Q3 2022 StoneCo Ltd Earnings Call
Good evening, ladies and gentlemen, and thank you for standing by.
Welcome to the stone co third quarter 2022 earnings conference call.
By now everyone should have access to our earnings release.
The company also posted a presentation to go along with its Paul.
All materials can be found online investors stone.
Throughout this conference call the company will be presenting non I O R. S financial information, including adjusted net income and adjusted net cash.
These are important financial measures for the company, but are not financial measures as defined by I guess all of us.
Reconciliations of the company's non Ifr S financial information to the Ifr S financial information appear in today's press release.
Finally, before we begin our formal remarks I would like to remind everyone that today's discussion may include forward looking statements.
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 20-F filed with the Securities and Exchange Commission, which is available at Www Dot S E C dot jobs.
I would now like to turn the conference over to your host Rafael Martins Vice President of Finance and Investor Relations Officer at Stone. Please proceed sir.
Thank you operator, and good evening, everyone joined.
Joining us today on the call we have our CEO geography, all and our Chief strategy Officer.
Today, we will present, our third quarter 2022 results.
Some recent trends and provide an updated outlook for our business.
I will now pass it over to juggle. So he can share some highlights of our performance jargon.
Thank you Howard and good evening everyone.
This quarter, we had strong growth with market share gains doubled.
Doubled our profit sequentially.
They are rated at a net addition of clients and generated strong liquidity with improving adjusted net cash.
Our profitability recovery is also gaining momentum.
But I think that I would like you to keep in mind about this quarter.
First our business is growing at a very strong pace. Our revenue grew 71% year over year, we accelerated quarterly M. S. N b net additions to reach 2.3 million clients and we accelerated our market share gains in payments.
True we saw consistent improvement in our profitability with doubled our profit versus last quarter with strong margin improvement and an adjusted EBIT of 211 million reais in the quarter.
Against currently above our guidance of over 125 million Reais.
Three our banking business continues to perform very well.
We accelerated the growth of active banking client and the volume of our client deposit, resulting in an increasing the average revenue per client.
For growth in our software business exceeded 20% year over year, driven by our Corp, Pos and ERP solution there.
The adjusted EBITDA margin in this segment increased significantly year over year and was a stable quarter over quarter, we expect our adjusted EBITDA margin in software to improve in the fourth quarter.
Finally, our business continues to generate cash our adjusted net cash balance grew faster increasing by 350 million Reais this quarter and 813 million year to date.
I will now pass it over to Leah will provide more details about our third quarter performance and our strategic updates Leah.
Thank you Chad and good evening everyone.
I'd like to jump straight to slide six where we show the performance of our financial services segment.
We're growing at a very strong pace with revenue up 84% year over year, and adjusted EBIT up 70% or 111% quarter over quarter, resulting in over 400 basis points of margin expansion in the quarter.
These strong results were driven by TPG growth higher monetization of clients and more efficiency in cost and expenses as we will detail further.
Moving to slide seven this quarter, we reached more than 2.3 million active M. S. N b clients with net adds increasing to 248000.
As we have been explaining over the last few quarters. This performance in net adds reflects the continued optimization of our commercial strategy to offer a stone and stone product for each client segment needs, resulting in positive net adds in both micro and SMB segments.
I think this is a key indicator of the success, we're having in our two brands and multichannel go to market strategy.
This strong growth in our client base was the main driver of M. S. N D. G. P D growth.
As shown in slide eight.
M. S N B T V moved 45% year over year to $74 7 billion house above our guidance range of between 73 and 74 billion House.
I'm, particularly encouraged that this growth resulted in M. S N b market share gains of 66 basis points compared to the total industry.
Our M. S N b take rates increased 11 basis points quarter over quarter, reaching two point, 21%, mainly a result of more repricing in the third quarter.
Moving to slide nine our banking active client base increased 33% year over year, reaching 561000 clients with deposits from M. S N b more than doubling to 2.7 billion hats.
We also increased the monetization on a per client basis with our Pac reaching 44. He is compared with 39 has last quarter.
I want to highlight an important trend in our banking business that will begin to take effect, especially in 2020 three.
As we sell more banking into our town planning phase, we expect to see a significant increase in our number of accounts total accounts balance and overall banking revenues.
Although the average revenue per clients should decrease as micro merchants have naturally smaller revenue contribution.
I also wanted to give you a brief update on credits we have started testing our new credit product and glad there our new head of credit is already on board.
Our focus with the new credit product is to enhance our understanding of clients' ability to pay on one hand and at the same time enable our clients to better manage their cash flows when they use our credit solutions.
Some of the elements that we're currently testing include an increased set of variables within our credit models.
<unk> processes that makes it easier to renegotiate the credit.
And the inclusion of our hub operations in the credit lifecycle of clients, we will start with the working capital and our credit card related products, but we expect to expand our portfolio to provide a broader set of products in the future.
We will take a conservative approach given the credit cycle. The market is facing and expect to ramp up our credit client base in 'twenty two 'twenty three.
