Q3 2019 Earnings Call

Good afternoon, ladies and gentlemen, thank you for standing by welcome to the Stone Company third quarter 2019 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 at www dot.

Stone Dot CEO on the Investor Relations section.

Throughout this conference call the company will be presenting non I ask are asked to financial information, including adjusted net income.

An adjusted free cash flow. These are important financial measures for the company, but are not financial measures as defined by the <unk> Rs.

Reconciliations of the company's Don I F. R S financial information to the <unk> financial information appear in today's press release.

Before we begin our formal remarks, I would like to remind everyone that today's discussion. It might include forward looking statements.

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.

Please refer to the forward looking statements disclosure in the company's earning release press release.

In addition, many of the risks regarding new business are disclosed in the company's form 20-F as filed with the Securities and Exchange Commission.

<unk>, which is available now at Www Dot S. E C. Dot Gov. Please note. This event is being recorded I would now like to turn the conference over to your host Rafael Martins Investor Relations Officer at Stone. Please proceed.

Good evening, everyone and thank you for joining US today, joining me on todays call Archie I would be all our CEO Marcel about Dean CFO and Liam Atlas Chief strategy Officer on this call will present, our operational and financial results for the third quarter and give updates regarding our strategic progress and solutions.

Ill pass it over to T. I want to share with you our main highlights in strategic updates geography.

Thank you all file and where do you have any everyone. Thanks for joining us today.

We will start by going through our main highlights as seen in the slide three and will follow with more detailed the date whenever resorts in the third quarter.

We have continued to deliver very strong results why we're moving fast you know strategic roadmap.

Help me or merchants managed their business better having access to financial services and I'm more seamless interest bearing weight and providing them with the best Christmas service of Brazil.

We have continued to grow fast both into hubs and indeed, <unk> integrated partnerships with TPC. Additionally, in hubs accelerating quarter over quarter.

We posted record net adds of almost six 9000 clients in the quarter, reaching a total active client base of 400 in 29000 merchants, while maintaining strong levels of profitability.

We delivered over 62% growth in revenue and 126% growth in adjusted net income.

Oh that with comparable take rate of one point 88 in the quarter in margin above 30%.

These results show was that we are on the right correct you noticed strategy to be the partner of choice for clients, providing them with the best value proposition.

We have been able to grow we're maintaining our differentiated service levels in sales logistics and got some service.

Logistics, our Green Angels delivered the Pos on average in less than one day, we for nine 9% service level agreement.

Good from a service we have been able to answer our calls on averaging less than five seconds with 95% of calls rate. It is excellent and we sold were quite issues in the first call you 82% of the cases.

We keep our team, 100% driven by obsession over clients and as a results demonstrate this mentality pays off.

We have also seen significant advancements in our solution beyond payments.

We have already disburse it over 185 million in CRAD to over 13000 clients offering claims a fortress button solution and we don't necessarily bureaucracy.

In banking, we have reaching a total of 29000 open accounts, having recently launched at the marketing campaign, introducing the prepaid card. In addition to the digital accounts.

The integration of for financial solutions acquiring banking in credit you know unified platform is already in pilot mode and is expected to be launching in the first quarter of next year.

Finally, our software solution client base has reached the mark well over 100000 clients in the third quarter.

We have to approximately 70000 in July having added over 30000 clients organically in just two months.

How did that it grouped oh the landmark recruiting program has reached almost 110000 applications in 29 team, making it one of the largest recruitment process in Brazil.

Regarding your partnership with global we have made great progress in many fronts in preoperational aspect of the business.

We have already defined it they knew brand to operate in the micro merchants space and expect to start operation to first quarter of 2020, we remain very excited to address this opportunity.

Going on to slide four we have just celebrated one year anniversary a four IPO.

We're very proud of the accomplishment off our team who have helped the daughter company not only grow but become better every day.

We have scaled fast growing your client base by 82%, surpassing 115 billion in CPV over the last 12 months.

Combined it with growth we have also improved our profitability, reaching an adjusted net income of 738 million in the last 12 months, we've not just the net margin over 30%.

Our two adjusted net income of 208 million re ice and a margin of 16% in the last 12 months prior to our IPO.

Finally, our take rate improvement by 11 basis points to one point 87 in the last 12 months as we continued to grow our SMB client base.

As you can see in its like five over the last year, we have had to continue focus on three areas.

The first area is developing new solutions to our clients that go way beyond merchant acquiring.

We had no grad offering and now we have 185 meter realities disbursed.

We move blade the number of softer clients by more than 10 times and have reaching almost 30000 stone banking accounts.

The second ever a focus what's the attraction of more and more balance to the company.

Recruit a program, which had 29000 applications one year ago had close to 110 10000 applications in 2019.

Finally, we have focused on improving even more our customer service metrics you have one at a much larger scale.

In this one year anniversary of our IPO, we would like to see a big and warm. Thanks first to our clients that trust our team inspiring every day to go further.

Second to our wonderful team that fight everyday to become better and better it really see all remission in culture as a way of living and finally for long term partner then investors that have supported us throughout the years and just like US are confident in the future that we're building.

