StoneCo Q1 2025 Earnings Report

StoneCo EPS Results

• Actual EPS: $0.34
• Consensus EPS: $0.32
• Beat/Miss: Beat by +$0.02
• One Year Ago EPS: N/A

StoneCo Revenue Results

• Actual Revenue: $625.86 million
• Expected Revenue: $3.68 billion
• Beat/Miss: Missed by -$3.06 billion
• YoY Revenue Growth: N/A

StoneCo Announcement Details

• Quarter: Q1 2025
• Date: 5/8/2025
• Time: After Market Closes
• Conference Call Date: Thursday, May 8, 2025
• Conference Call Time: 5:00PM ET

StoneCo (NASDAQ:STNE) provides financial technology and software solutions to merchants and integrated partners to conduct electronic commerce across in-store, online, and mobile channels in Brazil. It distributes its solutions, principally through proprietary Stone Hubs, which offer hyper-local sales and services; and sells solutions to brick-and-mortar and digital merchants through sales team. The company served small-and-medium-sized businesses; and marketplaces, e-commerce platforms, and integrated software vendors. StoneCo Ltd. was founded in 2000 and is headquartered in George Town, the Cayman Islands.

StoneCo Q1 2025 Earnings Call Transcript

Presentation

[Operator]

Good evening, Thank you for standing by. Welcome to StoneCo's First Quarter twenty twenty five 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.stone.co.

[Operator]

Throughout this conference call, the company will present certain non IFRS financial information, including adjusted net income, adjusted gross profit, adjusted net cash, adjusted basic EPS and ROE. These are important financial measures for the company but are not financial measures as defined by IFRS. Reconciliations of the company non IFRS financial information to the IFRS financial information appears in today's press release. Finally, before we begin our formal remarks, I would like to remind everyone that today's discussion may include forward looking statements. These forward looking statements are not guarantees of future performance and, therefore, you should not put undue reliance on them.

[Operator]

These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the company's expectations. Please refer to the forward looking statements disclosure in the company's earnings press release. In addition, many of the risks regarding the business are disclosed in the company's Form 20 F filed with the Securities and Exchange Commission, which is available at www.sec.gov. In hindsight, I would like to highlight that the company is restricting the number of questions to two per analyst. Joining the call today is Stone's CEO, Pedro Zener the CFO and IRO, Matteo Chereth the Strategy and Marketing Officer, Lia Matos and the Head of IR, Roberta Noroya.

[Operator]

I would now like to turn the conference over to your host, Pedro Zener. Please proceed.

[Pedro Zinner, Chief Executive Officer at StoneCo]

Thank you, operator, and good evening, everyone. I'd

[Pedro Zinner, Chief Executive Officer at StoneCo]

like

[Pedro Zinner, Chief Executive Officer at StoneCo]

to begin by reaffirming our annual goals and expressing how pleased I am with our first quarter performance. It was another successful chapter in our journey, marked by disciplined execution and continued progress toward our long term objectives. This quarter, we focused on profitability, executing a new cycle of price adjustments across our client base in response to the yield curve increase observed in the second half of last year. At the same time, we continue to develop solutions and features that truly make a difference in our clients' lives. I believe our results reflect the strength of our client centric approach, disciplined execution, and a rational competitive environment.

[Pedro Zinner, Chief Executive Officer at StoneCo]

When we take a step back and look at our performance in the context of our 02/2025 guidance, it becomes clear that we are on the right path. In the February, we grew gross profits by 19% year over year, driven by effective repricing execution and a reduction in our average funding spreads. This result outpaces the 14% annual gross profit growth outlined in our guidance. On the EPS front, we accelerated year over year growth to 36, significantly above the 18% growth implied in our full year outlook. This acceleration was primarily driven by strong adjusted gross profit growth, improved efficiency in administrative expenses and a more balanced distribution of marketing spends throughout the year.

[Pedro Zinner, Chief Executive Officer at StoneCo]

In addition, we repurchased BRL843 million or 15,100,000.0 shares during the quarter, including 5,700,000.0 shares repurchased in March, which were not included in the share count used in our guidance. Over the past twelve months, our distribution yield reached 12%, underscoring our strong conviction in our strategy, our business and our ability to execute. As a reminder, in our last earnings call, we laid out a disciplined capital allocation strategy based on three restrictive pillars, above which we would return excess capital to shareholders. With the close of 2024, we reached R3 billion in excess capital. Of that, approximately R1 billion dollars has already been returned through share repurchases year to date.

[Pedro Zinner, Chief Executive Officer at StoneCo]

Today, we are announcing a new share repurchase program of up to R2 billion dollars replacing the previous program. This move reaffirms our commitment to the framework and distribution policy we shared with you just a few months ago. With that, I believe we are well positioned to continue executing our strategy, achieving our goals, and generating long term value for our shareholders. Now I'll turn it over to Leah, who'll take you through our first quarter results in more detail. Leah?

