StoneCo Ltd
NASDAQ:STNE
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StoneCo Ltd
Earnings Call Analysis
Summary
Q3-2024
In Q3 2024, StoneCo reported a 7% year-over-year revenue growth, largely from its MSMB segment. Adjusted net income soared by 35%, driven by margin improvements and a strong share repurchase program, leading to a 43% increase in earnings per share (BRL 1.97). The MSMB client base expanded by 21% to nearly 4 million active clients. Notably, the take rate reached a record 2.58%. Additionally, their credit portfolio surpassed annual guidance at BRL 923 million, marking a quarter-over-quarter growth of 30%. Guidance for 2024 suggests a continued focus on profitability while navigating market dynamics.
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Good evening, everyone. Thank you for standing by. Welcome to StoneCo's Third 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 appears 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 actual results to differ materially from the company's expectations. Please refer to the forward-looking statements disclosure in the company's earnings press release. In addition, many of the risks regarding the business are disclosed in the company's Form 20-F filed with the Securities and Exchange Commission, which is available at www.sec.gov.
Joining the call today is Stone's CEO, Pedro Zinner; the CFO and IRO, Mateus Scherer; the Strategy and Marketing Officer, Lia Matos; and the Head of IR, Roberta Noronha.
I would now like to turn the conference over to your host, Pedro Zinner. Please proceed.
Thank you, operator, and good evening, everyone. Today, we will present our results for the third quarter of 2024 and provide an updated outlook for our business. I'd like to begin by highlighting some of the key milestones from our third quarter, a period marked by solid performance and significant business improvements, bringing us closer to achieving our annual targets, if not already meeting some of them. Upon reviewing the quarter, I can confidently state that we maintain committed to executing our strategies across various areas of our Financial Service segment.
On the payment side, we continue to observe encouraging trends in a healthy competitive environment. MSMB total payment volume grew by 20% year-over-year, reaching BRL 114 billion and serving 4 million MSMB clients, all while maintaining healthy unit economics, a key priority for us. In banking, demand deposits amounted to BRL 6.7 billion, representing a 50% increase compared to the previous year. Having made significant strides in scaling our payments and banking bundles for clients, our current focus is on enhancing client engagement. To achieve this, we are improving our clients' experience by developing additional solutions such as our savings product, which despite being in its initial stages, has already shown positive results.
Regarding credit, we are pleased to announce that we have surpassed our annual guidance, ending the quarter with a portfolio of BRL 923 million, an impressive growth of nearly 30% quarter-over-quarter. This portfolio is performing better than expected in terms of NPL levels, indicating that our credit offerings are aligned with our internal expectations and risk appetite.
Our specialized credit desk, which commenced operations at the beginning of the year, has delivered promising results in generating new deals and enhancing our distribution. Additionally, we have successfully executed our road map for loan products, making advancements in credit cards and launching Giro Facil, a revolving credit facility. We also continue to refine the experience our clients have throughout their credit cycle with us. In light of the performances I have just outlined, I'm proud to report that our MSMB take rate has reached a record of 2.58% in the quarter, setting a positive trajectory towards achieving our annual guidance of 2.49% and indicating sustained strong results in payments.
In terms of software, we continue to see significant progress in cross selling our financial service solutions to our software clients. Card TPV growth among these clients has exceeded twice the growth observed in MSMB volumes on a quarter-over-quarter basis. In addition, we are fully committed to executing our efficiency and cash generating initiatives. As a result, our EBITDA margin increased by 1.6 percentage points sequentially, now surpassing 18%. Given our commitment to acting in the best interest of our shareholders, we are currently evaluating options to maximize value, which I will discuss further in the end of this call.
Finally, on the efficiency front, we have seen our adjusted administrative expenses decrease by 7% year-to-date compared to last year, positioning us well to meet our 2024 guidance, which implies a 7% growth. I would also like to highlight that we have nearly completed our BRL 1 billion share repurchase program in the third quarter. We recognize that we currently have excess capital, leaving us with a strong balance sheet position.
We continuously evaluate the optimal use of capital to maximize shareholder returns and are now developing a more structured decision-making framework in consultation with our Board. We expect to provide further visibility over the coming quarters. As a result of our adjusted net income growth of 35% and the execution of our buyback program, our adjusted basic earnings per share increased significantly by 43% year-over-year.
Now I'd like to turn the floor over to Lia, who will discuss our performance for the third quarter of 2024. Lia?
Thank you, Pedro, and good evening, everyone. As Pedro mentioned, we're happy with our performance in the third quarter and with how we've been able to drive value to clients with our solutions and service. As presented on Slide 4, we saw good traction in our consolidated financial results. Our total revenue and income grew 7% year-over-year or 8% when we disregard the change in our internal accounting methodology for membership fees revenues held in the first quarter of '24. This growth is mainly a result of our performance in the MSMB segment, where we continue to grow client base and increase monetization.
Our adjusted EBT and net income both grew 35% year-over-year with margin up 4.5 percentage points and 3.6 percentage points, respectively, to 21.8% and 17.5%. This improvement in margins was driven mainly by the combination of our top line growth and lower financial expenses. Combining our adjusted net income growth with the significant repurchase of shares in the quarter, our adjusted basic EPS grew 43% year-over-year to reach BRL 1.97 per share.
