Good evening, ladies and gentlemen, thank you for standing by. Welcome to the StoneCo Second Quarter 2023 Earnings Conference Call. By now, everyone should have access to our earnings release. The company also posted a presentation to go along with its call. All material can be found online at investors.stone.co.

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

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

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. Please note, this event is being recorded. I would now like to turn the conference over to your host, Pedro Zinner, Chief Executive Officer at StoneCo. Please proceed..

Thank you, operator, and good evening, everyone. Joining me today on the call is our Chief Financial Officer and Investor Relations Officer, Mateus Scherer; our Chief Strategy Officer, Lia Matos; and our Head of IR, Roberta Noronha.

I will start today's call by giving you some of my thoughts on the second quarter, and then I will turn it over to the team to walk through our results in more detail. Overall, I was pleased with our performance in the second quarter.

Externally, from a commercial perspective, we generated strong growth by continuing to win in the areas we want to prioritize. Internally, within the company, we made progress across a broad range of initiatives to make our services and operations better and more efficient.

And financially, we produced results above our expectations as we continue to ramp our profitability and accumulated more cash firepower. As I evaluated the quarter, I also looked at how we performed relative to the priorities we outlined at the beginning of the year. Our first priority was to grow with efficiency.

In the second quarter, I think we met our objectives by generating strong top line growth with a significant improvement in our profitability. Our total revenue reached R$3 billion, an increase of 28% year-over-year and exceeding our guidance by 3%.

Coupled with the top line improvement, adjusted EBT surpassed guidance by 19%, reaching R$447 million, the highest mark for quarterly adjusted EBT in our history. As a result, adjusted net income grew 5.8x year-over-year, reaching R$322 million and yielding a net margin of 10.9% in the quarter. Our second priority was to generate cash.

Adjusted net cash increased R$1.6 billion year-over-year and R$338 million quarter-over-quarter to reach R$4.3 billion. This increase was mostly driven by the consistent cash flow generation of the business while we continued to invest in client growth and product and technology development.

Our third priority consisted on focusing the expansion of our Financial Services business. The Financial Services segment presented healthy TPV and client base growth and showed the improvements in monetization from clients.

MSMB TPV increased 19% year-over-year to reach R$83.3 billion despite macroeconomic headwinds in the period from higher interest rates, higher industry delinquency and declining consumer credit card limits. Our growth in the quarter was 3.7x the industry growth.

It's also important to highlight that during the quarter, we consistently grew our MSMB client base with 204,000 net adds. MSMB take rate increased 9 basis points sequentially to reach 2.48%. We have also expanded our banking solutions with the launch of debit cards, and we are now piloting credit cards for Stone clients.

And we continue to test our credit product with early results very much in line with our expectations. Our fourth priority was to evolve our software business. After delivering a first quarter below expectations, we were able to improve our software results.

Revenue for this segment reached R$383 million with a 17% adjusted EBITDA margin and a 620 basis point improvement on a quarter-over-quarter basis. I'm happy to see that while we're evolving the strategic fit of our software business, we are also capturing short-term efficiency gains.

Last but not least, it's also worth highlighting that this quarter, we took another important step towards having all the right resources in place to build a fit-for-purpose organization. As announced in May, I would like to formally welcome Mateus Scherer as our CFO and IRO and Roberta Noronha as our Head of Investor Relations.

I'm very excited to be working with Mateus and Roberta as we set the next stage of growth for the company. I would also like to thank [offline COO] for all the work they've done and to all the valuable contributions they made to Stone. I'm also pleased to announce that we're hosting our first StoneCo Day in New York this November.

I am excited to share our views on the business and how we are building an end-to-end value proposition for Brazilian commerce in the future. As we approach the event, we will share further details with you. Now I'd like to pass it over to Lia for a discussion on the second quarter 2023 performance and strategic updates.

Lia?.

Thank you, Pedro, and good evening, everyone. I'm going to start with the highlights of our Financial Services segment on Page 6. In the second quarter of '23, revenue in the segment increased 32% year-over-year to R$2.6 billion, mainly attributed to the performance in our MSMB client segment.

MSMB performance was mostly influenced by above-industry TPV growth, higher take rates and an increase in our client base. This, combined with operational leverage realized in our cost and expenses, resulted in adjusted EBT of R$398 million and a 15.6% EBT margin, representing a sequential improvement of 250 basis points.

On Slide 7, let's review the MSMB performance in a little bit more detail. Our payments client base experienced robust growth, reaching approximately 3 million active merchants, an annual increase of 43.3%. Quarter-over-quarter, this represented net additions of 204,000 active clients.

