Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the StoneCo Fourth Quarter and Fiscal Year 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 in 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 appear in today's press release. Finally, before we begin our formal remarks, I would like to remind everyone that today's discussion might 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. 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. I have here with me Thiago Piau, our CEO; Marcelo Baldin, CFO; and Lia Matos, Chief Strategy Officer. On this call, we'll present our operational and financial results for the fourth quarter and 2019 results.

I will pass it over to Thiago, so he can share with you the main highlights of our performance.

Thiago?.

Thank you, Rafael, and good evening, everyone. Thank you for joining us today. Before we start the presentation, I would like to give you some messages. 2019 was a special year for Stone, and we are very proud of our results.

We have grown fast, delivered strong profitability and more importantly, evolved our business significantly to become the one-stop shop platform for SMBs. During the year, we had strong net addition of clients and TPV, while keeping our take rates relatively stable and maintaining high levels of client satisfaction.

We have also successfully started to scale our credit, digital banking and software initiatives, which combined with our client-centric mentality, creates a powerful and unique value proposition in the SMB market. During 2019, we progressed in our vision to transform the SMB financial services industry in Brazil.

As mentioned during our first earnings call back in 2018, we are very happy to have contributed to the positive change in the Brazilian payments market, helping to set higher standards of service and solutions at more fair price for merchants.

In 2020, we have another big challenge, which is a top priority to us to become a complete financial platform for our clients. We aim to replace our clients' to additional banking relationship over time. And I think we are on track to do so.

Execution is the most important factor of our success, and we will continue to strengthen our culture of excellence, discipline and focus on long-term value creation for all of our stakeholders, while keeping ourselves humble to learn from our mistakes. Now moving to our presentation and starting on Slide 3.

We present the main highlights of our fourth quarter and full year results. Following our investments in operations, our net addition of clients jumped from nearly 140,000 in '18 to more than 220,000 in 2019, ending the year with almost 0.5 million active clients in payments, a growth rate of 84% year-over-year.

We ended 2019 with an acceleration in quarterly net new client addition, excluding micro merchant from 64,000 in the third quarter to over 6,000, 7,000 clients in the fourth quarter.

Since we discontinued investments in our Stone Mais solution ahead of the launch of our partnership with Global, we had a slightly negative net addition coming from Stone Mais. That's why our reported number of net client addition was 66,000 instead of 67,000 we just mentioned.

In 2020, we expect a new record of SMB client addition as we will invest even more in first half '20 than we did in 2019, focused on growing and improving our distribution network throughout the country.

During 2019, we proved our ability to invest and produce attractive retail confidence to rely once again on our execution, as Rafael will detail later. Our TPV growth accelerated versus the third quarter, with strong performance both in the hubs and in digital and integrated partners.

In the hubs, TPV grew more than the overall growth for the company, both year-over-year and quarter-over-quarter, further supported by the strong addition of clients. 26 out of 27 Brazilian states grew client base at least 60% year-over-year.

In Digital, we are positively impacted by a strong Black Friday, with Digital revenues growing almost 100% versus Black Friday in 2018. Integrated Partners, despite some volatility and lower prices in large accounts, we continue to see strong growth.

The growth in all channels has helped us reach an annual TPV of over BRL129 billion and approximately 8% market share in the Brazilian acquiring market.

Despite our strong investment in 2019, we were able to balance our growth with profitability, ending the year with an adjusted net income of BRL857 million, growing 150% year-over-year, and with an adjusted net margin for the full year of 33%.

As we have told you on our previous call, our acquiring banking and credit solutions are evolving to become an integrated financial platform. In January 2020, we have started to test this new platform in over 10,000 clients aiming to get client feedback and create the best user experience.

In the meantime, our individual solutions have been developing fast. Our banking solution reached 62,000 accounts in December, accelerating to 79,000 by the end of January, with continued strong engagement. The credit solution continues to ramp up to an outstanding balance of BRL166 million in December, jumping to BRL200 million in January.

We keep tight control over our supply of credit looking very closely at NPL levels as we continue to improve our solution and credit scoring. We already have more than 5% of our acquiring clients using our credit solution.

Finally, in software, we have grown our client base from approximately 100,000 in the third quarter to approximately 135,000 in the fourth quarter, aimed at strengthening the value proposition to our payment clients.

As Leo will mention further in the presentation, we also continue to evolve our inorganic strategy of investing in good software companies and entrepreneurs with great financial discipline.

As I mentioned before, 2020 is a very important year for our company with the rollout of our financial services, which will help our merchants to centralize their financial lives in 1 single platform with the best level of service and customer support.

Once our road map of products is executed, we expect that merchants will be able to use a Stone, as their main provider of financial solutions. We believe we are still in the early beginnings of our journey to improve merchants lives. Although, we have an 8% market share in the acquiring market in Brazil.

We have very low single-digit share of our combined target market of financial services, payments and software, which provides us huge growth opportunities. Finally, we are happy to have just launched our first campaign with Grupo Global for the micro-merchant segment under the brand TON.

The new company will be focused on providing differentiated customer service and support with a strong focus on cash efficiency, which is key to succeed in this segment.

We believe that over time, we can reach customers acquisition cost levels equivalent to large players in the market, leveraging Global's market expertise and Stone execution capabilities. We see Stone as a new venture, managed separately and with the potential to be among the largest players in the market in the long run.