Moving to slide 10, I want to remind you that over the last year, we have been continuously prioritizing sub acquired volumes because of their low profitability, but we remain focused on platform services as a result of acquire volumes decreased 56% while platform services CTV gross.
63% year over year.
The net result was that key accounts total TPB decreased 20% year over year.
We expect key accounts CTV growth to trend upwards. Once we have rolled off Morris of acquired volumes.
Due to this mix shift and higher prepayment prices take rates increase sequentially to zero point, 95% from 0.86% in the second quarter of 2022.
I will now shift to software and slightly low.
Software revenues increased 22% year over year, reaching 366 million house.
Adjusted EBITDA more than doubled year over year to 55 million reais with a margin of 15% relatively stable versus last quarter, and approximately 830 basis points higher year over year.
This quarter's software margin was affected by nonrecurring costs, which we expect to normalize in the fourth quarter of 22.
We expect our EBITDA margins to improve in the short term.
On page 12, I want to highlight a few points on the evolution of software.
Core P O S and ERP solutions continue to drive the growth in the segments, increasing revenue by 22% year over year, mainly due to the increase of the number of P. O S and ERP locations as well as average ticket digital solutions returned to growth this quarter, increasing revenues by 10% year over year.
We're benefiting in part from the acquisition of plug to a solution that helps clients sell online through integration with marketplaces.
The integration of our financial services and software products continues to progress we.
We integrated payments and picks acceptance in all sorts of verticals and stone banking into the ERP is a 12 vertical well.
While we're still evolving our go to market strategy I believe that this will be a strong differentiator in the way, we bring financial services and software for client and we're monitoring our progress here very closely now.
Now I want to pass it over to Hassan so he can discuss in more detail some of our key financial metrics.
Thanks Leah.
Slide 13, I would like to highlight our trajectory of solid growth combined with a strong recovery in our profitability.
Our revenue grew 71% year over year to $2 5 billion Reais in our adjusted net income more than doubled sequentially to 163 million Reais.
Leah mentioned our M. S N B T. P. D grew faster than the industry, but we also gained market share on a consolidated basis, even though we continue to prioritize the mcguire volumes.
Just on industry data our M. S. N B segment gained 66 basis points of share this quarter and our consolidated payment business, including key accounts gained 41 basis points of share.
As shown in slide 14, our adjusted EBIT reached 211 million reais, 69% above our guidance, representing significant year over year and quarter over quarter growth.
The outperformance relative to our guidance was mainly driven by better than expected revenue net of funding costs in financial services, including a successful repricing strategy.
In slide 15.
Talk about our costs and expenses focused mainly on quarter over quarter trends.
Cost of services as a percentage of revenue decreased 40 basis points to 26, 8%.
This gain in efficiency was driven by strong growth in revenue, which more than offset a nominal increase of 45 million reais in cost of services in the quarter.
The increase was a result of hiring investments in technology, and logistics increased costs with cloud and data center and depreciation and amortization.
Cost of services include upfront costs related to acquisition of new clients and despite strong growth in our client base does line reduced as a percentage of revenues both year over year and quarter over quarter.
Administrative expenses as a percentage of revenue had a slight decrease to 10%.
Dominantly each grew 20 million reais sequentially, mainly due to higher personnel expenses.
Selling expenses had an increase of around 80 basis points as a percentage of revenue mainly due to investments in the sales team largely focused on the hubs as well as marketing expenses.
Finally financial expenses decreased one 4% quarter over quarter. This was mainly due to a lower and more normalized duration of receivable sold to fund the prepayment business and the use of cash generated by our operations to pay down debt, reducing debt levels from $6 8 billion Reais in this.
Second quarter, two 6 billion reais in the third quarter.
Those two factors.
More than offsets the higher prepayment volumes and higher interest rates quarter over quarter.
In addition to our P&L evolution. This quarter, we continued to generate cash and improve our liquidity our adjusted net cash balance improved by around 350 million reais in the quarter, reaching three 1 billion reais.
In the first nine months of 2022, adjusted net cash increased by 813 million Reais.
As I just mentioned, we have used cash generated by our business year to date to pay down part of our debt given our already very strong cash position.
With that let me turn back to juggle. So he can comment a bit on our performance since the IPO talk about the recent changes in our management and our outlook for the fourth quarter 2020 to geography.
Thank you I'll hop off this quarter, we are competing for years as a public company.
I think that what the team has accomplished since then is remarkable.
As shown in slide 16 in the last four years, our active client base increased tenfold, reaching $2 4 million clients.
Despite that growth, we still have only 11% market share in payments in Brazil, and we see an addressable market of more than $13 5 million M. S N B's in the country.
So theres still plenty of room to grow.
Over that same period, we grew <unk> by four times, our revenue was six times.
Adjusted net income by 83%.
In four years.
We've also created our banking business from scratch and currently have over 560000 clients actively using our banking solutions.
There's still a lot to do in banking in terms of new products and features and we have a big opportunity where credit product.
Why are we in the early days of World financial platform evolution I'm very excited for the future of this business.
Since 2018, we have also evolved through having a very small presence in software to becoming the number one player for repay workflow tools in Brazil.
