speaker 1

MSMB TPV increased 19% year over year to reach R83.3 billion dollars Despite macroeconomic headwinds in the period from higher interest rates, higher industry delinquency and declining consumer credit card limits. Our growth in the quarter was 3.7 times the industry growth. It's also important to highlight that during the quarter, We consistently grew our MSNB client base with 204,000 net adds. MSNB take rate increased 9 basis points sequentially to reach 2.48%. We have also expanded our banking solutions with the launch of debit cards and we are now piloting credit cards for Stone clients And we continue to test our credit product with early results very much in line with our expectations.

Speaker 1

Our 4th priority was to evolve our software business. After delivering our Q1 below expectations, We were able to improve our software results. Revenue for this segment reached R383 $1,000,000 We have a 17% adjusted EBITDA margin and a 6 20 basis point improvement on a quarter over quarter basis. I'm happy to see that while we're evolving the strategic feet of our software business, we are also capturing short term efficiency gains. Last but not least, it's also worth highlighting that this quarter we took another important step Forward having all the right resources in place to build a fit for purpose organization.

Speaker 1

As announced in May, I'd like to formally welcome, Matheus Shere as our CFO and RRO and Roberta Noronia as our Head of Investor Relations. I'm very excited to be working with Matheus and Roberto as we set the next stage of growth for the company. I would also like to thank half of you for all the work they've done and to all the invaluable contributions they made to Stone. I'm also pleased to announce that we're hosting our 1st Stone Cold Day in New York this November. I am excited to share our views on the business and how we are building an end to end value proposition for Brazilian commerce in the future.

Speaker 1

As we approach the event, we will share further details with you. Now, I'd like to pass it over to Lir for a discussion on the Q2 2023 performance and strategic updates. Lia?

Speaker 2

Thank you, Pedro, and good evening, everyone. I'm going to start with the highlights of our Financial Services segment on Page 6. In the Q2 of 2023, revenue in the segment increased 32% year over year to R2.6 billion dollars mainly attributed to the performance in our MS and D client segment. MSNB performance was mostly influenced by above industry TPV growth, higher take rates and an increase in our client base. This combined with operational leverage realized in our costs and expenses resulted in adjusted EBT of BRL398 1,000,000 and a 15.6 percent EBT margin, representing a sequential improvement of 250 basis points.

Speaker 2

On Slide 7, let's review the MSMB performance in a little bit more detail. Our payments client base experienced robust growth, Reaching approximately 3,000,000 active merchants, an annual increase of 43.3%. Quarter over quarter, this represented net additions 204,000 active clients, the sequential deceleration in net additions from the Q1 'twenty three was driven by the conclusion of targeted marketing campaign efforts within the period. Through strategic optimization of our tone and offerings across our sales channels, we successfully sustained the expansion of our client base across all tiers within the MSMB segment. Moving to Slide 8, MSMB TPV increased to R83.3 billion dollars A 19.3% year over year growth and a 3.7 times above industry growth despite being impacted by slower overall We're very happy with this result, which was in line with our Q2 'twenty three guidance and illustrates our strong relative performance and the power of our value proposition and offerings.

Speaker 2

Looking ahead, we're confident that this relative Performance will continue and that we will continue to gain market share in the segment. Our MSMB take rates Also presented notable improvements on a quarterly and yearly basis. This quarter take rate reached 2.48 percent, increasing 9 basis points quarter over quarter and 38 basis points year over year. The annual improvement Can be attributed to continued adjustment in our commercial policy stronger growth in our micro and small clients, which have higher take rates The effect of changes in debit and prepaid card interchange cap regulation, which went into effect as of April 2023 and contribution from our banking solutions, mainly floating and fixed revenues. On Slide 9, I give a quick update on key accounts TPV.

Speaker 2

TPV decreased 32.5% year over year, And mix shift within the segment, key account take rates increased 28 basis points year over year. Now let's move to the banking performance on Slide 10. Our banking active client base increased 3.2 times year over year and 33.4 percent quarter over quarter to reach 1,700,000 active merchants. This strong growth was a result of the launch of Supercontaton in the Q1 of 2023 and the continued activation of banking combined with our acquiring solutions for Stone clients. Total deposits reached R3.9 billion dollars slightly up quarter over quarter.

Speaker 2

This quarter, we had a one time decrease in client deposits of R286 $1,000,000 as a result of the shift in the chargeback and cancellation collection process for Tong, with no impact to our P and L. Excluding this one time effect, our overall deposits would have increased 7.8% sequentially compared to 5.6% growth in our MS and D TPV, which illustrates the increasing engagement with our banking solutions. Due to the significant increase in banking clients, driven primarily growth in micro client accounts, which generate lower revenue contribution in comparison to SMB clients. ARPAK decreased to R25 from R37 in the Q1 of 2023 and R39 in the Q2 of 2022. We strongly believe in the power of combining our banking and acquiring offerings to MSMB clients.

Speaker 2

As such, we're working hard to enhance existing features and develop and launch new banking products. As an example, This quarter, we launched debit cards and have already started piloting credit cards for Stone clients. We're also working to enhance Client experience related to the different features that we offer as well as the integration of our banking to select TRPs within our software portfolio. On Slide 11, I'd like to provide a quick overview of our credit offering. Through the end of July, We had dispersed BRL26 1,000,000 to around 8.50 clients with an outstanding balance of BRL23.5 million.

Speaker 2

As we have discussed, we will take a conservative and disciplined approach Towards the expansion of this solution, growing the portfolio depending on market conditions and taking the necessary time to observe full cohort performances. Now let's move to Slide 12 and shift to the highlights of our software business. In the Q2 of 2023, software revenue increased 9.2% year over year to reach R383 million. This growth was driven by continued organic active store expansion In our core POS and ERP business, mainly in the SMB segment, top line grew 6.9% sequentially, mostly due to an increase in setup revenues in our core segments related to the client base growth. Software adjusted EBITDA increased 25.1 percent year over year to reach R66.5 million dollars which equates to a 17.4% margin and a sequential margin improvement of 6 20 basis points.

