Q2 2022 StoneCo Ltd Earnings Call

August 18, 2022

Good evening, ladies and gentlemen, thank you for standing by welcome to <unk> Company's second quarter 2022 earnings Conference call.

Now everyone should have access to our earnings release on the company also paid.

A presentation to go along with this call.

All material can be found at www dot dot com on the Investor Relations section.

This conference call the company will be presenting non I O.

Financial information, including adjusted net income and adjusted free cash flow. These.

These are important financial measures for the company, but aren't yet or not but are not financial measures as defined by ifr reconciliations in the company's non <unk> financial information to the.

Financial information appear in today's press.

Finally, before we begin our formal remarks I would like to remind everyone that today's discussion may include forward looking statements.

These forward looking statements are not guarantees of.

Future performance and therefore, you should not put undue reliance on them.

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. These are disclosed in the company's form 20-F filed with.

The Securities and Exchange Commission, which is available at Www Dot SEC Gov.

Now I'd like to turn the conference over here.

Martin VP of finance and Investor Relations at Steel Company. Please go ahead.

Thank you operator, and good evening, everyone joining us today on the call we have our CEO geography, al and our Chief strategy Officer, Lia Matos today, we will present, our second quarter 2022 results discuss some recent trends and provide an updated outlook for our business I will now pass you.

Over to Thiago so he can share some highlights of our performance jargon.

Thank you hustle and good evening everyone.

In the second quarter, we demonstrated consistent execution, combining strong growth with improving profitability.

We produced a strong performance in both PPV and revenue growth, while improving our operating margins in both of our segments.

We achieved total revenue of $2 3 billion, Reais, which was 5% above our guidance and up 82% year over year, excluding the negative revenue impact from the credit product in the second quarter 21, and pro forma for links on the profitability front.

Our adjusted EBIT margins increased sequentially from 4% in the first quarter to four 6% in the second quarter, driven by improving operating efficiency in our financial services and in our software businesses.

As we noted previously following the partial sale of our stake in Bunkering we.

We decided to stop adjusting the bond financial expenses in our results.

On the second quarter onwards.

As a result, our adjusted EBIT in the second quarter, reaching 107 million, 19% higher than our guidance of over 90 million Reais.

In our financial services segment, we were especially encouraged by five factors.

First the strong evolution of our payments client base, which crossed the 2 million Mark with our next generation of net adds in the quarter.

Second the strong M. S N V TPG growth of 78% year over year, driven by both our active client base growth and a continued improvement in go to market strategy for <unk> and stone product.

Third we were able to continue increasing our take rates, while we increased our average TPB for both stone and Tom projects sequentially.

Fourth the expansion of our banking platform generating more engagements and increasing opportunities to monetize claims in the future.

And finally efficiency gains and cost and expenses.

As a result, the financial services segment revenue grew 3.4 times year over year and 102%, excluding the effects associated with the credit product last year.

At the same time EBIT margins in the segment increased three 8% in the first quarter to four 3% in the second quarter.

Now our software segment revenue growth pro forma for Lynx reached 23%, mostly driven by a strong performance in our core software.

I'm encouraged by the margin evolution is softer with sequential improvement of almost 300 basis points in EBITDA margin, which reached over 15% in the quarter. This improvement was the result of continued efficiency gains and back office synergies, even though we continue to invest in our distribution customer service and marketing.

Capability.

We expect to continue ramping up our software margins in the second half of the year I am pleased with the consistency and direction of our results in the second quarter and I think this is a solid step forward to producing strong results by year end.

Looking to the second half of the year, we will maintain our focus on building on these achievements.

With that said I will now pass it over to Leah who will provide more details about our second quarter performance and a strategic update.

Leah.

Thank you Chad and good evening, everyone as Thiago just summarized the main financial and operating highlights I will dive a bit deeper into the drivers of our performance.

Starting on slide seven I will focus on our client base trends during the quarter. We reached over 2 million SMB clients with net adds of 196000, driven by strong commercial performance in both Tom and stone products. Despite some churn impact from our continuous pricing initiative.

We have continued optimizing our commercial strategy to onboard smaller clients onto our tone product well, we focus this phone product on bigger assemblies. This approach addresses our clients' needs more effectively and provide superior unit economics for us.

As you can see on page eight this strategy has led to better quality in our client base for stone and Tom both of which grew average T. P D over 30% year over year.

This combined with our client base growth resulted in an M. S. N BCP V and $69 9 billion house, 3% above our guidance for the quarter and 78% higher year over year.

At the same time, we improve their monetization with take rates increasing sequentially from two point up 6% to two point or 9% in the second quarter.

On slide nine we highlight the continued expansion and engagement with our banking platform.

On top of the growth in number of clients actively using our digital banking accounts I want to highlight the sequential improvement in our pack, which reached 39 <unk> per month this quarter compared to 33, eight last quarter and three times higher year over year, mostly driven by higher interest rates on average deposits from clients Banca <unk>.

I also want to briefly update you on the performance of our legacy portfolio. This quarter. We received 134 million has a cash inflow, which decreased the fair value of the credit portfolio and our balance sheet to 129 million house.

On slide 10, we will move on to our key accounts business as we show on the left side of the page TPG from key accounts had a slight decrease them in the period as we continue to prioritize sub acquirers on the other hand, the TPG growth and platform services was strong at 95% year over year.

Due to this mix shift and the increase in CDI rates take rates has increased sequentially 0.86%.

Now, let's shift to our software segment on slides 11, and 12 software revenue in the second quarter of 'twenty, two reached 351 million hives, representing 23% year over year growth pro forma for links at the same time adjusted EBITDA also improved reaching 53 million high with 50.