Now that we have gone through the main highlights so far a business I'll pass it over to have failed to talk in more details about the evolution or payment business.

Thanks, Joel I will start to buy given an update on our payments business, which you can follow ones like six we're very pleased to report acceleration in client additions with both strong TPV in solid take rate levels in the second and third quarters, we have been investing more in the operation. So we can bring to our solutions to.

A more and more clients in the third quarter, we have accelerated our net adds reaching a record of 68.7 thousand compared to 50.5 thousand in the prior quarter, we have grown our active client base across all regions in Brazil, and although SMB clients represent the vast majority off the growth we have also been growing.

Our bayes of clients in both digital and integrate partnerships.

It's important to highlight that this net addition acceleration came almost entirely from SMB clients as micro merchants using our study mice product added only 4.6 thousand clients in the quarter for a total base of 15.6 thousand active micro merchant clients when launched we expect the partnership with low.

We will enable us to Buda solid business, you know micro merchants space.

Our TPV grew 50% year over year into third quarter of 2019, a solid growth despite tough comparable into third quarter off 2018 into hubs. TPV addition has accelerated quarter over quarter and in digital and integrated partnerships, which are many large accounts, we had lower quarterly TPV addition, when compared to this.

Second quarter.

Compared with our main payment peers as you can see in the second chart. We are the fastest growing company in terms of TPV growing across all Brazilian regions.

Regarding take rates, our actual take rate was one point, 91%, where we had three basis point positive effect from client lifetime upward revision.

According to our air France, 15, we have to account for subscription revenue over the expected life of merchants on a leaner basis and assumptions for it linearization must be reviewed annually. The upward revision of lifetime of merchants have been contributed positively to take rate this quarter.

This regarding does affect our comparable take rate was one point, 88% up three bips compared to the prior quarter, mainly explained by stronger makes up clubs compared to digital and integrated partners.

Now that we have been through the main dynamics of our payment business I'll pass it over to leave so she can provide some details on our new solutions beyond payments.

Thanks half a that's Jabil mentioned, our credit strategy has evolved a lot since our last reported results. The number of client who use our credit offerings has increased from 3.4 thousand in July of 2019 to 13.4 thousand in October almost four times higher over three months regarding.

Disbursement, we have reached over 185 million he eyes in October compared to a little over 50 million in July with average ticket since inception of about 14000, he ice and the mid single digits delinquency rate.

As you know we had been giving credit to all third party partnership in a profit sharing model and intended to do a small pilot with our own capital seemed to have an S.C.D. license and more recently a few dig structure in place. We're now able to give credit on our own. We have just began a pilot disbursing around 55 million <unk>.

Our long capital and we have been continuously improving our proprietary credit scoring.

But just to be clear as geography has said many times before in our previous earnings calls, we don't intend to maintain significant credit risk in our balance sheet. This step we're giving now is the implementation of mechanisms that enable us to factor out the risk we my take on oral.

After we have that step fully implemented we intend to enter a phase of scaling the credit offerings.

Another important aspect about keeping credit is that we have being able to be very diligent and responsible in the way that we deal with this new initiatives. We continue very optimistic about the credit offerings, but we remain focused on maximizing returns with minimizes risks.

Our digital banking solution has also shown good traction as you can seems like eight the number of opened accounts has increased from approximately 10000 in July 29000 October with increasing engagement from client.

For example, the number of what it translates spur account has increased by 50% from the second quarter of 19 to the third quarter of 19, and the number of Bulleit. The speed by account has increased by 130% over the same period.

Both the stone account and the prepaid card were launched nationally in the campaign released in the end of October .

As we can see slide nine although currently our requiring banking in credit solutions are offered separates from each other we're very focused on integrating them in one single financial platform, which will make it much easier for our clients to use each of our solutions.

As we already presented in the last quarter's presentation. Our vision is to provide a single platform for merchants to solve all of their needs such as being bills, making wire transfers, taking a credit line controlling their cash flow among other things.

This platform will be supported by stones unique service levels and distribution.

We answered the phone on average in less than five seconds with the human nice customer support and have agents hours away from the merchants doorstep in case they needed we expect to launch our fully integrated platform in the first quarter of 2020.

In slide 10, we moved to our softer strategy update as you can see we continue to increase our client base as we roll out our reconciliation and CRM loyalty solutions as a result, the number of subscribed clients rose from approximately 70000 in July to over 100000 by the end of.

Third quarter.

As we increase the number of softer clients. We have also achieved significant increase in client engagement, which is an important metric for us to come from the value add of the solutions we provide.

As an example, the number of Axis is to our reconciliation platform for client has increased by 50% from the second quarter of 19 to the third COVID-19, and the percentage of heavy users of our CRM and loyalty solutions has doubled in the same period as seen in the charts on the right.

Yeah acceptance of our software solutions has been encouraging and we continue to work hard to strengthen our value proposition by providing more and better solutions to our clients.

With this I will turn it over to how fail to go through our financial results.

