Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the StoneCo Second Quarter 2019 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 at www.stone.co on the Investor Relations section.

Throughout this conference call, the company will be presenting non-IFRS financial information including adjusted net income and adjusted free cash flow. These are important financial measures for the company, but are not financial measures as defined by IFRS.

Reconciliations of the company’s non-IFRS financial information to the IFRS financial information to appear in today’s press release. Finally, before we begin our formal remarks, I would like to remind everyone that today’s discussion will include forward-looking statements.

These forward-looking statements are not guarantees of future performance and therefore you should not undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the company’s expectations.

Please refer to the forward-looking statements disclosure in the company’s earnings press release. In addition, many of the risks regarding the business are disclosed 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, Rafael Martins, Investor Relations Executive Officer at Stone. Please proceed..

Good evening, everyone and thank you for joining us today. Joining me on today’s call are Thiago Piau, our CEO; Marcelo Baldin, VP of Finance; and Lia Matos, Chief Strategy Officer. As you know on July 30, we announced preliminary metrics for the second quarter of 2019 as well as our joint venture with Grupo Globo.

On this call, we will present our full operational and financial results for the second quarter, update you on our strategic progress and give additional details on our company’s evolution. Thiago will start with some exciting strategic updates.

Thiago?.

Thank you, Rafael. Good evening everyone. Thanks for joining us today. Some remarks here. During the second quarter, we made great progress on our strategic long-term plan. So we have summarized the highlights on Slide 3. First, our business continued to grow fast and with profitability.

In the second quarter, we reached almost 30 billion in TPV and preliminary industry data indicates we had our largest quarterly market share gain over the last year reaching approximately 7% of total markets. We also accelerated the pace of adding new clients.

In the second quarter, we posted a record of more than 50,000 new clients bringing us to a total of over 360,000 active clients, 80% growth when compared to last year. While accelerating our growth, we kept our take rates stable at 1.85%. And despite the heavy investment for future growth, our adjusted net margin was above 33% in the quarter.

Our second results demonstrate the success of our business model and our team’s execution capabilities. We have been able to combine high growth and profitability in a way that very few companies have.

This was only possible because our clients see value in our services and in our products, which give us the confidence to invest even more in the business and accelerate our expansion. We dream very big and we want to accomplish much more to help our merchants.

Before Lia and Rafael discuss our second quarter results in more detail, I want to take a few minutes to talk about our strategic vision and plans for growth. I am pleased to report that in addition to second quarter financial results, in July, we reached three important milestones on our strategic growth initiatives.

First, we have made great progress in growing beyond payment solutions. We now have more than 70,000 clients with software subscription and that’s more than twice the number of software clients we had just one quarter ago. Important to highlight that’s mainly organic growth.

Secondly, since we launched the credit solution, at the beginning of March, we have already supplied credit to over 3,000 clients with a total disbursement of more than BRL50 million. And finally, we have formed a joint venture with Globo, the largest media group in Brazil, to go after the huge opportunity to serve micro merchants in the country.

This milestone represents significant progress towards achieving our goal of becoming the partner of choice for merchants, providing them a full range of solutions. Today, in Brazil, as you see in Slide 4, merchants must go to multiple providers to address this need.

You have heard us say many times that more and more we see the boundaries among payments, banking credit and software being broken down and we truly believe that our merchants deserve to fill their transaction support needs with one single touch point within seconds.

Stone is driving this breakthrough and we will continue to lead this evolution in Brazil. On Slide 5, we show how we are evolving our solutions moving forward with two different groups, our ABC platform and software. The ABC platform is an expansion of core payment business.

Soon, we will offer our clients access to acquiring banking services, credit and prepayments in one single technology platform and this will give clients a holistic view of their cash flow and help them be more preservative. Under the software strategy, we provide horizontal and vertical specific solutions to our merchants.

We currently offer software to three verticals, foodservice, retail and most recently beauty, with the POS in ERP designed for beauty salons. We plan to grow our software client base mainly organically and we see great opportunity to cross-sell software to our payment client base as Lia will show in a second.

With the combination of our ABC platform in our software solution, our clients will have pretty much everything they need to start, run and grow their store either online or offline. We have an operational platform combined with software is core to our strategy.

We want to believe that it is in provided integrated solutions on a large scale both from a technology and personal service point of view. As shown on Slide 6, our vision is to help our merchants to better manage their store and sell more bridging the gap between the digital and brick-and-mortar channels.

As you can see in this slide, everything starts with our agents.

We established a very close relationship with our merchants and can help them with all of their financial needs with a single platform, such as accepting all payment methods, having a bank account specifically designed for merchant needs and having access to credit in a very simple and transparent way.

Once we onboard our merchant on this platform, our Green Angel proves how dedicated we are in terms of support, delivering our POS hardware in less than 24 hours.

More than our financial platform, through our point-of-sale software, we help our merchants to better manage their store, and we integrate their inventory with digital channels such as marketplaces, social media and e-commerce.

As our clients start selling online, our Green Angels go back to our merchants and help them with last-mile logistics, saving them precious time so they don’t need to go to post office, for example.

The great thing about this vision is that we can offer it with unparalleled level of integrated customer service where we take our merchant’s phone call in 4 seconds or less and solve 90% of their requests on the line.

We see a lot of untapped opportunities ahead of us, which we intend to pursue with financial discipline, always keeping in mind the long-term goals of our company. We look forward to report to you in the future our strategic progress and results in these areas.

