StoneCo Ltd

NASDAQ:STNE

Earnings Call Transcript 2024-Q1

[Roberta Noronha, executive]

Thank you, operator, and good evening, everyone. Joining me today on the call is our CEO, Pedro Zinner, our Chief Financial and Investor Relations Officer, Mateus Schwening, our Chief Strategy and Marketing Officer, Lia Matos, and our Head of Credit, Gregor Ilg. Today, we will present our first quarter 2021 results and provide an updated outlook for our business. I will now pass it over to Pedro, so he can share some highlights of our performance. Pedro?

[Pedro Zinner, executive]

Thank you, Roberta, and good evening, everyone. I would like to begin by briefly talking about our first quarter 2024 results, which I believe are the kick off to a great year ahead of us. Our business continued to grow strongly, while we kept on delivering our strategic priorities. In Financial Services, we performed well across all of our client offerings. Starting with payments. We posted strong TPV growth, including PIX and nearly matched the same volumes from the holiday shopping season in the fourth quarter. This quarter, we launched instant payments in Ton, fulfilling a key request from our micro-merchant clients. In banking, we continue to show progress in onboarding new and existing clients through our bundled banking and payment solutions. And today, approximately 80% of our active client base as our bundled offering. A couple of highlights I'd like to make are the start of our pilot with credit cards in tone and the evolution of the banking solution for SMBs in Stone with features such as PIX [indiscernible] for our clients to simplify their workflows around paying their employees. And finally, our credit solution continues to grow according to plan. We maintain our conservative approach, but testing different client profiles to grow while making sure we balance our credit model. We have set up a specialized desk to offer credit to larger clients with TPV above R$500,000 per month, and this is just getting underway. Now let me shift to our software business, which performed well this quarter, so in progress versus our previous quarter results and in line with our strategic priorities. Our vertical software grew well in the first quarter with an annual revenue increase of 12%, which was purely organic. Our enterprise software remains a detractor, moderating our total software revenue growth, considering that we're not emphasizing this part of the business. However, the strong performance in our vertical software, combined with our efficiency efforts continue to drive total profitability in this segment. As we discussed in our Investor Day, we will continue cross-selling financial solutions into areas of our software client base and evolve on creating software and financial services by [indiscernible]. In 2024, we are focusing on the retail and gas station verticals, the latter being a highlight in the quarter. In summary, I was pleased with the direction of our first quarter 2021 results, and I think we remain on track to deliver our guidance for the year. Now I'd like to pass it over to Lia to discuss our first quarter 2024 performance and strategic updates. Lia?

[Lia de Matos, executive]

