Q2 2023 StoneCo Ltd Earnings Call
Speaker 1: Good evening ladies and gentlemen. Thank you for standing by. Welcome to the StoneCo second quarter twenty twenty three earnings conference call.
Speaker 1: By now, everyone should have access to our earnings release.
Speaker 1: The company also posted a presentation to go along with its call.
Speaker 1: All material can be found online at investors.stone.co.
Speaker 1: Throughout this conference call, the company will be presenting non-IFRS financial information, including adjusted net income and adjusted net cash.
Speaker 1: These are important financial measures for the company, but are not financial measures as defined by IFRS.
Speaker 1: Reconciliations of the company's non-IFRS financial information to the IFRS financial information appear in today's press release.
Speaker 1: Finally, before we begin our formal remarks, I would like to remind everyone that today's discussion might include forward-looking statements.
Speaker 1: These forward-looking statements are not guarantees of future performance and therefore you should not put undue reliance on them.
Speaker 1: These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the company's expectations.
Speaker 1: 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 1: Please note, this event is being recorded.
Speaker 1: I would now like to turn the conference over to your host, Pedro Zinner, Chief Executive Officer at StoneCo. Please proceed.
Speaker 2: Thank you operator and good evening everyone.
Speaker 2: Joining me today on the call is our Chief Financial Officer and Investor Relations Officer, Mathieu Scherer, our Chief Strategy Officer, Leah Matus, and our Head of IR, Alberto Norohe.
Speaker 2: I will start today's call by giving you some of my thoughts on the second quarter and then I will turn it over to the team to walk through our results in more detail.
Speaker 2: Overall, I was pleased with our performance in the second quarter.
Speaker 2: Externally, from a commercial perspective, we generated strong growth by continuing to win in the areas we want to prioritize.
Speaker 2: Internally, within the company, we made progress across a broad range of initiatives to make our services and operations better and more efficient.
Speaker 2: And financially, we produced results above our expectations as we continued to ramp our profitability and accumulated more cashfire power.
Speaker 2: As I evaluate the departure, I also looked at how we perform relative to the priorities we outline at the beginning of the year.
Speaker 2: Our first priority was to grow with efficiency.
Speaker 2: In the second quarter, I think we met our objectives.
Speaker 2: by generating strong top-line growth with a significant improvement in our profitability.
Speaker 2: Our total revenue reached 3 billion Reais, an increase of 28% year-over-year and exceeding our guidance by 3%.
Speaker 2: Coupled with the top line improvement, adjusted EBT surpassed guidance by 19%, reaching 447? and high.
Speaker 2: The highest mark for quarterly adjusted EBT in our history.
Speaker 2: As a result, adjusted net income grew 5.8 times year over year, reaching 322 million highs and yielding a net margin of 10.9% in the quarter.
Speaker 2: Our second priority was to generate cash.
Speaker 2: Adjusted net cash increased 1.6 billion hives here over here and 338 quarter over quarter to reach 4.3 billion hives.
Speaker 2: This increase was mostly driven by the consistent cash flow generation of the business, while we continue to invest in client growth and product and technology development. Our priority consisted on focusing the expansion of our financial services business. The financial services Fagmin presented healthy TPV and client-based growth, and showed improvements in monetization from clients.
Speaker 2: MSNBTPV increased 19% year over year to reach 83.3 billion in her eyes despite macroeconomic headwinds in the period from higher interest rates, higher industry delinquency and declining consumer credit card limits.
Speaker 2: Our growth in the quarter was 3.7 times the industry growth.
Speaker 2: It's also important to highlight that during the quarter
Speaker 2: We consistently grew our MSNB client base with 204,000 at ads.
Speaker 2: 9 bases point in sequence MSB take rate 4 ESP NUMIM A d
Speaker 2: to each 2.48%
Speaker 2: We have also expanded our banking solutions with the launch of debit cards. And we are now piloting credit cards for stone clients.
Speaker 2: And we continue to test our credit product with early results very much in line with our expectations.
Speaker 2: Our fourth priority was to evolve our software business.
Speaker 2: After delivering a first quarter below expectations, we were able to improve our software results.
Speaker 2: Revenue for this segment reached 383 million highs with a 17% adjusted EBITDA margin and a 620 basis point improvement on a quarter over quarter basis.
Speaker 2: I'm happy to see that while we're evolving the strategic feed of our software business, we are also capturing short-term efficiency gains.
Speaker 2: Last but not least, it's also worth highlighting that this quarter we took another important step towards having all the right resources in place to build a fit for purpose organization.
Speaker 2: As announced in May, I'd like to formally welcome Mateo Shere as our CFO in RRO in Roberto Nauronha as our head of investor relations.
Speaker 2: I'm very excited to be working with Matthäus and Roberta, as we set the next stage of growth for the company.
Speaker 2: I would also like to thank Rafa and Silvio for all the work they've done and to all the invaluable contributions they made to Stone.
Speaker 2: I'm also pleased to announce that we're hosting our first stone cold day in New York, same Lord, and ask the
Speaker 2: I am excited to share our views on the business and how we are building an end-to-end value proposition for Brazilian commerce in the future.
Speaker 2: As we approach the event, we will share further details with you.
Speaker 2: Now I'd like to pass it over to Lier for a discussion on the second quarter about the 2023 performance and strategic updates.
Speaker 2: to Leah for a discussion on the second quarter of 2023 performance and strategic updates. Leah?
Speaker 2: Thank you, Pedro, and good evening, everyone. I'm going to start with the highlights of our financial services segment on page six. Thank you.