With that, we can go over to Slide 4, where we take a deeper look at some of the accomplishments of 2019. We opened more than 100 hubs, invested over BRL143 million in new hires and promotions, over BRL80 million in software development and new software solutions and BRL15 million in training of our people and recruiting.

Even with all these investments, we were able to generate BRL857 million in adjusted net income, which shows the strength of the economics in our business model. The investments we've made in 2019, especially in the second and third quarters have already started to pay off, as you can see from our fourth quarter results.

Our pace of additions of SMB clients has accelerated, our TPV growth remains very strong, with record addition of TPV in the company's history, and our new solutions are developing fast, while we keep our NPS at high levels at 68. We also continue to attract talented people to our business with one of the biggest recruiting process in Latin America.

And we are ranked by LinkedIn among the top companies where Brazilians dreams to work at. Moving on to Slide 5. The chart on the left shows the growth in number of clients across different states in Brazil.

As you can see, we have grown our client base over 60% in 26 states out of 27 states, including São Paulo and Rio de Janeiro, which demonstrates that we are not only growing in specific regions, but consistently across the country. With the hubs we have, we currently cover approximately 2,700 resilient cities.

This has helped the company to deliver its biggest TPV addition in our history, both year-over-year and quarter-over-quarter, with almost BRL14 billion more added in the fourth quarter of 2019 compared to the fourth quarter 2018. We have grown fast, but have not forgotten the importance of having happy clients.

The number of clients rating our services as excellent, and our first call resolution rates have also been very consistent all along 2019. With that, I will pass it over to Lia, so she can talk in more detail about the performance of our solutions beyond payments..

Thank you, Thiago, and good evening, everyone. I will start by going through our credit solution. Despite not yet at full speed, we have continued to grow our number of clients as well as credit portfolio consistently.

As we have said before, we are ramping up the credit solution carefully, keeping NPLs under control, while continuously improving the product in our credit scoring engine. From the third to the fourth quarter, we multiplied the number of credit clients by 3.2, reaching over 24,000 clients by year-end.

Total disbursement finished the year north of BRL290 million, with an outstanding balance of BRL166 million and average maturity ranging between 6 and 9 months. In January 2020, we reached almost 29,000 clients using credit, close to BRL200 million of credit portfolio outstanding and over BRL360 million disbursement since inception.

We also have our FIDC structure already in place which will allow us to seek third-party funding for our credit solution. We see a lot of opportunity in credit as it is a huge market in 1 of the main pain points of our clients. On Slide 7, we move over to our banking solution.

As you may remember, we have disclosed that we had 29,000 open accounts as of October 2019, right after the launch of the product to a national campaign at the end of the month. In the fourth quarter of 2019, we have reached 62,000 open accounts, more than doubling compared to October and 3x more than what we had in the third quarter.

This number has grown further to 79,000 open accounts as of January 2020. Besides that, we continue to see strong traction in the level of activity in our digital account. The number of wire transfers was 3.5x higher in the fourth quarter compared to the third quarter, and the number of boletos state increased by 3.2x.

Also, the average balance per account increased by 17% quarter-over-quarter. As Thiago mentioned, we are evolving to become an integrated platform that brings together acquiring, banking and credit, as you can see on Slide 8.

As of January, we had more than 10,000 clients testing the ABC platform, and we are focused on evolving the product and level of service to a point, which makes us comfortable to scale by mid-2020. Meanwhile, we will continue to scale acquiring, banking and credit separately.

Besides increasing monetization opportunities, we have evidence that by offering additional financial solutions, our NPS goes up. As we have always done, we will continue to listen to our clients to prioritize future features to be launched in the platform according to their needs. Moving on to Slide 9. Let's talk a little bit about software.

Our strategy in software is twofold. On one hand, we are adding functionalities, which can be deployed through our distribution and service model with a focus on strengthening the value proposition and creating client stickiness.

In parallel, we continue to invest in software companies that offer vertical-specific solutions for SMBs, such as POS and ERP's with the objective of first achieving efficient capital allocation by investing in great entrepreneurs with a proven track record of product success and growth.

And second, supporting those teams to further grow their business and to integrate financial products into their offerings to generate a greater value proposition to their own clients. We are evolving to create a management system, where we support strong teams of entrepreneurs to grow, leveraging our support and capabilities network.

There are over 4,000 software companies in Brazil, and we see many successful models, both in specific niches as well as specific regions, and we are very excited with the opportunity to continue to invest in those partnerships. In the slide, we can also see an update of the overall evolution of software subscriptions.

We ended the fourth quarter with 135,000 clients using at least 1 of our software solutions. With a 35,000 organic client addition in the quarter. On the right-hand side of the slide, we show the penetration of our software solutions in our payments clients.

In the third quarter of 2019, 20% of our clients in payments used at least 1 of our software solutions, increasing to 22% in the fourth quarter. Therefore, we have a huge opportunity to continue penetrating our base with software improving our merchants' productivity and sales and the value proposition we provide to them.

With this recap of the evolution of our solutions beyond payments. I will pass it over to Rafael, who will talk about our entrance into the micro-merchant space with our Grupo Global partnership and our financial results..

Thank you, Lia. In January, we received the approval from the antitrust authority to proceed with our partnership with Grupo Global to enter the micro merchant space. And yesterday, we launched our first regional campaigns of the new brand TON, targeting that public.

