StoneCo Ltd

NASDAQ:STNE

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the StoneCo First Quarter 2019 Earnings Conference Call.

By now everyone should have access to the 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 free cash flow. 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 to appear in today's press release.

Finally, before we begin our formal remarks, I would like to remind everyone that today's discussion will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and, therefore, you should not 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 on 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, Investor Relations Executive Officer at Stone. Please proceed with your presentation.

[Rafael Martins, Investor Relations Executive Officer]

Good evening, everyone, and thank you for joining us today. Today, I have here with me Thiago Piau, our CEO; Marcelo Baldin, VP of Finance; and Lia Matos, Chief Strategy Officer.

After having announced some preliminary metrics for the first quarter of 2019 by April 1, we are announcing today our full financial results for that period. We are also announcing today that our Board has approved a share repurchase program of up to $200 million.

Before I comment on the first quarter 2019 results, I would like to turn the call over to Thiago. Thiago?

[Thiago Piau, Chief Executive Officer]

Thank you, Rafael. Good evening everyone. Thanks for joining us for our first quarter earnings call.

In the first quarter of 2019, we continue to deliver strong results and make great progress in our strategic roadmap. We are very proud of the way we started this year and pleased that our financial results came in even stronger than we expected, when announced our preliminary numbers on April 1.

In the first quarter of 2019, our revenue and client base increased year-over-year by 86% and 93% respectively. And we achieved a record adjusted net margin of nearly 35%. The business continues to perform very well across the board and we are taking market share.

We would also like to highlight our performance on two main fronts: first, the evolution of our card payment business and expansion through the hubs; and, second, the important progress we have made in our goal of empowering our clients with the introduction of new solutions that go way beyond payment.

So, let me discuss some highlights in our payment business and our expansion. We are very pleased with the continued evolution of performance of our hub strategy. We have seen a continued ramp-up in Stone hubs both in [indiscernible] within a lifetime value to cost of acquisition ratio of approximately 10x. Given the strong economics, we have decided to further invest in our Stone hub development in the second quarter. We expect this to bring returns in the second half of the year.

Also, we continue to grow our presence in digital, offering a complete suite of solution to ecommerce companies, marketplaces, payment services providers and independent software vendors. We believe that our end-to-end technology platform combined with our software offerings put us in a strong position to enable our brick-and-mortar SMB merchants to incorporate more and more digital commerce.

We keep creating new solutions to help our clients sell more effectively and with a better experience online. For example, we just started offering a customized prepayment model which helps marketplaces attract new sellers and have a more assertive prepayment price strategy.

We currently serve, 108 integrated partners. To continue to strengthen our leadership with these companies, we recently launched, the Stone partner program where entrepreneurs can access our platform and integrate through our APIs quickly on their own. With this program, we intend to incorporate new partners as well as strengthen our relationships with developers and software providers.

Now let's talk about important progress we have made in new solutions that go beyond payment. We added in the quarter three important software applications to our suite of solutions; Collact, a customer engagement in CRM solution designed to help merchants sell more by increasing customer recurring traffic and to help them better understand their customers preferences; VHSYS, a self-serviced and omni-channel point of sale in ERP platform focus on supporting different types of retail and service businesses. And Tablet Cloud, a white-label point of sale in ERP system focused on SMBs simpler needs.

We now have over 32000 clients that use at least one type of software service that we offer. This number includes 18,000 clients from VHSYS and Tablet Cloud and over 14,000 clients that use either Equals Raio-X, Collact, Linked Gourmet or our online and offline gateway software.

As a reminder, the majority of those clients are not included in the nearly 310,000 active clients that we have disclosed in our release as those only refer to clients processing payments with us. We currently have two main avenues to grow software. The continued rollout of existing solutions and the addition of new solutions through M&A. In either case, it is very important to keep the offer very simple for clients to understand and not to disrupt their operations providing a single and integrated client experience. These help us to keep the best NPS levels.

It is also important to have a seamless sales process in order to keep the high productivity levels of our sales people. Under our inorganic software strategy, the pipeline of opportunities has improved significantly as more entrepreneurs want to be part of the ecosystem we are building. However, these investments are always done with a lot of diligence from a cultural technological and financial standpoint. So, when we bring these new solutions to our portfolio, they usually have a lot of synergies with the company.