Thank you, Pedro, and good evening, everyone. As Pedro mentioned, we made progress in the first quarter across our strategic priorities, advancing on critical areas as we progress towards our 2024 and long-term goals. Before we start discussing our main financial highlights, I would like to remind you that from the first quarter '24 onwards, we have changed our internal accounting methodology for membership fees revenues. From now on, membership fees revenues will be deferred throughout the expected life of the merchant instead of being recognized entirely at the time of the acquisition of the merchant. The materials we're presenting incorporate this new internal accounting methodology as of the first quarter of '24. For this quarter, we will also present growth metrics using the previous methodology since this is the first and most impacted quarter. As you can see on Slide 4, our consolidated revenues grew 14% year-over-year, which combined with lower other and administrative expenses led to an increase of 75% in adjusted EBIT despite an increase in selling expenses due to the seasonality of investments in marketing and provisions for loan losses. These factors resulted in adjusted net income increasing by almost 90% year-over-year, reaching an adjusted net margin of 14.6%, up around 650 basis points. Now let's take a look at our Financial Services segment performance on Slide 5 to 9, starting on Slide 5 with the performance of our payments business for MSMBs. Our payments active client base increased 33% year-over-year, reaching almost 3.7 million active clients. Sequentially, this represented a net addition of 205,000 clients. The lower addition of clients compared to the previous year is primarily a result of the fact that we have caught up to the growth levels in the micro segment. As you will see on the pages that follow, besides optimizing our commercial strategy for growth and market share gains, we're also putting a lot of focus on improving our payments and banking bundle offerings to new client cohorts, both in Ton and Stone as well as driving more engagement with our solutions for older cohorts of clients. As you can see on Slide 6, this approach has resulted in profitable TPV growth and market share gains in the MSMB segments. MSMBTPV, including PIX P2M increased 24% year-over-year, excluding PIX P2M volumes, which were more than R$8 billion in the quarter, MSMBTPV increased more than 18% year-over-year. We achieved a strong growth while also increasing take rates by 15 basis points year-over-year to reach 2.54% with material contributions from all of our financial services solutions. We are continuously evolving our pricing and bundle strategy to achieve higher levels of client engagement, and we believe these strong numbers are the result of our competitive advantages in distribution, superior service and our increasing ability to offer more complete solutions to our clients. Moving to Slide 7. Let's discuss our banking performance. Our banking active client base nearly doubled year-over-year to around 2.4 million active clients. This growth was a result of the launch of Super Conta Ton in the beginning of 2023 and the continued activation of banking for Stone clients through our bundle offers. The decrease in growth rates compared to previous quarters is mainly due to the completion of our migration of Ton clients to our full banking solution. Going forward, we expect our banking active client base to grow more in line with the sequential increase in payments gross adds as we continue to effectively bundle payments and banking. This growth in our client base also helped drive a 53% year-over-year growth in client deposits, which reached R$6 billion in the quarter. Despite the seasonal grow-over effects from the fourth quarter and the lower average CDI in the period, ARPC increased to R$29.3 per month, driven by higher average deposits per client as a result of increased engagement with our banking solutions. As Pedro mentioned, this quarter, we made good progress in our product road map, starting to pilot credit cards for Ton clients as well as launching features that help our SMB clients to simplify their cash management workflows, such as paying suppliers and employees. Moving to Slide 8. I will talk about our credit performance. This quarter, we disbursed around R$295 million, reaching a portfolio of almost R$532 million, an increase of roughly 72% quarter-over-quarter. Provision expenses for working capital expected losses totaled R$44 million in the period, resulting in accumulated provision expenses of R$106 million as we are still constituting provisions in the amount of 20% of our portfolio. Although we are doing this conservatively, the performance of our vintages is above our expectations with NPLs between 50 and 90 days of 2.2% and NPLs over 90 days of 1.5%. As we've highlighted before, this is still a recently launched portfolio, so the ratio of [indiscernible] loans should increase as our cohorts mature. This year, we will continue with disbursements without changing our approach towards risk evaluation and close monitoring of market conditions. To summarize the performance of our Financial Services segment, the first quarter was again marked by strong TPV growth and higher take rates, resulting in financial services revenue growth of 16% year-over-year in the first quarter, reaching R$2.7 billion. As a result, our adjusted EBIT reached R$529 million with an adjusted EBITDA margin of 19.5%, which increased more than 600 basis points year-over-year. Moving to Slide 10. Let's talk about our software performance and strategic evolutions. Quarter-over-quarter, the payments TPV of clients that use both financial services and software solutions decreased 13%, primarily due to the seasonal effect in our retail vertical, which is strongly impacted by the higher volumes in the holiday shopping season of the fourth quarter. However, our gas station vertical, which has been a priority focus since last year has a positive performance quarter-over-quarter. These SMB clients have been increasingly receptive to our efforts to provide an end-to-end solution that combines management software, payments and banking. On Page 11, you can see the highlights of the performance of our vertical software business. As you can see, vertical software revenue grew 12% year-over-year. The priority verticals where we're focusing our initial strategic efforts to integrate financial services now account for 47% of total software revenues. Our software solutions in other verticals also had a strong quarter across different products. As a result, our vertical software now accounts for 76% of our total software revenues. In Slide 12, you can see that total Software segment revenue reached R$369 million, but grew lower than our vertical software. This is because overall software revenues include our more mature enterprise business. However, as a result of our focus on vertical software and our efficiency initiatives, our adjusted EBITDA in the Software segment increased to R$66 million in the quarter, up 65% year-over-year, improving our adjusted EBITDA margin by over 650 basis points to reach 17.8% in the quarter. As Pedro mentioned, the first quarter marked the beginning of an important year of strategic advancement for our business trajectory. Now I want to pass it over to Mateus to discuss in more detail some of our key financial metrics. Mateus?

[Mateus Schwening, executive]

Thank you, Leah, and good evening, everyone. I'd like to begin on Slide 13, where we discuss the quarter-on-quarter evolution of our cost and expenses as a percentage of revenues on an adjusted basis. Cost of services reached R$810 million, increasing 12% year-on-year and staying flattish quarter-on-quarter. Sequentially, cost of services increased 160 bps as a percentage of revenues as a result of higher transaction logistics and G&A costs as we grow our client base and higher provision for loan losses, which amounted to R$44 million in the first quarter of '24 versus R$39 million in the first quarter of '23. Administrative expenses decreased 12% year-on-year, leading to a 220 basis point reduction as a percentage of revenues when compared to the first quarter of '23. Sequentially, administrative expenses decreased 16%, down 100 basis points as a percentage of revenues due to seasonally higher personnel expenses in the first quarter and lower third-party services expenses in the first quarter. We remain committed to our guidance of spending less than R$1.15 million in administrative expenses for 2024, which implies a growth of less than 7% for the year. Selling expenses increased 36% year-on-year and 17% quarter-on-quarter, up 220 basis points sequentially as a percentage of revenues. This increase is mainly attributed to higher market investments as a result of a planned sponsorship for a reality television show, combined with higher investments in our sales team. Financial expenses decreased 2.2% year-on-year, leading to a 470 basis point reduction as a percentage of revenues. Quarter-on-quarter, financial expenses decreased 5.5% and remained flattish as a percentage of revenues. Lastly, other expenses decreased 58% sequentially and 230 basis points as a percentage of revenues as a result of lower share-based compensation expenses, which includes a nonrecurring positive impact of R$40 million from the net effect of cancellation and new rents of incentive plans and lower contingencies. Turning to Slide 13. Our adjusted net cash position was R$5.1 billion, reflecting an increase of R$1.2 billion year-on-year and R$87 million for the quarter. Lower when compared to previous quarters as we continue to deploy capital towards the expansion of our credit portfolio and also as a result of seasonally higher cash consumption in labor and social liabilities in the quarter. As we kick starting the year, I believe our first quarter results demonstrate we are executing on our plan, and we remain well on track to deliver our 2024 guidance. With that said, operator, can you please open the call up to questions.

[Operator]

Okay. At this time, we are going to open it up for questions and answers. [Operator instructions]. Our first question comes from Eduardo Rosman with BTG.