Thank you Leo as you can see on slide 12, we have reached the total 429000 active clients with a record. Net addition of 68.7 thousand in the quarter of which only 4.6 thousand are related to our study mice product for a micro merchants.

We also achieved 50% year over year growth in TPV with accelerating addition of TPV into hubs quarter over quarter.

Total revenue and income for the third quarter of 2019 increased by 62% year over year to 671 million Reais <unk> compared with 414 million reason to third quarter of 2018.

On Slide 13, you can see our complete Biennale for the quarter cost of services were 112.5 million realized for the third quarter, 39% higher compared to the third quarter of 2018.

Cost of services as a percentage of total revenue in income was 16.8% and efficiency gain of 2.7 percentage points over the prior year period, mainly as a function of lower provisions and losses efficiency gains in human resources and Brent fees.

Compared to the previous quarter cost of services as a percentage of total revenue and income reduced from 17.2% to 16.8% mainly explained by lower provisions and losses and Brent fees.

Moving on administrative expenses were 71 million rights in the third quarter of 2019 up 15% year over year administrative expenses as a percentage of total revenue and income was 10.6% into quarter 4.4 percentage points lower than the previous year asked the company gains operating leverage from its personnel.

And to see lease expenses.

Compared to the second quarter Afinion 19 administrative expenses as a percentage of total revenue in income decreased by 2.6 percentage points explained mainly by lower third party services expenses as well as lower travel expenses as into second quarter of two any 19. The company hosted its annual sales convention.

Selling expenses grew 103% year over year, reaching 100 and to me livery ice in the third quarter of 2019.

This increase was primarily due to higher personnel and marketing expenses compared with the second quarter opinion 19, selling expenses increased by 0.3 percentage points as we continue to hire new salespeople and invest in our operation.

Financial expenses were 101 million realized 21% higher than the third quarter off 2018 financial expenses as a percentage of financial income fell from 39.3% in the third quarter of 2018% to 30.2% in the third quarter of 2019.

This decrease resulted from lower cost of funds due to lower base rates cheaper funding lines and the use of more on cash to fund the prepayment operation combined with higher financial income when we compare to the previous quarter financial expenses as a percentage of revenue increased from 13.4% to 15.1% mainly.

Due to higher mix of third party capital to fund the growth in prepayment business.

We have many attractive funding alternatives that we contracted throughout the year that we have been using to fund this business.

As you can see on slide 14, our third quarter. Adjusted net income was 202 million right with the margin of 30.1% compared with 89 military ice in a margin of 21.6% in the third quarter of 2018.

The main factors that contributed to the growth in adjusted net income year over year. We're an increase in total revenue and income operating leverage in cost of services and administrative expenses and reduce cost of funds as we gain access to cheaper funny increased the use of owned cash to fund the prepayment operation.

Compared with the second quarter Australian 19, our adjusted net margin was three percentage points lower explained by lower than usual tax rate in the second quarter combined with stronger mix of funding towards third party capital to fund prepayment in the third quarter of 2019.

Finally on slide 15, we go through our adjusted free cash flow, we have generated 41 million realities of adjusted free cash flow into third quarter of 2019. This cash flow generation was lower than in previous quarters due to higher capex, which is mainly related to advanced payment of 100 and to me Annemarie ice to suppliers of Pos that enabled the.

Company to benefit from more favorable commercial terms would that sat operator, please open the call up to questions.

Thank you we will now begin the question and answer session. At this time, if you would like to ask your question. Please press Star then one on your Touchtone phone.

If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw the question. Please press Star then too.

Our first question Jay will come from Jorge Kuri with Morgan Stanley . Please go ahead.

Hi.

Congrats everyone on the numbers and two questions. If I may the first one is on a.

On on the TV before the quarter.

Can you help us understand.

To what extent the.

The addition of a record number of planes are still needs to be reflected in TPV sort of what what level of backlog do you think you're building open TPV. How did the clients were added during the quarter do have a disproportionate amount of pioneer added at the end other quarters. So we should expect them to start contributing more to.

Words.

The fourth quarter of the year.

And beyond the second question is on a on a subscription.

Rental homes official subscription, sorry, which and did pretty well and.

It was all Buck warning to my numbers up 16% or not productive merchant basis.

You know to what extend this is a success in monetizing some of the non <unk> some of the software and other products or do you provide or is it just you know much better.

POS business given the growth in merchants. Thank you.

Hi hole here. Thank you for questions. The great question. So let me start with some comments about TPV and then we move to these subscription revenue line. So first regarding TPV you were right. There's some effect of the sharp increase in that adds that resulted in some clients not transact.

The fourth quarter.

And there's some effect of the growth in the countryside of Brazil true.

And we expect a ramp up of that TPV over the fourth quarter. So you're right and overall comments regarding TPV is that we are growing TPV very fast on a quarter over quarter basis, So you'll see that the quarter the growth from the first quarter two the second quarter was a little bit bigger.

Then the growth from the second quarter to the third quarter and and to see <unk> do you have to to split this.

Different dynamics, one is digital channels integrated partnerships and we'll talk a little bit about this and the hubs. So when you see digital and integrated partnership channels. So we are growing faster every quarter, but these in the in this third quarter. We saw some pressure in the very big accounts in terms of.