We not only bring the new solutions to our existing client base, but also cross-sell payments to the new software client. Despite being filled with early beginnings; the software strategy is our next growth horizon.

As illustrated on Slide 5, many Brazilian merchants still use our Archaic Management Tools and we are very pleased to see how we are helping our clients with their business in different ways on a daily basis.

On Slide 6, we show some examples. First, on the [indiscernible] store in the countryside of Mato Grosso do Sul where the client use it to work with the same acquirer for many years and through an external audit show that you will spend over R$500 more than what you agreed upon his provider every month. That's when the merger decided to hire Stone and now uses Equals Raio-X and our payment solution saving time and money by having integrated solution for payments and reconciliation with full transparency.

Another interesting case is a steak house in the countryside of São Paulo by installing Equals Raio-X, the client found out that a food voucher was depositing his money in the wrong bank account. Fixing this mistake, the client recovered R$30,000 corresponding to 18 months of incorrectly routed deposits.

In addition, these clients realized they were using automatic prepayment through another payments provider paying higher rate than they originally thought. As shown in the Slide 6, Equals Raio-X helped merchants become more productive by providing them with a proper tool to reconcile multiple payment methods and understand better their cash flows, saving them time from collecting and reconciling paper receipts as traditionally done in Brazil.

In addition to saving time, Equals reconciliation softer has identified over R$40 million in incorrect fees being charged to our clients in 2018. Since the early days, Stone has always advocated for transparency in rates to make it simpler for our clients to manage their business in an efficient way. Offering Equals reconciliation software is one of the ways we materialize this belief.

Another software service we provide is Collact, a bakery client in São Paulo created a loyalty program with Collact and saw the traffic of members of the program was over 30% higher than non-members. Overall traffic at the bakery increased nearly 8% besides that Collact enabled the merchant to have more data about its customers allowing them to create targeted marketing campaigns and track revenue generated by them.

The last example is a restaurant in the countryside of São Paulo state. The restaurant changed its former ERP and POS software for the combined solution of Linked Gourmet. Equals Raio-X and Stone payments. Now he has access to an integrated and more flexible platform to manage back and front house deliveries as well as manage in the individual productivity metrics of the employees. Besides that, the client can rely on only metered free training on the platform and a 24/7 customer support.

With software, we aim at becoming a platform that addresses multiple pain points that our clients have, from managing their back office and financial processes to attracting more customers and make them more loyal. We will seek to develop this ecosystem by investing in the best quality software. We have great teams of entrepreneurs that dream big like ourselves.

Set solutions makeover specific functionalities and business needs such as CRM and reconciliation as well as the complete ERP and POS solutions for specific verticals and market niches. Besides software, in the first quarter, we launched our credit pilot, which has three important components. First, a transparent pricing that is simple and easy to understand. Second, it is a non-bureaucratic process of taking credit. And finally, clients pay back their loans with a percentage of their sales a model which is aligned with their business. We believe this solution will support our clients when they need funding to grow. Initial feedback, usage and economics have been very encouraging. We also made important advancements in our Stone account banking services pilot opening thousands of accounts and offering features such as wire transfers, payments of letters, payment of taxes among others.

It is important to highlight that regarding our banking platform, we are closely following the international standards and guidelines to build the first open banking API directly connected to the main backbone of the Brazilian Central Bank. This means we are providing partners with access to an infrastructure that until recently was restricted to banks. This allow us to focus on two main avenues of growth regarding the banking services.

One, to become the digital banking solution for SMBs targeting all of their needs and second to be the platform of choice for players who wish to embed fast payments and cash management capabilities in their consumer facing solutions such as wallet. Much like payments we've developed our banking platform from scratch based on the most up-to-date standards and we have the capability that will enable us to be a relevant participant in the market.

Once again, we are following the valuable lesson of how proprietary technology allows for innovation and quick responses to adapt to the changes which will continue to happen in Brazil.

Now, I wanted to talk a little about the most important asset we have here at Stone, our people. We are very proud of have been able to create a team of nearly 4000 passionate and entrepreneurial minded people with a purpose to serve merchants better. Two of the most important things in our culture are the fundamental beliefs that our clients drive everything that we do in an ownership mentality that permeates the entire company. We have absolutely no doubt that this makes total difference when serving our clients in the frontline of the business.