Now let's dive further into our Financial Services segment performance. Starting with payments on Slide 5, our MSMB client base reached almost 4 million active clients, a 21% growth year-over-year. The implied deceleration in the net addition of clients in the quarter results from different factors. First, to the phasing out of marketing investments made in the first half of the year; and second, due to a bigger focus on the quality of clients onboarded with healthy unit economics, as well as allocating capital towards client engagement rather than purely increasing our base.
As you might also remember, we usually start the relationship with our clients with a payments and banking bundle, which opens the door for higher engagement with our multiple payments, banking and credit solutions. We're proud to see that our focus on improving such bundles and products to our clients has driven positive results illustrated by our heavy user metric, which shows the percentage of MSMB clients with more than 3 products with us. Heavy users have been growing consistently, going from 21% a year ago to 34% this quarter.
Regarding payment volumes, MSMB TPV grew 20% year-over-year to reach BRL 114 billion in the quarter. This growth is composed of a 12.4% growth in card TPV and a 2.4x growth in PIX QR code volumes, as PIX continues to gain ground and cannibalize on debit volumes, with net positive economic benefits for us and for our clients. As a result of a stable competitive environment in payments, allowing for healthy take rates, our focus on growing with good unit economics and the increased engagement of our clients with more solutions, we have reached a record take rate for MSMBs of 2.58% in the third quarter, 9 basis points higher year-over-year and 3 basis points higher than the second quarter of '24.
Moving to Slide 6, we highlight our banking performance in the quarter. Our banking active client base grew 47% year-over-year to 2.8 million clients. As Pedro mentioned, our efforts to sell bundled banking and payment solutions to new clients has achieved a good maturity level since the majority of new clients today onboard with a payments and banking offer. Thus, our focus has shifted towards increasing engagement within our ecosystem.
As a result, total deposits from clients reached BRL 6.8 billion in the quarter, 53% higher year-over-year. Our Financeira license received at the beginning of the year has allowed us to expand the array of solutions that we can offer to our clients. Of the BRL 6.8 billion total retail deposits in the quarter, BRL 6.7 billion refer to demand deposits and BRL 121 million relates to on-platform time deposits from our savings products, which we haven't actively marketed yet. Though still in its early stage, we've been carefully managing the balance between time deposits and demand deposits and have seen accretive results, while offering our clients a new alternative to manage their money within our ecosystem.
In addition to on-platform time deposits, which are directed to our clients, we're also issuing time deposits distributed in third-party platforms outside our ecosystem, which we're calling off-platform time deposits. Those deposits have shown strong growth in the quarter, reaching BRL 1.7 billion in funding for the company.
Now let's move to credit on Slide 7. We have BRL 923 million in credit outstanding with our clients, which is already 15% above our annual guidance with still 1 quarter left to go. Out of this portfolio, BRL 864 million is related to Merchant Solutions, which currently comprises our working capital solution and our revolving credit facility solution, Giro Facil, launched in the beginning of this quarter. The other BRL 59 million relate to our credit card offer, which we're currently focusing on scaling within micro clients, as it is an important part of the credit value proposition for this segment.
When we look at provisions, we have been slowly converging the provision of the working capital solution to reach levels closer to the expected loss in our models. Thus, provision related to the working capital portfolio has been decreasing from 20% in the beginning of the year to 14% in the third quarter. As a result of this convergence and since working capital is still our most relevant credit solution by far, total provision expenses have reduced to virtually [ 0 ] this quarter compared with BRL 19 million 1 year ago and BRL 18 million in the second quarter of '24, contributing positively to our results when compared to previous periods.
Regarding NPLs, the NPL 90 days for Merchant Solutions continues to increase as expected, while the portfolio matures, reaching 3.7% in the quarter compared with 2.6% for the previous quarter. The decrease observed in the NPL 15 to 90 in the quarter was due to the better vintages when compared with the second quarter.
Finally, on Slide 8, we summarize the performance of our Financial Services segment. The strong evolution of our main strategic drivers, coupled with a stable competitive environment in payments has led to a solid financial performance. As such, Financial Services revenue reached BRL 3 billion, 8% higher year-over-year with an EBT margin of 22.8%, 5.1 percentage points higher over the same period.
Now let's talk briefly about our software performance on Slide 9. We see positive trends from our cross-selling initiative of offering financial services to our software client base, the strategic focus for the software segment. This can be seen by the card TPV of our clients that use both our financial services solutions and software solutions, which has reached BRL 5.8 billion in the quarter, growing more than twice the sequential growth seen in our MSMB card TPV. This result was boosted by our financial services specialist team, which has been doing a great job driving this cross-sell to strategic verticals within our Software segment.
Regarding software revenues, we have seen relatively stable performance year-over-year, growing 2.5% sequentially. On the bottom line, software adjusted EBITDA reached BRL 72 million in the quarter with a margin of 18.3%, 1.6 percentage points higher quarter-over-quarter, as we continue to manage the business for efficiency and cash generation.
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 start on Slide 10, where we discuss the quarter-over-quarter evolution of our costs and expenses on an adjusted basis. Cost of services decreased as a percentage of revenue from 26.2% in the second quarter of '24 to 25.6% in the third quarter of '24 due to the reduction in loan loss provisions. Excluding credit provisions, the cost remained relatively stable, as a percentage of revenue.
