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StoneCo (NASDAQ: STNE)
Q3 2024 Earnings Call
Nov 12, 2024, 5:00 p.m. ET
StoneCo Reports Q3 2024 Earnings: A Strong Quarter with Notable Growth
In-Depth Look at Earnings Results
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good evening, everyone. Thank you for joining us. Welcome to StoneCo’s third quarter 2024 earnings conference call. By now, everyone should have access to our earnings release.
The company also provided a presentation alongside this call. You can find all materials online at investors.stone.co. Please note that we will discuss non-IFRS financial information, including adjusted net income and adjusted net cash. These measures are important to us but differ from IFRS definitions.
Reconciliations of our non-IFRS financial data to IFRS can be found in today’s press release. Additionally, please be aware that our discussion may include forward-looking statements, which come with risks and uncertainties that could impact our actual results.
For more details on these risks, please refer to the forward-looking statements disclosure in the company’s earnings press release and our Form 20-F filed with the Securities and Exchange Commission, available at www.sec.gov. Joining us today are CEO Pedro Zinner, CFO and IRO Mateus Scherer, Strategy and Marketing Officer Lia Matos, and IR Head Roberta Noronha. I would now like to hand the call to Pedro Zinner.
Pedro Zinner — Chief Executive Officer
Thank you, operator, and good evening, everyone. Today, I will present our results for the third quarter of 2024 along with an update on our business outlook. We have achieved several milestones this quarter, marked by solid performance that brings us closer to our annual goals. Reviewing the quarter, I can confirm our commitment to executing our strategies in the Financial Services segment.
Our Payment segment saw a total payment volume growth of 20%, hitting BRL 114 billion while serving 4 million MSMB clients. Our focus remains on maintaining healthy unit economics. In banking, our demand deposits rose to BRL 6.7 billion, reflecting a 50% increase from last year. We are making strides in scaling our payment and banking bundles, and our aim is to enhance client engagement.
Focus on Client Experience and New Products
To enhance client experience, we are rolling out additional solutions, including our savings product that has shown early positive results. In credit, we surpassed our annual guidance, achieving a portfolio of BRL 923 million, a nearly 30% quarter-over-quarter growth. This portfolio is performing better than expected, aligning with our risk appetite and internal objectives.
We launched Giro Facil, a revolving credit facility, and are continuing to refine the client experience throughout the credit cycle. Notably, our MSMB take rate reached a record 2.58%, our trajectory pointing towards achieving our annual goal of 2.49%. In software, we have successfully cross-sold our financial service solutions, and card TPV growth among software clients has outpaced MSMB growth substantially.
In our efficiency efforts, our EBITDA margin increased by 1.6 percentage points, now exceeding 18%. We are also assessing ways to maximize shareholder value with our considerable capital surplus, as we approach the completion of our share repurchase program of 1 billion shares.
Year-to-date, our adjusted administrative expenses decreased by 7% compared to the previous year, aligning us well to meet our 2024 guidance of 7% growth. Our adjusted net income rose 35%, with adjusted basic earnings per share up by 43% year-over-year. Now, I’ll turn the call over to Lia Matos to discuss our performance in detail. Lia?
Lia Matos — Chief Marketing Officer and Chief Strategy Officer
Thank you, Pedro, and good evening, everyone. As Pedro highlighted, we are pleased with our performance in the third quarter and…
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Solid Financial Growth and Strategic Client Engagement Drive Strong Results
Steady Revenue Increase Amidst Strategic Changes
We’ve driven value for clients through our innovative solutions and services. On Slide 4, we report a healthy increase in our consolidated financial results: total revenue and income rose by 7% year over year, or by 8% if we exclude changes in our accounting method for membership fees from Q1 ’24.
Strong Performance in MSMB Segment
This growth stems largely from our performance within the MSMB segment, where we consistently expand our client base and enhance monetization. Adjusted EBIT and net income surged by 35% year over year, resulting in margins climbing by 4.5 and 3.6 percentage points, respectively, to 21.8% and 17.5%. Improved margins are primarily linked to top-line growth and reduced financial expenses. Thanks to our increased adjusted net income and a significant share buyback during the quarter, our adjusted basic EPS surged 43% year over year to BRL 1.97 per share.