0.2% adjusted EBITDA margin compared to 12, 3% in the first quarter and nine 2% in the second quarter was 21 pro forma for links we expect profitability improvements to continue throughout the year as we capture efficiency gains and back office synergies, even while we continue to invest on several.

France.

On slide 12, I want to highlight the main drivers of this performance and the progress of our software strategy.

First software revenue growth was driven mainly by core revenue growth that was up 28% year over year, driven by the higher number of P. O S. In New York, the locations and average ticket as well as the consolidation of Hecla. Nurture. This result was partially offset by the digital business, which day.

Crane revenues by 6%.

In order to strengthen our strategy of helping our software clients to sell through multiple channels. We concluded the acquisition of plugged to which streamlines integrations with marketplaces.

We believe we have a huge opportunity here to help our clients become truly omni channel and increase their sale.

The second point I want to highlight is that we're gaining scale and improving margins with annualized revenues of $1 4 billion highs. We continue to generate operating leverage from our integration efforts and efficiency gains in cost and expenses and we expect this trend to continue in the second half of this year.

Finally, we see significant room to grow organically and through new investments in our core P O S and ERP product.

Cross sell financial services to our existing client base and help our clients so more through multiple channels.

Now I would like to pass it over to a half of so he can discuss in more detail some of our key financial metrics.

Uh huh.

Thanks, Leah before I go over our financial results I would like to clarify that as anticipated in our last earnings release from the second quarter 2022 onwards, we will no longer adjust our results for the financial expenses related to our bond to allow for like to like comparison, we have included in our earnings material.

Historical numbers in the same criteria that we are now adopting.

That said starting on slide 13, I would like to highlight a few key points as you can see our results are consistently improving with revenue and margins from both our financial services and software segments increasing sequentially.

Our adjusted net income was $76 5 million reais compared with $51 7 million Reais last quarter, a 48% sequential improvement.

For the rest of the year, we expect profitability to keep increasing while balancing it with healthy growth levels.

As we have already detailed our topline trends I'll move directly to slide 15 to focus on our costs and expenses pro forma for links.

Following the trend we started seeing last quarter, we gained leverage in most of our costs and expenses line, both quarter over quarter and year over year with cost of services and selling expenses being the highlights for the quarter.

We will focus on our quarter over quarter evolution, which better shows our current trends.

Cost of services as a percentage of revenue decreased 540 basis points, driven mainly by lower data third cost.

As you'll see gains related to our registry business and lower DNA.

Administrative expenses, we had a small gain in efficiency as a percentage of revenue.

Our business kept growing we had higher third party services expenses, which was the main responsible for the absolute growth in this line.

As we continue to rationalize G&A growth, we expect to continue gaining leverage in this line over time.

Regarding selling expenses. This line decreased almost 400 basis points as a percentage of revenue as our marketing expenses return to more normalized levels.

Keep investing in our growth through commercial efforts in the second half of the year.

Financial expenses with the bond included in the previous quarters for comparison purposes presented a sequential growth of around 710 basis points as a percentage of revenue mainly due to three factors.

First the further increases in CDI rates that increased on average 20% quarter over quarter.

Second a larger mix of prepayment revenue and finally, our decision to increase the duration of our funding lines Lastly, other expenses as a percentage of revenue had an increase of almost 190 basis points, mainly explained by the write off of assets from the discontinued link speed business in the amount of <unk>.

$16 6 million Reais, the write off of equipment and other smaller effects. We are encouraged by the trends we are seeing and we will keep looking for opportunities to be more efficient in the second half of the year.

In addition to our P&L evolution this quarter, we continued to generate cash and improve our liquidity.

Our adjusted net cash improved by $195 6 million reais in the quarter and $455 6 million Reais in the first half of the year, reaching $2 6 billion Reais.

That said I will pass it back to childhood. So he can provide you additional updates about our team and our outlook for the third quarter geography.

Thank you Hassan before we move to our outlook for the third quarter I would like to give you an update about some additional changes to our executive team.

Marcello Boulding, our Chief Financial Officer his departure from the company. After five years of services building out our finance functions and helping the company execute on its IPO.

<unk> will be replaced by excuse me, what ice whose name it our interim CFO .

Q, who has extensive experience in finance, including serving 20 plus years as controller at Ambev will temporarily stepped down from our board to assume his new duties.

Also <unk> was appointed our chief legal officer.

New role, which will serve as part of the Executive Committee.

<unk> has 30 years of experience as in House counsel and head of legal department for different financial institutions as well as deep experience in capital markets.

We would like to thank <unk> for his valuable contributions to stone over the past five years and wish him success in his new endeavors.

Excited to have <unk>, who joined the management team and benefit from his significant experience in finance.

Also I would like to welcome <unk> to our team and look forward to her developing this critical new role for the company.

Finally, let's move to slide 16, where we will share with you our third quarter outlook for the business.

We expect the total revenue and income above $2 4 billion reais, representing a year over year growth above 63, 3%.

For <unk>, we expect volumes between 73, and 74 billion reais with year over year growth between 41, 4% and 43, 3%.

Finally regarding adjusted EBT, we expect more than 125 million reais without adjusting for the bond financial expenses compared to $106 7 million for the second quarter.

We still have a long path ahead of us, but we believe the consistent results achieved in the first half of the year demonstrate we are on the right track with an encouraging outlook for the second half of 2022 in which you continue to expand margins, while keeping strong growth levels.

With that said operator can you. Please open the call up to questions.

Thank you we will now begin the question and answer session.

If you would like to ask a question. Please press Star then one.

Please note that you may need to pick up your handset before pressing the keys.

If you would like to withdraw your question. Please press Star then two.

<unk> been pleased with the first question.

And our first question today will come from Tito <unk> with Goldman Sachs. Please go ahead.

Hi, good evening.

Everyone. Thank you for the call and taking my questions cut.