Administrative expenses increased 5% year-over-year or 9% quarter-over-quarter, resulting in a sequential increase of 30 bps, as a percentage of revenues. This increase was mainly attributed to higher provisions for variable compensation, which are seasonally higher in the second half of the year.
Selling expenses increased 13% year-over-year and decreased 4% quarter-over-quarter or 150 basis points, as a percentage of revenues. This decline was mainly driven by reduced marketing expenses, considering that in the first half of the year, we sponsored a reality TV show, which ended in the second quarter.
Financial expenses decreased 13% year-over-year and increased 7% sequentially or 50 basis points, as a percentage of revenues. The sequential increase was driven by higher funding needs due to TPV growth, lower share of equity in our funding mix following significant share buybacks this quarter and a higher number of working days. These effects were partially offset by lower average funding spreads.
This quarter, our proactive liability management played a key role in optimizing our funding costs, as we repurchased 60% of our 2021 bond issuance, our most expensive debt instrument and refinanced at significantly lower spreads through the issuance of new financial bills.
Our other expenses line increased by 12% year-over-year, but remained relatively stable sequentially. As our revenues grew, other expenses, as a percentage of revenues decreased by 20 basis points.
Finally, our tax rate was 20% in the quarter, down from 23.8% in Q2. This reduction was primarily due to the repurchase of approximately 60% of our bonds and the transfer of the remaining portion to a local entity, allowing us to benefit from a tax shield on the associated interest expense. This operation had a partial impact in Q3 and is expected to further benefit the company from Q4 onwards.
Turning to Slide 11, our adjusted net cash position reached BRL 4.9 billion by the end of the quarter, a decrease of BRL 0.3 billion on a sequential basis. The main reason for the reduction was the execution of our BRL 1 billion share buyback program with an outflow of BRL 742 million in the third quarter and BRL 979 million year-to-date.
Finally, let's move to Slide 12 to discuss our guidance. We are very pleased with our performance in these 9 months of 2024. On the financial front, I feel we are well positioned to deliver our guidance despite factors that impacted our P&L like our decision to make a sizable share buyback, the internal changes in the methodology of membership fees and macroeconomic headwinds with the unexpected rise of the yield curve.
On the operating side, I'm excited to share that we have already met our guidance for the credit portfolio, while maintaining NPLs completely under control and within our expectations or even better. On the banking front, the business is also evolving as expected with clients engaging with our solutions and keeping their deposits within our ecosystem, placing us on the right path to reach our target.
On the Payments side, MSMB CTPV continues to be the most challenging KPI. As PIX continues to grow at a faster pace than anticipated, we are still seeing the impact on our debit volumes. While this is accretive to our P&L, it shows a negative impact on our CTPV metric. Additionally, as the outlook for interest rates significantly changed this quarter, we decided to prioritize on the side of profitability versus growth. While this may penalize our short-term CTPV growth, we continue to believe in our ability to grow above market longer term, as we continue to strengthen our value proposition towards a complete solution to our clients.
Regarding industry growth, we continue to see significant growth opportunities in the Brazilian market. We have a very dynamic and innovative environment, and we see electronic payment methods expanding well beyond private consumption. While the pace of growth may differ from previous years, by engaging our clients with a broader suite of solutions, we establish a solid foundation for achieving our long-term targets.
To that end, on monetization, our year-to-date results reflect an MSMB take rate of 2.55%, exceeding our guidance of 2.49% with significant contributions from banking and credit and continued healthy pricing, particularly in payments. We have successfully bundled our products and maintained the dynamic pricing strategy, allowing us to increase the level of engagement with our solutions, while improving our target returns.
It's important to note that our banking and credit solutions are already playing an important role in our P&L, providing us with more tools to engage and monetize the relationship with our clients. With that said, we posted yet another quarter of consistent results and continue to focus on the strategic priorities set forth in our Investor Day.
Before we wrap up, I would like to hand it over to Pedro to discuss what we see for the software business ahead.
Thank you, Mateus. Before we move into the Q&A session, I want to take a moment to address some recent developments by sharing our perspective on our software business, our outlook for this asset and our strategic decisions, as we move forward.
As we have consistently communicated, we are fully executing our strategy focused on cross-selling financial services to our software clients in priority verticals. Our approach also emphasizes efficiency and cash generation, and we firmly believe this strategy not only creates substantial value for our clients, but also drives long-term success for us.
We remain steadfastly committed to this strategy, and I'm pleased to report that we are on track with its execution. Our efforts are resulting in the growth of bundled software and financial services solutions that address critical client pain points within key strategic verticals. While we have made significant strides with our financial services specialist distribution channel, we acknowledge the opportunity for further engagement with the Linx sales force. The success of our execution is reflected in our unwavering guidance and the strategic framework we established during our Investor Day, both of which remain firmly in place.
At the core of our mission is the objective to maximize shareholder value, and we approach this with an open-minded towards innovative strategies. A key area we are exploring is whether we can achieve our cross-selling objectives through a commercial partnership instead of directly owning the software assets. This approach would allow for a lighter asset footprint and better allocation of our capital.