We just got back from our annual sales convention which together with Recruta Stone, our semi-annual recruitment event are our most important cultural events of the year bringing together thousands of talented Stone employees from across the country. Recruta Stone is part of the commitment with highly motivated and talented people with high potential, training leaders in our culture and hiring practices and improving the Stone brand as an employer which are all crucial for our success. We had nearly 39,000 applicants for this edition of Recruta Stone.

Our sales convention is a big event for culture alignment and most importantly focused on client centricity. We have made available a short video of our annual sales events in our Investor Web site, so that you all could get a sense of what makes this company so special. Before I turn the call over to Rafael, I would also like to share some thoughts on the competitive environment as many investors ask this about that.

We have seen many so-called zero rate and aggressive pricing campaigns in the payments industry in Brazil since we started our operation. Aggressive initiatives to recover lost share from largest providers is nothing new. Despite these efforts in the past, we have seen limited impact to our business, which has continued to produce growth, market share gains and improvement in margins.

In the first quarter of 2019, we estimate to have gained approximately 0.5% market share compared to the fourth quarter of 2018.

As I have explained it before, we believe our value proposition helps enable us to gain market share without the need to learn new customers with non-transparent pricing or to force clients to accept products they don't want. Instead we are building an ecosystem of solutions in the software, payment, banking and credit space that not only resonates with clients’ daily needs, but are integrated both in terms of technology and customer service.

We are not changing our business or pricing strategy, but we continue to monitor real-time KPIs that can indicate to us if that the change to our operation are necessary. We currently have metrics like sales productivity, cancellation, renegotiation requests on track with our internal projections that were put in place at the beginning of the year.

We look to keep growing and improving our business every day. We believe that focusing on the value proposition to clients pace off as it increases their lifetime value with us either through a higher share of wallet or through higher stickness.

As an example, during the first quarter '19, clients using at least one of our software solutions combined with payments presented significantly lower churn levels when compared to clients using no software. We strongly believe that a combination of assets we have developed the distribution, technology and service put us in a unique position to become the partner of choice of SMBs. As I mentioned before, our whole company is focused on addressing their main pain points and helping them sell more manage better their business and growth.

This year we expect some of our additional solutions to start ramping up faster, like Equals Raio-X, Collact and our Stone banking accounts. These should present faster rollouts due to their horizontal nature and their stage within our distribution platform.

Finally, I wanted to express my gratitude to the entire Stone team for all the hard work the quality of our team is impressive. They always put our clients needs in first place and have a deep ownership mentality that makes us very proud and they always keep raising the bar in terms of execution.

I also would like to thank our long-term shareholders that have supported our strategy during this noisy and short-term volatile market. We have learned during our journey how important it is for disruptors like Stone to have a strong purpose in which the whole company really believes. Whenever you have great people working together towards a big goal. I believe it is much more about why rather than what. Our mission-driven purpose and disciplined focus of improving the lives of our clients has contributed greatly to our success and has enabled Stone to generate value among different stakeholders in a balanced way over the last few years, our clients, employees, our long-term shareholders, and the overall society.

With that, I turn it over to Rafael to provide more details on the performance.

[Rafael Martins, Investor Relations Executive Officer]

Thank you, Thiago.

As Thiago mentioned, we continue to gain market share, grow fast and improve margins at the same time. During the first quarter, we grew our number of active clients by 93% compared to the same period last year reaching nearly 310,000 active clients. This quarter, our net addition of clients surpassed 40,000 clients for the first time.

Total revenue and income increased by 86% to R$536 million in the first quarter of 2019 compared to R$288 million in the first quarter of 2018. This was mainly driven by our year-over-year increase of 87% in net revenue from transaction activities and other services and 85% increase in net revenue from subscription services and equipment rental and a 68% increase year-over-year in financial income.

Cost of services was R$85.4 million for the first quarter of 2019, an increase of 20.5% compared to the first quarter of 2018. Cost of services as a percentage of total revenue and income was 15.9% in the first quarter of 2019 and efficiency gain of 8.7 percentage points from 24.6% in the first quarter of 2018. This efficiency gain was seen in most categories especially transaction and deployment costs, personnel costs and provisions and losses as the company dilutes the fixed costs related to its proprietary technology platform and gains operating leverage in customer service and logistics.

