XP Inc. (NASDAQ:XP) Q3 2023 Earnings Call Transcript

XP Inc. (NASDAQ:XP) Q3 2023 Earnings Call Transcript November 13, 2023

Antonio Guimaraes: Good evening, everyone. I’m Antonio Guimaraes, Investor Relations at XP. It is a pleasure to be here with you today. On behalf of the company, I’d like to thank you all for the interest and welcome you to the 2023 third quarter’s earnings call. This quarter, we had a strong set of results, which will be presented by our CEO, Thiago Maffra, and our CFO, Bruno Constantino, who will also be both available for the Q&A session right after the presentation. [Operator Instructions] And before we begin our presentation, please refer to our legal disclaimers on page two, on which we clarify forward-looking statements. Additional information on forward-looking statements can be found on the SEC Filings section of the IR website. So now I’ll turn it over to Thiago Maffra. Good evening, Maffra.

Thiago Maffra: Thanks, Antonio. Good evening, everyone. Thank you for joining us today on our 2023 third quarter earnings call. It’s a pleasure to be here with you tonight. I will start with a brief introduction to this quarter’s highlights and key updates. In the third quarter of 2023, we had a strong quarter with increased top line growth and profitability across different metrics. This quarter despite the tough macroeconomic conditions that led to weaker organic net new money, we ended the quarter with BRL1.1 trillion in client assets, reaching all-time high records in most of our investment KPIs. For this quarter, as a result of our continuous focus in executing our strategy, we achieved the highest net income in our history at BRL1.1 billion, up 11% quarter-over-quarter and 5% year-over-year.

Our discipline in cost control has reflected in the best efficiency ratio in the last three years at 37.3%, down more than 400 bps year-over-year and 100 bps quarter-over-quarter. As a result of our efforts, ROE rose 58 bps quarter-over-quarter, reaching 22.6%, the highest during the year. And last but not least, our diluted earnings per share increased 7% quarter-over-quarter to BRL1.96 also the highest in our history. Moving to the next slide, I want to reinforce our three focus points. First, leadership investments by protecting and expanding our core business. In this quarter, we have incorporated Modal’s financials and operations which should be fully integrated in 2024. At the same time, we have reached an all-time high in different investment KPIs, enhancing our capacity to reap the benefits of our leadership position, hand-in-hand with more positive market conditions.

Second, superior product offering translated into the continuous improvement of our new verticals performance. New Verticals revenue grew three times in the last two years and now represents 11% of our total last 12 months revenue. We are certain that expanding the product offering into new verticals was the right decision, enabling us to diversify our revenues and deliver growth even in a tough environment for the investment market. This evolution confirms our initial thesis of the importance of having client investments first. For example, in credit cards, we estimate we have 50% of principality out of our total cardholders base. This is a clear example of many opportunities we will explore ahead in the proper time. Lastly, client focus, high quality and excellence in everything we deliver is a key pillar to achieve our long-term goals.

We remain focused on that maintaining the NPS above 70 at the top of the industry once again this quarter. High NPS directly translates into high share of wallet, and we see this consistently in our client base. High NPS directly translates into high share of wallet and we see this consistently in our client base. Our strategy is centered and providing advisers with the best tools, technology and products so they can better serve our clients. In this direction, we have evolved our incentive plans to advisers providing them with more intelligent models and systems in order to improve clients’ asset allocation, resulting in superior experience for retail investors. Moving to the next slide. As I mentioned earlier, we are happy to see improved profitability in our financial results for the quarter while we have made progress on Modal’s integration.

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Q&A Session

Following an initial recovery in capital markets activity in the second quarter, DCM volumes have continued to increase in the third quarter with all-time high revenue in Corporate and Issuer Services. As we said in the last quarter, a faster recovery in retail revenue and net inflows may take more time as it depends on better performance in riskier assets, which is tougher due to high interest rates. On the profitability front, we have increased three key metrics for XP, 74 bps in EBT margin quarter-over-quarter with higher operating leverage, plus 58 bps on ROAE quarter-over-quarter, one of the main metrics we look going forward, plus BRL0.13 in diluted EPS despite the issuance of 18.7 million shares related to Modal’s acquisition in the quarter.

