Q4 2022 StoneCo Ltd Earnings Call

March 14, 2023

Speaker 4: The that, that that.

Speaker 5: Good evening ladies and gentlemen, thank you for standing by. Welcome to the StoneCo Fourth Quarter and Fiscal Year 2022 Earnings Conference Call.

Speaker 6: By now everyone should have access to our earnings release.

Speaker 7: The company has also posted a presentation to go along with its call.

Speaker 8: All materials can be found at www.stone.co on the investor relations section.

Speaker 9: Throughout this conference call, the company will be presenting non-IFRS financial information, including adjusted net income and adjusted net cash.

Speaker 10: These are important financial measures for the company, but are not financial measures as defined by IFRS.

Speaker 11: Reconciliations of the company's non-IFRS financial information to the IFRS financial information appear in today's press release.

Speaker 12: Finally, before we begin our formal remarks, I would like to remind everyone that today's discussion might include forward-looking statements.

Speaker 13: These forward-looking statements are not guarantees of future performance, and therefore you should not put undue reliance on them.

Speaker 14: These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the company's expectations.

Speaker 15: Please refer to the forward-looking statements disclosure in the company's earnings press release.

Speaker 16: In addition, many of the risks regarding the business are disclosed in the company's form 20F, filed with the Securities and Exchange Commission, which is available at www.sec.gov.

Speaker 17: I would now like to turn the conference over to your host, Rafael Martins, VP of Finance and Investor Relations Officer at StoneCo. Please proceed.

Speaker 18: Thank you, operator, and good evening, everyone. Joining us today on the call, we have our CEO and board member, Thiago Piau, and our chief strategy officer, Liam Aptis.

Speaker 19: Today, we will present our fourth quarter 2022 results, discuss some recent trends, and provide an updated outlook for our business.

Speaker 20: I will now pass it over to Thiago so he can share some highlights of our performance. Thiago. Thank you.

Speaker 21: Thank you, Hafa, and good evening, everyone. Let me start by reviewing the key highlights for the year in fourth quarter 2022 that we lay out on slide 4 of our presentation.

Speaker 22: We successfully drove strong growth with improvement in profitability.

Speaker 23: Our revenue doubled in 2022 while our adjustment income reached $526 million REI.

Speaker 24: In the quarter, adjusted net income reached $235 million, a 44% sequestration growth. This achievement was largely a result of a successful price execution and strong operational average, while we improve engagement with our clients and continue to invest in our growth.

Speaker 25: We generated increasingly stronger cash flows. Our company is generating cash in a very consistent way and has a strong balance sheet and liquidity to fund its growth ahead. Our adjusted net cash increased by 1.2 billion REI's in 2022 and 385 million REI's in the fourth quarter alone.

Speaker 26: we expect that our cash flow generation will remain strong in 2023. In financial services, we expanded our client base, offered new solutions, and captured higher take rates. In 2022, we generated strong profitable growth in our client base while improving unit economics.

Speaker 27: both through price execution and increase in monetization for our banking solutions.

Speaker 28: In the fourth quarter, MSN BTPV grew 23% year on year, almost two times the industry growth.

Speaker 29: Active client base grew 48% year-on-year to 2.5 million merchants at the same time that we increased take rates by 50 pips compared to last year. Additionally, total banking deposits reached 4 billion REIs, 3.6 billion of which in the MSMB segment.

Speaker 30: reaching almost 693,000 active banking clients.

Speaker 31: I think such results show our ability to pass along price increases, gain market share, and improve engagement with our clients at the same time. In software, we gain scale, improve operating margins, and advance our product integration.

Speaker 32: Softer revenue grew 21% year-on-year in the fourth quarter, and our adjusted EBITDA margin reached 16.2% in the fourth quarter, the highest margin since we acquired the business. We gained efficiency while also investing in several areas to better serve our clients, like customer service and product integrations.

We've integrated our financial services platform to POS and ERP solutions in strategic verticals, opening a key cross-sell opportunity which we believe is unique within the industry.

Last, we enhanced the capabilities necessary to execute the next phase for Stone. We added to our team experienced and seasoned leaders strengthening key capabilities in banking, credit, product, tech, and risk, which will be crucial for our plans in the coming years. And once that packaging gets ready, then we will introduce our new venture to doing the marketing model.

I'm excited to share these results with you, which marked the completion of our turnaround in 2022, with the company well positioned to continue its successful story. Most importantly, we have executed our turnaround, maintaining our special culture and strong devotion to serve our clients.

Finally, we are also successfully completing our CEO transition and I am confident that, under Pedro's leadership, Stone will evolve on an even stronger future and in 2023, we start a new chapter in our journey.

Now, I'm very happy to bring Pedro to send a message to all of you.

Thank you, Thiago, and good evening, everyone. I'm really excited to be here and looking forward to leading the team in our journey. Over the first months of this transition, I was able to see how much has been delivered in 2022 and how well-said the company is to address the opportunities we see ahead of us.

I was also positively impressed by the quality of our people and our strong culture. The team has defined clear priorities for 2023, and I see this as an important first step for the path ahead.

I'll take the CEO role in April and today we'll participate in the call only as a listener.

I look forward to meeting all of you soon. Chicago, back to you.

Thank you, Pedro. It's great to have you on board and I wish you great success. I will now pass it over to Lia who will provide more details about our fourth quarter performance and strategic updates. Lia?

Thank you, Chagl, and good evening, everyone.

I will start on slide 5 with some highlights of our overall performance.

In the fourth quarter, we surpassed our guidance in all metrics, reaching 2.7 billion REIs in total revenue, 316 million REIs in adjusted EBT, and 235 million REIs in adjusted net income. As Chiavo already mentioned, we have exceeded our guidance in all metrics, reaching 2.7 billion REIs in adjusted net income.

This quarter reinforced a good balance between growth and profitability within our business.

Now let's move directly to slide seven so we can discuss our performance in the financial services segment.

In the fourth quarter of 2022, revenue increased 49% year over year to reach 2.3 billion reais.

AgessityBT increased to 286 million reais, with margins increasing from negative levels in the fourth quarter of 2021 to 12.4% in the fourth quarter of 2022.

stowing our discipline and allocating capital to grow our financial services platform. Moving to slide 8, our MS&E payments client base increased by 48% year-over-year to 2.5 million active merchants.

with 212,000 net addition of clients.

Regarding our net ad trends, our focus has been and will continue to be on onboarding the best clients, both in SMB and in micro-segments, reaching healthy levels of contribution margin per client, higher average TPV within each client's tier, and lower turn.

Also, by optimizing our commercial strategy of stone-in-stone offerings within our multiple sales channels, we were once again able to see client-based growth in all clienteers this quarter. I think this approach is pretty unique in the market and has led us to good levels of profitable TPV growth, as I will show on the next page.

MSN BTPV reached 82 billion REI in the quarter, 4% higher than the high end of our guidance of between 78 and 79 billion REI and growing 23% year over year, almost two times industry growth levels. We were able to produce that growth while increasing our take rates by 50% in the quarter.

On slide 10, I show some highlights of our banking business, which has evolved significantly in 2022. This quarter, we have reached 693,000 merchants actively using our banking solution, a 41% year-over-year increase, and a $2.5T increase in our banking business.

with client deposits growing 84% in the same period, reaching 3.6 billion reais in the fourth quarter of 2022. I think the evolution in overall client deposits speaks to the quality of our client base with a healthy mix in terms of average TPV and the value of having our banking solution attached to our acquiring solution with no incremental marketing investments.

Not only does that provide a superior experience to our clients who can rely on having the complete banking and acquiring experience in one single app, it also provides us with a steady flow of cash-in volumes from card TPV, PIX, and other payment methods. As an example of this additional engagement,

PIX in volumes tripled in 2022 to 44 billion REI's and increased 22% quarter over quarter, mainly driven by higher PIX P2M volumes. Another important highlight worth mentioning is the launch of Super Contaton in the first quarter of 23, our full banking solution for micro clients.

We expect Supercontaton to drive growth of overall level of deposits and banking revenue going forward.

I also want to take a brief moment to update you on where we are on credit.

Our focus in the second half of 22 was on building a fully automated process for credit underwriting and grants include the Stone App.

We also made our decision models more sophisticated through enhancement of data, strengthened the team, reviewed and approved our risk policies, and ran the first test with a small number of clients with positive initial results. In the first half of 2023, we expect to expand the size of our testing with clients.

with an emphasis on management of guarantees, testing and improving the quality of the decision models, and credit lifecycle monitoring and renegotiation through the app.