We are starting with regional campaigns to test and make more assertive moves, when we go nationally, reducing our cost of acquisition, which is something we are looking very carefully at, given that we already have knowledge about the lifetime value of those clients.

As you can see on Slide 10, TON will differentiate itself by redefining service levels and customer support in the micro-merchant space, which is aligned with Stone's DNA.

Customer support with some human connection, efficient POS delivery and smart SIM cards that enable POS devices to work with different telecom operators are some examples of what TON will offer its clients. In terms of solutions, TON will provide a complete ecosystem comprising banking services, cash in, cash out and financial products.

With TON's banking services, clients will be able to make wire transfers, pay bills and taxes and make deposits all integrated with acquiring. They will have cash in through different POS devices and payment link besides deposits and cash out from prepaid cards, withdrawals and wire transfers.

Financial products such as credit and insurance earned the roadmap to be offered soon as well. We remain very excited with this new venture and believe that if we execute correctly, we have all the capabilities necessary to succeed and become 1 of the big players in this market. Going over to Slide 11, I will go through our numbers in more detail.

As you can see on this slide, we have reached a total of 495,000 active clients in payments with net addition of 66,000 clients in the fourth quarter. We also accelerated our TPV growth to 51% year-over-year, reaching a total TPV of BRL40.2 billion in the fourth quarter.

Total revenue and income for the fourth quarter grew 48% year-over-year to BRL783 million compared with BRL529 million in the fourth quarter of 2018. Our take rate was a healthy 1.8% in the quarter, slightly lower than previous quarters.

The main reason for that is the effect of our key accounts, which had strong growth in the quarter and presented lower take rates at the same time.

Also, as you may recall, in fourth quarters, we have the effect from a higher mix of debit over credit affecting both take rates from transaction activities and financial income take rates as well as the effect of lower subscription take rates as those are not linked to the strong TPV seasonality.

Finally, we also had the effect of some holiday season incentives. If you compare our take rate of fourth quarter 2019 to that of the fourth quarter of 2018, the decline of 8 basis points is almost entirely explained by the effect of key accounts just mentioned.

As we always said, we manage take rates by balancing it with lifetime value of clients and growth in our client base, and we believe that in the fourth quarter, we had a good balance among those factors. On Slide 12, we show our annual performance.

Our TPV grew 55% year-over-year, reaching BRL129 billion compared to BRL83 billion in 2018, adding BRL46 billion in 1 year, which is almost the total volume we had in the whole year of 2017. Our total revenue and income increased by 63% year-over-year to BRL2.6 billion. Slide 13 shows our consolidated P&L for the quarter and for the year.

Going through our cost and expense lines in the P&L, we see that cost of services were BRL128 million in the fourth quarter, 27% higher than in the fourth quarter of '18.

As a percentage of total revenue and income, cost of services were 16.4%, 2.7 percentage points efficiency gain compared to the fourth quarter of '18 on lower provisions and losses, wire transfers costs as well as efficiency gains in technology, human resources.

Compared to the previous quarter, cost of services as a percentage of total revenue and income reduced from 16.8% to 16.4%, mainly explained by operating leverage in transaction and deployment costs and stronger seasonal operating leverage in the fourth quarters due to stronger volumes.

Moving on, administrative expenses were BRL72 million in the fourth quarter of 2019, down 1% year-over-year. As a percentage of total revenue and income, administrative expenses were 4.6 percentage points down, mainly explained by operating leverage from personnel expenses as well as lower travel expenses.

Compared with the third quarter of 2019, administrative expenses decreased by 1.4 percentage points, mainly explained by the stronger margin seasonality in fourth quarter as well as lower travel expenses.

Selling expenses were BRL109 million in the quarter, an increase of 86% year-over-year, explained mainly by higher personnel and marketing expenses.

Compared to the third quarter, selling expenses increased by BRL7 million, a lower increase compared to the previous quarter, mostly due to seasonally lower hiring of salespeople, combined with lower marketing investments.

Financial expenses were BRL107 million in the fourth quarter, 42% higher than the prior year period, mainly explained by higher prepayment volumes. Financial expenses as a percentage of financial income fell from 29% to 26%, mostly on higher financial income, combined with lower cost of funds, which was helped by the lower base rate in the country.

Compared to the previous quarter, financial expenses as a percentage of total revenue and income fell from 15% in the third quarter to 14% in the fourth quarter, mostly explained by the lower cost of funds related to the lower base rate.

As you can see on Slide 14, our fourth quarter adjusted net income was BRL275 million with 35.1% margin compared with BRL156 million in the fourth quarter of 2018 and 29.5% margin. During 2019, we have proved our ability to invest and produce attractive returns.

This is demonstrated by a margin compression in the second and third quarters of 2019, due to investments in the operation followed by acceleration in net additions and strong TPV in the following quarters.

Results from our investments are seen especially during the fourth quarter when, in addition to strong top line growth, we presented margin expansion quarter-over-quarter. When we look at total cost and expenses, they were 39.6% of total revenue and income in the fourth quarter compared to over 40% in the 2 previous quarters.

This is mostly explained by stronger top line growth in the fourth quarter, helped by holiday season as well as by fourth quarter being a seasonally weaker quarter in terms of investments. Moving to Slide 15.