Reaching approximately $1 5 billion reais in inland Eliza revenue.
The combination of our financial solutions and software is a powerful differentiator in the market and puts us in a unique position to offer a superior value proposition to our clients.
Why do we have expanded our business significantly we have kept our devotion to serving clients with the highest standards of service.
We also believe that our people and our culture are our most valuable asset.
As you can see on slide 17, we have continued to enhance our team to support our expansion attracting more talents in strengthening our company for the next decade.
This quarter, we are pleased to welcome on the demo theater is there a chief risk officer, and Piedra Xenia, our next CEO .
As we previously announced I will become a board member of <unk> core next year to focus my attention on developing key strategic and financial initiatives to drive the future expansion of the company Pedro Zinner, who joined the executive team No later than March 31st 2023, and we will begin working closely with me and they manage it.
<unk> team in a transition period before taking on the CEO role.
I have a deep trusting peer group and I'm excited to work with him as we continue to evolve the business.
We remain strongly committed to stone as a partner and look forward to supporting the team in this new part of our journey.
With that said I wanted to move to our fourth quarter outlook.
While the World Cup in the macroeconomic environment May impact our results, we continue to expect strong core growth and improving profitability in our business.
We expect a total revenue and income above $2 6 billion reais, representing a year over year growth above 38, 8%.
For MSNBC PV, we expect volumes between 78, and 79 billion reais compared with $74 7 billion in the third quarter.
Finally, we expect adjusted EBIT of more than 250 million reais compared with 211 million for the third quarter with.
With that said operator can you. Please open the call up to questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone, please pick up your handset or pushing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And it looks like our first question will come from Geoffrey Elliott with Autonomous. Please go ahead.
Hello, Thanks, very much for the call and for taking the question could we get a little bit in to the TPB numbers now Luke maybe first of all could you just confirm the TPB numbers that you report do they contain picks and what's the contribution.
<unk> from picks in the third quarter, and then thinking about M. S. N B T. P V growth going forward, there's clearly a bit of a slowdown in <unk>.
Flight by the guidance for the fourth quarter, if we look at the year on year.
Growth rate can you give us any preliminary thoughts about what sort of M. S. N B T PV growth, we should be expecting in 2023. Thank you.
Okay.
Thank you Jeffrey Rafael here. Thanks for the question I'll start the answer and then ill.
Moving to the year to complement the answer so regarding the second part of your question off the M. S. N V. TBD as we have mentioned in our release our guidance does have some negative impact from the World Cup between two and 3 billion Reais.
And I think that if you look at on a year over year perspective last year in the fourth quarter, we had a very strong comp as we grew TPG by 87%.
So it's natural to see that data.
You mentioned looking ahead, we expect that the growth in 2023 should stabilize at a higher level than in the fourth quarter.
We will continue to balance growth and profitability and do not anticipate further headwinds such as the World Cup. So I think that is a look.
Looking quarter over quarter, we continue to see.
Growth in our M S N b a TBD.
Leo do you want to to wet.
Yeah, just complementing on the question related to pick stocks. So this number does not contain peaks and just a few words about our expense within our base. Yeah. We see two main groups and we talk about the first is the picks that substitutes wire transfers, which we do not want it.
Dies and second these peaks that we see as a payment method is an acceptance methods, which can be reconciled and is integrated to the pls.
And this and molded peaks, we do monetize we see it gaining significant traction in our base is growing a lot and in terms of monetization, it's more or less in line with debit and let them be ours, it's still small compared to overall TPG credit cards P D but.
See it gaining a lot of traction.
Great. Thanks very much.
Thank you.
Thanks, Tim.
And our next question will come from Josh Siegel with Cantor Fitzgerald. Please go ahead.
Yes, hi, good afternoon. Thanks for taking my question I love to start by diving, a little deeper onto what youre seeing in the competitive landscape specifically for M. S. M. B I'm curious if you could provide some more color on the drivers behind your market share gains this quarter, while the entire industry continues to experience higher take rate. Thank you.
Hi, Josh juggle here. Thank you very much for your question we.
We see no big changes here in terms of competition.
From what we said in the previous quarters, we see that the market much more rational and the industry steel adjusted prices in the third quarter given the level of the volatility in interest rates. We continue to be very disciplined in terms of making pricing decisions based on minimal unit economics hurdles.
You are always balancing growth and profitability I think that over this year, we have build new distribution channels, we have access in new markets like the micro merchant segment.
And we are focused on improving our speed of growth in the EMS in the SMB space.
So I think that the combination of focusing ourselves on creating more distribution channels and having the discipline to create the minimal return hurdle in the way that we allocate capital towards growth has produced at this resorts and in terms of competition I think there's more and more of the same but the industry is being very rational.
And paying attention to interest rates volatility and are adjusting prices as.
Yes, I think that the happened last quarter.
Understood. That's very helpful. Thank you and how are you thinking about the M&A environment right now in Brazil, specifically in the software vertical thank you.
Hey, Josh Chug Chug, we'll hear back again, I think that in terms of software.