In the second half of the year, we want to begin scaling working capital loans to our clients. We will take a conservative approach, and the level and speed at which we do so will depend on the macro scenario and our risk appetite.

Our initial focus will be providing working capital loans to the S&B segment.

We're also planning the launch of credit cards to both micro and SMB segments and are exploring opportunities for cross-selling credit in links.

Moving to slide 11, I want to briefly talk about key accounts.

As we've been reinforcing for some quarters already, we have been shifting our priority from subacquiring business to platform services within this segment.

I want to remind our investors that Platform Services encompass a range of client segments that distribute our solution by integrating our payments and banking platforms to their own offerings.

such as software providers, e-commerce platforms and omnitannel retailers.

We see an attractive opportunity to continue to serve these client segments, which is evident by the strong level of growth in platform services TPV. The effect of this decision is a decline in subacquiring volumes and an improvement in overall key account take rate. This quarter, key account TPV decreased 18% year over year.

due to a 57% decrease in subacquired volumes and an increase of 32% in platform services TPD.

In slides 12 and 13, I'm going to shift to discuss some performance highlights of our software segment.

In slide 12, we can see a consistent growth in our top line combined with improvement in our operating margins. Revenue grew 21% year-over-year to 376 million REAIs. And our adjusted EBITDA more than doubled year-over-year to 61 million REAIs, with adjusted EBITDA margin increasing 760 basis points.

to 16.2%. This improvement in margins is mainly related to dilution of fixed costs, normalized cloud costs, and ongoing cost control efforts.

In slide 13, I will recap some elements of our strategic evolution and software. Our core POS and ERP continues to be the driver of segment growth, with revenues increasing 23% year-over-year due to an increase in locations and in average tickets.

The performance in the core reflects the unique attributes and vertical breadth of our solutions that have a leadership position in several retail verticals, such as apparel, footwear, optics, pharma, among others. As we evolve our software strategy, we see the central priority of our digital solutions.

being to enable those brick and mortar clients to sell more through digital channels by using our marketplace hub, ecommerce platform or order management system.

Digital solutions had a lower growth of 4% this quarter, especially due to the weaker performance of our ads and impulse businesses.

A crucial evolution in 2022 was the integration of our financial services platform to POS and ERP solutions in strategic software verticals. We believe this will be key for us as it opens up an important cross-cell opportunity to be explored through differentiated offerings to our clients.

The focus for 2023 on that front will be to build the optimal go-to-market strategy, leveraging both the stone distribution through the hubs as well as our software distribution franchisees.

Finally, as we did in 2022, in 2023 we will maintain the same approach to cost discipline while we invest in developing new products, improve our clients' experience, and explore selective M&A opportunities to gain ground on new strategic verticals.

Now I want to pass it over to Hafa so he can discuss in more detail some of our key financial metrics. Hafa? Thank you, Leah. I will now begin on slide 14 to discuss the evolution of our costs and expenses.

Before I talk about the quarterly evolution, I would like to zoom out to the evolution in the year because I think it shows the tangible results of our focus in improving the profitability of the business.

Throughout 2022, we saw operating leverage gains in almost all lines.

Our costs and expenses as a percentage of revenue decreased more than 1400 basis points in the fourth quarter compared to the prior year.

Cost of services decreased from 34.5% of revenue in the fourth quarter 2021 to 25.8% this quarter, a gain of 870 basis points.

Our selling expenses as a percentage of revenue decreased 200 basis points to 15%.

Administrative expenses grew less than our revenue, gaining 130 basis points of operational leverage.

Financial expenses decreased 270 basis points as a percentage of revenue as our positive cash flow generation gave us comfort to use more of our own cash to fund our prepayment business.

Now, let me give the main highlights of our sequential quarterly evolution.

Cost of services as a percentage of revenue decreased 100 basis points to 25.8%, mainly due to lower costs in software and efficiency gains in our registry business tag, logistics, and banking. Administrative expenses as a percentage of revenue increased 100 basis points to 11%, mostly driven by non-recurring costs.

We expect that administrative expenses will reduce on an absolute basis in the first quarter 2023. Selling expenses decreased around 40 basis points as a percentage of revenue as a result of roughly stable marketing expenses and despite increased investments in our sales force. In the trends seen in the third quarter 2022.

Financial expenses decreased 3.1% quarter over quarter, and as a percentage of revenue decreased 380 basis points to reach 33.4%.

This is mainly explained by higher use of our own cash to fund our prepayment operations.

Although having a positive effect in financial expenses, this has, on the other hand, led to a decrease of interest on cash, as noted by other financial income decreasing 20.6 million REIs quarter over quarter.

Other expenses increased to 85.2 million REIs in the quarter, increasing 90 basis points as a percentage of revenue. The quarterly increase was mainly due to impairment from proprietary operational software and write-off of known core assets amounting to 33.7 million REIs.

which were partially compensated by a gain in the sale of POS. As shown in slide 15, in addition to our P&L evolution, we have been consistently generating cash and improving our liquidity.

Our adjusted net cash balance improved by around 385 million REI in the quarter, reaching 3.5 billion at year end.

In the year, adjusted net cash increased by 1.2 billion REI's.

As I just mentioned, we have used a little more of the cash generated by our business to fund our prepayment operations, given our already very strong cash position.

Before I talk about our first quarter 2023 outlook, a brief comment on a change we are making starting next quarter regarding our non-IFRS adjusted metrics.

Starting next quarter, our many zero adjustments to IFRS results will no longer include adjustments related to share-based compensation expenses.

Until now, we adjusted those expenses related to extraordinary grants and already did not adjust share-based expenses related to annual recurring incentive plans.

To better align calculation, comparability, and simplifying the understanding of our financial results, we decided to be closer to IFRS reporting metrics and stop adjusting all share-based compensation expenses from our results from the first quarter 2023 onwards.

To help you reconcile our future results we have provided in the appendix of our presentation and in our earnings release, historical numbers with the new adjustment policy.

Now, moving to our first quarter, 2023 outlook on page 16. We expect total revenue and income above 2.6 billion REIs in the first quarter, representing an year-over-year growth above 25.6%.

For MSMB TPD, we expect volumes between 77 and 78 billion REIs in the first quarter, compared with 63.4 billion REIs in the first quarter of 2022, representing a year-over-year growth between 21.5 and 23.1%.

Finally, already considering share-based compensation fully expensed in our income statement, we expect adjusted EBT of more than 265 million REIs compared to 276 million REIs for the fourth quarter. As a reminder, the first quarter is usually seasonally weaker compared to fourth quarters.

because of higher volumes transacted during holiday season at year end. With that, let me turn the conference back to Lia so she can comment a bit on our priorities for 2023. Lia?

of higher volumes transacted during holiday season at year end. With that, let me turn the conference back to Leah so she can comment a bit on our priorities for 2023. Leah? Thanks, Hafa.

In 2022, we have set up a strong foundation to execute on our 2023 and longer-term priorities. Let me just highlight where our focus as a team will be this year. You can follow those highlights on page 17 of our presentation.

First, we will keep growing efficiently. Our plans for this year contemplate more OPEX discipline and a continued focus on MS&D growth, while maintaining our approach to pricing based on internal return hurdles allocating capital wisely. It is also imperative that we maintain a strong cash flow generation and overall liquidity to meet its current corporate goals.

We are on track to relaunch our working capital solution and launch our debit and credit cards to MSMB clients.

We will further develop the execution of our software strategy, strengthening our approach to cross-sell financial services into software client base with differentiated, integrated solutions.

Finally, after an enormous evolution on this front in 2022, we will maintain focus on evolving our management system and enhancing Stone's unique culture.

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 1 on your touch tone phone.

If you are using a speakerphone, please pick up your handset before pressing the keys.

If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.

At this time, we will pause momentarily to assemble our roster. The first question today comes from Sharik Sumar with Evercore ISI. Please go ahead.

Thanks a lot for taking my question. I just wanted to get a sense on the margin outlook for 2023. I mean I know operating efficiency is one of the key priorities, but how should we think about the trajectory for margin expansion? Like based on the guidance that you have said, it seems like…

First quarter is going to be more or less of flattish, but can we expect to see a good ramp up for the remaining three quarters after that?