I see impression of the incumbents, so that's why the growth.

In the third quarter in the big accounts are a little bit.

A small.

Smaller than the girlfriend and the first quarter to the second quarter.

So there's some some.

Volatility in the Big account operation, we made some adjustments in the way that we had two key accounts. So we already have bottomed that growth volume back now into Fourq water. When you talk about the hubs. Then we are accelerating growth every quarter, so we accelerating growth and the hubs again.

Mainly because of how power for a business model with in the SMB and how far would these hub strategy is very happy with the growth in the hubs and there is one very important information that when you when you see TPV churn in the hub in this third COVID-19, we are actually battered.

Then in the third quarter off last year, so our TPV churn at this point is better than what we had last year should the this is very positive in terms of showing the strength of the hub strategy.

And regarding the subscription line that it's your second question. So our strategy here is to protect the subscription revenue changing the mentality from the rent, though so the service levels that we offered the value proposition of service that you would that be offer towards our to our clients. We have the combination of this.

Softwares, So I think that this combination of service and softwares protect this line and as you can see results are pretty good so.

How do you want to add.

Yeah, a hard just to add to be Al's comments on the TPV. If you looked at TPV per merchant if you'll see the net adds in the quarter divided by total total active base you see that the new clients, they're more representative now than they were the previous quarter that means that you have more clients, they're not transacting to full quarter right. So it does.

Obviously has an effect because that does usually have they have half of the TBV right because they are not contributing the football so just to add to that point.

Because typically it's important to highlights that the average TPV into hubs is closer to 20000 realize amount.

Compared to the average for the company off 25000, so as you grow more into hubs you have this effect of mixture.

Alright. Thank you very much further detail explains our congrats again.

Thank you sorry.

Our next question will come from Tito Labarta with Goldman Sachs. Please go ahead.

Hi, Good evening. Thank you for the call also a couple of questions I guess on the take rate just understand it because it was to go up a little bit too is that a function of the mix improving as you mentioned you had less growth with the integrator partners in the digital accounts. So is that what that would help the take rates a little bit I guess also thinking about that given.

The competitive environment, you know if you were maybe more aggressive and had a lower take rate would that have helped you volume growth at all so just wanted understand the dynamics, we think competition and pricing and also the mix as much as you have and then the second question in terms of expenses right. We did see some operating leverage you continue to grow selling expenses quite a bit.

Administrative expenses kind of held up so is that what we should continue to expect will you continue to grow the hubs is a lot. So does that mean margin.

Any kind of stable from where we are now just how do we think about expenses and margin going forward. Thank you.

Thank you.

Hi Fi all here. So regarding your first question of take rate you're right. So the main reason for these lighting present take rate was the mix so more hubs.

Then the big accounts in the digital and integrate partners. When you look only at the hubs, where it seems stable take rates so that slight increase look mainly due to that right.

Regarding your second question is up margins at this this quarter in that in the selling expenses. We did some experiments in terms of marketing and business contributed a little to that.

Lane as well.

We're not providing specific guidance regarding margins, but we think that at the current margin levels that we have they aren't sort of ballast with the growth that we intend. So you shouldn't see big moves in terms of margins.

Going forward and departure.

I just had two comments so two to two comments here about decreased and the combination of secrets and indeed TPV. So keep in mind that we had the highest TPV growth.

In the industry here among players and we're the only player with increasing take rate in this competitive environment. So that's something very important that proves how stronger business model is we're very proud of that so we are seeing no changes in terms of take rates trends. So far we have stable take rates.

In the hubs and there is mix that helps a little bit. This this trend that you are seeing here.

And.

Unfortunately pricing is a very very strategic partner for a business. So we do not give much information about this but the numbers show that we are learning how to handle price offenses over the incumbents with different products and how we can see our clients. We fall lifetime value perspective, so we can be a little.

With more flexible when we have more lifetime of our clients. We are less flexible when we understand that the lifetimes not so big so we learned how to use different products and how to see lifetime value of the clients and that's why you would have the highest TPV growth in the industry and went and we're the only per player increasing take rates so very proud.

Out of the business model and the way that the team is executing this.

Great. Thanks very helpful. Just couple of quick follow up though so just understanding the take rate just maybe kind of conceptually, but if you work to be a bit more aggressive in pricing do you do you think your growth would be faster and I understand that's probably not your strategy, but just want to understand like how much pricing is potentially.

In a role in the deceleration we seen in volumes and then on the second question on margins.

Given all the investments you know probably not in the next few quarters, but longer term is there room for some margin expansion as you realize the benefits of these investments just maybe thinking a bit longer term on the margin.

Yes, so so to your first question. So we keep our ore mined here, 100% focus and value proposition and be obsessed with the work line. So at this moment, we think that the combination of growth in terms of net adds.

The pricing pointed we are using the margins that we have we believed that we are an optimal point year. So there's no no big change to do we want to keep profitability you keep in mind that we bring dizziness, if over the long run and the value proposition that we offer for our clients.