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Thank you, Pedro, and good evening, everyone. Diving into our first quarter twenty five results, we're very excited with the milestones we have achieved. Such results reflect our execution in a less favorable macroeconomic environment with interest rates trending higher, and we believe we have been successfully navigating this challenging scenario. On slide four, we highlight our main financial metrics on a consolidated basis. As you can see, we have shown good traction in revenues, gross profit and bottom line.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Our revenues grew 19% year over year and 2% quarter over quarter, despite seasonality in 4Q, resulting in revenues usually reducing sequentially in first quarters. This trend shows that we are on the right path. Our repricing initiatives have started to yield positive results despite the fact that it impacted in the quarter only partially. Adjusted gross profit also grew 19% year over year and decreased 3% on a sequential basis, mostly on lower quarter over quarter TPV, timing mismatch between the increase in prices and cost of funding and on higher cost of services. Finally, our adjusted net income grew 23% year over year and decreased 17% quarter over quarter.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

This sequential reduction was mainly a result of our lower adjusted gross profit combined with higher investments in our distribution channels and higher effective tax rates. Looking on a per share basis, adjusted basic EPS was BRL1.97 per share, 36% higher year over year and 13% lower sequentially. The better per share performance compared to nominal net income is a result of our commitment to returning excess capital to our shareholders with BRL2.4 billion returned in share buybacks over the last twelve months and BRL843 million in this quarter. On Slide five, we dive deeper into our Financial Services segment performance, starting with our payments business for MSNBs. Our MSNB payments active client base increased 17% year over year and 4% quarter over quarter to 4,300,000 clients.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

We also continue to see increased engagements of this client base with our different financial services solutions with our heavy user metric reaching 38 in the first quarter compared to 37% in the previous quarter. This trend is a natural result of our execution with regards to bundling financial services solutions and offering new features that address our clients' specific needs. MS and BTPV grew 17% year over year, even with the repricing efforts throughout the quarter. Going forward, we expect some deceleration in volume growth as a natural outcome of changes in our repricing policy, which should impact volumes throughout the remainder of the year as we prioritize profitability over pure volume growth in this scenario. Breaking down by types of transactions, MSNB card transaction volumes grew 10%, while MSMB PIX volumes grew 95% over the same period as PIX continues to cannibalize debit volumes.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

We believe this shift to be accretive to our results as we monetize PIX in line with debit and we see increased flow generating higher deposits with the usage of PIKs. Moving on to slide six, we dig deeper into our banking performance. On the left side of the slide, we show the retail deposits evolution and breakdown. Our total client deposits reached BRL8.3 billion, 30 8 percent higher year over year and 5% down sequentially due to seasonality. Deposits continue to outpace MSNB TPV growth, reaching 6.9% of MSNB TPV in the first quarter.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

As payments and banking bundles already have a high penetration within our base, the focus shifts increasingly towards driving further engagement with our solutions, where we expect to see steady evolution going forward. I would also like to recall that in our last earnings report, we have highlighted the changes in the mix of our time deposits going forward, aligned with what we call our cash sweep strategy. As we noted, we expect to convert a significant portion of our retail deposits into on platform time deposits by issuing certificate of deposits. This will allow us to utilize such amounts to fund our operations and thus reduce our funding costs in line with a reduction also in our floating revenues. Such strategy is accretive to our bottom line and also optimizes our capital structure.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

In line with this strategy, we have already started to ramp up time deposits and by the end of the first quarter, billion dollars of our total R8.3 billion dollars in retail deposits were already accounted as time deposits. The majority of such time deposits are a result of the cash sweep strategy and the remaining is related to investment product offerings to our clients. We expect this movement to finalize in the coming months contributing to the diversification of our funding sources. Moving on to slide seven, we give some color on our credit product evolution. Our total credit portfolio keeps growing consistently reaching BRL1.4 billion by the end of the quarter.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Out of the total, BRL1.3 billion relates to our merchant solutions, mainly comprised of working capital offerings to our SMB clients and BRL161 million amounts to credit card offerings with a special focus on micro merchants. This steady portfolio growth continues to be supported by the good quality of our cohorts with fifteen to ninety days NPLs at 2.61% and NPLs over ninety days of 4.57%, increasing as a natural outcome of our portfolio maturation process. In terms of provisions, we have stabilized at a 12% provision level relative to our portfolio as we outlined in our last earnings call. And as a result, we will now transition to a cost of risk view, which was 10% in the quarter. Finally, our coverage ratio was 256% in the period, converging to more meaningful levels versus the previous quarters.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

To wrap up, on slides eight and nine, we bring our segmented view between financial services and software. Our financial services segment revenues grew 20%, accelerating from 11% in the fourth quarter of twenty twenty four as a direct effect of our repricing initiatives throughout the quarter, which led to a sequential increase in revenues despite strong seasonal effects. Our adjusted EBT for the segment grew 21% year over year, reaching BRL637 million and a flat margin despite macro headwinds. The improved year over year results, combined with the repurchase of BRL2.4 billion in shares in the last twelve months, also led to an enhanced ROE of 27% for financial services in the first quarter of twenty twenty five compared with 23% in the same quarter of last year. Lastly, on the Software segment, we saw revenues growing 11% year over year, mainly driven by higher software recurring revenues, led by an increase in our software active client base combined with a higher average ticket.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Stronger revenues combined with gains in costs and expenses led to software adjusted EBITDA growing 12% year over year and posting a slight EBITDA margin expansion compared to the first quarter of twenty twenty four. We're also starting to share our software CapEx, which has shown improvement compared to software adjusted EBITDA having reduced from 71% of EBITDA in the first quarter of twenty twenty four to 51% this quarter, contributing to stronger cash conversion in our software business. To sum it up, this quarter's results present one more step towards achieving our short and long term targets. We believe we're on the right track to continue to help our clients by providing superior service and solutions and further generate value to our shareholders. Now I want to pass it over to Matteo's to discuss in more detail our overall financial performance.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Matteos?