[Eduardo Rosman, analyst]

I do have 2 questions here. The first one is on capital allocation, right? We know that you already did a lot, but you still have a lot of exposure to software, right? With many verticals that are not a priority. You own [Tag], for instance, which is seeing a big decline in revenues as you also have a big stake [indiscernible] and potentially other stakes in other companies as well, right? So just wanted to hear from you if there is room to keep improving the capital allocation and the cash position in the following quarters? That's the first question. And the second one, just trying to understand here your expectations for deposits, right? You have a guidance which is above R$7 billion for the year. But you ended the first quarter with R$6 billion, right, which is very good, given the -- that's -- usually, it's a weak quarter from a seasonality point of view, right? So I just wanted to understand your thoughts here if the expectations are now looking conservative for the year.

[Mateus Schwening, executive]

Rosman, thank you for the question, Mateus here. I'll take the first part regarding capital allocation and then pass it over to Lia on the banking side. So on capital allocation, I think it's fair to divide the question in 2 parts. First, I think we mentioned at Investor Day, but we do have a buyback plan in place. At this moment, right, it's a R$1 billion program, for which we did not buy any shares yet. I think the message here is that we remain committed to our long-term targets and therefore, we continue to believe that this is a good alternative for capital allocation. So it's basically a matter of playing the execution for the new product so that we have a solid framework in place in decision process. So that's the first piece. I think the second piece is also regarding the M&A, right, you mentioned [Hikone], and other companies that we have. Here, I think the message is that currently, we are still focused on improving the efficiency of those businesses. And I think you can see from the EBITDA margins on software that this is making progress quarter-by-quarter. But in regards to selling those assets, I mean, we've always analyzed different options in order to maximize shareholder value, but the business as a whole is performing well and generating cash so we have no urgency to 7 assets. So to be direct here. I think there is indeed an optionality to exit some assets for which we don't see as strategic, but that's not the focus at this moment. The focus is on efficiency.

[Pedro Zinner, executive]

Yes. If I might just add, I think it's in line with the last comment on Mateus. I think what we're trying to do is really improve cost efficiency initiatives to maximize value along these verticals that were not prioritized in the business plan. I think when time comes, we'll provide more visibility in terms of how we're going to position ourselves.

[Lia de Matos, executive]

Great. Rosman, Lia here, just to talk a little bit about trends in deposits. So indeed, we saw a strong performance in deposits in the first quarter and results were to some extent above our expectations. So this growth has been driven by so many factors, right? As Pedro mentioned, we continue to successfully bundle payments and banking to new sales, which leads to high penetration of clients that [indiscernible] as the main banking solution and the banking [indiscernible]. And we're also seeing higher levels of engagement with our clients leaving money within our ecosystem for a longer period as we go. So we're very happy with this evolution. It is, like you mentioned, beyond our expectation and thus point to us surpassing the guidance that we gave for the year. That said, we need to monitor this trend a little bit further throughout the year and then of course, if this remains consistent. We're naturally going to keep you updated, but we think it's a bit early to talk about reviewing guidance.

[Operator]

Next question from Kaio Prato with UBS.

[Kaio Penso Da Prato, analyst]

I have 2 questions on my side, please. The first one is related to your other expenses line. You had like a nonrecurring adjustment of R$70 million this quarter. I just would like to better understand what exactly it is about because that the net effect from the divestment is lower than that. And still on other expenses line, if you could please explain why we had like a reversal in share bid composition this quarter? And my second question, please, if I may, is related to your MDRs. Even considering the adjustment to the membership remodel, we can see that consolidated MDRs actually reduced this quarter in a quarter where we usually opposite because of seasonal effect. So I just would like to understand the moving parts here if this could be reflecting any type of pricing pressure or discount in order to incentivize deposits? And what can we expect going forward?

[Mateus Schwening, executive]

Thank you. So let me pick up the first question and then we move on to the revenues. So in regard to other expenses, you're right, we have basically 2 FX. The first one is not on the IFRS P&L, right, which we don't adjust. And here, we have a negative impact from the divestments of [indiscernible], which amounts to around R455 million. Other than that, we basically have the revaluation of coal and put options on the other companies that we have derived, for example, [Hecla]. So it's nothing new that is adjusted here, it's basically the same effect of actions on the M&A side. And then talking about the share base piece, which impacts our adjusted net income. Here, you're also right, we have a one-off effect, which contributed to around R$30 million, positive to the number. And basically on the line, we had 2 big effects on the quarter. The first one is a recurring one where we had some movement of our SUs related to our annual equity bonus, which includes more than 1,300 employees. And the second effect, which was the one-off is basically related to the board changes that we announced in the first quarter. So when you look at these 2 effects together, what we had was basically a grant of 2.49 million shares but a conciliation of 3.94 million shares. So in the quarter, we had a net reduction in share-based instruments outstanding, which also contributed to the P&L by around R$30 million. And again, you have a piece that is one-off and another piece that is recurring, which is the fact that we have less share-based instruments outstanding right now. Now the second question, I think it was related to MBRs and pricing in general, right? Here, I think there are also 2 pieces to the question. The first piece when you look at the take rate evolution as a whole, you saw basically a 16 basis point increase year-on-year and also a sizable increase quarter-on-quarter. Both of these changes were basically related to the contribution of the new solutions, so we could break down a 15 basis point increase in take rates that we had year-on-year, it's basically a function of banking and products contributing more to our revenue. On the MDR side, I think the variation month-over-month is basically attributed to the seasonality on CPV. You're right that we had the effect from membership fees were which impacted [indiscernible]. but when we exclude that from the calculation, it's basically a matter of seasonality.

