Q3 2023 StoneCo Ltd Earnings Call
Good evening, ladies and gentlemen, thank you for standing by welcome to the Stone co third quarter 2023 earnings conference call by now everyone should have access to our earnings release. The company also posted a presentation to go along with its call all material can be.
Online at investors Dot stone Darko.
This conference call the company will be presenting non <unk> financial information, including adjusted net income and adjusted net cash.
These are important financial measures for the company, but are not financial measures as defined by I F. R. S.
Reconciliations of the company's non ifr as financial information to the Ifr as 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 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 in.
In addition, many of the risks regarding the business are disclosed in the company's form 20-F filed with the Securities and Exchange Commission, which is available at Www Dot SEC Dot Gov I would now like to turn the conference over to your host for better or not I am head of Investor Relations <unk> co. Please proceed.
Sure.
Thank you operator, and good evening everyone.
Joining me today on the call is our CEO federal Venus.
Our chief financial and Investor Relations Officer materials show, and our Chief strategy and marketing officer, Liam or.
Today, we will present, our third quarter 2023 results.
Some recent trends.
And provide an updated outlook for our business.
I will now pass it over to Pedro So he can share some highlights of our performance Pedro.
Thank you Beth and good evening everyone.
Overall I was very pleased with the results delivered in the improvements we've made within the organization.
As I did in the previous quarters I want to begin by making a brief evaluation of our performance related to their priorities set for the quarter.
And our first priority to grow with efficiency, we once again had very positive results.
Total revenue increased 25% year over year to reach $3 1 billion highs.
Exceeding our guidance by 2%.
Combined with topline improvement adjusted EBITDA increased three three times year over year, reaching 545 million her eyes, and surpassing our guidance by 16%.
As a result, adjusted net income grew four times year over year to reach 435 million has the highest bottom lines.
Our history.
Our second priority was to generate cash.
Adjusted net cash increased by $1 8 billion year over year and $513 million.
After all required reaching $4 nine beat them.
Part of this excess cash was allocated in the repurchase program.
As approved by the board in September 2023, and two.
Total 300 million highs.
And our third priority to expand financial services business Msnb PPV continued to grow consistently at a strong pace.
<unk>, 20% year over year and more than twice the industry rates.
Combined with this we have also presented a healthy client base increase and an improvement in monetization.
Our MSA be client base increased 42% year over year, we were at client net addition of 317000 quarter over quarter.
<unk>, almost $3 3 million merchants using our payment solutions.
And at the same time, our M. S N b take rate increased 28 bps year over year to reach $2, 49%.
We have also evolved in our banking and credit solutions.
Banking active clients increased to $1 9 million.
$4 5 billion highest in deposits.
Demonstrating the successful strategy on the development of our platform and client engagement, we have all the solutions.
And lastly, we have expanded our credit portfolio, reaching 113 million higher in this quarter and concluded the testing of many features.
With our expectations.
And our fourth priority.
Our software business will continue to improve our results focusing on increasing efficiency as we promised.
Software revenues reached 388 million highs, we've adjusted EBITDA increased significantly to 79 million highs, reaching a margin of 25%.
This bottom line evolution is a result of our continuous focus on improving operational leverage and integration plans where stone cold.
Lastly, we have recently taken important steps towards building our fit for purpose organization.
In October we announced our new management structure to better align the company around specific go to market strategies for client segment and to accelerate the integration of our software and financial solutions.
We will further detail our strategic priorities in our Investor day on November 15, providing a better understanding on how the new organizational design with <unk>.
Partners in executing our strategy.
Before passing it over to Leah I would like to say that I'm looking forward to meeting investors in our Investor day in a few days from now.
I believe it will be a great opportunity for us to share our views on the business and our long term plans.
Now I would like to pass it over to Lisa to discuss our third quarter 2023 performance and our strategic updates.
Thank you Pat and good evening, everyone I.
As Phil mentioned, we had an important evolution over the last years in terms of balancing growth and profitability, which you can see on slide five.
We increased consolidated revenues by 25%, while improving our adjusted net margin by around 10 percentage points and a one year period.
As Matt will detail further this amazing margin improvement was a result of operational leverage across all main P&L lines.
Moving to highlights of our financial services segment on page six in the third quarter of 'twenty three revenue in this segment increased $2 7 billion highs a 29% year over year growth.
Mainly driven by our consistent performance and the Msnb segments.
With above industry, Msnb, TPG growth and higher take rates.
This coupled with operational leverage in costs and expenses led to a $3 six times increase in the segment's adjusted EBT.
To reach 485 million. He is with a 17, 7% EBT margin an increase of two one percentage points sequentially.
Moving to slide seven we will deep dive on our M. S N B performance.
M S N b payments client base increased 42% year over year to reach three 3 million active clients.
Sequentially. This represented a net addition of 317000 clients driven by our continued investments in performance marketing combined with better levels of churn.
Also through strategic optimization of our tongue and stone offerings across our sales channels. We continue to see positive trends in our client base across all tiers within the Msnb segments.
We believe this approach is unique and has led us to profitable TPG growth as I will show on the next page.