We have opportunities in terms of the core Pos and ERP solution in new verticals.
But we think that valuations is do you have to adjust.
In this new interest rates environments in order to produce returns, we think that we still have to wait for valuations to adjust and while weird.
Observing the market we are focused on our organic evolution. So basically the growth that you saw this quarter was based on organic execution. So we will keep paying attention, but we still have to see valuations adjusting batter here in Brazil.
Got it thank you for answering my questions.
Thank you very much Josh.
Hello next question will come from true consumer with Evercore ISI. Please go ahead.
Hi, Thanks for taking my question Oh, I have a question on financial expenses. It came down sequentially just wanted to get a sense as to how should we think about going forward and a second part to that question is that on the last call. You had mentioned lower capex in the second half of the yard is so.
Can we assume that you would be using this cash to do.
Pay down your debt and how should we think about the use of cash in 2023, well. It says you know capex is.
Is being dumped it thank you.
Thank you Sherry <unk> for your question Rafael here, So regarding financial expenses, we have a decrease this quarter as you mentioned for two main reasons as we said in our last earnings call last quarter, we have decided to increase the duration of our funding and in this quarter, we have a more normalized level of duration.
And also we have paid down debt, which reduces financial expenses.
We believe that in the short term there is still space to have finished expenses growing less than revenue over the medium term like we said our financial expenses should grow more in line with prepaid T. P V and average interest rates, we always optimize our funding cost the most efficient plenty lines. So it's natural that in our business, we sell shorter or longer.
Duration receivables.
Now from quarter to quarter overtime, such fluctuations should not be relevant so I think that and to your second point of your question about Capex as we anticipated previously the capex levels for 2022 should be lower than last year 2021 of course next year this tends to normalize.
We have.
Decided to use part of our cash generation over the last year to pay down some debt as you said given that we have already a very strong cash position and our balance sheet.
We'll continue to invest in the growth of our business development of New solutions next year, but we will always evaluate those type of decisions and financial decisions.
Depending on the cost of interest rates in our debt. So we can become more and more efficient.
Oh for Chunghwa here can a complement of course, so surely chagal here just to give you a little bit more color on 'twenty to 'twenty three.
We will continue to invest heavily on our growth we think that the company will continue to generate cash. Additionally to the investments we are making to grow and we will use that cash generation to strengthen our capital structure next year. So I think that these effect or maybe decreasing a little bit the level of liability of the comp.
We will continue because we expect strong cash flow generation next year.
Thank you so much and just one follow up on the macro front. It seems like obviously the forecasts for Brazilian GDP and inflation has it been improving I would say slightly though but can you talk about as to where are you seeing trends change and will be man are you see still weaknesses happened in the spending pattern.
In Brazil.
Hey, sure Rick.
It's very difficult for us to comment on that front right now I think that the macroeconomic environment change it a lot in the last in the last three weeks what I can say is that we are paying attention very closely to inflation in order to adjust our contracts and softer and we are paying a lot of attention to interest rates to adjust the pricing or financial.
Segment solutions, and we will reflect the macroeconomic environment and our pricing immediately so we're managing prices very closely and we will create much more dynamic into the next quarters, but I think that now its the time to paying attention and move as fast as we can to adjust the entire comfort.
But difficult to say, what this rule and we have to wait and see a little more.
Thank you so much appreciate it.
Thank you very much Eric.
And our next question will come from Tito Laboratory with Goldman Sachs. Please go ahead.
Hi, Good evening, everyone. Thank you for the call and taking my question.
Once they get some more color on sort of the credit outlook and we talked about them.
In pilot mode.
But can you talk to us a little bit some of those pilots what when do you think you know credit could become an important part of the business again.
What would you need to see to get more aggressive there.
Just to understand you know when that can be a contributor at some point and then the second question just any color you can give them with the cap on the prepaid interchange.
Expect to realize all the benefits of that how much did you benefit from it.
Could you give some of that to your customers to help offset.
Sort of that lower interchange in anyway. Thank you.
Hi, Tito yeah here.
Good question.
First regarding credit I think no big update other than what I, just said in the call and will be also highlighted last quarter. We're still in test mode and you know, we'll keep you posted as we have more updates our plan looking ahead as we need to be ready to relaunch towards the <unk>.
First half of next year.
But we really wanted to take a conservative approach to be able to test a full credit cycle with clients before making the decision to scale further which will probably happen more towards the second half of next year now we have Greg on board, which is really great and the team is in place and working really hard towards this plan. So I think that's the update that we can get.
Regarding credit we still think that that's a big opportunity ahead like Chad said.
We're really focused on.
Implementing this plan I think regarding interchange cap.
In fact, it's really going to be very dependent on competitive dynamics.
And we do believe that players will be more rational.
We'll take some more time until the full effect as fast food to merchants with that said, we believe that these benefits could be you know somewhere between 100 and 200 million in.
For 2023.
Thank you very helpful.
Just to complement our nearest answer about the interchange changes.
I think that if we pass anything to our clients. It will be a small amounts we are focusing on improving margins with that I think that we we gave away our margins in order to benefit our client base overtime I think that these change creates a more balanced in the industry and it should be.