Thank you. Hi, Serique. Rafael here. Thank you for the question. Although we are not providing specific guidance for the full year, I think that, as you said, our guidance for the first quarter implies pretty much the same EBT margin as the fourth. We are not providing specific guidance for the first quarter.

despite the weaker seasonality of the first quarter. When we look over time, we do expect to continue improving the profitability of our business. So there are quarterly seasonalities, but this is the overall trend that we expect. And I think that the main drivers for this improvement.

over time is as you said number one OPEC discipline especially in an administrative expenses

higher client monetization, right? New solutions when they kick in, we start to have contribution margins from those solutions. We are seeing this already happening with banking, for example, which is evolving very well. And I think that the natural operational leverage as we continue to grow our business with a healthy pricing policy, I think this naturally tends to dilute fixed costs in the company. So I want to thank all those lookates, who have got their hands full, and how they pay for this as a tool. I think having the high dollar portfolio at this scale and some of the ES rectangulars on the Worthier60 platform,

I think that those are the main drivers that we see over time for margins.

Thank you. And just have a quick follow-up on the top-line guidance of about $2.6 billion. I mean, I understand that there is some sort of seasonality that is factored in in the first quarter. If I look back historically, you have been gaining top-line growth.

sequentially by more than or approximately 200 million REIs. So is that like a good trend? Like what would make this cause to a slowdown in 2023?

Yeah, so as you said, usually top line of companies involved in retail, they tend to be soft in the first quarter. And if you remember, the first quarter of 2022 was the quarter that we strongly increased prices for example. So of course, this was all just the beginning of the future of retail Darren Melvin, the

makes the comps for in terms of year-over-growth tougher, but I think that we as we said in previous calls we have been balancing growth and profitability to levels that we think is healthy for the company and That will enable us to deliver on our threat

while improving the profitability of the content. Thank you so much.

while improving the profitability of the content. Thank you so much, Ja. Thank you.

The next question comes from Josh Kliger with Cantor Fitzgerald. Please go ahead.

Hey team this is Will Carlson on for Josh Seigler. Congrats on the quarter. Wondering if you guys can give any color on if there's been any material shift in terms of TPV year-to-date and additionally are you seeing any payments headwinds in the industry? Thank you.

Hi, Will. This is Lea here. No different trends, I think, in terms of the trends. The guidance that we gave last quarter for MSBTPV implied a growth of around 18%, and we indicated in that call that our MSBTPV growth in 2021 was about 1.5% and that was a growth in 2020.

Hi, we were just chatting speaking.

I think in terms of trends, the only thing that we are seeing, which is actually a good

A good result is that PIX in is increasing a lot. So we are seeing that as the banking increase engagement with our clients, we experience more caching volumes coming from PIX.

both from P2P and P2M type of transactions. So I think that we are capturing this evolution and we do not account in our TPV that additional volume that comes from PIX. So it's a positive effect that we are seeing in our banking execution.

Thanks, Steve. That's very helpful.

Thanks, Tim. That's very helpful. I think it will. Thank you. Thank you. Thank you, Tim. Thank you. Thank you.

The next question comes from Tito Labardo with Goldman Sachs. Please go ahead. Hi, good evening. Thank you for the call and for taking my question. A couple of questions. First, I think, you know, good job on maintaining the take rate despite the seasonality. And I hope to get some more participants in the next session.

And the TDD growth was still strong. So just how do you think about, I guess, when the competitive environment in your ability to further reprice, because it does seem that you were able to gain some share in the MSMB segment. Do you think that's sustainable? Do you think there's still room to increase pricing anymore from here?

just to think about how that can evolve. And then my second question, also good on the financial expenses, you continue to use your balance sheet there. Do you see more room to sort of use some of the cash on your balance sheet to continue to reduce your financial expenses here, or what's the level you feel comfortable with?

In terms of take rate, as you just said, there are some seasonality between third and fourth quarter because of additional debit volumes. So maintaining take rate is a positive for us. And because of that seasonality, we expect take rates to increase in the MSMB in the first quarter.

as the seasonality gets more credit than that on the first quarter. So we think that industry now have a very healthy level in terms of prices. All players adjusted prices upwards over the last year, mainly because of the cost of capital that obviously increased to everybody, and competition continues to be on a rational level.

Ciro, Rafael here. Regarding our second part of the question about financial expenses, as we have mentioned, the cash generation of the business gave us comfort to use parts of our own cash to reduce financial expenses. I think that we are at a more stable level now. So when you look at our financial expenses...

compared to our revenue, I think that we shouldn't change much from where we are right now. So we have been doing this for two quarters in a row and as we have also indicated previously, financial expenses should go over time more in line with our TPV and changes in interest rates in the country. So I think that we are comfortable where we are right now and of course

we'll keep looking at opportunities to optimize our funding. Okay, great. Thanks, Diego. Thanks, Rafa.

our funny. Okay, great.

Thanks, Joodle. The next question comes from Jess Cantwell with Wells Fargo. Please go ahead. All right.

Thank you. I appreciate this and nice results. I wanted to ask you if you could help us think through what we're seeing right now in MSMB, both on the TBB side and with TIGRATE, for the go forward, understanding that there are a lot of moving pieces with MACRA right now. I was hoping we can kind of...

to unpack the 50 basis point increase over the past 12 months and help us think that through in the takeaway going forward. And also, any thoughts on MSMB, TPB, as it's growing 23% right now, just trying to get a little more clarity on what, you know, how that might play out over the course of 2023. Thanks very much. Thank you.

Hi Jeff, Raphael here, thank you for the question. I will start and then I'll pass it to Leah to add. So when we think about take rates, I think we still have opportunity to improve MSMB take rates. And when we look at not only pricing, which mostly drove our 50-bit take rate year-over-year increase.

We'll keep optimizing prices and of course trying to improve unit economics, but also having the new solutions, especially banking and in the future credit, helping us with take-rate. The idea that we have is to keep improving monetization of our clients.

We are already seeing that not only in payments and I think that the nice What we observed that we liked was we were able to increase by 50 bits to take great while growing faster than the market in the industry. So I think that this is something

Also, for us to note, Alia, do you want to add?

Half way through me.

I want to add three comments here. One, Jeff, is that the card association in Brazil has indicated that the industry should grow between 14 and 18% this year. And we expect to continue to gain market share, so we will continue to grow faster than the industry.

As we said, we see space to continue to increase take rates, with respect to do so in the first quarter, and continue this trend because of our strategy of how we price our clients, seeing all the relationships that they have with us, with all the projects. So as we add more capabilities to our offering.

have better space to offer superior value proposition to them and then have better monetization. And I think that the ability to grow game market share and increase stake rates prove how strong our value proposition is. So those are the three comments I would like to add.

Okay, that's great color. Thanks very much. And I wanted to ask a follow-up in the financial services.

segment with key accounts and this is in reference to slide 11.

with key accounts and this is in reference to slide 11. What's interesting, this is in the presentation.

What's interesting is the platform services that you're approaching, I mean that increased by 32%.

And you're highlighting that the take rate has increased by 35 dips over the past year. So the question is, how much further does that have to go? Because we can see the subacquirer piece declining. I'm curious if you can help us think through a little more about the go-forward for K-Count TPB coming from platform services, and also what that could mean for the take rate and the K-Count piece going forward.

Our approach there is completely opportunistic. We have our pricing policies and our hurdles, and TPV may come or may not. That's not a focus for us. Our focus really is on the platform services clients, and those clients, they have higher take rates simply as a result of...

So we continue to see an opportunity to invest in this client segment so we can expect healthy TPV growth in that part of the key accounts business. And that will impact positively take rates as well.

We continue to see an opportunity to invest in this client segment so we can expect healthy TPV growth in that part of the key accounts business. And that will impact positively take rates as well. Tableau anything you want to add?

I think you said it all. Just a small comment is that Jeff, we see platform services almost like a type of distribution channel where we can access more merchants and more SMBs through third parties. I think that the team has the ability to keep a similar pace of what we are executing today and that will result in better grades.

for the whole key accounts segment, as Leah just mentioned. Okay, that's great. Thanks so much, appreciate it.

key accounts segment, as Leah just mentioned. Okay, that's great. Thanks so much. Appreciate it. Thanks, Jeff.

The next question comes from Keo Di Prato with Banco UBS. Please go ahead.

Hello everyone, good evening, thanks for the opportunity to ask questions. I have two on my side please. The first one is related to the banking business. So you reached 3.6 billion deposits this quarter and I'm wondering here what are the next steps of the company in this front.

Thank you.

Hi Caio, this is Tiago speaking. Actually, we have 4 billion REIs in deposits, 3.6 billion REIs from the MSMB segment.

So there are some deposits from the key account segments too, but the total deposit today is forbidden re-I's. We expect that our deposits will continue to increase. As engagements with the banking solutions are increasing in all segments, mainly the MSMB ones, in the first quarter, the MSMB will continue to increase.

we launched a new offering from Micro merchants called Super Contaton and we have good initial results. So we think that these trends will continue and I think that in terms of the yields today we don't offer yields on deposits to our clients.