Couple of questions I guess first on the take rate on the S. M. S N b take rate, so a little bit more expansion this quarter.

Just help us think about it.

Are you done with repricing there is there any more room to re price is this the kind of the take rate that we should expect from here.

Because he also saw the net merchant adds accelerate just to help us think about repricing versus sort of merchandise and your ability to add more merchants how is the competitive environment to allow you to do that.

And second question good.

Good job on costs and expenses are definitely seeing some improvement there is there more to do help us think about how that can evolve from here where else can you say, Steve on cost and control expenses to improve margins from here. Thank you.

How'd you to juggle here.

Start with the first part of your question. Thank you for all the questions.

If I Miss something please.

Help me here to remind all the points.

So first regarding take rates, we have continued to reprice clients. According to CDI.

In the second quarter repricing upwards were a little bit smaller than what we did in the first quarter, but now in the third quarter, we have intensified the repricing efforts and so far we are doing very well.

We expect that in the third quarter the improvement in take rates will be greater than the improvements that we had in the second quarter. So.

I think that we had the time to adjust our pricing to the value proposition of bolt ons from product and I think that we are performing well the client base is performing well and the net adds that we have shown this quarter.

I think that proves our ability to navigate this environment.

We are seeing a better performance in terms of commercial activities that we were expecting so we expect better net ads for the third quarter Q.

Regarding competition.

But what I can say here is that in payments. It has been the same dynamics as always we see the six main players in the market being rational regarding prices, which is good.

The banking credit we continue to build capabilities to allow us to compete head to head with incumbent banks. So we still have a lot of room in these additional financial services to our clients any softer competition tends to be more vertical specific and very fragmented Tito.

We continue to consolidate the industry given the strength of our solutions and the strength of the team so.

Theres no big news in competition, but I think that the six main players in the market.

That dominate the majority of the market share are being rational in terms of pricing and I think that this is positive for everyone.

In terms of cost and expenses, we are improving the spleen and there'll be we manage capital location in opex in our business. So we expect to continue to gain leverage in our lines. So we expect a better.

Second half of the year in terms of discipline in managing Opex.

Great. Thank you Kevin.

But very clear maybe just one quick follow up on the competitive environment, you mentioned that everybody is being more rational now.

How long does that rationality last I mean, do you think once rates come down and people start to get more aggressive again is everybody just kind of normalizing for the higher interest rates just to help us think kind of long term how competition could evolve just given how competitive it's been in the past.

The adult players were impacted by the CDI.

In the same way there are some differences in terms of capital structure between players, but in the end of the day I think that.

When the interest rates were moving up very very fast and the competitors are trying to see what.

Each other we're doing there was some.

Julie.

On the pricing strategy as a whole the players, but I think the analysis behind us we are not pricing or our projects based on the competition. We are pricing our products based on the relationship we have with our clients and the evolution of our solutions for them, but we have seen that the other players are more stable.

In relations to to price and their strategy.

Think that.

These dynamics, we have today will continue.

Interest rates goes down of course.

Some of that.

Moving to clients, but I think that the industry will keep margins when interest rates eased.

That's what I expect.

That's great that's very clear thanks, a lot Thiago.

Thanks Peter.

Okay.

And our next question will come from Josh <unk> with Cantor Fitzgerald. Please go ahead.

Yes, hi, thanks for taking my question.

So the average revenue per active client and banking continues to trend higher.

Do you believe there's more room for that to expand in the back half of 'twenty two as interest rates remain elevated.

Hi, Josh This is Lee thank you for the question.

I think the short answer is yes, so as we continue to see our clients engage further with our our banking solution I think there's a few drivers there right number one is average deposits are.

Of course, it's a big impact in the art back as I just mentioned.

Evolution in the quarter and that is correlated with interest rates. So as long as interest rates go up that that monetization will improve but also average deposits.

<unk> are trending upwards and also as we deploy more features and help our clients.

<unk> banking solutions that also will contribute positively to.

Two monetization so I think that the trend in monetization in banking as we see it as very positive going forward.

Great. Thank you for the color there and then if I could just have a follow up Msmbc P. P. B came in above your expectations. This quarter was that largely driven by higher tone ads or did average spending per merchant also surpass your original outlook. Thank you.

Okay.

Yeah.

Hi, Josh Chagal here.

I think the positive surprise was the average CPA view on both projects we were already expecting this improvement in net adds and we are adding that Ed all clients two years from the micro merchant space to the the the SMB in the museum wires and all.

Two years of clients for the year, we have a path even at that but the average spending per merchant or both stone and stone project came a little bit above our expectation and this was a positive I think that the client base is a bad quality now.

Let's see how this movement will continue for the second half of the year as I said, we expect to continue improving our net addition of clients because they think that we are managing the client base and the new sales are much better now, let's see how the average.

Will behave but I think that this trend will continue.

Great. Thank you very much.

Thank you Josh.

Thanks, Tom.

And our next question will come from Mario <unk> with Bank of America go ahead.

Okay.

Hi, everybody congratulations on the results. Let me ask you two questions. One is on the efficiency gains that you talked about.

I would assume a lot of these gangs is coming from the incorporation of links right and there was a significant overlap can you talk about how much of the links cost base has been reduced or how much do you expect to reduce.

In.

Just trying to get up better feel here for how much more cost savings that we can see.

And the second question is related to financial expenses, where theyre running close to 1 billion reais per quarter now.

But it seems to us that interest rates in Brazil.

Or close to a peak.

So just can you give us some type of sensitivity of your financial expenses due to movements in interest rates in Brazil that'll be very helpful. Thank you.

Hi, Mitra, how far out here and thank you for the question.

So regarding your first question of efficiency I think it's important to highlight that we are gaining efficiency not only in links and software business, but also in the financial services upfront. So if we look at both segments we are having.