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

Thank you, Lia, and good evening, everyone. On Slide 10, we detailed evolution of our consolidated P and L on an adjusted basis. As Lia mentioned, total revenue grew 19% year over year and 2% sequentially. This quarter, I'd like to reemphasize a notable shift within our revenue composition. Beginning late twenty twenty four, we've optimized our bundled offerings, significantly shifting revenue from transactional revenues to financial income.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

Consequently, financial income has increased notably, while transactional revenue has decreased on both quarterly and yearly comparisons. As we've consistently highlighted, that's another reason why it's important to track gross profit rather than individual revenue lines for a comprehensive understanding of our business. Now moving to our cost and expenses lines. Cost of services increased 15% year over year, translating to a decrease of 90 basis points as a percentage of revenues. This was driven primarily by lower provision for loan losses, reflecting reduced provisioning requirements as we aligned working capital provisions more closely with our expected credit loss models and efficiency gains in customer service.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

Administrative expenses increased 5% year over year, resulting in a reduction of 90 basis points as a percentage of revenues as a result of continued cost discipline within g and a expenses. Selling expenses increased 12% year over year and down 100 basis points as a percentage of revenues. This decrease was primarily due to a more balanced distribution of marketing spend throughout the year. Financial expenses increased 23% year over year, representing a 90 basis point rise as a percentage of revenues. This increase was primarily driven by the higher average CDI during the period.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

On the other hand, our cash sweep strategy allowed us to begin using client deposits as an additional funding source, which helped partially offset this impact by contributing positively to our funding costs. Our other expenses line increased by 109% year over year or 140 basis points, primarily driven by a positive nonrecurring share based expense reversal recorded in the first quarter of twenty four. Our effective tax rate was 19.7% in the quarter, down from 20.6% in first quarter twenty twenty four and in line with the level provided in our guidance. The year over year decrease was driven primarily by higher benefits from Lidomain combined with unutilized tax loss carryforwards generated in the sale of Pimpac in first quarter twenty twenty four, which did not happen again this quarter. Turning now to Slide 11, Our adjusted net cash position was BRL3.8 billion at the quarter end, representing a sequential decrease of BRL0.9 billion.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

This decrease mainly reflects ongoing share repurchase totaling BRL843 million in the quarter in addition to investments to grow our credit book. Before we move on to questions, I'd like to thank everyone for your continued support. We remain fully committed to executing our strategy and creating sustainable long term value for our clients, team and shareholders. With that said, we are now ready to 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 Our first question comes from Tito Labarta with Goldman Sachs.

[Tito Labarta, Vice President at Goldman Sachs]

Hi, good evening, Pedro, Lia, Matteo. So thank you for the call and taking my question. A couple of questions. One, just on the outlook for TPV growth, right? Because we've seen the card TPV growth growing high single digits, low double digits if we strip out the key accounts.

[Tito Labarta, Vice President at Goldman Sachs]

How do you think about that growth? Then also the PIX TPV growth, right? Still strong year over year, kind of stable ish quarter over quarter. I know you have the seasonality, but just to see how you think about the outlook for TPV growth both within the MSMB and key accounts and within without PIKs. And then my second question, we saw the announcement from Totus that now you guys are in negotiation for LINX.

[Tito Labarta, Vice President at Goldman Sachs]

Is there any color you can provide for, about that in terms of timing? I'm sure you can't discuss valuation at this point, but, yeah, just any any color you can provide there. And and if you were to sell Lynx, what would you potentially do with the the proceeds of that? Thank you.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Hi, Tito. Lia here. Thank you for your questions. I'm gonna take the TPV question and then pass it over to Pedro. So, regarding TPV trends, talking first about, MSNB TPV, there are three key points to highlight.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

First is that our long term guidance already implies some deceleration on TPV growth. So the guidance that we provided for 2027 on TPV last quarter implies a 14% CAGR. So this growth performance that we see is in line with this trend that we have already talked about. The second fact is that, naturally, in response to higher interest rates, as Matteo has mentioned, we have implemented a broader repricing, this quarter across our client base. These repricing efforts, they have performed very well, better than we expected, but some level of churn is always inevitable.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

So this will modestly impact TPV growth in the short term. Third, obviously, macroeconomic environment does remain challenging. So it's still a little bit early to say the full extent of its impact in the year. So the message regarding the year is that TPV growth will decelerate somewhat. But overall, general trend regarding TPV is very much in line with our long term guidance.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Regarding PIX, we continue to see PIX strongly cannibalizing on debit volumes. This is also what we see on the industry. So when we look at a ABEX industry data, for example, it does point out to very different behavior in terms of growth when we talk about credit card volumes versus debit volumes. And that is consistent also with what we observed in our base. Right?

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

So PixTPV cannibalizing on debit volumes, which is why we see this stronger pace of growth for PixTPV versus card TPV. Regarding key accounts, I think nothing really different to say about, key account TPV trends other than what we've already said. It's not the focus of our strategy. So the majority of our investments, both in product road map and in go to markets, are focused on MSNB clients. That said, our platform does address needs of some large enterprise clients, and we do serve those clients on an opportunistic basis.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

But, those are not the focus of our strategy. And because, normally, these clients can shift very large volumes very quickly, that tends to be a more volatile TPV behavior. So you can see kind of a strong shifts quarter on quarter. Those shifts have little impact on gross profit, but they do impact overall TPV. So I think those are the general trends in TPV that we can highlight, and I'll pass it over to Pedro to talk about transaction.