Is what we are charge in terms of take rates. So we're we're happy with the level of pricing that we haven't does Mormon and yes in the future. We expect that we can have more operating leverage the credit products. It's a very profitable one so keep in mind that we are investing many fronts offer a business at this stage so.

We are investing our banking products and the banking operation on the softer on the credit product and credit, scoring and all that that operation. We are invest even further in the hubs and we have very healthy margin. So this balance between the value proposition that offering the growth in terms of net adds in TPV.

The take rates, we think that we have a good balance between those metrics and we want to keep this kind of mentality of thinking about value proposition and be obsessing over our clients.

Okay, great. Thank you very much.

Thank you.

Our next question will come from Daniel Cinderella with Credit Suisse. Please go ahead.

I think very much my first question regarding prepayments you can see into the contribution from prepayment going up my question is how much room.

They are used to to continue penetrating.

Clients Weve prepayment and the second question regarding the mix between as semi in micro merchants, how should we expect that mixing like Q3 years from now. The this the me is expected to continue to do most relevant portion of the company or the micro merchant segment could gain a good share in the mix of.

Thank you very much.

Hi, there any out Jago. He was speaking thanks very much for your questions is a great question.

Very difficult to talk at this point about.

Makes between micro merchant and the SMB. So we are 100% focus.

On the SMB operations our corporation. The JV that we are starting with global that will be operational and to begin your first quarter is a new venture. So when we don't have much you see on that so we made advancements in terms of pre operational details such as definition of the brand products to acknowledge the.

People organization that we will use as well as we're defining the media plan with global what do you still too soon to say about how relevant that will be when you compare to the overall business, we keep 100% focus on the SMB that's our.

Our main core so we expect to keep the SMB as the quarter of the business in Armenia operation. So so that's.

The second question is regarding how much prepayment can go forward the right. So keep in mind that with this mix that we have more and more clients from for the Smbs declines off the SMB that pre pay a lot. So I think that when you think about duration.

And the pricing that we have in this product.

We are in the good point, but as we put more SMB clients through the hub operation.

You have this level of increase that you are seeing we expect to keep this trend.

As of the prepayment line and as we roll out the credit then we can be much more profitable because if you compare.

The pricing point from credits in prepayments on CRAD, we can charge almost doubled the price that the charge in the prepayment operation and we still price below the big banks. So there was a good opportunity here to have better margins in the credit product.

Offering better priced war.

Clients. So that's a win win when you compare our project against the Big Big banks, and so I think there's room to improve profitability in the way that we help merchants to get to fund their appreciation for the CRAD broad.

Great thank very much.

Thank you Daniel.

Our next question will come from Craig an hour with autonomous. Please go ahead.

Yes, hi, thanks, Great merchant number.

Wanted to ask couple of questions. So on the.

Just trying to forecast ahead TPV growth as we think about the TPV per merchant of new merchant to come on recently versus existing did I understand you correctly that you expect the run rate versus the average of the company to be about.

20% lower on the new merchants versus the current average.

Second I just wanted to understand the interplay the take rate a little more.

Am I correct in hearing you that you're saying there's pricing pressure at the larger merchants plus the integrated.

Players, but you're able to hold the line at the SMB. So therefore mixes what's keeping you stable on the take rate and then lastly, all could you talk about overtime, how we should think about the marketing and selling expenses as you pursue the micro merchant segment.

Where cost of customer acquisition is extremely high thanks.

Hi, Craig Rafael here. Thank you very much for the question regarding our first question of that TPV per merchant, what Chuck said is that in the hubs. The TPV Bremerton disclosure to 20000 realize if you'll see the average of the whole company today is around 25, so as you add more merchant seem to have.

Ups you'd have to have that affect decreasing that TPV per merchant, but overall, the incremental tpd per mertens not necessarily the 20000.

If you if you'll see the into hub themselves. The incremental claims are likely smaller because you're going to the countryside. So usually.

Have slightly smaller clients then the base into hubs, but but there is more but we are growing faster and that's why you have this acceleration of growth in the hubs and that's a very positive effect.

Yes, and to your second questions regarding the take rate in a dynamics between that a big accounts and the hubs. That's right. So you have more pricing pressure pressure in the in the big accounts and that digital in the integrated partners.

In the hubs, you'll have a flattish take rates, but overall as the mix of hubs increase you have the positive effect of the three bips a comparable increasing the take rates. So this was the dynamics that you see this quarter.

Regarding your third question of marketing and selling expenses for the micro merchants.

Usually if you were completely right. So the dynamics of cost of acquisition is totally different is a different different go to market strategy do too early for us to tool to mention about that we do intend to have very competitive.

Cost of a position and that's one of the reasons why we are bringing the know how global tool to that dangerous. So we can be efficient there and overall, we are try we'll try in the future tool to disclose as much as possible to the market. So you can see the differences between the dynamics and the two businesses.

But we do intend to have.

A very strong dynamics, there if you compare to that that market right.

Okay. Thank you.

Thank you very much.

Our next question will come from Mariano today with UBI S. Please go ahead.

Hi, Thank you.

