StoneCo Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 13, 2024

There are 18 speakers on the call.

Operator

Good evening ladies and gentlemen, Thank you for standing by. Welcome to the StoneCo First Quarter 2024 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. All material can be found online at investors.

Operator

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. Reconciliations of the company's non IFRS financial information to the IFRS financial information appear in today's press release. 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 20F filed with the Securities and Exchange Commission, which is available at www.sec.gov. I would now like to turn the conference over to your host, Roberta Noroya, Head of Investor Relations at StoneCo. Please proceed.

Speaker 1

Thank you, operator, and good evening, everyone. Joining me today on the call is our CEO, Pedro Singer our Chief Financial and Investor Relations Officer, Matteo Scherer our Chief Strategy and Marketing Officer, Lia Matos and our Head of Credit, Gregorio. Today, we will present our Q1 2024 results and provide an updated outlook for our businesses. I will now pass it over to Pedro, so he can share some highlights of our performance. Pedro?

Speaker 2

Thank you, Roberto, and good evening, everyone. I would like to begin by briefly talking about our Q1 2024 results, which I believe are the kickoff of a great year ahead of us. Our business continued to grow strongly, while we kept on delivering our strategic priorities. In financial services, we performed well across all of our client offerings. Starting with payments, we posted strong TPV growth, including PIKs and nearly matched the same volumes from the holiday shopping season in the Q4.

Speaker 2

This quarter, we launched instant payments in Tom, fulfilling a key request from our micro merchant clients. In banking, we continue to show progress in onboarding new and existing clients to our bundled banking and payment solution. And today, approximately 80% of our active client base has our bundled offering. A couple of highlights I'd like to make are the start of our pilot with credit cards in Tong and the evolution of the banking solution for SMBs in Tong with features such as fixing logic for our clients to simplify their workflows around paying their employees. And finally, our credit solution continues to grow according to plan.

Speaker 2

We maintain our conservative approach but are testing different client profiles to grow while making sure we balance our credit model. We have set up a specialized desk to offer credit to larger clients with TPV above 500,000 per month and this is just getting underway. Now let me shift to our software business, which performed well this quarter, showing progress versus our previous quarter results and in line with our strategic priorities. Our vertical software grew well in the Q1 with an annual revenue increase of 12%, which was purely organic. Our enterprise software remains a detractor, moderating our total software revenue growth, considering that we're not emphasizing this part of the business.

Speaker 2

However, the strong performance in our vertical software combined with our efficiency efforts continue to drive up total profitability in this segment. As we discussed in our Investor Day, we will continue cross selling financial solutions into areas of our software client base and evolve on creating software and financial services by those. In 2024, we are focusing on the retail and gas station vertical, the latter being a highlight in the quarter. In summary, I was pleased with the direction of our Q1 2024 results

Speaker 3

and I think we remain on track to deliver our guidance for the year. Now, I'd like to pass it over to Lir to discuss our Q1 2024 performance and strategic updates. Lia? Thank you, Pedro, and good evening, everyone. As Pedro mentioned, we made progress in the Q1 across our strategic priorities, advancing on critical areas as we progress towards our 2024 and long term goals.

Speaker 3

Before we start discussing our main financial highlights, I would like to remind you that from the Q1 'twenty four onwards, we have changed our internal accounting methodology for membership fees revenues. From now on, membership fees revenues will be deferred throughout the expected life of the merchant, instead of being recognized entirely at the time of the acquisition of the merchant. The materials we're presenting incorporate this new internal accounting methodology as of the Q1 of 2024. For this quarter, we will also present growth metrics using the previous methodology since this is the 1st and most impacted quarter. As you can see on Slide 4, our consolidated revenues grew 14% year over year, which combined with lower other and administrative expenses, led to an increase of 75% in adjusted EBT, despite an increase in selling expenses due to the seasonality of investments in marketing and provisions for loan losses.

Speaker 3

These factors resulted in adjusted net income increasing by almost 90% year over year, reaching an adjusted net margin of 14.6%, up around 6.50 basis points. Now let's take a look at our Financial Services segment performance on Slides 5 to 9. Starting on Slide 5 with the performance of our payments business for MSMBs. Our payments active client base increased 33% year over year, reaching almost 3,700,000 active clients. Sequentially, this represented a net addition of 205,000 clients.

Speaker 3

The lower addition of clients compared to the previous year is primarily a result of the fact that we have caught up to the growth levels in the micro segment. As you will see in the pages that follow, besides optimizing our commercial strategy for growth and market share gains, We're also putting a lot of focus on improving our payments and banking bundle offerings to new client cohorts, both in Tong and Stone, as well as driving more engagement with our solutions for older cohorts of clients. As you can see on Slide 6, this approach has resulted in profitable TPV growth and market share gains in the MSMB segment. MSMB TPV, including PIX P2M, increased 24% year over year. Excluding PIX P2M volumes, which were more than BRL 8,000,000,000 in the quarter, MSMB TPV increased more than 18% year over year.

Speaker 3

We achieved the strong growth while also increasing take rates by 15 basis points year over year to reach 2.54 percent with material contributions from all of our financial services solutions. We are continuously evolving our pricing and bundle strategy to achieve higher levels of client engagement, and we believe these strong numbers are the result of our competitive advantages in distribution, superior service and our increasing ability to offer more complete solutions to our clients. Moving to Slide 7, let's discuss our banking performance. Our banking active client base nearly doubled year over year to around 2,400,000 active clients. This growth was a result of the launch of Supercontaton in the beginning of 2023 and the continued activation of banking for Stone clients through our bundle offers.

