Q4 2019 Earnings Call
Good evening, everyone.
And thank you for joining us today. I have here with me check our CEO CFO and Liam Otto's Chief strategy officer on this call Will present our operations and financial results for the fourth quarter and 2019 results. I'll pass it over to Chicago so he can share with you the main highlights of our performance Thiago.
Thank you, ABBA and good evening everyone. Thank you for joining us today before we start the presentation. I would like to give you some messages.
2019 was a special year for a stone and we are very proud of our results. We have grown fast delivered strong profitability and more importantly evolving our wage significantly to become the one-stop-shop platform for smbs.
During the year we had strong that edition of clients and TV while keeping our take rate relatively stable and maintain high levels of client satisfaction. We have also successfully started to scale our credit digital Banking and software initiatives which combine it with our client-centric mentality creates a powerful and unique value proposition in the SMB market during 2019. We progress it in our vision to transform the S&P Financial Services industry in Brazil.
as mentioned
Your first earnings call back in 2018. We are very happy to have contributed to the positive change in the Brazilian payments Market helping to set higher standards of service and solutions. It's more fair price for merchants in 2020. We have another big challenge, which is a top priority to us to become a complete Financial platform for our clients. We aim to replace our clients traditional banking relationship over time and I think we are on track to do so execution is the most important factor of our success and will continue to stream a culture of Excellence discipline and focus on long-term value-creation for all of our stakeholders while keeping ourselves humble to learn from our mistakes.
No moving to our presentation and starting owns like three we present the main highlights of our fourth-quarter and full-year results following our investments in operations Team edition of clients jump it from nearly $140,000 in eighteen to more than 220,000 in 2019. And in the year with almost half a million active clients and payments wage growth rate of 84% year-over-year.
we ended with
19 with an acceleration in quarterly net new client Edition excluding micromerchant from 64,000 in the third quarter to over six seven thousand clients in the fourth quarter seems to be discontinued investments in our study my solution ahead of the launch of our partnership with global. We had a slightly negative net addition coming from Stoneham eyes. That's why our report. The number of net client Edition was $66,000 instead of 67,000. We just mentioned in 2020. We expect a new record of smbclient Edition sauce as we will invest even more in first-half to any than we did in 2019 focused on growing and improving our distribution Network throughout the country during 2019. We pack our ability to invest and produce attractive returns giving us confidence to rely once again on our execution as how far will detail later.
Or TV growth accelerated versus the third quarter with strong performance both in the hubs and in digital and integrated Partners in the hubs cpv Grill more than the overall growth for the company both year-over-year and quarter-over-quarter further supported by the strong addition of clients 26 out of 27 Brazilian States Grill client base at least 60% year-over-year in digital. We are positively impacted by a strong Black Friday with digital revenues growing Almost 100% vs. Black Friday 2018 integrated Partners, despite some volatility and lower prices in large accounts. We continue to see strong growth.
The Grove
Channels has helped it has reached an annual cpv of over $129 billion and approximately 8% market share in the Brazilian acquiring Market despite the strong investment 2019. We were able to balance our growth with profitability and in the year with an adjusted net income of $857. It's growing 150% year-over-year. And were you find adjusting that margin for the full year of 33% as we have told you on our previous call our acquiring Banking and credit solution are evolving to become integrated Financial platform January 2020. We have started to test this new platform in over ten thousand clients aiming to get client feedback and create the best user experience. In the meantime. Our individual Solutions have been developing fast our banking solution reached at 62,000 accounts in December accelerating to $79,000 a month.
of January we've continued
strong engagement
the credit solution continues to ramp up to an outstanding balance of $166 in December jumping to $200 in January. We keep tight control over all supply of credit looking very closely at all levels as we continue to improve our solution and credit scoring. We already have more than 5% of our acquiring clients using a credit solution finally in software. We have grown our client base from approximately a hundred thousand in the third quarter to approximately 135,000 in the fourth quarter at strengthening the value proposition to our payments clients will mentioned further in the presentation. We also continue to evolve are in organic strategy of investing in good faith companies and intrapreneurs with great financial displaying.
As I mentioned before 20/20 is a very important year for our company with the rollout of our financial services, which will help our emergence to centralize their financial lives in one single platform with the best level of service and customer support once our roadmap of products is executed. We expect that Merchants will be able to use the stone as their main provider of Financial Solutions.
We
If we are still in the early beginnings of our journey to improve Merchant lives, although we have an 8% market share in the aquarium Market in Brazil. We have very low single-digit share of our combined a target market or financial services payments and software which providers huge job growth opportunities.
Finally, we are happy to have just launched our first campaign with group of global for the micro Merchant segment under the brand Tong. The new company will be focused on providing differentiated customer service and support with a strong focus on efficiency, which is key to succeed in this segment. We believe that over time we can reach customers acquisition cost levels across too large place in the market leveraging Global Market expertise and stone execution capabilities. We see tone as a new Venture manage it separately and with the potential to be among them are just players in the market in the long run.
with that we can go over to his like for where we
Take a deeper. Look at some of the accomplishment of 2019.