On an annual comparison, our adjusted net income grew 150% to BRL857 million, and our adjusted net margin increased by 11.6 percentage points to 33.3%. This shows the underlying operating leverage in the hub operation, despite higher investments starting in the second quarter of 2019. Finally, on Slide 16, we show our adjusted free cash flow.

We have generated BRL415 million, adjusted free cash flow in 2019 compared with BRL304 million in 2018. We have adjusted our free cash flow methodology to account for our credit operation, the same way as our prepayment operation, both being funny solutions offered to merchants.

For more details, you can see the specific note on that in our earnings release, explaining the different effects on our cash flow statement from the different funding sources we use.

Having said that, our adjusted free cash flow increased in 2019 compared to 2018, mainly due to higher net income in the period, partially compensated by higher outflows of CapEx, interest paid and trade accounts receivables and other assets.

Before we go over to Q&A session, I would like to pass it over to Thiago, so he can wrap up our 2019 results..

Thank you, Rafael. As shown on Slide '17, we've made a management assessment of our 2019 performance. We are very proud of the strong growth we had in our payments ecosystem, combined with record profitability.

Another positive highlight of the year was the evolution of both our credit and digital banking solutions as well as the development of our ABC platform that we are launching this year.

We are also very happy with the rollout of our horizontal software solutions, namely our reconciliation in CRM products, and proud of our [indiscernible] program, which is now one of the largest recruitment process in Latin America.

Finally, we are very proud of being able to grow fast, while maintaining our strong culture and service levels to our clients. We wouldn't be able to do any of that without the feedback and trust of our clients and commitment of our people. We believe that we don't have to talk only about the good things, but also recognize where we can do better.

We could have accelerated investments earlier in 2019 and not only in the second quarter, as we can see the fruitful results that these investments brought to our company.

In Software, although we have scaled our horizontal solutions well, our vertical solutions are still at small scale and we believe we should have been more active in software deals, as this represents a great cross-sell opportunity for our financial platform.

Also, we believe we could have invested more in social and sustainability programs as we understand its importance to our community. Finally, we had a slight delay in the launch of TON, which was pushed out to the first quarter of 2020.

Now regarding 2020 and beyond, one of our main objectives is to be able to replace the existing banking relationship of our clients. This is a bigger and more challenging goal, but we are confident we will succeed. To accomplish that goal in our software-related initiatives to create long-term value, we have to invest not only heavily but wisely.

That's why we expect to invest in 2020, even more than we did in 2019, especially in the first half of the year. We will continue to invest in our hub operation in hiring new people in virtually all areas of the company, an intensive training of our team, in building further our financial platform and in new software companies through M&A.

At the same time, we remain committed to maintaining healthy margin levels in 2020. We are very excited with the year ahead of us and the great opportunities we have in our hands to continue to improve the lives of so many entrepreneurs in Brazil.

Finally, I want to say a big and warm thank you to our organization team, who is working very hard every day on behalf of our clients and our shareholders. With that said, operator, please open the call up to questions..

[Operator Instructions]. And our first question will come from Tito Labarta with Goldman Sachs. .

A couple of questions. I guess, first, on your margins, you mentioned you expect to have healthy margins in 2020. But just to understand what that means? I know there was some seasonality in this quarter.

But I mean, do you think your margins can continue to increase in 2020? Or how should we think about that evolving? And then also, like, how much do you think the banking credit can provide -- I don't know, if you can give some guidance there? Like, how fast it will grow? How much that can contribute in terms of revenues or earnings? So any color you can give on that would be helpful as well..

Thanks for the question, Rafael here. So regarding your first question, as Thiago mentioned, we intend to keep healthy margins. It shouldn't be far away from the margins you have seen along 2019. But as the company scales, you should see operating leverage. So that's why we said we are investing heavily.

The investment is mostly in the first half of the year, right? So you should see margins in the second half higher than in the first half. So to your second question, the new solutions, well, we already started to see despite very small. We already started to seeing results from the new solutions.

Over 2020, we think that this should evolve fast and then to become much bigger than they are now. It's still too early for us to provide any guidance on that, but I think they will be certainly more representative on the earnings of the company in 2020..

So Tito just to add something. So what we are trying to say here is that we are committed with the level of margins that you saw throughout 2019. But we want to keep the optionality to invest further in our business.

If you see -- if we see better avenues of growth as we saw in the second quarter and the third quarter because we have the financial discipline to invest and take the payoff on a very short term, as you saw in the fourth quarter. So we want to keep this optionality. We will invest heavily on our growth, but with financial discipline.

And regarding the banking and the credit, we see that those products over time from 2020 and beyond, give us the option to provide better rates in the combined solution to our clients, but charging less than they are chartered from the banks nowadays.

So I think that if you make an assessment of how much an SMB is charged by a bank account and all the separate transactional products that the banks charge when you go over that standard plan with a monthly subscription.

They charge additional per transactions amounts and if you see the rates that are charged in the credit operation, you will see that over time, we have the ability to increase, they create a re-rollout those solutions in our base..

Okay. And I guess, want a little bit on that. So to understand the margins, I guess, we should expect some margin pressure in the first half of the year. And then improve in the second half.

But I guess, for the full year basis, the right way to think that margins will be somewhat stable, and then you get to see some operating leverage maybe in 2021? And then also to think about that in terms of the volume growth where we saw TPV growing like 50%.