Speaker 3

The decrease in growth rates compared to previous quarters is mainly due to the completion of our migration of Tong clients to our full banking solution. Going forward, we expect our banking active client base to grow more in line with the sequential increase in payments gross adds as we continue to effectively bundle payments and banking. This growth in our client base also helped drive a 53% year over year growth in client deposits, which reached BRL6 1,000,000,000 in the quarter. Despite the seasonal grow over effects from the Q4 and the lower average CDI in the period, ARPAK increased to BRL29.3 per month, driven by higher average deposits per clients as a result of increased engagement with our banking solutions. As Pedro mentioned, this quarter, we made good progress in our product roadmap, starting to pilot credit cards for Tong clients, as well as launching features that help our SMB clients to simplify their cash management workflows, such as paying suppliers and employees.

Speaker 3

Moving to Slide 8, I will talk about our credit performance. This quarter, we disbursed around BRL295 million, reaching a portfolio of almost BRL 532 million, an increase of roughly 72% quarter over quarter. Provision expenses for working capital expected losses totaled BRL 44,000,000 in the period, resulting in accumulated provision expenses of BRL 106,000,000 as we are still constituting provisions in the amount of 20% of our portfolio. Although we are doing this conservatively, the performance of our vintages is above our expectations with NPLs between 50 90 days of 2.2% and NPLs over 90 days of 1.5%. As we've highlighted before, this is still a recently launched portfolio.

Speaker 3

So the ratio of past due loans should increase as our cohorts mature. This year, we will continue with disbursements without changing our approach towards risk evaluation and close monitoring of market conditions. To summarize the performance of our Financial Services segment, the Q1 was again marked by strong TPV growth and higher take rates, resulting in financial services revenue growth of 16% year over year in the Q1, reaching BRL2.7 billion. As a result, our adjusted EBT reached BRL529 1,000,000 with an adjusted EBT margin of 19.5%, which increased more than 600 basis points year over year. Moving to slide 10, let's talk about our software performance and strategic evolutions.

Speaker 3

Quarter over quarter, the payments TPV of clients that use both financial services and software solutions decreased 13%, primarily due to the seasonal effect in our retail vertical, which is strongly impacted by the higher volumes in the holiday shopping season of the Q4. However, our gas station vertical, which has been a priority focus since last year, has a positive performance quarter over quarter. These SMB clients have been increasingly receptive to our efforts to provide an end to end solution that combines management software, payments and banking. On Page 11, you can see the highlights of the performance of our vertical software business. As you can see, vertical software revenue grew 12% year over year.

Speaker 3

The priority verticals where we're focusing our initial strategic efforts to integrate financial services now account for 47% of total software revenues. Our software solutions in other verticals also had a strong quarter across different products. As a result, our vertical software now accounts for 76% of our total software revenues. In Slide 12, you can see that total software segment revenue reached BRL369 million, but grew slower than our vertical software. This is because overall software revenues include our more mature enterprise business.

Speaker 3

However, as a result of our focus on vertical software and our efficiency initiatives, our adjusted EBITDA in the software segment increased to $66,000,000 in the quarter, up 65% year over year, improving our adjusted EBITDA margin by over 6.50 basis points to reach 17.8% in the quarter. As Pedro mentioned, the Q1 marked the beginning of an important year of strategic advancement for our business trajectory. Now I want to pass it over to Matheus to discuss in more detail some of our key financial metrics. Mateus?

Speaker 4

Thank you, Lia, and good evening, everyone. I'd like to begin on Slide 13, where we discuss the quarter on quarter evolution of our costs and expenses as percentage of revenues on an adjusted basis. Cost of services reached $810,000,000 increasing 12% year on year and staying flattish quarter on quarter. Sequentially, cost of services increased 160 bps as a percentage of revenues as a result of higher transaction, logistics and DNA costs as we grow our client base and higher provision for luwon losses, which amounted to BRL44 1,000,000 in the Q1 of 2024 versus BRL39 1,000,000 in the Q4 of 2023. Administrative expenses decreased 12% year on year, leading to a 2 20 basis points reduction as percentage of revenues when compared to the Q1 of 2023.

Speaker 4

Sequentially, administrative expenses decreased 16%, down 100 basis points as a percentage of revenues due to seasonally higher personnel expenses in the Q4 and lower third party services expenses in the Q1. We remain committed to our guidance of spending less than BRL1.125 million in administrative expenses for 2024, which implies a growth of less than 7% for the year. Selling expenses increased 36% year on year and 17% quarter on quarter, up 220 basis points sequentially as a percentage of revenues. This increase is mainly attributed to higher market investments as a result of a planned sponsorship for a reality television show combined with higher investments in our sales team. Financial expenses decreased 2.2% year on year, leading to a 4 70 basis points reduction as percentage of revenues.

Speaker 4

Quarter on quarter, financial expenses decreased 5.5% and remained flattish as a percentage of revenues. Lastly, other expenses decreased 58 percent sequentially and 2 30 basis points as a percentage of revenues as a result of lower share based compensation expenses, which includes a nonrecurring positive impact of BRL 40,000,000 from the net effect of cancellation and new grants of incentive plans and lower contingencies. Turning to Slide 14. Our adjusted net cash position was BRL 5,100,000,000, reflecting an increase of BRL 1,200,000,000 year on year and BRL 87,000,000 for the quarter, lower when compared to previous quarters as we continue to deploy capital towards the expansion of our credit portfolio and also as a result of seasonally higher cash consumption in labor and social liabilities in the quarter. As we kick start the year, I believe our Q1 results demonstrates we are executing on our plan and we remain well on track to deliver our 2024 guidance.

Speaker 4

With that said, operator, can you please open the call up to questions?

Operator

Okay. At this time, we are going to open it up for questions and answers. If you have a question, please write it down in the Q and A section or click on raise hand for audio questions. Please remember that your company's name should be visible for your question to be taken. We do ask that when you pose your question that you pick up your headset to provide Our first question comes from Edouard Hosna with BTG.

Speaker 5

Hi, everyone. Good evening. I do have two questions here. The first one is on capital allocation, right? We know that you already did a lot, but you still have a lot of exposure to software, right, with many verticals that are not a priority.