Speaker 2

The EBITDA margin expansion is a result of higher revenue in the period and operating leverage in costs and expenses, which included a reduction in share based compensation expenses and lower levels of cost of services, mainly due to increased capitalization of R and D projects. These effects were partially offset by our continuous investments in our sales team and marketing as well as severance costs in the amount of BRL6.5 million related to an adjustment made to our organizational structure. In the Q2 of 'twenty three, we reduced headcount associated with our ongoing integration efforts within StoneCo, which should drive additional benefits going forward. As Pedro mentioned, while we evolve on capturing short term efficiency gains, We are advancing on the strategic fit of software within StoneCo. We have advanced on prioritizing 2 important verticals For driving financial services and software cross sell, while also testing different go to market initiatives.

Speaker 2

As we have mentioned, the process of building our end to end platform is a multiyear journey, but we believe we are taking the right steps to enhance and sustain our value proposition to our clients in the future. We expect to provide further details during our Stone Cold Day in November. Now I want to pass it over to Mattias to discuss some of our key financial metrics. Mattias?

Speaker 3

Thank you, Lia. I'm excited to take on this new role within Stone and look forward to working with the team in building the future of Stone Cold together. Moving to Slide 13, let's discuss our costs and expenses on an adjusted basis. Cost of services reached BRL685 million, increasing 9% year on year and decreasing 400 basis points as 3.40 basis points as a percentage of revenue. This sequential improvement can be explained by Lower technology expenses driven by R and D projects reassessments that led to higher capitalization And a BRL21 million non recurring benefit in the quarter and change in the allocation of variable compensation between our costs and expenses, which reduced allocation to cost of services.

Speaker 3

I would like to highlight that even if we excluded the unusual positive effect of BRL21 million from our results, we would still have gained operating leverage in cost of services of 2 70 basis points compared to the previous quarter. Administrative expenses increased 2.5% sequentially, which resulted in a 60 basis points reduction as a percentage of revenue compared to the previous quarter. Important to highlight that administrative expenses the Q2 'twenty three are 9% below the levels of the Q4 'twenty two, mainly as a result of the efficiency initiatives associated with our zero based budgeting process. Our expectation is that from this point onwards, Administrative expenses should grow sequentially, broadly in line with inflation, leading to further operating leverage. Selling expenses grew 22.6% year on year and 5.6% sequentially, decreasing 50 basis points as a percentage of revenue on a quarter on quarter basis.

Speaker 3

The slight sequential improvement is due to lower marketing Financial expenses increased 16.6% quarter on quarter and 2 40 basis points as a percentage of revenue to reach 35.9%. The increase was driven by 3 factors: growth in prepaid volumes, Our conservative decision to hold a higher cash balance in the quarter and a slight increase in the duration of receivables sold. Lastly, other expenses decreased 22.2 percent sequentially and 110 basis points as a percentage of revenue. The variation in other expenses can be mainly attributed to a positive net effect of $19,600,000 in our share based compensation expenses, primarily due to lower tax provision. Moving to Slide 14, I would like to talk about our cash generation.

Speaker 3

Adjusted net cash increased by BRL338 1,000,000 this quarter to reach BRL4.3 billion. The main driver for this was a strong cash flow from our operations as well as a sequential decrease in CapEx. As in the Q1 'twenty three, it was higher than usual due to a specific marketing campaign in the period that drove additional POS inventory. On a year on year basis, adjusted net cash increased by BRL1.6 billion. Now moving to our Q3 'twenty three outlook on Page 16.

Speaker 3

We expect total revenue and income above BRL3.75 billion in the Q3 of 2023, representing a year on year growth above 22.6%. For MSMB CPV, we expect volumes between BRL87 1,000,000,000 and BRL88 1,000,000,000 in the Q3 of 'twenty three, compared with BRL74.7 billion in the Q3 of 2022, representing a year on year growth between 16.4% and 17.8%. Before jumping to our Q and A, I would like to highlight that this is the last quarter we are providing quarterly guidance. As we will begin to provide a longer term outlook of our results during Stonico Day in November. With that said, operator,

Operator

The first question is from Sharik Sumar with Evercore ISI. Please go ahead.

Speaker 4

Hey, thanks a lot for taking my questions. My question is on the competitive dynamics within Brazil On the payment side, are you seeing any increasing traction or increased competition mainly Coming in from like U. S. Or any other countries outside Brazil and within Brazil as Well, as to how is the competitive landscape right now and where is the biggest market share gains that you are seeing so far? Thank you.

Speaker 2

Hi, Sherik. Leah here. Thank you for the question. I think regarding competitive dynamics, no big news. The dynamic that we saw this quarter is very similar to what we have seen In the past quarters, so if we look at the market share evolution and They continue to lose share at a slower pace, but they do.

Speaker 2

There's when we look at the volumes, it suggests that they have been shifting market share amongst each other at the top of the pyramid more towards larger clients. And what we have seen is very granular and local dynamics that we're able to react given that we have a very Specific view of the market dynamic in each region and can react through our hub operations and all of the data that we can capture locally. So no really big news, same trends that we're seeing. And as you have seen, we have been able to continue to gain share in the MSNB segment this quarter and we strongly believe that that's a dynamic that's going to continue going forward.