Now I would like to hand the call over to Lia, so she can give you more detail on our financial and software solution and an update on the Hub Strategy..

first, through our Stone digital accounts, which is currently in pre-launch phase and has more than 10,000 accounts; The second is by allowing consumer facing apps and other partners to connect our platform via APIs and offer banking services to their own clients.

With the client-centric approach, we are expanding the road map of features to offer the best digital account built for SMBs. The feedbacks to date have been incredibly encouraging. Now let’s talk about our software solutions.

Turning to Slide 8, we have been adding hundreds of clients a day, which allowed us to grow our number of subscribed clients from approximately 32,000 at the end of the first quarter to close to 70,000 in July, more than doubling in a short time and this growth has been virtually all organic.

Also, as the graph on the right side of the slide shows, there is a clear opportunity to cross sell software to our clients in payments. Among the 70,000 software clients, 46,000 are also our clients in payments and are included in the number of 360,000 active clients that we just reported.

We started our client relationship with payments, achieving the best NPS in the country, and now we are starting to offer software, focusing on ruling out horizontal offerings at first.

As we deepen our relationships with clients, we will offer them a more complete set of management tools in specific verticals creating stickiness and growing our client base organically. In addition to growth from our new banking and software solutions, we still have plenty of room to grow in our hubs, as you can see on Slide 9.

Our market share in terms of merchant count continues to grow both in locations where we have a long-standing presence and in cities where we’ve entered more recently. In fact, we grew market share by more than 20% year-to-date in mature cities compared to a 5x increase in less mature ones, which are both great results.

This proves the power of our value proposition over time despite an environment of increasing competition. Now I will turn back the word to Thiago so that he can comment on the JV we announced in July that will allow us to enter a huge market..

Great, Lia. Thanks a lot. As Lia just showed, we are very focused on building the best platform for our merchants. With the Hub Strategy, we created a very solid business model for our small and medium business, where we still have a sea of opportunity to explore.

And as I indicated before, we reinvest even more to accelerate growth and expand our successful business. At the end of ‘18, we are decongesting Stone Mais, our solution for fast growing segment in Brazil with over 21 million autonomous workers, and we learned that the critical asset for success in this market is media and marketing capabilities.

So we looked for the right partners to bring that to the table. We are thrilled to form a JV with Grupo Globo, the biggest media conglomerate in Brazil.

And as shown on Slide 10, we are creating a heavyweight contender in the micro-merchant space, combining the best media and marketing experience of Brazil’s top media company and Stone’s expertise in technology payments and financial services.

In addition to its high penetration within micro-merchants and unique communication capabilities, Grupo Globo will contribute an upfront investment of BRL461 million in media. And in addition to our operational support, technology and payment processing capabilities, Stone will contribute BRL15 million in cash.

The JV is expected to start operations in the fourth quarter, and we’ll have a dedicated team with Caio Fiuza as CEO. Within Stone itself, we remain focused on SMBs and digital clients.

We look forward to replicating our success in the SMB segment and providing a great experience to autonomous workers and micro-merchants all over the country, redefining the relationship between providers and clients in this segment.

A core value here at Stone is team play, creating synergy by forming partnerships, enable us to go far beyond what we can achieve alone. We are very happy to welcome our new partners and very confident that, together, we can address this huge opportunity with the talented and dedicated team of Grupo Globo.

With that, I will turn it over to Rafael to provide details on our second quarter financial performance..

Thank you, Thiago. As previously mentioned, we continue to evolve our business, improve our solutions to merchants and grow fast, all with very healthy margin levels. On our previous conference call, we mentioned that we would increase investment in our operations and especially in our Hub Strategy.

As you know, when we invest in a hub, we put cost upfront and later benefit from significant operating leverage as the hub matures. Although our investment is recent, we are already starting to see positive results in our main KPIs.

As you have just heard in the second quarter, we reached the mark of over 360,000 active clients with a record of more than 50,000 net adds in the second quarter of ‘19. It’s important to highlight that the net adds improve each month within the quarter with 19,000 net adds in June alone.

This gives us confidence that, in the coming quarters, we should see net addition of clients grow even more than the 50,000 presented in this quarter. As you will see on Slide 11, in the second quarter of ‘19, we also achieved 61% year-over-year growth in TPV representing an increase from the previous quarter growth.

Total revenue and income for the second quarter increased by 69% year-over-year to more than BRL586 million compared with nearly BRL348 million in the second quarter of 2018.

This growth was driven by a year-over-year increase of 56% in net revenue from transaction activities and other services, a 60% increase in net revenue from subscription services and equipment rental, and a 62% increase year-over-year in financial income.

As you will see on Slide 12, cost of services was nearly BRL101 million for the second quarter, an increase of 44% compared with the second quarter of 2018.

Cost of services as a percentage of total revenue and income was 17.2%, an efficiency gain of 3 percentage points over the prior year period and a 1.3 percentage point de-leverage compared with the first quarter of 2019.

The quarter-over-quarter dip was mainly due to higher logistics and customer service cost as we further invested in our operations as well as higher provisions and losses. Moving on to administrative expenses, in the second quarter of 2019, they increased by approximately 32% year-over-year to BRL77 million.

