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StoneCo (NASDAQ: STNE)
Q4 2023 Earnings Call
Mar 18, 2024, 5:00 p.m. ET

Highlights of the Earnings Call

• Strategic Reorganization
• New Focus Areas
• Financial Performance

Strategic Reorganization:

Operator

Greetings, distinguished investors. We appreciate your presence in this pivotal moment. Welcoming you all to the StoneCo earnings conference call, we extend our gratitude for your interest and commitment to our journey. The company’s disclosure of the earnings release and the complementary presentation is now accessible online at investors.stone.co. Throughout our discussion, we will showcase non-IFRS financial entities to illuminate our performance from different lenses.

As you delve into this realm with us, bear in mind that forward-looking statements might pepper our conversations today. These reflections, while insightful, carry the caveat of their inherent unpredictability. To grasp the full narrative of the risks at play, your perusal of our Form 20-F lodged with the Securities and Exchange Commission is encouraged. With that, I yield the floor to Roberta Noronha, our esteemed Head of Investor Relations at StoneCo.

Roberta Noronha — Head of Investor Relations

Thank you, dear operator, and good evening, esteemed guests. To grace this occasion alongside me are Pedro Zinner, our virtuoso CEO; Mateus Scherer, the ever-attentive CFO and investor relations connoisseur; and Lia Matos, the harbinger of our strategic vision as the chief strategy and marketing officer. Today, we unfurl the tapestry of our Q4 2023 results and project a lantern on our future trajectory. Without further ado, I extend the baton to Pedro for an exposition of our triumphs.

Pedro?

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Pedro Zinner — Chief Executive Officer

Cheers, Roberta, and esteemed assembly. In the reflections cast in our shareholder epistle, after a dalliance of a year at the helm, introspection has unveiled the treasure trove of our company’s mettle and room for growth. The odyssey, rife with insights and epiphanies, underscores not just the fiscal prowess but also the strategic peaks conquered.

The annals of our triumph extend beyond financial milestones, revealing strategic bastions fortified and pathways forged for future ascents, as elucidated in our investor summit. In the continuum of revelations derived from my stewardship, 2023 witnessed a melange of strategic tweaks to align our sails for tomorrow’s zephyrs. The compass reset has steered us toward bespoke solutions for micro to medium enterprises, tailoring our overtures with precision.

Trifurcating our focus onto the strategic trifecta outlined in the investor forum, we beckon the winds of change in the MSMB sphere. Our gaze, inscribed in the realms of retail, gas stations, culinary, and pharmaceutical citadels, augments our competitive sinew, unfurling avenues of growth. Lia’s discourse will enlighten us on the ripened fruits of Q4. Our second gambit: harnessing the fusion of payments, banking, and software realms. A goldmine awaits in entwining deeper with our client matrix. Currently, only a fraction of our clientele exemplify extensive solution engagement, beckoning the potentiation of our operational acumen.

The financial services tapestry of Q4 echoes the triumph of our choreography in payments and banking realms. The tribunal of the Stone platform is the third aegis in our strategic arsenal. Our upward trajectory initially fueled by velocity, sometimes at the altar of consistency and reusability, mandates the renovation of our tech tapestry, culminating in the grandeur of the Stone platform. This intersection heralds a harmonious crescendo, enriching client focus and deepening analytical insights through AI.

Our final pegs in the strategic symphony hone in on cost efficiency and fiscal prudence. Recognizing the fount of value awaiting unbridling in our operations, initiatives are afoot to elevate profitability to greater summits. With a shared service hub and zero-based budgeting, the clarion of financial efficiency reverberates across our corridors, fortifying the edifice of fiscal sagacity.

Before passing the baton to Lia, I orchestrate a brief overture on our 2023 saga. A milestone year in our annals, heralding a phoenix-like revival from the vicissitudes of 2021. The curtain call saw us waltz into the sunset of exceptional outcomes, especially in Q4, where our strategic crests saw us scallop eminent heights. Our growth trajectory embellished with a remarkable ascent, bearing witness to a commendable surge in MSMB TPV, escalating by 21% annually to 350 billion reais, a seminal feat echoing our prowess in the fiscal battlefield.

StoneCo: A Closer Look at Financial Success in 2023

The financial intricacies of Brazil’s StoneCo unfolded in the year 2023, revealing a robust landscape of growth and strategic advancements. The company’s report card included various key highlights that showcased not just operational excellence, but a resounding crescendo of financial prosperity. Let’s dive deep into the numbers and strategic maneuvers that defined StoneCo’s remarkable journey through 2023.