Talking about Modal, we already have fully consolidated Modal’s financials into our third quarter results. In this first quarter of integration, Modal has accounted for BRL161 million in top line and BRL111 million in SG&A. Lastly, in accordance to what we have been saying about returning more capital to shareholders, we just announced an additional dividend of $0.73 of per share to be paid in December 22, contributing to the optimization of our capital structure. Now I will hand it over to Bruno so he can discuss this quarter’s financials. Thank you.

Bruno Constantino: Thanks, Maffra. Good evening, everyone. It’s a pleasure to be here with you again. Starting with our gross revenue on the left part of the slide. This quarter, we reached record quarterly revenue in our history. BRL4.4 billion, a 17% growth quarter-over-quarter and 14% growth year-over-year. After discounting Modal’s revenue contribution of BRL161 million, XP ex-Modal revenue would be BRL4.2 billion, 10% higher than our previous record of BRL3.8 billion reached on third quarter ’22. The sequential growth in gross revenue was mainly led by retail, which was responsible for 45% of the growth quarter-over-quarter. Incorporate and Issuer Services, representing 37% of the growth quarter-over-quarter. Both retail and corporate and issuer services benefited from capital markets activity, especially in DCM, which we will explore in detail on the next slides.

On the right, in terms of revenue mix between segments, the highlight is corporate and issuer services with the strongest growth quarter-over-quarter, increasing its relevance by 57% from 7.6% in second quarter to 11.9% in third quarter. On the next couple of slides, we are going deeper into retail revenue, first, focus on retail core and then on new verticals. Moving to the next slide. When we look at our core equities, fixed income and funds platform, the main highlight for the quarter is fixed income. We had a strong sequential improvement to BRL718 million, all-time high fixed income quarterly revenue, representing a growth of 24% quarter-over-quarter. Our previous record was in second quarter ’22 when fixed income revenue reached BRL580 million.

As you know, fixed income revenue has two main components. Secondary trading and distribution of primary offerings. The later had a growth of 100% quarter-over-quarter and was five times the revenue of first quarter when we experienced a dysfunctional corporate bond market due to the impact of Americanas We underwrote some offerings during this turbulent moment, aiming to distribute them whenever conditions return to normal. This had an important contribution to the record quarter. We continue to see a healthy DCM pipeline, but we expect the third quarter fixed income revenue to be the best quarter for the year. Funds platform had a slightly decrease of 5% quarter-over-quarter, reaching BRL323 million, as expected, considering the second quarter had performance fees, which is seasonal and recognized at the end of every semester.

Excluding revenue from performance fees from second quarter results, third quarter was 8% higher quarter-over-quarter. And lastly, equities revenue increased 6% sequentially to BRL1.1 billion, positively impacted by Modal, approximately half of the growth and a continuous gradual improvement over time in equities. Moving to slide nine. Our new verticals continue to grow well, reaching a total of BRL442 million in third quarter plus 52% year-over-year and 11% quarter-over-quarter, enhancing our diversification and cross-sell opportunities. The main highlight of the quarter has continued to be cards revenue, reaching BRL259 million, a growth of 12% quarter-over-quarter and 77% year-over-year. When we compare our quarterly growth in TPV with the market based on recent data released by ABAX, XP grew 11% quarter-over-quarter compared to 7% from the market.

We expect cards to remain outperforming the other new verticals in the following quarters. Moving to slide 10. Coming back to total retail revenue. We have updated this slide to include third quarter results. The two key messages we delivered last quarter still stand. Number one, XP is a cyclical grower company. Core retail revenue is the best demonstration of this cyclicality. The peak of BRL8.3 billion in revenues in 2021 has not been reached yet again. Third quarter ’23, last 12 months, core retail revenue improved from last quarter to BRL7.6 billion, reducing this gap that was BRL1 billion last quarter to BRL740 million this quarter. It is worth remembering that in 2021, our clients’ assets were BRL815 billion. Our active clients were 3.4 million and our IFAs were 10,300.