Administrative expenses as a percentage of total revenue and income was 13.2% in the second quarter of ‘19 compared to 16.8% in the second quarter of 2018, an efficiency gain of 3.6 percentage points in the period as the company dilutes its fixed costs.

Compared with the first quarter, administrative expenses as a percentage of total revenue and income increased by 1.1 percentage points explained mainly by higher third-party services. Selling expenses grew by 99% year-over-year reaching over BRL87 million in the second quarter of ‘19.

This increase was primarily due to additional headcount in our sales team in line with our commitment to accelerate investment in hubs. Financial expenses were nearly BRL79 million, 6% higher than the second quarter of 2018.

Financial expenses as a percentage of financial income fell from 40.3% in the second quarter of ‘18 to 26.5% in the second quarter of ‘19. This decrease resulted from lower cost of funds due to lower base rates, cheaper funding lines and the use of more own cash to fund prepayment operations combined with higher financial income.

Compared with the first quarter, financial expenses increased 18%, in line with financial income. As you will see on Slide 13, our second quarter adjusted net income was BRL194 million with a margin of 33.1% compared with BRL71 million adjusted net income and a margin of 20.5% in the second quarter of 2018.

The main factors that contributed to the growth in adjusted net income year-over-year were an increase in total revenue and income, operating leverage in cost of services and administrative expenses, and reduced cost of funds as we gain access to cheaper funding and increase the use of own cash to fund the prepayment operation.

Compared with the first quarter of 2019, our adjusted net margin was negatively impacted by higher investments in our operations, partially offset by lower tax rates mainly due to interest on capital and R&D tax benefit.

During the second quarter, we invested more than BRL30 million in expanding our operations and in training to our employees, which led our cost and expenses to increase as a percentage of total revenue and income from 39.7% in the first quarter to 45.3% in the second quarter in line with our strategy of increasing the investment in our operation to expand growth.

Overall, in a time when the market keeps competing solely on prices, we were able to maintain our take rate flat at 1.85% balancing growth and profitability. Achieving the right balance between investments and profitability is key to generating higher returns to our long-term investors. Finally, let’s look at cash flow.

As shown on the Slide 14, we generated almost BRL80 million of adjusted free cash flow in the second quarter of 2019 compared with nearly BRL13 million of negative free cash flow in the second quarter of ‘18.

The main reason for the increase was an improvement in our adjusted net income year-over-year, which was partially offset by higher outflows from income tax paid, labor and social security liabilities, and other accounts receivable. With that said, operator, please open the call up to questions..

Thank you. [Operator Instructions] Our first question comes from Mr. Eduardo Rosman, BTG Pactual. You may proceed..

Hi, everyone. Congrats on the results. Congrats on the partnership with Grupo Globo. I have two questions. The first one, I am trying to understand here the dynamics of net adds. We can see here that you had like a great achievement during the quarter, but we saw as well that we saw big evolution throughout the months, right.

So it seems that in April, I think you got like 15,000 and then at the end of June, 19,000, just wanted to understand if something changed during the quarter, if you had – if you suffered from any special event we had like hedge announcing the [indiscernible], right, not sure if you suffered anything from that or if you had to change somehow the strategy during the quarter to accelerate the growth.

So just wanted to understand how these dynamics worked during the quarter? That’s question number one. Question number two is on your OpEx, right, we saw – on a year-on-year basis, you continue to improve your margins, right, but when compared to the previous quarter, expenses picked up, right? So we can clearly see that you are investing to grow.

So just wanted to understand if you are still kind of opening one new hub per week also want to understand if this kind of a pickup in growth, how much is related to the current business right of acquiring and growing the hubs and how much is related to new initiatives such as software digital banking, etcetera? Thanks a lot..

Hi, Rosman, Rafael here. Thank you very much for the question. So regarding your first question of net adds, nothing specific in the quarter, so we have continued investing in the business. So that increased net adds within the quarter.

It’s something that we are already playing and as a result of our investment, so our expansion in the hubs and our continued productivity within each hub. So this is nothing very specific or regarding competition and nothing related to that. To your second question in OpEx, you’re right.

So as we said in the last quarter, we invested this quarter in our growth. So that’s why you see the OpEx increasing quarter-over-quarter. When you look at the – each line item, you’ll see that the investments that we have made to grow, if you exclude that, you would see pretty much the same percentage of revenue in those costs and expenses.

So as an example, if you see our COGS, our cost of services, it has increased a little bit as a percentage of revenue, but for example, transaction costs, they have decreased as a percentage of revenue. And the same way with administrative expenses, if you look, we are having operational leverage with our personnel in that line as well.

So the big part there is investment in the hubs, customer service, logistics and technology. So that was the bulk of it. And regarding to your first question in net adds, I think no – nothing very new in competitive environment. I think Thiago can address that point..

Perfect. So thank you, Rafa. Thank you, Rosman, for the question. It’s a great question. So one comment about net adds is that we expect net adds to continue to grow quarter-over-quarter.

So as you can see, we are growing June, our net adds, more than we were in April, and we expect this trend to continue with more – with bigger net adds quarter-over-quarter. So regarding competition, I would take this opportunity to talk about two specific comments in – regarding short-term dynamics and long-term dynamics.

So first is that I understand that capital markets are worried about competition impacting our take rates in the short-term and announcements of our competitors. And to help our investors understand our perspective on these worries, what I can say is that I don’t expect significant changes in take rates in the next quarter.