Do you think that level of TPV growth can kind of sustain? Or how do we think about the growth that will get us to those margins also?.

So great. So we don't like to give a specific guidance about numbers that we are pursuing because, as we said, we keep this optionality to see what will be the capital -- the best capital allocation throughout the quarters, but what we can say is that we keep our commitment to grow net adds throughout 2020, we expect to keep this addition of TPV.

I think that our business model is strong enough to keep this kind of addition of TPV and net adds, and we are committed to keep our margins. So if we find opportunity to invest more to grow even more, maybe you can give away some margin, but we are committed to keep our margins at the levels that you saw throughout 2019..

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

I was wondering if you could talk a little bit about the economic impact or the potential economic impact of any of those factors and some of your new banking opportunities, particularly interest rates? I'm just trying to understand how -- now that you're offering new services, the new economic -- or how sensitive those new services are to fluctuation in the economy?.

Joe, Rafael here. If I -- let me know, if I understood correctly your question.

Do you refer to our new solutions in credit and banking or overall interest rate impacts in the company?.

Actually, both would be great, but I was referring to the new banking offerings. But both would be great, actually..

Sure. So if you look at banking activities, you have very small revenue. We do separate steel banking in the credit solution. The credit solution, we started to have some revenue already in the fourth quarter, despite very small steel. The banking transactional activities, they have very, very small revenue because we do charge very low fees for that.

But in the credit, you already started to see revenue in the fourth quarter, and we do expect this to grow very fast in 2020..

Got it.

And then maybe you could give us some idea on some of your targets around the Stone hubs for next year? And how that's trending per week, per month or whatever statistics you can give us to give us a sense of what you expect from a build-out perspective?.

Joseph, Thiago here speaking. So our expectation is to keep investing on our hubs. So we will keep the speed of addition of hubs throughout 2020 as we did in 2019. And we are pursuing now more density in the hubs that we are. So we are seeing that we have opportunities to increase market shares in the hubs that we are present at this point.

So we will invest to have more density in terms of agents by region. So I think that with both the combination of both parts. We will continue to grow our net addition of clients..

Got it. And then the last one for me, just from a competitive standpoint, I think, during the middle of the year, we saw one of your competitors get very aggressive on pricing. And I'm sure that some of the larger banks are trying to defend market share.

So any thoughts around what the competitive environment looks like leaving 2019 into 2020? And meaning, from an expectation standpoint, from a pricing perspective, are you expecting there to be further pressure?.

Joe, Rafael here. So we have seen nothing new in that topic, to be honest, I mean, in terms of competition and pricing, if you look at our evolution in take rates quarter-over-quarter, this was mainly due to key accounts, as we explained. So no big change there. We have seen the market still competitive as it has been for some time already.

So we do expect it to continue to be competitive, but this is sort of the environment that we have been playing for some time.

So no news there, right?.

Joseph, Thiago here. Just to complement a little bit. So I think that as we said in the previous quarter, we always try to balance our growth with forming KPIS, which is the growth in client base, revenue per client, our margins and our cash flow generation. So we are always balancing our growth through that -- those 4 factors.

And what you can see by our fourth quarter results is that, as we said in the third quarter, we had less volume from big accounts because of the level of volatility that they have and a little bit bigger take rates. So in the fourth quarter, as we said, was an opposite direction.

So we have more volume from the key accounts and with different take rates because of that. So when you talk about the core of the business in the SMBs, we see a very stable growth when you talk about revenue per client, margin, cash flow and the client base increase. And thank you very much for your questions, Joseph..

Our next question comes from Craig Maurer with Autonomous..

First, can you help -- just provide a little color on how you're pricing software at this point, whether it's being priced more as a retention tool or it's priced is a as a margin-accretive product?.

Craig, thank you for your question. This is Lia. So just as we've said before, we still do subsidize software when we offer it to our clients. We're much more focused on making sure that our offering really improves value proposition and stickiness of our client relationship.

So yes, I think the focus there is much more on that than on actual subscription revenue..

Yes. But just to complement, Craig. So when we say that we subsidize software is not that we are giving software for free. It's that, as we said before, our mindset here is to replace the old mentality of a rental for a monthly subscription that combine, the machine, the POS with the software, with a lower monthly subscription.

So we are monetizing our software, but we are not pushing too hard in terms of pricing that solution. We would prefer to have a much more extensive relationship of our clients and monetize through the transactional activities and all the payments and financial services..

Okay. And just one other question, unrelated.

Has there been any supply chain disruptions in terms of point-of-sale hardware coming from China, as I believe your biggest suppliers packs?.

Craig, Thiago here again. So great question. Actually, we are monitoring this situation very closely, and we do not expect any type of impacts in our supply chain. We have 4 different providers. We have 1 main provider that we are talking very closely.

But as we have planned, our inventory and as we deal with our supply chain, we do not expect any type of impacts at this moment..

Our next question comes from Giovanna Rosa with Bank of America..

I have two as well. Can you comment a little bit about your effective tax rate? It was much lower than in 2018. So what level should we expect for 2020? And my second question is about instant payments, we have been receiving a lot of questions.

So can you comment a little bit about the impacts, we expect for you, and also about the opportunities?.

Giovanna, thanks for your question, Rafael here. So the tax rate in this quarter was around 27%. We have mentioned, this year, in previous calls that we expected this to stay between 25% and 30%. This is the result of some tax planning initiatives. We have no specific guidance for 2020 right now.