Speaker 4

Thank you so much. My one follow-up is on the software EBITDA margins. I mean, it looks like it keeps fluctuating around, but any Where do you think that this could stabilize? I mean, how much more runway do you have to increase the margins? And what do you think could be the long term

Speaker 3

So first talking about the EBITDA for the software division on the quarter. We had an improvement in top line of 7% in the quarter We set up revenues from new sales, while we maintain costs and expenses under control. So when we look about the effect on costs and expenses, This was mostly a result of firstly, slightly higher capitalization of R and D expenses in the quarter, But also most of this was offset by severance costs associated with a reduction in headcount, which was driven by the integration process of some bankruptcy functions within Stoneco. So this reduction in headcount had a one time negative impact in our EBITDA of BRL6.5 million, but this should drive savings of around BRL10 1,000,000 per quarter going forward. So our expectations for the next quarter is that top line should continue to grow, while we have Cost discipline associated with the savings.

Speaker 3

So we're optimistic about margins in software going up.

Speaker 5

Thank you so much. Appreciate it.

Operator

The next question is from Juan Ricalde with Scotiabank. Please go ahead.

Speaker 6

Hi, congratulations on the service side and thank you for taking my question. My question is related to the Moving operational leverage on the cost of services. So when I see there is like a Sequential improvement of 3 40 basis points. And you mentioned that part of this is driven by the reassessment of the R and Assessment of the R and D projects that led to higher capitalization. My question is how much of this improvement of the

Speaker 3

Hey, Juan. Mathieu here. So you're right. We had 2 effects Related to capitalization of intangible assets in the quarter that impacted cost to serve. So firstly, we standardized the software segment's capitalization process To mirror the practice within our financial services units.

Speaker 3

And secondly, we also reviewed all the ongoing projects in our tech team And identified a few more projects related to new features that were not being capitalized previously. So as we highlighted in the earnings release, These adjustments resulted in a one time positive effect of $21,000,000 on our quarterly cost of services. But even if we excluded this unusual positive effect from our results, we would still have gained operating leverage and cost of That's operational leverage gained in the core operations in this line may be balanced out by provisions as we begin to expand our credit offering. But in the core itself, we should continue to have operating leverage in cost to serve.

Speaker 6

That's helpful. And one follow-up, if I may. When I look at the 3rd quarter guidance, I think that it is implied that there is going to be a small improvement in the adjusted EBIT margin. So if we if the margins end up being better than expected, what do you think that can be the driver Yes. What can be the positive surprises that we can have in terms of margins in the Q3?

Speaker 3

Yes. So I think the margin dynamics should be similar to the previous quarters. So we continue to have a big focus in terms of efficiency and driving savings in the whole company with a focus on a zero based budgeting process and implementation of our shared services center. And on the other hand, we also expect to keep growing our TPV And SMB, so when you combine these two effects, I think if we have any outperformance in terms of top line, This should flow to the bottom line as well.

Speaker 6

Understood. That's helpful. Thank you very much.

Operator

The next question is from Tito Labarta with Goldman Sachs. Please go ahead.

Speaker 7

Hi, good evening. Thanks for the call and taking my questions. Actually one question on the regulatory front, there's been a lot of noise about the elimination of revolving credit cards and some thoughts We do think interest free installments. Just curious, any thoughts from your end? I know there's no final decision on that, but just would you Any color you can provide on how what happened what could happen to interest re installments and your potential impact on the business here?

Speaker 7

Thank you.

Speaker 1

Hi, Chitou. Pedro here. Thank you for the questions. I think you gave the flavor in some ways. I think it's a bit too early to tell.

Speaker 1

I think we are closely following the debate. And as you're aware, we support all changes that would cause the competition and benefit merchants and consumers as we have always done, right. I think a regulatory change that takes away from merchants, the possibility of offering installment transactions Would definitely significantly impact private consumption and consequently the overall economy. I think how would this impact us? I think it's a bit premature to comment on the specific P and L impacts Given that there's nothing concrete being discussed, what we can say is that any modification in the interest rate, the free installment Structure would significantly affect the industry, right.

Speaker 1

So potential outcomes might involve a decrease in overall private consumption Majority of the credit transactions in Brazil are done through these installments and a possible repricing to balance industry economics This was CFO

Speaker 7

in summaries. Okay, great. Thanks for the color, Pedro. It's helpful. And just second question, just with interest rates coming down, I mean, you still have some leverage there as your financial expenses come down.

Speaker 7

But Just remind us the benefit or impact from 100 bps reduction in rate And I know the plan isn't to reduce any pricing on those prepayments, but just given the competitive environment, any potential risk there

Speaker 3

Yes. So, Matthew is here. So, first part of the question related to the impact of 100 basis cuts to our P and L. All else being equal, 100 basis points cut should positively impact our results by around 200,000,000 Important to remind that this is the net effect of the impact on our funding costs, but also on the floating revenue and on their financial income. Now talking about price, we're looking to react.

Speaker 3

We told a few times in the past, but pricing in our view is a dynamic process. We will continue to manage our pricing in the way that we have been doing the previous quarters, which is pursuing target returns for new sales, Having minimal contribution margins hurdles in our client base. We also believe that the acquiring industry continues to behave rationally As it has been the case for the previous 18 months, we noticed that all players had to deal with an abrupt Change in interest rates and had to adjust their offerings to a new reality. So nowadays, we don't see any We're buying market share with non profitable offers including ourselves. So given that said, The effective impact of the cuts will depend on the market's overall response, but we don't anticipate Any initiative to pass through the benefits of declining rates in the short term from our side.

Speaker 3

Nonetheless, we'll continue to actively monitor the market dynamics And adjust our pricing as necessary as long as it meets our internal hurdles.