Speaker 5

You own TAG, for instance, which is seeing a big decline in revenues. You also have a big stake in Hecla Nikky and potentially other stakes in other companies as well, right? So just wanted to hear from you if there is room to keep improving the capital allocation and the cash position in the following quarters. That's the first question. And the second one, just trying to understand here your expectations for deposits, right?

Speaker 5

You have a guidance which is above R7 $1,000,000,000 for the year. But, but he went at the Q1 with 6,000,000,000, right? Which which is very good given the that's usually it's a weak quarter for from a seasonality point of view, right? So just wanted to understand your thoughts here if the expectations are now looking conservative for the year. Thanks.

Speaker 4

Hey, Jose, thank you for the question. Matias here. I'll take the first part regarding capital allocation and then pass it over to Lira on the banking side. So on capital allocation, I think it's fair to divide the question in 2 parts. First, I think we mentioned this in the Investor Day, but we do have a buyback plan in place at this moment, right?

Speaker 4

It's a SEK 1,000,000,000 program for which we did not buy any shares yet. I think the message here is that we remain committed to our long term targets. And therefore, we continue to believe that this is a good alternative for capital allocation. So it's basically a matter of planning the execution for the new product so that we have a solid framework in place and decision process. So that's the first piece.

Speaker 4

I think the second piece is also regarding the M and A, right? You mentioned Hikomeki, TAGI and other companies that we have. Here, I think the message is that currently we're still focused on improving the efficiency of those business. And I think you can see from the digital margins on software that this is making progress quarter by quarter. But in regards to selling those assets, I mean, we always analyze different options in order to maximize shareholder value.

Speaker 4

But the business as a whole is performing well and generating cash, so we have no urgency to sell any assets. So to be direct here, I think there is indeed an optionality to exit some assets for which we don't see as strategic, but that's not the focus at this moment. The focus is on efficiency.

Speaker 2

Yes. If I might just add, I think it's in line with the last comment on Matthias. I think what we're trying to do is really improve cost efficiency initiatives to maximize value along these verticals that were not prioritized in the business plan. I think when time comes, we'll provide more visibility in terms of how we're going to position ourselves.

Speaker 3

Great. Hi, Bascome. Nia here. Just to talk a little bit about trends in deposits. So indeed we saw strong performance in deposits in the Q1 and results were to some extent above our expectations.

Speaker 3

So this growth, it was driven by 2 main factors, right? As Pedro mentioned, we continue to successfully bundle payments and banking to new sales, which leads to high penetrations of clients that choose Stone as their main banking solution and their banking domicile. And we're also seeing higher levels of engagements with our clients leaving money within our ecosystem for a longer period as we evolve. So we're very happy with this evolution. It is like you mentioned beyond our expectation and thus point to us surpassing the guidance that we gave for the year.

Speaker 3

That said, we need to monitor this trend a little bit further throughout the year. And of course, if this remains consistent, we're naturally going to keep you updated, but we think it's a bit early to talk about reviewing guidance.

Speaker 5

Great. Thanks a lot.

Operator

Next question from Caio Prato with UBS.

Speaker 6

Hi, everyone. Good evening. Thanks for the opportunity. I have two questions on my side, please. The first one is related to your other expenses line.

Speaker 6

You had like a nonrecurring adjustment of BRL 70,000,000 this quarter. I just would like to better understand what, was exactly it is about because since that the net effect from the divestments is lower than that. And still on other expenses line, if you could please explain why we had like a reversal in share based compensation this quarter? And my second question, please, if I may, is related to your MDRs. Even considering the adjustment to the membership fee model, we can see that consolidated MBRs actually reduced this quarter, in a quarter where we usually see the opposite because of seasonal effects.

Speaker 6

So just would like to understand the moving parts here, if this could be reflecting any type of pricing pressure or discounting order to incentivize the post? And what can we expect going forward? Thank you.

Speaker 4

Thank you. So let me pick up the first question, and then we move on to revenues. So in regard to other expenses, you're right, we have basically 2 effects. The first one is on the IFRS P and L, right, which we don't adjust. And here we have a negative impact from the divestment of PIMPAGI, which amounts to around BRL 55,000,000.

Speaker 4

Other than that, we basically have the revaluation of coal and put options on the other companies that we have this right, for example, Hikla Meki. It's nothing new that is adjusted here. It's basically the same effect of options on the M and A side. And then talking about the share based piece, which impacts our adjusted net income. Here you're also right, we have a one off effect, which contributed to around BRL 40,000,000 positive to the number.

Speaker 4

And basically on the line, we had 2 big effects on the quarter. The first one is a recurring one where we had some movement of our SUs related to our annual equity bonus, which includes more than 1,300 employees. And the second effect, which was the one off, is basically related to the board changes that we announced in the Q1. So when you look at these two effects together, what we had was basically a grant of 2,490,000 shares, but a cancellation of 3,940,000 shares. So in the quarter, we had a net reduction in share based instruments outstanding, which also contributed to the P and L by around BRL40 1,000,000.

Speaker 4

And again, you have a piece that is one off and another piece that is recurring, which is the fact that we have less share based instruments outstanding right now. Now the second question, I think it was related to MDRs and price in general, right? Here, I think there are also 2 pieces to the question. The first piece, when you look at the take rate evolution as a whole, you saw basically a 15 basis point increase year on year and also a sizable increase quarter on quarter. Both of these changes, they were basically related to the contribution of the new solutions.

Speaker 4

So if you break down the 15 basis points increase in take rates that we had year on year, it's basically a function of banking and credit contributing more to our revenues. On the MDR side, I think the variation month over month is basically attributed to the seasonality on TPV. You're right that we had the effect from membership fees there, which impacted about €68,000,000 But when we exclude that from the calculation, it's basically a matter of seasonality.

Speaker 6

Okay. Just a follow-up in terms of the seasonality that I mentioned. Shouldn't it be like more positive in terms of your MDRs Q on Q, because of the card mix and so on? So just would like to understand this part.