We open more than 100 hubs invested over $143 in new hires and promotions over eighty software developments and new software Solutions wage and 15-minute realizing training of our people and recurring
Even with all these Investments we were able to generate 857 million in adjusted net income which shows the strength of the economics in our business model Investments. We've made in 2019, especially in the second and third quarters have already started to pay off as you can see from our fourth-quarter results. Our pace of addition of smbclient has accelerated our TV growth remains, very strong with record edition of TV in the company's history in our new Solutions are developing fast why we keep our NPS at high levels at 68. We also continue to attract talented people to our business with one of the biggest recruiting process in Latin America, and we're right by lincon among the top companies where Brazilian streams to work at.
moving on to
The chart on the left shows the growth number of clients across different states and Brazil as you can see, we have grown our client base over 60% in twenty-six States wage out of twenty-seven States, including some Paulo and Rio de Janeiro which demonstrates that we are not only growing specific regions, but consistently across the country with the hubs. We have we currently offer over approximately 2.7 thousand Brazilian series.
This has helped with the company to deliver its biggest ppv Edition in our history both Eire of a year and quarter-over-quarter with almost fourteen billion reais more added in the fourth quarter of 2019 compared to the fourth quarter 2018.
We have grown fast but have not forgotten the importance of having happy clients. The number of clients raiding our services as excellent and our first call resolution rates home from being very consistent all along 2019 with that. I will pass it over to Leah so she can talk in more detail about the performance of our Solutions Beyond payments. Thank you, Jack good evening. Everyone. I will start by going through our credit solution despite not yet. It's full speed. We have continued to grow our number of clients as well as credit portfolio consistently as I said before we are ramping up the credit solution carefully keeping npls under control while continuously improving the product in our credit scoring engine from the 3rd to the 4th quarter. We multiply the phone number of credit clients by 3.2 reaching over 24,000 clients by your end total disbursement finished a year north of 290 highs with outstanding balance of what time
66 million height
An average maturity ranging between six and nine months in January 2020. We reached almost twenty-nine thousand clients using credit close to two hundred million kinds of credit portfolio outstanding in over three hundred and sixty million highs disbursements since Inception. We also have our fee structure already in place which will allow us to seek third-party funding for our solution. We see a lot of opportunity and credit as it is a huge Market in one of the main points of our clients on slice 7. We move over to our banking solution as you may remember we have disclosed that we had 29,000 open accounts as of October 2019, right after the launch of the product to our national campaign at the end of the month in the fourth quarter of 2019 Chef reached 62,000 open accounts more than doubling compared to October and three times more than what we had in the third quarter. This number has grown further to 79,000 open account as well.
January twenty twenty this
That we continue to see strong Traction in the level of activity in our digital account. The number of wire transfers was 3.5 Times Higher in the fourth quarter compared to the third quarter and phone number of bullets paid increased by 3.2 times. Also the average balance per account increased by 17% quarter-over-quarter s Tiago mentioned we are evolving too. He's coming integrated platform that brings together acquiring Banking and credit as you can see on slide eight as of January, we had more than 10,000 clients testing the ABC platform and we are focused on evolving the product and level of service to a point which makes us comfortable to scale by mid 2020. Meanwhile, we will continue to scale acquiring Banking and credit separately besides increasing monetization opportunities. We have evidence that by offering additional Financial Solutions our NPS goes up as we have always done. We will continue to listen to our client to prioritize home.
her features to be launched in
Platform according to their needs moving on to slide 9. Let's talk a little bit about software our strategy and software is twofold on one hand. We are adding functionalities wage can be deployed to our distribution and service model with a focus on strengthening the value proposition and creating client stickiness in parallel. We continue to invest in software companies that offer sux specific solutions for smbs such as POS an earpiece with the objective of first achieving efficient Capital allocation by investing in grade interpreting Wars with a proven track record of product success and growth and second supporting those teams to further grow their business and to integrate Financial products into their offerings to generate a greater value proposition to their own clients. We are evolving to create a management system where we support strong teams of interpreters to grow leveraging are supporting capabilities Network. There are over four thousand software companies in birth.
And we see many successful models.
Bolton specific niches as well as specific regions and we're very excited with the opportunity to continue to invest in those Partnerships in the slide. We can also see an update of the overall level of software subscriptions. We ended the fourth quarter with 135,000 clients using at least one of our software Solutions with a 35,000 organic line addition in the quarter page on the right-hand side of the slide. We show the penetration of our software Solutions in our payments clients in the third quarter of 2019 twenty per-cent of our clients and payments used at least one month after Solutions increasing to 22% in the fourth quarter. Therefore, we have a huge opportunity to continue penetrating our base with software improving our emergence productivity and sales tax and the value proposition. We provide to them
With this recap of the evolution of our Solutions be on payments. I will pass it over to her fellow who will talk about our entrance into the micro Merchant space with our group of global partnership with our financial results Julia in January. We received the approval from the antitrust authority to proceed with our partnership with group of global to enter the micro Merchants Row in yesterday. We launched our first Regional campaigns of the new brand Stone targeting that public we are starting with regional campaigns to test and make more assertive moves when we go Nash reducing our cost of acquisition, which is something we are looking very carefully at given that we already have knowledge about the lifetime value of those clients.
as you can
Seems like ten tonne will differentiate Itself by redefining service levels and customer support in the micro Merchant space which is aligned with stones DNA customer support with some human connection package delivery and smart SIM cards that enable POS devices to work with different Telecom operators are some examples of what song will offer to its clients in terms of solutions. Don't we provide a Coq Rico system comprising banking services cash-in cash-out and financial products with stones banking services clients will be able to make wire transfers pay bills and taxes and make deposits all graded with acquiring they will have cash in through different POS devices and payment link besides deposits and cash out from prepaid cards withdrawals and wire transfers Financial products such as credit and insurance are on the road map to be offered as soon as well.
we remain very excited with this new Venture and believe that if we execute correctly, we have all the capabilities necessary to succeed and become one of the
Declares in this market going over to his light 11. I will go through our numbers in more detail as you can see on this slide. We have reached a total of 495000 active clients and payments with navigation of 66,000 clients in the fourth quarter.