Oh opex efficiencies there.

Do have an improvement in margins in software right. They beat the margin went up from 12% to 15% this quarter.

So yes, we are capturing cost savings into software front, but also if.

Some of the cost efficiency. We had for example, we had lower data center costs efficiencies with our registry business. Our banking business also some cost efficiencies. So we do have.

Cost efficiencies related to the whole business and <unk> said this is something that.

Refers to the whole stone cool.

When we think about finished expenses as you said our financial expenses.

They tend to increase.

With the average interest rates in Brazil, and also the growth of our business. So if you look at our T V.

Consolidated <unk> grew 9% quarter over quarter, the CDI increased on average 20% quarter over quarter, and if you add up those two <unk>.

Ranges youll see that its pretty much what our finance expenses increased so asked the CDI rate tends to flatten and of course. It does have a benefit to finish expenses, but of course as Jojo said, we do adjust pricing policies also accordingly so.

I think that over time.

You should see a finished expenses stop increasing as a percentage of revenue as we have seen over the last year when the CDI sort of lessons.

How far can can add some comments here might've Thiago here speaking.

Just to make 100% clear.

When interest rates goes down if it happens we expect that we are close to the peak as you said if the trend in interest rates change in interest rate goes down we expect a direct contribution to our margins. So.

We have with ease in interest rates we.

We expect to capture these benefits in our margins and our reserves.

Okay. That's clear just a follow up then.

On your head Count can you talk about your total headcount today versus like two quarters ago or versus one year ago. When you integrated links.

Okay.

Hi, Mike how far out here yeah. So the head count today is a little over 14000 people, it's pretty much flattish over the last half year.

This is a result.

We commented of opec's discipline right.

So the head count head count is pretty much flattish the increase in personal expenses that you'll see in our.

The result is pretty much the adjustments, we have to do both legally and bringing new talents and the more senior people. So.

But overall head count is pretty much flattish.

Yes, Hi, sorry go ahead chuckle here, just a comment as I told you last quarter.

I think that we already have the infrastructure, we need in terms of people both in distribution and logistics customer service to attend our client base and the growth that we have projected for the medium short term and we are improving our productivity in the way that we designed our processes and now we have a new.

New wave of growth, adding more projects to our clients that we want to increase our number of people. So we expect to continue to gain leverage.

In the personnel expense line.

Okay, guys, that's very clear thank you.

Yeah.

Thank you very much Marty.

And our next question will come from Kyle <unk> with UBS. Please go ahead.

Yeah.

Hello, everyone. Thank you for the privilege for asking questions. So.

I have two here on my side please.

I think you completed a new partial sale of yours, taking local into this quarter.

The first one is can you. Please confirm this to us what it was being booked in our earnings and cash and what is your current is taking buckminster today and what is your strategy on this going forward in the second and we see that your cash generation was negative in this quarter again.

Close to 700 million cash burn year to date.

So just wondering if you can please share with us what's your view about that when do you expect to return to a positive cash generation and what should be the main drivers for <unk> going forward. Please thank you.

Hi, Kai you. Thank you for your question.

So regarding the partial sale of this taking bunk winter Youre right. We have we had a little under 5% stake in Queens, there we have to be around 4%. So basically we sold.

That 1% stake that we have that we had before.

This was.

We received those proceeds at the end of June So theres, a very small effect in terms of.

Those proceeds and of course, when you look at the Mark to market that we have after we have sold the mark to market refers to the stake. We have remained so as we have mentioned in the past. This is an investment we have made.

Back then and this is like not the core of our strategy right now to look at it we have a admiration for the inter team, but this is not.

A big focus now and we keep this stake we have in the bank winter.

Regarding the your second part of the question, we have actually generated cash and increase liquidity. This year almost half a billion reais. So our adjusted net cash position.

$2 6 billion Reais.

So.

That's when we expect of course to continue to generate cash are at lower capex in the second half of this year versus the first half.

And the idea is that our business continues to generate cash.

Hi, Ya Chicago here, just an additional color.

We may just one partial sale of bulk winter when we choose to receive the.

The cash option when they migrated to.

So NASDAQ so there was a we have no news.

Our investment in both winter we remain at the same a position we had and we talk to the market in the last earnings call. So there is only one sale when we choose the cash option in their migration in NASDAQ and no update on that.

Okay. Thank you very much.

Thank you Kai.

Yeah.

And our next question will come from Geoffrey Elliott with autonomous.

Go ahead.

Hello, Thanks, very much for taking the question.

You mentioned being 5% ahead of the outlook you provided but in a sense you will kind of further ahead really in June because the.

The outlook was given at the.

At the start of June and I guess at that point, you had pretty good visibility into the April and May numbers. So can you help us understand where did you performed better than expected was it a particularly strong June and then is there anything we can read it.

So that as we look out into the third quarter. Thank you.

Hi, Geoffrey Rafael here. Thank you for the question.

So I think yes, along the lines that what <unk> mentioned regarding the <unk> that we saw.

Better performance than expected.

I think we did see a strong June as you mentioned and that's that's pretty much the reason why we.

We delivered a number that is higher than the previous guidance.

So yes, when we look at topline the both TPG and revenue became above what we initially expected.

It gives them the strengths in June is there anything we can extrapolate from that I guess.

Are you performing better than you expected in June and can we kind of read through from that into July August September .

Okay.

Yes, I think that we the guidance we have provided for the third quarter.

Alrighty has some of those improvements versus the initial expectation so as Joe mentioned when we look for example at the take rate evolution, we see a bigger evolution in the third quarter compared to the second.

Versus the evolution, we had now from the second.

Versus the first.

So I think we have incorporated those.

Those effects already in our guidance.