Let me give you an example of how we are gaining efficiency in logistics delivering a better service at a lower cost. The average time of delivery, installation and support by the [GreenAngel's] [ph] improved by 20% year-over-year being less than one working day. This reduction was made in parallel with increased productivity and reduced costs. As the cost for GreenAngel visit reduced by 31% year-over-year.

Moving onto administrative expenses, in the first quarter of 2019, it increased by 10% year-over-year to R$64.8 million. The increase in administrative expenses is primarily attributed to growth in third-party services and facilities expenses to support the company's growth. Administrative expenses as a percentage of total revenue in income was 12.1% in the first quarter of 2019 compared to 20.5% in the first quarter of 2018, an efficiency gain of 8.4 percentage points in the period.

Certain expenses grew by 66.5% year-over-year reaching R$62.7 million in the first quarter of 2019. This was primarily due to additional headcount in our sales team in line with our strategy to grow in the hubs. Financial expenses were R$66.6 million, 2.8% lower than the first quarter of 2018. Financial expenses as a percentage of financial income reduced from 45.8% in the first quarter of 2018 to 26.5% in the first quarter of 2019. This reduction is explained by lower cost of funds due to lower base rates, cheaper funding lines contracted by the company and use of a higher amount of own cash to fund pre-payment operations.

As a result, our adjusted net income was R$186.3 million in the first quarter of 2019 with a margin of 34.8% compared to R$26.5 million in 2018 and a margin of 9.2%. The main factors that contributed to the growth in adjusted net income were increase in total revenue and income primarily due to higher TPV intake rate by focusing on growing the company's base of SMB margins, operating leverage in most lines especially costs of services and administrative expenses and reduced cost of funds as the company switched to cheaper funding and increased the use of own cash to fund the prepayment operation.

Overall, we have seen strong operating leverage. Our costs and expenses have decreased from 58.1% of total revenue in the first quarter of 2018 to 39.7% in the first quarter of 2019. Important to highlight that our P&L carries the investments related to hubs that have not yet fully contributed with their revenue potential.

And finally, the company generated R$108.8 million of adjusted free cash flow in the first quarter of 2019 compared to R$21.2 million in the first quarter of 2018. The main reason for that increase was an improvement in our adjusted net income year-over-year which was partially offset by higher outflows from income tax paid and other accounts payable.

With that said operator we will open the call up to questions.

[Operator]

Thank you. [Operator Instructions] And the first questioner today will be Felipe Salomao with Citibank. Please go ahead.

[Felipe Salomao, Citibank]

Hi, good night, Rafael and Thiago thanks for the question. I have one question on the credit product and also on the new banking lock rules. Are the new banking lock rules working properly in a way that the Stone has been able to offer credit facilities to its customers with no restrictions or this system or the industry is not at this point yet and are you still noticing some friction points between the Stone and the systems of lost income and banking income and merchant acquirers, which have been restricting Stone's appetite to lend money. That's the first question.

And the second question is, if you could share with us perhaps some big picture numbers about the potential revenues that the new credit product could bring to the company on a yearly basis let's say 2, 3 years from now. Only one is possible. These are my questions and thank you for the opportunity.

[Rafael Martins, Investor Relations Executive Officer]

Hi, Felipe. Rafael here. Thank you very much for the questions. I would answer your second question. The first question we -- the sound was not very good, if you could repeat the beginning of the question please. But I would talk regarding your credit question. I think we are still in the early beginning of the credit pilots. What we're seeing so far are great economics and we see it working very well in our pilots. So, the latest number that we've mentioned is over 150 clients in the pilot. When we look at the economics we see very attractive rates even considering the different risk reward equation.

I mean better than what we have been seeing in for example. So that now we are working on getting this solution very seamless to the client in a way that is a simple, transparent and in which they can pay for example with their sales, which is something sort of unique in Brazil. So, it's too early to talk about the full potential, we see the addressable market as we have mentioned before very big and effective and it's the big pain point for our clients. So, we need to address it.