Take rates can go up or down 2 or 3 basis points because of client mix. As you know, we have digital channel integrated partners with some large account clients and we have our hubs, but we are not concerned with competition for incumbents impacting our Hub Strategy or our ability to grow. So that’s the first comment.

Second comment is that, in our calls, we have talked a lot about competition with incumbent players – incumbent payment players; but in reality, we see our markets in a different way.

So our clients today, they pay around 2% take rates for us in our payment product, and if you consider a BRL20,000 on average TPV, this represents BRL400 a month that our clients pay to us.

And while the markets worried about where this BRL400 can get to, we see there our clients paid BRL200 fees monthly for POS and ERP solution that really don’t have high quality. And more than that, accounting, many times, is a nightmare for our clients, and they pay BRL800 a month or BRL1,000 a month for accounting services.

And beyond that, every time someone brings in new sale for them such as marketplaces or food delivery platform, they pay 16% to 20% in fees in this new sale.

So in our vision, we seek to provide all the service our client need to run their operation, integrate them with digital channels and marketplaces and help them with last-mile logistics using our 100% integrated platform and with our customer experience where we can solve all their problems in 1 simple phone call in four seconds and our team is more than happy to be there for them whenever they need.

So I am proud to say that we have an incredible team that quarter-over-quarter protects our core business. We are expanding our vision. We are evolving our strategy, 100% oriented to our clients’ needs.

And this obsession of our customers and the fact that we see many opportunities in the business of our clients is something really unique, which we don’t see other players trying to build. So that’s my takeaway regarding the competitive dynamics during the quarter. And thank you very much for your question, Rosman..

Thank you very much..

Our next question comes from Tito Labarta, Goldman Sachs..

Hi, good afternoon. Thanks for the call. Couple of questions as well. One, just following up in terms of your growth in clients and also with TPV, like you have seen clients grew like 80%, but TPV is growing around 61%.

I understand you are probably going into more – maybe more smaller merchants or more into your core business, but just should this trend continue where clients grow faster than TPV or how should we think about that evolution? And then the second question, in terms of the, I guess the new products with credit and software, how should we think about that? I guess, on the credit side, what percentage of your financial income will come from credit versus prepayments? Any color you can give on that? I know it’s still kind of early, but just want to get a sense of how should we kind of forecast that into our numbers.

And then also with the software like how much can you reach in terms of potential penetration? If you have 70,000 clients now, how fast does that grow? Thank you..

Hi, Tito, Rafael here. Thank you very much for the question. Regarding your question for our TPV, you still see a slight decline in TPV per client, and that’s mainly because of mix of clients still. So whenever we go to the countryside in Brazil, you have the same type of clients selling a little bit less, so that’s still the effect you see here.

Despite that, we were able to grow 60% TPV. And when you look at the market share in that quarter, this is the quarter where we gained most share if you look at the last year, all the four quarters. So I think we have been able to grow TPV at a healthy base.

Over the long-term, of course, this trends when you look at the SMBs in the country, you should have more aligned growth, right? So this is what we are seeing from a TPV perspective. And regarding your next question, Lia is going to answer..

Yes. Thanks for the question, Tito. So talking a little bit about new products and specifically about the financial services part of those products, like we said, we were incredibly encouraged with the growth of our credit offering. We started piloting it, and it’s been growing way ahead of our plans.

Like we mentioned, we launched credit and banking this year, right? And when we did that, our core payments platform was already pretty evolved, so we launched those three solutions separately.

What we are seeing and because of the very good feedback that we are getting from our clients, is that a natural evolution is to really integrate these three offerings into a single financial platform that we are calling ABC like you saw in the presentation.

And so we will naturally evolve to really offering one single financial platform where our clients can use multiple sets of financial services. Like we also said regarding prepayment and credit, we see this as part of the same revenue pool. So we see that there is like humongous opportunity. We have tapped so far 1% of this addressable market.

So we see a lot of leeway for growth in the future..

So just to add in terms of credit and prepayment dynamics, so as Lia said and we have shown on Slide 7, the total markets in terms of financing merchants in Brazil with credit and prepayment is very big. Every time merchants need money to match accounts receivables and payables, we can do this by prepayment.

And every time they need money to grow to buy more inventory or to open new store, we can do this using our credit solution. We don’t seek to bear risks in our balance sheet in terms of this credit operation. So we see opportunity to have partners in terms of this credit opportunity in which we can originate the credit.

We can have all relationship with the merchant to help them understand exactly how much they are paying, the ability of the merchant to pay as a part of their volume but not bearing the risk of this credit and having a strategic partner to bear these risks.

So that’s the only comment because now we have the license of the SCD, which is an entity in Brazil that give us the ability to give credit directly to our merchants. But our strategy is not to bear the risk of this credit in our balance sheet..

Okay, great. That’s very helpful.

Maybe if I can just follow-up, I guess, maybe just in terms of helping us think about the growth or how quickly it grows, right? If you are growing financial income today roughly around 50%, right, can that growth accelerate from here given these additional products, is that how we should think about that?.

It’s very difficult for us to say forward-looking statements about this. We don’t like to give guidance in terms of the future. But the credit opportunity’s very, very big as we already said.

We are mainly focused at this point in three fronts, which is integrating all the offering of payments, banking and credit, as you can see on Slide 5, to have 1 single platform for all of our clients. That’s the first focus. The second one is rolling out the software for our entire base. And the third one is growing credit.