On slide eight we show that MSNBC PV increased 20% year over year.
Our growth twice above the industry, demonstrating our continued ability to win new clients due to our competitive advantages around distribution service and our combined financial services offerings.
This <unk> performance was above our guidance of between 87% 88 billion house.
Also we were able to produce that growth, while increasing our take rates by 28 basis points year over year, and one basis point sequentially to 249%.
The yearly take rate improvement was a result of our continued financial services offerings expansion strong pricing execution and client mix.
Now on slide nine I will briefly update you on our key accounts for funds.
Key accounts PPV decreased 22, 8% year over year and was stable sequentially to reach 14 4 billion highs as we have continued to prioritize and off board low margin clients.
Year over year key accounts take rate increased 18 basis points.
As a result of the adjustments in our commercial policy and a mix shift within the segments.
Now, let's shift to our banking performance on slide 10.
Banking active client base increased three four times year over year to $1 9 million active clients.
This evolution was a result of the launch of Super comfort zone in the first quarter of 2003, and the continued activation of banking combined with acquiring solutions for some clients.
The growth in banking active clients combined with an increase in engagement led deposits to reach $4 5 billion has in the quarter.
51% year over year growth, which outpaced our M. S N b to PV growth by 30 percentage points.
Since <unk> is the main source of cash in volumes to our banking solution. This relative performance is a strong illustration of our continued ability to improve engagements as we launch new features and offerings.
In our upcoming Investor day, we will give more color on how we are evolving our value proposition around our combined solutions for smbs.
On Slide 11, let me give a brief update on our credit offerings.
Until September we reached a portfolio of 113 million highs is six one times quarter over quarter increase.
The performance of our vintages is above our expectations with NPL 15 to 90 days of 0.4% and NPL over 90 days are virtually zero.
I would like to note that this is our recently launched portfolio. So the ratio of past due loans should increase as our portfolio matures.
We will gradually accelerate disbursements by extending the credit offering to a larger number of clients without changing our diligence towards risk assessments and close monitoring of market conditions.
Lastly, this quarter, we have concluded the main improvements in our product features as we have finalized rebuilding our renegotiation process.
Now on slide 12, we will discuss our software segments.
Software revenue increased 6% year over year to 388 million highs driven by the continued organic active store expansion in our core Pos and ERP business, especially in the SMB segment.
Software revenue growth decelerated compared to the previous quarters because of weaker performance of our transactional revenues within our digital business.
Combined with lower average inflation, which affects price adjustments, especially in enterprise accounts contracts.
Software segment, adjusted EBITDA increased 50% year over year to reach $79 4 million higher with a margin of 25% an increase of three one percentage points compared to the second quarter of 'twenty three.
This strong figure was a result of higher revenue in the period and lower administrative expenses, especially as a result of more normalized levels of personnel expenses. After a reduction in head count in the second quarter of 'twenty three.
On the strategic front, we have prioritized four verticals to focus to drive financial services and software bundles.
During our Investor day, we intend to share additional details about how we see this opportunity ahead.
Now I want to pass it over to Mike <unk> for him to discuss some of our key financial metrics.
Thank you Leah and good evening everyone.
I would like to begin on slide 13, where we discussed a quarter on quarter evolution of costs and expenses on an adjusted basis.
Cost of services reached 773 million, increasing 15, 2% year on year, and decreasing 220 basis points as a percentage of revenues due to operating leverage gains.
Quarter on quarter cost of services increased 12, 9% and 140 basis points as a percentage of revenues.
The sequential increase in cost of services is explained by higher provision for losses and increased investments in technology and logistics as we continued to expand our businesses and client base.
Administrative expenses decreased three 3% year on year, and 19% sequentially, leading to a 130 basis points reduction as a percentage of revenues when compared to second quarter 2003.
This improvement can be attributed to more normalized levels of personal expenses and our software segments.
Following a reduction in head count in second quarter 2003.
Bind with higher than usual provisions for variable compensation less merger.
I'm very happy to see the three are starting to collect the benefits of the initiatives, we implemented more than a year ago around zero based budgeting and integration of back office functions in our software segments.
Increasing efficiency.
Strategic expenses, we will continue to be a priority going forward and we will give additional details of our own debt and the investor day.
Selling expenses increased seven 4% quarter on quarter, and 20 basis points as a percentage of revenues due to higher investments in our distribution channels.
With broker commissions combined with increased investments in performance marketing.
Financial expenses decreased one 4% quarter on quarter.
We have a reduction of 260 basis points as a percentage of revenues, reaching 33, 3%.
This evolution was driven by lower interest rates in the period Copel would refer decision to reinvest through cash generation towards funny or operation.
And it was just slightly offset by quarterly GDP growth.
Lastly, other expenses increased 11, 8% sequentially and 20 basis points as a percentage of revenue.
As a result of normalized levels of share based compensation expenses as the second quarter 'twenty three we incurred nonrecurring positive net effect of $19 6 million.
Moving to slide 14, our adjusted net cash increased by $1 8 billion year on year, and 530 million in the quarter, reaching $4 9 million Reais.