Recognize as an improvements in terms of margins for our industry.
So we will be focused here on trying to keep as much as we can.
To benefit our margins.
Great. Thanks Pavel.
If I could have one follow up on the credit and any of the other receivables market and do you plan to eventually ever use that the collateral to back the credit have all those issues have been resolved or is that something that you won't consider again, just curious any update on that.
Hum.
Hi to you to juggle here yesterday, a part of our execution and our plans.
But I think that the big evolution. We are doing here is increasing the level of data that we can take it through oh other providers they are our clients.
And including the information relationship that we have in our hub. So yes, we are considering the receivables as collateral we've defined that their strategy is based on that I think that what we are doing is improving our ability to access.
The ability to pay back the loans and improving the data that we can take from third party partners and improving our ability to access our clients through the hubs.
Great. Thank you Kevin.
Thank you very much you too thanks.
Thanks Peter.
Our next question will come from Kyle <unk> with UBS. Please go ahead.
Hello, everyone with night. Thanks for the question I have just one here on my side. Please.
I'd like to talk a little bit more about the future trends. So I think this year you were vocal about automation in that net income and profitability would gradually recover throughout the year. So I just would like to understand if the speech is being forced out from 'twenty three if we should continue.
To see higher profit sequentially also which does exactly and what should it be the drivers for this going forward. Please thank you.
<unk> chuckled here, yes, I think that this continues this trend will continue to 'twenty to 'twenty three based on two effects, we continue to allocate capital towards growth.
We are finalizing a very.
Hum.
Oh can I say it is a very strange zero based budget made borrower team did just rationalizing the way that we see Cogs and SG&A. So I think that the discipline in terms of Opex of the company is improving a lot. So revenue should grow faster than our opex and I think that these operational leverage.
<unk> will take place in 'twenty to 'twenty three.
Better than what we did this year. So we expect that the trend of improving overall results and margins continues for 2023.
Okay. Thank you and just a quick follow up.
On your answer you mentioned like a cost discipline.
Just to have a view.
If you could talk a little bit tomorrow or hubs or strategy for next year issue for XI.
Any additional investment that's a sport market share the case or given what you said you're closer to that at this current stage you are able to continue to gain share without accelerating investments.
Okay.
Hi, Kyle Yes, we see space to continue to invest in our hubs I think that we are creating more density in the locations that we already have presence.
With this discipline that we said that we are calculating minimal.
Hurdles of return.
And pricing is something that we are using to adjust our speed of growth, but in the balance that we have today, we see space to continue to allocate capital towards the growth of the SMB using our hubs are the main strategy. So we will create more density in next year and continue to grow.
Okay. Thank you very much.
Thank you very much.
And our next question will come from Mario.
Bank of America. Please go ahead.
Hi, everybody first of all congratulations on the results. Let me ask you two questions. Okay.
First one.
Is when we looked at your guidance.
Matched your guidance for revenues and TPG.
But basically those are two variables, where you don't have much control and you surprised us on Cogs and Opex.
So and that's what you control so I'm trying to understand like why were you surprised.
On Cogs and.
Opex are there any specific initiatives that you have underway here to improve the efficiency or are we seeing any synergies from the Lynx transaction and then I'll ask my second question.
Hi, Mario Rafael here. Thank you for the question. So I think that when we look to the outperformance versus our guidance I think the main driver of that was that we underestimated a little bit the level of impact of the repricing wave as we have done in the quarter. So I think it was <unk>.
Last related to costs and expenses, but more related to the to the extent of the pricing a wave as we have done we haven't even done some additional pricing in September . So I think that that was a reason behind the outperformance of the guidance, which led to a revenue net of funding costs.
Higher than we expected.
How far you said hefei, if I may complement Marty.
Regarding synergies we think.
Lynx.
We are doing two things here in terms of Opex. One is integrating the portfolio of companies that would be have invested overtime.
Into the Lynx and management system and the other one is integrating the back costs of Lynx interest don't so I think that this is creating more efficiency and we will see more results of that next year. So those are the things in terms of Opex that we are focused right now.
Okay.
And then my second question then is related to the change that you went to the board are you bringing in Pedro.
Someone that has a very different experience right now completely different industry. So what what attracted you guys.
To look for peer group, how do you think the strategy changes and as you guys pointed right on page 16 of the presentation.
That's fairly successful last four years since the IPO, we have over delivered.
How should we see the strategy change and what exactly do you think you're able to bring through to stone given that.
The experience is completely different.
From from what you guys do.
Great module I met theater in March between March and April and it created a very strong relationship with him since he joined the board seeking his advice is talking about the opportunities and the challenges of our company.
And I think that over that time.
Was clear to me that theater has the capability and the personal vantage required for the next phase of our company I throw team a lot and we remain committed as a partner to support the company and the team in this new route in this new role as a board member and I think that we are always trying to evolve bringing in new people with us.
Additional capability to support the expansion of the company and that's what we are doing I think that we are adding more talents.