Speaker 2: In the second quarter of 23, revenue in the segment increased 32% year-over-year to 2.6 billion in HIs, mainly attributed to the performance in our MSNB client segment.
Speaker 2: MSND Performance was mostly influenced by above industry TPPV growth, higher tape rates and an increase in our client base.
Speaker 2: This combined with operational leverage, realizing our costs and expenses.
Speaker 2: Resulted in a GESID-BT of 398 million reais, and the 15.6% TBT margin, representing a sequential improvement of 250 basis points.
Speaker 2: On to light seven, let's review the MSNB performance in a little bit more detail.
Speaker 2: Our payments client base experienced robust growth, reaching approximately 3 million active merchants, an annual increase of 43.3%.
Speaker 3: Quarter over quarter, this represented net additions of 204,000 active clients.
Speaker 3: The sequential deceleration and net additions from the first quarter 23 was driven by the conclusion of targeted marketing campaign efforts within the period.
Speaker 3: Through strategic optimization of our tone and stone offerings across our sales channels, we successfully sustained the expansion of our client base across all tiers within the MSNB segment.
Speaker 3: Moving to slide 8, MSNBTPV increased to 83.3 billion highs, a 19.3% year-over-year growth, and a 3.7 times above industry growth. Despite being impacted by slower overall industry growth, we're very happy with this result, which was in line with our second quarter 23 guidance.
Speaker 3: and illustrate our strong relative performance and the power of our value proposition and offerings.
Speaker 3: Looking ahead, we're confident that this relative performance will continue and that we will continue to gain market share in the segment.
Speaker 3: Our MSNB take rate also presented notable improvements on a quarterly and yearly basis.
Speaker 3: This quarter take rate reached 2.48%, increasing nine basis points quarter over quarter, and 38 basis points zero over year.
Speaker 3: The annual improvement can be attributed to continued adjustment in our commercial policy.
Speaker 3: Stronger growth in our micro and small clients, which have higher stake rates.
Speaker 3: The effects of changes in debit and prepaid card interchange cap regulation, which went into effect as of April 2023, and contribution from our banking solutions, mainly floating and picks revenues.
Speaker 3: On slide 9, I give a quick update on key accounts to TPV.
Speaker 3: TPV decreased 32.5% year over year, in line with our expectations, due to our de-emphasis of low margins of acquired volumes.
Speaker 3: As a result of adjustments in our commercial policy and mixed shift within the segment, key account take rates increase 28 basis points year over year.
Speaker 3: Now let's move to the banking performance on flight 10.
Speaker 3: Our banking active client base increased 3.2 times year-over-year and 33.4% quarter-over-quarter to reach 1.7 million active merchants. This strong growth was a result of the launch of supercontatons in the first quarter of 23.
Speaker 3: And the continued activation of banking combined with our requirements, the Lucian's first home clients.
Speaker 3: Total deposits reach 3.9 billion reais, slightly up, quarter of a quarter.
Speaker 3: This quarter, we had a one-time decrease in client deposits of 286 million reais as a result of the shift in the charge-back in cancellation collection process for tone with no impact to our PNL.
Speaker 3: Excluding this one time effect, our overall deposits would have increased 7.8% sequentially, compared to 5.6% growth in our MSNBTPV, which illustrates the increasing engagement with our banking solutions. Moving forward in Stories, lets discuss the project, regarding closing the organization involved
Speaker 3: ARPAC decreased to 25 reais from 37 reais in the first quarter of 23 and 39 reais in the second quarter of 22.
Speaker 3: We soundly believe in the power of combining our banking and acquiring offerings to MSND clients.
Speaker 3: As such, we're working hard to enhance existing features and develop and launch new banking products. As an example, this quarter we launched debit cards and have already started piloting credit cards for stoneplanes.
Speaker 3: We're also working to enhance client experience related to the different features that we offer, as well as the integration of our banking to select TRPs within our software portfolio.
Speaker 3: On slide 11, I'd like to provide a quick overview over credit offering.
Speaker 3: Through the end of July , we had dispersed 26 million reais to around 850 clients, with an outstanding balance of 23.5 million reais.
Speaker 3: The early performance of our advantages is in line with our enhanced credit underwriting standards with personal guarantees and Leonon receivables being executed as expected. The early performance of our advantages is in line with our enhanced credit underwriting standards with personal guarantees and Leonon receivables being executed as expected.
Speaker 3: As we have discussed, we will take a conservative and disciplined approach towards the expansion of this solution, growing the portfolio, depending on market conditions, and taking the necessary time to observe full cohort performances.
Speaker 3: Now let's move to slide 12 and shift to the highlights of our software business.
Speaker 3: In the second quarter of 23, thoughts of revenue increased 9.2% year over year to reach 383 million high.
Speaker 3: This growth was driven by continued organic active store expansion in our core POS and ERP business, mainly in the SNB segment.
Speaker 3: Top line grew 6.9% sequentially, mostly due to an increase in setup revenues in our core segment related to the client base growth.
Speaker 3: Lock the adjusted EBITDA, increase 25.1% year over year, to reach 66.5 million highs, which equates to a 17.4% margin and a sequential margin improvement of 620 basis points.
Speaker 3: The Avittam Argin Expansion is a result of higher revenue in the period and operating leverage in cost and expenses, which included a reduction in share-based compensation expenses and lower levels of cost of services, mainly due to increased capitalization of R&D projects.
Speaker 3: These effects were partially offset by our continuous investments in our sales team and marketing, as well as seventh cost in the amount of 6.5 million reais related to an adjustment made to our organizational structure.