We are we are very committed to that guidance.

Thank you.

On the Tia Jeffrey Thiago here speaking.

Great question, I think that in our outlook for the third quarter. What we're showing here is that although we are comparing our growth tougher comps because every quarter.

It is harder to continue to grow at the same pace because the base of PPV is big but we are seeing that at the top of the range, we would be growing 3% on M. S. M. D. C. P D. But total revenue would be growing at 63, 3% at the top of the guidance. So.

I think that here, we show our ability to improve take rates throughout these guidance.

And we are committed to the top of the range of the guidance.

Thank you.

Thank you Geoffrey.

And our next question will come from Neil.

We're all over it.

D C. Please go ahead.

Thank you for taking my question.

Thanks.

Please.

Wow.

I haven't competing the links.

Yeah.

I just want to touch them at some point that's the plan.

And the second question.

That's one thing.

And one of them.

Thanks for joining the call.

That said, we do apologize.

How come along thank you.

Hi, Neil Hi, Yeah, Yeah.

I understand you make two questions one regarding software and one regarding credit right.

Roughly aren't perfect.

Okay.

Okay. So let me start first.

With the software and how we see.

Penetration of financial services evolving into a software client base. So.

The penetration of financial services into our software client base has evolved sequentially and this had a positive impact on the growth of platform services TPG, the 95% growth year on year on platform services PPD, because that's where we account for.

The TPB within our software.

To be clear, we still see a lot of opportunity not only in acquiring but.

And.

Waiting banking to the ERP and when the time is right.

A few updates on the product side.

We have made good recent advancements in product integration.

Regarding fixed integration into the future.

When.

Fixes integrated as a payment method and that can be reconciled as a payment method, which greatly facilitates reconciliation for the clients we have a big coverage of.

POS is with a peak in April .

The second point is a native integration of strong banking into the ERP. This is in advance with a recent advances advancements we have made in the majority of the verticals. We have integrated the ERP two hours phone banking and it's really a facilitator clients cash management workflow.

We also have integrated our reconciliation platform to most of the vertical yockey.

And we had made also advancements in integration of mobile Pos in some verticals, where this will improve productivity in the store by streaming streamlining checkout process.

Examples of recent.

Dan Smith, Who's made an integration and we expect naturally that things will help us strengthen our software value proposition.

Verticals that we offer them.

When we think about credits within the software base. We think that this is an opportunity to address a little bit longer term because our priority in credit right. Now is focused on our SMB clients within this phone project, but if you I think we've talked about this before right. If you look at the linked client base, there's a big fraction of classes.

Middle of the pyramid there so.

Let me call within the SMB space, and we think that there's an opportunity there to leverage the software data to be more survey, that's sort of been giving credit to those clients.

And regarding where we are on credit itself.

I think the message is the same that we gave last quarter. So on the working capital project. We started testing in a very small scale the product and the system improvements that we have made.

We're really in test mode right now.

Some collateral the user experience some features and enhancements that we've done in the project and the idea is to continue these pets, who run our full cycle before we actually decide to scale.

I think our plans haven't changed and we are on track regarding the plan. We're also on track to start our pilots are very strong with our credit card product.

Continued this pilot throughout the second half of that yet. So I think those are the main messages regarding software and credits.

Can you parse it out.

As Josephine had some operating problems is that looking better now.

It's something that we're keeping an eye on to see how that.

And that is improving.

Hi, Neil.

Schedule here can.

Can I go ahead.

Okay.

So Neal hot regarding the registry of receivables I think the big update here.

We continue to follow the evolution of.

The three main players closely.

Integrated with the three of them.

Both in terms of credit drawn it and now we are starting to pay more attention.

Using the registered receivable to create projects to prepay.

Receivables for clients with suppliers, but we don't feel that we have.

Our system the stable enough in order for us to incur into risk only looking to that receivables that are being processed by the rescue so.

We are still being careful on that but I think that in the second half that industry removal.

We opened big opportunities for us.

Both in terms of prepaying receivables that clients have with other acquirers and this is a very big opportunity for links for example.

Dam to improve our collaterals in the credit cards, so let's see.

What the second half of the year will bring.

Okay.

Yeah.

And our next question will come from Pedro Leduc with detailed with BBA. Please go ahead.

Thank you so much grassley hosted a call for taking the question two for me. Please one just.

Seeing your guidance figure for Q revenues $2 4 billion.

It's almost flat.

Back to <unk>.

Mid single low single digit expansion at most.

Which.

Maybe it's just you guys being conservative, but yourself wallboard, just hurt that add straw further repricing that's us evolving.

He was like this deceleration I can't really reconcile them unless there's a big drop.

And the key accounts to come so just like to pick your brains around us if it maybe it's just conservatism or what you're seeing so far in the quarter.

Thank you.

Quite pilbara Rafael here. Thank you for the question.

So I think that.

We as you said I think an important point when we look at our revenue we do have a M. S. N b revenues in key accounts revenue in the financial services of course key accounts revenue they are.

More volatile and also we are discontinuing some super.

<unk> business. So they can be more volatile and of course, we want to make sure that.

Well, we'll reach the guidance that we give and of course the guidance is above two four.

But I think that this is the best number we have right now that we are very confident that we will.

We will reach but overall when we look at the growth that this guidance implies is still a very strong growth year over year over 60% growth in revenue that we think is is a healthy base of <unk>.

Versus the improvement in profitability that we want to we want to have so as Lia and Chuck mentioned, we are balancing growth and profitability in the second half of this year steel and we want to keep that consistent pace. So this is sort of the net effect of all of those elements in our business.

Have a super clear. Thank you and the other question is just a little more on the of the strategic business side.

We've recently.

So that's.

That's bringing Rodrigo Corey.

For BTG banking.

