Q3 2021 StoneCo Ltd Earnings Call
Good evening, ladies and gentlemen, thank you for standing by welcome to the Stone co third quarter 2021 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 materials can be found at www Dot stone dotcom.
On the Investor Relations section.
Throughout this conference call the company will be presenting non I F. R. S financial information, including adjusted net income and adjusted free cash flow.
These are important financial measures for the company, but are not financial measures as defined by the I R. S. Reconciliations of the company's non I F. R. S financial information to the I F. R. S financial information appear in today's press release.
Finally, before we begin our formal remarks I would like to remind everybody that today's discussion might include forward looking statements. These forward looking statements are not guarantees of future performance and therefore, you should not put undue reliance on them.
These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the company's expectations.
Please refer to the forward looking statements disclosure in the company's earnings press release.
In addition, many of the risks regarding the business are disclosed in the company's form 10, 20-F filed with the Securities and Exchange Commission, which is available at Www Dot SEC Gov.
Please note. This event is being recorded I would now like to turn the conference over to your host Rafael Martins VP of Finance and Investor Relations Officer at Stone caller.
Please proceed.
Thank you operator, and good evening everyone.
Joining us here debate, we have geography.
Oh, Yeah, Matos, Chief strategy Officer, and Mike <unk>, our CFO.
They will present, our third quarter 2021 operational and financial results.
As well as discuss some recent trends that we are observing.
Now I'll pass it over to Thiago. So he can share the main highlights of our performance Java.
Thank you Hock and good evening everyone.
As we started a new phase of our business with the full integration of links and as we complete three years as a public company I want to start on page one by talking about what motivate us to work hard every day.
Is there a purpose.
Our purpose is to serve the Brazilian tripping, they're transforming their dreams into results.
And our point of view any person wakes up every morning to build or run a business using entrepreneur.
We want to help them think bigger and turn their dreams into business results by serving them with excellence and helping their business to thrive.
We believe that certain interpret nurse is the best way, we can positively impact Brazilian society.
We want to do this by promoting fair financial relationships enhancing business productivity.
And providing more sales options.
We aspire to be a positive for us to transform the retail infant issue industry for more balanced with relationships.
To achieve our goals, we decided to build the best for an issue operating system for Brazilian entrepreneurs.
She is so early beginning we have always tried to build their business around merchant.
This has motivated us to build the hyper local distribution.
Enable us to be closer to our clients the proprietary technology to provide cost efficient and the reliability that our clients want and the best customer service in our industry.
With the acquisition of links and our current set of solutions for multiple retail verticals.
We seek to build the best workflow tools to generate efficiencies for our merchants.
And help them sell more through multiple channels.
We're only at the beginning of our journey and combined software and financial services.
Even more tangible results to our clients and we are really excited with the opportunities ahead.
On page two we showed that at the end of the quarter, our consolidated CPB, reaching 75 billion Reais.
Representing 54% year over year growth in.
And 26% quarter over quarter growth when excluding Corona washer volumes.
More importantly, our active client base increased two fold when compared to last year, reaching one 4 million clients driven by a heck with high net addition of clients in the quarter.
Of 294000.
The number of active digital banking accounts.
Grew at an even faster pace, surpassing 420000 in the quarter.
In software we've inclusion of links we had over 200000 clients using at least one of our solutions.
With annualized revenues close to $1 3 billion Reais.
Up 17 times year over year.
Even more encouraging the retention rate that links core stayed at high levels of 99%.
Now moving to page three we showed the CPC growth was primarily driven by the Msnb operation.
Which is the combination of micro and SMB operations, the Emerson BCP V.
Agree with a two year CAGR of 61% in the quarter accelerating from 48% in the second quarter and 42% in the first quarter.
Why are the more mature and be operation was able to grow TPB over 70%. The micro merchants volume surged to $3 4 billion reais in the quarter, nearly 23 times higher than the previous year.
On page four we show the consolidated net ads in Msnb's also accelerated to approximately 290000 in the quarter and.
And as a result, we reached over one 3 million active payment clients over two times higher than last year and three three times higher than two years ago.
We also posted a record high net adds when excluding the micro segments with over 80000 of which approximately 77000 in msnb's segments.
Representing an 82% growth quarter over quarter.
As Lee alluded to further in the presentation, we balanced this accelerated growth with solid unit economics.
We reduced Glenn acquisition costs improved the average revenue per merchant, both SMB and micro and kept payback periods in their control ranging from 11% to 15 months.