Speaker 7

Great. Thanks, Matheus, for that. And maybe just one follow-up on that, if I can. In the quarter, we did see a bigger increase in the financial expenses Compared to the financial income, so just to understand a little bit there why the

Speaker 3

So We mentioned this previously already as well, but that our expenses due to changes in our funding mix Between debt and sale of receivables, even without relevant changes in our funding spreads. So with that said, the increase in this Arthur can be mainly explained by 3 factors. 1st factor is the growth in MSMB TPV. 2nd Hector, it's also the conservative decision to hold a slightly higher cash balance in the quarter. And also we had a slight increase in the duration of receivables sold In the quarter, over the medium term, we already said a few times that these expenses are primarily influenced by So this is more an effect of the quarter and not a general trend going forward.

Speaker 7

Great, perfect. Thank you, Matthias.

Operator

The next question is from Gabriel Goussaint with Citibank. Please go ahead. Mr. Gouthan, is your line muted perhaps?

Speaker 8

Yes. Sorry for that. So good evening, guys. Could you elaborate a bit on the TPV slowdown you're seeing for the entire market? And how do you feel this could affect, especially for your MSMB TPV?

Speaker 8

Could we see also a slowdown even if you continue to gain share, but could you see a slowdown overall TPV growth there? Thank you.

Speaker 2

Thank you, Gabriel. Lia here. Thank you for the question. So I think regarding TPV TPV trends and focusing on the MSMB TPV dynamics. Even though we reached our guidance and We presented healthy growth.

Speaker 2

TPV was indeed a little bit softer than our initial forecast in the beginning of the quarter. Especially in May, we noticed the deceleration in same store sales of our clients, which is consistent with the lower growth for the overall market As reported by Abbex, we saw that Abbex reviewed the range of CPG growth of the market growth in the year. So We think that that's in line with the behavior that we saw within the base. But still on a relative basis, we grew almost 4 times more than the on average, despite like, Matteo said, keeping our pricing disciplined unchanged. So we're Pretty happy with the TPV performance that we saw.

Speaker 2

And our July data shows early signs of improvement compared Which really makes us comfortable with the guidance that we have provided and continuing to grow Above industry and gainshare within the segments. I think another important thing to mention, Gabriel, is that looking at dynamics regarding peaks, We have seen a very strong growth of P2M peaks within the base. If we look at overall Trends in fixed growth within our base, it's similar to what has happened in the market. So there was a very strong initial growth of fixed P2P, but more recently growth has been mainly driven by PIX P2M. Just reminding everyone that 6P2M is a payment method, which we enable our clients to accept through a dynamic QR code in the POS, And we monetize that very much in line with debit card net MDRs.

Speaker 2

And when we look at PIX P2M volumes in the quarter, they grew above 2 40% year over year. And if we were to look at a consolidated growth considering credit card card TPV sorry card TPV plus fixed P2M, We would see a yearly growth of 23%. So we think that there is Not per se a cannibalization of peaks within the base when we think about debit volumes, but Peaks definitely seems to be taking away from the growth of debit volumes. So this is a trend that we think is important to highlight And that for us, it really it benefits us because we monetize it very much in line with debit Cards and it naturally benefits clients because for them it's cheaper and settlement is instantaneous. So Yes, I think that's what we can say regarding overall TPV trends.

Speaker 8

Perfect. Thanks a lot.

Operator

The next question is from Antonio Puente from Bank of America. Please go ahead.

Speaker 8

Hey, Tim. Congrats on the results and thank you for your time. So two questions on my side. So first on expenses, I was just wondering if you could explain a little bit more the major drivers for the increase in the capitalization of expenses And we should continue to see this trend going forward in terms of CapEx. And also a broader question on strategy, If you could elaborate a little bit on execution.

Speaker 8

If you look at today's challenges, you have a very competitive Acquiring business challenges to integrate links and also your banking product. I'm just wondering when looking at all this, What do you consider to be your main execution challenges today? Thank you.

Speaker 3

Yes. So I'll start with the capitalization question and CapEx then pass it over to Lia to comment on the integration. So regarding the capitalization, so We had 2 primary factors influencing this movement. Firstly, we standardized the software segment's capitalization process to equalize those within our financial services unit. And secondly, we reviewed all the ongoing projects in our tech team identified a few more projects related to new features that were not being capitalized previously.

Speaker 3

This resulted in one time positive Effect of $21,000,000 in the quarterly cost of services, which should not repeat these dynamics in the future. Now talking about CapEx, it's also important to highlight that as we indicated previously, our CapEx Decreased sequentially from $416,000,000 in the Q4 in the previous quarter to $332,000,000 in this quarter. And we expect slightly lower CapEx for the coming quarters. So it's not a general trend.

Speaker 1

Hi, Pedro speaking here. Let me jump in. I think On the strategy side, I think throughout the rest of the year, we want to put a strong focus of the team in the integration, cost discipline, Incentives alignment and streamlining our software portfolio. I think this would be the key drivers for the short term. However, at the same time, we have several priorities in place regarding top line growth.

Speaker 1

So we're attacking Both sides of our P and L in some ways. The improvements we have to make in the software business, in reality, They're not a short term challenge. It will take time, though I'm really confident that the rewards are worth it. In the long term, our goal is really to build a unified commerce solution for our clients and our software business is really an integral part of our strategic We believe that we have a lot of work, a lot of work actually ahead of us, but we're really excited on the path to become The only end to end integrated software and financial services provider for Brazilian merchants. I think we'll be providing more flavor on this On the Investor Day, by mid November, how we set our long term KPIs and Our strategic view up until 2030, but I'll pass it over to Lia so that she can provide you maybe with more color On our key initiatives.

Speaker 2

Sure, Pedro. Thank you. So just to elaborate a little bit more on those challenges, Antonio, I think on the banking side, we are very happy with the evolution that we have seen. So we have seen Increased engagement of our clients with our banking solution. Of course, we see as a big value of the fact If we combine our offering to clients in acquiring and banking, acquiring provides a powerful cash in, which then can drive further engagement as we offer more features for our clients to solve their Main business pain points, we have a lot of work to do on the banking side, so a lot of work Being put into providing more and more features that address our clients' needs.