This strong sequential increase is a result of pretty strong cash flow from operations as well as a sequential decrease in capex as expected.
As Pedro mentioned, given our strong cash flow generation and our long term perspectives for the business.
September our board approved a share repurchase program of 300 million Reais, which was already fully executed.
With that said operator can you. Please open the call up to questions.
Okay. At this time, we're going to open it up for questions and answers.
Have a question please write it down in the Q&A section.
On right hand for audio questions. Please.
Please remember that your company's name should be visible for your question to be taken we do ask that when you pose your question that you pick up your headset to provide optimal sound quality.
Please hold while we poll for questions.
Our first question comes from people about that from Goldman Sachs. Your microphone is open.
Hi, Good evening, Thank you for call and taking my question a couple of questions I guess to start.
Maybe.
Good growth on the PPV, alright, continuing to take market share their teams.
Maybe can you give some color on them.
We'll be able to continue to take share and particularly between the micro merchant segment and SMB are you gaining more share I imagine maybe and micro merchants since it's smaller for you, but just said that the different dynamics between the micro and SMB and and also with the take rate is beginning to stabilize their I D.
See the take rate.
Bogging from here, particularly as rates start to come down.
And then if you can just give an update on sort of the regulatory environment, particularly talks of changes to interest free installments.
So recently, some news about not being able to potentially monetize picks any thoughts you have on that given the ongoing discussions here. Thank you.
Hi Chi.
Thank you for the question I'm going to take the first part and then.
I sit on two bedrooms so.
Your thoughts regarding <unk> growth, both ours and the industry.
So abaxis released numbers foreign market growth this quarter, a 9% growth in the quarter and they continue to guide the year between nine and 11%. So this implies that.
TPG growth will be slightly higher than the market for the fourth quarter.
Looking ahead, we expect in this industry growth to be slightly higher next year because.
We do see a recovery in credit card limits after delinquency reached a peak.
And regarding <unk>, you mentioned on <unk> on <unk> more and more we see 62 N volumes as part of the market right. That's a volume that it is a payment method.
Which we enable our clients to accept and it is a driver of growth. If you consider our 20% growth this quarter and you and you include in that number 60 to EM volumes that growth would have been higher around 24%.
So we.
We see this as a healthy level of growth and I think regarding overall trends T cell.
We continue to gain share within the M. S N b segments.
We continue to allocate capital towards growth in both micro and SME segments, and we do see positive trends in all client tiers and we think this has to do with.
The elements of differentiation that we provide clients around the offers that we provide them the service and the distribution model. So it's really about a combination.
And the overall message is we continued to gain share across the SMB segment.
Peter you want to take on the regulatory yes, hi.
Hi, Tito Thank you all for taking the call.
I think there has been a lot of debate around the interest rate caps on our revolving loans delinquency rates and interest free installments.
Oh, just extend that with myself.
And tried to highlight a few messages around the software.
So first.
We believe that's important limitations on interest free installments violates too.
The principal of our free competition.
Any any insurer as of today is already capable of deciding to arrangement with <unk>.
Tricked or increase the offering of installments and Thats really an economic decision.
Just to give you. An example, we've seen a few black Friday offers this week.
We had a large issuers have substantially increased the maximum number of installments to differentiate their own offerings.
Second.
Contrary to what has been said.
Strong empirical evidence that there is no relationship between the number of installments and delinquency levels and.
And just to give you. An example, according to a study that has been sponsored by <unk>.
Using a phone 10 chemical Matt person over immuno observational for a consumer purchase behavior.
If any the relationship between installment free transactions and delinquency rates is actually negative.
Therefore, again I think this reinforces our view that there shouldnt be any regulatory matter.
The pre installments.
Great. Thanks.
No I think just a few more points because I think that's important for ourselves to position.
And I think third.
A regulatory change that takes away from merchants the possibility of offering installment transactions in Brazil would significantly impact private consumption and consequently, the overall economy.
So I think this just to provide some data and according to the Central Bank credit card transactions represented about 20% of the country's GDP in 2022.
After total about half was executed an interest free installments, just showing the relevance of this payment method to the country.
So I think for this reasons.
I think it's a.
It's quite clear why we continue to hold our position that there shouldn't be any restriction on interest rate free transactions.
And.
Because if I may only add a CIT also ask about depreciation of charges in any kind of big transactions on the discussion there were indeed, some rumors about this discussion, but our understanding is that this debate you than that.
And we think it's unlikely that any regulation, we will prohibit charges on peak.
Perfect. Thank Tito there was also you also asked about take rates and I left that out of the answer so regarding take rates are we didn't change our pricing policy this quarter.
And we do not intend to change it anytime soon competitive dynamics remains the same if anything we see.
More rational behavior in the market as a whole.
When we look at take rate trends. This quarter, we had a sequential improvement which was small one basis points, which was driven by roughly stable prices a small positive impact from mix.
Which was slightly offset by a higher debit.
So regarding prices, we're not changing our strategy at all we don't intend to do so.
Okay. No that's great. Thanks, we Pedro and my guess is maybe just one quick follow up on that do you think the mix can continue to benefit the take rate from here, if you're growing more St micro and SMB.