The sequential deceleration in net additions from the first quarter '23 was driven by the conclusion of targeted marketing campaign efforts within the period. Through strategic optimization of our Stone and TON offerings across our sales channels, we successfully sustained the expansion of our client base across all tiers within the MSMB segment.

Moving to Slide 8. MSMB TPV increased to R$83.3 billion, a 19.3% year-over-year growth and a 3.7x above-industry growth.

Despite being impacted by slower overall industry growth, we're very happy with this result, which was in line with our second quarter '23 guidance and illustrates our strong relative performance and the power of our value proposition and offerings.

Looking ahead, we're confident that this relative performance will continue and that we will continue to gain market share in the segment. Our MSMB take rates also presented notable improvements on a quarterly and yearly basis. This quarter, take rate reached 2.48%, increasing 9 basis points quarter-over-quarter and 38 basis points year-over-year.

The annual improvement can be attributed to continued adjustments in our commercial policy, stronger growth in our micro and small clients which have higher take rates, the effect of changes in debit and prepaid card interchange cap regulation, which went into effect as of April 2023, and contribution from our banking solutions, mainly floating and fixed revenues.

On Slide 9, I give a quick update on key accounts TPV. TPV decreased 32.5% year-over-year, in line with our expectations due to our deemphasis of low-margin sub acquired volumes. As a result of adjustments in our commercial policy and mix shift within the segment, key account take rates increased 28 basis points year-over-year.

Now let's move to the banking performance on Slide 10. Our banking active client base increased 3.2x year-over-year and 33.4% quarter-over-quarter to reach 1.7 million active merchants.

This strong growth was a result of the launch of Super Conta TON in the first quarter of '23 and the continued activation of banking combined with our acquiring solution for Stone clients. Total deposits reached R$3.9 billion, slightly up quarter-over-quarter.

This quarter, we had a onetime decrease in client deposits of R$286 million as a result of the shift in the chargeback and cancellation collection process for TON with no impact to our P&L.

Excluding this onetime effect, our overall deposits would have increased 7.8% sequentially compared to 5.6% growth in our MSMB TPV, which illustrates the increasing engagement with our banking solutions.

Due to the significant increase in banking clients driven primarily by growth in micro client accounts, which generate lower revenue contribution in comparison to SMB clients, ARPAC decreased to R$25 from R$37 in the first quarter of '23 and R$39 in the second quarter of '22.

We strongly believe in the power of combining our banking and acquiring offerings to MSMB clients. As such, we're working hard to enhance existing features and develop and launch new banking products. As an example, this quarter, we launched debit cards and have already started piloting credit cards for Stone clients.

We're also working to enhance client experience related to the different features that we offer as well as the integration of our banking to select TRPs within our software portfolio. On Slide 11, I'd like to provide a quick overview of our credit offering.

Through the end of July, we had disbursed R$26 million to around 850 clients with an outstanding balance of R$23.5 million. The early performance of our vintages is in line with our enhanced credit underwriting standards with personal guarantees and lien on receivables being executed as expected.

As we have discussed, we will take a conservative and disciplined approach towards the expansion of this solution, growing the portfolio depending on market conditions and taking the necessary time to observe full cohort performances. Now let's move to Slide 12 and shift to the highlights of our software business.

In the second quarter of '23, software revenue increased 9.2% year-over-year to reach R$383 million. This growth was driven by continued organic active store expansion in our core POS and ERP business, mainly in the SMB segment.

Top line grew 6.9% sequentially mostly due to an increase in setup revenues in our core segment related to the client base growth. Software adjusted EBITDA increased 25.1% year-over-year to reach R$66.5 million, which equates to a 17.4% margin and a sequential margin improvement of 620 basis points.

The EBITDA margin expansion is a result of higher revenue in the period and operating leverage and cost and expenses, which included a reduction in share-based compensation expenses and lower levels of cost of services, mainly due to increased capitalization of R&D projects.

These effects were partially offset by our continuous investments in our sales team and marketing as well as severance cost in the amount of R$6.5 million related to an adjustment made to our organizational structure.

In the second quarter of '23, we reduced headcount associated with our ongoing integration efforts within StoneCo, which should drive additional benefits going forward. As Pedro mentioned, while we evolve on capturing short-term efficiency gains, we are advancing on the strategic fit of software within StoneCo.

We have advanced on prioritizing two important verticals for driving Financial Services and software cross-sell while also testing different go-to-market initiatives.

As we have mentioned, the process of building our end-to-end platform is a multiyear journey, but we believe we are taking the right steps to enhance and sustain our value proposition to our clients in the future. We expect to provide further details during our StoneCo Day in November.

Now I want to pass it over to Mateus to discuss some of our key financial metrics.