Drew will be I think very good leader for the company and I think that we will be stronger. So we're very happy with this movement and basically that is the retro now with Ctrip. He has the capability and the personal values for this next phase.
And.
How do you think the strategy changes then you know.
And again as you highlighted on page 16.
Increase the presence of software you were able to grow market share.
You know if you were to think about the next three years.
How how do you see the company evolving in which segments.
Great modern fit that we evolved a lot both in financial platform and software and.
And I think that that will continue to execute ease of execute on our growth plans, but with more discipline and I think that the capabilities in terms of leadership management, we will what we will move a lot and the other will be a <unk>.
A big contribution on that front I think that in terms of strategy.
What's the other is here a 100% on board I think they do you will be able to listen.
From him, but I think that the company is well set in terms of the results, we're delivering and and the direction, we are heading but always evolving.
I think that will continue to evolve once we have our investor day, we'll be able to give more color about about what we are planning for the next five year. We are just finalizing our five year plan revision now so I'm very excited with the business and I think that we'll be happy to listen more about this from the editor in the next coming.
When he is here 100% on board.
Okay. No. That's that's perfect. Thank you very much and good luck.
All of the board.
Thank you very much Mike Thank you very much.
And our next question will come from James Friedman with Susquehanna. Please go ahead.
Hi, Thiago, let me congratulate you it's been a great four years and we appreciated your leadership and accomplishments.
Okay.
So I.
I had two questions first for Ria and for half or so later.
Did.
Did you I heard you say the callouts about programmatic key accounts, but did you say.
She didn't hear maybe I missed it I apologize, but did you decompose the relative growth rates.
Of stone tone.
And the key accounts and if not could you just talk qualitatively about the relative growth rate.
Hi, James Juggle here.
Would just like to say thank you very much for your kind words and our personal Julia.
Hi, James Yeah, So regarding <unk>.
C P E growth and breakdown.
No.
The CPP growth in SMB contains both Don and stone projects and key accounts, we breakdown between sub acquired volumes, which had a decrease as we've been communicating over the last quarters that with deep prioritizing sub acquire.
Our volumes within key accounts and the other part of key accounts as platform services. So platform services contains you know our integrated partnerships that are software providers that sell software integrated to our claim payments platforms marketplaces e-commerce platforms. So a lot of those.
Our platform integration solutions and embedded payment.
<unk> are contained within platform.
<unk> services.
So I think that's the breakdown.
I just wanted to clarify.
Okay. Thank you.
Got it.
Oh I'm sorry go ahead, James sorry.
To your question is that.
When we look at our client tiers F N B's in Micros, we continue to.
Grow the client base in all of those years, so I think that.
Although we report M. S. N b, we do have a focus to offer the right product for the right clients. The best suited products for them, So and I think that is.
Sort of a dual brand strategy has been very successful and we have been able to grow both SMB and micro.
And then if I could just follow up.
So when you're expanding the financial.
And credit specific products again, how do you view the relative importance of margin.
As you lean into the credit business next year.
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Oh excuse me Mr Conference, operator, I'm, sorry, if it wasn't it looks like there was a technical difficulty I'll go ahead, and I hand, the conference back over to the presenters for this phone call.
Hello, everyone I'm, sorry, you were disconnected from the call, but now we're back let's continue.
Alrighty.
Again this is from James Friedman, James Friedman, if you'd like to continue with your follow up there.
Thank you.
And thank you for that prior answer and I was just I'm going to ask Arthur in as you lean into credit next year how should.
Should we think about the importance of margin is that a key criteria for you as you roll that out further.
Thank you.
Hi, James I think that as Leo said, the we are being very conservative with the credit relaunch right. So I don't think that credit will be relevant to our results next year. If you look on a like a bottom line perspective.
I think that one of the measures of course is we have to have good quality credit with the Npls that we are we want so I think this is a very.
An important that of course should lead to margin contributions to our business, but I think that what is important for us is to see the credit cycle with clients. Good quality those helping declined to manage their cash flows and have very healthy cohorts of.
Credit clients. So I think that over time this should bring additional contribution margin to the company.
Hi, James Shuck out here just to help to complement so.
Summary, low impact on margins on 2023, almost no impact on margins when it's entry.
Trunk credit margins should continue to improve because of the trends. We are already seeing and then we expect positive contribution for 'twenty to 'twenty four 'twenty five onwards.
Understood. Thank you. Thank you Thiago thank you.
Thank you very much James.
And our next question here will come from Sumit Datta with New Street Research. Please go ahead.
Suddenly please.
One is just on the.
Funding cost I think you talked about normalizing the duration of receivables.
It seems to make quite a big difference to to the funding cost per loan.
Just whether there was any difference in the in the level of kind of prepayment of a T. P V and also one that I think when when you tell them when you talked about adjusting the.
The duration of receivables in the second quarter being around a slightly more cautious macro outlook.
But when I look at your T. P V guide as we kind of discussed on this call and.
And when I take into account, what's happened to the acquiring TPB market in Q3, which I think it was down on Q2, it feels like there's a cautious outlook on the on the macro but again that doesn't seem reflected quite in the radio you're kind of funding.