Yeah, I think that's.
Yeah that is correct itself.
Okay, great. Thank you, we're going to give more color on these trends on the Investor day. So we intend to provide a little bit more of a long term perspective on take rates evolution.
And we'll see you then.
Our next question is from Mario <unk> from Bank of America. Your microphone is open.
Hi, guys can you hear me.
Yes, we can hear you yes.
Perfect.
Congratulations on the quarter.
It looks it looks quite good let.
Let me ask you two questions also on <unk>.
Software, we saw a slowdown in revenue generation like revenues growing 6% from nine but on the other hand EBITDA is up 50% you talked about some head count reductions can you specify.
The size of these reductions do you expect to make more.
So or have we already seen the full benefit.
These cost reductions and then on the credit side as you talked about Baidu increased disbursements or you made this burst of about $100 million be eyes.
I'm calculating a year above 33000 <unk> per client.
Can you give us a little bit more of a perspective, what type of clients are you targeting specific regions specific characteristics.
What is the interest rates that you're charging on these loans as well.
How big do you think this portfolio.
Can get to with FEMA year. Thank you.
Thank you Mario for the question I wanted to take the first part on top line trends in software and then pass it over to <unk> to elaborate elaborate on margin evolution and credits.
So regarding topline growth.
If you if we sort of double click on the drivers of of our software revenue evolution first we really are focusing on allocating capital to grow where we see the biggest opportunity which is in the verticals that we have prioritized and within the <unk> segment, there were happy with the level of growth.
We are seeing and we remain optimistic with the opportunities that we have a hedge.
We will give more color on this in the Investor day.
The biggest detractors to growth in software are the transactional revenues in our digital business and the enterprise business itself. That's remember that in the enterprise business, specifically, we already have a very high market penetration and our focus there is a lot more towards driving assist.
Nancy and cash generation.
And I want to also highlight that yes, we do monitor topline growth and it is important for us and we are allocating capital to grow where we see opportunity, but there is also a disproportional value to be captured in the installed base of software clients.
More and more we are driving our execution towards providing software and financial services bundles and really capturing the financial services opportunities that exist within the client software clients that we already have.
And there is a very attractive opportunity in the priority verticals.
We will have a chance to talk more about in the Investor day within the SMB segment, which is our focus.
So that's a little bit on trends on topline, maybe Matt just can elaborate more on the efficiency side.
Yeah for sure.
So regarding the margin evolution on software you're correct I think most of the evolution quarter on quarter, Jim for from more normalized levels of personal expenses and the software segments.
And I think this is related to something that we disclose unless foreign term, which was basically a reduction in head count that had a negative impact on the second quarter of $6 5 million in severance costs.
And while we are basically collecting the benefits from this reduction.
Now when I look ahead I think it's important to highlight that we we still see additional room for improvements in software margin if I'm wrong.
Not necessarily 100% related to personnel expenses, but I think in general we see more benefits to come from the integration between the two platforms.
I think the second question regarding credits.
So you are also right we skew the portfolio from 19 million in the second quarter to 113 million this quarter.
In terms of who we're focusing at this time I can be offerings, mostly focus on our SMB segments. So when you look at that volume off her own 30000 Reais per operation, we're basically talking about around one month of declines to give you.
So it is still very conservative approach.
But regarding the evolution in terms of sizing of the portfolio and the reach that recharge and I think that you used to provide more color on the overall performance and the strategy of the credit business on Investor day. So we have to wait a little bit of humor to build on that.
Alright, guys well that sounds good so.
Sure.
Our home Thursday, Thank you.
Thank you Mario.
Our next question is from Jeffrey Elliott.
Microphone is open.
Hello, Thanks, very much for taking the question.
<unk>.
In terms of the debit share increasing.
What was behind that is the seasonality is.
And industry trend is that.
Specific to you and is that something that.
<unk> continues and that you have more debit in the fourth quarter, but looking looking further ahead I'm just curious why debit was higher this time.
Hi, Geoffrey Lia here. So this is a market trend it hasnt to do with US specifically, we believe that this.
From what we have seen in terms of other players are releasing their results as it has been a trend in the markets.
Our hypothesis for this is.
Credit delinquencies still limiting credit limits on credit cards.
We think that this trend will improve going forward.
And then if I could squeeze it in on the buyback you did the.
$300 million very quickly do you kind of see that as the beginning of <unk>.
Process.
We'd be looking out for more of these going forward.
Yes. So good question, maybe taking a step back to give you some context on how we think about the topic.
So when you look at the third quarter results, we considered the company generating strong cash flows.
We generated 530 million net cash in this quarter, even after increasing the credit portfolio and also even after investing for future growth.
And as our business evolves, we do expect our approximated to continue to increase and additional drive even more cash generation.
The decision of how we're going to allocate this cash is becoming increasingly important for us.
And if you look at the past few quarters. Our decision was basically to reinvest most of discussion erasion towards this shrimp and your capital structure.
And when we look ahead, we still see a lot of room to reinvest in the business in general so even when we expand the credit business or in a banking solutions are still room to move money towards that.
