StoneCo Ltd
NASDAQ:STNE
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StoneCo Ltd
Earnings Call Analysis
Q2-2024 Analysis
StoneCo Ltd
In the second quarter of 2024, StoneCo reported an 8% year-over-year growth in consolidated revenues, largely driven by a consistent increase in Transaction Processed Volume (TPV) and improved client monetization. Notably, there was a revised internal accounting method for recognizing membership fees, which reduced reported revenue by approximately BRL 50 million. Excluding this adjustment, total revenue growth would have been closer to 10%. Adjusted Earnings Before Tax (EBT) climbed 46% year-over-year, underlining the effectiveness of StoneCo's cost management strategies.
The micro, small, and medium-sized business (MSMB) client base saw substantial growth, expanding by 30% year-over-year to nearly 3.9 million active clients. The company achieved a net addition of 184,000 clients in the quarter. Moreover, TPV in the MSMB segment grew 25% year-over-year, resulting from a 17.4% growth in card TPV and a remarkable 2.6-fold increase in PIX QR code transactions, totaling BRL 11.5 billion. Importantly, take rates rose by 7 basis points to reach 2.54%, reflecting enhanced credit and banking revenues.
In the banking sector, StoneCo's active client base increased by 62% year-over-year to 2.7 million, contributing to a 65% rise in client deposits, which reached BRL 6.5 billion. This robust growth was accompanied by a sequential 8.1% increase in deposits. However, the Average Revenue Per Active Client (ARPAC) decreased to BRL 25.7 per month, primarily due to lower average DI rates. The company is piloting interest-bearing products like time deposits, which have received positive client feedback.
StoneCo's credit portfolio surged to BRL 712 million, witnessing a 32% increase quarter-over-quarter. Within this, the working capital segment grew by 28% to BRL 682 million. Non-Performing Loans (NPLs) remained stable, with NPLs over 90 days recorded at 2.6%. The company has adjusted its provisions for expected losses down to 18%, indicating confidence in the credit quality of its portfolio.
Total software segment revenues were reported at BRL 384 million, remaining comparatively flat year-over-year but showcasing signs of improvement through cross-selling in priority verticals. The company's strategy is increasingly focused on recurring revenue, with a significant 450 basis points increase in such revenue as a percentage of overall income. However, some short-term adjustments may hinder immediate growth as the company prioritizes long-term sustainability over immediate returns.
StoneCo successfully reduced administrative expenses by 13% year-over-year, reflecting ongoing efficiency initiatives across operations. Selling expenses climbed 27% year-over-year, primarily driven by increased investment in the salesforce. However, as productivity from these investments matures, the company anticipates a gradual decrease in these costs relative to revenue.
Looking ahead, StoneCo maintains a cautious yet optimistic stance on achieving its 2024 guidance amid headwinds in the macroeconomic environment and changes in revenue recognition. The company aims for continued expansion in banking and credit, potentially exceeding its earlier projections. While there are challenges in card TPV growth due to the rising dominance of PIX transactions, the company still targets a Year-end total revenue exceeding BRL 1.9 billion.
The management communicated a strong commitment to shareholder returns through a share buyback program, with an additional 9.67 million shares repurchased for a total of BRL 724 million. The company is nearing completion of its BRL 1 billion buyback plan initiated in late 2023. Furthermore, ongoing evaluations of capital usage signal a balance between share repurchases and pursuing growth opportunities within the rapidly evolving financial services sector.
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Good evening, everyone. Thank you for standing by. Welcome to StoneCo Second Quarter 2024 Earnings Conference Call.
By now everyone should have access to our earnings release. The company also posted a presentation to go along with its call. All material can be found online at investors.Stone.co.
Throughout this conference call, the company will be presenting non-IFRS financial information, including adjusted net income and adjusted net cash. 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 appear in today's press release.
Finally, before we begin our formal remarks, I would like to remind everyone that today's discussion may include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause 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 in 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, Roberta Noronha, Head of Investor Relations at StoneCo. Please proceed.
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; and our Chief Strategy and Marketing Officer, Lia Matos. Today, we will present our second quarter 2024 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?
Thank you, Roberta, and good evening, everyone. After reviewing our second quarter results and our performance at midyear, I am pleased with our progress across our strategic priorities and believe we are on schedule to meet our 2024 goals. In payments, we continue to win in the MSMB market and take more market share. Our client base grew 30% year over year, TPV grew 25%, and card TPV increased over 17%.
We are also executing on our pricing and bundling strategies to enhance client engagement, as we discussed during our Investor Day. As a result, our MSMB take rates also continue to expand, increasing 7 basis points year over year to reach 2.54%. We believe these strong results arrive from our competitive advantages in distribution, superior service, and our growing ability to provide more comprehensive solutions to our clients.
In banking, we are making similar progress. Our client base grew 62% year over year and client deposits increased 65% as our team continues to cross sell effectively. We now have 2.7 million active banking clients and BRL 6.5 billion in deposits, which are approaching our 2024 targets. We have also started to pilot interest-bearing products, such as time deposits, which I believe is being well received by our clients and could be an exciting new area for us.
In credit, we're also evolving well towards our goals, even above set targets. Our total credit portfolio increased 32% quarter over quarter to reach BRL 712 million. Within that, our working capital portfolio grew over 28%, reaching BRL 682 million this quarter, with strong quality as shown with our NPL over 90 days still at 2.6%, very much in line with our expectations.
I'm also excited with some new initiatives underway. Our specialized credit desk, which is focused on addressing the opportunity within our larger SMB client base, successfully completed its first disbursement this past quarter, and we finalized the structuring of our Giro Facil product. This is a short-term overdraft solution designed to address the immediate capital needs of our clients, which is set to launch in the third quarter.