Before I pass it over to Leah I want to recap romaine strategic movement and what lies ahead.
As we indicated at the beginning of the year, we will keep investing heavily in our engineering sales marketing and operational teams to expand our capability and deliver on our purpose.
In the third quarter, we significantly increased the level of investment in our business.
We have invested approximately 120 million reais more OPEC and the growth of our operation any new business when compared with the third quarter of 2020.
This combined with higher interest rates impacted our margins and even though we started to reprice clients managing our payback strategy with discipline. We are doing this in a way that we keep good level of growth and don't Europe, our direct relationship with auto merchants, which is the most important thing given the opera.
Genesis rehab.
Looking ahead, we see February avenues of growth that reinforce each other to create more value to clients with good unit economics.
We still see a big room to expand our Msnb client base given that we estimate there are over 8 million smbs and over 20 million micro clients in Brazil.
Our ability to grow active base.
Foundry has the potential to increase revenue per merchant overtime by offering additional solutions to our clients.
In credit, we envisioned three projects to attend to different client needs.
Our current credit product that we are turning around.
<unk> card and overdrafts.
We continue focused on engineering.
Movement of our operation and the strengthening of the team.
We will start testing a credit product in small scale sharply.
Additionally, I would like to welcome the team of <unk>, a recent investment that we expect to close in the fourth quarter.
We see the software opportunity in SMB at the very beginning.
Our footprint and distribution.
Binding with vertical knowledge and integration capability.
Provide the building blocks toward our vision of softer integrated financial services in the SMB space.
When we look at Lynx clients. They have approximately 350 billion reais in NY Liza G M D and we monetize only 0.3% of such value.
Also those clients have approximately 200 billion reais in annual PPV and mid single digits penetration with our payment solutions.
We see plenty of room to grow organically in current verticals expand vertical coverage for new investments.
Further help our clients with integrated financial services offers.
And with projects to help them sell more through multiple channels.
Lastly, we will always keep our eyes on the long term opportunities building, a humble organization eager to learn devoted to silver our clients. The best way, we can envision and helping the team to reach its full potential through an ownership mentality.
With that said our pass it over to Neil.
Thank you Chad and thank you everyone for joining us today I want to start on page five talking about growth and engagement with our financial operating system.
Active banking client base increased to over four fold when compared to last year, reaching approximately 423000 clients with the number of SMB clients, who are settling transactions in this tone account, reaching 320000.
We also saw many engagement metrics improving on a quarterly and yearly basis, such as total accounts balance which reached over 1 billion at the end of the quarter at.
Three fold increase year over year.
Net cash inflow from the legacy credit product in the third quarter with 483 million house, which reduced the credit portfolio to approximately $1 6 billion. He is from 2 billion higher than the previous quarter. The coverage ratio remained above 100% and our legacy credit portfolio. It's performed.
As expected.
This quarter, we have shifted most of the focus in the credit business to building the team engineering capabilities and operations. So we can resume credit offerings to our clients.
We envision building three credit solutions based on their most important business needs.
First we're turning around our credit product by implementing improvements to our original short term loan. So we can carefully move forward in test mode, even with the registry system not working as expected.
Such improvements are the inclusion of personal guarantees from business owners and other businesses. They may have.
The better risk scoring through additional data.
Lamenting minimum and maximum monthly payments to facilitate early signs of default, while providing more flexibility on payment terms.
Moving the product for their clients can better understand impacts on their future cash flows and lastly, enhancing our early negotiation capability.
Also we're working to launch two short term lower ticket products.
First credit cards, which will provide our clients with a credit limit to use on day to day business expenses.
Second overdraft, giving our clients the convenience when they need to pay for and expected our emergency expenses and their cash flows are not enough to meet them.
As a step towards strengthening our team we are really happy to welcome the team of <unk>, a data driven SME lender, which operates under a fee based asset light approach.
We plan to initiate a testing things in small scale with short term loans between the fourth quarter of 'twenty, one and the first quarter of 'twenty, two with focus driven towards getting feedback from engineering and improvements of the operation.
Our insurance to loosen those still in pilot mode.
Encouraging initial results.
10500 active contract in which we earn a fee without underwriting risk.
Their families unemployment has multiple insurance needs and we're working to provide them superior financial protection.
This is another important step towards our goal to be the best financial operating system for Brazilian merchants.
On slide six seven and eight I will provide more color on unit economics and monetization opportunities we see out.
In slide six we show that we have been able to accelerate TPG growth and net addition of clients in the M. S. N B segment, while keeping healthy levels of monetization.
