StoneCo Ltd. (NASDAQ:STNE) Q4 2022 Earnings Call Transcript

StoneCo Ltd. (NASDAQ:STNE) Q4 2022 Earnings Call Transcript March 14, 2023

Operator: Good evening ladies and gentlemen. Thank you for standing by. Welcome to the StoneCo Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. By now, everyone should have access to our earnings release. The company also posted a presentation to go along with its call. All material can be found at www.stone.co on the Investor Relations section. Throughout this conference call, the company will be presenting non-IFRS financial information including adjusted net income and adjusted net cash. These are important financial measures for the company, but are not financial measures as defined by IFRS. Reconciliations of the company’s non-IFRS financial information to the IFRS financial information appear in today’s press release.

Finally, before we begin our formal remarks, I would like to remind everyone that today’s discussion might include forward-looking statements. These forward-looking statements are not guarantees of future performance and therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the company’s expectations. Please refer to the forward-looking statements disclosure in the company’s earnings press release. In addition many of the risks regarding the business are disclosed in the company’s Form 20-F filed with the Securities and Exchange Commission which is available at www.sec.gov. I would now like to turn the conference over to your host Rafael Martins, VP of Finance and Investor Relations Officer at StoneCo. Please proceed.

Rafael Martins: Thank you operator and good evening everyone. Joining us today on the call we have our CEO and Board member, Thiago Piau and our Chief Strategy Officer, Lia Matos. Today, we will present our fourth quarter 2022 results, discuss some recent trends, and provide an updated outlook for our business. I will now pass it over to Thiago, so he can share some highlights of our performance. Thiago?

Thiago Piau: Thank you, Rafa and good evening everyone. Let me start by reviewing the key highlights for the year and fourth quarter 2022 that we lay out on slide four of our presentation. We successfully drove strong growth with improvement in profitability. Our revenue doubled in 2022, while our adjusted net income reached R$526 million. In the quarter, adjusted net income reached R$235 million, a 44% sequential growth. This achievement was largely a result of a successful price execution and strong operational leverage, while we improve engagement with our clients and continue to invest in our growth. We generated increasingly stronger cash flows. Our company is generating cash in a very consistent way and has a strong balance sheet and liquidity to fund its growth ahead.

Our adjusted net cash increased by R$1.2 billion in 2022 and R$385 million in the fourth quarter alone. We expect that our cash flow generation will remain strong in 2023. In Financial Services, we expanded our client base, offered new solutions, and captured higher take rates. In 2022, we generated strong profitable growth in our client base, while improving unit economics both through price execution and increase in monetization from our banking solutions. In the fourth quarter, MSMB TPV grew 23% year-on-year almost two times the industry growth. Active client base grew 48% year-on-year to 2.5 million merchants at the same time that we increased take rates by 50 bps compared to last year. Additionally, total banking deposits reached R$4 billion, R$3.6 billion of which in the MSMB segment, reaching almost 693,000 active banking clients.

I think such results show our ability to pass along price increases, gain market share and improve engagement with our clients at the same time. In Software, we gained scale improved operating margins and advance our product integrations. Software revenue grew 21% year-on-year in the fourth quarter, and our adjusted EBITDA margin reached 16.2% in the fourth quarter, the highest margin since we acquired the business. We gained efficiency, while also investing in several areas to better serve our clients, like customer service and product integrations. We’ve integrated our financial services platform to POS and ERP solutions in strategic verticals, opening a key cross-sell opportunity, which we believe is unique within the industry. Last, we enhanced the capabilities necessary to execute the next phase for Stone.

We added to our team experienced and seasoned leaders, strengthening key capabilities in banking, credit, product, tech, and risk, which will be crucial for our plans in the coming years. I’m excited to share these results with you, which marks the completion of our turnaround in 2022, with the company well positioned to continue its successful story. Most importantly, we have executed our turnaround, maintaining our special culture and strong devotion to serve our clients. Finally we’re also successfully completing our CEO transition and I’m confident that under Pedro’s leadership, Stone will evolve on an even stronger future and 2023 will start a new chapter in our journey. Now, I’m very happy to bring Pedro to send the message to all of you.

Pedro Zinner: Thank you, Thiago and good evening everyone. I’m really excited to be here and looking forward to leading the team in our journey. Over the first months of this transition, I was able to see how much has been delivered in 2022 and how well said the company is to address the opportunities we see ahead of us. I was also positively impressed by the quality of our people and our strong culture. The team has defined clear priorities for 2023 and I see this as an important first step for the path ahead. I’ll take the CEO role in April. And today, we’ll participate in the call only as a listener. I look forward to meeting all of you soon. Thiago, back to you.