We also accelerated our TV growth to 51% year-over-year reaching a total of 40.2 billion in the fourth quarter total revenue and income for the fourth quarter grew 48% off to 783 million reais compared with $529 million reais in the fourth quarter of 2018. Our take rate was a healthy 1.8% in the quarter deadly lower than previous quarter's the main reason for that is the effect of our key accounts which had strong growth in the quarter and presented lower take rates at the same time. Also, as you may recall in fourth quarter, we have the effect from a higher mix of debit over credit affecting both take rates from transaction activities and financial income tax rates as well as the effect of lower subscription take rates as though I am not linked to the strong TV seasonality.
Finally, we also had it.
back to some holiday season centers
If you compare our take rate of fourth quarter 2019 to that of the fourth quarter of 2018. The decline of 8 basis points is almost entirely explained by the effect of key accounts. Just mentioned long as we only said we managed to take rates by balancing it with lifetime value of clients and growth in our client base. And we believe that in the fourth quarter. We had a good balance among those factors off on July 12th. We show our annual performance our TV grew 55% year-over-year reaching $129 billion reais compared to $83 billion reais and twenty $18,000 billion reality in one year, which is almost the total volume. We had in the whole year of 2017 our total revenue in income increased by 63% year-over-year to 2.6 billion size.
Like thirteen shows our Consolidated p&l for the quarter and for the ear going through our costs and expenses lines in the p&l. We see that cost of services were 128,000 in the fourth quarter 27% higher than in the fourth quarter of 18 as a percentage of total revenue and income cost of services were 16.4% 2.7 percentage points, especially compared to the fourth quarter of 18 on Lower provisions and losses wire transfers cost as well as efficiency gains and Technology human resources.
compared to the previous
Florida cost of services as a percentage of total revenue and income reduced from 16.8% to 16.4% mainly explained by operating leverage in transaction and deployment costs and stronger signal operating leverage in the fourth quarters due to Stronger volumes moving on administrative expenses where seventy-two million reais in the fourth quarter of 2019 down 1% year-over-year off as a percentage of total revenue income administrative expenses were four point six percentage points down mainly explained by operating leverage from personal expenses as well as lower travel expenses compared with the third quarter of 2019 administrative expenses decreased by 1.4% Point mainly explained by the stronger margin seasonality in fourth quarters, as well as lower travel expenses.
Selling expenses where 109 million reais in the quarter an increase of 86% year-over-year explained mainly by hire personnel and marketing expenses compared to the third quarter wage expenses increased by seven million reais a lower increase compared to the previous quarter mostly due to seasonally lower hiring of sales people combined with lower marketing Investments.
Extra expenses were 107 million reais in the fourth quarter 42% higher than the prior-year. Mainly explained by higher prepayment volumes Financial expenses as a percentage of income fell from 29% to 26% Mostly on higher Financial income combined with lower cost of funds, which was helped by the lower base rate in the country compared to the previous quarter of financial expenses as a percentage of total revenue and income fell from 15% in the third quarter to 14% in the fourth quarter. Mostly explained by the lower cost of funds related to the lower base wage.
As you can see on slide 14. Our fourth quarter adjusted net income was 275 million reais with 35.1% margin compared with 156 military eyes in the fourth quarter of 2018 and 29.5% margin during 2019. We have proved our ability to invest and produce attractive returns. This is demonstrated by a margin compression in the second and third quarters of 2019 due to investments in the operation followed by acceleration in that additions and strong TV in the following quarters.
results from
More Investments are seen especially during the fourth quarter when in addition to strong top-line growth. We presented margin expansion quarter-over-quarter.
When we look at all costs and expenses, they were 39.6% of total revenue and income in the fourth quarter compared to over 40% in the two previous quarters. This is mostly explained by Samsung Top Line growth in the fourth quarter helped by holiday season as well as by first quarter being a seasonally weaker quarter in terms of Investments move into his light 15 on an annual comparison. Just the net income grew 150% to 857 million reais and our adjusted net margin increased by eleven point six percentage points to 33.3% off. This shows the underlying operating leverage in the hub operation despite higher Investments are starting the second quarter of 2019.
Finally on July 16th. We show our adjusted free cash flow. We have generated 450 million reais adjusted free cash flow in 2019 compared with 304 and 2018. We have adjusted our free cash-flow methodology to account for a credit operation the same way as our prepayment operation both being funny Solutions offered to Merchants for more details. You can see the specific note on that in our earnings release explaining the different effects on our cash flow statement from the different funding sources. We use having said that our adjusted free cash flow increased in 2019 compared to 2018 mainly due to higher net income in the. Partially compensated by higher outflows of capex interest paid and trade accounts receivables and other assets before we go over to Q&A session. I would like to pass it over to Chicago so he can wrap up our 2019 results.