Average revenue per merchant and F&B is around 365 now.
While micro is 117 has showing improvement compared to last year.
We also improved the overall acquisition costs.
With cap roughly stable for Smbs, and 17% lower for micro merchants and maintained a stable operational costs.
With higher funding costs.
The net result, the payback period of new cohorts has ranked between 11 and 15 months.
Due to the increase in the Brazilian base rates experienced throughout the past quarters, we have started to adjust our commercial policy. So the new interest rate environment.
In slide seven we show that in banking, we have been able not only to grow client base, but also improve monetization for each client bank.
Banking number of clients increased four fold and average revenue per user improved 30% year over year in the quarter. The insurance product, which is still in pilot mode. Also improved average revenue per user since its inception.
On slide eight.
We want to show the rationale behind our investments in growth.
A broader look at the monetization opportunity in SMB merchant.
We see that the average revenue per merchant, but using payments with 340 <unk>.
And when they use our banking product with a prepaid card they generate an additional 30 highest monthly.
If they decide to use the protection of life and business insurance.
Generating additional 40 he is monthly.
Clients that have fully paid down their loans with us generated a monthly revenue of 327, Hawaii when we look on an accrual basis.
Lastly, the average monthly subscription for F&B clients currently using our Pos and ERP solutions. It was 160 <unk>.
In page nine we give a quick update on our key accounts business, which grew volumes by 10, 5% backed by two different underlying trend.
First some acquired volumes, which continued to decrease in overall volumes and revenues decreased when compared to last year.
Currently our top two sub acquirers represent only about 1% of our revenue net of funding costs.
Down from approximately 3% the previous quarter.
Conversely platform services increased volumes by 55% and currently represent around 60% of key account revenue.
Here, we enabled third party software providers and platforms to embed payments and financial services through API integration.
On slide 10, I want to shift to talk about our software business in the third quarter of 'twenty. One our consolidated software revenue was $314 8 million has with 200000 software clients.
Revenue was 17 times higher than the third quarter, 2020, or 27, 5% higher on a pro forma basis considering links.
<unk> recurring revenue grew 15, 5% in the quarter with Corp, Pos and ERP solutions, increasing 21, 2%.
Driven by both higher average ticket and an increase in the number of sources.
The consolidated software revenue from our portfolio X linked <unk>, which encompasses 10 companies.
182% year over year to $53 1 million house.
On page 11, we give an update on links integration and our priorities ahead.
This quarter, we executed the new leadership organization and the integration of main back office functions, especially finance.
My greatest half of link space of acquire clients with approximately 80% having already opted in and we plan to conclude the process by the end of the year.
We are now shifting focus to capturing the growth opportunities, we see ahead and prioritize execution within different parts of the business.
The first set of assets shown on the page is where we are investing in growth and quality.
We will continue to drive organic and inorganic growth within each vertical and invest to expand presence in new verticals.
Our Oems and impulse solutions are key assets to help our clients digitize our catalog better reach consumers.
No more through multiple channels.
Links as brick and mortar gateway and QR gateway are important building blocks to enable swap term payments integration and we will continue to strengthen and improve such solutions.
On page 12, I want to highlight the strength and opportunity within the Lincoln business with its deep knowledge of different verticals, attracting a powerful set of loved brands within Brazilian retail.
These are software solutions are present in over 106000 locations some of which are the main franchises, a Brazilian retail where the relationship with doors is similar to that of SMB.
I mean, Cisco location jointly transact close to 350 billion has a G N V and around 200 billion has with TPG.
Which we have only mid to single digits payments penetration.
On page 13, we take a broader look at our software business, considering both links and phone software portfolio and their representation from different clients tiers.
Key accounts currently represents 9% of total talk to Robin.
For this client segment, our execution is geared towards the high level of customization of large retailers workflow.
Given the digital omni maturity of our clients. This is an important segment regarding partnerships, we're building with consumer facing companies related to marketplace integration.
Mid to large clients accounts for 80% of softer revenues and in this segment vertical expertise is key.
We see an attractive monetization opportunity by creating integrated financial services offerings specific to each verticals need.
Also we see the opportunity to help these clients to sell more through multiple channels with an efficient omnichannel integration.
SMB accounts for 11% of overall software revenue.
We have over 120000, SMB clients using software and $1 3 million M. S N b payments clients.
We are working to leverage on our distribution capabilities to drive organic growth of software in this client segment.
On page 14, we wanted to share some initial experience, where we're working to improve the efficiency of our clients' processes through payments and open banking integrations with software.