To that end, we have engaged advisers, who are diligently analyzing and exploring potential alternatives for our software business. I want to emphasize that there is no set time frame or predetermined outcome at this stage. We are thoughtfully considering all options with our shareholders' best interest, as our top priority. We are committed to keep you informed about our progress, as we navigate this assessment.
Before we begin our Q&A, I want to express my sincere gratitude to each of you for your ongoing support. We are excited about our long-term goals and our commitment to delivering value for our shareholders.
With that, operator, could you please open the call for questions.
[Operator Instructions] Our first question comes from Tito Labarta with Goldman Sachs.
A couple of questions, if I may. First, just to think on your TPV, very strong growth on the QR code -- on the PIX QR code, offsetting maybe a bit slower growth on the card TPV than you had originally guided for. How do you think about that continuing to evolve both the growth in the card TPV and the PIX QR code? Because also, you had a very nice improvement in the take rate. We would think as the PIX QR code should have a lower take rate. So just help us understand how that's impacting the take rate.
And then I have a second question after that.
Tito, Lia here. Thank you for your question. So regarding TPV trends and how PIX impacts that. So we continue to see PIX growth ahead of expected. And now we can say that there is visible cannibalization from debit volumes. But as we've said many times before, that's accretive for us because PIX substitutes debit and substitutes physical money. So it's accretive both from the perspective of payments monetization, but also increased deposits and more money within the ecosystem. We expect this trend to continue.
So no reason for us to believe that PIX won't continue to gain ground, especially as efforts even within the Central Bank roadmap to improve usability of PIX will probably even improve adoption in the future. But as we -- if you were to consider the impact of PIX in our overall TPV, naturally take rates would be smaller. But again, it's important to highlight that this is all accretive because not only this is substitutes debit, but it's also incremental because it substitutes physical money.
Great. Thank you, Lia. And then just my second question, I just want to understand the provisioning on the credit portfolio because you mentioned it's like near [ 0 ]. I know that you mentioned the expected credit losses improved, and we see the early NPLs improved, but the 90-day NPLs are going up. And I think maybe you're still growing the loan portfolio quite a bit. I mean, 30% quarter-over-quarter growth. So I'm not sure I completely understand why provisions would go to [ 0 ] in the quarter when you're doing that type of growth even if the expected losses may be improving?
Tito, Mateus here. Thanks for the question. So I think we've mentioned this in a couple of quarters ago, but when we resumed our credit offering, we started to provision 20%, even though our expectations for expected credit losses were in the 10% range. What we're seeing right now is that as the results are evolving according to our expectations, we are reducing this excess in terms of provisioning. So we're basically converging the level of provisions with our expected credit losses.
And the way to look at that is that last quarter, we had 18% of the portfolio provisioned, and now we're [ going to ] 14% this quarter, and this is an ongoing process. So over the coming quarters, we're going to continue to have this convergence of both models, and that's why you see a low provision in the quarter.
Okay. So this low level should probably continue, as you continue to adjust to get closer to that 10%?
Yes, that's correct.
Our next question comes from Daniel Vaz with Safra.
Congrats on the results. I wanted to get your view on the card TPV for 2025. I was looking into the new Stone retail index data for September and October, and it looks like physical is kind of struggling to show relevant growth month-over-month. So is that any concern on your side? I see the digital growing well, but probably have a lower breakdown on your revenues. So how can we cross that data from the Stone index to your expectations for 2025 on the card, especially on the card TPV for 2025?
Daniel, Lia here. So thank you for the question. Not -- we're not going to point out numbers for '25 at this point. But in terms of trends, what we can say is that we see the growth levels that we are at right now at 20% as very healthy. Naturally, there is this shift between debit volumes and PIX volumes and that shift for us from an economics perspective is accretive, as we've mentioned several times before.
And what's important for us to highlight is, as long as we can maintain this healthy and solid pace of growth in clients and TPV, this is really the driving force for the monetization cycle within our business, as it drives not only payments monetization, but also deposit growth and engagement with our overall banking and credit. So as much as we continue to see this shift between PIX and debits, we don't think that, that's going to go away, as I just mentioned.
And we will take that into account when we talk about 2025 TPV guidance because -- remember that when we set the guidance last year for TPV, we were at a very different place in terms of PIX penetration in the overall industry. So PIX is here to stay. We will take that into account in our -- when we talk about 2025, but that's ahead, and that's what we can say right now.
Okay. And if I may follow up, you mentioned a shift in the panorama of PIX penetration, but we also have a shift in the macroeconomic environment. So how does that impact your maybe sales force capacity that you added like marketing expenses are still on a high level. So any changes in the way you want to run your business in 2025 due to the macroeconomic deterioration in Brazil?
Thanks for the question, Daniel. So in terms of sales force planning, it doesn't really change the outlook. The way that we plan sales force internally is more towards a bottoms-up approach. So looking at the market at a very granular level and making sure that we have the TAM to address.
But when we talk about the change in the yield curve, I think the other side of it is the pricing side. And to that end, I think we've been emphasizing this in a couple of quarters as well, but pricing has become a lot more dynamic within the company, meaning that we continuously evaluate the profitability of our cohorts and then we adjust prices accordingly.