Speaker 4

Yes. The seasonality on the MDR and P salon is positive. Again, we had a lower tick rate in the Q1 as a result of more debit mix, and now it's positive. But then you also have this is another in term of client mix, right? And that I think answers the question.

Speaker 6

Okay. Thank you, Matias.

Operator

Our

Speaker 7

Hey, guys. Thank you for your time and congrats on the results. So I would like to focus on credit. So first, if you could explore what if I'm different since you restarted the product? So in terms of the credit and the asset quality, the credit growth, what has been a surprise so far?

Speaker 7

Also, if you could explore a little bit a possible guidance revision since as you added more than $200,000,000 in portfolio quarter over quarter, I guess, you could be you could reach guidance by the end of the second quarter or close to that. Also, if you could explore a little bit competition. So we see peers getting increasingly intense in competition segment. We see banks going down the pyramid, the corporate pyramid. We also see other acquirers more focused on credit.

Speaker 7

So how do you see competition on the SME segment that you are focusing on? And finally, to conclude here, provisions, if you expect to continue to provision 20% of your loan book. Thank you.

Speaker 2

Hi. Thank you for the question. Pedro speaking. Well, I'll kick off with the guidance. I think as you said, the results for the 1st Q were indeed better than what we initially expected, especially on Banking and Credit.

Speaker 2

If we see these trends to be consistent throughout the year, we will mostly likely land above our guidance. But that said, our guidances were already set as a lower bound, and I think it's still premature to talk about changing in the Q1 of the year. So I'll pass it over to Gregor, who'll talk about the credit, and then we'll move to Iain Matheus.

Speaker 8

Yes. Hi, Antonio. With regards to your first question, what we did differently, we explored this extensively in our Investors Day last year. And what I can tell you now is what happened over the last 12 years. Well, we completed 1 year since the soft launch of our working capital facility, and looking backwards, I really believe we accomplished quite a lot.

Speaker 8

On the positive side, I would point out that we were able to structure the entire credit cycle and not only the concession phase. We have all the controls in place to monitor the growth from a very close perspective and prepare to react on a timely manner. This monitoring process has allowed us to test and improve a variety of models and policies, always challenging ourselves to improve efficiency and to unlock new cohorts. This is also the reason why we're still growing on a nonlinear mode, almost on a step like curve, reflecting the release of offers to new customers. Besides policies and models, we also managed to test quite a lot our pricing strategy, which is adjusted to size, risk, amongst others.

Speaker 8

We also succeeded in test bundling banking and acquiring features. The team is practically form and complete, one of the major challenges we faced by the beginning of the process. And we managed to keep the performance of the portfolio within our risk appetite parameters and pretty much without any major bumps on the road. On the improvement opportunities, I would say that we still have a huge opportunity to extract more value from our hubs. So far, the growth of our credit portfolio has been more focused on our app, and we understand that there is a huge potential to be unlocked by using this channel more efficiently.

Speaker 8

There are also many opportunities to improve communication overall. We are still in the beginning of our journey to interact with our clients in a deeper way, and this is reflected in less than expected conversion rates. We strongly believe that we can and will evolve on this matter and we will accelerate. Although we already tested bundling, we understand that we could have begun earlier and also believe that we barely scratched the surface here. Besides strengthening the relationship, we believe that the more we interact with our clients, combining different product and platforms, the better the performance of portfolio will be.

Speaker 8

And last but not least, we did not advance over our links customers yet. The potential here is huge. We are implementing new processes to capture these opportunities that should lead to a significant increase in share over time.

Speaker 3

Great. Antonio, let me complement here with some thoughts on competition, which I believe was one of your questions. So I think regarding competition, nothing really new regarding the competitive environment. We continue to see benefits in our P and L from the reduction in interest rates, with financial expenses as a percentage of revenues decreasing 4.7 percentage points year over year. And in our view, this is consistent with the fact that over the short to medium term, the competitive environment is much more rational and stable and players will benefit from decreasing interest rates.

Speaker 3

So we see, if anything, a much more rational competitive environment. Environment. That's the first message. But another important message is that longer term, we're going to remain focused on executing the strategy that we talked about in the Investor Day. We're going to continue to strengthen our execution and evolve our product road map.

Speaker 3

And as Matthijs mentioned, over the last year, we've seen tangible impact in take rates already from coming from monetization levers beyond payments. But the other way to look at this is that we're only at the beginning of this trajectory. There's still a lot of work for us to do in the evolution of our banking, in scaling our credit portfolio, building bundles with software to better monetize financial services relationship with our clients. So essentially to finalize the thought here is we really believe we're on the right track and each step is only going to strengthen our differentiation in serving MS and Ds. So I think this is a thought on competition.

Speaker 4

And I think the last piece was around the overlay, right, whether we're going to keep provisioning 20% or converge to these models. And to that end, I think the message is that in 2024, we will converge to a risk based approach. It's probably going to start either in the 2nd Q or 3rd Q, But towards the end of the year, we should have the provisions converging to our models.

Speaker 3

Many questions, Antonio. I think we covered them, right?

Speaker 7

Yes, yes. Thank you. Thank you very much.

Speaker 3

Thank you, Antonio.

Operator

Next question from Neha Agarwal with HSBC.

Speaker 9

Hello? Can you hear me? Yeah, Neha. We can hear you. Perfect.

Speaker 9

Thank you so much for taking my question. Just a quick one. Regarding the registry of receivables, has there been more operational improvement? How have you been able to use the data from the registry of receivables? And how is it helping in terms of underwriting?

Speaker 9

Any update there would be very helpful. Thank you so much.

Speaker 4

Minnie, Matias here. So there are two sides to the question. First, regarding the registry business on a standalone basis. To that end, I think target has been profitable for a while, but no big changes in terms of the operation. And then there is a piece on the credit side, right?