And if you could please just repeat your first question that we couldn't hear well at the beginning of the question please.

[Felipe Salomao, Citibank]

Yes, sure, Rafael. Hope you can hear me better now. I asked about the banking lock, if the new banking lock system is already properly working and is Stone has already been able to connect its systems with the rest of the industry in a way that you have been able to offer the new credit facilities using the new regulation would significantly reduce the risk. Or if we are not at this point at yet and if Stone and the industry still needs to work on a solution to make the new banking lock work properly. This was my first question. Hope you could hear me now.

[Thiago Piau, Chief Executive Officer]

Felipe, thank you. So, we are already connected to a clearinghouse called swift that make 100% compliance with the new rule of the central bank. Of course, the operational [indiscernible], the final goal of this rule, it was not achieved in the out, because some trades do not exchange information. But, we see the Central Bank the effort on this front is a very positive toward the market enforced on operationally speaking nothing has changed in our business so far.

In our operation of providing credit to our clients, at this point we are doing this through a third-party bank that takes this information about the lock of receivable into consideration and we expect that once the industry, they have the full maturity of those solutions. It will be very good to use this new lock of receivables arrangements in our side. That will be very positive to us mainly because we originate the receivables on the clients, we are very close to them. So, we think to be the first one to provide solutions to them.

So, we believe that with the new rules, it creates more ability for us to compete with the prices. When you compare prices of credit and prepayments and credits are much higher. So, the way that we set our operation is, we can fulfill working capital needs with prepayment. But whenever the clients need credit to grow more, we can provide that fee the KPI that they have we brought some of this third-party banking providers and take into consideration all the information relative to these banking lock agreements which in our perspective works in our favor as the company -- as the industry get matured.

[Felipe Salomao, Citibank]

Okay, Thiago. Thanks for the answers.

[Thiago Piau, Chief Executive Officer]

Very much Salomao.

[Operator]

And our next questioner today will be Mario Pierry with Bank of America Merrill Lynch. Please go ahead.

[Mario Pierry, Bank of America Merrill Lynch]

Hi, everybody. Let me ask you a couple of questions as well please. First one, as you mentioned, right, your peers have been announcing several new initiatives where they seem to be reducing their prices especially of prepayment rates. So, I wanted to hear from you. You mentioned you're not going to follow them. I like to hear from you then. What does this mean? Does it mean that your prices that they are in line with your peers or below your peers? Or is this having any impact on your churn rates? If you can give us some color on that.

Second question is related to this hub expansion that you said that you're going to accelerate your expansion, if you can give us some more color like number of hubs that you plan on having by the end of the year. What does it mean for additional costs? And where do you plan on opening these new hubs? Are you going to be expanding in other regions or in other geographies in Brazil? Or are you going to be primarily in the southeast of Brazil? Thank you.

[Thiago Piau, Chief Executive Officer]

Hi, Mario. Great question. Thank you very much. This is Thiago speaking. So, I will try to separate answer in three main fronts, which is this competition take rates and then talking about this further investments on the hubs. So, our perspective in terms of movements that they are doing much more in marketing campaign with us so-called zero prepayment rates that reality is just a different way to try the merchant. The market recognizes as what we call set NDRs in which the embedded prepayment rate in the NDR. And then try to move the overall price in an attempt to grow the client base, exactly like all these companies have done in the last 18 months.

At this point, we are not seeing signals in our operation that these campaigns actually affects our strategy and our ability to grow. So, we are measuring as we said right KPI very broadly, but we decided not to change our pricing policy or business strategy. We really believe that providing a superior value proposition to our customers with the best customer service really pays off and we have seen this every day in the streets being present at the counter of our merchants.

We really believe in our ability to show our clients that work has to pay a little bit more to have access to these world-class products and the best personal relationship. We are really helping them to manage their store better to run their business better. So that's why we decided to keep our value proposition and keep our strategy regarding price and we are not seeing any kind of impact in our ability to grow in our everyday KPI in our operation.

Regarding take rates, I think the take rates can grow likely up or down in the short-term because of clients mix that's been created for seasonality. If you are not seeing any type of impact from the take rates at this point neither in the first quarter or the second quarter by the days that we already have by the numbers that we have in the second quarter expect take rates to be stable.