In our Software business, we are making progress on our cross-sell initiatives, and we are improving the quality mix of our business towards more recurring revenues. Total software and vertical software revenue growth remained modest, but we're seeing underlying signs of improvement. For example, we're getting better cross-sell traction in our gas station and retail verticals, and we generated stronger card TPV growth from our software clients in priority verticals than our overall MSMB card TPV growth rates.
We still have a lot of work to do in our Software business over the long term, as I have mentioned, but I'm seeing some encouraging trends from our efforts. We have also maintained our focus on efficiency gains in the streamlining of administrative expenses, which decreased by 13% year over year. In the quarter, we achieved a 180 basis point reduction in administrative expenses as a percentage of revenues when compared to the second quarter of 2023. As a result of these positive developments, our adjusted basic EPS demonstrated strong growth, reaching BRL 1.61.
As I mentioned earlier, we remain committed to our business plan and the targets established during our Investor Day. In light of this commitment and considering short-term market fluctuations, we allocated capital to repurchase an additional 9.67 million shares, totally BRL 724 million, bringing us closer to completing the BRL 1 billion share repurchase program announced in November 2023. Additionally, as part of our liability management strategy, we allocated BRL 295 million to the tender offer for our 2028 bonds, achieving nearly 60% participation. In summary, I'm very satisfied with the trajectory of our results for the second quarter of 2024, and I have full confidence in our team's execution.
Now, I would like to pass the floor to Lia, who will discuss our second quarter 2024 performance and strategic updates. Lia?
Thank you, Pedro, and good evening, everyone. As Pedro mentioned, we were pleased to see the progress across our strategic priorities and initiatives in the second quarter, which I think positions us well to meet our 2024 and long-term goals.
As you can see on Slide 4, our consolidated revenues grew 8% year over year, mainly as a result of consistent TPV growth and higher client monetization. It is also important to remember that in the first quarter of 2024, we changed our internal accounting methodology for membership fees revenues, deferring this revenue stream over the expected life of a merchant, rather than recognizing it at the time of acquisition. This change reduced our reported revenue by around BRL 50 million in the second quarter. If we exclude this change, our total revenue growth would have been 10% in the quarter.
Despite this effect, adjusted EBT increased 46% year over year. This was driven by the combination of our top line growth and the ongoing benefits of our financial and administrative expenses efficiencies. As a result, our adjusted net income increased 54% year over year, and our adjusted basic EPS increased 57% year over year, reaching BRL 1.61.
Now let's dive further into our Financial Services segment performance on Slides 5 to 9. Starting with payments on Slide 5. Our MSMB client base increased 30% year over year, reaching almost 3.9 million active clients. We generated a net addition of 184,000 clients during the quarter. On a year-over-year basis, this growth was impacted by the fact that we have caught up to the growth levels in the Micro segment. And on a quarter over quarter basis, our net adds were impacted by the [ grow over ] effect of higher net adds in the first quarter, which benefited from our sponsorship of a popular reality TV show in the period. As you will see in 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 you can see on Slide 6, this approach has resulted in more profitable TPV growth and market share gains in the MSMB segment. Before we dive deeper into our TPV performance in payments, I would like to point out that we have refined our disclosure of TPV due to the increasing relevance of PIX QR codes in the market and in our transactional volumes. From now on, whenever we talk about TPV, we will refer to transactions settled through cards and PIX dynamic QR codes. When we talk about card TPV, we will be referring to transactions settled with cards only.
Now moving to volume and take rate results. MSMB TPV increased 25% year over year as a result of a 17.4% year-over-year growth in MSMB card TPV and a 2.6 fold increase in PIX QR code, which reached BRL 11.5 billion in the quarter. We achieved this strong growth while also increasing take rates by 7 basis points year over year, which reached 2.54% as a result of higher credit and banking revenues and higher prepaid volumes, partially offset by a lower duration from prepayment transactions.
On Slide 7, let's shift to discuss our banking performance. Our banking active client base increased 62% year over year to 2.7 million active clients as a result of growth in both Ton and Stone payment client base with an increase in penetration of clients using banking and payments bundles. This growth in our client base also helped drive a 65% year-over-year increase in client deposits, which reached BRL 6.5 billion in the quarter. Despite the sequential 8.1% growth in deposits, ARPAC decreased to BRL 25.7 per month, mainly as a result of lower average CDI in the period.
Moving to Slide 8. Let me give some highlights on our credit performance. Our credit portfolio increased to BRL 712 million, with the working capital portfolio alone increasing 28% sequentially to reach BRL 682 million in the quarter. The remainder of the portfolio is the result of the very initial results of our credit card products, both within Ton and Stone.
Because such cohorts are very early vintages, we highlight on the page the credit quality metrics of our working capital loan product alone. NPLs increased slightly this quarter, with NPLs between 15 and 90 days reaching 2.9% and NPLs over 90 days reaching 2.6%. As highlighted before, because these cohorts are also relatively new, the ratio of past due loans should continue to increase as they mature. Provision expenses for working capital expected losses were BRL 17 million in the period, decreasing significantly quarter over quarter. This reduction reflects the beginning of a conversion of provision levels to expected loss levels as the portfolio matures, with provisions now representing 18% of the working capital portfolio, down from 20% in previous quarters.
Finally, to summarize the performance of our Financial Services segment, the second quarter was again marked by strong year-over-year TPV growth and the successful development of our banking and credit initiatives. These resulted in segment revenue of BRL 2.8 billion and adjusted EBT of BRL 608 million in the quarter, up 11% and 53%, respectively, year-over-year, and an increase of 590 basis points in our adjusted EBT margin to reach 21.5%.
Moving to Slide 10. Let's talk about Software performance and its strategic evolutions. Quarter over quarter, the card TPV of clients that use both Financial Services and Software solutions increased 8%, primarily driven by the gas station and retail verticals, which have been our priority focus since last year. This result has been mostly driven by the cross-selling efforts from our Financial Services specialist distribution team, cross-selling bundles to Software clients. As Pedro mentioned, cross-sell volumes outperformed growth of MSMB card TPV in the quarter by almost a factor of 2. We're happy with the execution of our cross-selling initiatives so far in 2024, but I believe we still have a lot of room to grow, particularly as we gear up to enable our Linx software channels to also sell Software and Financial Services bundles.