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

Lia Matos: Thank you, Thiago, and good evening everyone. I will start on slide five, with some highlights of our overall performance. In the fourth quarter, we surpassed our guidance in all metrics, reaching R$2.7 billion in total revenue, R$316 million in adjusted EBITDA and R$235 million in adjusted net income. As Thiago already mentioned, this quarter reinforced a good balance between growth and profitability within our business. Now let’s move directly to slide seven, so we can discuss our performance in the Financial Services segment. In the fourth quarter of ’22, revenue increased 49% year-over-year to reach R$2.3 billion. Adjusted EBITDA increased to R$286 million with margins increasing from negative levels in the fourth quarter of 2021 to 12.4% in the fourth quarter of 2022 showing our discipline in allocating capital to grow our financial services platform.

Moving to slide 8. Our MSMB payments client base increased by 48% year-over-year to 2.5 million active merchants, with 212,000 net additional clients. Regarding our net adds strength, our focus has been and will continue to be on on-boarding the best clients both in SMB and in micro segments, reaching healthy levels of contribution margin per client, higher average TPV within each client’s tier and lower churn. Also, by optimizing our commercial strategy of tone and stone offerings, within our multiple sales channels. We were once again able to see client base growth in all client tiers this quarter. I think this approach is pretty unique in the market and has led us to good levels of profitable TPV growth, as I will show on the next page. MSMB TPV reached R$82 billion in the quarter 4% higher than the high end of our guidance of between R$78 million and R$79 billion and growing 23% year-over-year almost two times industry growth levels.

We were able to produce that growth, while increasing our take rates by 50 basis points year-over-year. MSMB take rate remained stable sequentially at 2.21% which was positively impacted by higher average prices in the quarter and positive client mix, offset by a seasonal increase in debit over credit volumes. On slide 10, I show some highlights of our banking business, which has evolved significantly in 2022. This quarter, we have reached 693,000 merchants actively using our banking solution, a 41% year-over-year increase with client deposits growing 84% in the same period, reaching R$3.6 billion in the fourth quarter of 2022. I think the evolution in overall client deposits speaks to the quality of our client base, with a healthy mix in terms of average TPV, and the value of having our banking solution attached to our acquiring solution, with no incremental marketing investments.

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Not only does that provide a superior experience to our clients, who can rely on having the complete banking and acquiring experience in one single application, it also provides us with a steady flow of cash and volumes from card TPV, PIX and other payment methods. As an example of this additional engagement, PIX and volumes tripled in 2022 to R$44 billion, and increased 22% quarter-over-quarter mainly driven by higher fixed PIX and volumes. Another important highlight worth mentioning is the launch of Super Conta Ton in the first quarter of 2023, our full banking solution for micro clients. We expect Super Conta Ton to drive growth of overall level of deposits and banking revenue going forward. I also want to take a brief moment to update you on where we are on credit.

Our focus in the second half of 2022 was on building a fully automated process for credit underwriting and grants to include the Stone App. We also made our decision models more sophisticated through enhancement of data, strengthen the team reviewed and approved our risk policies, and run the first test with a small number of clients, with positive initial results. In the first half of 2023, we expect to expand the size of our testing with clients with an emphasis on management guarantees, testing and improving the quality of the decision models and credit life cycle monitoring and renegotiation through the app. In the second half of the year, we want to begin scaling working capital loans to our clients. We will take a conservative approach and the level and speed at which we do so will depend on the macro scenario and our risk appetite.

Our initial focus will be providing working capital loans to the SMB segment. We’re also planning the launch of credit cards to both micro and SMB segments and are exploring opportunities for cross-selling credits and links. Moving to slide 11. I want to briefly talk about key accounts. As we’ve been reinforcing for some quarters already, we have been shifting our priority from sub-acquiring business to platform services within this segment. I want to remind our investors that platform services encompass a range of client segments that distribute our solution by integrating our payments and banking platforms to their own offerings such as software providers, e-commerce platforms and omnichannel retailers. We see an attractive opportunity to continue to serve these client segments, which is evidenced by the strong level of growth in Platform Services TPV.

The effect of this decision is the decline in sub-acquiring volumes and an improvement in overall key account take rates. This quarter key account TPV decreased 18% year-over-year due to a 57% decrease in sub acquired volumes and an increase of 32% in Platform Services TPV. On slides 12 and 13, I’m going to shift to discuss some performance highlights of our software segment. On slide 12, we can see a consistent growth in our top-line combined with improvement in our operating margins. Revenue grew 21% year-over-year to BRL376 million and our adjusted EBITDA more than doubled year-over-year to BRL61 million with adjusted EBITDA margin increasing 760 basis points to 16.2%. This improvement in margins is mainly related to dilution of fixed costs, normalized cloud costs and ongoing cost control efforts.