Payments Segment Expands Client Base
Turning to our Financial Services segment, Slide 5 highlights performance within Payments. Our MSMB client base now consists of nearly 4 million active clients, marking a 21% year-over-year growth rate. The slower growth in new clients this quarter can be attributed to the winding down of marketing expenses from earlier in the year and a shift towards onboarding higher-quality clients with solid unit economics.
New client relationships typically begin with a payment and banking bundle, fostering deeper engagement with our diverse financial products. This strategic focus has resulted in a significant increase in “heavy users,” those utilizing multiple products, rising from 21% a year ago to 34% this quarter. Payment volumes reflect this success: MSMB Total Payment Volume (TPV) grew 20% year over year, reaching BRL 114 billion.
This figure includes a 12.4% rise in Card TPV and an impressive 2.4 times growth in PIX QR code transactions, demonstrating PIX’s impact and its competitive benefits for our clients. Thanks to a stable competitive landscape in payments, we achieved a record MSMB take rate of 2.58%, up nine basis points from the previous year and three basis points higher than Q2 ’24.
Banking Segment Shows Robust Growth
Moving to Slide 6, our banking segment has shown impressive growth. The active client base in banking soared 47% year-over-year, reaching 2.8 million clients. As previously mentioned, we’ve matured our approach to selling bundled banking and payment solutions, now targeting deeper engagement within our ecosystem. This resulted in total deposits of BRL 6.8 billion this quarter, an increase of 53% year over year.
Of the total deposits, BRL 6.7 billion were demand deposits, while BRL 121 million pertained to on-platform time deposits, which we have yet to actively promote. Despite being early in this strategy, we have carefully balanced demand and time deposits, yielding favorable results for client money management. Additionally, we have expanded offerings to third-party platforms, with off-platform time deposits reaching BRL 1.7 billion.
Credit Portfolio Exceeds Expectations
Next, let’s examine credit on Slide 7. Our outstanding credit portfolio reached BRL 923 million, exceeding our annual guidance by 15% with one quarter remaining. Merchant Solutions, which includes our working capital and new revolving credit solution Giro Facil, accounts for BRL 864 million of this figure. The remaining BRL 59 million comes from our credit card offering, which we are focusing on expanding to micro clients.
We are gradually adjusting provisions for our working capital solution to align with expected losses, reducing provisioning from 20% at the year’s start to 14% by the third quarter. Consequently, total provision expenses have dropped to nearly zero this quarter, a significant decrease from BRL 19 million a year ago and BRL 18 million in Q2 ’24, positively impacting our financial results. Non-Performing Loans (NPLs) have moderately risen to 3.7% for Merchant Solutions, reflective of portfolio maturation.
Financial Services Segment Thrives Amid Stable Conditions
On Slide 8, we discuss our Financial Services segment which has performed strongly, with financial services revenue reaching BRL 3 billion, an 8% increase year over year, and an EBT margin of 22.8%, up by 5.1 percentage points over the same period.
Software Segment Shows Stable Earnings
On Slide 9, performance in the software segment reflects positive trends from cross-selling financial services to our software customers. Card TPV for clients using both financial and software solutions reached BRL 5.8 billion this quarter, more than doubling sequential growth compared to MSMB Card TPV. With our financial services specialist team effectively pursuing these cross-selling initiatives, we’re seeing positive outcomes.
Software revenues have remained stable, growing by 2.5% sequentially. Our adjusted EBITDA for the software segment reached BRL 72 million this quarter, with an 18.3% margin, representing an improvement of 1.6 percentage points quarter over quarter as we focus on efficiency and cash generation. Now, I will hand it over to Mateus for a detailed discussion on key financial metrics.
Mateus Scherer — Chief Financial Officer
Thank you, Lia, and good evening, everyone. Let’s start on Slide 10, where we analyze the quarter-over-quarter changes in our adjusted costs and expenses. Cost of services fell as a percentage of revenue from 26.2% in Q2 ’24 to 25.6% in Q3 ’24, mostly due to reduced loan loss provisions. Excluding credit provisions, our costs remained relatively stable as a percentage of revenue.
Administrative expenses increased by 5% year over year.