On Page 11, you can see the standalone performance of our vertical software business, where we're seeing some improvements in the quality of our revenues. Vertical software revenue grew 3% year over year due to an increase in recurring revenue growth, offset by a decrease in nonrecurring revenues in priority verticals. As a result, we believe the revenue quality of our priority verticals is improving, with recurring revenue as a percentage of total revenues increasing by more than 450 basis points year over year.
In Slide 12, we present the consolidated performance of software. As you can see, total Software segment revenues reached BRL 384 million, remaining flattish year over year, driven by the trends I just described in our vertical software business, offset by slower growth in the enterprise business. Adjusted EBITDA in the Software segment decreased to BRL 64 million in the quarter, down 4% year over year, and 3% quarter over quarter, impacted by a nonrecurring severance expense of BRL 3.2 million, and by our decision to focus on growing recurring versus nonrecurring revenues, which has a negative impact in the short term, but should be accretive for the business in the long run.
We continue our efforts to implement the software strategy that we presented in our Investor Day. While we're happy with our evolution in cross-selling initiatives in the gas station and retail verticals, we're still working on learning how to best enable our software distribution channels to sell Financial Services and Software bundles via commercial incentives and systems integrations. We also continue to pursue efficiency initiatives and a more disciplined capital allocation approach within our Software segments.
Now, I want to pass it over to Mateus to discuss in more detail some of our key financial metrics. Mateus?
Thank you, Lia, and good evening, everyone. I would like to begin on Slide 13 where we discuss the quarter-over-quarter evolution of costs and expenses on an adjusted basis.
Cost of services reached BRL 841 million, increasing by 23% year over year, and 4% quarter over quarter. Sequentially, cost of services as a percentage of revenues decreased by 10 basis points, primarily due to a reduction in loan loss provisions, which were reduced to BRL 18 million this quarter from BRL 45 million in the first quarter of '24. This reduction reflects the beginning of the process of aligning our provision levels with expected credit losses as the portfolio matures, with provisions now representing 18% of the working capital portfolio. This decrease was offset by higher provision for losses in the quarter on our acquiring and banking solutions.
Administrative expenses decreased by 13% year over year, resulting in a 180 basis point reduction as a percentage of revenues compared to the second quarter of '23. Sequentially, administrative expenses increased by 1.4%, but declined by 20 basis points as a percentage of revenues. This was driven by lower expenses in the Software segment due to efficiency gains, as well as by the divestment of PinPag in the first quarter of '24, which eliminated expenses in the Non-Allocated segment.
Selling expenses increased 27% year over year and decreased 0.9% quarter over quarter, down 80 basis points sequentially as a percentage of revenues. This decrease is primarily due to a reduction of approximately BRL 26 million in marketing expenses related to the sponsorship of reality TV show, like Lia mentioned, partially offset by increased investments in sales teams. Looking ahead, we anticipate gradual dilution of selling expenses as these investments in sales teams mature.
Financial expenses decreased 20% year over year and decreased 4.5% sequentially, leading to a 230 basis points reduction as a percentage of revenues. This decrease was a result of lower average CDI in the period, a reduction in our funding spreads, and our decision to reinvest our cash generation towards the funding of our operation. These effects were partially offset by higher funding needs for our prepayment and credit operations, as well as by a higher number of working days in the quarter.
Lastly, other expenses increased 26% year over year and 80% sequentially, or 140 basis points as a percentage of revenues. This variation was a result of more normalized levels of share-based compensation expenses, as the first quarter of '24 included a nonrecurring positive impact of BRL 40.5 million from the net effect of the cancellation and new grants of incentive plans. Excluding these effects, other expenses net would have been flattish as a percentage of revenues.
Turning to Slide 14. Our adjustment at cash position was BRL 5.3 billion by the end of the quarter, reflecting an increase of almost BRL 1 billion year over year and BRL 117 million for the quarter. We continued to deploy capital towards the expansion of our credit portfolio and executed on our share buyback program in the amount of BRL 237 million this quarter.
As Pedro mentioned, I would like to highlight that in July, we allocated capital to repurchase an additional 9.6 million shares, amounting to BRL 724 million, nearly completing the BRL 1 billion buyback repurchase program announced in November 2023. Additionally, we allocated $295 million in July to the tender offer for our 2028 bonds, which will further optimize our funding spreads as we move forward.
Finally, let's move to Slide 15 to discuss our guidance. We are very pleased with our performance in the first half of the year. The profitability achieved in the first half of '24 has positioned us favorably to meet our full year guidance, despite several headwinds. This includes a BRL 120 million reduction in revenues due to the changes in recognition of membership fee revenues and a challenging macroeconomic environment with a higher yield curve.
In our banking and credit solutions, which are key drivers for our long-term growth, we have exceeded initial expectations, not only in volume but also in quality. This strong performance may put us on track to surpass our year-end guidance in these areas. From my perspective, the most challenging area so far has been our MSMB card TPV. PIX QR codes penetration in the markets and within our client base has been higher than we anticipated when setting our guidance in November of last year. This has affected our overall volume mix towards less card TPV and more PIX QR code TPV. Although this trend is positive for the business, it also means that card TPV is growing a little tighter within our expected range. We ended the first half of '24 with 18% growth, exactly in line with our guidance. Despite a more challenging comparable base in the second half of '24, we remain laser-focused on our efforts to meet this guidance. Overall, I believe our second quarter results are trending favorably, and we are on track to achieve our long-term goals.
With that said, operator, can you please open the call up to questions?
[Operator Instructions] Our first question comes from Mario Pierry with Bank of America.