Speaker 3: In the second quarter of 23, we reduced headcount associated with our ongoing integration efforts within Stoneco. Which should drive additional benefits going forward.
Speaker 3: As Goodroom mentioned, while we evolve on capturing short term efficiency gains, we are advancing on the strategic fit of software within Stoneco.
Speaker 3: We have advanced on prioritizing two important verticals for driving financial services and software cross-cell, while also testing different go-to-market initiatives.
Speaker 3: As we have mentioned, the process of building our end-to-end platform is a multi-year journey, we believe we are taking the right steps to enhance and sustain our value proposition to our clients in the future.
Speaker 3: We expect to provide further details during our Stone Cold Day in November .
Speaker 3: Now, I want to pass it over to Mateus to discuss some of our key financial metrics.
Speaker 4: Mateusz? Thank you, Léa. I'm excited to take on this new role within Stone and look forward to working with the team in building the future of Stone Coach together.
Speaker 4: Moving to slide 13, let's discuss our costs and expenses on an adjusted basis.
Speaker 4: cost of services reached 600 and 85 million re-eins, increasing 9% a year on year, and decreasing for 100 basis points as a percentage of revenue to reach 23.2%.
Speaker 4: Compared to the previous quarter, it decreased 5% and 340 basis points as a percentage of revenue.
Speaker 4: This sequential improvement can be explained by
Speaker 4: lower technology expenses driven by R&D projects reassessments that led to higher capitalization, and a 21 million re-is non-recurring benefits in the quarter.
Speaker 4: and changing the allocation of comparable compensation between our costs and expenses.
Speaker 4: which reduced allocation to cost of services.
Speaker 4: I would like to highlight that even if we excluded the unusual positive effect of 21 million we add some more results will you?
Speaker 4: We would still have gained operating leverage in cost of services of $107 e-base points compared to the previous quarter.
Speaker 4: administrative expenses increased 2.5% sequentially, which resulted in a 60 basis points reduction as a percentage of revenue compared to the previous quarter.
Speaker 4: Important to highlight that administrative expenses for the second quarter 23 are 9% below the levels of the first quarter 22.
Speaker 4: Many as a result of the efficiency initiatives associated with our zero-basit budgeting process.
Speaker 4: Our expectation is that, from this point onwards, administrative expenses should grow sequentially, broadly in line with inflation.
Speaker 4: leading to further operating leverage.
Speaker 4: Selling expenses grew 22.6% year-on-year and 5.6% sequentially, decreasing 50 basis points as a percentage of revenue on a quarter-on-quarter basis.
Speaker 4: These light sequential improvements is due to lower marketing investments in the periods.
Speaker 4: Financial expenses increased at 16.6% quoted on quarter and 240 basis points was a percentage of revenue to reach 35.9%.
Speaker 4: The increase was driven by three factors.
Speaker 4: Growth and Prepaid Volumes
Speaker 4: our conservative decision to hold a higher cash balance in the quarter and a slight increase in the duration of receivable sold.
Speaker 4: Lastly, other expenses decrease at 22.2% to quantity and 110 wages points as a percentage of revenue.
Speaker 4: The variation in other expenses can be mainly attributed to a positive net effect of 19.6 million in our sharebase compensation expenses.
Speaker 4: primarily due to lower text provision.
Speaker 4: Moving to slide 13, I would like to talk about her cast generation.
Speaker 4: Adjusting ad cash increases by 338 million REI this quarter to reach 4.3 billion REI.
Speaker 4: The main driver for this was a strong cash flow from our operations, as well as a sequential decrease in capex, as in the first quarter 23 it was higher than usual due to a specific marketing campaign in the period that drove additional POS inventory.
Speaker 4: On a year-on-year basis, adjusted net cash increased by 1.6 billion REIs.
Speaker 4: Now, moving to our third quarter 23 outlook on page 16. We expect total revenue and income above 3 billion and 75 million REI in the third quarter 23, representing a year-on-year growth above 22.6%.
Speaker 4: For MSMB TPV, we expect volumes between 87 and 88 billion REI in the third quarter of 2023, compared with 74.7 billion REI in the third quarter of 2022, representing a year-on-year growth between 16.4% and 17.8%.
Speaker 4: Finally, we expect adjusted EBT of more than 470 million REIs.
Speaker 4: Before jumping to our Q&A, I would like to highlight that this is the last quarter we are providing quarterly guidance.
Speaker 4: as we'll begin to provide a longer term outlook of our results during Stonical Day in November .
Speaker 4: With that said, operator, can you please open the call up to questions?
Speaker 1: At this time, we're going to open it up for questions and answers.
Speaker 1: To ask a question, you may press star then 1 on your telephone keypad.
Speaker 1: If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker 1: To withdraw your question, please press star then 2.
Speaker 1: One moment please for the first question. The first question is from Sharik Sumar with Evercore ISI. Please go ahead.
Speaker 5: Thanks a lot for taking my questions. My question is on the competitive dynamics within Brazil on the payment side. Are you seeing any increasing traction or increased competition mainly?
Speaker 5: coming in from the US or any other countries outside Brazil, and within Brazil as well as to how is the competitive landscape right now, and where is the biggest market share gains that you are seeing so far? Thank you.
Speaker 3: Hi, Charisse. Leah here. Thank you for the question. I think regarding comparative dynamics, no big news. The dynamics that we saw this quarter is very similar to what we have seen in the past quarters.
Speaker 3: So if we look at the market share evolution and we look at the market share evolution
Speaker 3: They continue to lose share at a slower pace, but they do. When we look at the volume...