Strong Q3 Results Driven by Strategic Financial Management
Key Financial Insights from the Latest Quarter
During the recent quarter, company performance reflected a robust year-over-year growth of 9% and a sequential increase of 30 basis points (bps) in revenues. This improvement largely stemmed from increased provisions for variable compensation, which typically rise in the latter half of the year. Notably, selling expenses surged by 13% annually but saw a 5% decline sequentially, down 150 bps as a percentage of revenues. This drop is attributed to lower marketing costs following the conclusion of a sponsored reality TV show in the second quarter.
Impact of Financial Management on Expenses
Financial expenses decreased by 13% year-over-year, although there was a 7% sequential increase, translating to a 50 bps rise as a percentage of revenues. This uptick was largely due to higher funding demands driven by Total Payment Volume (TPV) growth, along with a decreased equity share in funding following significant share repurchases. These factors collaborated to elevate costs despite lower average funding spreads. In a proactive move, we optimized funding costs by repurchasing 60% of our 2021 bond issuance—our highest-cost debt—and refinancing it at much lower spreads through newly issued financial bills.
Stable Expenses and Effective Tax Management
The “other expenses” category showed a 12% increase year-over-year but remained stable on a sequential basis. As revenues climbed, these expenses as a percentage of total revenues decreased by 20 bps. The tax rate dropped to 20% from 23.8% in Q2, primarily due to the strategic repurchase of 60% of our bonds and transferring the remainder to a local entity. This adjustment provided a tax shield on associated interest expenses, with the full benefits expected to materialize from Q4 onward.
Cash Position and Recent Buyback Program
By the end of the quarter, our adjusted net cash position reached BRL 4.9 billion, representing a decrease of BRL 0.3 billion sequentially. This reduction was mainly due to the execution of our BRL 1 billion share buyback program, which led to an outflow of BRL 742 million in Q3 and BRL 979 million year-to-date.
Looking Ahead: Guidance and Market Position
We are proud of our performance over the first nine months of 2024 and remain optimistic about meeting our financial guidance. Despite challenges such as our large share buyback, adjustments in membership fee methodologies, and macroeconomic pressures from yield curve shifts, we are positioned to achieve our goals. On the operational front, we have already met credit portfolio targets while maintaining non-performing loans (NPLs) within our expectations.
The banking operations are developing well, indicating that clients are increasingly utilizing our offerings and retaining their deposits. Conversely, the MSMB CTPV remains a challenging KPI, with its rapid growth affecting debit volume—we expect this will have a negative short-term impact on our CTPV metric despite being beneficial for our profitability.
Long-Term Strategies for Growth
Changes in the interest rate outlook this quarter prompted a shift in our focus towards profitability rather than immediate growth. While this approach may slow our short-term CTPV growth, we believe in our capacity to outperform the market over the long haul as we enhance our value proposition. The Brazilian market offers considerable growth potential, characterized by a dynamic, innovative environment and expanding electronic payment methods beyond just private consumption.
Though growth may not mirror past rates, a focus on client engagement with an expanded suite of solutions lays a solid foundation for future success. Our year-to-date metrics reflect an MSMB take rate of 2.55%, surpassing our guidance of 2.49%, bolstered by banking credits and healthy pricing in payments. The combination of our bundled product offerings and dynamic pricing strategy has elevated client engagement while improving expected returns.
As we close another quarter of steady results, we remain dedicated to the strategic priorities established during our Investor Day. Now, I would like to hand the floor to Pedro to share insights on the future of our software business.
Pedro Zinner — Chief Executive Officer
Reflections on the Software Business Strategy
Thank you, Mateus. As we transition into the Q&A segment, I want to highlight recent developments in our software business and our long-term outlook. We are still executing our strategy of cross-selling financial services to software clients in priority sectors, while also emphasizing efficiency and cash generation. This method not only benefits our clients significantly but also promotes our own sustained success.
Our commitment to this strategy is unwavering, and I’m pleased to report solid progress in bundling software with financial services to tackle critical challenges faced by clients in key strategic areas. Although we’ve achieved substantial growth through our financial services distribution channel, we recognize the need for enhanced collaboration with Linx’s sales team.
Exploring New Strategies
Maximizing shareholder value remains our core mission, and we are open to innovative strategies that could facilitate our goals. One area under consideration is achieving our cross-selling objectives through partnerships rather than direct ownership of software assets. This approach could improve capital allocation and reduce asset burden.