Retail or digital banking lead.

Before that he was a part of the big retail bank as well.

Our senior Vice mentioned banking services, a couple of times on this call.

Avoid thinking that you have all this budget to spend the global.

Maybe to boost that Avenue as well am I correct in the line of thinking that this should be a major a passion point for you guys. So in the near future.

Hi, <unk>.

So here, yes, you are right in the line of thinking we want to be a protagonist in financial services.

For merchants in Brazil.

We're creating big efforts to improve our client base with the main projects we're on top of that.

<unk> transformed the company being perceived.

Draw clients as the main financial provider to all their needs and one of the big steps. We are doing is improving our team and.

Improving our ability to create new products integrated.

Very simple way for our clients.

I think we have the capability of the distribution the culture and the team to execute so let's see how we will evolve for the next six months and one year, but I believe that the new team that we are bringing.

Well Mark was combine it with the pool of talent, we have here and with gradual.

We will be a big boost in our strategy and our evolution. So yes.

Yes, that's the direction we're headed.

Super clear wish you guys. So much success in to talk to you soon thank you.

Thank you very much better.

And our next question will come from Domingos <unk> with Jpmorgan. Please go ahead.

Thank you good evening.

And Lee and often what else is there.

My question is just kind of trying to pick your brain on the pricing what are you guys taking to consideration so.

When we look at at year end your revenues basically grew about 9% Q on Q, which is good it's about in line with what we saw PPD growth.

But when we had financial expenses.

Shrink, 1% Q on Q.

And the point I struggle, a little bit is hearing you say that.

Price not based on competition, which has promoted here improving the margin.

But instead based on relationship with your existing clients. So I guess my question is when you're pricing these or are you baking in.

<unk>.

Rising financial expenses and I'm, adding all the financial expense, because it's pretty hard to locate on a journey.

The booking prepayment versus debentures or.

Our weighted average cost of fundings.

And I.

I guess this was an extensive if youre not really pushing that hard on this price adjustment for both seeking that kind of.

They create or inclusive inclusive.

If that's a figure you are satisfied because we didn't see a good compression Q on Q.

And lastly, like what exactly is your senior management's main goes or.

Remunerated.

If it is on TPG growth.

Or traditional profitability, because obviously, we're seeing big shifting <unk>.

Mr sentiment on on that kind of position. Thank you.

Hi, Domingos Rafael here very very good question regarding the Finnish expenses. So when we look the second quarter. We saw last contribution if you look at the change in our pre tax profits. We saw less contribution from revenue net financial expenses and the improved.

And profitability was mainly from OPEC discipline.

Think that in the third quarter this dynamics.

A little different because we have a we.

We expect a better dynamics of revenue net of the financial expenses.

And there is always some lagging effect between how the CDI evolved and brings the finished expenses versus our pricing.

What we tried to do is always to look and to your question about how we see it we look at the unit economics of our clients and the returns we have from investing our talk there.

And we have some hurdles that we.

We look so after the the cei increases suite.

We do adjust prices.

To adjust accordingly, so I think that's that lagging effect may have some some impacts there I think one other effect that you have in financial expenses this quarter.

We have taken.

<unk> taken the decision to two.

To have a little longer funding lines. So this also have some negative effect there so it's not.

100%.

The funding cost that we have in our clients. So this also has an impact there.

And I think a juggle we'd like to add.

Sure.

Yeah.

And you're right before <unk>.

So.

The surprises to the positive heroes, so congrats on that but if I understood you right basically the wafer price adjustments comes a little bit behind Selic. So when I look at that they create inclusive of our financial expenses.

So nothing drastic happens the expectation is that it moves up so you can choose to recompose that margin.

Yes, Hi, Domingos juggle here, let me add on that so first let.

Let me talk about the cadence of repricing, we did the descriptive.

You could see a improvement in the first quarter.

And we don't want to create too much stress both in our client base and our team. So the improvements that we did in the second quarter was a smaller because it's it's hard for you to keep improving prices.

Frequently in your client base without stressing the relationship that's why we took longer.

The clients to adapt to this new reality and now on July and August , but basically on August we did another significant movement already and I think that we did as well so creating some space.

So those two big movements.

I think that was good.

To the to the client base and to the team. So I think that we are now creating more predictability in the way that we execute our pricing strategy and we have a deep client base. That's really important so it was a big jump in the first quarter, a little bit smaller one on the second quarter and now we've proven the pace back again on the third.

Water and I think that that strategy is performing well both in the base and in commercial activity. So so that's the the scenario you are seeing and you were right when you see that revenue loss.

Our funding costs.

Basically in line with last quarter and there is this effect that the Hopper just mentioned, but we increased the duration of our funding lines are a little bit too mainly because of the microenvironment elections in Brazil, We would think that it was good to be a little bit conservative and improved duration in our lending lines show.

We did it so theres some of that effect and deadline to use you will see in third quarter a different effect. So you will see in the third quarter revenues growing faster than our funding so.

We are managing this.

Appropriately.

No very clear thank you and good to know you look at that ratio. So I appreciate it.

And our next.

One last comment.

Sorry.

It was just your last question you ask is what is the focus of management.

TPG or revenue or profit.

We are focused on the quality of the client base and we are focused on profitability. We will continue to grow at the first days.

You'll see that we are committed to net adds but.

Have to choose today, our focus our focus is to improve profitability balancing batter our growth with profitability and I think that we are delivering that so we will continue to evolve in our pricing. So that's where we have where our minds here.

I'm, sorry, I'm, sorry that I forgot to answer previously.

Great.

And the next question will come from Jeff Cantwell with Wells Fargo. Please go ahead.

Hey, Thank you I appreciate you squeezing me in.

I wanted to ask.

Good to hear from you I wanted to ask you about your software.