Speaker 2

And I think like Pedro said, on the Software side, this is really a multiyear journey, but we have, I think, started to take some very important steps Just really prioritizing what we feel are the most important initial steps that we have to take. So just to give a little bit of color on that, we have prioritized what we see as the key verticals for us to address as opportunities for cross selling Financial services to software clients, and the initiatives that we're undertaking regarding those verticals are initiatives around product Bundles, product integration, go to market initiatives, when we look at the Cross sell today, about 17% of our software clients use our financial services. That's up from about 15% At the beginning of the year, it's very early stages, but we started to see some initial traction and we're very confident with the direction that we're taking. So Just to give a little bit more color on those evolution points.

Speaker 8

That's great. Thank you, Liaison. Thank you.

Operator

The next question is from Josh Zeigler with Cantor Fitzgerald. Please go ahead.

Speaker 9

Hey guys, thanks for taking my question and congratulations on the execution this quarter. I wanted to dive a little bit deeper into what you guys were just Which is on the software side. So there was some noticeable improvement in the software revenue this quarter. Can you help us understand how you achieved such a strong improvement in the number of active locations and how you got that Cross selling flywheel to really start spinning between Financial Services and Software.

Speaker 2

Yes. Thank you for the question, Josh. So we're really putting focusing the investments in growth within our software business Around our less mature channels, so namely franchises inbound and inbound, those channels they really address Kind of the middle of the pyramid in terms of client segments, right? So remember that Linx has a strong presence in the enterprise Segment and is growing more and more in the middle of the pyramid, what we call mid to large clients. So that's really what drove The growth in locations, and that's an area where we will continue to invest going forward because it is very strategic for us when you think about The opportunity to combine software and financial services to offer a more a stronger value proposition to our clients.

Speaker 2

So I think regarding the cross sell, not much more to say than what I have already said. I think We're organizing a lot more around that front this year and really having kind of Financial services team and software team align on the objective to achieve this cross sell and Making sure that we have initiatives around products, around offering, around go to market in a very structured way. There's a lot of opportunities. There are several verticals for us to address within Linx. So we really started focusing On the ones where we see there's the largest opportunity within our software client base today and within the market overall, right?

Speaker 2

So We want to pick verticals that have a large TAM for us to address in the market and that have a relevant client base and software for us to tackle. So this is pretty much where we're focused on. And yes, that's the color that we can provide right now. We'll be able to give more color on this, like Pedro That at Stone Day in November.

Speaker 9

Great. Thank you, Leah. And looking forward to that additional color. I also want to ask About the rollout of the new credit card product, what's the timing on actually getting that fully to market? And do you believe the mix of credit cards will have a significant impact on your banking segment moving forward?

Speaker 2

Yes. So like we said, we are piloting the credit card product and we hope to be able to scale towards the end of this year. Yes, not much more to say at this point. I don't know, Peter, if Sean add a little bit more color.

Speaker 1

Yes. I think you might remember that in the last call, we We highlighted that we're taking a conservative approach in some ways. A conservative and disciplined approach towards the expansion of our credit book, Taking the necessary time to observe the full cohort performing and also being mindful That the current macroeconomic environment conditions were not the best ones to quickly expand the credit book, right. So We're keeping the conservative approach in some ways, but you see a bit more scale up over the next semester. I think regarding our portfolio performance, I think it's premature to draw definitive conclusions.

Speaker 1

I think initial results are a bit better Than expected by all models. And I think that's pretty much that we have to say at this point.

Speaker 9

Great. Thank you very much for the color guys. Appreciate it.

Operator

The next question is from Neha Agrawala with HSBC. Please go ahead.

Speaker 10

Hi, thank you for taking my question. My first question is on the MSMB segment. You seem to continue to gain market share in that particular segment. Is that right? And what's allowing you to gain a market share, especially in the SMB segment, which has always been so competitive, but Currently, all players are very keenly focusing on that segment.

Speaker 10

And is there any particular player from whom you are gaining market share? My second question is on the long tail. There was a decline in the active client. I presume it's due to the long tail segment, If you could elaborate on that. And we also hear that you probably are a bit more price aggressive in the long tail segment.

Speaker 10

Is that right? And how do you expect to continue gaining share in the long term? Thank you so much.

Speaker 2

Hi, Mia. I think there were Leah here. Thank you for the question. I think there were a few questions within your question. So let me start answering and then Let me know if there's if I covered it all, okay?

Speaker 2

So I think regarding market share gains in the MS and D segment, just Going back to fundamentals here, we created a model centered around providing the best service and really owning the touch points with our clients From distribution to service and logistics, regarding distribution, we continue to see white spaces Where we have room to grow across Brazil in our hubs and also to further allocate capital and marketing to grow in the micro segment. So I think that's an important point to highlight that we continue to invest in growth both in SMB and Micro segments. A second important point is that over the past years, we have invested in expanding our product offering to clients. That's another layer that really Strengthens our value proposition and we did this while we continue to expand distribution footprint and at the same time Sustain the best customer service in the market. And I think a third important factor, Which is part of your question is our ability to optimize stone and stone offerings across our multiple channels Gave us an assertiveness and allowed us to optimize unit economics for different client tiers and maximize our ability Gain share in both micro and SMB segments with attractive economics.

Speaker 2

So I think that that's an important point, right? We've said this many times, but It's very important for us to balance this growth with profitability. In the end, it's the combination of these factors that I mentioned That creates a strong value proposition and sustains our ability to continue to win clients every day across the Spectrum of client profiles with attractive economics. So I think that's our take on market share evolution, Neha.

Speaker 10

Perfect. And in terms of the decline in the active clients?