We are currently engaging advisors to explore options for our software business while keeping our shareholders’ interests at the forefront. I want to assure you that there are no predetermined outcomes or timelines at this stage, as we carefully assess all potential paths forward.
Thank you for your continued support. We are excited about our long-term objectives and our commitment to delivering shareholder value. Operator, please open the floor for questions.
Questions & Answers:
Operator
We will now begin the Q&A portion. [Operator instructions] Our first question comes from Tito Labarta at Goldman Sachs.
Tito Labarta — Analyst
Hi. Good evening. Thank you for taking my question. I have a couple of inquiries to discuss.
First, regarding your TPV, there has been notable growth in QR code transactions, particularly on the PIX platform, though card TPV growth seems somewhat slower than expected…
Analyzing Growth Trends and Financial Metrics: Insights from Recent Analyst Q&A
Understanding Card TPV and PIX Growth Dynamics
Originally, expectations surrounding Card Total Payment Volume (TPV) were pegged to certain levels. As your perspective on the evolving landscape of both Card TPV and the PIX QR code develops, how do you foresee these figures entraining? The recent uptick in take rates complicates this picture, particularly as one might assume that the PIX QR code could be associated with lower take rates. Could you clarify how these elements are intertwined?
Lia Matos — Chief Marketing Officer and Chief Strategy Officer
Hi, Tito. Lia here. Thank you for your question. We’re pleased to report that the growth of PIX is currently exceeding our expectations. We’re witnessing some noticeable cannibalization from debit transactions. However, as we’ve noted before, this shift actually benefits us. PIX payments are replacing both debit cards and cash transactions, contributing positively not only to payment monetization but also to increased deposits within our ecosystem. We foresee this trend to persist.
While it’s logical to deduce that PIX would lead to lower take rates, we argue that this change overall is advantageous. As we move forward, we anticipate continued growth in PIX, particularly with the initiatives from the Central Bank aimed at enhancing PIX’s usability, which should further ease its acceptance in the marketplace.
Tito Labarta — Analyst
Thank you, Lia. My second question relates to your credit portfolio provisioning. I understand you mentioned it’s near zero. Although expected credit losses seem to be improving along with early non-performing loans (NPLs), the rate of 90-day NPLs is on the rise. Given the substantial growth of the loan portfolio—30% growth quarter-over-quarter—it’s unclear why provisions would reach such low levels under these circumstances.
Mateus Scherer — Chief Financial Officer
Hi, Tito. Mateus here. Thank you for this important question. A while back, we shared that upon reopening our credit offerings, we began provisionally allocating 20% despite expecting credit losses to hover around 10%. What we are currently observing is that as our outcomes align with these expectations, we are progressively reducing the excess provisions. Last quarter, we recorded provisions at 18% of our portfolio, which has now decreased to 14%. This adjustment is an ongoing process, and we anticipate continued convergence between the two figures in the upcoming quarters.
Tito Labarta — Analyst
Understood. So, this low provisioning level should likely persist as you adjust towards that 10% benchmark?
Mateus Scherer — Chief Financial Officer
Yes, that is correct.
Tito Labarta — Analyst
Great, thank you, Mateus.
Operator
Thank you, Tito. Our next query comes from Daniel Vaz with Safra.
Daniel Vaz — Safra — Analyst
Hello, everyone. Congratulations on the results, Pedro, Lia, Mateus. I appreciate the opportunity to ask questions. I’d like your perspective on Card TPV projections for 2025.
According to the latest Stone Retail Index Data for September and October, physical transactions seem to be struggling to achieve significant growth lately. While digital transactions are performing well, their contribution to your initial revenues appears relatively limited. How do we link this data from the Stone Index with your expectations for Card TPV in 2025?
Lia Matos — Chief Marketing Officer and Chief Strategy Officer
Hi, Daniel. Thanks for your inquiry. Currently, we’re not in a position to disclose specific figures for 2025. Nevertheless, we regard our current growth rate of 20% as quite healthy. The ongoing transition from debit to PIX volumes remains significant for us, and we view this shift as a positive economic change that we have consistently highlighted. Sustaining our current robust growth in clients and TPV will continue to propel our monetization efforts—which are vital for both payment processing and deposit growth within our banking segment. As we plan for 2025, rest assured that we will factor in the anticipated increase in PIX’s prevalence within the industry.