But whenever my funeral, a good opportunity to tomo keep excess cash for.
For example towards repurchases, we're certainly going to evaluate this auction.
And again.
I think this is a common trend.
But we're going to share more details about our philosophy for capital allocation in the Investor day, but it is an option that we are constantly evaluating here.
Great well I'll see you next week and hear more about events. Thanks very much. Thank.
Thank you.
Our next question is from <unk> from Citi. Your microphone is open.
Hey, guys. Good evening I hope the answers to my questions not that you can talk about.
Certainly the next thing.
Can you share if you have plans to go full banking and younger lesion.
In our discussion.
Thanks.
Having oh, okay service to become bigger and bigger to our.
Client base makes sense.
At this point you probably have a bolt.
So maybe on the clients.
Okay.
My commercial segment saw.
Going full banking license that all makes sense. Thank you.
Yep.
From Washington in terms of the banking license we are in the process obtained its license.
We don't control the full road map, but I think we are in the last stages of the regulatory approval and we should have access to the license soon.
Wonder if you think about what does that license allows us to do I think it's mostly using the deposits that we have is another funding a lever.
In terms of the products, we're going to discuss a lot in diverse or need a roadmap on how we're thinking about the banking product evolution are certainly a lot of potential there, but I think the license itself is not a restriction in our roadmap it tomorrow boats, enabling us to use the deposits going forward.
Okay.
Thank you.
Next question from me, how God Willa from HSBC your microphone is open.
Oh absolutely.
Thank you for a question my first question is on Capex.
Have a nice decline quarter on quarter and you're all keeping.
Despite strong comps in our north.
Let me give us some color as to how can you break down the road.
We have not seen Oh.
And they came back from what we saw in this quarter is just that human beings. So they become without kind of this lovely.
Can we expect in the coming quarters, although they didn't question. It is only when you gave us some sense of what.
What was in danger.
Well listen now using solar quieting.
<unk> signed.
Signs of cross sell bundles and some of the large lines, we have seen some links.
One is obviously a lot would be helpful. Thank you so much.
Thank you Neil.
I'll take the first question regarding complex and then maybe you can give some color regarding means and it adds I think there was a question on <unk> I'll take it.
So I'm talking about Capex first a few things to highlight here so.
So usually there are differences between the cash outflow and activation of PP&E.
As for example, we can purchase to be an E&P. It later as a result of negotiations with suppliers or maybe pay down purchases of PP&E related to previous periods.
Given a lot of data about the dynamics in the financial statements footnote 18 five.
So when you look at this quarter, we added 232 million of European Union Tangibles, but the actual cash outflow was 176 million as part of the additions that we did this quarter, we will be effectively beads future periods. So that's part of the explanation.
But in any case, when you take a longer term perspective.
In terms of Capex management, so just to give you a little bit more color on that when.
When you look at Capex as a percentage of revenues for example, it has been trending downwards from seven 9% in the nine months of 2022.
<unk>, 7% in the nine months of 2023 and.
And I think that has a lot to do with the efficiencies that we have been seeking in our logistics operation.
Handler, two spoiler too much but if some other topic that we're going to give additional details in our investor day next week.
Well may be great. Yeah. So yeah on net adds and then I'll talk a little bit about softer I believe your question was around cross sell in bundles.
In that adds so.
What we can say is the following a year to date, we have consistently invested in selling bolstering our hubs and distribution channels that are focused on smbs, but also performance marketing to drive growth in in a micro clients, while our investments in selling expenses in the hubs they have a more stable level.
Solution performance marketing capital location can be more volatile quarter over quarter.
But the message here is those investments have been yielding great returns.
And they have enabled us to continue to invest and to continue to grow.
But we also want to highlight that net additions in itself is not a target per se.
We do allocate towards growth in TPG.
And gaining share across the SMB segment as a whole and most importantly, with discipline on pricing execution and healthy levels of return so that the CPG World can also drive profitable growth. So I think that's the message regarding.
That adds trends when we talk about foster and we will give more color on this but let me qualify that a little bit.
When you look at the TPB pool so.
As a proxy of the financial opportunity that exists within software client base.
Round 60, 40 is between a M. S N b versus enterprise are key accounts right. So there is a significant opportunity.
In terms of not only payments, but also banking and eventually credits.
On some articles that we have prioritized our our execution towards.
Today, our penetration of a financial services within these verticals is still small we're at the beginning of that journey, but we're seeing it.
Extremely positive results in terms of number one our ability to offer a value for a better value proposition by combining software in financial services I think the Big example, here is gas stations, where we have started very recently a big efforts across the company across all of our.
Channels around offering embedded software and payments and banking solutions to gas station appliance, which is irrelevant vertical within links.
But there are other verticals that we will deployed this execution as well and when we look at the clients that are actually using those solutions.
Not only is that a lever of growth because we bring in more TPG and more deposits from banking.
But it's also a strong monetization lever because when we look at the unit economics of these clients. It is significantly better than the unit economics of clients that use only financial services. So the messages. We're excited we're at the beginning of the journey, we really feel that now we have the right organizational Ella.