The prepayments so they could be helpful. Just to get some clarity around that please.
Sure Sumit Rafael here, So I think that first if we look at our liabilities they have a longer duration.
Duration than our assets and prepayments business. So I think we are already conservative in the way we deal with our capital structure and also we have generated a significant cash over the last year and if we think about the amount of cash balance we have sit on balance sheet.
It was a little over 6 billion last quarter and I think that we had and we saw a space to keep being conservative and high liquidity levels, but also be a little more efficient in the way we fund the prepayment business. So I think that.
We're always looking at them to be more efficient in that capital structure management and of course in the fourth quarter TPG trends that we saw it does have some effects that shouldn't be recurring effects regarding world Cup. So I think that this is a sort of the.
The financial expenses dynamics this quarter I don't know childhood, we'd like to add.
Yes, a piece of semi Thiago here just to help you understand trends or prepayments.
<unk> continued to perform very well and as Hoffa said, we think that in the short term, we still have space.
For funding cost to grow less than revenue from prepayments, but over time, we think that the funding costs should grow in line with <unk> and the CDI rates. So short term, we think that it will grow less than revenue over the medium term you should grow in line with T. P V and CDI rates.
Okay. That's very helpful. Thank you.
Thank you very much Amit.
And our next question will come from Pedro Leduc with Utah BBA. Please go ahead.
Thank you good evening, thanks for taking the question.
A little bit on the banking side of things they care about your brother ecosystem, Therefore for Smes.
You've mentioned deposits 2.7 billion, if you can give us a little bit of color on what the profile is how fast they turn.
And of course, you reinforced the banking team you will increase the product features.
We think about stone bank until 2023, what should we think about products the client profile of Sydney's I imagine and.
<unk>.
Also reignited youre credits, you're still piloting it but if you can give us a rough sense on how big of a loan book it could be in 2023 by the end assuming it goes well.
It will be much appreciate it thank you.
Hi, Pedro Chuckle here I'll start and then I'll pass it over.
Thank you for the question I think that regarding banking, what we can say that today being banking's basically focused on the smbs.
We still have space to continue to grow our banking client base in the SMB space because of the client base, we have in payments.
And still have room to increase the engagement of our clients with our solutions as we rolled over more functionality today, our clients. They still have to use bank accounts through other players because we are still actually some functionality I think that once we have the pool.
Feature that we have planned to be segments. The engagement will increase and this will produce better results more than this we are now moving our attention to provide more banking solutions to micro merchant space because <unk> today has a very limited accounts. So we're not taking into account in our numbers our clients for micro merchants.
Once we expand our offering of banking to micro merchants that do create positive effects. Both on total outstanding balance rather than just throw interchange from the cards and activation of peaks. So theres a positive movements towards next year of moving banking towards the micro merchant space. So we see this as a very big Avenue.
Cool.
For 2023, Yeah do you want to complement please.
Yeah, just some quick additional comments I think Charles said most of the.
The evolution in deposits came from naturally the growth in the number of accounts, but also average outstanding borrowings on our clients' increasing as well. So you know a lot of work to do there to increase the feature set to increase engagements that we've already seen very positive.
Faction Smbs I think one additional color regarding opportunity is we're excited but Tony.
Within Lynx, Spain, so integrating banking to the ERP of Lynx clients. It's still early stages. So although you know the absolute number of clients and small where we're seeing very positive feedbacks from clients. Because this is an integration that really adds tangible value, who you know facilitating clients' workflows.
Helping them better manage cash flows automate their financial processes in a much better way. So that's the only additional color that I would give I think our focus our big focus right. Now is on you know SMB client base and selling.
Selling banking into its own client base, but we see a big future opportunity within <unk> client base as well.
That's that's very helpful and a quick follow up just on the potential and remember if you guys have budgeted in our loan book targets for 2023 already but on the banking side as well understood.
Interesting thank.
Thank you.
Hi, Pedro Yeah, no specific guidance on that I think that the message.
But that we gave them credit is is the way that we see how 'twenty three will play out right now of course, we'll we'll give more color as we evolve well I think that's the message there.
Super Thank you guys so much.
Thank you Pat.
And our next question will come from Domingos <unk> with uncle J P. Morgan. Please go ahead.
Yes, Hi, PR.
Hi, everyone. Thanks for taking the question is well first congrats very nice to see the I guess the pricing dynamics, it's been a while we see CTV growing 3% Q on Q1 revenues growing 16, I mean, a massive increase specialty adding the cost of funding.
We see basically a 20 bps improvement in in flight take rate all inclusive <unk> my question on that front piece.
I know things are pretty spread but if you had to simplify when did you pass the price adjustment, especially on the prepayments like in which month of the quarter. So that we kind of can guesstimate, how much has been baked in and the overall quarterly volumes.
Second one is on taxes like you you guys reached a 20% tax you mentioned basically the mark to market. There is an impact we removing value valuation.
From the <unk>, and we get to like 36% tax, which seems pretty high and when we look at the tax reconciliation, we actually see a line seeing effects our effective tax rate.