Speaker 4

And to that end, I think the message is that it's mostly working on this. We are being able to access the collateral for all the main providers when we are underwriting, and that's a very important collateral to our business.

Speaker 9

Okay. So you have been able to access the volume from other players and the collateral is working well as of now?

Speaker 4

Yes. Yes. It is.

Speaker 9

Has there been any instance where you've made use of that collateral so far?

Speaker 4

Yeah. So in our renegotiation process in general, I think the first step is basically accessing the receivables that we have against the clients as collateral. And then only afterwards that we move towards a phase where we actually renegotiate the credits. So it has been the first, I would say, gatekeep in terms of collecting the credit and it's fully operational now.

Speaker 9

Perfect. Super helpful. Thank you.

Operator

Next question from Yuri Fernandes with JPMorgan.

Speaker 10

Hey, guys. Good evening and thank you for letting me asking questions. I have a follow-up on Caio's question on the adjustments on your net income. Just confirming that both the net effect of PPAC, the BRL53 million is there. And also the lower compensation, the lower share based compensation, the BRL40 1,000,000.

Speaker 10

When I checked the table before, it's not clear for me where those two items are there. So just making sure that the negative was removed out of the positive result of your recurring adjustment? That's the first one. And on my second question would be on your administrative expenses. They were pretty good.

Speaker 10

I know there is some seasonality here. But even year over year, it's down a lot. I think you mentioned 3rd party services helping you. So if you can provide more color, which are those services like how this line should behave going forward? Thank you.

Speaker 4

Hey, Yuri. Thank you for the question. So on the first piece, let's talk about the adjustments. So we only adjust basically mark to market related to M and E transactions. We don't adjust share based compensation whatsoever.

Speaker 4

So it's fully expensed. And therefore, the positive one off is not adjusted, right? The only thing that is adjusted to that end is the loss on the divestment of PIMBAC in this quarter. And keep in mind that in the Q1, we had the opposite effect. We had a gain on the amount of VITA, which was not adjusted as well.

Speaker 4

So that's the first piece. The second piece, I think, is related to administrative expenses. And here, I think you're right. There was a sizable reduction quarter on quarter, but also year on year. When we look at the quarter on quarter evolution, it's mostly due to seasonality.

Speaker 4

I think we've been vocal on the call from the Q4 that administrative expenses was seasonally higher back then, and it's the opposite way right now. But when you look at an annual comparison, then most of the benefits are related to the initiatives that we have in place in the company, namely the zero based budgeting initiative and also the implementation of the shared services center. And here on a macro level, basically what we're doing is unifying processes in our corporate functions. And over time, this leads to lower expenses related to 3rd party services and administrative expenses in general. So that's the main trend on the line.

Speaker 10

Super clear, Matias. Both replies. Thank you very much.

Speaker 4

Thank you, Jiri.

Operator

Next question from Georgi Curi with Morgan Stanley.

Speaker 11

Hi, everyone. Thanks for the opportunity to ask questions. I wanted to ask about selling expenses. You mentioned the 36% year on year jump, 17% quarter on quarter was partly due to a marketing expense related to a sponsorship of a TV show and investments in your sales team. Would it be possible for you to quantify how much of that 5.29 was the TV show?

Speaker 11

And I'm asking this because as you look at marketing expenses going up 36% for a revenue growth of 14% or a TPV growth of 13% for the quarter, that will that that that's it's actually concerning if it's not most of it, the TV show, right, where you're actually having to spend much more in sales and marketing for the underlying business in order to grow revenues at a lower pace. And even if I just look at over the last 12 months, forget about this quarter, if I just look at the last 12 months, your marketing expenses 12 months over 12 months are up 21% for a TPV growth, which is much less than that. And so I'm just wondering to what extent some of it also is a more competitive industry. And I did hear the response that Leah posed to a question a couple of questions before that the competition remains rational. But this level of incremental marketing expenses to grow the business at a much lower base, especially considering that you have, I don't know, 25%, 30% market share in your core business of SMBs, maybe 20%.

Speaker 11

How should we think about that? And how do you think that's going to evolve going forward in order for you to keep this pace of revenue growth that we're going to continue to see this just out growth in marketing expenses? How do you think about all those things? Thank you.

Speaker 4

Thanks for the question, Hari. So let me start with the explanation of marketing expense, and then we talk about the link we have in Israel. So on selling expense first, I think we have to segregate the sequential evolution from the yearly evolution. When you look on a year over year perspective, in the Q1 of 'twenty three, we had some one offs related to relocation of variable compensation between CEDI and admin. So this makes the year on year evolution less relevant here.

Speaker 4

Now I think the best way to look at the number is indeed looking at the sequential evolution, which was 17%. And on that front, basically everything is related to our investments in the big brother Brazil. So the sequential increase in selling is mostly a function of that, which basically impacts Q1 and to a lesser extent, 2nd quarter as well. Now when we look ahead, we still see some opportunities to invest in distribution channels. And I think we've been vocal to say that as long as we see healthy return hurdles, we'll continue to do so.

Speaker 4

But with that said, as percentage of revenues, I think we should start to see operational leverage kicking in this line throughout the year. So that's the first piece referring to the selling evolution in general. I think the second piece that you mentioned is whether we are seeing some kind of effect from competition and the link between those investments and the top line growth, right? And to that end, first of all, I think the best way to look at the number is not looking at the consolidated TPV. The investments we do in selling have very little to do with the growth in key accounts, which I think we've mentioned we are being opportunistic.

Speaker 4

So on workers, it can grow more. On other workers, it can grow less. But when you look at the evolution of MSM BTPV, I think the message is not that we are decelerating actually. So if you look at the evolution of TPVs, including peaks, which we monetize the same manner as debits, basically, we grew 24% this quarter, about 25% in the Q4, and 3rd Q was in the low 20s. So the message here is either stable or accelerating, but not decelerating.