Revenue in and really it's about yourself with EBITDA, which it looks like it's up about three.

300 basis points sequentially.

The 15%. So can you can you just sort of give us a little more color.

And what's driving that expansion in the margin there and then any color you can give us on the go forward.

From a margin perspective for the software the software piece of it would be great. Thank you very much.

Yeah.

Hi, Jeff Thiago here.

Two main things one we are integrating our portfolio of companies into links management system, creating one big business units that combines all of our software businesses.

That these are true provides us an ability to continue to grow at the pace. We are I think that in the medium term, we expect to continue to grow at this pace, but improved margins, we've got a 15% EBITDA which was.

I think that we can get to 20%.

Quickly I expect to have positive news about margins close to 20% at the end of the year. So I think that the discipline that the team has to provide efficiency to all of our software products and continued to invest behind growth.

And improve our customer service to clients and.

And software is really performing well so if we continue to grow at this pace, which is look I think it's a help level.

To the medium term and ink and continue to improve margin and I believe in our ability to get close to 20% EBITDA margin in the end of the year is to be a very good first step and in next year, we have to continue to improve our efficiencies and continue to improve our cross sell in our base. So I think that those are the two main things.

Okay, Great and then just a follow up on that.

Can you can you sort of prioritize or explain what are the biggest drivers to get from 15% to 20% is that top line growth is it something with the efficiency that we should be aware of I was just wanted to drill down on that area to the best we can thanks.

Thanks again.

Yeah.

Hi, Jeff Rafael here, So I think it's a combination of those elements. So the fact that we were able to grow have strong growth organically does help to dilute G&A expenses I think this is number one we.

We have been able to improve efficiency and some costs like for example, cloud cost negotiation.

So I think those are the main drivers are.

Off the margins there.

We see and of course, when we are we do have less mature solutions in our software business not only links and to ask those solutions mature and grow and.

And we expand them and integrate into links itself.

I think that this also contributes to a higher margin. So remember that we have invested in software solutions in the past that were basically zero margins.

As we evolve those solutions they gain traction we are able to get them more mature and are also in great margins. So I think those are.

Some of the main elements that should help us there.

Okay. That's perfect. Thank you for all the color I appreciate it congrats on the results.

Thank you Jeff.

And this will conclude our question and answer session I would like to turn the conference back over to the AGA for any closing remark.

I would just like to say a big thank you to the Amit to our team for the amazing work in the quarter and for the support of our shareholders. We expect a very good second half. We are very excited about our business and see you next quarter. Thank you very much bye bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.

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Good evening, ladies and gentlemen, thank you for standing by welcome to <unk> Company's second quarter 2022 earnings conference call by now everyone should have access to our earnings release on the company also posted a presentation to go along with its call all material can be found at www Dot dot com.

Investor Relations section throughout this conference call the company will be presenting non <unk> financial information, including adjusted net income and adjusted free cash flow.

These are important financial measures for the company Bernardo.

Are not financial measures as defined by <unk> reconciliations of the company's non <unk> financial information to the <unk> financial information appears in today's press release.

Finally, before we begin our formal remarks I would like to remind everyone that today's discussion 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. These are disclosed in the company's form 20-F.

With the Securities and Exchange Commission, which is available at Www Dot SEC Gov.

I'd now like to turn the conference over to your host Martin VP of Finance and Investor Relations Company.

Go ahead.

Thank you operator, and good evening, everyone joining us today on the call we have our CEO of <unk> and our Chief strategy Officer, Lia Matos to date, we will present, our second quarter 2022 results discuss some recent trends and provide an updated outlook for our business.

I will now pass it over to Thiago. So he can share some highlights of our performance.

Thank you Hock and good evening everyone.

In the second quarter, we demonstrated consistent execution, combining strong growth with improving profitability with.

We produced a strong performance in both <unk> and revenue growth, while improving our operating margins in both of our segments.

Question from 4% in the first quarter to four 6% in the second quarter, driven by improving operating efficiency in our financial services and in our software businesses.

We noted previously following the partial sale of our stake in <unk> we.

We decided to stop adjusting the bond financial expenses in our results from the second quarter onwards.

As a result, our adjusted EBIT in the second quarter, reaching 107 million reais, 19% higher than our guidance of over 90 million Reais.

In our financial services segment, we were especially encouraged by five factors.

First the strong evolution of our payments client base, which crossed the 2 million Mark with an acceleration of net adds in the quarter.

Second the strong <unk> growth of 78% year over year, driven by both our active client base growth and <unk>.

Improvements in go to market strategy for <unk> and stone product.

Third we were able to continue increasing our take rates, while we increased our average <unk> for both stone and Tom project sequentially.

Fourth the expansion of our banking platform generating more engagements and increasing opportunities to monetize clients in the future.

And finally efficiency gains and cost and expenses.

As a result, the financial services segment revenue grew three four times year over year and one <unk>.

Other than 2%, excluding the effect associated with the credit product last year.

At the same time.

Margins in the segment increased three 8% in the first quarter to four 3% in the second quarter.

Now our software segment revenue growth pro forma for Lynx reached 23%, mostly driven by a strong performance in our core software.

I'm encouraged by the margin evolution is softer with sequential improvement of almost 300 basis points in EBITDA margin, which reached over 15% in the quarter.

This improvement was the result of continued efficiency gains and back office synergies, even though we continue to invest in our distribution customer service and marketing capabilities.

Looking to the second half of the year, we will maintain our focus on building on these achievements.

With that said.

I will now pass it over to Lisa who will provide more details about our second quarter performance and a strategic update.

Leah.

Thank you Chad and good evening, everyone as Thiago just summarized the main financial and operating highlights I will dive a bit deeper into the drivers of our performance.