So we see that software is the strategy to reduce churn and create more stickiness, and definitely credit is the way that we can have more yields in the future. So it’s really a big opportunity. We will invest heavily on that, but we don’t want to take the risk of the clients. So we will evolve this looking for these topics that I just told you..

Okay, great. Thank you..

Next question comes from Mario Pierry, Bank of America..

Hi, everybody. Congratulations on the quarter. Let me ask you also a couple of questions, please.

The first one on the Globo partnership here, can you be more specific how you are planning on addressing the micro-merchants segment? How are you going to price your products right? Because you already have one competitor that is very present there, very transparent pricing structure.

So I was wondering if you are going to try to replicate the model or if you have a completely different strategy, if you’re going to be using the same brand, the Stone brand or you are going to differentiate.

And also, when I look at your client base todaywhat percentage of your clients do you think are already in this micro-merchant segment? Then the second question that I have is when we look at this growth in software clients, right, there’s big growth.

Is this because your clients are more aware of your product? Or is it because you’re launching new products and clients have seen the value? I’m just trying to understand here, right, because you made a few acquisitions during the quarter of software providers. So I was wondering what is attracting the clients here.

Is it the new products that you’re introducing? Or is it just that they are aware of your products? What are you doing then to get people more interested in signing up and using your software products?.

Great, Mario. Thank you very much for the question. It’s a great question. So I will start answering the question regarding the JV with Globo now and then Lia will talk a little bit about the software part. So to your question, we will have a separate brand for this operation. So we are looking to launch this on fourth quarter.

So we are creating this brand. It will be linked to Stone, but it will be a separate brand and are creating here for – with 4 hands with Grupo Globo. And we are happy to see that we will be a heavyweight contender, a top player in this market. We think that the market’s very big. It has space to everyone, but we seek to be a top player in the market.

And our differentiated – differentiation will be in 3 main areas. So first, we will redefine customer service for micro-merchants as we already do for SMBs.

Second part’s that the level of marketing data and consumer intelligence of Grupo Globo will allow us to be very efficient in customer acquisition and the distribution of this product will be mainly through digital channels.

As we already have an efficient operation and then a best-in-class technology as you know, for our core business, we think that this will create the ability to us to pass part of these efficiencies to our clients using price. So pricing’s something that we can use.

So those are the main – the 3 main areas that we are looking in terms of this joint venture with Grupo Globo. We’ll have more details about our solution including the price, brand and feature to disclose to the market when we officially launch the JV. And we are planning to report this joint venture separately once we launch of the operation.

So that’s something that we are talking with our auditors. But we seek to report the joint venture separately. The client base in terms of micro-merchant at this point is very, very small. It’s almost irrelevant, very low single digits, so it’s very, very small as we said in our earnings calls before.

So those are the takeaways regarding the JV with Globo.

Lia, do you want to talk about the software part?.

Yes. Sure.

Just, Mario, to highlight a couple of points in software and especially the organic – recent organic growth that we saw in software, okay, I think first thing is this organic growth I think speaks to the power of our distribution, right? So the fact that we can own distribution on all fronts and that we interact directly with our merchants really makes us – gives us a very good position in terms of being able to offer anything beyond payments really, right, so anything that our merchants need.

So I think that’s the first important point. And the second is our ability that – to, through technology, integrate these software offerings, right, to our core payments offerings. So this really allows us to offer software in a very simple way.

And I think the other very important point is that all of our merchants, as we see it, they use software today. And they interact with thousands of local providers that are spread out throughout Brazil, so this is a very, very fragmented market, right? And these solutions tend to be relatively low-quality on-premise solutions.

So there is a huge untapped opportunity as Thiago has already mentioned. And I think those are the elements that really explain our ability to have been able to grow organically in software..

So let me just go back to the joint venture of Grupo Globo again because I know that there are some questions about the client base, and I just want to make sure that I address this right. So we are not entering the micro-merchant space because we see competitive pressure in the SMBs. It’s actually the opposite.

We continue to be extremely excited with the SMB opportunity as we communicated in our vision, and we also see a lot of opportunities in the micro-merchant space. That’s why we want to have both operations separately, and we will report separately for the market to see net adds, take rates and all the KPIs of both operations separately.

But our focus continues to be 100% in the SMBs, and we are very excited with everything that we can do for our merchants from now on. And we expect to continue to grow net adds quarter-over-quarter as we have done so far..

Next question comes from Felipe Salomao, Citibank..

I have two questions. One is a follow-up from a Mario’s question, and then I have a different one. It’s – the first one is about the new software offering, right? I mean, Stone had a very strong organic growth of 35,000 new clients.

And my question is are these clients or most of these clients pay an additional fee for these software services or the offering of these software services is actually embedded within the subscription fee that Stone was already charging from all the SMB clients since day 1.

So is – are the new software offerings generating additional revenues or just helping to keep take rate stable? That would be my first question. And the second question is about the average – the TPV per average client. So the TPV per average client was down 13% year-on-year and 3% quarter-on-quarter.

And would it be possible to get a better sense on what are the key reasons behind this marginal decrease? Should we not expect, I don’t know, TPV per merchant to actually grow given that merchants are becoming more familiar with Stone service and are willing to increase their usage of Stone’s POS devices while no longer using, let’s say, incumbent players? So I just want to get a better sense of this specific trend.