[Kaio Penso Da Prato, analyst]

Okay. Just a follow-up in terms of the seasonality that you mentioned, shouldn't it be like more positive in terms of your MDRs Q-on-Q because of the card mix and so on? So I just would like to understand this part.

[Lia de Matos, executive]

Yes, the seasonality on the [BRP] salon is positive. Again, we had a lower decrease in the first quarter as a result of more debit mix and now it's positive, but then you also have the seasonality in terms of client mix, right? And that I think answers the question.

[Operator]

Our next question comes from Antonio Ruette with Bank of America.

[Antonio Gregorin Ruette, analyst]

Congrats on the results. So I would like to focus on credit. So first, if you could explore what is on different since you restarted the product. So in terms of the credit and the asset quality, the credit growth, what has been a surprise so far? Also, if you could explore a little bit a possible guidance revision since as you added more than R$200 million in portfolio quarter-over-quarter. I guess you could be -- you could reach guidance but less in the second quarter or close to that. Also, if you could explore a little bit competition. So we see peers getting increasingly intense competition segment, we see banks going down the pyramid the corporate rebate, we also see other acquirers more focused on credit, so how do you see competition on the SME segment that you are focusing on? And finally, to conclude here, provisions if you expect to continue to provision 20% of your loan book?

[Pedro Zinner, executive]

Thank you for the question, Pedro speaking. Well, I'll kick off with the guidance. I think as you said, the results for the first Q were indeed better than what we initially expected, especially on banking and credit. If we see these trends to be consistent throughout the year, we will mostly likely land above our guidance. But that said, our guidances were already set as a lower bound and I think it's still premature to talk about changing in the first quarter of the year. So I'll pass it over to Greg, who will talk about the credit, and then we'll move to Lia and Mateus.

[Gregor Ilg, executive]

Antonio. With regards to your first question, what we did differently, we explored this extensively in our Investors Day last year. And what I can tell you now is what happened over the last 12 years. Well, we completed 1 year since the soft launch of our working capital facilities and looking backwards, I really believe we accomplished quite a lot. On the positive side, I would point out that we were able to structure the entire credit cycle and not only the concession phase. We have all the controls in place to monitor the growth from a very close perspective and prepare to react on a timely manner. This monitoring process has allowed us to test and improve a variety of models and policies, always challenging ourselves to improve efficiency and unlock new cohorts. This is also the reason why we are still growing on a nonlinear mode, almost on a step-like curve, reflecting the release of offers to new customers. Besides policies and models, we also managed to test quite a lot our pricing strategy, which is adjusted to size, risk, amongst others. We also succeeded in test bundling banking and acquiring features. The team is practically form and complete one of the major challenges we faced by the beginning of the process, and we managed to keep the performance of the portfolio within our risk appetite parameters and pretty much without any major bumps on the road. On the improvement opportunities, I would say that we still have a huge opportunity to extract more value from our hubs. So far, the growth of our credit portfolio has been more focused on our app, and we understand that there is a huge potential to be unlocked by using this channel more efficiently. There are also many opportunities to improve communication overall. We are still in the beginning of our journey to interact with our clients in a deeper way, and this is reflected in less-than-expected conversion rates. We strongly believe that we can and will evolve on this matter, and we will accelerate. Although we already tested bundling, we understand that we could have begun earlier and also believe that we barely scratch the surface here. Besides strengthening the relationship, we believe that the more we interact with our clients, combining different product platforms, the better the performance of the portfolio will be. And last but not least, we did not advance over our link customers yet. The potential here is huge. We are implementing new processes to capture these opportunities that should lead to a significant increase in share over time.

[Lia de Matos, executive]

Great. Antonio, let me complement you with some thoughts on competition, which I believe was one of your questions. So I think regarding competition, nothing really new regarding the competitive environment. We continue to see benefits in our P&L from the reduction in interest rates with financial expenses as a percentage of revenue decreasing 4.7 percentage points year-over-year. And in our view, this is consistent with the fact that over the short to medium term, the competitive environment is much more rational and stable and players will benefit from decreasing interest rates. So we see, if anything, a much more rational competitive environment. That's the first message. But another important message is that longer term, we're going to remain focused on executing the strategy that we talked about in the Investor Day. We're going to continue to strengthen our execution and evolve our product road map. And as Mateus mentioned, over the last year, we've seen tangible impact in take rates already from -- coming from monetization levers beyond payments. But the other way to look at this is that we're only at the beginning of this trajectory, there's still a lot of work for us to do in the evolution of our banking, in saving our credit portfolio, building bundles with software to better monetize financial services relationship with our clients. So essentially, to finalize the [indiscernible], we really believe we're on the right track and each step is only going to strengthen our differentiation in serving MSMBs. So I think this is a total competition.

[Mateus Schwening, executive]

And I think the last piece was around the [overlay], right? Whether we're going to keep provisioning 20% or converge to the risk model. And to that end, I think the message is that in 2024, we will converge to risk-based approach. It's probably going to start either in the second Q or third Q but towards the end of the year, we should have the provision conversion to our models.

[Lia de Matos, executive]

Many questions Antonio I think we covered them, right?

[Operator]

Next question from Neha Agarwala with HSBC.