Daniel Vaz — Safra — Analyst
Thank you for that clarity. If I may follow up, you mentioned the evolving landscape of PIX penetration. Yet, we are also dealing with macroeconomic shifts. How do these factors affect your sales force capacity? Furthermore, with marketing expenses remaining high, are there any changes to your operational strategy for 2025 in response to Brazil’s economic challenges?
Mateus Scherer — Chief Financial Officer
Thank you, Daniel. In terms of our sales force planning, the current economic outlook won’t fundamentally alter our approach. Our strategy is firmly rooted in a bottom-up analysis, where we assess markets in fine detail to ensure adequate engagement.
Regarding the changing yield curve, we are dynamically evaluating pricing strategies to optimize profitability for our cohorts. As interest rates evolve, we will gradually integrate this into our decision-making processes and assess how pricing may reflect these changes for clients. Major pricing adjustments are typically avoided in Q4 due to holiday seasonality, so we can expect more pronounced pricing shifts to commence in the first quarter of 2025.
Daniel Vaz — Safra — Analyst
Got it. Thank you for your insights. This has been very helpful.
Mateus Scherer — Chief Financial Officer
Thank you.
Lia Matos — Chief Marketing Officer and Chief Strategy Officer
Thank you.
Operator
Next, we will hear from Mario Pierry with Bank of America.
Mario Pierry — Bank of America Merrill Lynch — Analyst
Good evening, team. Congratulations on a solid quarter. I would like to further investigate the dynamics of the take rate, which I believe was partially addressed in previous discussions.
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MSMB Reports Stronger Take Rates Amid Positive Banking Trends
Take Rates Surpass Guidance
In an analysis of MSMB’s performance, CFO Mateus Scherer noted that the company’s take rates reached 2.58%, exceeding their guidance of 2.49%. This increase can largely be attributed to a higher adoption of credit and banking solutions rather than a shift in their transaction mix.
Impact of the Yield Curve on Pricing
Scherer explained that while higher rates persist in Brazil, an adjustment in pricing is expected due to the rising yield curve, with impacts anticipated from Q4 2024. As a result, take rates are projected to increase as the company adjusts to these new conditions.
Credit Card Growth Strategy
When discussing the credit card sector, CMO Lia Matos emphasized that the company is still in the early stages of expanding its credit card offerings, specifically targeting micro-segments. As they refine their approach, they’ll continue to evaluate performance and enhance their product to cater to different customer needs.
The Role of PIX in MSMB’s Growth
HSBC Analyst Neha Agarwala questioned the effects of PIX on MSMB’s operations. Matos highlighted that the PIX QR code system provides a unique experience for small businesses and is designed to reduce fraud, thereby enhancing its appeal. While there is concern about possible pricing competition among peers, both Matos and Scherer stated they do not foresee significant pressures affecting the pricing of PIX processing.
Stable Environment for PIX Pricing
Scherer reassured that MSMB’s pricing for PIX aligns closely with that of debit transactions and that they expect stability in the market moving forward. As PIX continues to grow, it remains an integral part of MSMB’s strategy, particularly as it offers a viable alternative to cash transactions, promoting more deposits within their system.
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Key Financial Insights on Take Rate and Credit Reserves Raise Questions
Understanding Key Account Take Rate Improvements
More questions have emerged regarding the financial dynamics of the company. First, there was a notable increase of 14 basis points in the take rate for key accounts. Can you explain the reasons behind this uptick? Secondly, concerning the credit book, it’s mentioned that an expected loss of about 10% is anticipated. This adjustment aims to bring reserves as a percentage of the loan book down to 10% from the current 14%. However, when comparing this strategy with competitors like MercadoLibre, which reports reserves between 30% and 40%, there are concerns. Is there a distinct difference in the types of merchants served that leads to a lower reserve expectation? Given the complexities of Brazil’s market, why not opt for higher provisioning as a safeguard? Thank you.
Lia Matos — Chief Marketing Officer and Chief Strategy Officer
I’ll quickly address the inquiry regarding key accounts and then turn to Mateus for deeper insights on non-performing loans (NPLs). The key accounts segment experienced an 11.3% reduction in total payment volume (TPV) sequentially. This drop is mainly attributed to the loss of significant volume from a single large sub-acquirer, impacting our overall mix positively in terms of take rates. The observed improvement of 14 basis points is largely a result of these mix effects. Mateus, please elaborate on the NPL situation.