Speaker 3: It suggests that they have been shifting market share amongst each other at the top of the pyramid more towards larger clients
Speaker 3: And what we have seen is very granular in local dynamics that we're able to react given that we have a very specific view of the market dynamic in each region and can react through our hub operations and all of the data that we can capture locally. So, no really big news. Those same trends that we're seeing.
Speaker 3: And as you have seen, we have been able to continue to gain share in the MSMB segments this quarter, and we strongly believe that that's a dynamic that's going to continue going forward. For X example, we did.. children falling through tardsches….
Speaker 5: Thank you so much. My one follow-up is on the software EBITDA margins. It looks like it keeps fluctuating around, but any color on where do you think that this could stabilize? I mean, how much more runway do you have to increase the margins, and what do you think could be the long-term sustainable margin for this?
Speaker 4: for the software division on the quarter. We had an improvement in top line of 7% in the quarter fueled by setup revenues from new sales while we maintained costs and expenses under control.
Speaker 4: So, when we look about the effect on cost and expenses, this was mostly a result of
Speaker 4: Firstly, it's likely higher capitalization of R&D expenses in the quarter, but also most of this was offset by severance costs associated with a reduction in headcounts, which was driven by the integration process of some BECOFC functions within STONCO.
Speaker 4: So this reduction in headcount had a one-time negative impact in our ABA of six and a half million REIs.
Speaker 4: This should drive savings of around 10 million REIs per quarter going forward.
Speaker 4: So, our expectations for the next quarter is that top line should continue to grow while we have cost discipline associated with the savings. So, we are optimistic about margins in software going up.
Speaker 6: Thank you so much. I appreciate it.
Speaker 1: The next question is from Juan Recalde with Scotiabank. Please go ahead. Please make your stopwatch short and eight to
Speaker 2: Hi, congratulations on the strong results and thank you for taking my question. My question is related to the improving operational leverage on the cost of services.
Speaker 7: So when I see this like a question improvement of 340 basis points and you mentioned that part of this is driven by the reassessment of the R&D projects that led to higher capitalization. My question is how much of this improvement of the R&D projects is driven by the R&D projects
Speaker 4: 340 basis points was driven by this change in the R&D. Hey Juan, Mateo is here. You're right, we had two effects related to capitalization of intangible acids in the corridor that impacted cost to serve.
Speaker 4: Firstly, we standardized the software segment's capitalization process to mirror the practice within our financial services unit.
Speaker 4: Secondly, we also reviewed all the ongoing projects in our tech team and identified a few more projects related to new features that were not being capitalized previously.
Speaker 4: As we highlighted in the earnings release, these adjustments resulted in a one-time positive effect of 21 million on our quarterly cost of services.
Speaker 4: But, even if we excluded this unusual positive effect from our results, we would still have gain operating leverage and cost of services of around 270 basis points compared to the previous corridor.
Speaker 4: When we look ahead, we anticipate that operational leverage gained in the core operations in this line may be balanced out by provisions as we begin to expand our credit offering, but in the core itself we should continue to have operating leverage in cluster serve.
Speaker 7: That's helpful. And one follow-up, if I may, when I look at the third quarter guidance, I think that it is implied that there is going to be a small improvement in the adjusted EVT margin as well as increased risk defense posting and metering around the role of a called in the UK Open Source Court? lit.
Speaker 7: So, yeah, if we've...
Speaker 7: If the margins end up being better than expected, what do you think can be the drivers there? What can be the positive surprises that we can have in terms of margins in the third quarter? What can be the positive surprises that we can have in terms of margins in the third quarter?
Speaker 4: I think the margin dynamics should be similar to the previous quarters. We continue to have a big focus in terms of efficiency and driving savings in the whole company with a focus on a zero-basis budgeting process and implementation of a shared services center.
Speaker 4: On the other hand, we also expect to keep growing our TPV and MSMB. When you combine these two effects, I think if we have any outperformance in terms of top line, this should flow to the bottom line as well.
Speaker 7: Thank you very much.
Speaker 1: The next question is from Tito Labarta with Goldman Sachs. Please go ahead.
Speaker 8: Hi, good evening. Thanks for calling and taking our questions. Actually, one question on the regulatory front, there's been a lot of noise about the elimination of involving credit cards and some talks about reducing interest reinstallment. Just curious, any thoughts from your end? I know there's no final decision on that, but just what you heard.
Speaker 2: Thank you for the question. I think you gave the flavor in some ways. I think it is a bit too early to tell. I think we are closely following the debate.
Speaker 2: And as you are aware, we support all changes that would cost the competition and benefit merchants and consumers as we have always done.
Speaker 2: I think a regulatory change that takes away from merchants the possibility of offering installment transactions.
Speaker 2: would definitely significantly impact private consumption and consequently the overall economy.
Speaker 2: I think
Speaker 2: How would this impact us? I think it is a bit premature to comment on specific PNL impacts.
Speaker 2: given that there is nothing concrete being discussed.
Speaker 2: What we can say is that any modification in the interest rate free installment
Speaker 2: The structure would significantly affect the industry.
Speaker 2: So, potential outcomes might involve a decrease in overall private consumption since the majority of the credit transactions in Brazil are done through these installments and a possible repricing to balance industry economics is foreseeable in some ways.
Speaker 8: Okay, great. Thanks for the call, Pedro. It's helpful. And just a second question. Just with interest rates coming down, I mean, you still have some leverage there as your financial expenses come down. Just remind us the benefit or impact from a…
Speaker 8: any pricing on the prepayment, but just given the competitive environment, any potential risk there on the take rate as rates come down as well. Thank you.
Speaker 4: First part of the question related to the impact of 100 bases cut to our P&L.