Let me ask you a question about competition. Have you seen any changes in the competitive environment over the last 3 months, especially coming from maybe some of the incumbent banks, and any changes at Cielo? Because we did notice that you increased, or you talked about making higher investments in your sales team. I wanted to understand that a little bit better. Why are you investing in sales team? Do you think you have a disadvantage, you're catching up, or you're seeing a more competitive environment? And if you're seeing a competitive environment, if you can discuss like how you're seeing take rates trending.
Mario, Pedro here. Thank you for the question. I'll jumpstart, and then I'll pass over to Lia to make further comments. Well, I think on the pricing piece, I think the way we see it is it has become really a dynamic process within the company, meaning that we continuously evaluate the profitability of our cohorts, and we adjust prices accordingly. So in terms of the new interest rate environment and competition, I think we'll gradually incorporate the new yield curve and changes in the competition environment in our decision making. And I think we'll evaluate the economics of passing through the shifts into our clients.
But I think as a direction, I think we will continue to prioritize profitability and to price based on returns. Still on the competition piece, and I'm not going to address specifically on the Cielo piece, but I think the market has evolved a lot. And I think other players have been behaving in a similar way, right? Just another point I wanted to highlight is that more and more we have more levers to price the relationship with clients through the bundles as the core of our strategy between payments, banking, credit, and software. So I think to some extent, this is a hedge against short-term interest rate dynamics, and in some ways on the competition side. I'll pass over to Lia to talk about selling.
Mario, Lia here. So talking a little bit about dynamics around selling, I think there's 2 relevant dynamics to highlight. First is more of a short-term discussion, which is we've already seen a reduction in selling expenses as a percentage of revenue, as Mateus mentioned, due to a BRL 26 million decrease, given that we sponsored Big Brother Brasil in the first quarter. So that's more of a short-term dynamics, and it's going to continue to impact positively throughout the year.
But longer term, regarding selling, we continue to invest, and we talked about this, especially scaling our specialist distribution as we continue to move up to onboard larger SMBs within the SMB segment. And as you know, there's dynamics regarding our selling expenses in distribution, which is we frontload investments in sales. So there's a frontload of OpEx and the results will come as we continue to onboard those clients. So we are going to see this impact for a few more quarters, but longer-term, we do anticipate a gradual dilution in those selling expenses as the sales force matures, and we bring in more clients.
And if I may add, Mario, Mateus here. I think in summary, the investments that we're doing in terms of hiring these specialists is not a reaction on any sort in terms of reacting to the competitive environment in the short term. It's because we're basically seeing a huge opportunity to go upmarket within SMBs with very profitable type of clients, good unit economics, and our decision is much more of a bottom-up decision and not a reaction to anything that any player is doing.
That's clear. Can you just give us like a sense of the size of how many people are we talking about?
We don't disclose the breakdown, Mario. But I think the way to see this is, it's proportional to the distribution of the TAM, right? When we talk about what we call medium clients, so the larger SMBs, naturally from a density perspective, there are less of them spread throughout the country, right? So we always allocate sales teams in terms of the opportunity that we see locally in terms of the TAM. And although there are less medium clients within a specific hub or within a specific region, these clients have very attractive economics, right? They have larger TPV. There's a lot of opportunity to upsell credit. So we see this from the perspective of the addressable market. And if you think about the overall sales force, specialists are a smaller percentage of that and pretty much in line with the distribution of the addressable markets.
Our next question comes from Eduardo Rosman with BTG.
I have 2 questions here. The first one is a follow-up to what I asked during the last conference call. And it's more about the Software division, right? Why not consider divesting from at least part of it, given that the number of verticals likely to have synergies with Stone is not that large. So that's the first one.
And the second one is a follow-up as well on the competitive front. We saw a big surge on the number of acquirers in recent years. What do you think about this market in terms of consolidation? Do you see room for M&As in the sector? So that would be the second question.
Rosman, Pedro here. Thank you for the question. On the first one, I think, we remain focused on executing the strategy we unveiled at our Investor Day. I think in Software, our efforts are really concentrated on driving cross-sell in our priority verticals and improving overall business efficiencies. And I think you can see that from the results that we presented. So while we are pleased with the progress we made so far, I think we do recognize that there is still work to be done on both fronts, right?
And regarding the potential sale, I'd like to emphasize that we're not selling the asset. I think in some ways there have been some rumors and what we said is that we continually evaluate all options to maximize value from our assets and really allocate capital within the company. But our focus at this point in time is really on executing the strategy we have laid out. And on the second question, I apologize, but can you please repeat?
Yes. In terms of consolidation, we saw like big number of acquirers and payment companies coming to the market in recent years. Many of them naturally don't have probably the scale. We do have the ones linked to the big banks, which are becoming a cost center. So how do you guys see the market evolving? Do you see room for consolidation?
Rosman, let me highlight our view on the competitive environment regarding number of players and then pass it over to Pedro to complete the answer. So, if anything, I think we see less players entering the markets over the last couple of years, right? I think this dynamic has been much more intense in the past. What we do see is different players being relevant within each segment of the market. So Micro, there's a very clear competitive landscape. SMBs it's different as you move up. Naturally, we compete more with incumbents. But I think the overall trends of 5 key players more or less playing out consistently in terms of market share evolution, I think that has been consistent. And the group which [ ABEX ] calls other does gain share as a group. But I don't think that there's been a lot of difference in who those players are. Yes, so I think from the competitive dynamics fronts, I don't think that we see a lot of change. If anything, we see less intense like new entrants and new players coming into the market more recently. Pedro, do you want to complete on...?
No, I don't believe that there are many other points to highlight. I agree with Lia there. Not really any big news regarding the competitive environment. I think it's been quite stable over the past couple of quarters and no big changes on this front.
Our next question comes from Neha Agarwala with HSBC.
On the OpEx side, the delivery so far has been quite strong despite some one-off expenses. Is there upside to your guidance? Could you have better costs and that could drive your bottom line? Or are there any other costs or investments that you're looking to make that could weigh in on the second half of the year?