As shown on the light Seventeen, we've made a management assessment of our 2019 performance. We are very proud of the strong growth. We had in our payments ecosystem combine it with record profitability another positive highlight of the year was the evolution of both our credit and digital banking Solutions as well as the development of our ABC platform. We are launching this year. We are also very happy with the rollout of our horizontal software Solutions namely our reconciliation in CRM product and proud of our program, which is now one of the largest recruitment process in Latin America. Finally. We are very proud of being able to grow fast while maintaining our strong culture and service levels too on a client's we wouldn't be able to do any of that without the feedback and Trust of our clients and commitment of our people
We believe that we don't have to talk only about the good things but also recognize where we can do better. We could have accelerated Investments earlier in 2019 month and not only in the second quarter as we can see the fruitful results that these Investments brought to our company in softer. Although we have scaled our horizontal Solutions. Well our volt Solutions are still at small-scale and we believe we should have been more active in software deals as this represents a great cross daily opportunity for a financial platform. Also, I believe we could have invested more in Social and sustainability programs as we understand its importance to our community. Finally. We had a slight delay in the launch of tone, which was walking out to the first quarter of 2020.
Thank you ABBA.
no regard
2020 and Beyond one of our main objectives is to be able to replace the existing banking relationship of our clients. This is a bigger and more challenging goal, but we are confident. We will succeed not to accomplish that goal and our software related initiatives to create long-term value. We have to invest not only heavily but wisely
that's why we expect to invest in 2020 even more than we did in 2019, especially in the first half of the year. We will continue to invest in our Hub operation. In fact, we knew people in virtually all areas of the company in intensive training of our team in building further our financial platform any new software companies through m&a at the same time. We remain committed to maintaining healthy margin levels in 2020. We are very excited with the year ahead of us and the great opportunities we have in our hands to connect to improve the life of so many entrepreneurs in Brazil.
finally
I want to say a big and warm. Thank you to our organization team who is working very hard every day on behalf of our clients and our shareholders with that said operator. Please open the call up to questions at this time. We're going to open it up for questions and answers. If you would like to ask a question, please press star one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two.
And our first question will come from Tito Lovato with Goldman Sachs.
Hi, good evening. Thanks for the call a couple of questions. I guess first on your margins. You mentioned you expect to have healthy margin in twenty-twenty, but just understand. You know, what that means. There was a scene Denali in this quarter, but I mean do you think margins can continue to increase in 2020 or you know, I should we think about that evolving and then also the how much do you think the, you know, the banking credit can provide me? I don't know if you can give some guidance there or like how fast they grow how much that can contribute in terms of Revenue wage earnings. Let me call her you can give on that would be helpful as well. Thank you.
Hi Taro. Thanks for the question Raphael here.
So regarding your first question, uh as Thiago mentioned we intend to keep healthy margins. Uh, it shouldn't be far away from the margins. You have seen a long 2019, but as the company wage scales, you should see operating leverage. So that's why we said we are investing heavily. The investment is mostly in the first half of the year, right? So you should see margins in the second half month higher than in the first half. So to your second question the new Solutions, we already started to see in spite very small. We already started to seeing results from the new Solutions wage 2020. We think that this should evolve fast and then and to become much bigger than they are now still too early for us to to provide any guidance on that, but I think they will be certainly more representative in the earnings of the company in 2020.
And I so just to add something. So what we are trying to say here is that we are committed with the level of margins that you saw throughout 2019. But we want to keep the optionality to invest further in our business. If you if we see better Avenues of growth as we saw in the second quarter in the third quarter because we have the financial needs to invest and take the payoff on a very short-term as you saw in the fourth quarter. So we want to keep this optionality. We will invest heavily on our growth but with financial discipline back regarding the banking and the and the credit we see that those products over time from 2012 and Beyond give us the the option to provide better rates in the combat solution to our clients, but charging last that they are charged from the bank nowadays. So I think that if you make an assessment of how much an SMB is charged by a bank account number
all the separate transactional process
Looks that the banks charge when you go over that standard plan with a monthly subscription. They charge additional per transactions amounts. And if you see the rates that are charged in the credit application, you will see that over time. We have the ability to increase it creates every roll out those Solutions in our base.
Okay, thank you. And I guess just follow up a little bit on that. So to understand the margins, I guess we should expect some margin pressure in the first half of the year and then improving the second half but I guess for the full year basis the right way to think that margins would be somewhat stable and then you get to see some operating leverage maybe in twenty Twenty-One and then also to think about that in terms of volume growth after we saw TV growing, you know, like fifty percent. Do you think that level of TV girls can kind of sustained or how do we think about the the growth that will get us through this marja?
It's a great so we don't like to.
Give a specific guidance about numbers that we are pursuing because as we said we keep this optionality to see what will be the capital of the best-kept our location throughout the quarters. But what we can say is that we keep our commitment to grow not ads throughout 2020. We expect to keep this additional TV. I think that our business model strong enough to keep this kind of edition of TV and ads and we are committed to keep our margins. So if we find opportunity to invest more to grow even more maybe you can give away some margin, but we have committed to keep our margins at the levels that you saw throughout 2019. All right. Thank you very much.