Mateus?.

growth in prepaid volumes, our conservative decision to hold a higher cash balance in the quarter, and a slight increase in the duration of receivables sold. Lastly, other expenses decreased 22.2% sequentially and 110 basis points as a percentage of revenue.

The variation in other expenses can be mainly attributed to a positive net effect of R$19.6 million in our share-based compensation expenses, primarily due to lower tax provision. Moving to Slide 14, I would like to talk about our cash generation. Adjusted net cash increased by R$338 million this quarter to reach R$4.3 billion.

The main driver for this was a strong cash flow from our operations as well as a sequential decrease in CapEx as in the first quarter '23, it was higher than usual due to a specific marketing campaign in the period that drove additional POS inventory. On a year-on-year basis, adjusted net cash increased by R$1.6 billion.

Now moving to our third quarter '23 outlook on Page 16. We expect total revenue and income of growth R$3,075 million in the third quarter of '23, representing year-on-year growth above 22.6%.

For MSMB TPV, we expect volumes between R$87 billion, and R$88 billion in the third quarter '23, compared with R$74.7 billion in the third quarter of 2022 representing year-on-year growth between 16.4% and 17.8%. Finally, we expect adjusted EBT of more than BRL470 million.

Before I jump into our Q&A, I would like to highlight that this is the last quarter, we are providing quarterly guidance as we begin to provide a longer-term outlook of our results during StoneCo Day in November.

With that said, operator, can you please open the call up to questions?.

[Operator Instructions] The first question is from Sheriq Sumar with Evercore ISI. Please go ahead..

Hi. Thanks a lot for taking my questions. My question is on the competitive dynamics within Brazil on the payment side. Are you seeing any increasing traction or increased competition mainly coming in from like the U.S.

or any other countries outside Brazil? And within Brazil as well as to how is, the competitive landscape right now, and where is the biggest market share gains that you are seen so far? Thank you..

Hi, Sheriq, Lia here. And thank you for the question. I think regarding competitive dynamics, no big news, the dynamics that we saw this quarter is very similar to what we had seen in the past quarters. So if we look at the market share evolution and this [technical difficulty] as a group, they continue to lose share at a slower pace, but they do.

When we look at the volumes, it suggests that they have been shifting market share amongst each other at the top of the pyramid, more towards larger clients.

And what we have seen is very granular in local dynamics that we're able to react given that we have a very specific view of the market dynamic in each region, and can react through our hub operations and all of the data that we can capture locally. So, no really big news, same trends that we're seeing.

And as you have seen, we have been able to continue to gain share in the MSMB segment this quarter. And we strongly believe that that's a dynamic that's going to continue going forward..

Thank you so much. My one follow-up is on the software EBITDA margins.

I mean it looks like it keeps fluctuating around, but any color on, where do you think that this could stabilize? I mean how much more runway do you have to increase the margins and what do you think could be the long-term sustainable margin for this segment?.

Hi, Sheriq, Mateus here. So first, talking about the EBITDA for the software division on the quarter, we had an improvement in top-line of 7% in the quarter, fueled by setup revenues from new sales while we maintain costs and expenses under control.

So when we look about the effect on costs and expenses, this was mostly a result of firstly, is slightly higher capitalization of R&D expenses in the quarter. But also most of this was offset by severance costs associated with a reduction in headcount, which was driven by the integration process of some of the [cost functions] within StoneCo.

So this reduction in headcount had a one-time negative impact in our EBITDA of R$6.5 million, but this should drive savings of around R$10 million per quarter going forward. So our expectation for the next quarter is that topline should continue to grow, while we have cost discipline associated with the savings.

So, we're optimistic about margins in software, going up..

Thank you so much. Appreciate it..

The next question is from Juan Recalde with Scotiabank. Please go ahead..

Hi, congratulations on the strong results. And thank you for taking my question. My question is related to the improving operational leverage on the cost of services. So when I see, this is like sequential improvement of 340 basis points.

And you mentioned that part of this is driven by the reassessment of the R&D projects that led to higher capitalization.

So my question is how much of this improvement of 340 basis points was driven by - this change in the R&D?.

Hi Juan, Mateus here. So you're right, we had two effects related to capitalization of intangible assets in the quarter that impacted cost to services. So firstly, we standardized the software segment's capitalization process to mirror the practice within our financial services units.

And secondly, we also reviewed all the ongoing projects in our tech team, and identify the few more projects related to new features that were not being capitalized previously. So as we highlighted in the earnings release, these adjustments resulted in a one-time positive effect of R$21 million on our quarterly cost of services.

But even if we excluded this unusual positive effect from our results, we would still have gained operating leverage and cost of services of around 270 basis points compared to the previous quarter.

So when we look ahead, we anticipate that operational leverage gains in the corporation in this line, may be balanced out by provisions as we begin to expand our credit offering. But in the core itself, we should continue to have operating leverage in cost to services..