[Pedro Zinner, Chief Executive Officer at StoneCo]

Thank you, Ria. Thank you, Chietu. Well, I think as you all know as as you noted, we have entered with into exclusivity agreement with Totus to negotiate the sale of the asset. I think at this stage, I think it's really hard to provide any additional details regarding the valuation as you already highlighted or the duration of the exclusivity period. I think what we can say is that negotiations are progressing positively.

[Pedro Zinner, Chief Executive Officer at StoneCo]

However, given the complexity involved in the transaction of such a magnitude, I think there are a lot of factors that still need to be negotiated and agreed upon. And therefore, I think it's still challenging to specify an exact timeline for reaching a final agreement. But be certain that we'll keep the market informed as the discussions moves ahead. On the allocation side, I think it's hard to talk about the future given the uncertainty in terms of of the closing of the of the transaction. What I can say is if we were to make the decision today, I think we would do exactly what we're doing in terms of share buybacks.

[Pedro Zinner, Chief Executive Officer at StoneCo]

Because when we assess the long term implied returns of repurchasing shares at current levels, we believe that buybacks represent a very attractive use of capital and seem to be value accretive in terms of decisions for shareholders. So that's the position as of today. Okay? Thank you.

[Tito Labarta, Vice President at Goldman Sachs]

Okay. No. Perfect. Thank you, Pedro. That that's helpful color on that.

[Tito Labarta, Vice President at Goldman Sachs]

Maybe if I can, just one quick follow-up on the TPV with Lia. Just on the cannibalization of debit, do you see a lot more room for cannibalization there? I don't know, any way to quantify that? And have you seen any cannibalization of credit, particularly with the PICS financing at all? So, yeah, has it impacted credit at all?

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Hi, Tito. So, I think the answer to the first part of your question is yes. I think we can continue to expect debit, debit volumes to be cannibalized by peaks. When you look at a back industry data versus central bank data, it also points to that direction because debit card, TPV in the industry is sort of flattish. Right?

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

It was flattish throughout last year, and it it it had actually a slight decrease in the first quarter. And and when you look at growth data, it's a very different trend. It's a strong growth. So I do believe that this trend will continue. But, also, let's not forget that PIX cannibalizes on debit volume, but it also cannibalizes on cash.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

So in general, it's it's accretive for us because PIX volumes become more deposits in the banking ecosystem, and we we we continue to monetize on PIX. So I think that's the first part of the of the answer. The second part is no. We do not see any cannibalization on, credit volumes, and neither the industry trends are suggestive of that either. Right?

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

When you look at ABEX data for credit card TPV growth, it's 13.5% in the first quarter, which is a healthy growth level, And it's not suggestive in our view of, fixed cannibalization of credit volumes in the industry either. Thanks, Tito.

[Operator]

Our next question comes from Mario Pierry with Bank of America.

[Mario Pierry, Managing Director at Bank of America Merrill Lynch]

Hi, guys. Good afternoon. Congratulations on the quarter. I wanted to explore a little bit more about your price increases. As you mentioned, right, like you started repricing in the beginning of this year because of the yield curve had widened last year.

[Mario Pierry, Managing Director at Bank of America Merrill Lynch]

Now we're seeing the opposite trend, right? We've seen the yield curve tighten. What does it mean for your outlook for prices? Would you consider passing on some of the benefits to your clients maybe later in the year? I ask this because as you mentioned, right, Lia, you are seems like you're losing some market share.

[Mario Pierry, Managing Director at Bank of America Merrill Lynch]

It seems like you're growing slightly below the industry. You said that churn has increased. So trying to understand from your perspective, if you're seeing if you eventually see lower funding costs because of lower rates in Brazil, if you consider repricing your clients. And if we can explore a little bit more also, like what percentage of your clients have been repriced already? Like you said, you started fairly late repricing beginning of this year.

[Mario Pierry, Managing Director at Bank of America Merrill Lynch]

What percentage of your client base has already, been repriced? Thank you.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

Mario, Matthew is here. Thanks for the question. So the first part of the question regarding, whether we plan to pass through or change the pricing policy given the recent movements in terms of the yield curve. I think the short answer here is no. So just to give a step back and a little bit of a recap, we decided to do a really extensive repricing wave in the first queue.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

But in terms of magnitude of the adjustments, when we did the repricing wave, we basically targeted the yield curve of of the half of the year, which back then was around 15%. If we were to look at the yield curves nowadays, again, it's really close to that. It's 14.7, 14 point eight percent. So the impacts of the yield curve tightening now are not big in the short run. I think it's it's the curve of the second half that really tightens, but that was not built into the repricing waves that we did back then.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

So it really doesn't move the needle. The only thing that I would disagree with your question is that in terms of market share, we're not actually losing market share when we look at the target segment, which is MSMBs. So market share was about flattish in the quarter. And if you were to look at a longer term window for the past twelve months, we actually gained, like, 0.1 or 0.08% market share. And, again, like I said, in terms of our plan, that's pretty much what was embedded in the plan.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

The plan embeds a 14% CAGR until 2027. So the expectation was always to keep a healthier pricing policy, focus on profitability, and not on growth at any cost. And I think the the final piece of the question in regards to the extent of the base that was already repriced, the vast majority of the base was already repriced. Last earnings call, I think the message that we provided was that in our Stone brands, pretty much all the repricing leave was was done. In the second q, we did the repricing in our Stone brand as well.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

Results were also really good when we we look at the churn levels versus the the price increases that we did. There are still a few waves to to be done in the second queue, but they are really small. I think the vast majority of the base was already repriced.