And my second question is on the credit book. The originations I saw this quarter, disbursements were slightly down quarter on quarter. Any particular dynamics there? The NPL ratio is increasing as expected, but are you comfortable with the risk? If you can share more color about the uptake of the working capital, is it directed more towards the SMBs, any particular type of merchants who are more willing to take the loan, or whom you are more willing to lend to? Any color on the credit book would be very helpful.
Thanks for the question, Neha. Mateus here. I'll start by addressing the credit one, and then we'll talk about OpEx. So regarding credits, in terms of quality, I think we're really happy with the performance of the portfolio, so no worries whatsoever. But in terms of growth, I think the message here is that when we think about the growth in disbursements, it's not going to be linear over time. What we're doing now is that basically we're making a series of experiments to test new criteria in the cohorts. And whenever the results from those tests are positive, we roll out new offerings, and then we unlock a bigger wave of disbursements. That has been the behavior of the past quarters as well.
And when we look at the guidance, we guided for a portfolio above BRL 800 million by the year ends. We're already with BRL 712 million the first half of the year. So actually, when we compare to our plan, even though the disbursement for this quarter was a little bit smaller than the previous one, we're actually above the initial plan.
And that said, when we look ahead, I'd say in terms of the economics of the product, we're becoming increasingly comfortable over time. I think the challenge and the opportunity now is that there is a lot to be done in terms of improving the conversion of the [ approved ] pool, but also increasing the percentage of clients to which we extend a credit line as a result of those tests. Keep in mind that when we look at the product nowadays, it's still pretty much fully digital, so with very low participation from the distribution channels, which is key in terms of increasing conversion and penetration in the future. So that's pretty much the message around credits.
On the OpEx side, I think you're correct. We've had a good performance in the first half of the year, especially on the administrative expenses. When we look at administrative expenses, it's down 13% year on year. When we look at the second Q, we guided actually for a growth, right? So it's becoming more clear that we're probably going to land with upside in that line. But more broadly, when we think about operational leverage, looking ahead, I think the message here is twofold. So within the operation, when you look at selling expenses and costs to serve specifically, I think we should continue to see operational leverage in the next quarter. So there's still work to be done there.
We're probably also going to see tax rates converging more towards the bottom of the range that we provided on the 20% to 25% range. I think the place where it's going to become more challenging in the second half is probably going to be financial expenses, simply given the fact that interest rates are expected to increase in second half versus decrease in the first half. And we also did a sizable buyback, which is accretive when we look at EPS over time, but has a short-term negative impact to the P&L. So those are pretty much the main movements that we see going ahead.
Our next question comes from Tiago Binsfeld with Goldman Sachs.
My first one is on PIX. I think you mentioned that this has been an area of challenge. So I wonder how you see the evolution of the PIX agenda. We're following news of PIX tap-to-pay. We also see within the open banking agenda some initiatives. We know direct payments. So how are you preparing for those changes? And do you think there can be a meaningful impact to [ TPV ]? And I can ask my second question after that.
Tiago, I believe it was chopping a little bit. The whole question is around PIX dynamics, correct?
Yes, that's right, Lia.
Perfect. So let me give an overview of PIX dynamics in terms of the performance and then how we see the outlook regarding PIX. So I think the first message is we continue to see a strong growth from increased penetration of PIX QR code -- dynamic QR code, which is the PIX that we see as a payment method, right? That's been true both within our banks and the markets based on central bank figures. So that's been an evolution beyond our expectations at the beginning of the year. So PIX penetration is now higher than we initially expected.
I think for us, this is a net positive, as we said many times before, because number one, we see PIX as being incremental to our overall volumes. So if you look at the overall, I think the way to illustrate this is the following. If you look at electronics penetration and how that has evolved as a percentage of household consumption over the past year, we see that penetration of credit has more or less remained stable, even slightly increasing year on year. While if you look at the sum of debit plus PIX plus prepaid volumes, this has increased significantly, right? So from 25% around the year ago to around 33% today. So what this means to us is that this volume is taking -- there is a slight cannibalization of debit, but overall it's taking volume from cash.
So the reason why it's accretive for us is because we monetize this in line with net MDRs for debits, but it is accretive from the perspective of more engagement with our banking solutions and naturally more cash in and more overall deposits. So that's the big message around PIX's performance so far.
When we look ahead, I think there's a roadmap that we know that the central bank has put out. There's an evolution around PIX NFC. And I guess our take on this is the following. All of this evolution opens up opportunities for us to improve client experience, for us to evolve our product development roadmap around the PIX rails. So there's a lot that we have already developed on PIX rails, and there's a lot that we will continue to do.
We think that PIX NFC may accelerate the cannibalization of debit volumes, as I just described, because it's going to greatly improve the user experience around paying through PIX. But as I just said, I think this is accretive for us. And our mission here is to make sure that we stay ahead of the central bank's roadmap, anticipating how we can turn this regulatory evolution into better products and better solutions for our clients.
I think the same is true regarding open banking. Naturally, we expect that with more access to data and an ability to create better product experience, we can also gain from that by giving better experience and solutions to our clients. So I think that's the overall message.
And if I may, a second question on Software, just to follow up. What do you think are the main KPIs we should follow if execution is going according to plan? I think in the past, you may have provided some guidance on margins in that segment. If you could provide an update on that as well, would be helpful.
Sure, Tiago. So good question. So I think the 2 main metrics to look out for, which are in line with the 2 pieces of the strategy that we communicated in the Investor Day, is number one, how we are evolving in cross-selling financial services to Linx clients. So we disclosed the metric of TPV overlap. TPV is, of course, only one part of the story, because as we get better at cross-selling Financial Services to Software clients, we also want to advance on the banking and on the credit opportunity. But for now, tracking this TPV overlap is an indicator of our traction regarding this part of the strategy.