[Neha Agarwala, analyst]

Hello, can you hear me? Just a quick one. Regarding the registry of receivables, has there been more operational improvement? How have you been able to use the data from the registry of receivables? And how is it helping in terms of underwriting? Any update there would be very helpful.

[Mateus Schwening, executive]

Neha, Mateus here. So there are 2 sides to the question. First, regarding the registry business on a stand-alone basis. To that end, I think [indiscernible] has been profitable for [indiscernible] but no big changes in terms of the operations. And then there is a piece on the credit side, right? And to that end, I think the message is that it's mostly working on this. We have been able to access the collateral for all the main providers when we are underwriting, and that's a very important collateral to our business.

[Neha Agarwala, analyst]

Okay. So you have been able to access the volume from other players and the collateral is working well as of now?

[Mateus Schwening, executive]

Yes. Yes, it is.

[Neha Agarwala, analyst]

Has there been any instance that you made use of that collateral so far?

[Mateus Schwening, executive]

Yes. So in our renegotiation process in general, I think the first step is basically accessing the receivables that we have against the clients as collateral. And then only afterwards that we move towards the field where we actually renegotiate the credits. So it has been the first, I would say, gatekeep in terms of collecting the credit and it's fully operational now.

[Operator]

Next question from Yuri Fernandes with JPMorgan.

[Yuri Fernandes, analyst]

I have a follow-up on Kaio's question on the adjustments on your net income. Just confirming that both the net effect of PPAC, the R$53 million is there and also the lower compensation, the lower share-based compensation, the R$40 million. When I checked the Table 4, it's not clear for me where those 2 items are there. So just making sure that the negative was removed out of the positive result of your recurring adjustment? That's the first one. And on -- my second question would be on your administrative expenses. They were really good. I know there is some seasonality here but even year-over-year, it's down a lot. I think you mentioned third-party services helping you. So if you can provide more color, which are those services like how this line should behave going forward.

[Mateus Schwening, executive]

Thank you for your question. So on the first piece, let's talk about the adjustments. So we only adjust basically mark-to-market related to M&A transactions. We don't adjust share base compensation whatsoever. So it's fully expensed. And therefore, the positive one-off is not adjusted, right. The only thing that is adjusted to that end is the loss on the divestment of [impact] in this quarter and keep in mind that in the first quarter, we had the opposite effect. We had a gain on the amount of EBITDA, which was not adjusted as well. So that's the first piece. The second piece, I think, is related to administrative expenses. And here, I think you're right, there was a sizable reduction quarter-on-quarter, but also year-on-year. When we look at the quarter-on-quarter evolution, it's mostly due to seasonality. I think we've been vocal on the fall from the first quarter. The administrative expenses was seasonally higher back then, and it's the opposite way right now. But when you look at an annual comparison, then most of the benefits are related to the initiatives that we have in place in the company, namely the zero-based budgeting initiative and also the implementation of the shared [indiscernible] center. And here, on a macro level, basically, what we're doing is unifying processes in our corporate functions and over time, this leads to lower expenses related to third-party services and administrative expenses in general. So that's the main trend on the line.

[Operator]

Next question is from Jorge Kuri with Morgan Stanley.

[Jorge Kuri, analyst]

Hi, everyone. Thanks for the opportunity to ask questions. I wanted to ask about selling expenses. You mentioned the 36% year-on-year jump, 17% quarter-over-quarter was partly due to a marketing expense related to a sponsorship of a TV show and investments in yourself team. Would it be possible for you to quantify how much of that R$529 million was the TV show. And I'm asking this because as you look at marketing expenses, going of 36% for a revenue growth of 14% or a TPV growth of 13% for the quarter, that it's actually concerning if it's not most of it, the TV show, right, where you're actually having to spend much more in sales and marketing for the underlying business in order to grow revenues at a lower pace. And even if I just look at over the last 12 months, forget about this quarter, if I just look at the last 12 months, your marketing expenses 12 months over 12 months are up 21% for a TPV growth, which is much less than that. And so I'm just wondering to what extent some of it also is a more competitive industry. And I did hear the response that Lia posed to a question -- a couple of questions before that the competition remains rational, but this level of incremental marketing expenses to grow the business at a much lower pace, especially considering that you have, I don't know, 25%, 30% market share in your core business of SMBs, maybe 20%. How should we think about that? And how do you think that's going to evolve going forward in order for you to keep this pace of revenue growth, we're going to continue to see these just out growth in marketing expenses. How do you think about all of those things?

[Mateus Schwening, executive]

Thanks for the question, Jorge. So let me start with the explanation of marketing expense, and then we talk about the increase [indiscernible]. So on selling expense first, I think we have to segregate the sequential evolution from the yearly evolution. When you look on a year-over-year perspective, in the first quarter of '23, we had some one-offs related to reallocation of variable compensation between selling and admin. So this makes a year-on-year evolution less relevant here. Now I think the best way to look at the number is indeed looking at the sequential evolution, which was 17%. And on that front, basically, everything is related to our investments in the [indiscernible]. So the sequential increase in selling is mostly a function of that, which basically impacts first quarter and to a lesser extent, second quarter as well. Now when we look ahead, we still see some opportunities to invest in distribution channels and I think we've been vocal to say that as long as we see healthy return hurdles, we'll continue to do so. But with that said, as a percentage of revenues, I think we should start to see operational leverage fitting in, in this line throughout the year. So that's the first piece referring to the selling evolution in general. I think the second piece that you mentioned is whether we are seeing some kind of effect from competition and the link between those investments and the top line growth, right? And to that end, first of all, I think the best way to look at the number is not looking at the consolidated TPV, the investments we do in selling have very little to do with the growth in key accounts, which I think we've mentioned, we are being opportunistic. So on parts, it can go more on other quarters it can go lower that. But when you look at the evolution of MSMB TPV, I think the message is not that we are decelerating actually. So if you look at the evolution of TPVs, including PIX, which we monetize [indiscernible], basically, we grew 24% this quarter, above 25% in the first quarter and third key was in the low 20s. So the message here is either stable or accelerating but not decelerating. So again, that's pretty much how we see the line. The evolution is mostly explained indeed by the reality [visual] investments that we did. And in terms of [into] growth, I think the proper way to look at the numbers looking at MSMB volumes and not TPV in general. I don't know if I answered all your questions Jorge?