Okay. My question. My question is on the credit business.

Ladies and Italys made a single data and enough I question before that rates are almost double the prefunding rate I wanted to spend a little bit better what is that the ratio if they're on the percentage of the monthly.

I see that motion and they feel code.

Give more color on the.

Also please.

Credit and the cold they show rate I understand that steel ill have a pre approved credit line.

For the motion and why did the coalition ratio.

I'll lead off those machines.

The the credits you all set thank you.

Hi, My Deanna Leah here, so just a few.

Numbers regarding our credit offerings. So the race on varies between six and nine months and the average.

Size of of the credit offering is 14000.

The main channel strategy that we use here is our our clients can actually order credit to the portal. So we implement this spring approval process and it's a pretty unbureaucratized process for our clients Gorder credits, it's all done through our digital channels.

And just to make sure that VR information about how we think about the rule roll out of this product. So at this point, we'd builder proprietary credit engine. So we are testing or proprietary credits engine it'd be a very responsible about npls. So we have this.

Mid single mid single digits Npls.

Or the level of credit that we are offering the digital channels.

As our reports on our app or the better channels at this point and once we see that we have the full operation affect me out these receivables of the credit operation, we can get more scale in the credit Board product, then we will roll out the hubs and roofing betting that point, we will be get much more scale in terms of these credit.

Broad so stage one wants to use a 35 partner to bear entirely the risks. So we're only focusing on origination and we saw that ortho app and hubs worked pretty well then we started to put a little bit of our own capital.

Start to use your own CRAD aging.

We received the license off the S. C. D. Now we are starting to see how would you operation works with arranging Rs is the license our credit notes next phases to affect routes. This receivable through our balance sheet, because we don't intend to bear the risk of the product and once we.

Finish. This step then we will roll out the credit product throughout the hubs, but we're doing this on a very diligent way, we I think a lot of what they should it wouldn't be ALS and we think that this project will be something very important for us in the medium term.

Thank you.

Thank you might Hannah thinking about China.

Our next question will come from the Rayna Kumar with Evercore ISI. Please go ahead.

Thanks for taking my question.

It's really good to see that net merchant number in the quarter can you continue to increase net margin at the same pace you did this quarter.

Secondly, could you call out how many hubs you now have and how we should think about the white space left to add hubs from here.

<unk>.

Hi, Ryan Chicago here. So, yes, we have the ability to keep growing this our base of net adds a combination of investing more in the hubs in key operational efficiency in terms of churn control. So we expect to continue to grow old net ads.

On 2020.

And as we said, we expect long term growth in terms of our hub strategy here and we're proving this on our results.

Every quarter. So can you could you. Please just repeat the second question. Please I think it was in terms of a number of hubs. So we continue to open hubs in the same base that we have mentioned before we have over 300 hubs.

So far in recover more than 2000 Cds in Brazil, we don't see this space slowing down and we still see a lot of opportunity to continue to grow in terms of both a further penetrating the hubs that we are already in and opening new hubs on a regular basis.

Right.

So on a weekly basis, so as Leo said less than where we said that we have a little bit over 300 hubs.

Back to have two two and 19 was something around 400 hubs in our operation and this base of open hubs. We continue for all 20 to 20.

Let me just adds to a point.

We see our ability to increase net adds very strong.

Just a seasonality factor usually in fourth quarter, it's not usually as high as it could be because of merchants are focused on holiday season, and they're not exchanging a much so.

But we'll still continue to be very strong.

Very helpful. Thank you.

Thank you.

Thank you know our next question will come from Jeff Cantwell with Guggenheim Securities. Please go ahead.

Hi, Congrats on the results come back you for for schizophrenia.

Nice nice acceleration number of S&P merchandise this quarter you already touched on this but I wonder if you might ask you wanting to slightly different way, which is can you talk a little bit about kudos, new SMB customer sorry, maybe just give us appeal for which geographies to industry verticals, you're seeing the most momentum.

This quarter and do you also get beginning that leasing cohorts might be stickier than perhaps cohorts because upgrade we see strategy I was there anything that gives you confidence that emerging churn could potentially be produced over time or any details you can provide an emergence would be great.

Thanks.

Yes, just to us to answer your question, we Havent seen significant changes in the profile of the clients. We add into hubs. There is of course, a slight like a half I mentioned that the beginning a a slightly lower average tpd. When we go to further in the country side of Brazil, but essentially.

The profile of the merchants that we are bringing onto our.

Ecosystem remain the same we continue to work very hard on strike strengthening the value proposition.

Our clients both in terms of service and also in terms of solutions and of course, we do expect that to continue to strengthen.

The lifetime value of our clients with us. So I think that's pretty much covered your questions and Jeff just juggle here just one more common so.

What is important I think to see here is that even though we are a me much bigger company now one year. After the IPO you will see the first core resolution was going up.

The number of calls rated as excellent for the customer support is going up so you're keeping our npls as we grow so.

We have does in fact off Oh, our clients talking about our services our product.