In the medium to long-term we expect take rates to go up add new solutions ramp up. Taking a little bit about the investment zone the hubs. We see better [indiscernible] economy in the hubs and at this point we have management capabilities that allow us to locate what the outlook towards the hub strategy in order to grow that. So actually, what we expect is more investments in the sales and marketing and some of the administrative expense that we produce better net adds and better TPV for this year.

Remember that the hubs [indiscernible] very tough. As you have disclosed in the past every time we invest in the hubs, it is important to see that we [indiscernible] that results future growth and very strong returns. The payback of the hub is considerably less than one year. So, given the results that we have seen, our management capability we decided to deploy a little more capital to grow faster and it will produce returns there with us and we expect margins for the year to be in line of what we have. But we want to grow warrants of net adds and TPV and we know that we have the ability to do so.

[Mario Pierry, Bank of America Merrill Lynch]

Okay. Just see if I can follow-up. Then, if you can give us a perspective how many hubs you have? So, it seems to me then you are investing in the existing hubs primarily rather than opening new hubs?

[Rafael Martins, Investor Relations Executive Officer]

Hi, Mario. Rafael here. So, that's right. So, the latest number we would grow this 245 hubs by January this year. We are opening more than two hubs per week. So, we would see that number accelerate significantly. We're investing in both the next 50 hubs in current regions and in new regions. So, I think when we look at this, we should see the impact and the impact in our additions and TPV.

[Thiago Piau, Chief Executive Officer]

Mario, [indiscernible] hubs that we have we can create more density as we learn it. We have more clients in some regions than we have expected in the past. So, we decided to invest a little bit more. But we are mainly focused on keeping this mission of opening hubs on very efficiently working through the year. So, we have opened more hubs to cover more cities.

[Mario Pierry, Bank of America Merrill Lynch]

Okay. And just remind me, you informed that your geographic distribution within Brazil. Are you already operating northeast of Brazil, or are there any plans of expanding outside of the southeast in the short-term?

[Thiago Piau, Chief Executive Officer]

Yes. We do have operations in the Northeast and the Southeast. So, we have operation in both. At this point we are covering 1/3rd of the Brazilian cities. Lia, what is the number of cities that we're covering at this point?

[Lia Matos, Chief Strategy Officer]

1500.

[Thiago Piau, Chief Executive Officer]

Something around 1,500, right? We are covering something around 1,500 cities in Brazil. But we still have a lot of opportunity to create more density on the cities and we seek to open hubs -- next to the hub is that we have already opened before mainly because of word of mouth that creates quality marketing effect that's why we do not invest a lot on marketing, when we set it up a hub. So, we will continue to grow our ability to cover more cities and penetrate more cities that we are. Do you want to add Lia?

[Lia Matos, Chief Strategy Officer]

Yes. Just to compliment we are in all regions of Brazil. We have hubs in all regions.

[Mario Pierry, Bank of America Merrill Lynch]

Okay, great. Thank you very.

[Thiago Piau, Chief Executive Officer]

Mario, thank you for the good questions.

[Operator]

And our next questioner today will be Eduardo Rosman with BTG Pactual. Please go ahead.

[Eduardo Rosman, BTG Pactual]

Hi, guys. Two questions here. The first one is on the profitability, right, the company has been showing impressive bottom-line profitability like LTV to CAC ratio is very high at 10x. So, my question is, do you think you could deliver -- you could be delivering stronger growth in number of clients [indiscernible] if you are investing more or reducing prices? I'm asking that because the big success you have in those definitely calling the attention of several comparisons, so if you have this kind of a discussion internally about IT delivering more growth to eventually benefit from that more in the medium to long-term.

And the second question is on your strategy on instant payment and the strategy outside Brazil, I think today we saw Itau launching a new platform with the aim of promoting Eastern payments right as a tool to populate to know the platform and attract customers. It was also reported I think in the press that Stone was speaking to the regulators in Chile. So, if you can give us an update you know about the strategies in these two businesses? Thank you very much.