Speaker 4

So again, that's pretty much how we see the line. The evolution is mostly explained indeed by the reality TV show investments that we did. And in terms of linked growth, I think the proper way to look at the number is looking at MSCB volumes and not TPV in general. Don't know if I answered all your questions, Jorge.

Speaker 11

Yes, yes, that was clear. Thank you very much, Matheus. I appreciate it. I mean, if I just adjust for this quarterly jump, yes, there seems to be some operating leverage on the last 12 month basis of your selling expenses, but not a lot. And so I guess, I'm still just wondering, how should we think about the amount of expenses that you needed to put into the business, given the big market share that you have and how does that relate to competition?

Speaker 11

So anything any view that you have around that would be helpful.

Speaker 4

Yeah, yeah, for sure. So like I said, I think the sequential increase that we had was mostly due to the reality TV show investments. And going forward on a nominal basis, it shouldn't grow that much. So most of the leverage will come to from continuing to grow top line, having this baseline in terms of selling. And then a last piece, I think when talking about operational leverage in the line, especially looking at the Q1, it's also important to remind that we had a negative one off in the revenue side, right, which was the 68,000,000 from the change in the recognition of membership fees.

Speaker 4

When you factor that in and then you look excluding the investments of Big Brother Brazil, I think it's more clear to see the operational leverage that is kicking in there.

Operator

Next question from Daniel Vaz with Safra.

Speaker 12

Hi, everyone. I have a question regarding credit. So we know you're offering your working capital solution for a limited portion of your client base, right, so mainly in the upper part of the SMB. So I wanted to ask you if you have already been testing pilots in smaller clients and how have been this the outcome of this testing so far? So are you willing to expand the eligible base at some point in this year?

Speaker 12

Have you been doing that? So it will be good to hear from you. Thank you.

Speaker 8

Yes. Hi, Benil. Yes, we have expanded our offer to lower customers, both on the working capital facility and also we are initiating now a test with credit cards on our Ton business. So we are evolving on covering the entire client basis with a credit offer. And so far, I mean, the tests have been successful, and we think that there's opportunity to expand here and reaching out for more customers.

Speaker 4

Yes, I think the one caveat here, Daniel, like Gregor mentioned, it's still on test phase here. So I wouldn't say we are right to roll out yet. I think the message is that the early indicators are good. But again, we're taking the cautious approach in credit in general. And then especially on micro merchants, which we know are more volatile and risky, right, by nature, it's going to be even more cautious.

Speaker 4

So I wouldn't expect a big evolution already contributing to results this year. It's most about testing and learning this year.

Speaker 12

Okay. Thank you. And if I may, just a quick one in the change of the accounting method. So how are you recognizing revenues now? It's a 12 month pace.

Speaker 12

It's a 24. Could you just give a little refresh for us?

Speaker 4

Yeah. So up until the last quarter, membership fees were basically recognized as soon as a client was onboarded. So it was upfront. Now it's basically deferred throughout the lifetime of the clients. We don't disclose the specifics in terms of how many months we're using.

Speaker 4

But I mean, it's very close to market standards. So if you look at the periods, I think you should have a good benchmark for that.

Speaker 12

All right. Thanks for that. Congrats on the results.

Speaker 4

Thank you.

Operator

Next question from Thiago Bienfeld with Goldman Sachs.

Speaker 13

Hi. Good evening, everyone. Thank you for taking my question. I have just one on financial expense. If you could discuss what are your main expectations for Terminal Saliq?

Speaker 13

And also if you could discuss if you have any initiatives to lower financial expenses by year end. And finally, if you have any plans to remunerate deposits, remind us what has been your strategy here? Thank you so much.

Speaker 4

Thanks for the question, Sihamo. So first, let's start with our perspective for terminal Selic. I think to be really honest here, we don't have a perspective here. I think our approach is basically to look at the market data that we have and then we adjust our pricing accordingly. I think we mentioned this a few times, but our pricing has become a lot more dynamic nowadays.

Speaker 4

So basically, we have the price that we use to onboard the clients. But over time, we adjust it upwards or downwards according to the volumes that we're seeing, the solutions that the clients are using. So it has become a dynamic process. And to that end, I think it allows us to adjust whatever silic we see in our front in a very quick manner. So that's piece number 1.

Speaker 4

2nd piece regarding initiatives to lower financial expenses. I think our team has done a great job over the past quarters and years, not only of being more efficient in terms of the spreads that we have, but also being a lot more conservative. So if

Speaker 14

you look

Speaker 4

at the credit profile of the company, we're having longer and longer funding, which is good. Now when you look at structural initiatives that we have in place, I think the main one to mention is the financier license, which we got end of last year. And that basically allows us to access retail funding and also to access the deposit base that we have to fund prepayments and credits. But on both of these fronts, our approach is really cautious because we want to make sure that we don't cannibalize our current deposit base for which we don't remunerate anything. And as you can see by the results, it's getting quite a lot of traction without that, right?

Speaker 4

So basically what we're doing right now is testing. We have a very small pilot in terms of remunerating deposits. We're also testing the waters in terms of retail funding. And that's pretty much the mood of the year. I wouldn't expect any big movements on the balance sheet in 2024.

Speaker 4

And the final question, can you remind me what was it?

Speaker 13

My final question was on the deposits. What's your strategy for remuneration or paying for deposits eventually?

Speaker 4

Well, I think we covered that, but basically the message here is the following. We have a very good business in our banking product, which is basically built upon the working capital needs of our clients, right? So we offer a simple solution for them. And we're able to get this deposit base without remunerating. But we also see space to advance on banking on the remunerated side.

Speaker 4

So basically, tackling the savings pocket of our clients. If you look back at the Investor Day, I think the approach that we shared was basically creating an automated savings product, which is basically using the same engine that we have in credit, where we get a percentage of the TPV, but redirecting that feature towards clients that are savers. So we're basically able to help our clients to save towards their goals. And on that product, the idea is to remunerate the deposit base. But again, being really cautious here not to cannibalize the product that we have in place.