[Jorge Kuri, analyst]

Yes, yes, that was clear. Thank you very much Mateus. Appreciate it. I mean if I just adjust for -- if I adjust for this quarterly, John, yes, there seems to be some operating leverage on the last 12-month basis of your selling expenses, but not a lot. And so I guess I'm still just wondering how should we think about the amount of expenses that you needed to put into the business, given the big market share that you have? And how does that relate to competition? So anything -- any view that you have around that would be helpful.

[Mateus Schwening, executive]

Yes, yes, for sure. So like I said, I think the sequential increase that we had was mostly due to the reality TV Show investment. And going forward, on a nominal basis, it shouldn't grow that much. So most of the leverage from continuing to grow top line having this baseline in terms of selling. And then [Alec] piece, I think when talking about operational leverage in the line, especially looking at the first quarter, it's also important to remind that we had a negative one-off in the revenue side, right, which was the R$60 million from the change in the recognition of membership fees. When you factor that in and then you look excluding the investments of [indiscernible], I think it's more clear to see the operational leverage that is kicking in there.

[Operator]

Next question from Daniel Vaz with Safra.

[Unknown Analyst]

I have a question regarding credit. So we know you're offering your working capital solution for a limited portion of your client base, right, so mainly in the upper part of the SMB. So I wanted to ask you if you have already been testing pilots in smaller clients? And how have been this -- the outcome of this testing so far? So are you willing to expand the eligible base at some point in this year? Have you been doing that? So it will be good to hear from you.

[Gregor Ilg, executive]

Yes. Daniel, yes, we have expanded our offer to lower customers, both on the working capital facility and also we are initiating now a test with credit cards on our Ton business. So we are evolving on covering the entire client bases with a credit offer. And so far, I mean, the tests have been successful, and we think that there is opportunity to expand here and reaching out for more customers.

[Mateus Schwening, executive]

Yes. I think the one caveat here, Daniel, like Gregor mentioned, it is still on test phase here. So I wouldn't say we are right to roll out yet. I think the message is that the early indicators are good. But again, we're taking a cautious approach in credit in general and then especially on micro merchants, which we know are more volatile and risky, right, by nature, it's going to be even more cautious. So I wouldn't expect a big evolution already contributing to results this year. It's most about testing and learning this year.

[Unknown Analyst]

And if I may, just a quick one on the change of the accounting method. So how are you recognizing revenues now? It's a 12-month base, it's at 24-month?. Could you just give a little refresh for us?

[Mateus Schwening, executive]

Yes. So open to the last quarter, membership fees were basically recognized as soon as the client was onboarded, so it was upfront. Now it's basically deferred throughout the lifetime of the clients. We don't disclose the specifics in terms of how many months we are using. But I mean, it's very close to market standards. So if you look at the peers, I think you should have a good benchmark for that.

[Operator]

Next question from Tiago Binsfeld with Goldman Sachs.

[Unknown Analyst]

I have just one on financial expenses. If you could discuss what are your main expectations for terminal [SELIC]. And also, if you could discuss if you have any initiatives to lower financial expenses by year-end? And finally, if you have any plans to remunerate deposits, remind us what has been your strategy here?

[Mateus Schwening, executive]

Thanks for the question, [indiscernible]. So first, let's start with our perspective for our terminal [indiscernible]. I think to be really honest here, we don't have a perspective here. I think our approach is basically to look at the market data that we have and then we adjust our pricing accordingly. I think we mentioned this a few times, but our pricing has become a lot more dynamic nowadays. So basically, we have the trends that we use to onboard a client. But over time, we adjusted upwards or downwards according to the volumes that we're seeing, the solutions that the clients are using. So it has become a dynamic process. And to that end, I think it allows us to adjust whatever slip we see in our phones in a very quick manner. So that's piece number one. Secondly piece regarding initiatives to lower financial expenses, I think our team has done a great job over the past quarters and years, not only of being more efficient in terms of the spreads that we have, but also being a lot more conservative. So if you look at the credit profile of the company, we're having longer and longer term, which is good. Now when you look at the structural initiatives that we have in place, I think the main one to mention is the finance license, which we got end of last year. And that basically allows us to access retail funding and also to access the deposit base that we have to fund prepayments and credit. But on both of these fronts, our approach is really cautious because we want to make sure that we don't cannibalize our current deposit base for which we don't remunerate anything. And as you can see by the results, it's getting quite a lot of traction without that, right? So basically, what we're doing right now is testing. We have a very small pilot in terms of remunerating deposits. We're also testing the waters in terms of retail funding, and that's pretty much the mode of the year. I wouldn't expect any big movements on the balance sheet in 2024. And the final question, can you remind me what was it?