Speaker 2

Yes, sure. So that's because in the Q1, we had a big marketing campaign around Big Brother Brazil, a It's almost like you had a stronger impact in that as in the Q1 due to

Speaker 3

The active client base itself is still growing. So we grew from 2,700,000 in the Q1 to 2023 Up to roughly 3,000,000 active clients in the 2nd quarter, what decelerated was the net addition of clients and likely I said this Was related to the marketing campaign that we ran in the Q1.

Speaker 10

Okay, perfect. That's great. Thank you so much and congratulations on the quarter.

Speaker 2

Thank you, Neha.

Operator

The next question is from John Coffey with Barclays. Please go ahead.

Speaker 11

Hi, thank you very much for taking my question. The question I have is a bit of a follow-up on Neha's question and it was regarding the MSN B TPV growth of 19 I was wondering if you could just maybe paint that growth in some broad strokes. When we think about this, is a lot of this coming from is any of this coming Green space, is it taking away market share from more like some of the incumbents like the acquirers have been in result for some time or maybe some of the newer FinTechs. Just trying to get an idea of where this is coming from. Again, especially as you said that it almost Quadrupled the overall market growth.

Speaker 11

And then just my last follow-up is it looks like on a sequential basis, key accounts, their TPV was only down about 3%.

Speaker 2

Hi, John. Leah again here. So I think Sorry, the first part of your question was around TPV Dynamics, right?

Speaker 11

Yes, for MSMBs and where that's coming from, greenfield, old incumbents, fellow fintechs?

Speaker 2

Yes, it's really a mix. So first message is we've always taken market share from competitors, right, since day 1 of our existence. So that's always a very strong dynamics that drive our TPV growth. TPV growth also is impacted by Sales growth within the base. But as long as we can continue to win new clients and sustain those relationships Over a healthy lifetime, that will allow us to continue to gain market share.

Speaker 2

I think I just explained on Neha's Question, the reasons behind this continuous market share gain, but it's really a combination of same store sales growth, new clients Wins. And I don't see that the competitive dynamics in terms of players has really changed much recently. I don't think that there's any difference in terms of who are the main competitors. It varies by region. It varies by client segments, There hasn't been really significant changes recently.

Speaker 11

Okay. Thank you. And is the pain over for key accounts as far as quarter over quarter declines

Speaker 2

TPV? I think we can expect to see this TPV dynamics Stable from now on. Like we said, this is an opportunistic segment for us. So yes, not much to say there. I think we Can expect stable TPG behavior.

Speaker 11

Perfect. Thank you very much.

Operator

Excuse me. The next question is from Guilherme Gisborne with JPMorgan. Please go ahead.

Speaker 12

Hey, hello. Thank you everyone for the call. Two questions on my side. The first one is related to the long tail. You talked a little bit about the competition on SMB that seems still healthy.

Speaker 12

We did saw some marketing campaigns on the long tail, a little bit more aggressive this quarter. There was also some news flow on one specific player Focusing on the segment, I think they're targeting to grow in the segment going forward. So Just separating here the SMB from the long tail, if you still see the same economics, how has been the competitive dynamics? And the second one is just to crush back. You mentioned the chargeback impact on the banking deposits.

Speaker 12

If you can just clarify a little bit what is this impact wasn't 100% clear to us. Thank you.

Speaker 2

Okay, Guilherme. Thank you. I'm going to take the first part of the question and then pass it over to Matteo. So Regarding micro segment, I think one key point to highlight here is our ability to really optimize Strategically, our stone and stone offering to maximize market share gains with attractive economics within EMS and B client segments. Regarding Our target within the micro segment is really about how we structure offerings in a way that we attract The healthy economics clients within the micro segment, so our clients profile Micro is a client profile of higher average CPVs and we do have, like we said many times before, Return hurdles for all clients, segments and products.

Speaker 2

So we're able through the offerings to really optimize The clients that we bring, so, I guess, is there any other dynamics that we can say regarding micro segments? Maybe Matias can take the second part of the question on banking.

Speaker 3

Yes, for sure. So like you mentioned, we indeed had a one off in the quarter We have a negative impact of $286,000,000 in deposits, but without any P and L impact. And This impact was associated with a shift in our chargeback and cancellation collection process. Just to give you a little bit of more color, Whenever we receive the chargeback or cancellation associated with a total merchant, we use it to block the same amount from the merchant's outstanding deposits To guarantee the collection, in the process of migration from Tom's old merchant account to Supercontaton, We settled these amounts instead of only reserving them, which had a one time negative impact on deposits, but no P and L impact whatsoever. Also important to highlight that adjusted our deposit base would have seen a 7.8% sequential growth, which outpaces the 5.6% growth in MSM BTPV, which we think illustrates the continued increase in client engagement that we are seeing Within our banking products.

Speaker 12

Super clear. Just one follow-up, I may, on the banking side, I was also looking at the presentation. You mentioned that the performance of the early vintages has been in line with the credit underwriting standards. Can you share to us what is the expected credit loss in this product that you are working with At maturity, not necessarily now, but like on a sustainable basis, what do you believe is the loss ratio for this type of working capital?

Speaker 3

Yes, for sure. So it's still too early to talk about definitive conclusions regarding the portfolio performance. But what we can share is that currently our model predicts an expected loss is slightly below 10%. We are conservatively provisioning nearly 20% due to the limited track records of our models and also prevailing market benchmarks. But the performance itself of the cohorts has been better than what the model forecasts.

Speaker 3

Again, it's too early to draw any Big conclusions on this, but as the portfolio grows over time, we will improve the disclosure on our credit performance, so you can also

Speaker 5

Good evening. Thanks for the opportunity. I have a question related to the competitive dynamic on the commercial teams So while we saw you and other players talking about the still rational behavior in terms of price, We have been seeing some players talking about an increase in sales force.