Speaker 4

So that's basically the strategy there.

Speaker 10

It's clear. Thank you, Matias.

Operator

Next question from Jamie Friedman with SIG.

Speaker 14

Hi. Let me echo the congratulations. I wanted to ask about the take rate on key accounts. It was up 14 basis points year on year and 15 basis points sequentially. So I'm just and I understand that's part of the strategy.

Speaker 14

I'm wondering though, how high can this go because it seems like you got a very good cadence there.

Speaker 3

Hi, Jamie. Lia here. So I think regarding take rate trends in key accounts. So the one basis points increase quarter on quarter is basically product mix, credit versus debit. And the 14 basis points increase year over year is really a consequence of our strategy in terms of repricing and offering spot prepayment for some clients.

Speaker 3

So I think the overall message here is let's remember that key accounts for we see key accounts as sort of an opportunistic strategy. So if we find a key account client where we can have a good relationship in terms of pricing and good returns or even a more broad sort of product discussion that enables us to have a more profitable relationship, we will do so, but that's not really the focus of our execution. So we're a lot we've been a lot more opportunistic there. So it's hard to pinpoint what the trends will be. I think that the trends that we are seeing is more or less kind of in line with what we expect, right?

Speaker 3

So take rates, slightly positive from this effect of a higher emphasis on profitability and repricing. But on the TPV side, it tends to be volatile. It's hard to pinpoint a trend. I think those are the takeaways.

Speaker 14

Thank you, Lia. And then in answer to a previous question, I think you had addressed the opportunity to lend into the LINKS merchant base, which my understanding is I don't believe you've begun. So how and when are you thinking about that opportunity? If you could elaborate on that. Thank you.

Speaker 3

Yes. So we disclosed this metric that we It's

Speaker 4

about lending on links, right?

Speaker 3

Is it lending on links was the question, Jamie?

Speaker 14

Oh, yes. I'm sorry if I didn't say it right. That's what I meant to say, yes.

Speaker 3

Okay. Yes. So, like Gregor mentioned, right, we're just starting to look at the opportunity for credit in the LINKS client base. So what we know is that it is a big opportunity and it's very in line with what Pietro said at the beginning of the call today to sort of implement a specific process for higher average TPV clients because that is the profile of Linx clients overall. Even within those priority verticals, the average TPV of those clients tends to be somewhere around 200, 500,000 a month.

Speaker 3

So these are medium clients within the SMB space. We know that there's a very, significant opportunity there. And this will fall into the context of the whole the overall cross selling initiative, right? So, in order to provide lending to those clients, we want to do so in a context where we actually offer the full stone solution integrated software. So it's really very early days.

Speaker 3

We know the opportunity is big. We're starting to organize ourselves around that opportunity. But at this point, the focus on cross selling is a lot more on really the structural go to market initiatives that enable us to actually start to offer financial services solutions to software clients. So yes, we are excited with the credit opportunity in LinxClient base, but it's very early days to give any more precise figures on that.

Speaker 14

Perfect. Thank you, Leo.

Operator

Thank you, Jamie. Next question from Pedro Ledoux with Itau BBA.

Speaker 15

Thank you guys for the question. Good evening. 2, first on the financial side that your guys are looking at for them have had the new document recently out on what you have seen and revenues or the funding side, early thoughts and maybe how you can manage around that? And the second, from the early portfolio that you have on the credit side, if you're already seeing benefits, be it on churn, be it on higher share of wallet, all those clients, is credit helping you, you believe it's just through credit, but is it bringing positive side effects on other things?

Speaker 3

Hi, Pietro. I'm not sure we understood the first part of your question, if you could please repeat it. You're chopping a little bit sorry, I think you're chopping a little bit for us. I don't know if you can go to a spot where there's a little better connection.

Speaker 15

I'll join the line back in. Sorry.

Speaker 3

Okay, Pedro. Thank you.

Operator

Okay. While we wait for Pedro, next question from Renato Meloni. Please, Renato.

Speaker 16

Hi, everyone. Thanks for the space here for questions. My first question is on the asset quality of the credit portfolio. I know it's a bit early to look at NPLs, but I wonder what you're seeing in the margin here. And if you can compare that to what we're seeing in the industry numbers.

Speaker 16

And then maybe if you have an expectation of where NPLs will stabilize and why? And then I have a second question here on your funding strategy. And if you how do you see space to continue using your own cash generation as a funding source here or if you expect that to the mix to shift going forward? Thank you.

Speaker 4

Thank you, Renato. Let me start on the latter question. So basically, we fund credit nowadays using our capital structure, right? So we have a mix of equity and debt. I think we're not looking towards having a specific instruments for credit, like factoring out risk on this, basically because it's too expensive in Brazil.

Speaker 4

So if there is an option at an attractive rate, we will for sure consider. But given the structure that we have in Brazil, I think it's likely that the strategy for funding may continue the same. And then on asset quality, I think you're right that looking at NPLs alone, it's basically really affected by the speed of growth, right? I think what we can share from nowadays is basically 2 things. So first, in terms of expected losses, our models are pointing towards the 10% threshold.

Speaker 4

So when you think about NPLs over 90, it should increase, right? It shouldn't stay at 1.5% or 2% area. It should move towards this expected credit loss level and be slightly below that. So that's the first piece of the message. The second, I think, is looking at cohort data.

Speaker 4

So I think in the Investor Day, we shared the over 30 MOD3 for the portfolio. And I think we disclosed at that time between 3% 4% for the cohorts. And that pretty much remains the same nowadays. So I think the performance for the portfolio has remained really consistent over the past many months. And the final point, I think you mentioned, is around returns.

Speaker 4

So the margin for credits, I think we're not disclosing the margin itself. But what we can see in terms of rates, we usually charge between 3% to 5% per month. We are on the lower end of that range nowadays, basically because we are choosing clients that have a better risk profile in general. And then if you combine the 3% per month with the 10% expected credit losses, I think you should arrive at the margin for the product pretty easily. So that's the message there.