And I think the second big message that we brought out is the opportunity to increase efficiency within the software segments. And so, monitoring margin evolution is an important aspect of this, naturally. We did talk about margin behavior this quarter. There was a one-off effect from restructuring costs. But in the long run, we continue to see still opportunity to improve margins within the Software segment. So I think that's the main -- those 2 main things to track.
Our next question comes from Kaio Prato with UBS.
I have 2 on my side, please, mostly related to your cash. The first one is in terms of the tender offer of your bond. Should we expect the usage of own cash for this operation and also given your current cash generation? Or should we expect the issuance of a new bond with probably lower cost? And by the end of the day, when we think about your P&L in the third Q and in the coming quarters, what type of impacts could we expect as we will probably see savings related to the interest rates and also a potential tax shield for the remainder of the bond that was not bought. If you could help us walk through the impacts would be good, please.
And the second one, also looking at your cash generation, just would like to understand what could be the next steps here. Where could we see the usage of cash? If it could go more to prepayment or [ credit product ]. And if you plan to open a new buyback program, as you almost completed the one announced last year in August.
Kaio, Mateus here. So first, let's talk about the tender of the bonds. In terms of impact to the P&L, the buyback of the bonds itself had a neutral impact in terms of financial expenses upfront. But when you look ahead, there's indeed a relevant savings going ahead because first we swap a debt that was running at CDI plus 3%, which is the bonds. For other loans in our balance sheet, that are going to be with much lower spreads. So to the first part of your question, in terms of the balance sheet itself, we're basically swapping the bonds with other debt instruments. It's not going to be a bond issuance. And they run at a much lower spread.
And like you mentioned, besides the savings in terms of having lower financial expenses on these new debt instruments, we now also have the tax shield on the financial expenses that were associated with the bonds, both because these new issuances are happening onshore, and also because in the tender offer of the bonds, we included a provision to switch the debtholder of the bonds to a local entity. So when you add that together, you have a positive impact to the P&L moving ahead.
The second part of the question, I think, was around what we're going to do in terms of the cash generation going forward, right?
Right. And if you plan to open a new buyback program as well.
Yes. So first, in terms of opening a new buyback plan, we still view buybacks as very attractive capital allocation, especially considering that we are, in our view, outperforming the expectations outlined in the initial plan in the Investor Day. But when we consider additional share buybacks, we need to also remain mindful that our business is growing very fast. And we have a lot of new avenues for future growth that may require additional capital. So, in short, I think we haven't yet made a decision on whether we're going to announce a new buyback program on second half or not. But it's certainly something that we will evaluate and provide updates on the coming quarters.
Now, in terms of uses for the cash that we're generating, when you look at the capital structure for the company, we think we are in a very good and strong position. The company had a net cash position of around BRL 5 billion prior to the buybacks. And even after repurchasing around BRL 1 billion in this first half, 1st July, the company should still increase its adjusted net cash position, simply given the fact that the cash flow generation from the business has been really strong.
And in terms of what we're going to do with that cash generation, I think the message is pretty much the same. We continuously evaluate the best use of capital in order to maximize shareholder returns. We feel that if there is an opportunity to buy back shares, given how discounted the company is versus our plan, we can do so. What we need to balance here again is the opportunity for the company to grow and to deploy capital in the business itself. When you look at our industry, I think it's a huge industry, and we want to ensure that we have the firepower to pursue the opportunities that we have, especially within credit. So that's pretty much the message here.
Our next question comes from Jorge Kuri with Morgan Stanley.
I wanted to ask if we go back, I'm sorry, to the question about selling expenses. I know you're looking at it on a quarter-on-quarter basis, but given the investments in people and how long they take [ to get ] results, I think it's just better to look at them on a year-on-year basis. But your marketing expenses are up 27% year on year and for a revenue growth of 8% year on year. So that's 3x revenues and relative to TPV is around 2x TPV.
And so, I went back and looked at that relationship last year, and it's not necessarily getting any better. So I wanted to go back and ask to what extent maybe the business is getting more competitive, and maybe it's not getting more competitive on prices, but it's just getting more competitive on the ability -- on the productivity of the infrastructure that you need in order to generate revenues, because there's just more and more companies looking for the same pool of clients. So if you can just give us a little bit more confidence on why we're going to see a reversal of this negative trend.
And then my second question is on your banking ARPAC, which was down 13% quarter on quarter, even though your loan book has really exploded, right? It's up manyfold year on year, 35% I think quarter on quarter. And rates were lower on the float, meaningfully lower, if you look at it on year-on-year basis. But on a quarter-on-quarter basis, average rates were only like 5% lower. So can you just walk us through why your banking ARPAC was down 13% quarter on quarter?
Yes, Jorge. So I'll start from the last question and then we'll talk about selling. In terms of the banking ARPAC, the revenues from credits are not included in the banking ARPAC. It's basically the transactional banking revenues plus floating. So the main driver that explains why banking ARPAC went down quarter on quarter is mainly CDI. So CDI actually went down 6.9% quarter on quarter. And that pretty much covers the gap.
Now, in terms of selling...
Is there any reason why the credit revenues are not included in the banking ARPAC?
Yes, the way that we see the business, we look at credits on a standalone piece. And then when we talk about banking on our segmentation and reporting, we decided to only include the floating and transactional piece. So it's basically a decision on how we disclose the numbers.
And also, Jorge, just to complement Mateus' answer on this. Remember that we extend credit to only a small amount of clients whereas we have a very high penetration of banking, right? So if we were to include credit revenues in our ARPAC, there would be a huge average effect because you're diluting this small cohort of clients that has credit in a big banking base, right? So it doesn't make sense to us to include for that reason. So maybe Mateus on selling.