[Thiago Piau, Chief Executive Officer]

Thank you, Rosman. Thank you for the great questions. So, I'd try to cover [indiscernible]. So, first part it was about the growth. Yes, we believe that we have the ability to grow faster in terms of net adds and TPV. And I expect to show this throughout the quarters. We only think that we're always having to remind peers that we have to grow quality, so there is a right base of growth that we have to keep. We definitely expect to have better net adds and better TPV admission on a quarter-over-quarter basis. That's why we said that we want to invest more in the hubs. But we don't want to do this at this point by reducing price. We believe in our ability to show better value proposition. And while we're growing, we're creating a culture in our team.

So, we want to maintain our quality, we want to maintain our culture, value proposition. So that's why we decided not to lower price to grow. We will invest more in our channels. We can use the addition of software. We can subsidize the addition of software to show much more value proposition with kind of the same degree that we have and over time we can use those additional software to bring more discreet. But, we don't want to reduce the price of the core product. We really believe that working for the client to have access to all of the customer service and everything that we're offering for the product that we are charging at this point as we think to grow faster.

Second part, I think it was about the instant payments and how we see players in instant payments. So, regarding instant payments we have seen many players creating closer teams to like changing the way that consumers do transaction with cards. And in here, I think that first we have to separate the merchant business of the card business. We feel ourselves -- as a feedback as a technology company that provides financial solutions to merchants. So, our role is to allow our merchants to accept operating assets by authorizing and value the risk of the transaction, understanding optimizing cash flow, helping them to understand the fees they are paying but everything for them.

Instant payment solutions in our perspective may disrupt the card business both in issuance and card teams. And we believe our major merchant base offers a strategic advantage for us in this scenario. So that's why we want to grow our client base as fast as we can.

Talking about the Brazilian reality, all these teams that operate about R$20 billion in volume are obligated to be open schemes as defined by the central bank regulation which means any issuing state institution would be able to reach for that specific payment method. And any merchant acquiring or merchant payment institution can allow its merchant to accept that specific payment methods. So, we see the way that the industry is structured in Brazil. That's a very positive one because it presents a different pricing both to consumers and merchants. And we see that it forces competition.

Moving ahead, we'll support the [indiscernible] of the market by providing opening bank infrastructure that we are building. We expect to be the platform for startups in 2018, all consumer facing solutions with transactional activities. So, it's still very, very early to say exactly what this instant payment actually means operationally speaking to the merchants, but we believe in our ability to allow them to accept all payment methods, understanding cash flow, see all the rates. So that's our goal in this industry.

I think the third question was about the international discussions. Yes, talked sometimes to understand the regulation standpoint and the market standpoint here in Latin America. But, at this point, we are mainly focused on Brazil. We think that in capital allocation metrics being focused on Brazil in the next one to two years is the best move that we can give you.

[Eduardo Rosman, BTG Pactual]

Thank you, Thiago for the great answers.

[Operator]

And our next questioner today will be Craig Maurer with the Autonomous Research. Please go ahead.

[Craig Maurer, Autonomous Research]

Yes. Hi. Thanks for taking the question. You spent a good amount of time talking about the software solutions that you are using to grow share and provide any greater value proposition. My question is whether or not you're seeing any urgency from the incumbents to invest in enhanced software solutions to match your offering and whether you see that as a risk?

[Thiago Piau, Chief Executive Officer]

Hi, Craig. Thank you for this great question. It's Thiago speaking. Actually, we are not seeing the incumbents in terms of the payment competitors trying to do the same type of offering with software. What we're seeing actually is some of the software players again reveal trying to create a bundle services as payment. But within our ability to provide the best offering to the customer. So that's actually how we see the industry in a very positive way. So, we see incumbents to push on price, but we are not seeing any efforts regarding products or better customer service or software solutions that can help merchants. On that front, I think that we keep being the main player pushing the strategy and put these out there through our hearts to our customers because we really believe that the combination of software and payments, when you really understand how the transactional [indiscernible] of the merchant happens and you have the ability to provide 100% support for them in a very easy simple way very fast creates all the difference. So, we're still not seeing the incumbents making a move towards this direction at this point.