Rationale Behind Credit Reserve Levels
Mateus Scherer — Chief Financial Officer
Absolutely. Regarding the anticipated 10% level of expected credit losses, the difference from competitors reporting around 30% can be explained by our client mix. The average loan amount in our portfolio stands at BRL 30,000, substantially larger than the loan sizes typical for our peers, which are often ten times lower. Our target clientele consists mainly of small-to-medium businesses (SMBs) as opposed to micro merchants. While we are exploring offerings for micro merchants, our current focus is primarily on SMBs, leading us to this conservative estimate of reserves.
Neha Agarwala — HSBC — Analyst
Thank you, Lia and Mateus. This clarity is very helpful.
Lia Matos — Chief Marketing Officer and Chief Strategy Officer
Thank you, Neha.
Mateus Scherer — Chief Financial Officer
Thank you.
Operator
Next, we have Jamie Friedman from SIG with more questions.
Jamie Friedman — Analyst
Hi, congratulations to the team. I have queries for both Mateus and Lia. First, how should we assess the path forward for financial expenses, given they were slightly below your earlier expectations? And Lia, does the bundling strategy influence merchant growth?
Mateus Scherer — Chief Financial Officer
Thanks, Jamie. I’ll tackle the financial expenses first. There are four main factors influencing this line: our funding needs, the mix of funding sources, interest rates, and funding spreads. In the third quarter, we saw a 7% sequential increase in financial expenses due to several impacts. Notably, there was a 5% increase in the number of working days and rising funding needs associated with growing TPV as well as a significant buyback this quarter, which decreased our equity proportion relative to debt. However, we’ve issued new financial instruments thanks to our financier license, which has led to a reduction in funding spreads overall.
Looking ahead to the fourth quarter, we anticipate a rise in interest rates according to the yield curve, suggesting a more challenging environment for financial expenses in the near term. Despite this, positive trends continue in funding spreads and TPV growth, indicating strong cash generation.
Lia Matos — Chief Marketing Officer and Chief Strategy Officer
Now, on to your question about the bundling strategy. The impact of this strategy on client growth is indirect. Our net additions and client growth dynamics stem from two main factors. First, the effects of marketing sponsorships, which have seasonal growth impacts. Secondly, our emphasis has shifted toward profitability rather than simply increasing client numbers, focusing on the quality of clients we onboard.
When considering bundling, there are two main dynamics. The first relates to cross-selling financial services to our software clients, and our disclosed cross-sell TPV metric has shown good progress there, despite the slower growth in overall client numbers due to the focus on larger clients, primarily in the SMB segment. The bundling of payments and banking services has achieved maturity, significantly contributing to recent deposit growth.
As we engage further with our banking and credit offerings, our bundling strategies will naturally evolve, but they aren’t fundamentally driving client growth dynamics.
Jamie Friedman — Analyst
Thank you both for your insights.
Lia Matos — Chief Marketing Officer and Chief Strategy Officer
Thank you, Jamie.
Mateus Scherer
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Financial Leaders Discuss Capital Allocation and Software Strategy in Recent Earnings Call
Chief Financial Officer
Thank you.
Operator
Next question from Guilherme Grespan with JPMorgan.
Guilherme Grespan — JPMorgan Chase and Company — Analyst
Good evening, everyone. Thank you for the Q&A. My question is going to be on capital allocation. I believe Zinner mentioned at the start of the call that you are evaluating how to allocate excess cash. You indicated that you have about $5 billion in excess cash and generate nearly $2 billion in net cash annually. There seem to be two main factors limiting capital distribution: the capital requirements and working capital needs.
From our calculations, it appears you hold a capital ratio of over 40% in Brazil. Moreover, the Brazilian securitization market is well developed, which alleviates capital pressures. Therefore, I inquire about your internal analysis regarding the $5 billion in excess cash. How much might you distribute, and regarding the $2 billion in net cash generated yearly, how much do you foresee being available for distribution? Additionally, will management incentives shift from nominal profit to ROE or at least profit per share? Thank you.