We highlight multiple benefits depending on their specific needs.
It is enabling automatic settlement between service providers and hired professionals.
Such as hair stylists and hair salons.
This specific feature is possible through the integration of drinks, our Pos and ERP for beauty with the strong platform and saves our clients time and money by avoiding double taxation.
Like This example, there are several others highlighted in the page that are brought by different integrated solution.
We're only at the beginning of this journey, but we're very excited with the value we can bring to our clients in the future.
Now I will shift it over to have file who will give you an update on our financial performance in the quarter and the evolution since our IPO.
Harper.
Thanks, Leah now we are entering the last section of the presentation. The financial highlights as shown on slide 15, our total active client base grew over two fold, reaching nearly $1 4 million clients.
While micro merchant active base grew by over eight times to 545000 clients.
Record net adds excluding micro of 80000, ending the quarter with 847000 clients.
Our total revenue in Egypt was 147 billion reais in the quarter, representing a 57% increase when compared to last year.
Links consolidation, which added 262 million rising revenue and the growth of our existing business contributed positively to this growth.
And the lack of revenue from our credit product contributed negatively.
Our business excluding links in our credit product grew revenue by over 55% year over year.
The credit product on the other hand, which contributed with 156 million <unk> revenue in the third quarter last year didn't contributed to our revenue this quarter.
Cause we temporarily paused new disbursements as mentioned in our previous earnings call.
Looking at our TPG, we reached 75 billion reais in the quarter or approximately 300 billion reais on an annualized basis.
This does not include links pay volumes T.
CTV ex Corona voucher grew 53, 6% year over year.
In slide 16, we show our consistent market share gains in payments look.
Looking at the main players in the market with public available data stone co reached nearly 13% of market share in PPV.
If we consider only our msnb volumes market share over total market volume is approximately 9%.
More importantly, we can see that our F&B business has been gaining share in a very consistent way with our highest ever quarterly market share gain of over one three percentage points as you can see on the chart in the bottom right of the page.
Moving onto slide 17, we show the pro forma results with links both including and excluding the credit product.
As <unk> mentioned, the pro forma growth of our business was 46% when excluding the credit product and 26% when we see reported numbers with credit.
There are four elements I would like to highlight here.
First our business kept high growth levels after the acquisition of links.
Interesting to highlight our business model is protected against inflation, both in the payments business, which captures a take rate of nominal transactions and in the software business, which has inflation adjusted contracts.
Second point to highlight is that in this quarter, we had significantly higher opex investment in growth and new solutions S. Jaguar has mentioned previously.
So you can see cost of services and selling expenses increased at a higher pace than our revenue and cost of services. We have investments in our registry platform and other data center cost to support the growth of our operation incremental investments in our technology customer service and logistics teams.
And selling expenses, we have investments in the expansion of our hub operations higher marketing expenses and higher investments in coal.
The third point to highlight is that our administrative expenses increased significantly over 100% year over year.
Here, we had over 63 million reais in this quarter of one off fee paid to advisers relative to the links and bunk Windsor transaction, Besides higher amortization of fair value adjustments on intangible assets related to acquisitions and G&A expenses related to our software operations apart from links.
Important to note that in this quarter, we have separately disclosed the mark to market results from our investment in bunk winter.
We had a loss of $1 3 billion Reais this quarter compared to a gain of $841 million in the previous quarter.
The fourth point to highlight is financial expenses as Leah mentioned basic interest rate has increased significantly in Brazil over the last quarters.
This combined with strong growth in our prepayment volumes led to an increase in financial expenses pro forma for links of over 290%.
Adjusting our commercial policy to this new environment balancing the pace, we expand our business with healthy monetization, but we still see in the third quarter and in the fourth quarters of 2021 lower margins than usual because of that effect.
As we mentioned a couple of times in the past usually there is a lag between changes in CDI and our commercial strategy adjustment.
As a result of those factors our adjusted net income was 133 million reais in the third quarter.
If we exclude our credit solution.
Our net income was $152 million, mainly because of the financial expenses, we still had in our P&L related to our legacy credit portfolio.
Now, let's move on to page 18, where we show our reported P&L.
We grew revenue by 57% with subscription revenue growing over 300%.
As a result of links consolidation.
Excluding lease subscription revenue grew 64%.
Largely driven by higher active client base.
Bind with higher contribution from our software solutions.
Transaction revenue grew last at 23%, mainly because of Corona of Osha revenue in the third quarter of last year.