In slide 13, I will recap some elements of our strategic evolution and software. Our core POS and ERP continues to be the driver of segment growth with revenues increasing 23% year-over-year due to an increase in locations and in average ticket. The performance in the core reflects the unique attributes and vertical breadth of our solutions that have a leadership position in several retail verticals such as apparel, footwear, optics, pharma among others. As we evolve our software strategy, we see the central priority of our digital solutions being to enable those brick-and-mortar clients to sell more through digital channels by using our marketplace hub, e-commerce platform or order management system. Digital Solutions had a lower growth of 4% this quarter, especially, due to the weaker performance of our ads and impulse businesses.

A crucial evolution in 2022 was the integration of our financial services platform to POS and ERP solutions in strategic software verticals. We believe this will be key for us as it opens up an important cross-sell opportunity to be explored through differentiated offerings to our clients. The focus for 2023 on that front will be to build the optimal go-to-market strategy, leveraging both the Stone distribution through the hubs as well as our software distribution franchisees. Finally as we did in 2022, in 2023 we will maintain the same approach to cost discipline, while we invest in developing new products, improve our clients’ experience and explore selective M&A opportunities to gain ground on new strategic verticals. Now, I want to pass it over to Rafa so he can discuss in more detail some of our key financial metrics.

Rafa?

Rafael Martins: Thank you, Lia. I will now begin on slide 14 to discuss the evolution of our costs and expenses. Before I talk about the quarterly evolution, I would like to zoom out to the evolution in the year because I think it shows the tangible results of our focus in improving the profitability of the business. Throughout 2022 we saw operating leverage gains in almost all lines. Our cost and expenses as a percentage of revenue decreased more than 1,400 basis points in the fourth quarter compared to the prior year. Cost of services decreased from 34.5% of revenue in the fourth quarter 2021 to 25.8% this quarter, a gain of 870 basis points. Our selling expenses as a percentage of revenue decreased 200 basis points to 15%.

Administrative expenses grew less than our revenue gaining 130 basis points of operational leverage. Financial expenses decreased 270 basis points as a percentage of revenue as our positive cash flow generation gave us comfort to use more of our own cash to fund our prepayment business. Now let me give the main highlights of our sequential quarterly evolution. Cost of services as a percentage of revenue decreased 100 basis points to 25.8% mainly due to lower costs in software and efficiency gains in our registry business tags, logistics and banking. Administrative expenses as a percentage of revenue increased 100 basis points to 11%, mostly driven by nonrecurring, higher expenses related to third-party advisory and seasonal personnel expenses.

As Lia will detail shortly, in 2023 a key priority for us is OpEx discipline and we do not expect this line to grow more than inflation along this year. We expect that administrative expenses will reduce on an absolute basis in the first quarter 2023. Selling expenses decreased around 40 basis points as a percentage of revenue as a result of roughly stable marketing expenses and despite increased investments in our sales force. Following the trend seen in the third quarter 2022, financial expenses decreased 3.1% quarter-over-quarter and as a percentage of revenue decreased 380 basis points to reach 33.4%. This is mainly explained by higher use of our own cash to fund our prepayment operations. Although, having a positive effect in financial expenses this has on the other hand led to a decrease of interest on cash as noted by other financial income decreasing BRL20.6 million quarter-over-quarter.

Other expenses increased to BRL85.2 million in the quarter increasing 90 basis points as a percentage of revenue. The quarterly increase was mainly due to impairment from proprietary operational software and write-off of non-core assets amounting to BRL33.7 million, which were partially compensated by a gain in the sale of POS. As shown in slide 15, in addition to our P&L evolution, we have been consistently generating cash and improving our liquidity. Our adjusted net cash balance improved by around BRL385 million in the quarter reaching BRL3.5 billion at year-end. In the year, adjusted net cash increased by BRL1.2 billion. As I just mentioned, we have used a little more of the cash generated by our business to fund our prepayment operations, given our already very strong cash position.

Before I talk about our first quarter 2023 outlook, a brief comment on a change we are making starting next quarter regarding our non-IFRS adjusted metrics. Starting next quarter, our managerial adjustments to IFRS results will no longer include adjustments related to share-based compensation expenses. Until now, we adjusted those expenses related to extraordinary grants and already did not adjust share-based expenses related to annual recurring incentive plans. To better align calculation, comparability and simplifying the understanding of our financial results, we decided to be closer to IFRS reported metric and stop adjusting all share-based compensation expenses from our results from the first quarter 2023 onwards. To help you reconcile our future results, we have provided in the appendix of our presentation and in our earnings release, historical numbers with the new adjustment policy.