However, those deposits, they stay 100% in collateralized treasury floating bills by the central bank. So we take interest on those deposits and I think that we will continue to execute the bank strategy like that. We are not executing any different type of license at this moment. We think that the execution we have.

has a very low risk and provides good economics to the company.

really speaks to the quality of the client base and having the banking attached to the acquiring solution. So that pretty much guarantees that cashing volume from TPV, from PIX as Chago mentioned, and other payment methods into the banking account. So I think that was just the element that I wanted to add. Tell us more.

Thank you very much, Léa, as well. And the other question, if I may, which is related to your funding source as well. If you can please detail a little bit more, like what was the breakdown for funding sources from the payment operations this quarter, and if you can please explain what you are seeing in terms of funding costs.

evolution since the beginning of the year in those lines, please. Thank you very much. Hi, Rafael here. So, the majority of our funding sources for pre-payment is the sale of receivables that we do to fund that operation. We also have some debt on our balance sheet.

When we look at the cost and the spread, they have both in debt and in the sale of receivable, they have even slightly decreased quarter over quarter. So I think that we are not seeing big changes there. Of course, as we generate more cash and bring additional cash from our operations, we have more flexibility.

to deploy that in our business, but still today is the minority part of our fund is being at own cash, right, from own capital. So, and that's even important because when you have different capital structures and different players with more equity, for example, deployed in that operation.

course you could have less financial expenses, but in our case I think that this has been the case given the growth of the company. Okay, thank you very much. Have fun.

have less financial expenses. But in our case, I think that this has been the case given the growth of the company. Okay, thank you very much. Have fun, Chagulia. Thank you, Kai.

The next question comes from William Berenjard with Itau BDA. Please go ahead.

Good night everybody. Thanks for the opportunity. So I have a question related to the MSNB volume growth and how it reflects into your SGA. So it seems selling expenses are growing above TPV growth.

even the MSMB growth. So I would like to understand how do you expect this dynamic to unfold in 2023 and if as volumes growth are already healthy so should we assume you will prioritize in 2023?

controlling these selling expenses and if this is not the case, why is this your choice?

Hi, William, Rafael here. I think that one of the dynamics in the selling expenses is when we think about the quality of merchants that Leah said, for only is not only important to bring a client, not only with a better TPV in given the cohort of the client, the tier of the client, but also profitable client with a good contribution margin. So, thank you.

That's why when we look at selling expenses and compared to revenue, we have seen an improvement quarter over quarter. This year we will continue to invest in our distribution because we do see profitable unit economics. So the way we look at selling expenses is whenever we see the new clients, the new vintages coming with healthy unit economics.

above the hurdles of return we have, we continue to invest, right? As it is public information, we have a marketing campaign in Brazil in the first quarter, right, with Big Brother. This has marketing expenses in there, of course. A big part of that is non-cash, because we have, this is a part of our agreement with Global back in 2021, 2020.

and we believe that this is something that brings returns to the company. So the selling expenses is really a line that when we have the opportunity to increase with good returns we are happy, right? So I think that that's the dynamics that we see in that line. Alfa Chago here, just to complement, I think that in summary.

Selling expenses as a percentage of revenues are gaining leverage. There's still space to continue that trend, although we continue to invest on our growth. And as Hafa said, we continue to invest in our growth and we continue to invest in our

I think that the agreement we made with Global gives us the ability to create a powerful brand in Brazil, both in stone and tone, and the depreciation of those brands are an important part of our strategy. We have a non-cash investment.

because of the agreement we did with Cripple Global before. So I think that this is a positive and a good differentiation in terms of how we are building our brands. Okay, that's clear. Thanks for the answer.

Thanks, William. The next question comes from Antonio Rued with Bank of America. Please go ahead.

Hey guys, we're asking the results. So two questions on my side. The first one, if you could help us to better understand the figures from ABAC to disclose the guidance for their perspectives of 14 to 18% of TPD growth for the year 2020.

When you look at this number, how to think about it, we have some players considering the number as conservative, not very conservative. What are the main drivers to reach this number here? And also a second one on funding costs. We intend to keep using cash.

as a way to reduce your funding costs in coming quarters. That's it on my side, thank you.

Hi, Antonio, Rafael here. Regarding your first question, that's right, Abec mentioned 14 to 18% growth in the industry this year. They do have a lot of data, right? How do you say they are the only 21% growth you're looking at, entrepreneur? oil determining economyahoo.com

more data than we have. And I think I would say that we are internally looking at the lower end of that range. But at the same time, we are looking at geogos that have to grow more than the industry. So we are not very worried with that, if it will be 14 or 18%.

Regarding the second part of your question in funding, I think that, as I mentioned before, we think that the financial expenses compared to the revenue, they should be pretty much where they are. We were always very conservative in the level of cash that we keep in our balance sheets. We have a lot of flexibility.

strong liquidity to be able to address opportunities for growth quickly and I think that this will continue to be the case right so I think that we are pretty much stabilized now and in terms of funding we'll always look to improve efficiency in funding negotiation with our counterparties but I think we are at a more stable level right now.

Great. Thank you, guys.

Thank you. The next question comes from Mija Ejirwana with HSVP. Please go ahead. Hi, everyone.

Hi, thank you for taking my question. I just wanted a clarification on the TPV growth. I understand the APEX guidance, but I think you mentioned that the MSMD segment for you would grow north of 18%. Is the number right or could the growth be stronger?

My second question is on PIX. So I understand that you do not include the PIX volumes in your TPV, but would it make sense to include at least the acquiring PIX TPV to the total volume base because you can charge for the PIX P2B volume? Could you tell us what is the pricing for these PIX volumes?

Happy to be worried. Thanks so much. Hi Neha, I'm gonna start here. Your to answer your question regarding peaks and then I will pass it over to Hafa. I think regarding peaks, although you know we do monetize peaks P2M because that's a payment method that.

we enable our clients to accept through the POS. So I explained that the evolution in PIX PPV was mostly driven by PIX P2M volumes. What we've seen in terms of behavior within our client base also reflects overall trends in the market, which is the first growth of PPV really came from substituting wire transfers and substitution for cash. But more recently, what we've seen is a trend of more strong trading markets that create more segments of dice rushing back into the market.

So I think that's the message regarding PIX. So I'll pass it over to Haffa to get to your other question. Leah, if I could just clarify, you monetize the P2M PIX transactions and you include the revenues in your total revenues, but the volumes are currently not included in the TPU base.

Perfect, exactly that. So we monetized PIXP2M in line with DebitNet MDRs and that's included in our transactional revenue.

Okay, so that would be about 60 basis points or so? Depends on client segment that we're talking about. It can range because larger clients naturally are going to have a lower net MDR. Smaller clients are going to have a higher, but it's in line with that net MDR. And yeah, Rafael here regarding your

percent growth so I think answering your question yes it is possible to be to be better right than the high end of the apex range.

Perfect. If I can ask please in just one more question. Competition in the SMB space I believe it is much more discipline. You're not seeing anybody being aggressive on pricing and you don't want to be aggressive on pricing. You want to focus on profitability this year. Just correct me if I'm wrong.

What about the long tail? In the long tail, would you like to be more aggressive in pricing, taking more shares? Or are you seeing players being more aggressive in terms of pricing in the long tail? If you could just give us some color on both these segments separately, that would be very helpful. Thank you.

I think that competition is much more stable now in the SMB. We price higher than our competitors and in the micro space we price in line with our competitors. I think that that's the color I can give you.

Thank you so much. Thank you, Neha. The next question comes from William Payne with Susquehanna. Please go ahead. WhengamersIA God is my doughnut.

Hi guys, thank you very much for taking my question.

I was thinking about credit and I guess this is very broad, but how do you think investors should think about the timing of the expansion of credit? I know it's a big part of the business, but then the company took a bit of a break recently. So just how should we think about the timing of the expansion of credit there?

Hi William, Lia here. So as I mentioned just now, we are planning to start scaling credit in the second half of 23. So I think in terms of the timing that's what we're planning for and we can expect you know expansion to happen more significantly towards 2024.

That's what we have in our plans and we can give color on Okay perfect um and then I guess my follow-up here

While the company doesn't give longer-term guidance...

Do you generally see margin expansions from current levels over time? So I guess phrase another way Do you feel that? profitability margins now

have peaked or do they have more runway?

Hi, William. Chiago here. I think that in terms of margin, as Rafael said, we see space to continue to increase margins. As we said, first quarter has a seasonal effect.