And that's in place to continue to advance on this but it's it is very early days, we will give more color on this bolt on where we are and what are sort of our long term perspective on this next Wednesday.
Okay very helpful. Thank you fellows.
Thank you Neil.
Our next question is from Carlos Gomez Lopez from HSBC Your microphone is open.
Maybe we can move on to the next and if Carlos wants to go back to the line of Ken.
Okay. Our next question is from city Tomorrow from Evercore ISI.
Microphone is open.
Okay.
No.
Yes, we can hear you okay.
Great sorry about that so I just wanted to ask about the it's about the financial expenses investments how should we think about for the fourth quarter I mean, depending on track given the fact that Brazil breast meat.
Inpatient rate has come down how.
How should we think about the mix of using cash or things are pardon.
Pardon and deposits and all sorts of all the other levers within the overall expenses.
To drive margins higher I mean, I know you talked about lowering some headcount within the software business, but what are the other measures that you could think about.
Sure.
And b for the whole quarter.
Thank you.
Yeah.
Yep. Thank you sure Rick So maybe starting talking about financial expense.
<unk> mentioned isn't the best but.
We think over the medium term our financial expense should be driven by three factors basically first one being the interest rates in the country second one being the overall cash generation and the third one being TPB roof.
I think when we look at the evolution this quarter the slight decrease that we had in financial expenses was basically a function of three factors.
So in the third quarter, we saw.
<unk> in Brazil, reducing from $13, 65% to $13, 27% on average.
Secondly, we basically decided to reinvest our cash generation towards funding the operation and third I think Vishal factors were just slightly offset by the quarterly PV growth.
When we look forward I think the perspective, you still have some reduction in terms of the CDI rate. So we're going to have that going forward and the business I think like we mentioned.
There are no question continue should generate a lot of cash. So you should also contribute to the overall trends.
I think the second question regarding overall costs and expenses.
Levers for the company.
Something that we mentioned in the call. It's the general trends in terms of administrative expenses I think it's something that we also highlighted a few quarters ago, but if.
If you look at a long term trend for this line.
After the first quarter 'twenty, two we started implementing a lot of measures in the company in terms of our zero based budgeting implementation of shared services Center and also advancing the software integration.
And I think this has led this line to decline in a nominal basis since the beginning of the year declining from 296 million first quarter of this year turnaround 240 million this quarter.
And we still see room to improve this line as a percentage of revenue going forward I think the idea is to keep these expenses at control why are we skewing the business.
Another very important trends when we look at the cost to serve I think regain margin two percentage points in terms of margins.
Usually basis when you look at the plan.
And when we deep dive into this line, we're really seen gains across all the main lines of the business be it the logistics customer service for losses for example.
I think the only different trends that we are starting to see and then it's important to highlight is that as we expand our credit book.
We're booking the provision for losses upfront due to <unk> nine.
So in this quarter alone as we expanded the book from 19 million in the third quarter to 113 million in this quarter.
We are provisioning at 20% because we don't have enough data in our models too to provision more aggressively. So when we look at these effect alone impacted negative negative negatively our cost to serve by 18 million Reais, which is around 50 basis points as a percentage of revenue.
So I think overall when we look forward. The idea is to continue to gain efficiency in order to mainline, but do we have to bear in mind that we're going to have this effect from credits as we scale this business.
Uh huh.
Thank you so much that Russell, but I just wanted to double.
Double click on the previous pricing.
For me at Amazon.
MSNBC.
Yes.
Is there like any particular vertical that you saw particular strength or is it like Rob with your holidays.
And you had more people sign up for that and what are the early read for fourth quarter. Like are you seeing the same level of activity or has it kind of slowed down.
You were chopping up a little bit so if I didn't understand your question. Please please repeat it I believe it was about net adds correct.
That's right yes.
Sorry about the background lines no no that's okay. So.
I I talked a little bit.
In a prior question that you have made I believe around a <unk> net adds of home infusion. So.
Our main sort of objective function here is to continue to grow and gain share in a profitable way. So it is true that net adds may fluctuate from quarter to quarter, but that's going to be our driver as long as we can continue to see opportunities to allocate investment and growth in a profitable.
They will continue to do so so.
I think this is more or less we can say in terms of color around our net adds evolution.
Uh huh.
The metric that we like to track really closely is the evolution of our TPG in market share and that does PPV comes in at healthy level, providing the healthy levels of return.
Thank you.
Next question.
<unk> from UT Fernandez from J P. Morgan your microphone is open.
Hey, guys good night and congrats on the results and on the peaks and the disclosure, where we like it I would like to ask on Texas.
It was lower this quarter, you mentioned more revenues coming through Hep's umbrella among other things.
What are those resorts coming coming from abroad I'm asking this because we see some fears bouquet, having some <unk> abroad. So just would like to check if that's the case for you also Texas what can you see about this line should remain low what is your view here. Thank you.
Thank you for the question you had.
So regarding Texas.
We mentioned in the best that we see over and normalize at fixed rates as being between 20% to 25%, but over the past few quarters, we were operating closer to 27%.