[Mario Pierry, Managing Director at Bank of America Merrill Lynch]

That's clear. Matthias, let me ask you then on the market share. As you mentioned, like your market share has been stable then. You used to be a story of gaining market share, right? How do you see your ability to grow your market share in the next couple of years?

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Mario, just to complement on Matteo's points regarding market share trends. The 14% implied CAGR in our long term TPV guidance does mean that we believe we will continue to grow above the industry and gain share, albeit at a slower pace than in the past. That's natural as we have achieved a significant level of scale and our presence in the MS and B segment. So I think that's the first message that we want to to really convey. So the net positive market share gains on a on a yearly basis, albeit at a lower level than historically, to us, is in line with our plan.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Now to your question on what are the drivers. Right? I think the drivers are really the continuation of the execution of our plan of bringing more solutions to our clients. So more and more, we believe that we have new levers to pull regarding how we address the pain points of our clients and how we actually price those solutions from a bundling and offering strategy perspective. So that's the first and I I would say most important element is the element of how we we believe we will continue to differentiate ourselves in the way that we serve our clients from a product, from an offering, and from a service perspective.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

I think the second important element, let's not forget that Stone is also about a big differentiator around our distribution capabilities, where more and more, we're driving the organizations towards a unified growth and distribution approach, really leveraging data and technology. So we wanna be, I would say, more and more assertive over time in terms of addressing the pockets of growth opportunities that we still see in the market. Like, the more scale we achieve, the more sophisticated we need to be. Right? So we need to have very clear visibility on granular market data and where the growth opportunities are.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

And by implementing a more unified go to market approach, really leveraging market data and technology, we believe that we still have opportunities to grow. So distribution is also an important part of the equation as it has always been in our business model. Thank you, Mario.

[Operator]

Our next question comes from Neha Agarwala with HSBC. You can open your microphone.

[Neha Agarwala, Analyst at HSBC]

Hi. Can you hear me?

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Yes, Neha. We can hear you. Hi.

[Neha Agarwala, Analyst at HSBC]

Perfect. Hi. Congratulations on the numbers. Just a quick follow-up on the previous, questions, and sorry to harp on that. What I I cannot piece together is expectation of further slowdown, deceleration in TPV growth.

[Neha Agarwala, Analyst at HSBC]

And I'll tell you why because you have already done the repricing in the one q already. So if there was a churn, you would see that more in one q. So and acknowledging that all the players in the market have been quite aggressive in terms of repricing. Everybody's pushing the pricing up. So why should volume decelerate in the MSMB segment in the coming quarters?

[Neha Agarwala, Analyst at HSBC]

That is something that I'm still not very clear about. Second question is on is on competition. Do you see, with players like Mercado Pago being more aggressive, growing very strongly in Brazil acquiring, also adding some salespeople on the ground, adding some software, moving up market. Do you see that, having any impact on your core MSMP segment? And, also, we we saw that Fiserv is entering Brazil.

[Neha Agarwala, Analyst at HSBC]

They did us a transaction recently. And, do you think that could be competition with, their offering of Clover? Could that be a competition on the software, side of the business that you've been trying to build out with the key verticals. So any thoughts on that would be very helpful.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

Anyhow, Matteo's here. I'll take the first part of how you piece together, TPV growth deceleration over the short term versus the repricing has been done in the first q, and then pass it over to Lia to talk about the the other part of the question. So on the first piece, two things here. So the first one is that when you think about the impacts of repricing, it's right that we did the majority of the repricing waves in the first queue, but they were done throughout the quarter. So in terms of the impact of churn, even though it's small, you have the full impact on the following quarters.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

Right? There's some lag. And the second thing is that when you talk about the TV growth generally decelerating over the medium to long term, it's not only about the repricing waves. I think the repricing waves are important in the short term, but not material when you look at the longer term. I think there is also a matter of the overall size of the business here, which again was already embedded in the plan.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

So given the size of the company, it's natural that on a percentage basis, the growth rates over the long term will be somewhat smaller. Right?

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Perfect. Maybe just to elaborate on on competitive dynamics, Neha, to on the question regarding global players entering the market, We haven't really seen, to be honest, any relevance of such global players becoming, like, important on the competitive dynamics. That said, we do monitor com competitive dynamics very, very closely and very, very granularly. Because of the data capabilities that we have through our operational platform, we can really understand what the local competitive dynamics is. So onto the second part of your question regarding local players, you know, deploying a similar distribution strategy as ours.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

I mean, we do see that in in some specific regions, in some specific areas. But it's, again, not very significant when we think about the SMB focus that we have, which is let's not forget that we're continuously moving our distribution approach upwards towards a specialist distribution that can really address the larger SMBs with a very differentiated service level and offering. So I think the message here is, yes, players are replicating our model. We are continuously running to stay ahead. And staying ahead is about how we evolve the model, how we use technology, and how we use data to be really precise on addressing where the pockets of growth are.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Regarding your point about products, we talked about this extensively in the investor day. We are evolving our stone solution to address workflow needs of our clients. That's going to be, you know, there's a pillar of software in the strategy, right, where we connect financial workflows with business workflows of our clients. We don't talk about this so much as being software, but Stone is evolving more and more towards being a software and a management solution for our clients as well. So and I think we have, you know, the advantage that we're very close to those clients already.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Our distribution covers 99% of GDP, and, we already have a pretty clear picture on where the market opportunities are throughout Brazil.