So on a quarter-by-quarter basis, margin should improve. And in terms of outlook, we are giving the outlook for the first quarter, and we are giving space for Pedro to come in the first quarter earnings call and give more core about future outlook.

Okay, perfect. Thank you, guys. Thank you, William. Thanks, William. The next question comes from Natalia Kornfield with J.P. Morgan. Please go ahead. Okay, thank you, William.

Guys, thank you for taking my question. I have two questions for you. The first one, I know that you are not considering buybacks of your bonds.

However, given current prices at around like 68 cents on the dollar, I'm wondering if that has changed. And my second question is back to funding.

just to understand how, and you mentioned here, the sale of receivables.

just to understand how sales receivables have been post-Americanas and you're funding the local market in general post-Americanas, not only the sales of receivables but also the Fijics and loans with banks. How has this been post-Americanas for you? Those are my questions.

in prices. So that's why we are confident with the guidance we gave. So if you see in the implied guidance there's no material change in terms of how we fund our business or the prices we pay to get access to funding. So it's pretty much a regular execution for first quarter. In terms of the bond, we do see an opportunity in terms of our bonds, in terms of the implied spread.

And we are always evaluating options to allocate capital wisely and we are following closely that. And we think that that is a good capital location for students for investors. And we are following this very closely.

Alright, so now you consider a possible buyback of the bonds at current prices.

I think that that's not the statement I'm saying, I'm just saying that we are following closely and we need this as a good investment opportunity. We are following closely.

Right, and your sale of receivables, you're saying that hasn't changed from post Americanas? It hasn't changed in terms of volume and almost no change in terms of price because of the number of counterparts we have, so no big changes in our execution. That's why we're confident with our guidance.

There are no changes in terms of how we fund the business. No impact from the Americana's event in Brazil. Thank you very much.

in terms of how we fund the business. No impact from the Americanas event in Brazil. Okay, thank you very much. Thank you, Rata Ali.

This concludes our question and answer session. I would like to turn the conference back over to Thiago Piau for any closing remarks. Hi everyone. As this is my last earnings call, I just would like to say a big thank you to all of you, especially to the incredible Stone team.

It's a pleasure to lead this company. I learned a lot. I'm really excited with the pep for heads

I think that this thing will do amazing, and I'm here to support the business as a shareholder. Very happy with the transformation of Stone in the previous years. Thank you very much, and bye-bye. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.'ve

The the coun.

Good evening ladies and gentlemen, thank you for standing by. Welcome to the Stone Co. 4th Quarter and Fiscal Year 2022 Earnings Conference Call. By now everyone should have access to our earnings release.

The company has also posted a presentation to go along with its call. All material can be found at www.stone.co on the Investor Relations section. Throughout this conference call, the company will be presenting non-IFRS 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 IFRS. Reconciliations of the Company's non-IFRS Financial Information to the IFRS 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 might include forward-looking statements.

These forward-looking statements are not guarantees of future performance and therefore you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the company's expectations. Please refer to the forward-looking statements disclosure in the company's earnings press release.

In addition, many of the risks regarding the business are disclosed in the company's form 20F, filed with the Securities and Exchange Commission, which is available at www.sec.gov.

I would now like to turn the conference over to your host, Rafael Martins, VP of Finance and Investor Relations Officer at StoneCo. Please proceed. Thank you, operator, and good evening, everyone. Joining us today on the call, we have our CEO and board member, Thiago Piau.

and our Chief Strategy Officer, Liam Aptus. Today, we will present our fourth 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. Thiago. Thank you, Jafa, and good evening, everyone. Let me start by reviewing the key highlights for the year in fourth quarter 2022 that we lay out on slide 4 of our presentation.

We successfully drove strong growth with improvement in profitability. Our revenue doubled in 2022 while our adjustment income reached $526 million REI.

In the quarter, adjusted net income reached $235 million, a 44% sequestration growth. This achievement was largely a result of a successful price execution and strong operational average, while we improved engagement with our clients and continued to invest in our growth. We generated increasingly stronger cash flows. Our company is generating cash in a very consistent way and is now generating cash in a very consistent way.

and has a strong balance sheet and liquidity to fund its growth ahead. Our adjusted net cash increased by 1.2 billion reais in 2022 and 385 million reais in the fourth quarter alone. We expect that our cash flow generation will remain strong in 2023. In financial services, we expanded our client base, offered new solutions, and captured higher take rates.

In 2022, we generated strong profitable growth in our client base, while improving unit economics, both through price execution and increase in monetization for our banking solutions.

In the fourth quarter, MSN BTPV grew 23% year on year, almost two times the industry growth. Active client base grew 48% year on year to 2.5 million merchants at the same time that we increased take rates by 50 pips compared to last year.

Additionally, total banking deposits reached 4 billion REIs, 3.6 billion of which in the MSMB segment, reaching almost 693,000 active banking clients. I think such results show our ability to pass along price increases.

Gain market share and improve engagement with our clients at the same time. In software we gain scale, improve operating margins, and advance our product integration.

Software revenue grew 21% year-on-year in the fourth quarter, and our adjusted EBITDA margin reached 16.2% in the fourth quarter, the highest margin since we acquired the business. We gained efficiency while also investing in several areas to better serve our clients, like customer service and product integrations.

We've integrated our financial services platform to POS and ERP solutions in strategic verticals, opening a key cross-sell opportunity which we believe is unique within the industry.

Last, we enhanced the capability necessary to execute the next phase for Stone. We added to our team experienced and seasoned leaders strengthening key capabilities in banking, credit, product, tech, and risk, which will be crucial for our plans in the coming years. For more videos like this one, click the button above.

Finally, we're also successfully completing our CEO transition and I'm confident that under Pedro's leadership, Stone will evolve on an even stronger future and 2023 will start a new chapter in our journey. Now I'm very happy to bring Pedro to send a message to all of you.

The team has defined clear priorities for 2023 and I see this as an important first step for the path ahead. I'll take the CEO role in April and today we'll participate in the call only as a listener.

I look forward to meeting all of you soon. Thiago, back to you. Thank you, Pedro. It's great to have you on board and I wish you great success. I will now pass it over to Lia who will provide more details about our fourth quarter performance and strategic updates. Lia. Thank you, Thiago, and good evening, everyone.

I will start on slide five with some highlights of our overall performance. In the fourth quarter, we surpassed our guidance in all metrics, reaching 2.7 billion REIs in total revenue, 316 million REIs in adjusted EBT, and 235 million REIs in adjusted net income. As Thiago already mentioned, this quarter reinforced a good balance between growth and profitability within the last quarter. In the fourth quarter, we surpassed our guidance in all metrics, reaching 2.7 billion REIs in adjusted net income. As Thiago already mentioned, this quarter reinforced a good balance between growth and

increasing from negative levels in the fourth quarter of 2021 to 12.4% in the fourth quarter of 2022.

stowing our discipline and allocating capital to grow our financial services platform. Moving to slide 8, our MS&E Payments Client base increased by 48% year-over-year to 2.5 million active merchants.

with 212,000 net addition of clients. Regarding our net ad trends, our focus has been and will continue to be on onboarding the best clients, both in SMB and in micro segments, reaching healthy levels of contribution margin per client.

higher average TPV within each client tier and lower turn. Also, by optimizing our commercial strategy of stone and stone offerings within our multiple sales channels, we were once again able to see client-based growth in all client tiers this quarter. I think this approach is pretty unique in the market.

and has led us to good levels of profitable TPV growth, as I will show on the next page. MS&B TPV reached 82 billion reais in the quarter, 4% higher than the high end of our guidance of between 78 and 79 billion reais, and growing 23% year over year, almost two times industry growth levels.

We were able to produce that growth while increasing our take rates by 50 basis points year over year. MS&B take rates remained stable sequentially at 2.21%, which was positively impacted by higher average prices in the quarter and positive client mix, offset by a seasonal increase in debit over credit volumes. On slide 10, I show some highlights of our banking business which has evolved since the beginning of the pandemic.

deposits speaks to the quality of our client base with a healthy mix in terms of average TPV and the value of having our banking solution attached to our acquiring solution with no incremental marketing investments.

As an example of this additional engagement, PIX in volumes tripled in 2022 to 44 billion REIs and increased 22% quarter over quarter, mainly driven by higher PIX P2M volumes. Another important highlight worth mentioning is the launch of Supercontaton in the first quarter of 2020.

Our focus in the second half of 22 was on building a fully automated process for credit underwriting and granting through the Stone App. We also made our decision models more sophisticated through enhancement of data, strengthened the team, reviewed and approved our risk policies, and ran the first test with a small number of clients.

with positive initial results. In the first half of 2023, we expect to expand the size of our testing with clients, with an emphasis on management of guarantees, testing and improving the quality of the decision models, and credit lifecycle monitoring and renegotiation through the app.