Speaker 4: All else being equal, 100 basis points cut should positively impact our results by around 200 million.
Speaker 4: important to remind that this is the net effect of the impact on our funding costs, but also on the floating revenue and other financial income.
Speaker 4: Now talking about price
Speaker 4: price
Speaker 4: We told a few times in the past but pricing in our view is a dynamic process.
Speaker 4: We will continue to manage our pricing in the way that we have been doing in the previous quarters which is pursuing target returns for new sales.
Speaker 4: Having minimal contribution margins hurdles in our client base.
Speaker 4: We also believe that the acquiring industry continues to behave rationally, as it has been the case for the previous 18 months.
Speaker 4: we noticed that all players had to deal with an abrupt change in interest rates and had to adjust their offerings to a new reality. So nowadays we don't see any plays.
Speaker 4: a biomarker share with non-profitable offers including ourselves.
Speaker 4: Given that said, the effective impact of the cut will depend on the market's overall response.
Speaker 4: but we don't anticipate any initiative to pass through the benefits of declining rates in the short term from our side.
Speaker 4: Nonetheless, we will continue to actively monitor the market dynamics and adjust our pricing as necessary as long as it meets our internal hurdles.
Speaker 8: Great. Thanks, Mateos, for that. And maybe just one follow-up on that if I can. In the quarter, we did see a bigger increase in the financial expenses compared to the financial income. So, just to understand a little bit there why the spike in the financial expenses this quarter is great to see.
Speaker 4: Yeah, sure. So, we mentioned this previously already as well, but there are...
Speaker 4: to change in our funny mix between that and seal of receivables even without relevant changes in our funny spreads.
Speaker 4: So, with that said, the increase in this quarter can be mainly explained by three factors. The first factor is the growth in MSN-BT-PV.
Speaker 4: Second factor is also the conservative decision to hold a slightly higher cash balance in the quarter. And also we had a slight increase in the duration of receivables sold in the quarter. Over the medium term, we already said a few times that these expenses are primarily influenced by...
Speaker 4: This is more an effect of the quarter and not a general trend going forward.
Speaker 4: This is more an effect of the quarter and not a general trend going forward.
Speaker 1: Great, perfect. Thank you, Mateus. The next question is from Gabriel Gouson with Citibank. Please go ahead.
Speaker 1: Mr. Guzman, is your line muted perhaps?
Speaker 2: Yes, sorry for that. So good evening guys. Could you elaborate a bit on the TPV slowdown you're seeing for the entire market and how do you feel this could affect, especially for your MS and BPV? Could we see also a slowdown even if you continue to gain share?
Speaker 4: but we will see a slow down overall to PV growth there. Thank you.
Speaker 6: slow down overall to PV growth there. Thank you.
Speaker 3: Thank you, Gabriella, or Leah here. Thank you for the question. So I think regarding TPV trends and focusing on the MSMB-TPV dynamics, to the calculating thelin S silence
Speaker 3: Even though we reached our guidance and we presented healthy growth, TPV was indeed a little bit softer than our initial forecast in the beginning of the quarter. Especially in May, we noticed the deceleration in same-store sales of our clients.
Speaker 3: which is consistent with the lower growth for the overall market. As reported by Abax, we saw that Abax reviewed the range of TPG growth, of the market growth in the year. So we think that that's in line with the behavior that we saw within the base. But still, on a relative basis, we grew almost four times more than the industry.
Speaker 3: that we saw. And our July data shows early signs of improvement comparing theDE lay in some cases data ensuring that the red X Semi Vol
Speaker 3: which really makes us comfortable with the guidance that we have provided and continuing to grow above industry and gain share within the segment. I think another important thing to mention, Gabriel, is that looking at dynamics regarding peaks
Speaker 3: We have seen a very strong growth of pituitempics within the base.
Speaker 3: If we look at overall trends in PIX growth within our base, it's similar to what has happened in the market. So there was a very strong initial growth of PIX P2P. But more recently, growth has been mainly driven by PIX P2M. Just reminding everyone that PIX P2M is a payment method in which we...
Speaker 3: net MDRs. When we look at fixed P2M volumes in the quarter, they grew above 240% year over year. If you were to look at a consolidated growth considering credit cardlasering, those rising rates also were-
Speaker 3: card TPV plus PIXP2M, we would see a yearly growth of 23%. So we think that there is a
Speaker 3: Not per se a cannibalization of peaks within the base.
Speaker 3: when we think about debit volumes, but PICS definitely seems to be taking away from the growth of debit volumes. So this is a trend that we think is important to highlight.
Speaker 3: and that for us it really benefits us because we monetize it very much in line with debit cards. And it naturally benefits clients because for them it's cheaper and settlement is instantaneous.
Speaker 3: Yeah, I think that's what we can say regarding overall TPV trends. Perfect, thanks a lot.
Speaker 1: The next question is from Antonio.
Speaker 6: from Bank of America. Please go ahead. Hey Tim, congrats to the results and thank you for your time. So two questions on my side. So first on expenses, I was just wondering if we could extend a little bit more the major drivers for the increase in the capitalization of expenses.
Speaker 6: and we should continue to see this trend going forward in terms of CATX. And also a broader question on strategy, if you could elaborate a little bit on execution. If you look at today's challenges, you have a very competitive acquiring business.
Speaker 6: what you consider to be your main execution challenges today. Thank you.
Speaker 4: I'll start with the capitalization question and CAPEX and then pass it over to Léa to comment on integration.