Our next question comes from Joseph with Cantor Fitzgerald.
Hi, I was wondering if you could talk a little bit about the economic impact or the potential economic impact of any of those factors on some of your new banking opportunities particularly interest rates and just trying to understand how now that you're offering these Services the new economic, uh, or how sensitive those new services are to walk in the economy.
I just have Raphael here. Let me know if I understood correctly or your question. Do you refer to our new Solutions in credit and banking job or overall interest rates impacts in the company.
Actually both would be great. But I was referring to the new banking offerings but both would be great actually sure. So if you look at banking activities may you have very small Revenue. We do separate sealed Banking and the credit solution the credit solution. We started to have some Revenue already in the fourth quarter despite very small steel banking transaction activities. They have a very very small Revenue because we do charge very low fees for that. But in the credit you you you already started to see Revenue agent with quarter and we do expect this to grow very fast in 2020.
Got it. And then maybe you could give us some idea on some of your targets around the stone hubs for next year. And you know how that's trending per week per month or whatever statistic you could get a sense of you know, what you expect from the bill. Perspective.
Hi, Joseph speaking. So our expectations to keep investing on our hubs. So we will keep the speed of edition of hubs throughout to any 2018 in 2019. And we are pursuing now more density in the hubs that we are so we are seeing that we have opportunity to increase market shares in the hubs that we are present at this point. I should invest to have more density in terms of Agents by region. So I think that we've both the combination of of both we will continue to grow our new edition of clients.
Got it, and then the last one for me just from a competitive standpoint. I think during the middle of the year. We sell one of your competitors get very aggressive on pricing, and I'm sure that some of the same things are trying to defend market share. So any thoughts around what the competitive environment looks like leading to leaving 2019 into twenty-twenty and leaving from an expectation standpoint of more pricing perspective. Are you expecting there to be further pressure? Thanks.
Hi Joe, Raphael here. So we have seen nothing new in that in that topic to be honest. I mean in terms of competition and pricing if you look at our evolution in take rates quarter report wage was mainly due to the account as we explained. So no, no big change there. We have seen the market still competitive as it has been for some time already. So, you know, we do expect it to happen to be competitive. But this is sort of the environment that we have been blamed for some time. So no no new news. They're right here just to Thursday to complement a little bit. So I think that as we said in the previous quarter, we always try to balance our growth with farming kti's which is the growth in client base Revenue per client our margin in our cash flow generation. So we are always balancing grow through that those four factors and what do you can see by or fourth quarter results. Is that as we sat in the third quarter?
The third quarter we had last volume from being accounts because of this level of volatility that they have and a little bit bigger take rates. So in the fourth quarter as we said was an opera
The directions we have more volume from the key accounts and with different decrease because of that. So when you talk about the core of the bills in the smbs, we see a very stable growth when you talk about revenue for clients margin Flash Blue and kind client base increase and and thank you very much for questions Joseph. Thanks.
Our next question comes from Craig Mara with autonomous.
Yeah. Hi. Thanks for taking my questions first. Can you help just provide a little color on how your pricing software at this point? You know, whether it's being priced more as a retention tool or it's priced as a as a margin of creative product. Thank you.
Hi Craig. Thank you for your question. This is Leah. So just as we said before we still do subsidize software, and we offer it to our clients. We're much more focused on making sure that our offering really improves value proposition and stickiness of our client relationship. So, yeah, I think the focus there is much more on that than an actual subscription Revenue off just to compliment correct. So when we say that we subsidize software is not that we are giving software for free is that as we said before our mind-set he is to replace the old mentality just a rental for a monthly subscription that combined the the the the the machines the POS with the software with a lower monthly subscription box. So we are monetizing our software but we are not pushing too hard in terms of pricing that solution. We would prefer to have a much more extensive relationship of our client than monetize wage.
To the transaction activities and all the payments and financial services.
Okay. Thanks. And just one other question unrelated has there been any supply chain disruptions in terms of point-of-sale Hardware coming from China as I believe your biggest suppliers packs.
Hey, correct Thiago here again. So great question. Actually, we are monitoring this this situation very closely. And we do not suspect any type of impact in our supply chain. We have four different providers. We have one main provided that we are talking very closely. But as we have planned our inventory and as we deal with our supply chain, we do not expect any type of impact appointment.
Thank you. Thank you Craig.
Our next question comes from Giovanna Rosa with Bank of America.
Hi everyone. Thanks for taking my question. I have two as well. Can you comment a little bit about your effective tax rate? It was much lower than in 2018. So what level should we expect for 2020 and my second question is about different payments. We have been receiving a lot of questions. So can you comment a little bit about the impacts you expect for you and also about the opportunities things?