Congratulations for the very strong results..

Thank you, Felipe. I’m going to take the first part of the question, and then Rafa’s going to answer the second. So regarding software, again, in the context of subscription revenue, like we mentioned, we’re offering this software as an integral part of our offering. So we do not, at this point, charge beyond the subscription revenue.

We are focusing on sustaining stable take rates. And most importantly, on growing our base of software – growing the base of merchants that use software integrated with payments, what we are seeing is very encouraging early results and churn reduction for the clients that actually use our software offerings. So I hope that answers your question.

And I’ll pass on to Rafael to answer the second part..

Thanks for the question. So regarding that TPV per client, as we mentioned, it declined 3% quarter-over-quarter. We still see the dilution of large clients we have in our base because when you look how fast we are growing in the SMB space, and if you see in the hub, the average TPV is a little over BRL20,000. So it’s lower than our average TPV today.

You still have that effect, right? It’s not migration or the clients leaving us. So that’s the main reason. We still see the dilution of large clients there..

Next question comes from Daniel Federle, Credit Suisse..

Hi, everyone thank you very much for taking my questions. The first one is to try to understand a little bit better the dynamics in the prepayment revenues. We continue to see prepayment revenues growing pretty healthy in spite of some competitors offering the prepayment of single-installment transactions for free.

My question is if Stone is not suffering or feeling any pressure in reducing the interest rates for single-installment transactions or if Stone is offsetting these with higher fees in multi-installment transactions or with higher volume. And my second question is a follow-up on the strategy, the micro-merchant segment.

Just understand if I understood correctly and if Stone is seeing opportunity to practice lower prices in this segment. Thank you very much..

Hi, Daniel Thiago here. Thank you for your question, very good question. So first, regarding the prepayment, we are not using higher rates in the client base to offset these announcements of competition as you have asked.

So actually, we said many times that our business model is very protected from competition because of the value proposition that we offer having our agent close to our clients, having our customer service with so high-quality service that we offer to our merchants.

And I think that the results of this quarter proves the ability of these teams to protect its core business and how strong our business model is. So actually, we continue with the same level of prepayments and the same strategy. So we are really not suffering from this effect that you just mentioned. And the second part of the question is regarding....

Micro-merchants..

Yes.

Is your question micro-merchants regarding price? Is that right? Regarding micro-merchants?.

Yes..

Oh, yes. So we do have the option to use price. So it’s something that we will take into account as we launch this operation. We believe that we already have a technology platform that is very high quality and makes a difference for our clients and that service is something that our clients do see value. So those are the first ones that we will use.

But if needed, we have price to use because our operation is very, very efficient. So that’s something that we will have in mind..

Our next question comes from Joseph Foresi, Cantor Fitzgerald..

A couple of questions for me, could you provide us with an update on your Stone Hubs build-out and what your targets are for this year? And then maybe you could also give us a little bit more color on some of the financial options and how you expect that to change as you’ve seen that – financial options for the merchants and now you expect that to change as you move more to the micro-merchant level.

And then finally, I just wanted to get some general comments around the Central Bank and some of the moves towards real-time payments and technology and the pricing environment..

Yes. Thank you, Joseph, for the questions. So regarding hubs, what we can say is that we continue to accelerate our hub openings. So over the second quarter, we opened over 2 hubs every week.

And although we don’t give any guidance in terms of the number of hubs that we expect to reach in the long run, what we can say is that we continue to see a lot of opportunity, both in opening new hubs as well as to further penetrate the hubs that we are already in as you could see on Page 9 of our presentation. That’s regarding hubs.

I’m going to skip to the third question, and then I’m going to ask you to please repeat the second question because I think we didn’t get it very clearly. So I believe your third question was regarding fast payments, right? So we see fast payments as a certain evolution in Brazil.

We see the regulator creating a framework to talk about fast payments and that opportunity.

Like we said before in previous calls, we have a platform, our open banking platform that is very adapted, we think, to the reality of where regulators are pointing in terms of that evolution in Brazil, which is very similar to the kind of evolution that happened in Europe.

We see that fast payments is just one more payment method, right? It’s likely to disrupt debit and cash, and we see this disruption happening much more on the consumer side than on the merchant side. So the merchant side of the business in Brazil has already been significantly disrupted.

And we believe that our role here is to really help merchants accept any type of payment method. Brazil has a large complexity of payment methods already in existence, so debit and credit cards, vouchers, boletos.

And now fast payments is yet another form of payment, and we will enable our merchants to accept that as well as another form of payment and most importantly, through software and our tools to reconcile all those payments to make their life and their cash management pretty easy. And if I may, just ask you to repeat the second question again..

Lia, may I just add one comment, just add one comment on the fast payment part?.

Sure..

So we don’t believe that in Brazil we will have very big closed schemes, closed-loop schemes as you have in other countries mainly because there was a regulation – we have a rule that if a scheme go over BRL20 billion in volume in 12 months, it’s obligated to be an open scheme, which represents that every payment company that onboard merchants will have the ability to onboard their merchants into this payment scheme, and every issuer will have the ability to issue this payment method.

That’s a rule that the Central Bank put in the market. So, we don’t think that we will have in Brazil an environment with big closed scheme – big closed-loop schemes as exist in other countries.

So for us, it will be this new payment method, fast payment method, will be one more payment method for us to help our merchants to accept and manage all their cash flow in a single platform..