Speaker 4: Regarding the capitalization, we basically had two primary factors influencing this movement. Firstly, we standardized the software segment's capitalization process to equalize those within our financial services unit. Secondly, we reviewed all the ongoing projects in our tech team and identified a few more projects.
Speaker 4: related to new features that were not being capitalized previously. This resulted in a one-time positive effect of 21 million in the quarterly cost of services, which should not repeat these dynamics in the future.
Speaker 4: Now, talking about capex, it's also important to highlight that, as we indicated previously, our capex decreased sequentially from 416 million in the previous quarter to 332 million in this quarter.
Speaker 4: We expect it's likely lower capex for the coming quarters, so it's not a general trend.
Speaker 4: lower capex for the coming quarters. It's not a general trend.
Speaker 2: Hi, Pedro speaking here. Let me jump in. I think on the strategy side, I think throughout the rest of the year, we want to put a strong focus of the team in the integration cost discipline.
Speaker 2: incentives alignment and streamlining our software portfolio. I think this would be the key drivers for the short term. However, at the same time, we have several priorities in place regarding top line growth. We are attacking both sides of our P&L in some ways.
Speaker 2: The improvements we have to make in the software business, in reality, they are not a short-term challenge.
Speaker 2: limits we have to make in the software business, in reality they are not a short-term challenge. It will take time.'re finding out the'' they do more work in Machine Learning in the software community.
Speaker 2: So I'm really confident that the rewards are worth it.
Speaker 2: In the long term, our goal is really to build a unified commerce solution for our clients.
Speaker 2: Our software business is really an integral part of our strategic vision.
Speaker 2: We believe that we have a lot of work actually ahead of us.
Speaker 2: But we're really excited on the path to become the only end-to-end integrated software and financial services provider for Brazilian merchants.
Speaker 2: I think we will be providing more flavor on this on the investor day by mid-November, how we set our long-term KPIs and our strategic view up until 2030. But I will pass it over to Leah so that she can provide you maybe with more color on our key initiatives. Sure, Pedro, thank you. Thank you.
Speaker 3: Just to elaborate a little bit more on those challenges, Antonio, I think on the banking side, we are very happy with the evolution that we have seen. So we have seen increased engagement of our clients with our banking.
Speaker 3: Of course, we see as a big value the fact that we combine our offering to clients in acquiring and banking. Acquiring provides a powerful cash-in which then can drive further engagement as we offer more features for our clients to solve their main business pain points.
Speaker 3: We have a lot of work to do on the banking side, so a lot of work being put into providing more and more features that address our clients' needs. And I think like Pedro said, on the software side this is really a multiyear journey. But we have, I think, started to take some very important steps.
Speaker 3: this year regarding having the right setup in terms of organization, of having the right incentives, of really prioritizing what we feel are the most important initial steps that we have to take. So just to give a little bit of color on that, we have prioritized what we see as the key vertical.
Speaker 3: that we're undertaking regarding those verticals are initiatives around product bundles, product integration. This is all talk I wanted to give to you all today atuding to the board
Speaker 3: go-to-market initiatives. When we look at the cross-sell today, about 17% of our software clients use our financial services. That's up from about 15%.
Speaker 3: at the beginning of the year. It's very early stages, but we started to see some initial traction, and we're very confident with the direction that we're taking. So just to give a little bit more color on those evolution points.
Speaker 3: any of the year. It's very early stages, but we started to see some initial traction, and we're very confident with the direction that we're taking. So just to give a little bit more color on those evolution points. That's great, thank you.
Speaker 1: The next question is from Josh Seigler with Cancer Fitzgerald. Please go ahead. Hey guys, thanks for taking my question and congratulations on the execution this quarter. I wanted to dive a little bit deeper into what you guys were just talking about which is on the software side. So there was some noticeable improvement in the software revenue this quarter.
Speaker 1: Can you help us understand how you achieved such a strong improvement in the number of active locations and how you got that cross selling flywheel to really start spinning between financial services and software?
Speaker 3: Yeah, thank you for the question, Josh. So we're really focusing the investments and growth within our software business around our less mature channels, so namely franchises and inbound. Those channels, they really address.
Speaker 3: kind of the middle of the pyramid in terms of client segments. So remember that Lynx has a strong presence in the enterprise segment, and is growing more and more in the middle of the pyramid, what we call mid to large clients. So that's really what drove the growth in locations. And that's an area where we will continue to invest.
Speaker 3: Starting the cross-sell, not much more to say than what I have already said. I think we're organizing a lot more around that front this year and really having kind of financial services team and software team aligned on the objective to achieve this cross-sell. I think we're going to have a lot more to say than what I have already said.
Speaker 3: making sure that we have initiatives around products, around offering, around go to market in a very structured way. There are a lot of opportunities. There are several verticals for us to address within Lynx. So we really started focusing on the ones that we see there's the largest opportunity within our software client base today.
Speaker 3: much where we're focused on. And yeah, that's the color that we can provide right now. We'll be able to give more color on this, like Pedro said, at Stone Day in November .
Speaker 1: Great. Thank you, Leah. I'm looking forward to that additional color. I also want to ask about the rollout of the new credit card product. What's the timing on actually getting that fully to market, and do you believe the mix of credit cards will have a significant impact on your banking segment moving forward?
Speaker 3: So like we said, we are piloting the credit card product and we hope to be able to scale towards the end of this year. Not much more to say at this point. I don't know, Pedro, if you want to add a little bit more color? Yes, I think you might remember that in the last call...
Speaker 2: time to observe the full cohort performing and also be mindful.
Speaker 2: that the current macroeconomic environment conditions were not the best ones to quickly expand the credit book. So we're keeping the conservative approach in some ways, but you'll see a bit more SKWAP over the next semester.