Mateus Scherer — Chief Financial Officer
Thank you, Grespan. I appreciate your insights. To address the first part of your question on capital allocation, your assessment is largely accurate. Our capital structure remains solid with potential for further optimization. As you pointed out, our cash generation continues each quarter, even with growth in our credit operations, indicating that we have some capital beyond our requirements.
We don’t intend to hoard excess capital. If we determine that we have surplus funds beyond what’s necessary for our operational plans, we aim to implement a framework for capital distribution to our shareholders. However, we are still finalizing this framework, so it’s premature to specify how much we might distribute at this time. As Pedro mentioned, we plan to provide clearer visibility in the coming quarters.
Now, regarding the management incentives, Pedro, would you like to elaborate on that?
Pedro Zinner — Chief Executive Officer
Certainly. Grespan, your observation is spot on. The ongoing discussion about capital allocation naturally influences how we develop management incentives. Currently, our focus is more aligned with earnings per share rather than strictly ROE. This topic is part of our broader discussions, and we anticipate sharing more specifics in the first quarter of next year.
Guilherme Grespan — JPMorgan Chase and Company — Analyst
OK. Thank you.
Operator
Next, we have Renato Meloni from Autonomous Research.
Renato Meloni — Autonomous Research — Analyst
Hi, everyone. Thank you for the call and for taking my questions. My first query concerns the software business. In last quarter’s call, Pedro seemed confident about retaining ownership of the software asset to enhance cross-selling opportunities. What prompted this change in strategy towards potentially selling the asset? Additionally, I have a second question regarding your expected effective tax rate, especially in light of possible reductions from the bond repurchase. Thank you.
Pedro Zinner — Chief Executive Officer
Thank you for your question, Renato. We still view our software offerings as essential to our strategy, as noted during our Investor Day presentation. Now that product integrations are established, we believe we can achieve significant cross-selling through commercial partnerships without necessarily maintaining ownership of the asset.
While we remain confident in our approach, any sale will be pursued only if it aligns with adding shareholder value. Importantly, our strategy of pursuing a more asset-light operation by utilizing contracts to bolster our balance sheet remains intact.
Mateus Scherer — Chief Financial Officer
Regarding the tax rate, we have previously mentioned that our effective tax rate typically ranges from 20% to 25%. The recent bond buyback should help push us towards the lower end of this range. However, typical seasonality effects mean that the fourth quarter often yields lower tax rates than the rest of the year. Thus, our expectations remain within the 20% to 25% range, with fluctuations based on these seasonal patterns.
Renato Meloni — Autonomous Research — Analyst
That’s helpful, thank you.
Pedro Zinner — Chief Executive Officer
To reiterate a key point, we believe in the value of our unique software asset. While we can execute our strategy without owning it, any transaction we consider will be carefully evaluated for its potential to enhance shareholder value.
Renato Meloni — Autonomous Research — Analyst
Thank you. That’s clear.
Operator
Next question comes from Kaio Da Prato with UBS.
Kaio Da Prato — Analyst
Hello, everyone. Good evening. Thanks for the Q&A. I have two questions. First, regarding your card’s transaction volume growth, specifically for micro, small, and medium-sized businesses (MSMBs), it seems there is a shift from cards to PIX. However, your recent growth was slightly below industry averages. Can you shed light on possible reasons for this apparent market share dip? Are there any specific segments involved, and what’s your outlook for future market share given your strong sales force in the MSMB sector?
Second, in following up on Grespan’s inquiry about capital allocation, could you share insights based on your evaluation?
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Exploring Growth Strategies: Key Insights from Recent Financial Discussions
Lia Matos — Chief Marketing Officer and Chief Strategy Officer
Greetings, Kaio. This is Lia. I’d like to clarify the dynamics of Total Payment Volume (TPV) and your inquiry about growth compared to the industry. Instead of focusing solely on quarter-to-quarter changes, we analyze our market share over a longer timeframe.
Our long-term goal involves consistent market share growth, though at a more gradual rate than before due to the business’s increasing scale. The timing of our marketing and sales investments may lead to slight fluctuations in market share from quarter to quarter, but what matters to us is sustaining overall growth and market share over time. This is reflected in our TPV guidance discussed during Investor Day. It’s essential to account for the impact of PIX, which has evolved differently than we initially projected; however, we remain confident in our client acquisition and broader market share potential.