Hi Giovanna. Thanks for your question. How far y'all here so that the tax rate in this quarter was around 27% We have mentioned this year in previous calls that we expected this to stay between five and 30% This is a result of some tax planning initiatives. We have no specific guidance for 22 in right now, but I think we continue to to look at opportunities to improve to explain. So as soon as we have any any additional caller, we we can provide you guys so in regarding fast payments Lee is going to answer so high Giovanna. I'm going to take the opportunity of a question to talk a little bit about our overall view on the regulatory Evolution. So we see that the regulatory Evolution this series is really positive for the industry and positive or A business as well. So first talking about instant payments, and we see that fix will disrupt will actually help to disrupt a lot more the consumer faith.
side of the industry
In the short-term, we believe it's likely to impact cash and tax payments and even eventually debit cards us as being the partner to smbs. We will always be able our clients to accept any form of payments. So fix included, we think our role will continue to be strong to enabling our clients to accept any former payments and the economics that that we have from the service will not be affected and it's important to note that when you look at the acquiring side of the business. It's all been significantly disrupted over the last years as is clear when we look at the economic evolution of incumbent players and all so much better service levels that we have today. So we're actually really encouraged to see that the regulatory evolution is pointing towards also improvements in the consumer-facing side of the industry and then I think yep.
important to take the opportunity to also talk a little bit about
You Evolution on register of receivables and credit portability. So we think that these are two very important Evolutions when we talk about our ability to continue to offer more and more credits more clients. So first on credits portability, this will give us access to credit relationship that Merchants have today with incumbent providers office credit will become a new Avenue where we can establish a new relationship with clients and bringing that credit into our ecosystem and through the register of receivables. We will have access to a much greater addressable markets by leveraging those receivables as collateral to give both credit and prepayment to more and more clients. So we really encourage with overall regulatory evolution.
This is Tiago. Let me just let me just add some some comments on that and try to summarize a little bit. So I think that this this month's payment and fix new system of the central bank will be positive for the industry and positive for a business mainly because I think that through that will have much more electronic transactions not going through our platform and I think that my view is that in beginning will challenge the speed and the cost of wire transfer boletos tax and bill payments and maybe challenge some cash transactions to I think that those will be the first type of transactions that challenge the Peaks real Challenge and that will be helpful to us to have more in a transaction through our platform when you talk about potential impacts in the acquiring business. What I do believe is that throughout the previews the last I don't know three to four years.
You had a lot of people Usha in terms of negotiating the net mgrs.
Or the part of the transaction of the acquiring because of competition mainly but the interchange in The Cutting fee was never negotiated before so I think that now through peacock maybe consumer-facing companies will have the ability to offer type of transactions to Consumer with maybe better rates in terms of interchange and carbon fees, but I believe in our ability to keep freaking AMA Cocina transaction. And for example, we have our partnership with army, which is a very good example. It's a it's a wallet that we accept in our in our in our machines in our payment system and mainly the partnership that we did is in a way that we are protecting our net in the arse, but I'm still have a very good economic through challenging The Interchange and the card Brands. So, I think that our decision to be at the side of the merchant enabling them to accept all payment methods in a very simple integrated way way offering working wage.
So solution regardless of the payment methods is something that really protects our value proposition. So we expect
To keep our economics on that side and regarding the evolutions on the credit space. We have maybe less than 1% market share in these in the off the market of financing the working capital of smbs. So we are very happy to see that SCD licensed which we already have we have the ability to to be a part of this portability of credit. So it will be a way that we will would Challenge and maybe did for credit relationship with better rates and there's a lot of space to do that and the page Strather receivable. It brings a lot of transparency and security to do even more crowded. So I think that it will be very positive for our company over the long run. So we expect the main or maybe the the one provider of all the Financial Solutions to our merchants and having better ability to compete is something that we always like so yep.
Expect positive impact in our business because of evolution in regulation and and we think that central banks doing an amazing job in terms of putting the rules out there discussing with everyone and not providing more competition to the overall Market.
Okay, very clear. Thanks.
Thank you for Giovanna.
Our next question comes from Felipe settlement with Citibank.
Hi chod, liya Falcon. Congratulations on the on the best results again. Most of my questions were already answered. So I just have one specific question. I saw on the six-k that in the Carter, uh son has reorganized the structure and you guys did they speak of stone Brazil Parts person a maintenance and two other Holdings and the six-game mentions that this reorganization rims to create a more efficient corporate organization structure and allow for Life Cost Cuts for cost reductions. So does this specific split had translated into any one-time impact positive impact on Colfax doing for 19? This is my question.
Thank you.
Thank you for requesting Thiago who you're speaking. It's a very good question. So we don't have any one-time effect in our in our results. Nothing material. So I'm not any items unusual in terms of nature side. So what we did actually was to reorganize our structure to make sure that we have the entity that is regulated by the central banks. We have the acquires the the SCD all the regulated entity under one umbrella and we have a separate one, which is the company that we use to invest in the software companies that we have this this operation as you know, so we don't want to put both operations under the same umbrella. So we decided to separately to make sure that we can manage our location and deal with regulation in the best way possible.
Thank you. Thank you Charlie for the question that makes a lot of sense.
Thank you very much. Hello.
Our next question comes from with HSBC. Hi, thank you for taking my question. I'm supposed to question is on the credit. It appears the ticket size of the loans has been declining. Is that right? And if you could give some more color on that that would be helpful further on the credit side. It seems like you're not have more than 25,000 clients taking credit which is a little above 5% penetration in terms of clients. Is that slow fast life than what you had expected and how many more clients can we expect to be added in in 2022 just to get an idea of the pace of acceleration in this is my second question would be on expenses expenses seem to be very controlled in fourth-quarter, especially if you take into account seasonality, which pushes them higher wage.
Hi, Felipe.