Yes. So on selling, maybe I'll start with the dynamics that we expect as a percentage of revenues, and then Lia can add on your piece about the relationship between selling and competition. So in terms of the selling expenses, the way we see it, given the nature of the business, there's a lag between upfront investments in sales teams and the resulting benefits. And the same is true for marketing. So every time that we either hire a new sales team or do a marketing campaign, we get the OpEx upfront, and then it generates an increase in sales over time, and it takes time to build this new portfolio of clients and to dilute selling as a percentage of revenues given the recurring nature of the business. So it's a different dynamic from a transactional business, where you really get the revenues at the same time that you spend the money.
The way that we see, we did an increase in investments in the first Q due to Big Brother Brasil and also because we're building out the specialist sales force. So it's true that when you look at the annual comparison for selling expenses, it increases. But I think the reason why we're really confident that we're going to see dilution in the coming quarters is because it's already happening. So when you look at the first Q, selling was 17.2% as a percentage of revenues. Second Q, it's down to 16.4%. And as we mature the investments in the sales personnel that we hired, we're looking at the productivity and the numbers that are coming from those investments, we're confident that we're going to produce the bigger client base, the bigger TPV, and then the dilution will follow. Lia, do you want to add on the relationship versus the competitive environment?
Sure. So, Jorge, we've talked a few times about this, right? So I think in general terms, we agree with you on the assessment of how the acquiring industry will evolve regarding growth, right? So big message is, we're going to see less growth in the industry when we think about acquiring specifically over the next 5 years than we saw in the last 5 years. But I think we see competitive dynamics play out a little bit differently from what you mentioned. So, the first important message is, as we emphasize in the Investor Day and since then, there's still a lot of room for us to grow in Financial Services beyond payments. And we've seen a clear trend around all players offering more complete solutions, right? So this is not something exclusive to Stone. I think the overall industry has moved away from fewer player acquiring to more complete financial solutions offerings. And given that we still have a large opportunity to improve monetization beyond payments and penetrate more on banking and on credit, this is how we see the investments in selling that we make, right? So this will drive better returns on our investments in selling in the long term. So that's how we see the equation.
I think the second piece of the answer revolves around what we've already talked about as well, which is, as we have observed in recent quarters, within acquiring what we believe is that the trend will continue to be one where players focus their growth within specific niches of the market, be those specific tiers of clients or specific regions. So, for example, incumbents as a group gaining more share in the key account space, even though as a group, incumbents are losing share. Also, dynamics where we see regional pockets of growth and regional competitive dynamics playing out. So I think that the message is, yes, in an industry that grows less in the future, we have to be better and better at assessing where the pockets of growth are. But as we continue to evolve our operating model, and we talked about specialist sales force as one example of this, but it's not the only one. We continue to make sure that we can stay ahead and really understand where these pockets of growth are within our focus, which is serving MSMBs, and continue to grow and gain share within MSMBs.
So I think as a result of these 2 factors, future growth rates in acquiring will be lower overall, and this is already implied in our TPV long-term guidance that we gave in the Investor Day. Just to remember, we talked about 13% CAGR in terms of acquiring TPV towards 2027. So this is built into a dynamics of what we understand the industry evolution to be. But our focus is a lot more on growth as a result of more monetization coming from the clients that we onboard to our ecosystem.
Our next question comes from Gustavo Schroden with Bradesco BBI.
Most of my questions were answered, but I'd like to explore a little bit your guidance. It seems to me that it is a little bit conservative at this point because if you analyze, for example, the TPV, it is running very healthy. And I'm assuming that there is a seasonality in the fourth quarter, maybe that will be easily above this 18% growth. Deposit is also growing very fast. Credit portfolio take rate is above the 2.49% as you expected. And net income is running, also assuming the seasonality in the fourth quarter, is running to be above this BRL 1.9 billion for the year. So why you are still like keeping this BRL 1.9 billion as a minimum? Do you think that it is a conservative approach? Should we indeed expect something above BRL 2 billion or BRL 2.1 billion for the year? That would be reasonable? That's my question.
Gustavo, Pedro here. Thank you for the question. I think I'll try to provide the whole concept. And I think we emphasize in our Investor Day, I think we transition to a policy of providing annual guidance, right? So unless there is an extremely material change in the business or in the macroenvironment, I don't believe that we anticipate revisiting our guidance by midyear. And also when we look at the numbers, I think the guidance, as you mentioned, the guidance provided for the year, they set the floor for our key indicators. So for most of these, we are indeed seeing more positive trends. I think you're right. And we do expect to exceed our targets, but I think it's part of the game.
So the only metric, as you mentioned, that may prove more challenging is really card TPV, as we're really witnessing a stronger growth in PIX transactions, which were not included in the TPV metric we provided for guidance, despite being monetized in line with net MDRs for debit transactions. So PIX QR code penetration in the market and within our client base has been higher than we anticipated when we set our guidance in November last year. So this would affect our overall volume mix to address card TPV, specifically on debit and more on PIX QR code. But in general terms, I think we're keeping the guidance, as I mentioned before.
Okay, very clear. And just to follow up here, very clear your points about the card TPV and the PIX potential impacts and about interest rates. So anything that you see here that could change or could impact our guidance, as now we have a different environment or different expectations for rates, anything that you could comment here would be great.
Gustavo, Mateus here. So when we think about interest rates, they are going to be a drag on second half. Again, first half, I think the expectation was that interest rates would decrease. When you look now, they are expected to increase on the second half. But we need to keep in mind that when we did the Investor Day and provided the guidance in November, the interest rate curve was not that low as well. So there is a negative headwind there, but it's not really material and not enough to change the guidance.
Our next question comes from Yuri Fernandes with J.P. Morgan.
Quick one on Rio Grande do Sul. I think this was a topic to discuss in the past quarter. You were giving grace periods, subscription free for some clients. Any impact to this quarter? What was the final number here? And if you exclude Rio Grande do Sul, how your earnings would have behaved? That's the first one.
And a second one on, I think Lia already explored a lot, the bank initiatives. But just on deposits, I know you're testing these remuneration for deposits to put these on your -- the pilot test is on your release. If you can provide more color on timing, what you plan to do, the risks of cannibalization of your deposits free of yields nowadays. So just some color on the remuneration of deposit strategy here.