In the short term, the recent TPV growth dynamics have not shifted structurally. PIX has grown faster than expected, contributing to a decline in debit volumes. Mateus noted our strategic focus on profitability over short-term growth, which may impact Card TPV. Additionally, we faced some seasonal challenges this quarter due to fewer Saturdays in September.
Despite these factors, we perceive recent growth levels—20% year-over-year in Q3, factoring in PIX—as robust, enhancing our future revenue opportunities from banking and credit throughout the client lifecycle. That’s our overview of the TPV dynamics.
Mateus Scherer — Chief Financial Officer
To address your second question about the software business and possible uses for proceeds, as Pedro mentioned, we haven’t reached a decision on whether to proceed with a transaction. We’re exploring options, making it premature to speculate on how any proceeds may be allocated. Generally, we believe our capital structure is sound. If a transaction does yield excess cash, evaluating options like buybacks or distributions will be on the table.
Kaio Da Prato — Analyst
Thank you, Lia and Mateus.
Lia Matos — Chief Marketing Officer and Chief Strategy Officer
Thanks, Kaio.
Operator
Next, we have a question from William Barranjard with Itau BBA.
William Barranjard — Itau BBA — Analyst
Thank you for taking my question. I wanted to ask about the potential sale of your software assets. Could you elaborate on which companies you might consider selling to? You mentioned seeking a commercial partnership if a sale occurs. Does that exclude companies with acquiring capabilities or existing partnerships in that area?
Mateus Scherer — Chief Financial Officer
Thank you, William. Regarding commercial agreements, we currently collaborate with various software firms through an exclusive partner program. If we move forward with a transaction, maintaining these partnerships will be critical to our decision-making process. Now, could you clarify your second question?
William Barranjard — Itau BBA — Analyst
My concern was whether potential buyers would automatically exclude firms already engaged in payments. However, that seems clear.
Pedro Zinner — Chief Executive Officer
At this stage, we cannot disclose specific details regarding potential buyers. However, I can confirm strong interest in our asset from over 20 entities, including both strategic firms and financial investors. Discussions are ongoing.
William Barranjard — Itau BBA — Analyst
Thank you for clarifying.
Operator
Next up is John Coffey with Barclays.
John Coffey — Analyst
Thank you. John here. I have a question concerning the impact of the SELIC rate on pricing. Reflecting on past years, when SELIC soared to around 13.75%, there were notable pricing adjustments made by you and your competitors. With the current trend of rising rates, what are your thoughts on necessary pricing changes, particularly any steps taken in Q3 and plans for 2025?
Mateus Scherer — Chief Financial Officer
Thank you for your question, John. Pricing has become a dynamic aspect of our operations. We assess our client base monthly, considering various factors including product usage and economic conditions to decide on price adjustments. With interest rates on the rise, we anticipate more frequent repricing actions moving forward. While we may not see immediate effects from these adjustments in Q3 and Q4, the expectation is to reflect those increases in our pricing strategy as time progresses.
John Coffey — Analyst
Thank you for your insights.
Operator
There are no further questions at this time. This wraps up our Q&A session. Any unanswered questions will be addressed later.
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StoneCo’s Earnings Call Concludes with Positive Outlook
Final Thoughts from CEO Pedro Zinner
CEO Pedro Zinner thanked participants during the call and expressed hope for continued engagement in the next quarter.
Pedro Zinner — Chief Executive Officer
“Thank you very much to everyone for participating in the call. I look forward to connecting with you all again next quarter. Thank you.”
Operator
[Operator signoff]
Duration: 0 minutes
Participants on the Call:
- Pedro Zinner — Chief Executive Officer
- Lia Matos — Chief Marketing Officer and Chief Strategy Officer
- Mateus Scherer — Chief Financial Officer
- Tito Labarta — Analyst
- Daniel Vaz — Safra — Analyst
- Mario Pierry — Bank of America Merrill Lynch — Analyst
- Neha Agarwala — HSBC — Analyst
- Jamie Friedman — Analyst
- Guilherme Grespan — JPMorgan Chase and Company — Analyst
- Renato Meloni — Autonomous Research — Analyst
- Kaio Da Prato — Analyst
- William Barranjard — Itau BBA — Analyst
- John Coffey — Analyst
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