Impressive Growth Trajectory

StoneCo’s financial report shone bright with dazzling figures, enveloping a rich tapestry of success stories. Deposits blossomed to a staggering 6.1 billion reais by the end of December, painting a vibrant portrait of financial vitality in vivid hues. The growth engine hummed with enthusiasm, mirroring an uptrend that resonated well with investors.

Monetization Metrics

The monetization realm witnessed a splendid performance, like the crescendo of a symphony hitting all the right notes. MSMB take rates danced to a new rhythm, reaching 2.43%, up 22 basis points from the previous year. This ballet of numbers exhibited a graceful pirouette that delighted stakeholders and painted a picture of financial finesse.

Strategic Advancements

StoneCo’s voyage in 2023 wasn’t just about numbers; it was a saga of strategic conquests and calculated moves. The company’s credit solutions portfolio soared to new heights, touching a working capital portfolio of 309 million reais by year-end. The health of this portfolio stood as a beacon of excellence, with NPLs tightly controlled, reflecting meticulous financial stewardship.

Operational Leverage and Scaling Heights

The quest to scale through innovative platforms bore fruit, catapulting StoneCo’s EBT to a remarkable 2 billion reais, a significant leap from the previous year. This operational leverage not only boosted financial metrics but also underscored the company’s ability to navigate through challenging terrains with poise and panache.

Financial Resilience and Profitability

StoneCo’s financial mettle was tested and proven resilient in the face of market fluctuations. The adjusted net profit surged to 1.6 billion reais, a testament to the company’s unwavering commitment to profitability. This financial fortress translated into a robust cash position of 5.1 billion reais, showcasing StoneCo’s financial prowess in turbulent waters.

Challenges and Efficiency Gains

Amid triumphs, StoneCo faced challenges in the software segment, navigating through lower growth in nonstrategic verticals. However, the company’s efficiency initiatives bore fruit, with EBITDA margins witnessing a commendable uptick to 16.4%. The strategic maneuvers laid a sturdy foundation for future growth and resilience.

Strategic Roadmap for 2024

As StoneCo bids adieu to a triumphant 2023, the strategic compass is set firmly on the path ahead. The company’s fourth-quarter results have positioned it favorably to chart a course towards a promising 2024 and beyond. With financial muscles flexed and strategies sharpened, StoneCo stands poised to paint another masterpiece in the canvas of financial success.

Now, as the baton of financial narrative passes, we await the unfolding chapters with bated breath, eager to witness StoneCo’s saga of success continue unabated.

The Rise and Evolution of Financial Services and Software: A Strategic Outlook

Driving Growth Through Strategic Priorities

In the fourth quarter, the financial services and software conglomerate reported impressive financials, with a year-over-year revenue surge of 24% to 2.9 billion reais. The adjusted EBT reached 604 million reais, accompanied by a margin increase of over 10 percentage points compared to the previous year.

Strategic Verticals Propel Performance

The stellar performance was largely fueled by gas stations within the four strategic verticals, showcasing the company’s commitment to providing comprehensive solutions amalgamating management software, payment services, and banking to its SMB clientele. Efforts are honed towards establishing a robust go-to-market strategy for scaling distribution of integrated software and financial services offerings.

Focus on Product Value Proposition

Further, the company is intensifying its product value proposition to tap into growth opportunities within key verticals, earmarking gas stations and retail as primary focal points for 2024. Additionally, post-sales integration is prioritized to sustain superior client service levels and enhance customer engagement.

Challenges in Software Segment

Nevertheless, the software segment experienced a 3.5% dip in revenue, attributable to decreased enterprise business revenues. Despite facing challenges, the company remains optimistic about future margin improvement in the software domain by concentrating on cost savings and process enhancements.

Financial Overview and Operational Efficiency

Administrative expenses witnessed a sequential uptick due to heightened third-party service and personnel costs in the fourth quarter. However, the firm remains committed to operational efficiency, prioritizing G&A cost containment going forward. Similarly, selling expenses remained steady even with increased provisions for variable compensation.

Leadership Transition and Governance Standards

The company announced a significant leadership transition with founder and chairman, Andre Street, stepping down from the board, along with vice-chairman Conrado Engel and board member Patricia Verderesi. The move underscores a profound commitment to professionalize management and elevate governance standards.

Outlook and Guided Metrics for 2024

Looking ahead, the company exudes confidence for a robust 2024, anticipating a growth trajectory with an MSMB TPV projection exceeding 412 billion and client deposits surpassing 7 billion reais. These strategic moves, coupled with a strong and visionary leadership lineup, set the stage for continued progress and success in the financial services and software landscape.