This helps a lot or brand. So we have brand recognition of being the best service here in Brazil, and we will start to have more stickiness. That's why you can see that TPV churns, a little bit lower and we are better this year against last year. So there is an effect of the growth of the business and how the value proposition.

As being recognized by the merchants.

Great and then related related to that I won't ask about your HBC strategy, because you guys I've talked about it as a key for your your company's growth.

Nice to get a sense for how you feel about the progress you're making with banking and credit and I wouldn't ask you for 2020 guidance related to that but is there anyway can you sort of give us an update in terms of how much.

Your your back any credit offerings could potentially contribute to your your total revenue next year and or or over time. Thanks.

Sure. So regarding credit I think we've I think chocolate covered it pretty well it's important to highlight that so far we had been offering credit banking and acquiring.

A separate offer is right and we as we have announced in the in the last quarter, we're working hard to integrate these offerings into a single financial platform.

Regarding banking, we launched our banking solution nationally at the end of October and we have seen a lot of traction. Since then in terms of a daily openings of new accounts.

We will launch we expect the launched integrated platform, it's already in pilot mode, and we expect to launch in the first quarter 2020, what we believe is that.

By enabling our clients to use one single integrated platform, we will make that their entire rations with our solutions much less cumbersome and most importantly, not only simplify their life, but also have one single digital channel in which we can offer all of those solution. So we're really excited with the progress that we're making.

We have gotten very positive feedback so far regarding this integrated financial platform and we continue to be encouraged with the opportunity.

Great. Thanks very much.

Thank you.

Our next question will come from the John Coffee with Susquehanna. Please go ahead.

Thank you for taking my call.

My question.

Following some of the other callers questions is on the merchant ads. So Q3 Q3 merchandise. It really did seem exceptionally strong, especially you know quarter over quarter. I was wondering is there anything you'd call out that was special about Q3 that really led to the growth because I think even if you back out the 4.6 of the micro merchants you still.

Acceleration, so I'm just wondering what what factors I should consider and.

I know you spoke also little bit about the seasonality of Q4 and this number but would this be I guess would you consider this like this roughly 69.

I'll send that merchant ads to be a bit of an outlier for the year or would you expect that maybe next quarter you would see something that would be in the same range.

Hi, Jon Chappell here. Thank you very much for a question. It's a great question. So.

So let's talk about net ads not only about fourth quarter, because as a how file sad.

To talk about net ads in for fourth quarter is something that's not very is because you have all of this year Christmas in Brazil, So change that it'll be the dynamic so.

So we had we are not see any type of the decrease of net adds but it's difficult to see how much we can grow.

Our net adds on for water, but we expect to keep this trend of growing that adds threw out a first second third and fourth quarter of next year. So expect to grow our net adds every quarter over 2020, and it's mainly because of focus towards the SMB and the hub operation.

Operationally efficient.

We are very driven by productivity of our team and churn control. So we we you we'll still see addition of net adds and growth of net adds throughout twenties Twain. So as we said we see this opportunity as a long term one so 2020, I think that will keep the base off.

Net ads growth.

Yes, if I just a rough file here just to add to chart was points. So it. It. So then it's not an outlier that number right. So we do see our ability to increase that number overtime.

And then into second quarter, when we are reporting our results on some investors asking us about that the margin and so on so this is also a reflection of our investments. So as we invest we do or we're very diligent in having the return on investments, we make and the that's one of the effect you're seeing now yeah and as we said before.

We are seeing two metrics here in terms of invest into hub, which is cost of acquisition lifetime value. So we're not seeing change in terms of the ratio between lifetime value cost of acquisition Thats why we aim best even further in the hubs and we will keep this growth in net ads.

Great. Thank you.

Thank you. Thank you. Thank you.

Our next question will come from now Agarwal with HSBC. Please go ahead.

Thank you for taking my question congratulations on the stronger does a fresh just a follow up on the previous question.

You said that you should be able to maintain this at the this net adds eight for the next year. So 60 570 tokens book what goes net adds seem reasonable to you.

Thank you Andy just wanted to clarify that and the second question is on credit I believe in your speech you mentioned that about 55 million of the door to book non look was undertaken on the on balance sheet.

Is that right and how do you see that evolving I mean, what percentage of the talking loans given not to clients will generally be on on balance sheet resources with the banks any any color on that for train trendy would be very helpful. Thank you so much.

Thank you need Leah here, so just to confirm your on your first.

Question, Yes, you are right. We expect we don't think the 60 a this number of net adds is an outlier now expect to continue to increase net adds on a quarterly basis like travel just mentioned regarding credits. We have this burst of about 55 million of our own capital.

And today, we do have this risk in the our balance sheet, but we do not intend to scale, our credit business by taking risk in our balance sheet like job was said already we're working hard on creating the mechanisms to be able to factor out the risks from our balance sheet and that's how we intend to scale the credits.

Offering we're also very focused right now on improving.

Credit product itself, we I cannot really overemphasize.

How much the current income that offerings, our bureaucratized to our clients and how positive. The feedback is that we're getting in terms of the transparency that we give in terms of our clients being able to reconcile.

How how much they they're paying in terms of fees and so on so we're really focused on continuing to improve the product.