But I think we continue to look at opportunities to improve tax planning. So as soon as we have any additional color we can provide you guys. So regarding fast payments, Lia is going to answer..

So Giovanna, I'm going to take the opportunity of your question to talk a little bit about our overall view on the regulatory evolution. So we see that the regulatory evolution this year is really positive for the industry and positive for our business as well. So first, talking about instant payments.

And we see that peaks will disrupt, will actually help to disrupt a lot more the consumer-facing side of the industry. In the short term, we believe it's likely to impact cash, boletos, then tax payments and even eventually debit cards. Us as being the partner to SMBS, we will always enable our clients to accept any form of payment. So peaks included.

We think our role will continue to be strong to enabling our clients to accept any form of payments and the economics that we have from this service will not be affected. And it's important to note that when you look at the acquiring side of the business, it's already been significantly disrupted over the last years.

As is clear when we look at the economic evolution of incumbent players and also much better service levels that we have today. So we're actually really encouraged to see that the regulatory evolution is pointing towards also improvement in the consumer-facing side of the industry.

And then I think it's important to take the opportunity to also talk a little bit about the evolution on register of receivables and credit portability. So we think that these are two very important evolutions. When we talk about our ability to continue to offer more and more credit to more clients.

So first, on credit portability, this will give us access to credit relationship that merchants have today with incumbent providers. And credit will become a new avenue where we can establish a new relationship with clients and bringing that credit into our ecosystem.

And through the register of receivables, we will have access to a much greater addressable market by leveraging those receivables as collateral to give both credit and prepayment to more and more clients. So we're really encouraged with the overall regulatory evolution..

This is Thiago. Let me just add some comments on that and try to summarize a little bit. So I think that this instant payment and picks, new system of the Central Bank will be positive for the industry and positive for our business, mainly because I think that through that, we will have much more electronic transactions going through our platform.

And I think that my view is that in the beginning, picks will challenge the speed and the cost of wire transfer, boletos, tax and be payments and maybe challenge some cash transactions, too.

I think that those will be the first type of transactions that challenge -- that picks will challenge and that will be helpful to us to have more electronic transactions through our platform.

When you talk about potential impacts in the acquiring business, what I do believe is that throughout the previous -- the last, I don't know, 3 to 4 years, you had a lot of evolution in terms of negotiating the net MDRs or the part of the transaction of the acquiring because of competition, mainly, but the interchange and the Cat brand fee was never negotiated before.

So I think that now through picks may be consumer-facing companies will have the ability to offer type of transactions to consumer with maybe better rates in terms of interchange and card brand fees. But I believe in our ability to keep our economics in the transaction. And for example, we have our partnership with picks, which is a very good example.

It's a wallet that we accept in our machines, in our payment system and mainly the partnership that we did is in a way that we are protecting our net, but we still have a very good economics through challenging the interchange and the card brands.

So I think that our decision to be at the side of the merchant enabling them to accept all payment methods in a very simple, integrated way, offering working capital solution regardless of the payment methods. It's something that really protect our value proposition. So we expect to keep our economics on that side. And regarding the evolutions.

On the credit space, we have maybe less than 1% market share in the market of financing the working capital of SMBs. So we are very happy to see that SEC license, which we already have.

We have the ability to be part of this portability of credit so it will be a way that we will -- would challenge and maybe bid for credit relationship with better rates, and there's a lot of space to do that. And the registry of receivable brings a lot of transparency and security to do even more credit.

So I think that it will be very positive for our company over the long run. So we expect to be the main or maybe the 1 provider of all the financial solutions to our merchants and having better ability to compete is something that we always like. So we expect positive impact in our business because of evolution in regulation.

And we think that Central Bank is doing an amazing job in terms of putting the rules out there, discussing with everyone and providing more competition to the overall market..

Our next question comes from Felipe Salomao with Citibank..

Thiago, Lia, Rafael congratulations on the -- on very strong results again. Most of my questions were already answered. So I have one specific question. I saw in the 6-K that in the quarter, Stone has reorganized the structure. And you guys did the state of Stone Brazil, PagSeguro into Stone Pagamentos and two other holdings.

And these mentioned that this reorganization aims to create a more efficient corporate organization structure and allow for cost cuts for cost reductions. So does this specific split have translated into any onetime impact, positive impact on costs during 4Q '19? This was my question..

Felipe. Thank you for your question. Thiago here speaking. It's a very good question. So we don't have any onetime effect in our results, nothing material. So not any item than usual in terms of nature, size. So what we did actually was to reorganize our structure to make sure that we have the entity that is regulated by the Central Bank.

So we have the acquirers, the SCD or the regulated entity under 1 umbrella, and we have a separate one, which is the company that we used to invest in the software companies that we have this operation, as you know.

So we don't want to put both operations under the same umbrella, so we decided to separately to make sure that we can manage, see capital allocation and view of regulation in the best way possible..

Our next question comes from Neha Agarwala with HSBC..

My first question is on the credit. It appears the ticket size of the loans has been declining. Is that right? And if you could give some more color on that, that would be helpful. Further on the credit side, it seems like you now have more than 25,000 clients taking credit, which is a little above 5% penetration in terms of clients.