And with the new interest rate environment, what we're going to do is basically we're going to gradually incorporate this new yield curve in our decision-making and evaluate the economics of passing through these shifts to our clients. So it should be a natural progress. The only important note here is that we tend not to make big price movements in the first Q given the strong seasonality. So I think these waves of passing through the new yield curve should be stronger from the first quarter of '25 onwards.
Our next question comes from Mario Pierry with Bank of America.
Congratulations on the quarter. I wanted to explore a little bit more exactly on the take rate. And I think you answered part of that question -- in the previous question. But basically, when we look at your MSMB take rates, right, like you were running at 2.58%, you were guiding for 2.49%, the mix has been weaker than expected given PIX. So why is your take rate higher than what you were expecting? Is it because you already started to implement higher prices for your clients? You said a lot, right, that the competitive environment is very rational. Or is it because the banking product is more profitable for you?
Mario, thanks for the question, Mateus here. So when you look at the delta between the take rates that we are reporting, the 2.58% and the 2.49% that was the guidance, Basically, the whole delta is explained by a higher penetration of both credit and banking. Banking, of course, we're going to start to have the impact of the yield curve over the deposits. But when you look at the actual level of deposits, we're also ahead of guidance, right?
And in terms of credit, again, in the third Q, we already met the guidance. So the contribution that we're seeing in the P&L is bigger than what we anticipated. So I think it has less to do with the mix of PIX versus card TPV and more to do with the penetration of new solutions in the company.
Okay. That's clear. So -- and based on your previous answer, then even though we're still seeing higher rates in Brazil that you could implement that we're going to see, right, a shift in your pricing to reflect this higher yield curve. So what you're saying basically is that the take rate should be going higher from these levels, correct?
Yes, that's right. So when you look at third Q, you don't see yet a big impact from repricing because the yield curve is expected to rise from Q4 onwards. So this will probably take place from the first quarter of '25 onwards. And then that's correct. So the take rate should go up, as a result of the repricing waves.
Perfect. And let me ask you a second question, unrelated. We saw right that the credit card portfolio is growing at a faster pace. I think I read somewhere that you said that you increased the attractiveness of the credit card product. Can you explain what do you mean by that? What changes have you made to the credit card product?
Hi. Lia Here. So essentially, the message here is we're still at the beginning of scaling our credit card product. We've launched it now for both Ton and Stone. We do believe that credit card has a strong value proposition for the micro segment. And we're taking a similar approach here in terms of carefully increasing our offer according to what we observe in terms of performance, making sure that we maintain a conservative approach with regards to risk. So pretty similar to what we did at the beginning of the scaling of our working capital solution.
We are still fine-tuning from the perspective of the offer. So basically, what is the right value proposition for credit cards within SMBs versus micro. We know it is different. They have different needs. These are different segments that behave differently. So the message here is that it's very much at the beginning of the growth of this product, and we're still kind of learning with these early stages. And naturally, as we evolve, we will provide more visibility, as we continue to scale.
Our next question comes from Neha Agarwala with HSBC.
Congratulations on the results. If you can dive a bit into PIX. Right now, you mentioned that the take rate that you get from PIX is pretty similar to what you have on the debit cards. So technically, cannibalization of debit cards does not really have an impact on your overall take rate. Do you expect this dynamic to change? Would you see -- expect as PIX gains prevalence, would you see competition in terms of pricing among your peers, which leads to lower pricing for PIX and makes it a bit less attractive?
And on that, we have more new features coming on PIX, right? We have the automatic and the recurring PIX payments. What is your expectation, as these new products are launched and adopted, would you think that this could cannibalize credit cards as well? And if so, what are the ways that it could impact your business? So if you can just start with that first.
Neha, Lia here. So let me elaborate a little bit further on PIX QR code and our perspectives on monetization. So it is very clear that PIX QR code, the dynamic QR code integrated to the POS machine is a very different user experience, especially for SMB clients because it allows reconciliation. There's a big difference in terms of fraud. We know that PIX P2P, so the types of static QR code or other capture methods in PIX that are not dynamic, they tend to have a much higher level of fraud. So we firmly believe that this is kind of a value add in terms of offering a new payment solution for our clients, and that is here to stay, right?
So PIX NFC is just another step in that direction. We do believe that as PIX NFC improves the user experience, especially on the side of the consumer, that's going to likely accelerate the trend, where PIX cannibalizes on debit volumes. We do not see PIX cannibalizing on credit volumes. I think the ABEX data on card TPV growth kind of points to that direction, right? We continue to see healthy growth in credit card TPV. We -- within our base, we do not see any evidence of PIX cannibalizing on credit volumes, especially because of the nature of installments, right? So we haven't seen this, as a relevant trend at all within our base.
Our base case scenario is really PIX continuing to grow in adoption versus debit volumes. And because this is a value-added solution that we offer clients in terms of all the features associated to any payment method, we don't believe that monetization is likely to change. But then, again, a very important aspect of PIX for us is that it substitutes its cash, and that's all accretive, right? So more deposits within our ecosystem, everything I've already said. But that kind of summarizes the picture in terms of how we see PIX.
And you're not seeing any pressure from your peers in terms of pricing for PIX processing?