Excluding those transaction revenue grew a little over 47% year over year.
Our financial income grew by 32% year over year, including revenue from our credit solution, which contributed to 156 million Reais and revenue in the third quarter of 2020 and virtually zero to this quarter's results.
Our prepayment business continues to grow at a strong pace with our financial income excluding credit Enlink.
<unk> by approximately 100% of year over year Leslie.
Leslie other financial income increased 96, 7%.
This increase was mostly because of the higher base rates in Brazil, which was partially compensated by lower average cash balance.
Cost and expenses increased mainly because of links consolidation and further reasons I have just mentioned before in the previous page in our press release, we give more details of the growth drivers excluding links consolidation.
Moving onto slide 19, we can see the evolution of adjusted net income, which reached 133 million reais in the quarter.
Also as we have mentioned in our earnings release last quarter. We have now evolved our manager a view of adjusted free cash flow and other cash flow metrics. We believe this provides a more assertive way to look at cash flow, especially given the dynamics of prepayment and credit solutions as well as additional disclosure to investors to understand.
Our business in our earnings release, we detailed the changes we have made.
So looking at the table on the right hand side of the presentation, we see that our adjusted free cash flow, which does not take into account our cash flow from credit and prepayment operation remained relatively stable year over year. Despite a strong increase in investments we have generated 238 million reais of adjusted free cash flow in the quarter slightly.
Higher than last year, the increase was mainly driven by a much higher cash net income, which grew by 168% and lower capex, partially offset by lower cash flow from working capital variations.
In the quarter, our prepayment business has required two 5 billion as of cash, which we funded mainly through sale of receivables. Our credit business has released over 480 million Reais and cash flow as we are collecting loans from our legacy portfolio with no new disbursement.
Also we have disbursed $4 7 billion reais in the quarter for the acquisition of links which was funded by our follow on offering in the third quarter of 2020.
Moving to slide 23.
Three years have passed since we became a public company and we believe it is a good moment to come back to some of the messages we have provided by our IPO.
What we have done since then and what we are doing now.
By that time, we intended to develop solutions in the banking space and to serve micro merchants.
Then our solutions in banking and micro merchant space have gained significant scale despite being still in the early days.
Active clients in banking have surpassed 420000, and we have surpassed the mark of half a million merchants with our <unk> solution.
Looking ahead, we aim to be the best financial operating system for Brazil merchants S. Jaguar has mentioned in the beginning of vertical.
Also we have mentioned back in 2018 that we would selectively pursue acquisitions, especially in the software space.
Then we have invested in 12 company being today the number one company in softer for retail management in Brazil.
And looking ahead, we aim to be the best workflow tool for Brazilian merchants and help them drive sales through multiple channels.
By the IPO. We also said that we intended to continue to grow our base of stone hubs.
We have increased from 180 proprietary hubs in 2018.
To over 450 hubs to date gaining density of coverage.
Our client base increased from a little over 230000 by the third quarter of 2018 to $1 4 million clients now of which $1 $34 million in F&B.
S shared with FES. We believe there is still plenty of room to grow with nearly 30 million smbs in Brazil.
Following to the next slide we show how our metrics changed since our IPO. We grew our client base at over 80% three year CAGR and our TPB in revenue in a 50% and 53% three year CAGR respectively.
Our adjusted net income has increased from 89 million reais in the quarter to 133 million now, although we continue to invest heavily in our business we.
We improved our ability to recruit talent.
With over 130000 applications to our recruiter program this year.
We maintain very high service levels with Kohl's rated as excellent in our customer support roughly stable at 92% and the accolades from our logistics at 96%.
Also we have raised the bar for ourselves, whereas in 2018, we had the goal to take phone calls in 20 seconds. We now do it in five seconds.
We are proud of what we achieved since we got our first client in 2014, but we are much more excited with the opportunities ahead of US. We are just in the beginning of our journey.
With that said operator can you. Please open the call up to questions.
At this time, we're going to open it up for questions and answers if he would like to ask a question. Please press star one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
One moment please for the first question.
Okay.
Our first question will come from Tito law Barta with Goldman Sachs. Please go ahead.
Hi, good evening, thanks for the call and the presentation and taking my questions a couple of questions.
One maybe just to understand a little bit on on links and some of the opportunities that you see there I mean, you gave some color in terms of what Youre looking to do but I was curious on the the payment volumes that you highlighted from links around 200 billion any indication on <unk>.
Essentially capturing.
Those volumes over time and also on the omni channel strategy.
As you.