Is that slow, fast than what you had expected? And how many more clients can we expect to be added in 2020, just to get an idea of the pace of acceleration in this? My second question would be on expenses. Expenses seem to be very controlled in fourth quarter, especially, if you take into account seasonality, which pushes them higher.

Any one-offs regarding CapEx or OpEx in fourth quarter? How sustainable are these levels, going forward? And then lastly, I know you mentioned about the register of receivables and that it should bring in transparency in the long run for the system.

But should the transparency also lead to lower splits? And any time line regarding the registry of receivables?.

Thanks for your question, Rafael here. So regarding your first question in credit, about the average ticket. The average ticket declines a little bit in the fourth quarter, and this is mainly because as the fourth quarter is strong in TPV, usually clients, they pay down their loans faster.

And in the model that we are now in the pilot, the client has to pay off all the debt until they can take another credit. So that's why you do see that effect in the fourth quarter of stronger TPVS, they paid down the outstanding amount a little faster.

So regarding the penetration pace, we think that we started actually our credit solution in the first quarter of '19 so we developed the credit engine. We tested. So we believe that a little over 5% of clients, it's a very fast pace for such a complex and important solution. We do see this increasing in 2020.

But we are very proud of the pace that we had so far, and this is totally in line with what we expected. Your second question regarding expenses. Yes, we have seen operating leverage and cost control in the company.

We -- you do have very small items like we adjusted in our net income bridge, like one, a little less than BRL2 million of fair value of options, but this is very low. The main point here is that we always aim to grow, but also have a lot of financial discipline and capital allocation and expenses.

We did some tests and some investments, for example, in the third quarter as marketing expenses that we didn't do in the fourth quarter. So this helped a little bit. But overall, we expect to keep, despite high investments, a very healthy level margins -- level of margins, as Thiago mentioned.

To your third question regarding the registry of receivables of spreads. We do see that with the registry of receivables, you have more competition in the marketplace. But also, you do have the prepayment market also competing with credit, right? So despite you might see some lower rates.

In prepayment, you have an open space, not only for prepayment, competing with credit, but also ourselves offering prepayments to clients that are not necessarily our clients. So the addressable market expense a lot. So Thiago will complement about the registry..

Yes, just some topics. So to your question, Neha, first, thank you very much for your questions. Thiago speaking. So first, we expect to accelerate a lot credit through 2020. So we are very focused on that. So we will accelerate a lot, but it will be -- we have a lot of focus on NPLs control. So we are doing very well in terms of NPL management.

We've low single-digit NPLS, and we already have the structure in place to factor out those receivables and you will see in the very, very short term, our ability to factor out entirely our credit outstanding balance. So that's one part, and we will put a lot of efforts in terms of scaling our credit solution.

In terms of costs, as Rafael said, we will always be very diligent and disciplined in terms of cost management, it's about the culture of the company. So we are here for the long run, our teams is growing fast, and we want to make sure that we have a culture of discipline and financial diligence. So it's very important to us.

And regarding spreads, we think that with the registered receivables and the ability to -- with the credit portability, it will may bring the spreads down in the whole market, but we expect take rates to go up over the long run because of that. Because the spreads and credit are just too high.

So we have the optionality to help our clients with better rates, increasing take rates over time. So we do not expect decrease in our spreads, but actually, we think that we will be the one helping the market to bring spread a little bit down, but growing take rates and providing much better service to our clients..

Our next question comes from Thomas Pareto with BTG Pactual..

I just wanted to follow-up on the net revenue subscriptions because, in fact, in this quarter, we saw a 3% decrease quarter-over-quarter. And in third quarter, this line accelerated over 25%.

Just want to get a better sense of what we can expect going forward? Was the third quarter too high quarter or in Q4 is more recurrent level? If you could give us a bit more detail?.

Thomas, thanks for the question. Rafael, here. So when you look at subscription, in the third quarter, we had the 3 basis points effect of the revision in the lifetime of clients. So a big part of this happened only in the third quarter. So that's why you have that small decline.

If you look at underlying subscription, apart from that effect, we do see this increasing slightly over quarter-over-quarter. We do expect our subscription revenue to increase over time. However, we do look at total take rates when we manage the way we charge claims.

So as we mentioned in our release, we offered some incentives, holiday season incentives for clients, for example. This is because we see that is effective in bringing new clients and then they stay with us. So we are providing some incentives in that subscription line. However, we do see this line continue to grow over time..

Our next question comes from James Friedman with Susquehanna..

Congratulations on the year and the results. I guess, I'll ask my two upfront in the interest of time. In terms of the ABC priorities, you have a lot of interesting helpful disclosures about software.

Where do you anticipate software penetration potentially going over time? And I think you had said that there's a difference between the vertical and horizontal performance in software. So maybe if you could elaborate on that? That's the first one.

And then -- I realize that you don't give guidance, but are there any seasonal callouts that you want to share? I realize you're saying the expenses, it sounds like it might be front-end loaded for the year. Anything else that we should consider, while we're building up the model? Those are the two questions from me..

Thanks, James, for your question. I believe your question was regarding software. So let me just clarify a little bit. So when we're talking about horizontal versus vertical, what we mean is that we are really focused on 2 avenues of growth in software.

So the first is, whenever, a functionality can be simply deployed within our distribution and service model. We will be -- we'll focus on doing so. It's very important to us that we can scale software by providing, continue to provide the same level of service NPS and support that we offer clients today.