Give me 1 of sugar in capex.
Our topics in fourth-quarter how sustainable at these levels going forward. And then lastly I know you mentioned about the receivables found that it should bring in transparency in the long run for the system, but should that transparency also lead to lower spreads and any time line regarding the registry of receivables off.
Thank you. I need thanks for your question. How file here so regarding your first question in credit about the average ticket. The average ticket declines a little bit in the fourth. And this is mainly because as the fourth quarter is strong and TV usually clients they pay down their their loans faster. And in the model that we are now in the pilot, the client has to pay off all the debt until they can take another credit. So that's why you do see that effect in the fourth quarter of stronger TVs. They pay down the the outstanding amount a little faster. So regarding that the penetration face we think that we started actually our credit solution in the first quarter of nineteen. So we developed wage credit engine we tested so we believe that a little over 5% of clients is it's a very fast pace for for such a complex and important solution. We do see this increasing in 2020.
but we are very
We are very proud of of the base that we we we had so far in this is totally in line with what we expected your second question regarding expenses. Yes. We we had operating leverage and cost control in the company. We you do have very small items. Like we we adjusted in our net income Bridge like one little less than 2 million areas of fair value of home of options. But this is a very low the the main point here is that we we always aim to grow but also have a lot of financial discipline and capital location and expenses. We did some some tests and some Investments for example in the third quarter as marketing expenses that we didn't do in the fourth quarter. So this helps a little bit but overall, uh, we we expect despite. Hi investment's a very healthy living margins, uh level of margins FG augmentation you to your third question regarding the registry.
Of receivables of spreads. We we do see that with the registry of receivables. You have more competition in the marketplace, but also you do have
The prepayment market also competing with credit, right? So despite you might see some lower rates in prepayment. You have an open space not only for prepayment income with credit but also ourselves offering three payments to to clients that are not necessarily our clients. So the addressable Market expands a lot. So jauga will complement about the wrong just some topics. So to your question you have first. Thank you very much for questions. Jack speaking. So first we expect to accelerate accelerate a lot of fruit to age twenty. So we are very focused on that. So we will accelerate a lot but it will be with a lot of focus on any PLS control. So we are doing very well off of management with low single-digits. Npl and we already have the structure in place to factor out those receivables and yep.
See in the very very short-term our ability to factor out entirely our credit outstanding balance. So that's one part and we will put a lot of efforts in terms of scam or credit solution in terms of cost as how fast add we we will always be very diligent and discipline in terms of cost management. It's about the culture of the company. So we are here for the long run our teams growing fast and we want to make sure that we have a culture of discipline in financial diligence. So it's not important to us in in regarding spreads. We think that with the registry receivables and and ability to to with the credit possibility. It will may bring them down in the whole Market, but we expect they creates to grow up over the long run because of that because the spreads and credit just too high so we have the the the wage
To help our clients with better rate increasingly great.
Overtime so you do not pack decrease narrow stretch, but actually we think that we will be the one helping the market to bring spread a little bit down but growing take rates and providing much better service to our clients.
May I have the thank you so much. Our next question comes from Thomas. Hi everyone. Thanks God opportunity. I just wanted to follow up on on the net revenue subscriptions. Because in fact in in this quarter, we saw a 3% decrease quarter-over-quarter and in third-quarter this line accelerated over 25% just once you get a a better sense, so of what we can expect to going forward was the third quarter and to hike water or or in in Q4 is more of a current level. If you could give us a bit more detail, I'm very thankful.
Hi Thomas Thanks for the question have out here. So when you look at subscription and the third quarter, we had that 3 basis points effect of the revision and the list of clients. So a big part of this happen only in the third quarter. So that's why you have that small decline. If you look at underlying subscription apart from that affects, we do see this increasing slightly over a quarter reporter. We do expect our subscription revenues increase Over time. However, we do look at total take crits when we managed the way we charge. So as we mentioned in our release we offered some incentives holiday season incentives for clients. For example, this is because we see that it's effective in bringing new clients and then they stay with us so long, we we are providing some incentives in that subscription line. However, we do see this line continue to grow over time.
Okay. Thank you.
Our next question comes from James Friedman with Susquehanna.
Thank you for taking my question and congratulations on the year and the results. I just I guess I'll ask my two up front in the interest of time in terms of a b c priorities you had a lot of interesting helpful disclosures about software. Where do you anticipate software penetration potentially going over time? And I think you had said that there's a difference between the vertical and horizontal performance and software. So maybe if you could elaborate on that, that's the first one and then
I realize that you don't give guidance, but are there any seasonal call outs that you want to share? I realize you're saying the expenses. It sounds like might be front and loaded for the year anything else that would consider. Well, we're building at the model. Those are the two questions for me. Thank you. Thanks James for your question. I believe your question was regarding software. So let me just clarify by a little bit. So when we're talking about horse horizontal vs vertical what we mean is that we are really focused on onto Avenues a growth and software. So the first is whenever a functionality can be simply deployed within our distribution and service model. We will we will focus on doing so it's very important to us that we can scale softer by providing continue to provide the same level of service NPS and support that we offer clients today. So we we yep.
Take a lot of care to make sure that we can.