Get some of the software <unk> to your merchants or any color you can give in terms of like the potential synergies that can arise and then second question I guess in terms of your margin and I understand your financial expenses went up you're investing a lot in the business. I think you said margin could fall again in <unk> you know your margin today is 9%.
Well below historical levels.
Do you think you're going to continue to see pressure on that because of the higher financial expenses and investments in the business.
Any paths.
Pathway to get back to those historical margins that you had in the past.
Any color on that would be helpful. Thank you.
Hi, Tito this is Lee. Thank you so much for the question I will get started and then pass it onto to juggle.
So regarding links Tito I think the big message here is we do see a bigger pool of T. P V than we anticipated a prior to to actually.
Administering the company.
And in many ways, we see more opportunities to add value to our clients here, but our focus is really about.
Thinking more deeply about each vertical and I think we tried to illustrate a little bit.
These initial testing.
Tests and pilots that were running so the direction that we will go here.
Not to think about.
Pure commodity payments penetration, but thinking how can really add value to our clients and we're in the workflow of those clients, who can actually simplify their lives through this payments and open banking integrations. So we want to help our investors to see these opportunities as we see them, but we're not really ready to provide.
Any synergy guidance at this point.
I think.
Omnichannel is the second part of your question So I think.
Any channel the Big focus is when we show that pyramid, where we show the links clients by tier and when we think about the big clients right.
Key account clients within links those are naturally the clients that are more digitally mature all of them already have omnichannel or most of them already have omnichannel operations and our initial focus will be unhealthy those clients connect to different consumer ecosystems are and I think into as an example.
All right and I think as a as a second step on the mid large clients, we do see a huge opportunity as well to help them in a more simplified way to become an omni channel and digitizing and be able to sell through multiple channels and I think when we talk about the SMB opportunity that's a slightly more <unk>.
Long term opportunity that we see.
Chaga wanted to talk about margins.
Elliot. Thank you try to Thiago here. Thank you for the question, let's try to be helpful. About leaks too I think that we are we executing the first space. When we think about the payments and financial services, which is really migrating clients from the platform of link space to our own platform and <unk>.
Learning the execution with the integration and all the sales process in order for us to implement the strategy. We believe into the client base of links so as we said 80% of declines already accepted to migrate we are focusing on making this migration the best way possible and we want to end. This in this.
Fourth quarter maximum in the beginning of first quarter and we are implementing all the processes needed to penetrate the client base. We have we are happy to see that links is much more concentrated around the medium and small clients that we believe previously so we see good opportunities here in terms of omni channel as well.
Leah said win.
It's 12, there are some examples of very good brands.
Can you hear me, yes, working okay, yes, I can hear you now so when you see in page 12, you can see some of the brands I'm sorry. The team was saying that it was not working here sorry. So we show some of the brands that we have here, but more and more than this I think that those clients. They are much more concentrated into brick and mortar sales. If we can on a very simple way.
<unk> ability to sell through multiple channels through e-commerce platforms through conversational path firms through social will really bring new sales for them and that's where we really changed the relationship with merchants, we are really focused towards that.
Talking about margins as you said I think that we have unusual margins and in the short term you should see margins a little bit we should see margins lower than usually and we see this as a temporary and not structural some elements here to have in mind, when we think about margins.
First we've decided to set of our company to be much bigger in terms of scale.
We are investing heavily with unit economics disciplined so as we grow theater, we will get the benefit of operational leverage.
Given that we see good returns on the investments we are doing and we are trying to show. This by the payback period that we are experiencing GM SMB, we think that's worth it to keep high levels of growth in the business.
Second is that we are investing in new fronts to silver merchants. So you can see the additional products and a very accretive way. We are trying to show what we want to build for the future to enhance the relationship with our merchants in this slide 14, and slide eight so as we progress towards our emission we.
Our our margins to considerably expand.
Third our business has some exposure to macro environment as <unk> said in a positive and negative weight. We are positively exposed to inflation given that it increased to PV and the software contracts are naturally adjusted by inflation, but were negatively impacted by interest rates as funding is a very.
Parts and resource to grow our company.
The way to mitigate this negative exposure is really for products and the right pricing strategy. So when we scaled our balance sheet. Our banking solutions, we have more outstanding balance of our clients today, we have over 1 billion reais in outstanding balance.
And we are here beauty, a natural hedge and although there is a lag between interest rates increase and our repricing strategy, because we don't want to jeopardize our relationship with our clients and keep good level of growth you can see that the our strategy we will move forward.