Our initial focus will be providing working capital loans to the S&B segments. We're also planning the launch of credit cards to both micro and S&B segments and are exploring opportunities for cross-selling credit in LYNX.

Moving to slide 11, I want to briefly talk about key accounts. As we've been reinforcing for some quarters already, we have been shifting our priority from subacquiring business to platform services within this segment. I want to remind our investors that platform services encompass a range of client segments wherein someIT terrible patterns increase regardless of the squad in theSh Boris.

that distribute our solution by integrating our payments and banking platforms to their own offerings, such as software providers, e-commerce platforms, and omnichannel retailers. We see an attractive opportunity to continue to serve these client segments, which is evident by the strong level of growth in platform services TPD.

The effect of this decision is a decline in subacquiring volumes and an improvement in overall key account take rate. This quarter, key account TPV decreased 18% year over year due to a 57% decrease in subacquired volumes and an increase of 32% in platform services TPV.

In slides 12 and 13, I'm going to shift to discuss some performance highlights of our software segment. In slide 12, we can see a consistent growth in our top line combined with improvement in our operating margins. Revenue grew 21% year-over-year to 376 million REIs. And our adjusted EBITDA more than doubled year-over-year.

to 61 million REI's with adjusted EBITDA margin increasing 760 basis points to 16.2 percent. This improvement in margins is mainly related to dilution of fixed costs, normalized cloud costs and ongoing cost control efforts.

that have a leadership position in several retail verticals, such as apparel, footwear, optics, pharma, among others. As we evolve our software strategy, we see the central priority of our digital solutions being to enable those brick-and-mortar clients to sell more through digital channels by using our marketplace strategy.

in 2022 was integration of our financial services platform to POS and ERP solutions in strategic software verticals. We believe this will be key for us as it opens up an important cross-cell opportunity to be explored through differentiated offerings to our clients.

The focus for 2023 on that front will be to build the optimal go-to-market strategy, leveraging both the stone distribution through the hubs as well as our software distribution franchisees.

Now I want to pass it over to Hafa so he can discuss in more detail some of our key financial metrics. Hafa?

Thank you, Lea. I will now begin on slide 14 to discuss the evolution of our costs and expenses. Before I talk about the quarterly evolution, I would like to zoom out to the evolution in the year because I think it shows the tangible results of our focus in improving the profitability of the business.

Throughout 2022, we saw operating leverage gains in almost all lines. Our cost and expenses as a percentage of revenue decreased more than 1400 basis points in the fourth quarter compared to the prior year. Cost of services decreased from 34.5% of revenue in the fourth quarter 2021 to 25.8% this quarter, a gain of 870.

as our positive cash flow generation gave us comfort to use more of our own cash to fund our prepayment business.

Now, let me give the main highlights of our sequential quarterly evolution. Cost of services as a percentage of revenue decreased 100 basis points to 25.8%, mainly due to lower costs in software and efficiency gains in our registry business tag, logistics, and banking. Administrative expenses as a percentage of revenue increased 100 basis points to 11%, and a increase inwashed business revenues from April 2018. Hazef Thanks For Watching! The resumes will be over

will reduce on an absolute basis in the first quarter 2023.

Selling expenses decreased around 40 basis points as a percentage of revenue, as a result of roughly stable marketing expenses and despite increased investments in our sales force.

Following the trend seen in the third quarter 2022, financial expenses decreased 3.1% quarter-over-quarter and as a percentage of revenue decreased 380 basis points to reach 33.4%. This is mainly explained by higher use of our own cash to fund our prepayment.

which were partially compensated by a gain in the sale of POS. As shown in slide 15, in addition to our P&L evolution, we have been consistently generating cash and improving our liquidity.

Our adjusted net cash balance improved by around 385 million REIs in the quarter, reaching 3.5 billion at year-end. In the year, adjusted net cash increased by 1.2 billion REIs.

As I just mentioned, we have used a little more of the cash generated by our business to fund our prepayment operations, given our already very strong cash position.

Before I talk about our first quarter 2023 outlook, a brief comment on a change we are making starting next quarter regarding our non-IFRS adjusted metrics.

Starting next quarter, our managerial adjustments to IFRS results will no longer include adjustments related to share-based compensation expenses. Until now, we adjusted those expenses related to extraordinary grants and already did not adjust share-based expenses related to annual recurring incentive plans. To better align calculations, we all took the opportunity to

comparability, and simplifying the understanding of our financial results, we decided to be closer to IFRS reporting metrics and stop adjusting all share-based compensation expenses from our results from the first quarter 2023 onwards. To help you reconcile our future results, you can click on the link in the description to view the video.

we have provided in the appendix of our presentation and in our earnings release, historical numbers with the new adjustment policy. Now, moving to our first quarter, 2023 outlook on page 16. We expect total revenue and income above 2.6 billion REIs in the first quarter, representing an year-over-year growth above 25.6%. For MSMB TPD, we expect volumes between 70 and 80 percent.

of more than 265 million REIs compared to 276 million REIs for the fourth quarter. As a reminder, the first quarter is usually seasonally weaker compared to fourth quarters because of higher volumes transacted during holiday season at year end. With that, let me turn the conference back to Lia so she can comment a bit on our priorities for 2023. Lia?

million REI compared to 276 million REI for the fourth quarter. As a reminder, the first quarter is usually seasonally weaker compared to fourth quarters because of higher volumes transacted during holiday season at year end. With that, let me turn the conference back to Leah so she can comment a bit on our priorities for 2023. Leah? Thanks, Jafa. Thanks, Jafa.

In 2022, we have set up a strong foundation to execute on our 2023 and longer term priorities. Let me just highlight where our focus as a team will be this year. You can follow those highlights on page 17 of our presentation. First, we will keep growing efficiently. Our plans for this year contemplate more OPEX discipline and a continued focus on MS&D growth, while maintaining our approach to pricing based on internal return hurdles, allocating capital wisely.

It is also imperative that we maintain a strong cash flow generation and overall liquidity position. This provides us with more flexibility to invest in the growth of our business. We will continue to work hard to expand our core through the evolution of our banking offers to micro and SMB clients, leading to higher client engagement. Together with this, we are on track to relaunch our working capital solution.

and launch our debit and credit cards to MS&E clients. We will further develop the execution of our software strategy, strengthening our approach to cross-sell financial services into software client base with differentiated integrated solutions.

Finally, after an enormous evolution on this front in 2022, we will maintain focus on evolving our management system and enhancing Stone's unique culture. 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 1 on your touch tone phone.

If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.

At this time, we will pause momentarily to assemble our roster. The first question today comes from Sharik Sumar with Evercore ISI. Please go ahead. Thanks a lot for taking my question. I just wanted to get a sense on the margin outlook for 2020.

Hi, thank you for the question. Although we are not providing specific guidance for the full year, I think that, as you said, our guidance for the first quarter implies pretty much the same EBT margin as the fourth, despite the weaker seasonality of the first quarter. Can we look over time?

We do expect to continue improving the profitability of our business. So there are quarterly seasonalities, but this is the overall trend that we expect and I think that the main drivers for this improvement over time is as you said number one OPEC discipline, especially in the administrative expenses higher client monetization, right?

new solutions when they kick in, we start to have contribution margins from those solutions. We are seeing this already happening with banking, for example, which is evolving very well. And I think that the natural operational leverage as we continue to grow our business with a healthy pricing policy, I think this naturally tends to dilute fixed costs in the company. So I think that those are the main drivers that we see over time for margins.

Thank you. And just have a quick follow-up on the top-line guidance of about $2.6 billion. I mean I understand that there is some sort of seasonality that is factored in in the first quarter, but if I look back historically, like you have been gaining top-line growth sequentially by more than or approximately 200 million REI's. So is that like a good trend? Like what would make...

quarter that we strongly increase prices for example so of course this makes the comps for in terms of year-over-growth suffer but I think that we as we said in previous calls we have been balancing growth and profitability to levels that we think is healthy for the company and that will enable us to deliver on our threat

while improving the profitability of the company. Thank you so much, yeah. Thank you. The next question comes from Josh Sligar with Cantor Fitzgerald. Please go ahead. Hey team, this is Will Carlson on for Josh Siegler. Congrats on the quarter. Wondering if you guys can give any color on if there's been any material shift in the last year.

gave last quarter for MSBTPV implied a growth of around 18%. And we indicated in that call that our MSBTPV growth in 2023 should be higher than that. And our current guidance in the first quarter of 23 reinforces this indication and our view didn't really change.

since what we last said in the last earnings call. Chag, wanna add something? Yeah, Leah, thank you. Hi, Will, this is Chag speaking. I think in terms of trends, the only thing that we are seeing is the trend in the market.

which is actually a good result is that PIX in is increasing a lot. So we are seeing that as the banking increase engagement with our clients we experience more cashing volume coming from PIX.