So we take a lot of care to make sure that we can deploy software within our operational model. And these tend to be lighter, more simple solutions that can integrate and be deployed in a seamless way, right? At the same time, we're also really focused on investing in great entrepreneurs. So Brazil has a lot of opportunity in software.

We see great software entrepreneurs that are focused both on specific vertical niches as well as specific regions. And we're really excited with the opportunity to continue to invest in those partnerships. And this is both, in our view, a very good capital allocation.

And at the same time, we can support those entrepreneurs with our network of capabilities, and we can help them integrate payments into their offerings, and that gives an upside value creation that they can provide to their clients. So this is really kind of a twofold strategy, we tried to clarify here..

James, Rafael here. Regarding your second question of seasonality. I think the main seasonality here, usual, like in retail, right, is the fourth quarter to the first quarter. So first quarter is usually a weaker quarter in terms of sales. So that has some effect in your TPV, in your top line.

So I think this is the main as every year of holiday season in the fourth quarter and the start of the year and the first is seasonally weaker in the retail market..

So Thiago here, James. Just let me add some comments about the software. So when we, Lia told about the twofold strategy. In one hand, we have a very strong operation regarding the sales process in the onboarding process of our clients that give us this growth ability in our financial solutions.

And when we have softwares that respect this kind of operation and makes us keep the growth and the pace of net adds, we can roll out software through our hub strategy and keep the same level of net additional clients.

But when you look for a much more deeper type of software like ERP and POS solutions, they have a different operational way of making the sale process and implementation on that strategy. We are looking to an intelligent capital allocation that the deals by themselves, they make a lot of sense in terms of capital allocation perspective.

And we have the ability to give all the APIs and the financial products for those entrepreneurs to penetrate financial solutions into their client base, therefore, bringing much more revenue per clients than they currently have. So we are seeking entrepreneurs that have these client centricity as we have.

They have already proven their ability to grow their own business. We are aligned in terms of thinking about technology and we see the entrepreneurial environment in the same way.

So when you have an alignment of culture, passion for clients, mindset in terms of technology, and we have this growth ability, proven by the entrepreneur then we are much more able to pursue investment, but with great capital allocation perspective..

Our next question comes from Julie Chariell with Bloomberg..

I had a question on the micro-merchant business, the TON business, you laid out some important offerings on cash in and cash out solutions that were just rolled out, I guess, this month.

I'm wondering if those are fully in place with this reach or when they will be filtering into the offerings? When the national rollout will take place? And then services do you expect to come in the pipeline over the course of the year?.

Julie, thanks for your question, Rafael here. So as we mentioned in our presentation, we already have it in place. So the solutions that you mentioned, the ones that are in the road map. We have mentioned in the Slide 10 of our presentation. So this is live, and we already started to operate the solutions.

As we mentioned, also, we we're bring in differentiated service and support in that segment. So we think that is a very powerful value proposition, the same way we did in the SME space. So it's sort of in Stone's DNA and with the partnership with Global.

We believe, we can be very efficient in customer acquisition cost, which in this market is very, very important. So it's live. And we are doing it in different phases. As you said, we are in regional campaigns now. We have some thresholds and KPI to measure and then we move to national campaigns.

So we'll do it along this year of 2020, you will see that evolution over time..

Is there any target number in terms of merchant adds that you're looking for this year?.

Yes, it's still very soon for us to comment about that. We just launched yesterday. So we are just tracking the initial traction, and we'll see the results. I think, of course, when you look at number of merchants is a different dynamics versus SMEs. When we look at over the next few years, we do expect to become a relevant player in that market.

So still too early, and we'll provide more and more updates as we go..

Rafael, can I add some comments?.

Sure..

So Julie, it's Thiago here. Just to add some comments. So in the product that we have launched, we already have the different types of machines, the accounts, the ability for our clients to do a transfer, be payment, tax payments for deposits. It's all integrated for acquiring. They already have the card to do cash out. So it's all there.

And we have in our road map to add credit, insurance, mobile top up.

So we are seeking for features that makes all the difference for our clients in the micro merchant space, but I'm very happy to see that we already -- we are already offering a very complete solution to this type of clients, and we seek to redefine customer service, as Rafal said, and the growth of tone will be mainly balanced by cost of acquisition.

And here is where we think that our partnership with Grupo Global will be very, very fruitful because we already understand this operation as we have described pace of Stone Mais. So we know pretty much the lifetime value of these clients.

So the biggest challenge here is to get in the cost of acquisition -- clients' cost of acquisition of the big players. And I think that our partnership with Group Global will give us the ability to get there, and then we can scale pretty fast this venture. So we're very happy with the launch of TON..

There are no questions further. And this will conclude our question-and-answer session. I would like to turn the call back over to our host for any final considerations..

Hi, everyone. Tiago here speaking. I just would like to say, a big thank you to our team. It was an incredible year. A lot of efforts and a lot of good results. We are very happy to see the satisfaction of our clients, the evolution of the overall team and the industry itself.

2020, we think that will be a great year, and we want to say, a big thank to our shareholders that has backed us throughout these many years. Very happy with the opportunities ahead, and we are only in the beginning of our journey. So for us, 2020 is day 1 back again. So I'm sure that we have many great evolutions to bring to you in the next quarters.

Thank you, everyone..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..