No, no news around that [indiscernible].
And on that front, if I may add Lia, remember that how we price PIX nowadays is closer to the dynamics of net MDRs to debit. And if you think about the pricing of debit transaction, it was a fee that was supposed to cover the distribution costs, the reconciliation features and so on and so forth. And that pricing is stable for quite a while now in the market. So we're not really worried about these trends or these challenges in terms of pricing for PIX. I think it's quite a stable environment nowadays.
Two more questions. First, on the take rate in the key account segment, there was a big 14 basis points quarter-on-quarter jump. So if you could just explain what led to that improvement in the take rate for key accounts?
And my second question is on the credit book. You mentioned that you expect about a 10% expected loss, and that's why you want to bring the reserves, as a percentage of your loan book to around 10%, which is currently 14%. When I look at some players like, for instance, Mercado Libre, who kind of breaks down it by segment, and they do credit to merchants, both on and off platform, their reserves, as a percentage of loan book is around 30%, 40%. So is there a difference in the kind of merchants? What are you seeing that makes you think that to have reserves of 10% -- why not -- I mean, given that Brazil is a difficult market and [ it's your ] first time doing great, why not maintain a higher level of provisioning than what you expect just to have some safeguard?
Okay. Neha, I'll take the -- quickly the key accounts question and then pass it over to Mateus to elaborate on NPL dynamics. So within our key accounts, there was an 11.3% sequential reduction in TPV. That's basically because we lost -- remember that there is volume concentration within the segment. So we lost a significant volume from one specific sub-acquirer. And evidently, because this is a large player that counts positively towards shift mix in terms of take rates, so this move was also happened with an observed take rate improvement of 14 basis points. So it's simply a mix effect.
So Mateus, do you want to elaborate a little bit on NPLs?
Yes, for sure. So on the question of why we're talking about 10% as a level of expected credit losses when other peers are reporting on the 30% level, I think we're talking about a different mix of clients here. So if you look at the average ticket of our current credit portfolio, we're talking about BRL 30,000 in average loan size. If you look at the peers, we're talking about maybe 10x lower.
And I think if you were to look at the profile of clients that these other players are targeting, it would be more similar to a micro merchant and not an SMB merchant. Of course, we have initiatives to test and learn on that segment. But when we talk about our current working capital offering, it's mostly targets within SMB. So that's the difference.
Next question from Jamie Friedman with SIG.
Congratulations, guys. I have one for Mateus and one for Lia. The first one is how should we think about financial expenses going forward because those were a little bit below Mateus, what we were anticipating on a sequential basis.
And then Lia, in terms of the bundling strategy, is that potentially impacting merchant growth, bundling strategy and merchant growth?
Jamie, so I'll start with the financial expenses question and then pass it over to Lia. So in terms of financial expenses, when you think about the drivers of that line, there are basically 4 main factors. Our funding needs are the first one, the mix of funding sources, funding from third parties versus equity, the level of interest rates and the funding spreads, right?
When you look at the third Q, financial expenses rose by 7% quarter-over-quarter, basically given the following facts. So first, we had an increase in the number of working days in the quarter, which were 5% higher. Second, it's related to the funding needs piece. So we had growing TPV and therefore, bigger funding needs. And third, we did a sizable buyback in the quarter as well. So our mix of equity versus debt, of course, was lower.
On the other hand, we're talking a lot about the new financial instruments that we're issuing because of the Financeira license. And what we're seeing overall in our financial expenses is a reduction in the funding spreads. So that's the offsetting factor here that bridges the gap.
Now when we look ahead, I think the only difference that we're going to see [ starting ] in the fourth Q is that interest rates should start to rise, right, according to the yield curve. So when we think about the dynamics of financial expenses in relation to revenues, I think that's the big shift. So we should have a more challenging scenario in terms of financial expense solely due to the yield curves. But all the other factors, I think they are on a positive trend. So we're going to continue to generate cash. Funding spreads are also showing a positive trend and funding needs are basically a result of TPV growth. So those are the main factors there. Lia?
Yes. Jamie, so just taking your question on bundling -- and bundling strategies and how that has affected client base growth. So there's not a direct relationship. So our net adds, and the dynamics of client base growth is really a result of 2 main factors. First, what Mateus mentioned, that is the effect of the sponsorship and our marketing investments and the sponsorship in the reality show that happened in the first half of the year phasing out. So there's a seasonal impact in terms of client base growth. And second, our decision to really weigh on the side of profitability versus growth. So really paying attention on the quality of the clients versus the actual number of clients that we onboard.
Speaking more broadly, when we think about bundling, I think there's 2 slightly different dynamics there. Number one is bundling when we talk about cross-selling financial services to our software clients. We disclosed the cross-sell TPV metric. I think that's a good guide of that evolution. It doesn't impact so much client base growth because of a mix effect. Basically, those are larger clients, right? The nature of those software clients is medium clients within SMBs.
So in actual number of clients, it's not that relevant, but it is significant in terms of TPV growth. And we're seeing pretty good performance of our specialist sales channel within financial services, cross-selling financial services bundled to software to our software clients. So that's one part of the strategy. We're happy with the evolutions there.