Got it. Okay. Yes. And just my second question was around Slide 7. You talked about working capital and for us in the U.S. market, installment payments and some of the commentary around that, the financing aspect of what you do is fairly new.

So I wanted to get your feedback on sort of the trajectory of that and how it might change as you move more to the merchant – or the micro-merchant level..

Great. So we don’t expect big changes in terms of how this operation works mainly because prepayments in Brazil is the way that our merchants use these products to fund their clients for them to purchase more.

Because interest rates for consumers in Brazil are very big, so our merchants, they prefer to offer installments, and they embed the cost of this prepayment in the price of their product.

And that’s the best way to finance this purchase because they are combining many transactions and they are negotiating funding with acquirers and banks as an asset-backed secure, so based on the receivables that they have. So that’s why the interest rates for the merchants to do this are much, much lower than the interest rates charged to consumers.

So we don’t expect changes in terms of this prepayment operation. And in the micro-merchant space, the dynamic is quite the same. So clients, they like to offer credit for their clients to buy more, and they fund this with prepayment and taking credit from the banks..

Thank you..

Next question comes from Craig Maurer, Autonomous..

Hi, thanks for taking the questions. First, I was hoping you can comment on actually something you said earlier. You said that small – that SMB volumes are diluting the volumes from large merchants, which is expected from Stone.

However, that doesn’t necessarily line up with the take rate being flat or the transaction take rate especially you can see falling. You would expect the opposite. You would expect a rising take rate if SMB was becoming a larger portion of the TPV. So I was hoping you could talk through why the take rate isn’t rising if SMB is growing as a component.

And secondly, on the entrance into micro, I believe it was a BRL 461 million investment from Grupo Globo into what theoretically should be marketing and advertising spend. And the reason why I’m asking about that is that’s effectively a little more than 1 year of the budget at PagSeguro.

So how should we expect the move into micro to impact the rate of growth in expenses around selling and advertising?.

Thanks for the question, Craig. Rafael here. So regarding to your question of take rates and SMBs, what we see, we see a very competitive dynamics in the large accounts in Brazil, so what we are seeing is incumbents putting pricing pressure in the big accounts. So if you look at that, you should see that our take rates should go down.

We do have still a positive effect from the mix in SMBs.

And always – I mean as a whole in the company, we balance the take rates with the LTV to CAC as we have also always mentioned, which is basically whenever I have a client that has a certain volume, we might decrease a little bit the take rate on that client for that client to bring more volume and generate more LTV.

So we never manage the take rate alone, and we manage it together with our growth levels, lifetime value to CAC. So that’s the way we see things, and that’s why you don’t see the take rates going up as you mentioned..

So as Rafael said, yes, you would expect take rates to go up with this new addition of clients in the hubs. But what is happening here in terms of take rates is that we have big clients as marketplaces and some sub-acquirers. And in that business, we see that competition is trying to use prices as a weapon, so sometimes we adjust.

But it’s not a concern in terms of take rates in the hubs at this point. Regarding the investments of Grupo Globo and our own investment in this operation, we think that having an initial investment of BRL500 million in this business that we already have all the operation working. The product’s done.

So we think that we have enough capital to start this and prove that this business model has a cost of acquisition and lifetime value that justify to have more investments. So it’s just we don’t expect that this operation will change the dynamics of the SMB in terms of investments, and that’s why we will report separately.

But we see that this is a huge opportunity. We are allocating capital with a side pocket to this opportunity. And we think that this initial BRL500 million will give us the ability to be in a very good position in terms of proving our ability to create a very strong business model for this operation..

Thank you..

Our next question comes from Julie Chariell, Bloomberg..

Just had a few more on the credit side of the business, I am wondering if the offering has been rolled out publicly or if it’s still sort of just in a more mature initial phase.

And as part of that, are you targeting the merchants who you’re going after for credit or are they coming to you at this point? I’m wondering if they are – since you are able to kind of get a view into the TPV kind of flow for these merchants, if you’re still at the point of kind of going after, pursuing the ones who you think are most credit worthy.

And if you could put some numbers around that, how many clients have you identified so far? How many clients are getting credit right now? And how many do you feel are most eligible out of that very large client base? And just lastly on the partnership for the credit risk, if you have a timetable for when you might find or announce a partner..

Julie, I’m going to start answering that question. If I don’t get everything, please repeat the question, okay? But regarding our offer, what we do is we actually pre-select the group of clients from our base – from within our base, and we actually pre-approve that credit amount, and we offer it through our portal.

So this is a pretty much kind of a self-service type of flow, right? And those clients, they can order that credit either through the portal or by calling us. So the way we actually analyze whether those clients are creditworthy is looking at their transactional history.

That’s a huge advantage that we have, right, so we can see how they have transacted with us over the last 12 months. And that’s how we actually base our credit offering to those clients. Regarding partners, yes, we are exploring new partnerships so that we can continue to grow.

Like we said, we are incredibly encouraged and we have tapped only a small part of the opportunity even looking within our own client base..

Can you share anything on the eligible number of the creditworthy clients that you see in your client base and then maybe the terms of the credit that you are offering, the rates specifically?.

Yes, not at this moment. We are still in the initial phase like we said. We are incredibly encouraged, but we are not disclosing anything beyond what we have disclosed at this point..

Okay, understood. Thank you..