[Rafael Martins, Investor Relations Executive Officer]

Trying to add to Thiago's point, Rafael here Craig. We don't see players out there offering the software payments credit and banking offerings in an integrated way. So, whenever you do have some softer competition, it is separate from the obvious solutions offered to merchants. So, what we intend to do is offer an integrated solution both in terms of technology and in customer service so, so the clients can reach out to us in a very simple way if they have any issue or any questions regarding any of those solutions. So, we don't see other players doing something like that and offering a search integrated solutions.

[Craig Maurer, Autonomous Research]

Thanks. If I can just ask one follow-up, Cielo had discussed the addition of 1,500 new salespeople and what I was curious about was, are you seeing a concerted, organized effort from that group or has that not been highly recognizable yet in the market?

[Thiago Piau, Chief Executive Officer]

Good question. At this point we are not seeing this impacting our operation actually, when we see results in the street every day. And we don't believe that when we talk about the distribution to what we have built in the hubs, we think this is not about number of people, I think that it is about the culture that we have, the purpose of our business, the value proposition that we bring to the customer is the combined solution of the [indiscernible], the GreenAngel, the customer service agent, the platform that we have built that allows our people to offer a solution in the service right away -- the very best quality possible. So, I don't think that it's only about number of people in the streets. I think that is about the combined platform that we have put it together.

So, yes, we saw that our competitors are trying to put more people in the streets, but I think that the client will really like our product and our service and that's what creates all the difference.

[Craig Maurer, Autonomous Research]

Okay. Thank you.

[Operator]

[Operator Instructions] The next questioner will be [indiscernible] with Credit Suisse. Please go ahead.

[Unidentified Analyst]

Hi everyone. Congratulations on the results. I have two questions if I may. The first one is regarding the operating leverage. How further do you think you can get from the operating leverage via growing TPV without growing the personnel expenses? Or in other words, how much TPV can you get with the same workforce that you have today?

And the second one, I would like to understand a little better the rationale behind the 200 million buyback program that you have just announced considering that the stock price is still above the price that the IPO came out. And the announcement coming shortly after a follow-on in early April? Thank you.

[Rafael Martins, Investor Relations Executive Officer]

Hi, [Aftab] [ph]. Thank you, Rafael here. So, regarding your first question on operational leverage, I think -- we have said before, we do have a lot of SG&A in our P&L that is front loaded. So, if you look at some tracks that we have provided just recently you see that -- if you see the vintage of our hubs, you still have a lot of potential to add new clients with the same sort of SG&A structure. So, with the current structure that we have potential for additional TPV. But as Thiago mentioned, we're not -- I mean we intend to grow more, right. So, we expect to invest further in the growth of our hubs. And whenever we invest further you us first. But, the average age of our hubs nowadays is around one-year. And you can see the client ramp-up of the vintage, of hubs you can see that there's a lot of potential to bring new TPV with the current hubs we have, right. So that's, for example one of the reasons why you see such operational leverage in the first quarter because of that effect of hubs maturity and bringing new TPV with the same structure.

Regarding your second question on the buyback, I think that there was an additional lever that we'd like to have to generate value for shareholders. I think this is an optionality that management believes is very important for us to have given the stock price volatility. And there's no specific timeframe to execute a buyback. But we believe this is the lever that we have to have. That we generate a lot of value to shareholders as well. So, that's why we announced the Board approval of that share repurchase.

[Unidentified Analyst]

Very clear, Thiago and Rafael. Thanks, again and congratulations on the results again.

[Operator]

And there looks to be no further questions at this time. This will conclude the question-and-answer session. And now, I would like to turn the conference back over to Mr. Rafael Martins for final considerations.

[Thiago Piau, Chief Executive Officer]

Hi, everyone. Thiago speaking. Thank you very much for having the time to do this call with us and to further study our company we're very happy and very excited with the results in this first quarter. And we see a lot of opportunity in the quarters ahead of us. So, thank you very much for all the support, all the long-term investors that have supported us, 2019 is a great year for the company. Thank you very much. Rafael, you want to say some words?

[Rafael Martins, Investor Relations Executive Officer]

Yes. I'd like to thank you all. We're always available for questions if analysts and investors have follow-up questions please let us know. Thank you very much for participating.

[Thiago Piau, Chief Executive Officer]

Thank you, guys. Bye-bye.

[Operator]

And the conference has now concluded. Thank you all for attending today's presentation. And you may now disconnect your lines.