It will move forward fast, but there is this lag that we have to pay attention. So moving forward, we expect our margins to increase by the effects that I just told you.
Thanks, Kevin that's.
That's helpful just to understand going forward.
<unk>.
Next quarter next year is that the longer timeframe in terms of those margins are increasing and you also said remained below historical levels.
Is there a downside from the 9% margin. We saw this quarter or are you just mean relative to the near 25% to 30% margins you should be below that just trying to quantify a little bit some of the evolution because.
Big Delta from where you were to where you are today.
Yes, two two so we are already executing the repricing strategy both unit sales and in the current client phase. We have we have taken a cautious approach as we said not to jeopardize relationship, but we are doing well. So we are executing this with disciplined throughout November and December and I think that we are more.
Well when we think long term about margins, we expect to have a high margin company, mainly because we believe in our ability to drive much more engagement of our clients with the solutions. We are building keeping the cost to serve under control. So we think that were fit to expand the base we have.
Because of the strategic roadmap, we see in front of us. So I think that very short term you will see level of margins higher than what we had one year ago, but mid term, we expect to very high margin company because of the our expectations in terms of product.
Okay, Alright, thank you Kevin.
Our next question will come from David <unk> with Evercore ISI. Please go ahead.
Thank you good evening could you expand upon your expected timeline to restart credit origination how the integration with the registry of receivables is going and when we might see start to see some operating leverage in the credit business.
Hi, David Lia here. Thank you for the question.
As I mentioned, we expect to start requesting our original product, which is short term loans between the fourth quarter of 'twenty one in the first quarter 'twenty two we're implementing in this product several improvements so that we can start to test and test the impact of those improve.
And that's without needing to rely on the registering systems fully functioning so those improvements are.
For example, the inclusion of personal guarantees from the business owners.
Essentially all of their business. They may have improved risk, scoring through additional data and part of that has to do with in a very important fact that I didn't detail my twitches incorporating hub operation into the credit is much better than we did before so part of that data has to do with it.
And interactions that our sales agents, our green Angels and our customer service teams have with our clients every day.
Implementing some product adjustments as well also make some minimum maximum or prepayments that will facilitate and make it more flexible for our clients to pay and enables us to actually identify earlier.
Signs of default and improving better just UX better experience for those clients that they can really interact with the product throughout its life cycle in a much better way and enhancing our early negotiation capabilities. This also has to do with incorporating hubs better into the process.
So we really will test all of these improvements as we start testing on the <unk>.
<unk> fourth quarter and in the first quarter of 2022, we will not.
Wait for the registry to be fully functional.
And we wanted to do this without having to rely on that but that said we do expect.
That long term the registry systems will work and that will get into regime eventually.
Okay. Thanks for that just as a follow up when do you think you'll start to originate credit and volume in other words, you talked about starting to re test in the fourth quarter of this year in the first quarter of next year, but when do you think your.
You know you're lending product will be back at volume levels that we saw.
Prior to halting the origination of credit.
Hi, David Thiago here.
Think that we are not ready to provide a specific guidance in terms of scaling. The credits we are really focused towards engineering and getting the feedback of clients and all the clients experience that we have learned throughout this we're near executing the crowded will start.
We expect to start disbursing this quarter and we think that this mindset towards engineering towards client experience, making sure that all the negotiation renegotiation process works and the best way possible for our clients is the mindset that we need.
To have today I think that by maybe the end of the first quarter or beginning of first quarter to be easier to prove to provide you. Some guidance in terms of scale, we want to keep our minds now towards engineering and getting the product in the way we want.
Understood. Thank you.
Thank you David.
Thanks, David our next question.
Our next question will come from Mario Perry with Bank of America. Please go ahead.
Hi, everybody good evening, thanks for taking my questions.
Two questions as well.
A little bit repetitive, but I wanted to be clear.
So on links.
When you first made announced acquisition you expected links the EPS accretive.
In the first year.
That's still the case.
When we look at links right.
The revenues are Annualizing close to 1 billion Reais.
Are you seeing should we expect any meaningful acceleration in revenues of links them in the next 12 months.
And especially also loan costs links right. As you mentioned you have been investing a lot to make sure that.
Youll migrate clients into our platform. So I wanted to understand a little bit better is this transaction EPS accretive or not in the first year.
And then the second question is about your ability to pass on higher prices.
As you have them for higher financial expenses right.
Right.
I understand that other players in the same position as you are given the wholesale funding.