Thanks, team. That's very helpful. Thank you, Will. Thanks, Will. The next question comes from Tito Labardo with Goldman Sachs. Please go ahead.

Hi, good evening. Thank you for the call and taking my question. A couple of questions. First, I think, you know, good job on maintaining the take rate despite the seasonality and the TPD growth was still strong. So just how do you think about, I guess, when the competitive environment in your ability to no strain is gonna' be a lack of both the

to further reprice because it does seem that you were able to gain some share in the MSMB segment. Do you think that's sustainable? Do you think there's still room to increase pricing anymore from here just to think about how that can evolve? And then my second question, also good on the financial expenses, you continue to use your balance sheet there. Do you see more room to, you know, see more of that?

much more stable throughout the year and you continue to do so in fourth quarter. In terms of take rate as you just said there are some seasonalities between third and fourth quarter because of additional debit volumes so maintaining take rate is a positive for us and because of that seasonality we expect take rates

to increase in the MSMB in the first quarter, as the seasonality gets more credit than that on the first quarter. So we think that industry now have a very healthy level in terms of prices. All players adjusted prices upwards over the last year, mainly because of the cost of capital that obviously increased to everybody.

and competition continues to be on a rational level. Tiro, Rafael here. Regarding our second part of the question about financial expenses, as we have mentioned, the cash generation of the business gave us comfort to use parts of our own cash to reduce financial expenses. I think that we are a more stable level now, so when you look at our financial expenses compared to our revenue, I think that...

we shouldn't change much from where we are right now. So we have been doing this for two quarters in a row. And as we have also indicated previously, financial expenses should go over time more in line with our TPV and changes in interest rates in the country. So I think that we are comfortable where we are right now. And of course, we'll keep looking at opportunities to optimize our funding. OK, great. Thanks, Diego. Thanks, Rafa.

right now so we have been doing this for two quarters in a row and as we have also indicated previously financial expenses should go over time more in line with our TPV and changes in interest rates in the country so I think that we are comfortable where we are right now and of course we'll keep looking at opportunities to optimize our funding. Okay great, thanks Chagal, thanks Rafa.

Thanks, Jeter. The next question comes from Jeff Cantwell with Wells Fargo. Please go ahead. Thank you. I appreciate this and nice results. I wanted to ask you if you could help us think through what we're seeing right now in MSMB, both on the TBB side and with T-Grate, for the go-forward, understanding that there are a lot of moving pieces with the macro right now. I was hoping we can kind of unpack the 50 basis point.

increase over the past 12 months and help us think that through in the take rate going forward and also any thoughts on MSMB, TPB, as it's growing 23% right now, just trying to get a little more clarity on what you know how that might play out over the course of 2023. Thanks very much. Hi Jeff, Rafael here, thank you for the question. I will start and then I'll pass it to Leah to add. So when we think about take rates, I think we still have opportunity to improve MSMB take rate. I think and when we look at not only pricing right which

and mostly drove our 50 bps take rate year over year increase. We'll keep optimizing prices and of course trying to improve unit economics, but also having the new solutions, especially banking and in the future credit helping us with take rate. So the idea that we have is to keep improving monetization of our clients. We are already seeing that not only in payments. And I think that the nice.

What we observed that we liked was we were able to increase by 50 bits to take great while growing faster than the market in the industry. So I think that this is something also for us to note. Alia, do you wanna add? Hafa, if I may. I want to add three comments here. One, Jeff, is that the card association in Brazil have indicated that the industry should grow between 14 and 18% this year. And we expect to continue to gain market share, so we will continue to grow faster than.

position is. So those are the three comments I would like to add. Okay that's great color, thanks very much. And I wanted to ask a follow-up in the financial services.

segment with key accounts and this is in reference to slide 11.

with key accounts and this is in reference to slide 11. What's interesting, this is in the presentation.

What's interesting is the platform services that you're referencing, I mean that increased by 32% and you're highlighting that the take rate has increased by 35 bps over the past year. So, the question is how much further does that have to go because we can see the subacquirer piece declining. I'm curious if you can help us think through a little more about the go forward for K-Count TPB coming from platform services.

And also what that could mean for the state grade in the key account piece going forward. Thanks very much. Hi Jeff, I'm going to start here Leah and then if Thiago wants to complement. So this shift that we're seeing in terms of TPV in key accounts, I mean, we've been talking about this over the last quarters, in terms of deprioritizing subacquired volumes. Our approach there is

completely opportunistic. We have our pricing policies and our hurdles, and TPV may come or may not. That's not a focus for us. Our focus really is on the platform services clients, and those clients, they have higher take rates simply as a result of the value that we offer to those clients by enabling them to integrate to our payments and banking platforms and distribute those solutions integrated to their offerings, like software clients.

e-commerce platforms, marketplaces. So we continue to see an opportunity to invest in this client segment so we can expect healthy TPV growth in that part of the key accounts business. And that will impact positively take rates as well.

platforms, marketplaces, so we continue to see an opportunity to invest in this client segment so we can expect healthy TPV growth in that part of the key accounts business and that will impact positively take rates as well. Tabu, anything you want to add?

Just a small comment is that Jeff, we see platform services almost like a type of distribution channel where we can access more merchants and more SMBs through third parties. I think that the team has the ability to keep a similar pace of what we are executing today and that will result in better take rates for the whole key accounts segment as Leah just mentioned. Okay, that's great. Thanks very much. Appreciate it. Thanks, Jeff.

The next question comes from Keo Di Prato with Banco UBS. Please go ahead. Hello everyone. Good evening. Thanks for the opportunity to ask questions. I have two on my side please. The first one is related to the banking business. So you reached 3.6 billion deposits this quarter and I'm wondering here what are the next steps of the company in this front. Have you already requested any banking license to the business?

date is forbidden realized. We expect that our deposits will continue to increase. The engagements with the banking solutions are increasing in all segments mainly the MSMB ones. In the first quarter we launched a new offering for micro merchants called Super Contaton and we have good initial results.

So we think that these trends will continue. And I think that in terms of the yields, today we don't offer yields on deposits to our clients. However, those deposits, they stay 100% in collateralized treasury floating bills by the central bank. So we take interest on those deposits.

I think that we will continue to execute the bank strategy like that. We are not executing any different type of license at this moment. We think that the execution we have has a very low risk and provides good economics to the company.

I think it's one of the relevant aspects of the evolution of banking, which is we're planning the launch of our credit cards this year, both for micro and SMB clients. So that's an example of an additional feature that we will offer that we expect to increase engagement with our banking solution. Get took off and stay King Konguv,

And I think I spoke about this in the call, but the evolution in outstanding deposits really speaks to the quality of the client base and having the banking attached to the acquiring solution. So that pretty much guarantees that cashing volume from TPV, from PIX, as Thiago mentioned, and other payment methods into the banking account.

So I think that was just the element that I wanted to add. Okay, thank you very much, Leah, as well. And the other question, if I may, is related to your funding source as well. If you can please detail a little bit more, like what about the breakdown of your funding sources from key payment operations this quarter? And if you can please expand what you are seeing in the funding part.

They have both in debt and in the sale of receivable, they have even slightly decreased quarter over quarter. So I think that we are not seeing big changes there. Of course, as we generate more cash and bring additional cash from our operations, we have more flexibility to deploy that in our business. But still today is the minority part of our fund is being at own cash, right from.

own capital. And that's even important because when you have different capital structures and different players with more equity, for example, deployed in that operation, of course you could have less financial expenses, right? So, but in our case, I think that this has been the case given the growth of the company, right? Thank you.

capital. That's even important because when you have different capital structures and different players with more equity for example deployed in that operation, of course you could have less financial expenses. But in our case I think that this has been the case given the growth of the company. Okay, thank you very much. Hafa chagulia.

Thank you, Kai. The next question comes from William with ETAL BBA. Please go ahead. Good night, everybody. Thanks for the opportunity. I have a question related to the MS&B volume growth and how it reflects into your SGA. It seems selling expenses are growing above TPZ growth.

even the MSMB growth. I would like to understand how do you expect this dynamic to unfold in 2023 and if as volumes growth are already healthy so should we assume you will prioritize in 2023 controlling these selling expenses and if this is not the case why is this your choice?