Speaker 2: I think regarding our portfolio performance, I think it's premature to draw definitive conclusions.
Speaker 2: I think initial results are a bit better than expected by our models.
Speaker 2: And I think that's pretty much it that we have to say at this point.
Speaker 1: Great, thank you very much for calling guys, appreciate it.
Speaker 1: The next question is from Neha Agarwala with HSBC. Please go ahead.
Speaker 9: Hi, thank you for taking my question. My first question is on the MSMB segment. You seem to continue to gain market share in that particular segment. Is that right? And what allows you to gain a market share, especially in the SMB segment, which is the SMB segment, to gain market share?
Speaker 9: It has always been so competitive but currently all players are very keenly focusing on that segment. Is there any particular player from whom you are gaining market share? My second question is on the long tail. There was a decline in the active climb.
Speaker 9: I presume it's due to the long tail segment. If you could elaborate on that. And we also hear that you probably are a bit more price aggressive in the long tail segment. Is that right? And how do you expect to continue gaining share in the long tail? Thank you so much.
Speaker 3: Hi, Nia. I think there were, Leah here, thank you for the question. I think there were a few questions within your question, so let me start answering and then let me know if I covered it all, okay? So I think regarding market share gains in the MS&E segment, just going back to fundamentals here…
Speaker 3: We created a model centered around providing the best service and really owning the touch points with our clients from distribution to service and logistics. Regarding distribution, we continue to see white spaces where we have room to grow across Brazil in our hubs, and also to further allocate capital and marketing to grow in the micro segment.
Speaker 3: I think that's an important point to highlight as we continue to invest in growth, both in SMB and microsegments. A second important point is that over the past years, we have invested in expanding our product offerings to clients. That's another layer that really strengthens our value proposition.
Speaker 3: And we did this while we continued to expand distribution footprint, and at the same time, sustain the best customer service in the market. And I think a third important factor, which is part of your question, is our ability to optimize.
Speaker 3: stone and stone offerings across our multiple channels, gave us an assertiveness and allowed us to optimize unit economics for different clienteers and maximize our ability to gain share in both micro and S&D segments with attractive economics. So I think that that's an important point, right?
Speaker 3: We've said this many times, but it's very important for us to balance this growth with profitability. In the end, it's the combination of these factors that I mentioned that creates a strong value proposition and sustains our ability to continue to win clients.
Speaker 3: every day across the spectrum of client profiles with attractive economics. So I think that's our take on market share evolution.
Speaker 3: And in terms of the decline in the active slides? Yeah, sure. So that's because in the first quarter we had a big marketing campaign around Big Brother Brazil, a reality show in Brazil that it's almost like you had a
Speaker 3: a stronger impact in that as in the first quarter due to these targeted marketing campaigns that subsided within the first quarter. So that's the reason why we saw this evolution. Any color, Mateusz, you wanna add? On the compliment, the active client base itself is still growing. So- Perfect. We grew from 2.7 million in the first quarter to 23.
Speaker 4: up to roughly 3 million active clients in the second quarter. What this accelerated was the net addition of clients and like Lia said, this was related to the marketing campaign that we ran in the first quarter.
Speaker 9: Okay, perfect. That's great. Thank you so much and congratulations on the quarter.
Speaker 1: Thank you Neha. The next question is from
Speaker 1: Hi, thank you very much for taking my question. The question I have is a bit of a follow-up on Neha's question. And it was regarding the MSN, the PPV growth of 19%. I was wondering if you could just maybe paint that growth in some broad strokes. When we think about this, is a lot of this coming from, is any of this coming from green space? Is it taking away market share from more like some of the incumbents, like the, you know, the acquires have been in Brazil for some time, or maybe...
Speaker 1: sequential basis key accounts, their TPV was only down about 3%. Are we nearing the bottom here where we can start to see some growth in known accounts, sorry, key accounts TPV?
Speaker 1: their TPV was only down about 3%. Are we nearing the bottom here where we can start to see some growth in known accounts, sorry, key accounts TPV? That's it.
Speaker 1: Hi, John . Leah again here. So I think, sorry, the first part of your question was around CPV dynamics, right? Yeah, for MSMBs and where that's coming from, Greenfield, old incumbents, fellow fintechs. Ah!
Speaker 3: Yeah, it's really a mix. So first message is we've always taken market share from competitors, right, since day one of our existence. So that's always a very strong dynamics that drives our TTV growth. TTV growth also is impacted by same-store sales growth within the base.
Speaker 3: But as long as we can continue to win new clients and sustain those relationships over a healthy lifetime That will allow us to continue to gain market share. I think I just explained on Nihas question the reasons behind this continuous market share game, but it's really a combination of things
Speaker 3: has really changed much recently. I don't think that there's any difference in terms of who are the main competitors. It varies by region, it varies by client segment, but there hasn't been really significant changes recently. Okay, thank you. And is the pain over for key accounts as far as quarter-to-quarter declines in TPV?
Speaker 3: I think we can expect to see this TPV dynamics stable from now on. Like we said, this is an opportunistic segment for us. So, yeah, not much to say there. I think we can expect stable TPV behavior. Perfect. Thank you very much. Thank you very much.
Speaker 10: The next question is from Giharam Gisbon with JP Morgan. Please go ahead.