Deploy, software within our operational model and these tend to be lighter more Simple Solutions that can integrate and be deployed in in a seamless wage right at the same time. We are also really focused on investing in great entrepreneurs. So Brazil has a lot of opportunity and software. We see great software entrepreneurs our Focus both on a specific vertical Nature's as well as specific regions, and we're really excited with the opportunity to continue to invest in those Partnerships and took this is both in our view a very good Capital allocation. And at the same time we can support those those intrapreneurs with our network of capabilities and we can help them integrate payments into their offerings and that gives an upside value creation that they can provide to their clients. So this is really kind of a two-fold strategy that we're dead.
Try to clarify here.
Hi, my name's Raphael here regarding your second question of seasonal. I think that the main seasonally here usual like in retail right is the fourth quarter to the first quarter. So first off is usually the the week reporter in terms of sales. So that that has some effect in your TV and your top-line. So I think this is the main as every year of holiday season in the fourth quarter off and the start of the year in the first is seasonally weaker in the retail Market to Chicago here James. Just let me add some comments about the softer off. So when we Leah told about the two-fold strategy in one hand, we have a very strong operation regarding the sales process in the onboarding process of our clients that gives grofe ability in our Financial Solutions. And when we have software that respect this kind of operation and make this keep the growth wage.
And in the pace of nods we can roll out software through.
Our Hub strategy and keep the same level of navigation of clients. But when you look for a much more deeper type of software like e r p and POS solutions, they have a different operational way of saying making the sale process and implementation on that strategy. We are looking to an intelligent Capital location that the deals by themselves. They make a lot of sense in terms of capital location and we have the ability to give all the apis in the financial products for those intrapreneurs to penetrate Financial Solutions into their client base there for bringing much more Revenue per month and then they currently have so we are seeking intrapreneurs that have this client centricity as we have they have already proven their ability to grow their own business office. We had a line terms of thinking about tech knowledge and we see the intrapreneurial environment in the same way. So when you have a an alignment of culture passion for clients dead
Mindset in terms of tech knowledge and we have this growth of ability proven by the intrapreneur. Then we are much more able to pursue the investment but with great Capital location perspective.
Great. Thank you for the commentary. Thank you very much.
Thank you James. Our next question comes from Julie with Bloomberg.
Good afternoon. Thanks for sitting in the end. I had a question on the micro merchant business that's on business Elite out some important offerings wage on cash in and cash out solutions that were just rolled out. I guess this month. I'm wondering if those are fully in place with this Regional launch or when they will be filtering into the offerings. When the National Rollout will take place. And then what services do you expect to come in the pipeline over the course of a year?
Hi, Julie. Thanks for your question. How far I go here? So as we mentioned in our presentation, we we we rather have it in place. So the solutions that you mentioned the ones that are in the roadmap, uh, we have mentioned this light tan of our presentation. So this is live and we we already started to to operate, uh, the solutions as we mentioned. Also we were bringing differentiated service and support in that segment. So we think that is a very powerful value proposition the same way we did in SME space. So it's sort of in Stones DNA and with with life partnership with global. We believe we can be very efficient in customer acquisition cost with which in this market is is very very important. So now it's live we are doing it in different phases. We as you said we are in Regional campaigns now, we have some threshold some kpi to measure and then we move to National campaigns. So we'll we'll do it along this year of 2020 you'll see that
that Evolution over time
Is there any Target number in terms of merchant ads that you're looking for for this year?
It's still it's still very soon for us to comment about that. We just launched yesterday. So we are just tracking the the initial attraction and we'll see the results. I think of course when you look at number emergency is a different Dynamics versus a Siamese, uh, when we look at over the next few years, we do expect to become a a relevant player in that market so still still too early and we'll provide more and more updates as as we as we go half a can I add some comments? So Julie Heights Tiago here just to add some comments. So in the product that we have launched we all have different types of machines the account the ability for our clients to do I transfer bill payment tax payments put deposits. It's all integrated for acquiring they already have the card to do cash out. So it's all there. Umm, and we have in our roadmap to add Credit Insurance Mobile Top-Up. So we are seeking for
for features that makes all the difference for our clients the micro Merchant space, but I'm very happy to see that we already we are already offering of
Very complete solution to this, uh to this type of clients and we seek to redefine customer service as half. I'll sad and the growth of don't will be mainly balanced by the cost of acquisition and here is where we think that our partnership with group of global will be very very fruitful because we already understand this operation as we have this client base of 20 miles so we know pretty much the lifetime value of this client. So the biggest challenge here is to get in the cost of acquisition clients cost of acquisition of the big players and I think that took ownership with global will give us the ability to get there and then we can scale pre fast this this Venture so very happy with the lounge of them.
Thank you, Julie. Thank you. Thanks.
Or no questions further and this will conclude our question-and-answer session. I would like to turn the call back over to our hosts for any final considerations.
Hi, everyone Tiago here speaking. I just would like to say a big thank you to our team. It was an incredible year a lot of efforts and a lot of good results were very happy to see the satisfaction of our clients the evolution of the overall team and the industry itself twenty-twenty. We think that will be a great year and you want to say a big thank to our shareholders that has back as throughout this many years very happy with the opportunities ahead and we are only in the beginning of our journey. So it's for us twenty twenties. They went back again. So we have I think oh, I'm sure that we have many great revolutions to bring to you in the next quarter's. Thank you, everyone.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.