So I think what happened in the third quarter is that we basically reverted back to what we see of the normalized trend for the business.
What's also worth mentioning here is that in this quarter. We had one off effect also in taxes related to new record record musician of deferred tax assets in the amount of $23 5 million as.
As we reflect on losses in some subsidiaries that had accumulated tax credits related to losses in previous periods.
Thank the footnote seven one to seven three of the financial statements <unk> on this topic.
The first part of the question, we basically see when we look ahead the effective tax rate continued to be within the 20% to 25% level.
As for the second part of the question, we do have a part of our a few deep offshore.
We are a Q&A entity and this indeed contributors to a bit of Earth X rates, but.
When we look at the general trends I think are at fixed rates is not unusual when we compare it to all the benchmarks.
Okay.
That's super clear can you share how much is <unk> abroad, and how much our local base.
I think we do have this disclosure in footnote seven one until seven three but basically when you showed the profits on offshore entities, it's all related to predict.
We have amazing materials, so quickly I would check.
You.
Next question from John Coffey from Barclays. Your microphone is open.
Okay.
Oh, sorry, whereas I think youre on mute.
We couldn't hear your question, sorry, alright, Okay I'll start over.
So.
I saw one thing when new disclosure you had in your press release was <unk> was $5 5 billion, which is quite a little quite a bit of euro T. P V about 5% or a little bit more I was wondering if foreign if you could just provide some general comments about where you're seeing those picks volumes any kind of verticals or kind of merchant.
And Furthermore, could depicts volumes be one one contributor to the higher take rate because as I understand that you don't include <unk> T. P V and Euro overall PPV number. So you do include the revenues that do come from picks.
Hi, John So yeah, giving a little bit more color on on fix I'm more and more we believe it is important to provide a visibility.
Two the impact of fixed because it is.
Coming more and more significant.
So I think a big messages on where it's relevant right. So big B to Wham is more relevant in the SMB space.
Why is that so because 62 M is essentially a payment method.
That our clients need to reconcile just as any other payment methods. So.
The capture method that we offer in peaks between is a dynamic QR codes.
That the transaction can be are reconciled in the dashboard so that for larger smbs more sophisticated clients that have multiple skus that's important.
And that's a monetization driver for us like like you like you mentioned it is you.
You you are correct that because we don't.
Yeah.
Consider 62 N TPC and the overall TPB.
This does have a slight slightly accretive impact on take rates.
So we see fix as an important driver of overall market growth going forward. The way that we look at it is overall household consumption and mixed my payment method and we do see fix between taking away not only from cash but from growth in debit volumes itself for us.
This is sort of a net neutral because we monetize 60 to them in line with debit not M D ours, but for our clients is much better because for our clients to get our money settled instantaneously and they do not they interchange we think there is evolution to happen around.
The UX and the user experience its not fantastic yet because for example, a big fan of feed doesn't exist, but as products are usage.
And functionality evolves and the central bank is as likely pointing that roadmap our forward in the next years.
Fix will become.
More and more relevant and for US. We've said this many times before more and more we see picks on it as an opportunity and a way in which we can leverage the fixed rails to develop new products new offerings to our clients so to us the messages that we see this as a positive trend.
Alright. Thank you I just wanted to one one follow up just on take rates in general as we look out next quarter and the quarters ahead could you help contextualize.
The effects of competitive effects, which could pressure take rates the the move you're having downstream to smaller merchants wood, which could push them up as well just the seasonality, which I think generally in Q4 debit is bigger in Brazil, just kind of trying to evaluate the pressure's going up and down on your take.
Rates going forward.
Sure John So I think aside from sort of short term fluctuation in in debit versus credit that has seasonality effects like you mentioned fourth quarter, we always expect debit mix to the higher aside from that I think the overall trends.
We can point to and [laughter], sorry, forgive conveyor to give these boilers, but we will provide a little bit more color on this in the Investor day.
Is that you know we continue to execute our pricing strategy as we have said.
We will not.
Range, our approach to pricing discipline, we do not have that in our plans.
More and more pneumonia.
New monetization drivers come into the picture not only big but overall banking and the more that we evolve on our banking solution. The more we have levers to monetize the relationship with our clients. So we do see that as a positive trend and overall take rates.
Going forward I don't think we're going to see too many changes in terms of mix shifts to be honest, because I think that the pace of growth is more or less.
If you look at longer time horizons, it's more or less stable across tiers. So I think that the trends that we can think of our our pricing execution and more and more monetization drivers from banking other solutions.
Thank you.
Thank you John.
Yes.
Our next question is from Josh Seigler from Cantor Fitzgerald your microphone is open.
Hi, guys can you hear me.
Yes, okay.
Okay, great congratulations on the quarter really nice results here.
First question I was just wondering as we head into <unk>, how should we be thinking about the seasonality aspects and are there any abnormalities to this quarter as compared to previous years.
Okay.
Thanks for the question, Josh So no Big news I think as usual first quarter tends to have a better to PV peer firms because of the Christmas and Black Friday, So nothing new on that regard.