Mark to market of equity of about $37 9 million and 38 million. So I'm just a little curious like what exactly is the you know moving parts around these.
Tax bracket that looks high you should remove I guess either.
Hi, Domingos Chuckle here I think that the pricing initiatives, we did were a.
Spreads around the quarter, we see space for some slight increase for fourth quarter, but you're not focusing on that I think that the spreads will continue to evolve on four quarter because as we said, we think that cost of funding should grow less than revenue. So that can produce better spreads for fourth quarter.
That's why we're giving a stronger guidance for fourth Q and are still have to see the dynamics in the industry between debit and credit to the very seasonal quarter, but.
I think that the trend of improving spreads will continue from fourth quarter, and 2023 and regarding that I think that youre right. When your analysis. So we are seeing exactly the same way, we think thats do you have space to improve our efficiency.
Boyfriend or entities in our treasury. So we'll be focused on that and we have a specific plan in terms of tax in our zero based budget. So we are very we are paying attention to that line very much but can we go to see exactly the way you see.
Perfect and just to confirm so you're basically saying you're starting in August July August and September . So it was it was it was equally.
Equally spread it was that concentrated towards the end of the quarter.
Alright, so just yeah youre right.
Alright, Thank you guys congrats on the.
Our results thank.
Thank you very much to me it was.
And our last question today will come from Nicholas.
Bank of America. Please go ahead.
Thanks for the time for last question.
So my first question is on the decline on your cash position by $1 4 billion Reais. So you mentioned you paid down some debt in the quarter. If you can discuss what type of update it was if it was spun bad debt insurers.
Basically because you couldn't refinance this debt at a good rate and if you're paying down debt. Then my question would be why not buy back some of the 'twenty 'twenty eight bonds given they are trading well below par if you can talk about.
The way you think about buying back debt and finally on your adjusted cash position. So you make a lot of adjustments to the cash and debt position, but I know these are new aren't Jasmine this quarter, which is included in the cash position the deposits from the banking customers.
You have an offsetting liability for roughly the four basically the same amount.
So there's no impact on the net debt position by my question is why does suggest why these new adjustment and why are they changing disclosure now thanks.
Hi, Nicholas Rafael here, let me try to answer all parts of your question.
So first when you think about the decrease in the cash position as I said this was our decision.
<unk> to be more efficient and capital structure and right. So if you think about one of the desk that we have prepaid was $400 million of our debenture on the beginning of July right and also some other <unk> that we havent prepaid it has nothing to do with our ability to refinance by the opposite I think that Oh.
As the company has generated more liquidity.
We have more and more funding lines from different counterparties and so I.
I think that was it was really a decision to be more efficient there and if as you said the adjusted net cash position that we have has increased.
Adjustment that you mentioned about the banking is actually our decision to be even more conservative in the way we look internally at many Julie about that cash because we have banking deposits with us, but we do consider this as our adjusted debt right and.
And we have banking assets as well.
We consider as an asset.
There is a technicality that part of the banking deposits that are in transit. We do have the ability for example to take that cash for ourselves, we don't need regulatory wise to put that in treasury, but.
When we look at the adjusted net cash position, we do consider this as a death. So I think that we decided to do that way.
Not to like have the illusion that that cash that belongs to the client and transit is our cash. So I think that we can go in details with you but.
This reflects our our approach internally of how we manage the liquidity.
And can you remind me if I'm wrong.
Thiago Arturo, Yes, I'm, sorry, Nicholas just to complement and trying to summarize a little bit Indiana of last year during the third quarter and fourth quarter when it was <unk>.
Margins decreasing we decided to increase our cash position in order to give them comfort for.
Our debt holders and I think that that was a very good strategy, but in the other way we created some inefficiencies.
Carrying a very deep.
Cash position, we decided to better manage and better balanced. These are at this quarter. So we're very comfortable with the level of cash and the capital structure, we have and actually what is happening today is that our results are improving is that the spreads that the debt holders in the liability lines we have today.
They are decreasing so I think that the as the results of the company are improving we access more lines with better prices and that's why we are comfortable to decrease a little bit.
Their balance sheet to carry too much inefficiency on our treasury, but it's a very conservative approach.
Thanks, very much for that sure I Wonder if I could just one follow up then if I may a few pay down some of the state in the quarter was there any thought given to buying back some of the 20 eights given they're trading at 75 cents.
Not yet.
Paying attention to the opportunity with regard to your board.
We're not we didn't started to buy back our bonds yes.
Okay, Thanks, very much Jaguar and land Rover.
Thank you very much Nicolas.
This concludes our question and answer session I would like to turn the conference back over to Tiago for any closing remarks.
Hello, everyone Thiago here I, just like to say thank you very much for your support I'm very happy to see evolution of our business and today I would like to pass the final remarks, Julie yes, yeah.
Thank you Chad.
I want to say.
For everyone listening in big Thank you to our investors for their continued support and I just wanted to say that the team is happy with the results this quarter and really looking ahead.
2023, Thank you everyone.
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