And when we think about our micro and SMB client base, both with Stone and Ton offerings, we're basically at the point now that the vast majority of clients already onboard with a payments and banking bundle. That's been the reality for a while. I would say that, that part of the strategy of bundling payments and banking, that's already reached relative maturity, and that's really driven a big part of the deposit growth in the past. Now naturally, that's going to be more about engaging further with the banking and the credit, et cetera. But I would say that those bundling strategies, they will continue to evolve naturally as our road map evolves, but that's not what's driving the dynamics in terms of client base growth.
Next question from Guilherme Grespan with JPMorgan.
My question is going to be on capital allocation. I think Zinner started the call talking a little bit that you guys are studying a little bit more the requirements of allocation to the business and maybe you have excess cash. And I think it's a fair discussion. We discussed a lot. You basically -- you're sitting at BRL 5 billion excess cash, you generate almost BRL 2 billion net cash per year. And when we discuss here, we basically see 2 restrictions, I think, to the capital distribution. The first one would be capital. But when we do our math here, you are already sitting in our estimates more than 40% capital ratio in Brazil. And the second would be the working capital funding need, which our impression is that the securitization market in Brazil, it's already fairly developed. So my question to you is basically out of the BRL 5 billion that we're sitting in excess cash, the internal analysis that you guys are carrying, how much you think you can distribute or out of the BRL 2 billion net cash that you generate per year, how much can you distribute?
And the second question is basically the management incentive to that. I think part of the alignment here come from the KPIs. If you're planning to change the management KPI from nominal profit to ROE or at least EPS profit per share.
Thank you, Grespan. So I'll take the first part of the question regarding the framework of capital allocation. So I think in general, your view is the right one. So when we look at the capital structure of the company nowadays, we think that we are maintaining a solid and conservative capital structure with room for optimization. And I think we can see that not only by the adjusted net cash position that you mentioned, but also when you think about capitalization levels and the level of diversification in our funding sources, we're in a good shape nowadays.
Like you mentioned, I think the company continues to generate cash each quarter, even after accounting for the growth of the credit book. And based on those factors, again, we think that we have some excess of capital. And our mindset here is not to accumulate capital within the company. If we judge that we have capital in excess of what we need to execute the plan. The idea is to develop a framework to distribute that to shareholders in one way or the other.
As for the specific figures, given that we are still finishing this framework, we're not going to be sharing right now how many billions we think they are available to be distributed or so on and so forth. But like Pedro mentioned in the call, I think the idea is to provide this visibility to the market in the coming quarters. So we're working on that right now.
And on the incentive question, do you want to take this one, Pedro?
Yes. On the incentive side, I think you raised a fair point, and I think it's part of the whole framework in terms of the discussion on how we're going to allocate capital and make the decisions over time. I think the discussion is, as of today is really centered, as you mentioned, more on the EPS side rather than ROE itself. But it's part of the whole framework discussion that we're having. And I think we're going to be providing more visibility on that on the first quarter of next year.
Our next question comes from Renato Meloni with Autonomous Research.
So my first question was on the software business, and thinking here of Pedro's comments last call, it seemed that he was still, I would say, more convicted on owning the assets to benefit from the cross-selling opportunities. So I wonder here what drove the strategy change here now that you're considering a potential sale of the asset? And then if you allow me for a quick second question, just wondering what you expect to be the recurring effective tax rate now that you might have some benefits here on the bond repurchase.
Renato, thank you for the question. I think we remain confident that offering software to our clients is a key pillar of our strategy, as we highlighted in the Investor Day presentation. But now the product integrations are established, we believe that we can drive cross-selling opportunities through commercial partnerships without necessarily owning the asset. And I think this is what I tried to highlight in the call.
So while we're very confident in terms of our ability to execute our strategy that way, any transaction will only be pursued if it [indiscernible] add shareholder value. And we believe that -- sorry, we believe that there's no big change in the strategy at all. I think the way we want to move is really in terms of a more asset-light strategy using commercial contracts to actually revamp our balance sheet in some ways and improve our capital allocation. So the strategy remains pretty much the same.
And in terms of the tax rate question, I think we've mentioned in the past that we see the range for our tax rate has been between 20% to 25%. Of course, this is a big range, right? I think what the change that we have now with the bond buyback does is basically take us to the lower end of that range. But I think in terms of expectations going ahead, that remains quite the same.
Of course, you may remember that we also have some seasonality on the tax rate. So [ 4Q ] tends to be lower than the remainder of the year. But as a benchmark, I think the 20% to 25% range remains in place, but we should be on the lower end of that.
Yes. Sorry. And if I might come back, just to reinforce, I think the core message that I wanted to convey is on our belief that we have a unique software asset, right? But while we are confident in our ability to execute the strategy without necessarily owning the asset, we really believe that the transaction would add shareholder value.
Our next question comes from Kaio Da Prato with UBS.
I have 2 on my side, please. The first one, I want to touch base again on your cards TPV growth and especially for the MSMBs. I understand the shift from cards to PIX. But if we look at the quarter-on-quarter, your growth was slightly below the cards industry that was out a few days ago. So I just would like to understand, in your view, why we saw this implied market share loss, if it was related to some specific segment or no? And what's your expectation going forward, thinking about market share, especially as you probably have one of the largest salesforce in the MSMB industry nowadays?