Speaker 12

So in this front, I would like to

Speaker 5

get your sense about the view on the industry sales force, If you're indeed seeing higher competition that front or not, if that concerns and what do you think about your current sales force today if we could Expect any expansion or actually the office giving you your hedge count is way higher than some peers. So just a few thoughts here would be good. Thank you.

Speaker 2

Yes. Hi, Kai. It's Lia again. So I think on the dynamics regarding What perhaps competitors have been saying regarding hiring sales people. We like to highlight this In our calls to remind our investors that it's not only about distribution, right?

Speaker 2

Our model is not only about putting salespeople on the streets. It's about the combination of several factors. It's about Our agents that actually have a role not only in the sales process, but also in the life cycle process of our clients. The fact that we have this combined with Lifemile logistics, customer service and that we have an operation which is really Integrated through technology that technology enables us to gain efficiency and provide intelligence to the way that we serve clients. We think that The results of this is really the level of satisfaction that our clients have with us, both in stone and stone products.

Speaker 2

And as much as we see these efforts to kind of copy the distribution aspect of the model, the model is about more than that. Now regarding The fact that we have this technology that supports our operation Gives us a very granular level of data that enables us to identify at a very local level where the white spaces are. So we can take a route, a city, a hub and see exactly what the competitive The vision of whether or not we allocate more sales team To that specific hub, to that specific city. So when we look at it from that broad perspective, thinking about About the vast geography of Brazil, we still see a lot of white spaces where we can grow. So I think that's the message regarding Sales, headcount and dynamics going forward.

Speaker 5

Okay, Elias. Thank you very much. And if I may, just a quick follow-up on your key accounts TPV. We saw it contracting more than 30% this So just would like to understand how much of your TPV on key accounts is related to the sub acquiring business? And on the platform services, what is the perspective going forward if this is a focus of the company or not?

Speaker 5

And is competition has been increasing here? Thank

Speaker 2

you. Yes, Kyle. I mean, like I said, no big news there. I think we I'd say more stable TPV dynamics. We can provide more on the sidelines, but we don't expect different Very different dynamics going forward.

Speaker 2

More and more volumes have contributions from platform services as opposed to sub acquirers, But not much more to say here.

Speaker 5

Okay, dear. Thank you very much.

Operator

The next question is from William Barringer with Itau BBA. Please go ahead.

Speaker 13

Good night, everyone. Thanks for the question. So I would like to pick your brains here on the new cohorts of clients. So I would like to understand how these new cohorts, they compare to your current pace in terms of take rates, Especially in the MSNB segment. So I guess, in other words, how much smaller is the average volume Those new clients versus the current base.

Speaker 13

And if it's fair to assume that only by maintaining the current mix So that is clients. We should see an improvement in take rates ahead.

Speaker 2

Thank you for your question, William. I'm going to take the first part and then maybe pass it over to Matheus To talk a little bit about the pricing side, but I think On the first part of your sorry, what was the first part of your question again? Can you

Speaker 6

Sure.

Speaker 8

Just basic Oh,

Speaker 2

average, sorry. Average TPV, yes. So I think trends that we can expect going forward is more and more Our hub operation on larger SMBs, so more and more we're onboarding average TPVs that are larger Then the average TPV of the base within SMB clients. Of course, when you look at average TPV In the MSMB on a consolidated basis, there is a big mix shift effect that comes from micro versus SMB. We're more and more focusing on the larger SMBs within the segment.

Speaker 2

So That's not going to show up in the overall average CPV number, but that's a trend that we are seeing when we look within the hub strategy and the SMB client Segment itself.

Speaker 3

Yes. And just complementing regarding take rates, since the micro segment is still growing faster than the SMB segment, We do have some effect in terms of mix in the take rates. If we look at the evolution of take rates between the previous quarter and this one, This mix shift accounted for 4 bps in the increasing take rates.

Speaker 13

Okay. That's very clear. Thank you.

Operator

The next question is from Jamie Friedman with Susquehanna. Please go ahead.

Speaker 14

Hi. Thank you. And let me compliment you on the investor presentation. I like the new format. I wanted to ask first about the software and I realize others are as well.

Speaker 14

And Lee, I understand you're saying It's a multi year journey, but the deal was announced August 11, 2020. So this is multiple years. So I was hoping either you or Pedro could share your perspective on what has Gone less than right or what's gone wrong. 9% growth is okay, but I don't think that that was what you aspire to The time of the Lynx merger and right now it's actually dilutive to growth. So I think I understand what you're going to try and do going forward because you said it.

Speaker 14

I'm just curious what's gone wrong.

Speaker 1

Hi, Jamie, it's Pedro speaking. Thank you for the question. Well, To be honest, I think that was a decision made by the company in the past. I think you're right in some ways. I think the acquisition actually happened 2 years ago.

Speaker 1

But when you look back, I think a lot had happened within the company over the past 2 years, right? I think there was the whole Credit situation in some ways, interest rates went all the way up and I believe that the company was not that well prepared To deal with this new interest rate dynamics and pass through on prices. So the decision at that point in time was really to focus Putting the company on track into the financial services business. In my view, it was the right one. I think Linx was a standalone business, was running by itself and the decision was To leave the decision to integrate for a later point in time.

Speaker 1

And I think this is exactly what we're doing as of today, right? And I think the other part of the question is also focused, right? I think you cannot do everything at the same time. And when you look back even a couple of months ago, I think the company had over 100 initiatives being run at the same time. We downplayed this to 2020 or 2021, which is still a big number, but we're volumes are providing focus within the company so that we set the stage and the plan to do what we want.

Speaker 1

Lia gave you some flavor in terms of the verticals we're prioritizing. Again, a good example of focus. And I think we're moving to the right direction and how we set the stage for the long term. I really would invite you To wait up until the Investor Day presentation because we're going to provide a full picture on that.