Exploring Financial Progress and Strategic Initiatives

Investor Queries Unveil Insights

Operator

[Operator instructions] Our first question comes from Mauricio [Inaudible] with Evercore. Mauricio, you can open your microphone.

Software Business Expansion Discussed

Sheriq Sumar — Evercore ISI — Analyst

Hi. This is Sheriq Sumar from Evercore ISI. I had a question on the software business coming to Slide 13…

Lia Matos — Chief Operating Officer and Chief Strategy Officer

Hi, Sheriq. Lia here. Thank you for the question. So, I’m going to keep talking a little bit about what we highlighted on Page 14…

So, this page talks about the evolution of this strategic priority…

And this metric reached 5.8 billion reais in the quarter, which represents a sequential growth of 19%…

Insight into Financial Stability and Growth

Mateus Scherer — Chief Financial Officer and Investor Relations Officer

Yeah, for sure. So, I think you also touched upon the software revenues on a stand-alone basis…

That was a direct top-line enterprise…

But I think, like Lia said, the priority here is really not under the revenues for software stand-alone…

So, again, yes, I think there can be some upside for enterprise software revenues in the future…

Financial Expense Outlook

Mateus Scherer — Chief Financial Officer and Investor Relations Officer

Sure, I will start with the first part and then I will ask you to repeat the second part…

Just to start, on financial expenses, I think the trends for 2024 are pretty much similar to what we saw in the quarter, which is that financial expenses should be driven by the changes in interest rates…

Cash generation, which I think is a similar trend as the business evolves its cash generation and we use part of this cash to funds repayments and credits…

Market Concerns and Stakeholder Queries

Eduardo Rosman — BTG Pactual — Analyst

Hi, everyone. I have two questions here. The first one is on your credit business, right? You are booking your results now on an accrual basis and also booking upfront provisions…

But you’re still using a cost of risk of 20% while you believe actual losses will be under 10%, right? …

…trying to understand here how much time you need, you know, to be able to use a lower cost of risk or eventually how much time we need here to be able to see a convergence of the cost of risk to your actual kind of losses…

And the second one, just trying to understand, because the stock is down 10% in the aftermarket…

… trying to understand here what could be behind, you know, the sell-off and many investors and clients here asking about, you know, Street departure…

But if you can remind us, like his economic stake is not that large anymore.

Insightful Analysis on Recent Board Changes and Financial Strategies

Evolution of Credit Strategies

The financial world is a bit like a turbulent sea, with crests and troughs constantly challenging even the most steadfast ships. As Mateus Scherer, the Chief Financial Officer, eloquently stated, the company’s transition to risk-based credit models resembles a gradual shift in wind direction, promising a smoother voyage in the long run.

Steady Governance Amidst Changes

Change, they say, is the only constant in life, and Pedro Zinner, the Chief Executive Officer, echoes this sentiment when discussing the recent evolution in the company’s board. Just like the changing tides revealing new possibilities, Pedro mentions that Andre’s transition signifies a natural progression in the organization’s journey towards professionalism and strategic growth.

Strategic Financial Moves and Client Engagement

When we set sail in the unpredictable waters of finance, strategic acquisitions can act as the sturdy anchor that stabilizes and propels a company forward. Mateus Scherer’s discussion about the acquisition of a Financeira license suggests a smart move akin to securing a favorable wind that will aid in easing funding costs.

Client-Centric Banking Innovations

Just like a well-crafted symphony, Lia Matos, the Chief Operating Officer, explains the harmonious blend of payment solutions and banking services that have orchestrated a surge in client deposits. The seasonal rhythm of deposits mirrors the ebb and flow of the financial landscape, with a promising trajectory continuing well into the current quarter.

Consistent Tax Forecasting for Smooth Sailing

Forecasting tax rates in an ever-changing financial climate is akin to predicting the weather at sea. Mateus Scherer’s assertion of anticipating a tax rate between 20% to 25% provides a steady compass, guiding the company through potential financial storms that may lie ahead.

Unlocking Insights: Financial Growth Outlook

Bank of America Merrill Lynch’s Roadmap Unveiled

Bank of America Merrill Lynch recently shed light on their detailed roadmap for the upcoming year amidst their investor day discussions. The executives provided a glimpse into the strategic direction, emphasizing the importance of investment products in their agenda. The commitment to prioritizing clients’ needs and delivering value stood out as a cornerstone of their roadmap.