[Neha Agarwala, Analyst at HSBC]

Very, very clearly. Yeah. If if I can just follow-up on that. So I do understand that, the reason why Stone gained a lot of market share in the in the SME segment is because of the reach that you just mentioned and the good quality service that you provided. But what what Ricardo Pablo was saying that they're seeing very strong volumes, and that is because of the more comprehensive suite of products that they are providing.

[Neha Agarwala, Analyst at HSBC]

And one of that product is credit. Right? They are being quite active in terms of giving credit to the merchants, that are working with them. Do you feel that there is probably going to be more pressure, given competition to do be more active in credit? And do you see any risk in that sense, or do you see any pricing pressure coming, from more intense competition in the SMB space?

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

Yeah. I'll take the first part of the question, and then, yeah, may jump in to to complement. So

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

for

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

the for the pricing piece of the question, the short answer is also no. So when you look at the pricing environment, it's pretty much stable. And I think the repricing waves are a good indication of that. In the end of the day, I think there was a big worry, with market participants on whether the market was going to be rational with this interest rates increases. And I think what we saw pretty much for the industry as a whole was everyone repricing and being pretty much rational in terms of pricing.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

In terms of credit, I'll begin, and then Lia may add. It's true that credit is a very important piece of the equation. I think when you mentioned a few competitors that we're seeing, I think we're talking about different client profiles here. So in terms of our core SMB clients, with the average size that we operate, I don't think there are too many other players focused on our target niche. But, again, I I think the general concept that you provided, which is credit being a very important part of the the offering, is undeniable.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

And on that front, when we look at the progress on our credit book, again, the the there is a big challenge in terms of our long term plan. But I think if you look at the performance since the Investor Day, we're pretty much online or even slightly better than what we anticipated on that front. So that's progressing well.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Yeah. I I would have nothing to add, Neha. I think Matteo said it all.

[Neha Agarwala, Analyst at HSBC]

That's great. No. Very clear. Thank you so much for your comments.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Thank you, Neha.

[Operator]

Our next question comes from Guillermo Grispa with JPMorgan.

[Guilherme Grespan, Equity Research Analyst at JP Morgan]

The first question two questions on our side. The first one is related to net cash. There was a pretty decent decline in net cash, almost 1,000,000,000. I understand almost BRL 900,000,000 is going to be buyback. But all the rest, basically, the net income you generated in the quarter, you didn't convert into cash.

[Guilherme Grespan, Equity Research Analyst at JP Morgan]

And you explained the presentation, right? You put several balance sheet items that kind of dragged the cash conversion. But my question is more looking forward. I just want to understand if those items were one off of the quarter. And next quarter, if you print again, I don't know, $05,000,000,000 in earnings, we're to see $1,000,000,000 in cash generation is going to revert this cash conversion or if it's something that is going to last and you basically did not convert and it's not going to happen in the second Q.

[Guilherme Grespan, Equity Research Analyst at JP Morgan]

And then the second question is related to take rates. I just want to have your sense on how should we think about take rates net of funding cost into the second quarter. I think you have the benefit of repricing not having impacted the full quarter, right? So probably the gross financial income is going to move up, but at the same time the financial costs are going to continue to move up as a lead move higher. So just want to understand how you think about this net take rate already net of funding cost, if we should see it going up or down.

[Guilherme Grespan, Equity Research Analyst at JP Morgan]

And by the way, congratulations on the repricing. If it's worth anything, we appreciate more the profitability than market share. Okay? Thank you.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

Thanks, Giuseppe. Thanks for the question as well. So I'll I'll take both. The first one was around net cash. So I think you pretty much touched upon the the answer here.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

So when you look at the quarter, there were both seasonal and also seasonal effects and also some one offs. In terms of the one offs, we had some prepaid expenses related to our contract with Grupo Global. So as you may well know, this year, we were also subject to the contract agreements, and we're doing Big Brother Brazil and a few other shows. And most of the disbursement around this contract happened in the first q. And, also, when you look at the other balance sheet lines, especially the higher labor and Social Security liabilities effect, that's pretty much related to the payment of variable compensation, which happens in the first queue.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

And, again, when you look at the following quarters, we don't have both effects. So think the dynamics is similar to what you described, which is cash generation should be higher than net income, of course, excluding the effect of credit and buybacks. Right? The second question around take rates. So to to be really honest, I think we're looking less and less into take rates internally because it's becoming harder given the shifting lines that we have.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

You saw in the earnings release that we did a big movement in terms of, advancing with our cash sweeping strategy, which shifts lines between financial income and financial expenses net. So the metric that we're looking more now is, of course, adjusted gross profits. When you look at the adjusted gross profit in relation to TPV, then we saw an increase from the first q to the first q already. It came from 1.18% to 1.23, so a five bps increase. That was pretty much the effect of both the repricing and also some seasonality as in the fourth q, we have a higher mix of debit.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

When we look at the second q, given that the repricings were done throughout the quarter, we should expect some level of increase. But, again, we need to keep in mind that even though we have the full effect from the repricing waves, we also have a higher interest rates in the second Q as compared to the first Q. Right? So that's why it's not such a a big jump, but that's the general trend there.

[Guilherme Grespan, Equity Research Analyst at JP Morgan]

That's clear. Thank you, Matteos.

[Operator]

Our next question comes from Renate Meloni with Autonomous Research.