Of the business. However, my concern is that some of the incumbents might see this as an opportunity to regain market share might be reluctant to pass prices. So can you discuss a little bit about the market dynamics and your ability to pass the pass on higher prices going forward. Thank you.
Hi, <unk>, Hi Fi out here. Thank you for the question. So regarding your first question of EPS accretion. So links is a is a very healthy business in terms of margin. So a bit the margins very healthy when we look at interest rates right. Now are linked bottomline today is contributing negatively to our result, so we are.
Reassessing and are re budgeting for next year and the opportunities that we see the EPS accretion. We do believe that this is a very accretive business rigor.
Regarding the timing of when this should be accretive will come back to you on more details with the synergies.
But I think that the interest rate scenario makes the bottom line in terms of net income and EPS.
Slightly lower than we expected, but when we look at other opportunities for example, as links core growth.
It's performing better than we had expected when we did the deal. So I think it will be.
A tradeoff that the opportunity here is not maximizing linked bottomline, but rather building to the future that Leo mentioned, so we are testing already integrations and different segments of clients.
And one important thing I think.
To mention is.
When we talk about penetrating financial services and linked clients.
Much more focused on rather than going to the big clients on selling payments in penetrating payments with a small fees. We're trying to have a deep knowledge on what product fits best for each vertical and client profile and from the conversation we have been with the team. There is a lot more to explore than we thought and this will be very accretive so.
This is a.
The update on links.
I might have changed here.
Just a quick comment on links if you see slide 11, we try to broke down what we seen links in terms of solutions in three buckets. So first bucket I think it's about the core.
Positively impressed by how strong the corner of links is so we were surprised by the growth of the core the Pos and ERP solutions. The group of Oems the theft solution, which is the brick and mortar gateway and in here, we really want to invest in growth and quality and we wouldn't see the combination of distribution channels.
It links has built through one force franchises and what stone has built with the hubs with franchises in all the channels. We use I think that we will have a greater chance of accelerating our software strategy with the combination of both teams. So we really like the execution of those assets and we believe that is opportune.
<unk> in terms of growth in software <unk> is bigger than what we thought in the beginning when we think about the E. Commerce platform I think there's a turnaround here that we have to invest more in terms of scalability and feature and worth. It. So we are taking the time to help the team to <unk>.
Turn around the E Commerce platform, we have a two year CAGR of 39%, which is interesting to see because 2020 was a huge growth because of the pandemic. So there is a good movements interaction, but we believe that in order to get the E Commerce platform, where we want their investments in terms of technology to do here and I think.
The negative surprise was the payments platform that we decided to shut down as fast as we could because we think that the quality of the platform and the risks involved was worsening we fought in the beginning so we decided to put our energy towards migrating clients.
Okay.
And I think that is delayed a little bit for mens in terms of penetration, but it hasnt changed our plans and the opportunities we see when do you think about the ability to reprice.
We already changed prices in terms of new sales and we started small but we already started the repricing in the client base. So I'm seeing that we are moving towards the direction that we want having the discipline to balance payback period and contribution margin for each client, we don't talk too much about repricing because.
It's very sensitive in terms of competition, but I can tell you is that we always every time that we have to talk about repricing with clients. We have to do in a very granular way.
<unk> client by client segment the size of the products they use and really create the best proposal that we can do for them. So we are not rushing because we want to protect our client base, but the first results that youre seeing shows that we have the ability to execute the repricing without jeopardizing.
The relationship so we're doing a balanced way.
Okay guys now that's very clear thank you very much.
Thank you Marty our next question will come.
Our next question will come from Jamie Friedman with Susquehanna. Please go ahead.
Hi.
Hey, good results here guys I'll just ask my two upfront.
So about the slide 11.
Thiago and Leo with your comment would.
Would you say, 50% of the clients instead of acquiring migrated to scold, 80% opted in.
My understanding was that you were targeting 20% in year. One run rate is just mixing things up here like what is sub acquiring as a percentage of the <unk> I guess my question. That's the first question.
Thiago I thought you said earlier, maybe I misheard I really apologize if I misheard that you thought that margins would be higher in the short term. If you could just I realize you guys don't give guidance, but if you could just clarify that because that seemed.
Different than what I would've thought thank you.
Hi, Jamie I'll take the first part of the question and pass it to Chad was so yes, let me clarify your.
Your question regarding migration versus the synergy in terms of penetrating a linksys base. So the number that we did here relates to link space <unk> had a sub acquire within its linked linked space set of assets and that's where we put.
The first focus of the team because we saw some risk there.