Banking Domicile and Client Engagement

In response to analysts’ queries about banking domicile, Bank of America Merrill Lynch’s Chief Operating Officer and Chief Strategy Officer, Lia Matos, revealed that approximately 50% of their clients currently have a banking account. The company saw a notable shift in client engagement after migrating TON clients to a full banking solution in 2023. Matos highlighted ongoing efforts to enhance client offerings and drive banking services to both new and existing clients.

Expense Management Strategies for 2024

When quizzed about expense projections for 2024, Mateus Scherer, the Chief Financial Officer and Investor Relations Officer, delved into the intricacies of cost management. Scherer outlined a comprehensive approach that includes embracing efficiency through zero-based budgeting and shared service center implementations. Balancing cost-saving initiatives with strategic investments in financial services segments forms the crux of their expense strategy moving forward.

Volume Growth and Market Competition

Neha Agarwala from HSBC probed Bank of America Merrill Lynch executives on volume growth prospects amid evolving market dynamics. Lia Matos elaborated on the company’s commitment to outpacing market growth rates in the MSMB segment. She touched on the competitive landscape, emphasizing the benefits derived from decreased interest rates and the stable competitive environment prevailing in the industry.

Insights on Revenue Trends and Financial Efficiency

Renato Meloni from Autonomous Research sought insights into revenue trends and financial efficiencies. Discussions around take rates and financial expenses elucidated the interplay of seasonality, client mix dynamics, and declining interest rates on the company’s financial performance. The executives provided clarity on the factors influencing revenue streams and expense management strategies for the upcoming year.

The Financial Facade: A Closer Look at StoneCo’s Q4 Earnings Call

Mateus Scherer — Chief Financial Officer and Investor Relations Officer

Entering the intricate world of StoneCo’s Q4 earnings call, it becomes evident that the financial complexities are akin to a Rubik’s Cube – with each turn revealing a new layer of strategic maneuvering. Scherer delves into the realm of “take rate piece” and financial expenses, shedding light on the intricacies of StoneCo’s financial performance.

Take Rates and Financial Expenses: Unraveling the Tapestry

StoneCo experienced a shift in the dynamics of its Total Payment Volume (TPV) in Q4, with Stone TPV gaining prominence over Ton’s TPV, a departure from previous quarters. This uptick managed to offset the increased contribution from banking and credit, which is outpacing the growth of payments overall. Scherer attributes the majority of the decline to a blend of mix, particularly credit versus debit, with a subtle client mix alteration adding to the equation.

When dissecting financial expenses, Scherer acknowledges a minor effect in the mix between the sale of receivables and total debt outstanding for the quarter. This ephemeral effect, inherent to the ever-shifting financial landscape, blends seamlessly with the reduction in CDI and variations in working days and average cash balances. Scherer reinforces the predictability of StoneCo’s financial expenses for 2024, attributing fluctuations to temporal drivers rather than intrinsic shifts.

In response to inquiries regarding pricing dynamics and interest rates, Scherer paints a vivid picture of the nuanced market landscape. With a cautious eye on the ebb and flow of pricing within each segment, Scherer elucidates the intricate dance of public prices in the micro sphere and individualized pricing in the SMB sector. The strategic foresight unveils StoneCo’s unwavering focus on enhancing engagement through banking solutions and new product offerings, steering clear of simplistic scalability based on interest rate fluctuations.

Vendor Queries: Unveiling Market Intricacies

As vendor voices intertwine with StoneCo’s narrative, questions arise regarding market behavior and growth projections. From challenges of irrational market pricing to the cadence of TPV growth in 2024, the inquiries paint a canvas of market intricacies awaiting unravelling.

Lia Matos, Chief Operating Officer and Chief Strategy Officer, steps in to offer insights on TPV growth dynamics, emphasizing the consistency embedded in StoneCo’s projections. The perennial dance of seasonalities and the steadfast guidance for the year underscore the strategic clarity permeating StoneCo’s trajectory.

Diving into the labyrinth of market behavior and pricing dynamics, John Coffey from Barclays seeks clarity on the triggers for StoneCo’s pricing aggression. At the crux of market competitiveness lies the delicate balance between pricing movements and market entrants, hinting at the intricate web of market signaling and strategic resilience driving StoneCo’s pricing strategies.

In a market environment rife with speculation and competitive fervor, StoneCo’s strategic clarity shines through the maze of financial intricacies and market oscillations. With a steady hand navigating the tempestuous waters of financial acumen, StoneCo sets sail on a course guided by strategic foresight and unwavering commitment to market resilience.