Thank you, Julie..

Thank you, Julie..

Next question comes from Neha Agarwala, HSBC..

Hi, thank you for taking my questions. Most of them have been answered, but I have a few more. First on the tax rate, it was quite low this quarter.

How should we think about it in the coming quarters? And how should we think about it for the year as a whole? My second question is on the new POS platform that is being offered by your competitors, they are offering payment solutions through the NFC technology, which would not require a POS terminal.

Do you have a similar solution? And what are your thoughts regarding the impact of such a move for the system as a whole? And on your credit business, I understand you are not giving too many details, but any idea of the term that you’re offering for credit? Is it 2 months, 3 months, and also when you look at your customer base, if you analyze say 100 customers, how many of those – what percentage, if you can give us a rough estimate, do you think are eligible as per your standards to receive credit? Thank you so much..

Hi, Neha, Rafael here. Thank you very much for your questions. So your first question regarding tax rates, this was mainly a result of our tax planning this quarter. Some effects of this are going to remain and some were higher than usual in this quarter.

So this is two effects, just what we call in Brazil [indiscernible] is interest on capital and some R&D tax benefits. So regarding the following quarters, I think Marcelo Baldin can talk a little bit about..

Hi, Neha. For the following quarters, we expect effective tax rates to stabilize between 25% and 30% in the near-term, great..

Yes. I think you made a question, Neha, regarding NFC..

Yes..

Really, really early to say anything about it, right? We see a lot of different models out there. We see a lot of wallets that use QR codes to enable the transaction. NFC is just another way to enable the transaction, right? Again, for us, this is a matter of discussion about technology and it’s not a barrier to implement.

What we are worried and what we are concerned is what our clients actually need. And we will be closely monitoring what our clients need and prepare ourselves to be able to offer that, so there is not anything much that we can say beyond that..

Yes. And regarding the credit question about the terms, so at this moment, we have terms around 6 and 12 months, but main part of our client base, we offer 6 months duration of credit. So it’s really a short-term credit..

Thank you. If I can ask one last question, do you have any plans to open a bank? I know you have a digital account. But the way PagSeguro created a bank do you have any such plans for Stone? Thank you so much..

Thank you, Neha. Actually, we don’t have plans to have a banking license. As you may know, in Brazil, banking license creates a obligation for you to have a capital requirement that, at this moment, we don’t need mainly because we are offering transactional activities of this banking strategy.

So we are not actually leveraging the deposits that we have, so we don’t need a banking license. And we don’t want to have at this moment the level of capital requirement that a banking license needs. So we will continue to be a payment company licensed by the Central Bank. And with the license that we have, we can take deposits.

We can do all the transaction activities such as issuing boletos, paying deals, doing payroll payments. We just can’t leverage the money that we have in our balance sheet of our clients, so this money has to be in cash or in treasury bonds. So that’s why we are not looking for licenses to be a bank..

Great. That’s very clear. Thank you so much..

Thank you, Neha..

Thank you, Neha..

Next question comes from Domingos Falavina, JPMorgan..

Thank you, Rafael and everybody also for taking the questions. Two quick questions. The first one is just I noticed you mentioned allowance for doubtful accounts and looking at your cash flow statement, it seems that number came up to BRL15 million versus BRL3 million to BRL4 million run-rate in first Q or even 1 year ago.

So can you explain a little bit what exactly were those losses like if they are associated with loans and etcetera, because supposedly once you approve the transaction, you should be very close to zero NPLs? Second question, we are pretty positively surprised by the subscription revenues growing Q-on-Q, which is a pretty good signal of you indeed differentiating as a higher-quality service.

You mentioned a little bit some products that you offer.

But if you could touch a little bit more detail as far as if the exemptions are being given on a more widely spread basis or like if this growth came predominantly from new clients or it’s just being able to pass on price increases in those subscriptions just to get a bit more sense on how receptive clients are..

Domingos thanks for the question. So regarding your first question of the better allowance, this is regarding the merchant acquiring operations, nothing related to the credit part. So, this is increase in our operations and mainly related to digital charge-backs.

So this is part of our business, nothing related to credit, right? And regarding your second question, I think, as we have mentioned previously, we are charging the software within our plans. So this is the way we are doing it.

And sometimes, we charge incremental amounts in those plans; and sometimes, we charge less, right? So I think Lia can complement a little..

Yes. I think just to complement that we are really much more focused on making sure that the software strategy is something that we can see gain scale, right? So we have been really offering this in the context of the subscription revenue within a bundle to clients.

As we evolve, and like we mentioned in the presentation, we are really encouraged to furthering our software offering, right to a more complete platform.

And as we do that in the medium term, we do expect positive impact in subscription revenue, but in the short term, our real focus is making sure that we scale software and that we can see the pieces of churn reduction and LTV increase in the clients that use software..

Perfect, Lia. And one last one, just make sure I didn’t miss anything. I didn’t see any cash outflow from acquisition of shares, so fair to assume that there was no share buyback performed this quarter..

Hi, Domingos. That’s correct. We haven’t done any share buyback in the quarter..

Super. Thank you..

Thank you, Domingos..

Thank you, Domingos..

There are no questions at this time. This concludes the question-and-answer session. I will now turn over to Mr. Rafael Martins for his final consideration..

I would like to thank everyone for participating on the call. See you next quarter. Thank you..

Thank you all..