Speaker 14

Okay. That's a good answer. Thank you, Pedro. And then, Matteo, if I could just ask, what level of provisions is contemplated In the operating margin of 15.3% at the midpoint of the Q3 guidance?

Speaker 3

The same level that we are provisioning nowadays, which is 20%.

Speaker 14

Okay. And did you say what the originations would be?

Speaker 3

No, no. We are not disclosing the Outstanding portfolio for the next quarter.

Speaker 14

Okay. Thank you. Thank you all.

Operator

The next question is from Sumit Datta with New Street Research. Please go ahead.

Speaker 15

Yes. Hi there. Thanks very much. Just a I just wanted to go back to the briefly to the discussion on debit volumes and PIK's P2M. And First of all, can I just double check?

Speaker 15

I think you gave an indication as to what the contribution of those volumes is for stone you don't include in your TPV, but Great to get that number. And then just to sense check the following kind of idea really because If P2M in the industry is being monetized in line with debit, the current narrative around soft card volumes In the sector is pretty misleading, isn't it, for the acquirers because when we look at the BCP data on the PIKS P2M and we look at AbbViex and put them Actually, those volumes in entirety are growing at a healthier level around 20%. So I just wanted to See if I was on the right track with that. And then finally, again, if P2M continues to be relevant, isn't this super supportive for Gross margins going forward and maybe already supported for current gross margins. Thanks very much.

Speaker 2

Hi. So I think I've given their overall numbers regarding fixed P2M evolution. So if you consider overall CPV including peaks, the 19% Growth would increase to 23% slightly over 23% growth and that's because of much Stronger growth at peak P2M volumes. That trend that we have seen within the base is similar to the trend we've seen in the market. Some players do disclose TPV including peaks, we have not made the decision to disclose TPV in cooling fixed, but it is a trend going forward that is here to stay.

Speaker 2

We saw a very quick early adoption of PIIX PIIP and then now more recently we've seen more adoption of PIIX PIIN. So I think that's J. Rice:] And yes, it is a solution that It's a payment method that many consumers decide to use and that many merchants may want to incentivize So the settlement characteristics and the economics associated with accepting these transactions, but naturally there's a usability around fixed that is Still, I would say, not at the level of cards, right? So this is an evolution. We still have to see how this is going to play out, but More and more we are going to give color on this.

Speaker 15

And just to double check, it is currently if it's being priced at the same level as Debit, it's a much higher gross profit business at the moment, right?

Speaker 2

Yes. When

Speaker 3

we say it's price similar to the EBIT, we mean on the net MDRs Of debit. So it contributes to take rates, but it's not that accretive to gross margins.

Speaker 2

Yes. Okay.

Speaker 15

Got it. Thanks.

Operator

And our final question today is from Nicholas Riva with Bank of America. Please go ahead.

Speaker 16

Thanks for the chance to ask questions. I wanted to ask on your debt. I see that The balance outstanding of the Fidiki continued to decline in the quarter to BRL 318 1,000,000. So I wanted to ask about your ability to access the Fidiki And in general, the local debt market in Brazil. And then second, One thing that Tito Labartas had asked about was your funding cost, your financial expenses, which increased 16% in the quarter to BRL 1,100,000,000 Despite total debt not increasing in the quarter and you mentioned some changes in your fund mix driving this increase in financial expenses.

Speaker 16

I wonder if you could talk a bit about now that the Central Bank in Brazil has started to cut Reference rates and more is expected in this regard. How we should think about funding cost and in general the overall profitability of the prepayment business going forward? Thanks.

Speaker 3

Yes. So, Matthias here. Thanks for the questions. So talking about the mix of debt versus sale of receivable, I think we mentioned when we talked about financial But one of the reasons why financial expenses increased more than MSMB TPV was because we did more sale of receivables Compared to debt in the quarter and that's one of the reasons why when you look at our balance sheet, you see total debt decreasing, But financial expense is increasing. This decision was made mostly because it was the better economic decision.

Speaker 3

So Because the spreads for sale of receivables were better in this quarter. But this is not an overall trend or a long term trend. Like we mentioned in the past, when we look at longer term trends for financial expenses, we think that this line should trend with the yield curves in Brazil And also with the growth in TPV, so as the yield curve in Brazil is decreasing, we expect financial expenses to Have some positive effect from that in the future.

Speaker 16

Okay. Thanks, Matos.

Speaker 3

Thank you.

Operator

This concludes our question and answer session. I will now turn the call over to Pedro Zinner for final considerations.

Speaker 1

Thank you And thank you all for participating on the call and I hope to see you again in the next quarter. Thank you. Have a good night.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Key Takeaways

  • StoneCo exceeded guidance with Q2 revenue of R$3.1 billion (+28% YoY) and record adjusted EBIT of R$447 million (+19% vs guidance), driving adjusted net income of R$322 million (+5.8× YoY) and a 10.9% net margin.
  • Generated R$338 million in adjusted net cash during Q2 (R$4.3 billion total), up R$1.6 billion YoY, supported by strong operating cash flow amid continued investments in client growth and technology.
  • The Financial Services segment delivered an MSMB TPV increase of 19% YoY to R$83.3 billion (3.7× industry growth), 204,000 net client adds, and a take rate of 2.48% (+9 bps Q/Q), while debuting debit cards and piloting credit cards.
  • In the Software business, revenue rose 9.2% YoY to R$383 million with a 17.4% adjusted EBITDA margin (+620 bps Q/Q), reflecting operating leverage, higher R&D capitalization and headcount optimization.
  • Strengthened leadership by appointing a new CFO and Head of IR, and announced the inaugural Stone Cold Day in New York this November to outline its long-term end-to-end commerce strategy.
AI Generated. May Contain Errors.
Earnings Conference Call
StoneCo Q2 2023
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