Operator

Next question from John Coffey with Barclays.

Speaker 17

Hi. Thank you very much for taking my question. I just had, two questions for you. For 1, on your TPV, it looks like it seems like your top line TPV number now includes picks. And so if that's the case and that's kind of your primary, TPV metric, how should I think about your guidance?

Speaker 17

Your especially your MSMB TPV of that 412 floor, does that, is that just tying to the TPV without picks? And then likewise, when we think about the MSMB take rate, would that be considered with TPV again, including picks or excluding? And just the, the last question I had, the MSMB payment net adds, I think Leah said in her prepared remarks that we saw a little bit of a decline this quarter because now Stone is reaching, I think like, you know, like market growth rates, if I understood that correctly for MSMBs, does that mean like we should, that's kind of a good cadence in that 200 range to think about net ads going forward or am I off on that? Thanks.

Speaker 3

Hi, John. Lia here. So I'm going to take both questions. First on TPV, I think it's important to note that we disclose both, right? So both TPV considering PyxP2M and TPV only considering cards, right?

Speaker 3

So the reason why we're disclosing we've always disclosed both, but fixed fee to 1 has more and more incrementally become a relevant and important acceptance method for our clients. Let's also remember that we monetize PIX P2M in line with debit net MTRs and we allow our clients to reconcile PIKS P2M as a payment method. So I think this is just a little bit of context to start answering the question. So in fact, regarding the guidance of TPV, we are seeing TPV trends considering only card volumes closely aligned with our guidance. But additionally, we're positively surprised with the strong performance that we're seeing in P2M volumes, where we're going strongly on a sequential basis.

Speaker 3

And like I said, it's net positive for us because we monetize that in line with debit and net MDRs. And it is very positive for our clients because for them it is a cheaper solution in terms of payments acceptance and money gets settled instantaneously. So just to give the numbers again, TPV including PIX grew 24%, while if we exclude PIX P2M, we saw 18% growth. And the 18% growth is very much in line with what our guidance for the year implies. So the message is we remain committed with the TPV guidance and we're going to continue to disclose both figures, right?

Speaker 3

TPV with fixed P2M and TPV considering only cards. The second part of the question was net adds, right?

Speaker 4

Yes.

Speaker 3

Yes. So you were right in that, what we expect going forward in terms of net adds is it is more levels more or less in line with what we saw this quarter. So since over the last year, we strongly increased our penetration in the micro segments. It's not surprising that incremental growth is smaller. That said, we're really happy with the commercial performance in the quarter.

Speaker 3

It is associated with our participation in BBB. I think we discussed this earlier in the call. But importantly, regarding this investment in BBB that we made this quarter, we did see a very positive impact in the quarter, but we also expect a tail effect throughout the year. It's important for us to maintain the consistency of the communication so that we can really capture the value in terms of more brand recognition, stronger communication to a broader audience. Right?

Speaker 3

So all of that for us is a positive trend and we expect net adds to be in line with what we're seeing and we're happy with that level. But also, as remember, we don't have net adds as a single objective function because it's important that we are always looking at healthy payback hurdles and that we can grow with good profitability. So I think that's the big message, John.

Speaker 7

Great. Thank you.

Operator

There are no questions at this time. This concludes the question and answer session. I will now turn over to Pedro Zener, CEO at Stone Cold for final considerations.

Speaker 2

Well, thank you very much. I think before we end the call, just wanted to provide an update in terms of the tragedy in Rio Grande do Sul. I think we are engaged and committed to the situation, supporting our clients, employees and local communities with a series of programs and initiatives. Our commitment to Brazil entrepreneurs is above all a commitment to people. And we have partnered with Union Brazil, which is an NGO that has been on the front lines of the floods from us to support those who need it at most at this time.

Speaker 2

I think the other question is regarding the impact in terms of our TPV and guidance and so forth. So we've seen a significant impact in TPV within the region with some cities reducing TPV by up to 40%. But that said, our exposure to Rio Grande do Sul is about 4% to 6% of our TPV. So the impact will be most likely limited and should not impact our guidance. In terms of the P and L, there will be a negative impact in the Q2, not only as a result of the TPV impact, but also because we are fully committed to supporting our clients and employees within the region.

Speaker 2

We have already exempted the subscription fees of our clients in the region. We have reduced the payment fees, provided grace period of 90 days in credit repayments, among many other actions. I think it's still too early to quantify the impact for the quarter, but the message here is that we remain committed to the guidance despite of those effects and we're considerate about the treasury that is actually happening in the country. With that said, I'd like to thank you all for participating in the call and see you in our next quarter results. Thank you very much.

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Key Takeaways

  • Financial results: Consolidated revenues grew 14% year-over-year and adjusted net income nearly doubled (+90%) to a 14.6% margin, driven by lower admin expenses and strong segment performance.
  • Payments & banking: MSMB payments TPV rose 24% YoY (18% ex-PIX) with active clients up 33%, while banking users nearly doubled to 2.4 million, leading to a 53% jump in deposits to BRL 61 billion and higher ARPAK.
  • Credit expansion: The credit portfolio swelled 72% QoQ to BRL 532 million, NPLs remain low (2.2% and 1.5%), and the company maintains a conservative 20% provisioning rate while piloting credit cards and a large-client desk.
  • Software focus: Organic vertical software revenue climbed 12% YoY and now represents 76% of total software sales, fueling a 65% YoY rise in adjusted software EBITDA to BRL 66 million and a 17.8% margin.
  • Cost & efficiency: Administrative costs fell 12% YoY from shared services and zero-based budgeting, selling expenses rose 36% due to marketing investments, and financial expenses declined 2.2% amid lower interest rates.
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Earnings Conference Call
StoneCo Q1 2024
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