Excellent and then from a strategy perspective, I was wondering if you could elaborate a little bit on how you're thinking about a potential rollout of credit cards, especially given you know the increase in credit delinquencies that youre seeing across the macro right now.
Hi, Josh So Lia here I think the message around the speed of rollout is the same as <unk>.
As we have said regarding credit we're being conservative in terms of the speed at which we scale, where we remain attentive to the macro environments.
So I think.
No different message as to our overall strategy in credits.
We will take our time to scale at the speed that our risk appetite the allows us to and we will remain observant of the macro environment.
Got it understood. Thanks for taking my questions and looking forward at the analyst day.
Thank you Josh seal there bye bye.
Next question from Jamie Friedman from S. A G. Your microphone is open.
Yeah.
Jamie I believe you're on mute we cannot hear you.
Hi can you hear me now.
Yes, now we can.
Awesome.
Good evening.
Gratulation on the strong results good progress here I just wanted to ask well the first one is.
Philosophically how are you thinking about guidance.
Gears in the evolution, where you guide there some that you don't so we're just wondering where your mind is now about your approach to guidance.
Yeah for sure Jami.
So we mentioned this in the previous call.
Open until the last quarter, we were following the policy of giving quarterly guidance.
And we're no longer providing this kind of guidance.
But you start to you in the Investor Day, you did you used to give.
Guidance on a few metrics on a longer term perspective, so we're going to share figures for 2024, but also provide a perspective on 2027.
Seven per debuted this so that you can have a longer term outlook for the business as a whole.
Yeah.
Perfect that makes sense and then if I could just have one follow up.
With regard to the picks can you see if those are the like prepaid picks or are you seeing volumes for fixed parcel up idle as well at this point.
Any color on that would be helpful.
No we do not see any relevance from fixed Buffalo go at this point, we do know that some players are putting a lot of investments around.
Thanks, Fahad, but for us it's a payment method that's that the it's mostly taking away from like I said cash or debit and the growth of debits.
Yep.
Okay.
Okay, well look forward to seeing you next week. Thank you very much. Thank you Jamie.
Our next question is from Tayo that path from UBS Your microphone is open.
Hello, everyone. Good evening. Thank you for taking my questions I have.
Two questions here quickly. Please looking through your steak right and breaking it down it looks like the increase came mainly from financial revenue. So just would like to understand what were the moving parts here. If you increased the penetration of prepayments during the third quarter four.
Any specific segment if there was any change in prices because you mentioned in your press release the effect of adjustments in commercial parties. So just would like to double click here or if this is already related to the mix shift and I mean on a Q on Q perspective S year.
Over a year, it's clear the effects of prices and Moreover, if I may looking looking to the net take rates of your financial revenues net of banking they posted effect and financial expenses. It actually expanded a lot also Q on Q, suggesting that you also use more of your own.
On cash to fund the prepayment business. So I know that you talked a bit about that in one of the questions before but just would like to confirm if that indeed happened.
Why did you decide to do it.
Watch who do we expect going forward as well thank you.
Thank you Kyle.
So maybe starting for the from the last question.
Indeed, our net take rates when I look on net financial expenses increased a lot Q on Q, but I think it's less related to the decision of using more of our cash towards funding and more related to the fact that interest rates started to decline in Brazil in general and we're not passing that through to clients. So it's more.
<unk> discipline in pricing and less about capital structure movements.
Now the second part of the question.
Did not make any big changes in our pricing policy in the quarter.
So when you look at the degree evolution quarter on quarter, it's mostly about mix shifts a little bit towards micro and also diesel this is slightly offset by debit mix likely emotions.
But I think what's worth mentioning is that when you think about the pricing we price for our clients as a whole and not by revenue line of our revenue stream.
So from time to time, we can see some rebalance in terms of how much we're monetizing each lever with financial income or transactional revenues for example.
So I wouldn't read too much into those kinds of changes I would track the decrease in general as a whole.
Okay.
Okay. Thank you very much.
Thank you okay.
Next question from Nicholas <unk> from Bank of America, you can activate your microphone.
Thanks, very much a part of a transfer of course from.
So.
You reported one figure in a net cash position of about three points of Ampligen reality seen gosh, you use some of that liquidity to repair or choose for the economy to rise of your shares in November your own fulfillment slowly to grow your your credit for loan book. My question is why not use some of these.
Our liquidity to buy back some of your reporting tornado inside the basin.
Thank you Nicholas.
So great question indeed.
Indeed in our view when you look at our bonds are trading at levels that don't reflect the company's credit worthiness honestly.
And therefore buying back bonds is indeed, a plausible auction taller keep cap so that we constantly evaluate.
However, when you think about capital allocation within capital location is about choices.
So in our view given the current environment and the current prices buying back shares offers greater returns for shareholders when compared to buying back the bonds.
So that's why we're focused on that option right now.
Yeah.
Okay. Thank you very much myself.
Thank you Nicholas.
There are no questions at this time. This concludes our question and answer session I will now turn it.
Over to Pedro Zinner CEO at stone cold for final considerations.
Well. Thank you very much taller rueful participate on the call and hope to see you all in our Investor Day meeting next Wednesday, Thank you very much.
[noise].