Now, moving to our first quarter 2023 outlook on page 16. We expect total revenue and income above R$2.6 billion in the first quarter, representing a year-over-year growth above 25.6%. For MSMB TPV, we expect volumes between R$77 million and R$78 billion in the first quarter compared with R$63.4 billion in the first quarter of 2022, representing a year-over-year growth between 21.5% and 23.1%. Finally, already considering share-based compensation, fully expensed in our income statement, we expect adjusted EBT of more than R$265 million compared to BRL 276 million for the fourth quarter. As a reminder, the first quarter is usually seasonally weaker compared to fourth quarters, because of higher volumes transacted during holiday season at year-end.

With that, let me turn the conference back to Lia, so she can comment a bit on our priorities for 2023. Lia?

Lia Matos: Thanks Rafa. In 2022, we have set up a strong foundation to execute on our 2023 and longer-term priorities. Let me just highlight where our focus as a team will be this year. You can follow those highlights on page 17 of our presentation. First, we will keep growing efficiently. Our plans for this year contemplate more OpEx discipline and a continued focus on MSMB growth, while maintaining our approach to pricing based on internal return hurdles allocating capital wisely. It is also imperative that we maintain a strong cash flow generation and overall liquidity position. This provides us with more flexibility to invest in the growth of our business. We will continue to work hard to expand our core through the evolution of our banking offers to micro and SMB clients, leading to higher client engagement.

Together with this, we are on track to re-launch our working capital solution and launch our debit and credit cards to MSMB clients. We will further develop the execution of our software strategy, strengthening our approach to cross-sell financial services into software client base with differentiated integrated solutions. Finally, after an enormous evolution on this front in 2022, we will maintain focus on evolving our management system and enhancing Stone’s unique culture. With that said, operator, can you please open the call up to questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. The first question today comes from Sheriq Sumar with Evercore ISI. Please, go ahead.

Sheriq Sumar: Yes. Thanks a lot for taking my question. I just wanted to get a sense on the margin outlook for 2023. I mean, I know operating efficiency is one of the key priorities. But how should we think about the trajectory for margin expansion? Like, based on the guidance that you have said, it seems like first quarter is going to be more or less flattish, but can we expect to see a good ramp-up for the remaining three quarters after that? Thank you.

Rafael Martins: Hi, Sheriq, Rafael here. Thank you for the question. So, although, we are not providing specific guidance for the full year, I think that, as you said, our guidance for the first quarter implies pretty much the same EBITDA margin as the fourth, despite the weaker seasonality of the first quarter. When we look over time, we do expect to continue improving the profitability of our business. So there are quarterly seasonalities, but this is the overall trend that we expect. And I think that the main drivers for this improvement over time is as you said, number one, OpEx discipline, especially, in administrative expenses, higher client monetization, right, new solutions when they kick in and we start to have contribution margins from those solutions.

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

Sheriq Sumar: Thank you. And just have a quick follow-up on the top line guidance of about R$2.6 billion. I mean, I understand that there is some sort of seasonality that is factored in, in the first quarter, but if I look back historically, like you have been gaining top line growth sequentially by more than or approximately R$200 million. So is that like a good trend? Like, what would make the — this cost to a slowdown in 2023?

Rafael Martins: Yes. So, as you said, Sheriq, usually top line of companies involved in retail, they tend to be soft in the first quarter. And if you remember, the first quarter of 2022 was the quarter that we strongly increased prices, for example. So, of course, this makes the comps for in terms of year-over-year growth tougher. But I think that we — as we said in previous calls, we have been balancing growth and profitability to levels that we think is healthy for the company and that will enable us to deliver on our , while improving the profitability of the company.

Sheriq Sumar: Thank you so much. Yes.

Rafael Martins: Thank you.

Operator: The next question comes from Josh Siegler with Cantor Fitzgerald. Please, go ahead.

Will Carlson: Hey, team. This is Will Carlson on for Josh Siegler. Congrats on the quarter. Wondering if you guys can give any color on, if there’s been any material shift in terms of TPV year-to-date? And additionally, are you seeing any payment headwinds in the industry? Thank you.

Lia Matos: No. Hi Will, this is Lia here. No different trends, I think in terms of TPV trends. The guidance that you gave last quarter for MSMB TPV implied a growth of around 18%. And we indicated in that call that our MSMB TPV growth in 2023 should be higher than that. And our current guidance in the first quarter of 2023 reinforces this indication and our view didn’t really change since what we have said in the last earnings call. Thiago, do you want to add something?