[Unknown Analyst]

My final question was on the deposits. What's your strategy for remuneration or paying for deposits eventually?

[Mateus Schwening, executive]

Well, I think we covered that. But basically, the message here is the following: We have a very good business in our banking products, which is basically built upon the working capital needs of our clients, right? So we offer a single solution for them, and we're able to get this deposit base without remunerating, but we also see space to advance on banking on the remunerated side, so basically taking the savings pocket of our clients. If you look back at the Investor Day, I think the approach that we shared was basically creating an automated savings product, which is basically using the same engine that we have in credit, where we get a percentage of the TPV, but redirecting that feature towards clients that are savers. So we're basically able to help our clients to save towards their goals. And on that product, the idea is to remunerate the deposit base. But again, being really cautious here not to cannibalize the product that we have in place. So that's basically the strategy there.

[Operator]

Next question from Jamie Friedman with SIG.

[James Friedman, analyst]

Let me echo the congratulations. I wanted to ask about the take rate on key accounts. It was up 14 basis points year-on-year and 15 basis points sequentially. So I'm just -- and I understand that's part of the strategy. I'm wondering, though, how high can this go? Because it seems like you've got a very good cadence there.

[Lia de Matos, executive]

Jamie, Lia here. So I think regarding take rate trends in key accounts. So the 1 basis point increase quarter-on-quarter is basically product mix, credit versus debit and the 14 basis point increase year-over-year is really a consequence of our strategy in terms of repricing and offering spot prepayments for some clients. So I think the overall message here is, let's remember that key accounts for [indiscernible] accounts as sort of an opportunistic strategy. So -- if we find a key account clients where we can have a good relationship in terms of pricing and good returns or even a more broad sort of product discussions that enabled us to have a more profitable relationship, we will do so, but that's not really the focus of our execution. So we're -- we've been a lot more opportunistic there. It's hard to pinpoint what the trend will be. I think that the trend that we are seeing is more or less kind of in line with what we expect, right? So take rates slightly positive from this effect of a higher emphasis on profitability and repricing. But on the PPC side, it tends to be volatile. So it's hard to see point and trends. I think those are the takeaways.

[James Friedman, analyst]

And in answer to your previous question, I think you had addressed the opportunity to lend into the Linx merchant base, which my understanding is I don't believe you'd be gone. So how and when are you thinking about that opportunity? If you could elaborate on that?

[Lia de Matos, executive]

Yes. So we disclosed this metric that we -- [indiscernible] Is it, lending on mix was the question, Jamie.

[James Friedman, analyst]

Yes, I'm sorry, if I didn't say it right. That's what I meant to say, yes.

[Lia de Matos, executive]

Okay, yes. So like Gregor mentioned, right, we're just starting to look at the opportunities for credit in the Linx client base. So what we know is that it is a big opportunity, and it's very in line with what Pedro said at the beginning of the call today to sort of implement a specific process for higher average TPV clients because that is the profile of Linx clients overall. Even within those priority verticals, the average CPV of those clients tends to be somewhere around R$200,000, R$500,000 a month. So these are medium clients within the SMB space. We know that there is a very significant opportunity there. And this will fall into the context of the whole -- the overall cross-selling initiative, right? So in order to provide lending to those clients we want to do so in a context where we actually offer the full [some] solution integrated software. So it's really very early days. We know the opportunity is big. We're starting to organize ourselves around that opportunity. But at this point, the focus on cross-selling is a lot more really the structural go-to-market initiatives that enable us to actually start to offer financial services, solutions to software clients. So yes, we are excited with the credit opportunity in Linx client base, but it's very early days to give any more precise figures on that.

[Operator]

Next question is from Pedro Leduc with Itaú BBA.

[Pedro Leduc, analyst]

Thank you, guys, for the question. Good evening. Two, first, on the financial side that your guys are looking at for the -- have had the new document recently out on what you have seen in revenues or the funding side, early thoughts and maybe how you can manage around that? And the second, from the early portfolio that you have on the credit side, if you're already seeing benefits bet on churn, be it on higher share of wallet or those clients is credit helping you, you believe [Audio Gap] through credit, but is it bringing positive side effects on other things.

[Lia de Matos, executive]

I'm not sure we understood the first part of your question. If you could please repeat it? Sorry. I think you're chopping a little bit for us. I don't know if you can go to a spot where there's a little better connection.

[Operator]

While we wait for Pedro. Next question from Renato Miloni.

[Unknown Analyst]

My first question is on the asset quality of the credit portfolio. I know it's a bit early to look at NPLs, but I wonder what you're seeing the margin here and if you can compare that to what we're seeing in the industry numbers? And then maybe if you have an expectation of where NPLs will stabilize NY. And then I have a second question here on your funding strategy and if you -- how do you see space to continue using your own cash generation as a funding source here? Or if you expect that to -- the mix to shift going forward?