Continue to improve our credit scoring engine and we will grow by trading this mechanism to fat throughout the rest from our balance sheet.

Okay, if I can follow up that.

How is the repayment of the loan.

Undertaken as good as a percentage of receivables.

That's an did you added to the India.

Hi, good nobody paid by the merchant. Thank you so much yeah. So they'll modality that we offer now it's a discount on the receivables so percentage discount on the receivables. So we have a daily percentages discount of the volume of the clients that we keep.

Nor the them for to payback is long and Thats why the average term is seeks to the average duration seeks to nine month and that's very simple because the merger knew exactly home with there being charged it every day. So it's really connects with the way that they managed their business yeah. If it's very transparent for them to see the entire.

Patients through their order so I think that that's what the clients really likes in this project the understand exactly what is doing an everyday that can follow up indeed in the al and a dashboard works pretty well.

Yep.

Okay. Thank you so much thank you.

Thank you and you have thank you anyhow.

As a reminder, if he would like to ask your question. Please press Star then one our next question will come from Julie Cerio with Bloomberg Intelligence. Please go ahead.

Hi, good evening, Thanks for taking my question.

Thats, a little bit more about the integrated.

Well it out.

Next year.

Yes, the cases where around.

But in terms of revenue.

Extending.

Just thinking that you see incremental driver revenue or is it really more about reducing churn and getting existing customers to give you more sticky on the platform.

Oxide.

Actually ramping up sales as you have been.

It's been more sales more marketing in the first quarter or the first half of next year, you know temporary bump up in that study.

Hi, Julie CCI go here. Thank very much for question. So I will start here. The first question regarding the the a b C platform. So the strategy in the agency platform is really that today you for merchants wants to have all the financial service they have to get in touch with me.

At times, the banks and incumbent payment players so combining all the financial solutions in one single platform give us the ability to so all of their needs.

Taking the phone call in less than five seconds. So we all the problems in the first phone calls to the level of service that we can offer integrated to all the financial solutions that they need.

Something really powerful and we will be the only one that can offer the integrated customer service to our clients through all the financial solutions that they need fro, you shrink will lead to a staying views do we wire transfer all the payment Masters did they want to understand the reconciliation off all the payment methods the payment methods.

That we provide payment methods that other players provide do they will be able to reconcile all in the a b C. Because the higher she's Ruby inside gave you see platform. So it's really about taking because some of service to a completely different level offering all the financial solutions and as you see who have more.

Revenue from.

Is actually activities, because we will have the wire transfer in the bullet to issues.

And we expect to have more revenue from the funding of the merchant with the credit products. So we think that we will be able to give a complete product in terms of financial solutions to our clients fully integrated with the customer service well integrated where we can be as the doorstep offer clients whenever they need so we really believe that that will be.

Very powerful value proposition to our clients very difficult to replicate you know that incumbents in Brazil. They have some conflict of interest with the parent banks that have control over though that company. So the way that we think about technology integration Christmas service spirit unique and the way that we.

Now the relationship through the hubs is pretty unique too. So we're excited with this new product.

Hey, anything to add an expense.

You mean regarding the launch of the platform.

Yes, no no no we don't expect any new expense in terms of that.

We will use exactly the same strategy that we have.

Keep in mind that this quarter the third quite as there is important notice to to be made in this third quarter. We invested doubled the amount be marketed than we had in the second quarter.

There was a debt and that was the trial. So we were experiencing.

As many marketing to see how much we can drive in terms of productivity offer with team. So we made this investment.

In our nationwide soap opera here in Brazil, very famous just be interesting too to learn how marketing works with the hubs. So we we are focused here on keeping this level of margins and we've always very many new investments to grow either affording and what I'm happy to see is that we have.

These 30% margin, even though we invest heavily in the new operation.

So I think that as we said the balance between growth value proposition and how much we charge margins are in the very healthy level and we we intend to chip this.

Okay terrific. Thank you so much.

Thank you thank you Julie.

Our next question will come from Philippe somehow with Citibank. Please go ahead.

Hi, Joe di by Al. Thanks.

Well asking questions.

Good question about the partial banking.

It appears that Philippe line has dropped from the call and at this time, we have no further questions any question Q and I would like to turn the call over at the geography power for any closing remarks.

Can we just wait a little or like what minutes I mean, it's a C. Salomone, we'll go back not a problem at all.

So, let's just wait for one or two minutes to see if filippi, we'll be back then if not the will do the final remarks.

Perfect.

<unk>.

Hi, everyone. So as Phillips is not back I think it will do the final remarks here, we were just waiting because giving information we're very with transparency in order formation that or shareholder base wants to see at the analyst something very important for us. That's why we decided to wait but no. The final remarks, I would first like to.

Say, a big thanks for our team for the effort. So I'm very impressive with the energy of the team and how people really leaves our mission CR mission and the fashion over appliance as a way of living we're very happy with the growth that we have we see this business as an oh as an opportune.

Before long term growth, we're very happy with everything that has been done.

Thank you very much for your support and see you next quarter Bye bye.

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