[Renato Meloni, Senior Analyst at Autonomous Research]

Hi, everyone. Congrats on the results here, and thanks for taking my question. So, just first on the your on your deposit, strategy. Right? So there was this big shift, compared to the last quarter on your time deposits.

[Renato Meloni, Senior Analyst at Autonomous Research]

Do you think you have achieved the right mix here? Or, do you still expect to grow, time deposits? And, are you still going to be reaping benefits, from lower cost of funding based on deposits here, or we're already seeing, most of it? Right? And then, just still on this, are you facing more competition from other peers?

[Renato Meloni, Senior Analyst at Autonomous Research]

We've seen some, higher yields, being, announced recently. So I wonder if that's, affecting your strategy and if you're rethinking anything there. And then just a quick follow-up on financial income. I wonder if you can break down how much of the financial income growth came from repricing and how much was just from the reclassification from transactional revenues? Thank you.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

Thanks, Anantum. I'll take the first and the last piece of the question, and then Liam may add on the competition side. So first, on the cash sweeping effects, I think it's worthwhile to give a little bit of a step back here on the strategy around deposits as a whole. So as we anticipated in the last earnings call, this first queue is started to really roll out the cash sweeping strategy, which basically consists on migrating our retail deposits towards towards, time deposits. Just as a reminder, whenever we do that, on one hand, we lose the financial income we have from the floating on our deposits, but that is more than offset by the gains that we have in financial expenses net because we don't need to use, other funding sources.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

Right? In terms of the quarter, this 6,300,000,000.0 is a big step in terms of the migration of the cash sweeping, but it's not the the end results. I think the remainder of the deposit base, the vast majority should also be migrated over the coming months as well. But in terms of the p and l impact, given that we did this migration towards the end of the quarter, the impacts on our p and l in the quarter were minimal, so really immaterial. And we should see the effects this effect on the p and l on the coming quarters.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

Just as a reminder, we lose a % of CDI on our revenue. We gain our cost of funding. So the net result should be around 75 to a 25 basis points per year that we gain on the amount of deposits that we migrate. And with that, I think you can make the math on the impact on the p and l going forward.

[Renato Meloni, Senior Analyst at Autonomous Research]

Okay.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

The

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

second question, I think, was on financial income, if we can break down the effects of the the bundling. Again, I think that the message here is is pretty similar to the take rate question, which is it's really hard to break down because there are too many moving pieces now. We had the migration between transactional revenues towards financial income, but we also have other effects. Right? The credit portfolio growing, the cash sweeping strategy.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

So I think the best way to understand is not on a line by line basis, but rather looking towards the combined, gross profit or the combined revenue streams.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Perfect. So let me just complement the question, your on your question around competition. I think almost every week, we see new offerings regarding, investment products in the market. So it is a very dynamic space, I would say. But our take and we have tested ourselves different offerings as well and tested conversion and elasticity.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

What we observed what we observed is that for our client profile, which is a merchant, the investment product is important, but very much from the perspective of of saving for specific purposes. Right? So, you know, normally, you know, these promotions, they will tend to be more impactful when we talk about consumer banking and less on business banking. So, I mean, nothing really new. We we we have ourselves tested different offerings.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

And from our perspective, the really important aspect of this offering is to give our clients the opportunity to save for different objectives within the Stone ecosystem. That's much more important than the actual spreads.

[Renato Meloni, Senior Analyst at Autonomous Research]

That's pretty clear. Thanks, everyone.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Thank you, Hana.

[Operator]

Our next question comes from Danielle Vaz with Safra.

[Daniel Vaz, Lead Analyst - Equity Research at Safra National Bank]

Congrats on the results. Two on my end. I think about the repricing during the quarter, you did several adjustments, right? So you arrived in a higher take rate from that. But I want ask if it's fair to assume that you should still increase take rates in the next quarter as we would see the full impact from the repricing, right?

[Daniel Vaz, Lead Analyst - Equity Research at Safra National Bank]

Probably you did part of on January, part on February. So wanted to take the full impact from the repricing on the next quarter if it is positive. And if also, is there any adjustments on any specific niche of customers that you would do? And the follow-up to Renato's question and Mato's answer about the net positive effect, right? So you have potential lower floating revenues and lower funding costs.

[Daniel Vaz, Lead Analyst - Equity Research at Safra National Bank]

Can you give us a color about this conversion you already did in the first quarter if has any positive effect already? Or should we expect that from the second quarter going forward? Thank you.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

Hey, Daniel. Thanks for the question. So the first one around the effects of repricing, you are writing the concept, which is we need the repricing waves throughout the first queue, so the full effect will be felt on the second queue. Also, a small reminder on that end is that we did the full repricing waves for the stone product in the first queue. On the stone product, they were done throughout the second queue.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

So there will also be some leftover for the third queue as well. Again, in terms of the metric, we're not looking at take rates internally anymore. The metric that we're tracking is gross profit, versus TPV. And on that front, the message is the one that you just said, which is given that the full effects will be felt on the second queue, there's still some, room for improvement there. The second part of the question, just to make sure that I got, I think it's whether the effects of the cash sweeping were significant on the first queue or whether we should, feel those effects on the second queue.

[Daniel Vaz, Lead Analyst - Equity Research at Safra National Bank]

Yeah. That's

[Daniel Vaz, Lead Analyst - Equity Research at Safra National Bank]

it.

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

Yeah. So on that front, even though we did the migration of a significant part of the deposits on the first queue, they were done really towards the end of the quarter. So from a p and l perspective, we had a minimal impact in the first q. Most of the benefits will also be felt, from the second q onwards.