Hi, William, Rafael here. I think that one of the dynamics in the selling expenses is when we think about the quality of merchants that Leah said, FAR only is not only important to bring a client, not only with a better TPV, given the cohort of the client, the tier of the client, but also a profitable client with a good contribution margin. That's why when we look at selling expenses.

and compared to revenue, we have seen an improvement quarter over quarter. This year we will continue to invest in our distribution because we do see profitable unit economics. So the way we look at selling expenses is whenever we see the new clients, the new vintages coming with healthy unit economics above the hurdles of return we have, we continue to invest, right? As it is public information, we have a marketing campaign in Brazil in the first quarter with Big Brother. This has marketing expenses in there of course. A big part of that is non-cash, because we have.

This is a part of our agreement with Global back in 2021, 2020. And we believe that this is something that brings returns to the company. So the selling expenses is really a line that when we have the opportunity to increase with good returns, we are happy, right? So I think that that's the dynamics that we see in that line.

Javi, just to complement, I think that in summary, selling expenses as a percentage of revenues are gaining leverage. There's still space to continue that trend, although we continue to invest on our growth. And as Hafa said, we continue to invest in the

because of the agreement we did with Cripple Global before. So I think that this is a positive and a good differentiation in terms of how we are building our brand.

Thanks, William. The next question comes from Antonio Ruet with Bank of America. Please go ahead. The next question comes from

Two questions on my side. The first one, if you could help us to better understand the figures from ABEC to disclose the guidance for their perspectives of 14 to 18% of TPD growth for the year. When you look at this number, how do you think about it? We have some players considering the number as not very conservative.

What are the main drivers to read this number here? And also a second one on funding costs. Do you intend to keep using cash as a way to reduce your funding costs in coming quarters? That's it on my side, thank you. Hi, Antonio, Rafael here. So regarding your first question, that's right, Abec mentioned 14 to 18% growth in the industry this year.

they do have a lot of data, right? So more data than we have. And I think I would say that we are internally looking at the lower end of that range. But at the same time, we are looking at JAGO-CED to grow more than the industry. So we are not very worried with that if it will be 14 or 18%. Regarding the second part of your question in funding.

I think that, as I mentioned before, we think that the financial expenses compared to the revenue, they should be pretty much where they are. We were always very conservative in the level of cash that we keep in our balance sheets. We have a lot of flexibility, strong liquidity, to be able to address opportunities for growth quickly. And I think that this will continue to be the case, right? So I think that we are pretty much stabilized now and in terms of funding, we will always look to improve efficiency in funding, negotiation with our counterparties, but.

I think we are on a more stable level right now. Great. Thank you, guys. Thank you. The next question comes from Mija Ejirwana with HSCP. Please go ahead. Hi. Thank you for taking my question. I just wanted a clarification on the TPV Grota and the APEX guidance. But I think you mentioned...

that the MSMB segment for you would grow north of 18%. Is the number right or could the growth be stronger? My second question is on PICS. So I understand that you do not include the PICS volume in your PPV, but would it make sense to include at least the acquiring PICS PPV to the total volume base because you can charge for the PICS P2B volume? And could you tell us what is the pricing for these P2B volumes? Thanks so much.

Hi Niaha, I'm going to start here to answer your question regarding PICS and then I will pass it over to Hafsa. I think regarding PICS, although we do monetize PICS P2M because that's a payment method that we enable our clients to accept through the POS. For more information, visit www.PICS.org

I explained that the evolution in PIX PPV was mostly driven by PIX P2M volumes. What we've seen in terms of behavior within our client base also reflects overall trends in the market, which is the first growth of PPV really came from substituting wire transfers and substitution for cash. But more recently, what we've seen is a trend more strong towards PIX P2M. PIX PPV Hour 1

So that's a modality that we do monetize. We do not include PIX in our overall TPV, but we will continue to bring color on that evolution going forward, which we see as very positive, because not only the PIX P2M is something that we monetize, but also it really improves engagement with our banking solution in all clienteers. So I think that's the message regarding PIX. So I'll pass it over to Hafa to get to your other question. Leah, if I could just clarify, you monetize the P2M PIX transactions and you include...

with that debit and that MDRs. And Nia, Rafael here, regarding your first part of the question of TPD, I think you're right, right? When we say the 14 to 18% growth of ABEX, with Peter we've been looking at all the research of ABEX,

mentioned in our last earnings call that MSNBTPD should grow over above 18% right this year and I think that this still holds true our guidance for the first quarter implies over 20% growth so I think answering your question yes it is possible to be to be better right than the high end of ABEX range. Perfect if I can ask please in this one more question.

Competition in the SMB space, I believe it is much more disciplined. You're not seeing anybody being aggressive on pricing. And you don't want to be aggressive on pricing. You want to focus on profitability this year. Just correct me if I'm wrong. What about the long tail? In the long tail, would you like to be more aggressive in pricing, taking more shares? Or are you seeing players being more aggressive in terms of pricing in the long tail? If you could just give us some color on both these segments separately.

Thank you so much.

Thank you, Neha. The next question comes from William Payne with Susquehanna. Please go ahead.

Hi guys. Thank you very much for taking my question. I was thinking about credit and I guess this is very broad, but how do you think investors should think about the timing of the expansion of credit? I know it was a big part of the business, but then the company took a bit of a break recently.

Just how should we think about the timing of the expansion of credit there? Hi, William. Leah here. So as I mentioned just now, we are planning to start scaling credit in the second half of 23. So I think in terms of the timing, that's what we're planning for. And we can expect expansion to happen more significantly towards 2024. That's what we have in our plans, and we can give color on.

Okay, perfect. And then I guess my follow up here, while the company doesn't give longer term guidance, do you generally see margin expansions from current levels over time? So I guess phrased another way, do you feel that profitability margins now have peaked or do they have more runway? In other words they're goingrows, high stressers are going to be a lot lower in Payless ambition and this is more pressing in a more basic sense. Okay, saying.

Hi, William. Chiago here. I think that in terms of margin, as Rafael said, we see space to continue to increase margins. As we said, first quarter has a seasonal effect.

The next question comes from Natalia Kornfeld with JP Morgan. Please go ahead. Guys, thank you for taking my question. I have two questions for you. The first one, I know that you were not –

The next question comes from Natalia Cornfield with JP Morgan. Please go ahead Guys, thank you for taking my question. I have two questions for you. The first one I know that you were not considering by bags of your bones

However, given current prices at around like 68 cents on the dollar, I'm wondering if that has changed. And my second question is back to funding.

Just to understand how, and you mentioned here, the sale of receivables. Just to understand how sale of receivables have been post-Americanas. And you're funding the local market in general post-Americanas, not only the sale of receivables but also the Fijics and loans with banks. How has this been post-Americanas for you?

Those are my questions. In terms of receivables, we do have many counterparts in Brazil, in the local market. So I think that we have the ability to continue our strategy to fund our business with sale of receivables without relevant changes in terms of funding prices.

So that's why we are confident with the guidance we gave. So if you see in the implied guidance, there's no material change in terms of how we fund our business or the prices we pay to get access to funding. So it's pretty much a regular execution for first quarter. In terms of the bond, we do see an opportunity in terms of our bonds, in terms of the implied spread.

and we are always evaluating options to allocate capital wisely, and we are following closely that, and we think that that is a good capital location for two to four investors, and we are following this very closely. All right, so now you consider a possible buyback of the bonds at current prices.

I think that that's not the statement I'm saying, I'm just saying that we are following closely and we need this as a good investment opportunity. We are following closely.

Right, and your sale of receivables, you're saying that hasn't changed from post-Americanas? It hasn't changed in terms of volume and almost no change in terms of price because of the number of counterparts we have, so no big changes in our execution. That's why we're confident with our guidance.

There are no changes in terms of how we fund the business. No impact from the Americana's event in Brazil. Okay, thank you very much. Thank you, Rataj. This concludes our question and answer session. I would like to turn the conference back over to Tiago Pial, but in closing remarks.

No changes in terms of how we fund the business. No impact from the Americana's event in Brazil. Okay, thank you very much. Thank you, Natalia. This concludes our question and answer session. I would like to turn the conference back over to Thiago Pial for any closing remarks.

Hi everyone. As this is my last earnings call, I just would like to say a big thank you to all of you, especially to the incredible Stone team. It's a pleasure to lead this company. I learned a lot. I'm really excited with the path ahead. I think that this thing will do amazing. And I'm here to support the business as a shareholder. Very happy with the transformation of Stone in the previous years. Thank you very much, and bye bye. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Q4 2022 StoneCo Ltd Earnings Call

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