And the second one, just following up from Grespan's question on capital allocation. And the last one, given your evaluation about the potential option for the software business, engagement with advisers and so on. Is it fair to assume that if we decide for a sale, the main option to maximize shareholder value today would be exactly distributing this capital or if you are looking for any specific allocation in a specific product or project, please?
Kaio, Lia here. Let me talk a little bit about TPV dynamics and your question regarding our growth versus industry. So when we think about market share, we prefer to look at our market share dynamics in a longer time horizon than only on a quarter-over-quarter basis. So our long-term target does imply continued market share gains over the long run, albeit at a lower pace than we had in the past naturally just because of the scale of the business, right?
Given that we face marketing and sales investments differently throughout the year, this may mean that we slightly lose share one quarter, but gain on the other to compensate for that. What's important for us is to maintain a consistent pace of growth and market share gains in the long run. That is also implied in our overall guidance for TPV, right, that we pointed out in the Investor Day. We do need to consider when we talk about TPV guidance for 2025 and even longer term, the dynamics of PIX because that's played out differently than we had anticipated last year. But nothing changes in terms of our perspective and our ability to continue to win clients and gain market share overall.
Regarding shorter term, right, the recent TPV growth dynamics, nothing structurally different happened this quarter other than what we have already said. So PIX growth ahead of expected with visible cannibalization from debit volumes. Our decision, as Mateus mentioned, to prioritize on the side of profitability versus growth, which may have an impact in short-term card TPV. And there's also some negative seasonality in the quarter since we had a September with less Saturdays than usual.
So I mean, these 3 were the main effects shorter term, but that it doesn't change our perspective on the longer-term dynamics. And we see our third quarter growth levels at 20% year-over-year, considering PIX as very healthy and driving the overall monetization possibilities through banking and through credit in the future throughout the life cycle of our clients. So yes, that's our take on the overall dynamics of TPV.
And on the second question around the software business and a potential use of proceeds, I think like Pedro mentioned, first of all, we have not even made a decision yet on whether a transaction will take place or not. We're evaluating options. So to that end, I think it's premature to discuss potential use of proceeds. But in general, like I mentioned in my answer regarding capital allocation, we feel good. We feel comfortable in terms of our capital structure nowadays. So of course, if we have excess cash from a potential transaction, either buying back or distributing that excess cash would be a possible option that we're going to evaluate.
Next question from William Barranjard with Itau BBA.
My question here is quite fast, frankly. So regarding your software slide regarding the possible sales of the asset, I just wanted to ask a little bit into which players you could be looking at to sell it. So -- as you mentioned that you are looking into a commercial partnership if the sales really happen. So can I exclude as potential buyers every player that has acquiring capabilities or has already partners on the acquiring space?
Thanks for the question. So I'll take the first part regarding the commercial agreements. So I think the idea here is that when you look at our operational days, we currently collaborate with various software companies through our partner program. And we have some of those partnerships under exclusivity agreements as well. So if we decide to proceed with any transaction, indeed maintaining those agreements would be a very important condition. And of course, we're going to factor that into the decision-making process.
I think the second question, if you could repeat.
No, I think it's just one question really regarding like potential buyers and if like automatically, if you exclude automatically players that already have like payments capabilities and so on. But I guess, it's clear.
Yes. I think at this stage, we really cannot share the specific details. However, what we can confirm is that there has been a strong interest in the asset from a diverse group of more than 20 players, and that includes both financial investors and strategic companies. So at this point, it's really -- it's an open discussion.
Our next question comes from John Coffey with Barclays.
This is John. I guess one of the questions I had for you is on the impact of the SELIC rate in pricing. I think we look back a number of years ago when the SELIC started climbing to, I think it was 13.75%, there were some pricing changes that you made in some of your competitors as well. And I think there was some concern later that when the rates started to decline that you would actually have to maybe reduce price. So now that we seem to be in a bit of a rising interest rate environment in Brazil, what are your thoughts on changing prices, raising prices, maybe what you've done already in Q3, if you have done any and going forward, maybe particularly as we get into 2025?
Thanks for the question, John. So I think I touched upon this on the other question. But I think the emphasis here is that pricing is really becoming a dynamic process within the company nowadays. So we literally evaluate the unit economics of the whole client base every single month. And we take a lot of factors into that calculation, both product usage and of course, the macroeconomic conditions. And then we make a judgment on whether we're going to adjust prices or not. Of course, now that we're seeing interest rates rising implied in the curve, that goes into the calculation and what ends up happening is that we're going to have most likely a higher level of repricing and adjustments going forward.
So to answer your question, I think the idea is indeed to pass through some of the increase that we're going to see. This is a process that usually has some lag and takes a while. So if you look at the numbers from third Q and also fourth Q, we shouldn't see a big impact from repricing waves. But as time goes by, I think the expectation is indeed to pass through some of those increases.
There are no questions at this time. This concludes the question-and-answer session. The questions that have not been answered in this conference call will be addressed later by the StoneCo team. I will now turn over to Pedro Zinner, CEO at StoneCo for final considerations.
Well, thank you very much for everyone for participating in the call, and hope to see you in the next quarter. Thank you.
This does conclude today's presentation. You may now disconnect.