Maintaining Momentum: StoneCo’s Financial Strategy and Growth Trajectory

Capital Allocation Strategy and Credit Market Dynamics

Amidst the ebb and flow of Wall Street’s predictions, StoneCo’s value proposition stands strong, anchored by a low-teens earnings multiple. The company’s steadfast cash generation, exemplified by a resilient fourth quarter, fueled a robust buyback of 300 million last year, alongside strategic capital deployments in credits. With a momentous approval of a new 1 billion reais buyback plan at investor day, the spotlight now shifts to the meticulous execution of this endeavor.

As the guidance hints at a substantial increase in the credit book to 5.5 billion, StoneCo remains attuned to the intricate dance of capital allocation. While this surge seems significant in isolation, it pales in comparison to Brazil’s expansive credit market. Keeping a weather eye on this evolving landscape, StoneCo forges ahead with a clear vision, aiming to strike a balance between buybacks and potential credit ventures.

The Software Segment’s Growth Trajectory

Delving into the software realm, StoneCo’s Chief Operating Officer and Chief Strategy Officer, Lia Matos, unveils a multi-faceted growth panorama. A nuanced breakdown reveals three distinct axes of growth within the software domain: the core verticals, the enterprise segment, and the softer assets lying in wait. The fusion of software and financial services propels StoneCo into a realm of boundless possibilities, fostering growth through enhanced product value and streamlined go-to-market strategies.

The enterprise terrain, having already garnered a significant market share, witnesses a more tempered growth outlook. However, the uncharted territories of other software assets gleam with potential, showcasing robust growth trajectories in the foreseeable future. StoneCo’s strategic prowess shines through as they navigate these diverse landscapes with finesse and foresight.

Efficiency Initiatives and Margin Evolution

Embarking on a journey towards operational efficiency, StoneCo’s Chief Financial Officer, Mateus Scherer, unveils a tapestry of measures poised to elevate the software segment’s margins. Anchored by the implementation of shared services centers and zero-based budgeting, StoneCo’s software arm charts a course towards mid-teens EBITDA margins in 2023, with a bold trajectory beyond the 20% threshold by 2024. Prioritizing operational excellence over top-line growth, StoneCo paves the way for a sustainable and prosperous future.

Corporate Governance and Strategic Direction

Beyond the realms of financial strategy, StoneCo’s recent announcements regarding key stakeholders shed light on pivotal governance decisions. The disclosure of Andre Street’s substantial ownership, totaling around 7% of the company’s economic value, prompts inquiries about potential share trade-offs and non-compete agreements. Addressing these concerns, StoneCo’s Chief Executive Officer, Pedro Zinner, underscores the essence of transparency and delineation, assuring stakeholders of a cohesive and forward-looking governance framework.

Revealing Insights into StoneCo’s Earnings Call

Key Discussion Highlights

Roberta Noronha — Head of Investor Relations

Pedro Zinner — Chief Executive Officer

Lia Matos — Chief Operating Officer and Chief Strategy Officer

Mateus Scherer — Chief Financial Officer and Investor Relations Officer

Sheriq Sumar — Evercore ISI — Analyst

Eduardo Rosman — BTG Pactual — Analyst

Mario Pierry — Bank of America Merrill Lynch — Analyst

Tiago Binsfeld — Goldman Sachs — Analyst

Neha Agarwala — HSBC — Analyst

Renato Meloni — Autonomous Research — Analyst

John Coffey — Barclays — Analyst

Unknown speaker

Jorge Kuri — Morgan Stanley — Analyst

Unveiling Insights with StoneCo

In a recent earnings call, StoneCo’s top brass, headed by the poised Pedro Zinner as the Chief Executive Officer, shared intriguing insights that captivated the investor audience. With Mateus Scherer steering as the Chief Financial Officer and Investor Relations Officer, the tones were set for a riveting discussion.

Lifting the Veil on Financial Aspects

Throughout the call, financial analysts like Sheriq Sumar, Eduardo Rosman, Mario Pierry, Tiago Binsfeld, Neha Agarwala, Renato Meloni, and John Coffey, along with others, sought wisdom from the StoneCo leadership. Each query drove the narrative towards a deeper understanding of the company’s financial landscape.

Powerful Closing Statements

As the call drew to a close, Pedro Zinner expressed gratitude to the shareholders for their unwavering support. The sense of camaraderie and partnership between StoneCo and its investors was palpable, setting a solid foundation for the journey ahead.

On a parting note, the call left a resonating message echoing, promising another engaging rendezvous in the upcoming quarter. Jorge Kuri of Morgan Stanley wrapped up the call, leaving the audience with a symphony of optimism and anticipation.