Pedro speaking. I'll kick off with the Rio Grande do Sul question. Well, I'm happy to say that the impact was smaller than we initially anticipated. And I think this is really thanks to the swift recovery of TPV in the affected region. So good news on that side. But overall, we really experienced a negative impact of approximately BRL 150 million on our TPV, in ballpark numbers around BRL 10 million on our overall results.
And just a quick note that this impact was not only due to the TPV reduction, but also because of the series of actions that we really took to support our clients during this critical time when they most needed us. And I'll pass it over to Mateus.
Yes. In terms of the remuneration of deposits, we're still testing. I think we started to disclose on the balance sheet the amounts that we have with time deposit with merchants. We're going to see that's really immaterial yet. And we're basically still testing to ensure that we don't cannibalize the economics of the current banking offering. So in terms of timing, I think that during the next quarters, we'll gradually extend the pilots to a larger base. But it should only start to make a difference in the balance sheet and in the results next year. I think we shouldn't expect anything big for 2024 on that front.
Our next question comes from Renato Meloni with Autonomous Research.
So my first one is related to the credit portfolio, given the large success that you had so far in looking at the guidance, I think it'd be interesting to explore a bit what went well and what was ahead of your expectation here. And also, if you could maybe provide some KPI or some way to look at the growth for the upcoming years up to the 2027 guidance that you provided.
My second question is somewhat related to this, but it's about financial expenses. You've been able to keep them relatively low by using a lot of your own cash generation. But then going back to your comments on the large growth opportunities that you have and the potential cash usage of that, do you see financial expenses growing further? And then if that's the case, is there a timeline that you expect for that to happen?
Renato, so first on the financial expenses piece. I think, like I said, even after the share buyback of BRL 1 billion, when you look at the adjusted net cash generation for the company, I think we're still going to be in a position where we continue to generate cash. And naturally, unless we have an additional decision to allocate capital elsewhere, we're going to keep reinvesting, and it's going to continue to be a positive effect on our financial expenses.
That said, when we look especially for the dynamics of the second half of this year, I think the big factor that is going to change is really the effect of interest rates. When you look at the first half, interest rates decreased substantially, and that naturally helps financial expenses. Second half, I think, the expectation now is that it's probably going to increase. So I think that's the main dynamic there, interest rates. In terms of the other dynamics, reinvest in cash generation and also spreads, I think they are trending really well.
Now, in terms of the credit, I'll kick-start talking a little bit about what went right versus what went wrong, and then pass it over to Lia to talk about the future. So like I mentioned in the beginning, I think when you look at the economics of the credit products, we're really becoming increasingly confident with the profitability of the product. I think that's an area where we were really cautious at the beginning, given the results that we had in the first wave.
So I would say that when you look at the core offering that we have of credit within SMBs, it's really trending well, and we're becoming more and more comfortable. That's why when you look at the provisions as well, it has started to come down, from the 20% levels to 18%, and over time, it's going to continue to converge towards our models.
I think we've mentioned this a few times, but when you look at the portfolio, the BRL 700 million portfolio, the vast majority of that portfolio is really on what we call this core offering around SMBs. But of course, embedded in this number, we're running a series of tests. So we're running tests on Micro, tests on different profiles within SMBs, different kinds of credit ratings. And this is a continuous effort, where we really test and learn a lot. There are many mistakes that we did, many things that we got right. But I would say that net-net, the main message here is that we're really optimistic around the economics of the product.
In terms of challenges and opportunities moving ahead, I think in terms of distribution, it's really a place where we have a lot to improve, and there's a huge opportunity, because, like I said, when we look at the offering nowadays, it is still pretty much fully digital, so very low participation from distribution channels. And this is probably going to be key to increase conversion and penetration in the future, and therefore, grow the portfolio. I don't know if you want to add, Lia.
No. I think perhaps, Renato, just add a little bit on our perspectives on the longer-term guidance regarding the credit portfolio. Naturally, when we consider this long-term guidance, it's not restricted to what Mateus is calling the core offer, which is working capital loans for SMBs. So there's an extensive roadmap around other credit solutions.
We talked about some products that we have started to pilot, so credit cards for both Ton and Stone, the Giro Facil product within SMBs, which is kind of an overdraft solution. So the message is there's a big opportunity. We have work to do in terms of building more relevant capabilities that will enable us to expand the product offering, so the types of credit solutions that we offer our clients. But we're confident with the guidance this year and the long-term guidance as well.
Our next question comes from Gabriel Gusan with Citi.
One quick question about peer-to-merchant PIX pricing. Are you guys seeing any pressure so far, or do you envision seeing pressure in the rates that you're charging? You were saying something similar to debit levels. We hear from competition, too. But we do understand that economics on that are probably much better than the debit with less costs associated to that. So anything to share on that front?
Gabriel, Lia here. So in terms of pricing PIX P2M, basically, we price it in line with debit net MDRs. It naturally depends on the client tier. So prices will be lower for bigger merchants, higher for smaller merchants. But essentially, I think that's the message. It's naturally a win-win for us and for our clients because they pay less. We gain the same, and it's accretive to our banking engagement. And I think that's the message. So there's a value-add around offering PIX dynamic QR codes because it greatly facilitates our client's ability to reconcile this as a payment method. If they were to use a P2P-type PIX transfer, that would be a challenge. And that's very relevant within SMBs. So there's a clear value-add around this offer, and we don't see any pressure on pricing. And that's the dynamics.
There are no questions at this time. This concludes the question-and-answer session. Questions that were not answered will be addressed later by the StoneCo team. I will now turn over to Pedro Zinner, CEO at StoneCo, for final considerations.
Well, I just want to thank you all for participating in the call, and I hope to see you again in the next quarter. Thank you.
This concludes StoneCo presentation. You may now disconnect.