[Daniel Vaz, Lead Analyst - Equity Research at Safra National Bank]

Right. And and I I believe that you you mentioned about 20,000,000 for every billion conversion in the last quarter. Is it is it right? Like, pretax benefits?

[Mateus Scherer Schwening, CFO & IRO at StoneCo]

Yeah. It's from 75 to a 25 basis points over the volume that we migrate per year. So if you do the math, it's it's pretty much around those levels.

[Daniel Vaz, Lead Analyst - Equity Research at Safra National Bank]

Okay. Thanks again.

[Operator]

Our next question comes from Marcelo Mizari with Bradesco BBI. You can open your microphone.

[Marcelo Mizrahi, Equity Research at Bradesco BBI]

Hi, guys. Congratulations for the results. My question is related to the volume. So in conference calls of many companies like Visa and some malls. They were refer about the impact of Easter on their volumes of sales.

[Marcelo Mizrahi, Equity Research at Bradesco BBI]

So my question here is to understand the impact of Easter in the PPVs and volumes of stone during the first quarter and the potential impact on the second quarter. So could you give us some color about the volumes year to date putting April together with the first quarter or some color about that? Thank you.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Hi, Marcel. Thanks for the question. So no specific trends on our side. I think that possibly has to do with the profile of the client base. When we talk about overall industry, there's a big proportion of volumes that come from large retail that we serve very minimally.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Right? So we we I think no specific trends to highlight there.

[Operator]

Our

[Operator]

next question comes from Thiago Paola with BTG.

[Eduardo Rosman, Analyst at BTG Pactual]

Hi, everyone. Thanks for the opportunity here to ask a question. I have one on credit front, maybe a follow-up of another question made previously. We just saw another quarter of very strong growth in the credit portfolio, I mean 20% on a sequential basis. So my question is really about better understanding the competitive advantage you believe Stone has in this segment, especially after the restructuring phase the product went through.

[Eduardo Rosman, Analyst at BTG Pactual]

Matthias mentioned that the niche that Stone is targeting could be slightly different from other peers. But just trying to understand how do you believe your approach or your underwriting model differs from other players who might be offering similar products to to a similar client base? And what you consider to be your structural advantage on this front to support your 2027 guidance are committed to on the credit portfolio? Thank

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

Thank you, Thiago. Let me elaborate a little bit, taking a step back and talking about overall credit strategy. I think I'm going to address some of your points in this answer. So first, I think there's two pieces two important pieces that are somewhat distinct within the credit strategy. First, regarding our longer duration working capital loan, This is really the product that we have developed and and perfected and and continue to evolve over time to serve the needs of our small and medium clients, so the larger, more sophisticated SMBs.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

And while we continue to pursue growth there through a digital approach, we're incrementally investing in what we call our credit specialist distribution. So part of the specialist distribution is focused around credit. So this really has enabled us to make the right types of offer for those larger SMB clients. Again, on the product experience, I think we've talked about this many times. It is, very differentiated for for an SMB because, they repay really according to their sales.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

So this alignment that the product provides, I think, is a differentiated aspect that we have observed since the beginning of our credit offerings. So I think we continue to be optimistic on the growth trend there. And when we look at the portfolio growth, that is the big driver of growth, right, that we have observed. But there's a second part to the credit strategy that is less mature, more recent, that we're also seeing very positive results. And I think there's a lot of work to do, but and it's really regarding addressing what we call shorter duration credit solutions.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

They address address different types of needs of our clients. For example, when we talk about credit cards that we are scaling, although, you know, at still less mature levels than we compare with working capital loans, This this product is much more suited for micro clients. They have more consumer like needs. So I think there's a lot for us to do on the credit card side, and it will address more the the base of the pyramid when we talk about the profile of clients. But even when we go back to our SMB clients, we have seen also very positive response from our clients in terms of the offerings of products that we have developed around shorter duration products that we have developed around fixed rails.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

For example, helping them pay suppliers, giving them more terms or some short term loans to pay suppliers or even overdraft solutions. So there's kind of a a group of shorter term duration products that we are developing for for SMBs as well. So I think the message is there's a lot to do. We'll continue to be optimistic about our long term guidance, and the differentiation really will be about the way that we offer the product, the product experience itself, and our distribution approach.

[Eduardo Rosman, Analyst at BTG Pactual]

Perfect. Thanks, Aliyah. Thanks very much.

[Lia Machado de Matos, Strategy & Marketing Officer at StoneCo]

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 StoneCo, for final considerations.

[Pedro Zinner, Chief Executive Officer at StoneCo]

Well, thank you very much for you all for participating in our call. Hope to see you again in the next quarter. Thank you very much.

[Operator]

This concludes today's presentation. You may disconnect and have a nice evening.

Participants

Executives

• Pedro Zinner, Chief Executive Officer
• Lia Machado de Matos, Strategy & Marketing Officer
• Mateus Scherer Schwening, CFO & IRO

Analysts

• Tito Labarta, Vice President at Goldman Sachs
• Mario Pierry, Managing Director at Bank of America Merrill Lynch
• Neha Agarwala, Analyst at HSBC
• Guilherme Grespan, Equity Research Analyst at JP Morgan
• Renato Meloni, Senior Analyst at Autonomous Research
• Daniel Vaz, Lead Analyst - Equity Research at Safra National Bank
• Marcelo Mizrahi, Equity Research at Bradesco BBI
• Eduardo Rosman, Analyst at BTG Pactual