Starting on slide seven I will focus on our client base trends during the quarter. We reached over 2 million MSM declines with net adds of 196000, driven by strong commercial performance in both Tom and stone products. Despite some churn impact from our continuous pricing in Asia.

We have continued optimizing our commercial strategy to onboard smaller clients onto our tone product, while we focus the stone product on bigger Smbs. This approach addresses our clients' needs more effectively and provide superior unit economics for us.

As you can see on page eight this strategy has led to better quality in our client base for stone and Tom both of which grew average TPG over 30% year over year.

This combined with our client base growth resulted in an MSNBC PV of $69 9 billion, 3% above our guidance for the quarter and 78% higher year over year.

At the same time, we improve their monetization with take rates increasing sequentially from two 6% to two point or 9% in the second quarter.

On slide nine we highlight the continued expansion and engagement with our banking platform.

On top of the growth in number of clients actively using our digital banking account I want to highlight the sequential improvement in our pack, which reached 39 <unk> per month this quarter compared to 33, <unk> last quarter and three times higher year over year, mostly driven by higher interest rates on average deposits from clients Bank account.

<unk>.

I also want to briefly update you on the performance of our legacy portfolio. This quarter, we received 134 million of cash inflow, which decreased the fair value of the credit portfolio and our balance sheet to 129 million has.

On slide 10, we will move on to our key accounts business as we show on the left side of the page TPG from key accounts had a slight decrease during the period as we continue to de prioritize sub acquirers on the other hand, the TPG growth and platform services was strong at 95% year over year.

Due to this mix shift and the increase of CDI rates take rates has increased sequentially to 0.86%.

Now, let's shift to our software segment on slides 11, and 12 softer revenue in the second quarter of 'twenty, two reached 351 million reais, representing 23% year over year growth pro forma for links at the same time adjusted EBITDA also improved reaching 53 million Reais with 15.

0.2% adjusted EBITDA margin compared to 12, 3% in the first quarter and nine 2% in the second quarter of 'twenty one.

Pharma four links we expect profitability improvements to continue throughout the year as we capture efficiency gains and back office synergies, even while we continue to invest on several fronts.

On slide 12, I want to highlight the main drivers of this performance and the progress of our software strategy.

First software revenue growth was driven mainly by core revenue growth that was up 28% year over year, driven by the higher number of Pos and ERP locations and average ticket as well as the consolidation of Hecla. Nurture. This result was partially offset by the digital business, which day.

<unk> revenues by 6% and.

In order to strengthen our strategy of helping our software clients to sell through multiple channels. We concluded the acquisition of plugged to which streamlines integrations with marketplaces.

We believe we have a huge opportunity here to help our clients become truly omni channel and increase their sale.

Finally, we see significant room to grow organically and through new investments in our core Pos and ERP product cross sell financial services to our existing client base and help our clients Omar through multiple channels.

Now I would like to pass it over to <unk>. So he can discuss in more detail some of our key financial metrics Hoffa thankfully.

Historical numbers in the same criteria that we are now adopting <unk>.

Our adjusted net income was $76 5 million reais compared with $51 7 million Reais last quarter, a 48% sequential improvement.

For the rest of the year, we expect profitability to keep increasing while balancing it with healthy growth levels.

As we have already detailed our topline trends I'll move directly.

Slide 15 to focus on our costs and expenses pro forma for links.

Following the trend we started seeing last quarter, we gained leverage in most of our costs and expenses line.

Quarter over quarter and year over year with cost of services and selling expenses being the highlights for the quarter.

We will focus on our quarter over quarter evolution, which better shows our current trends.

Cost of services as a percentage of revenue decreased 540 basis points, driven mainly by lower data center costs efficiency gains related to our registry business and lower D&A.

Administrative expenses, we had a small gain in efficiency as a percentage of revenue as our business kept growing we had higher third party services expenses, which was the main responsible for the absolute growth in this line.

As we continue to rationalize G&A growth, we expect to continue gaining leverage in this line over time.

Regarding selling expenses. This line decreased almost 400 basis points as a percentage of revenue.

Our marketing expenses return to more normalized levels.

Investing in our growth through commercial efforts in the second half of the year.

First the further increases in CDI rates that increased on average 20% quarter over quarter.

Second a larger mix of prepayment revenue and finally, our decision to increase the duration of our funding lines.

Lastly, other expenses as a percentage of revenue had an increase of almost 190 basis points, mainly explained by the write off of assets from the discontinued link speed business in the amount of $16 6 million Reais the write off of Pos equipment and other smaller effects. We are encouraged by the trends.

We are seeing and we will keep looking for opportunities to be more efficient in the second half of the year.

In addition to our P&L evolution this quarter, we continued to generate cash and improve our liquidity.

Our adjusted net cash improved by $195 6 million reais in the quarter and $455 6 million in the first half of the year, reaching $2 6 billion Reais.

That said I will pass it back to Chunghwa. So he can provide you additional updates about our team and our outlook for the third quarter geography.

Thank you have a before we move to our outlook for the third quarter I would like to give you an update about some additional changes to our executive team.

Marcello Boulding, our Chief Financial Officer his departure from the company. After five years of services building out our finance functions and helping the company execute on its IPO.

<unk> will be replaced by a few of them what ice who was named our interim CFO .

Q, who has extensive experience in finance, including serving 20 plus years as controller at Ambev will temporarily stepped down from our board to assume his new duties.

Also <unk> was appointed our chief legal officer.

New role, which will serve as part of the Executive Committee.

<unk> has 30 years of experience in house counsel and head of legal departments for different financial institutions as well as deep experience in capital markets.

We would like to thank Paul Dean for his valuable contributions to stone over the past five years and wish him success in his new endeavors.

I am excited to have <unk>, who joined the management team and benefit from his significant experience in finance.