Speaker 11: Hey hello thank you everyone for the call two questions on my side the first one is related to the long tail you talked a little bit about the competition on SMB that seems is still healthy we did saw some marketing campaigns on the long tail a little bit more aggressive this quarter there was also some news flow on one specific player focusing on the on the segment I think they're targeting to grow in the segment
Speaker 11: going forward. So just separating here the SMB from the long tail, if you still see the same economics, how has been the competitive dynamics and the second one is just to cross-check, you mentioned the chargeback impact on the banking deposits, if you can just clarify a little bit what is this impact wasn't a hundred percent clear to us. Thank you.
Speaker 3: Okay, Guilherme, thank you. I'm going to take the first part of the question and then pass it over to Mateo. Regarding micro-segment, I think one key point to highlight here is our ability to really optimize strategically our tone-in-stone offering to maximize markets or gains with attractive economics within EMS&D client segments.
Speaker 3: Regarding our targets within the microsegment, it's really about
Speaker 3: how we structure offerings in a way that we attract the healthy economics clients within the micro segment. So our clients profile within micro is a client profile of higher average CPVs and we do have, like we said many times before.
Speaker 3: return hurdles for all clients, segments, and products. So we're able through the offerings to really optimize the clients that we bring.
Speaker 4: that we can say regarding microsegments. Maybe Matheus can take the second part of the question on banking. Yeah, for sure. So, like you mentioned, we indeed had a one-off in the corridor with a negative impact of 286 million in deposits, but without any P&L impact. And this impact was associated with a shift in our chargeback and cancellation collection process.
Speaker 4: deposits to guarantee the collection. In the process of migration from TON's old merchant account to Supercontaton, we settled these amounts instead of only reserving them, which had a one-time negative impact on deposits but no P&L impact whatsoever.
Speaker 4: Also important to highlight that adjusting our deposit base would have seen a 7.8% sequential growth.
Speaker 4: which outpaces the 5.6% growth in MSNBT PV, which we think illustrates the continued increase in client engagement that we are seeing within our banking products.
Speaker 11: basis what do you believe is the loss ratio for this type of working capital loan?
Speaker 4: It is still too early to talk about definitive conclusions regarding portfolio performance, but what we can share is that currently our model predicts an expected loss slightly below 10%. We are conservatively provisioning nearly 20% due to the limited track records of our models and also prevailing market
Speaker 12: the progress.
Speaker 6: Perfect Thank youthe next question is from Kyo pratto with Banco Europe UBS. Please go ahead. Hello with anything for the opportunity. I have a question related to the competitive designment and on the commercial teams today, why we saw.
Speaker 6: you and other players talking about the still rational behavior in terms of price. We have been seeing some players talking about an increase in Salesforce. So in this round, I would like to get your sense about the view on the industry of Salesforce, if you are indeed seeing higher competition that front or not, if that's concerned, and what do you think about your current Salesforce today if we could expect an expansion.
Speaker 3: or actually the opposite, giving you your hash count is way higher than some peers. So just a few thoughts here would be good. Thank you. Yeah, hi Kai, Iulia again. So I think on the dynamics regarding what perhaps competitors have been saying regarding hiring sales people.
Speaker 3: We like to highlight this in our calls to remind our investors that
Speaker 3: It's not only about distribution, right? Our model is not only about putting salespeople on the streets. It's about the combination of several factors. It's about our agents that actually have a role not only in the sales process, but also in the lifecycle process of our clients. The fact that we have this combined with last mile logistics.
Speaker 3: customer service, and that we have an operation which is really integrated through technology, that technology enables us to gain efficiency and provide intelligence to the way that we serve clients. We think that the results of this is really the level of satisfaction that our clients have with us, both in...
Speaker 3: than that. Now, regarding the opportunities that we see, the fact that we have this technology that supports our operation gives us a very granular level of data that enables us to identify at a very local level where the white spaces are so we can take, you know,
Speaker 3: a route, a city, a hub, and see exactly what the competitors' vision is of whether or not we allocate more sales teams to that specific hub, to that specific city. When we look at it from that broad perspective, thinking about the vast geography of Brazil, I think it would be interesting to look at how an infrastructure can be a concentration base for its impact. But now in Brazil, if we look at the
Speaker 3: we still see a lot of white spaces where we can grow. So I think that's the message regarding sales headcount and dynamics going forward.
Speaker 3: still see a lot of white spaces where we can grow. So I think that's the message regarding sales, headcount and dynamics going forward.
Speaker 2: despite total debt not increasing in the quarter. And you mentioned some changes in your fund mix driving this increase in financial expenses. I wonder if you could talk a bit about, now that the central bank in Brazil has started to cut reference rates and more is expected in this regard.
Speaker 4: Matthew is here. Thanks for the question. Talking about the mix of debt versus sale of receivables, I think we mentioned when we talked about financial expenses, but one of the reasons why financial expenses increased more than MSMB TPD was because we did more sale of receivables compared to debt in the quarter. That's one of the reasons why when you look at our balance sheet you see total debt decreasing but financial expenses increasing.
Speaker 4: This decision was made mostly because it was the better economic decision, because the spreads for CO2 receivables were better in this quarter. But this is not an overall trend or a long-term trend. Like we mentioned in the past, when we look at longer-term trends for financial expenses.
Speaker 4: We think that this line should trend with the yield curves in Brazil and also with the growth in TPV. So as the yield curve in Brazil is decreasing, we expect financial expenses to have some positive effect from that in the future.
Speaker 13: Okay, thanks Matos.
Speaker 10: Thank you. This concludes our question and answer session. I will now turn the call over to Pedro Zinner for final considerations.
Speaker 2: Thank you all for participating on the call and I hope to see you again in the next quarter. Thank you. Bye goodbye.
Speaker 10: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker 14: ["ulk replenish lil Union"]