[Mateus Schwening, executive]

Thank you, Renato. Let me start on the latter question. So basically, we fund credit notes using our capital structure, right? So we have a net equity in that. I think we're not looking towards having a specific instrument for credit, like factoring out risk [indiscernible], basically because it's too expensive in Brazil. So if there is an option at an attractive rate, we will, for sure, consider. But given the structure that we have in Brazil, I think it's likely that the strategy for [indiscernible] may continue the same. And then on asset quality, I think you're right that looking at NPLs alone, it's basically really affected by the speed of growth, right. I think what we can share from nowadays is basically two things, so first, in terms of expected losses, our models are pointing towards the 10% threshold. So when you think about NPLs over '19, it should increase, right? It shouldn't stay at 1.5% or 2% area. It should move towards this expected credit loss level and be slightly below that. So that's the first piece of the message. The second, I think, is looking at cohort data. So I think in the Investor Day, we shared the over 30 month 3 for the portfolio. And I think we disclosed at that time between 3% and 4% for the cohort and that pretty much remains the same nowadays. So I think the performance for the portfolio has remained really consistent over the past many months. And the final point, I think you mentioned is around return, so the margin per credit. I think we're not disclosing the margin itself, but what we can say in terms of rates, we usually charge between 3% to 5% per month. We are on the lower end of that range [indiscernible], basically because we are choosing clients that have a better risk profile in general. And then if you combine the 3% per month, with the 10% expected credit losses, I think you should arrive at the margin for the product pretty easy. So that's the message there.

[Operator]

Next question from John Coffey with Barclays.

[John Coffey, analyst]

I just had 2 questions for you. For one, on your TPV, it seems like your top line TPV number now includes PIX. And so if that's the case, and that's kind of your primary TPV metric, how should I think about your guidance, especially your MSMB TPV of that 412 floor. Is that just tying to the TPV without PIX? And then likewise, when we think about the MSMB take rate, would that be considered with TPV, again, including PIX or excluding? And just the last question I had, the second question. For the MSMB payment net adds, I think Lia said in her prepared remarks that we saw a little bit of a decline this quarter because now Stone is reaching, I think, like market growth rates, if I understood that correctly, for MSMBs, does that mean like we should -- that's kind of a good cadence in that 200 range to think about net adds going forward? Or am I off on that?

[Lia de Matos, executive]

Lia here, so I'm going to take both questions. First, on TPV I think it's important to note that we disclose both, right? So both TPV considering PIX P2M and TPV only considering cards, right? So the reason why we're disposing -- we've always disclosed both. But PIX P2M has more and more incrementally become a relevant and important acceptance method for our clients. Let's also remember that we monetized PIX P2M in line with debit net MDR, and we allow our clients to reconcile P1 as a payment method. So I think this is just a little bit of context to start answering the question. So in fact, regarding the guidance of TPV, we are seeing TPV trends considering only card volumes close behind with our guidance. But additionally, we're positively prepared with the strong performance that we're seeing in PIX P2M volumes, where we're going strongly on a sequential basis. And like I said, it's not positive for us because we monetize that in line with debit net MDR and it is very positive for our clients because for them, it is a cheaper solution in terms of payment acceptance and money gets [indiscernible] instantaneously. So just to give the numbers again, TPV including PIX grew 24%, while if we exclude PIX P2M, we saw 18% growth, and the 18% growth is very much in line with what our guidance in the year -- for the year implied. So the message is we remain committed with the TPV guidance. And we're going to continue to disclose both figures, right? TPV with PIX P2M and TPV considering only cards. The second part of the question was net adds, right?

[John Coffey, analyst]

Yes.

[Lia de Matos, executive]

Yes. So you are right that what we expect going forward in terms of net adds is more -- levels more or less in line with what we saw this quarter. So since over the last year, we strongly increased our penetration in the micro segment. It's not surprising that incremental growth is smaller. That said, we're really happy with the commercial performance in the quarter. It is associated with our participation in [indiscernible]. I think we have discussed it earlier in the call. But importantly, regarding this investment in [indiscernible] May this quarter, we did see a very positive impact in the quarter, but we also expect that tail effect throughout the year. It's important for us to maintain the consistency of the communication so that we can really capture the value in terms of more brand recognition, stronger communication to a broader organs, right? So all of that for us is a positive trend, and we expect net adds to be in line with what we're seeing, and we're happy with that level. But also as remember, we don't have net assets with single objective function because it's important that we are always looking at healthy payback hurdles and that we can grow with good profitability. So I think that's the big message, John.

[Operator]

There are no questions at this time. This concludes the question-and-answer session. I will now turn it over to Pedro Zinner, CEO at StoneCo for final considerations.

[Pedro Zinner, executive]

Well, thank you very much. I think before we end the call, I just wanted to provide an update in terms of the tragedy in [indiscernible]. I think we are engaged and committed to the situation, supporting our clients, employees and local communities with a series of programs and initiatives. Our commitment to Brazilian Japanese is above all a commitment to people. And we have partnered with Union Brazil, which is an NGO that has been on the front lines of the floods for months to support those who needed at most at this time. I think the other question is regarding the impact in terms of our TPV and guidance and so forth. So we've seen a significant impact in TPV within the region with some cities reducing TPV by up to 40%. But that said, our exposure to [indiscernible] is about 4% to 6% of our TPV. So the impact will be most likely limited and should not impact our guidance. In terms of the P&L, there will be a negative impact in the second quarter, not only as a result of the TPV impact, but also because we are fully committed to supporting our clients and employees within the region. We have already accepted the subscription fees of our clients in the region. We have reduced the payment fees, provided a great period of 90 days in credit repayments among many other actions. I think it's still too early to quantify the impact for the quarter, but the message here is that we remain committed to the guidance despite of those effects and were considered about the tragedy that has actually happened in the country. With that said, I'd like to thank you all for participating in the call and see you in our next quarter results. Thank you very much.

[Operator]

Thank you. This does conclude today's presentation.