That's helpful. And one follow-up if I may. When I look at the third quarter guidance, I think that it is implied that - there is going to be a small improvement in the adjusted EBITDA margin.

So if we - if the margins end up being better than expected, what do you think that can be the drivers there of? What can be the positive surprises that we can have in terms of margins in the third quarter?.

Yes. So, I think the margin dynamics should be similar to the previous quarters. So, we continued to have a big focus in terms of efficiency, and driving savings in the whole company with a focus on a zero-based budgeting process, and implementation of our shared services center. And on the other hand, we also expect to keep growing our TPV MSMB.

So when you combine these two effects, I think if we have any outperformance in terms of top-line, this should flow to the bottom line as well..

Understood. That's helpful. Thank you very much..

The next question is from Tito Labarta with Goldman Sachs. Please go ahead..

Hi, good evening. Thanks for the call and taking my questions. Actually, one question on the regulatory front there is a lot of noise about the elimination of revolving credit cards, and some talks about reducing interest-free installments.

Just curious, any thoughts from your end, I know that there is no final decision on that, but just what you heard, any color you can provide on - what happened, what could happen, [reducing] interest installments impact on the business here? Thank you..

Hi, Tito, Pedro here. Thank you for the questions. I think - you gave the flavor in some ways. I think it's a bit too early to tell. I think we're closely following the debate.

And as you are aware, we would support all changes that would cause the competition and benefit merchants and consumers as we have always done, right? I think a regulatory change that takes away from merchants, the possibility of offering installment transactions would definitely significantly impact private consumption, and consequently the overall economy.

I think, how would, this impact us. I think it's a bit premature to comment on specific P&L impacts, given that there is nothing concrete being discussed, what we can say is that any modification in the interest rate free installment structure would significantly affect the industry.

But so potential outcomes might involve a decrease in overall private consumption since the majority of the credit transactions in Brazil are done through these installments, and a possible repricing to balance industry economics is foreseeable in some ways..

Okay, great. Thanks for the color. Pedro, it's helpful. And just second question, just with interest rates coming down, I mean, you still have some leverage there as your financial expenses come down. But just reminds us the benefit or impact from 100 bps reduction in rate.

And I know the plan isn't just to reduce any pricing on the prepayments, but just given the competitive environment, any potential risk there on the take rate as rates come down as well? Thank you..

Yes, so Mateus here. So first part of the question related to the impact of 100 basis cut to our P&L. All else being equal, 100 basis points cut should positively impact our results by around R$200 million. Important to remind that this is the net effect of the impact on our funding costs but also on the floating revenue and other financial income.

Now talking about price, [technical difficulty] react. We told a few times in the past but pricing in our view is a dynamic process. We will continue to manage our pricing in the way that we have been doing in the previous quarters, which is pursuing target returns for new sales, having minimal contribution margin hurdles in our client base.

We also believe that the acquiring industry continues to behave rationally as it has been the case for the previous 18 months. We noticed that all players had to deal with an abrupt change in interest rates and had to adjust their offerings to a new reality.

So nowadays, we don't see any [technical difficulty] by market share with nonprofitable offers, including ourselves. So given that said, the effective impact of the cut will depend on the market's overall response but we don't anticipate any initiative to pass through the benefits of declining rates in the short term from our side.

Nonetheless, we'll continue to actively monitor the market dynamics and adjust our pricing as necessary as long as it meets our internal hurdles..

Great. Thanks Mateus for that. And maybe just one follow-up on that, if I can. Just in the quarter, we did see a bigger increase in the financial expenses compared to the financial income. So just to understand a little bit there why the spike in the financial expenses this quarter is relatively stable..

first factor is the growth in MSMB TPV; second factor is also the conservative decision to hold a slightly higher cash balance in the quarter; and also, we had a slight increase in the duration of receivables sold in the quarter. Over the medium term, we already said a few times that these expenses are primarily influenced by TPV curve.

So this is more an effect of the quarter and not a general trends going forward..

Great. Perfect. Thank you, Mateus..

The next question is from Gabriel Gusan with Citibank. Please go ahead. Mr.

Gusan, is your line mute perhaps?.

Yes, sorry for that. Good evening, guys. Could you elaborate a bit on the TPV slowdown you're seeing for the entire market? And how do you feel this could affect, especially for your MSMB TPV, could we see also a slowdown even if you continue to gain share, but do you see a slowdown overall TPV growth there? Thank you..

Thank you, Gabriel. Lia here. Thank you for the question. So I think regarding TPV trends and focusing on the MSMB TPV dynamics, even though we reached our guidance and we presented healthy growth, TPV was indeed a little bit softer than our initial forecast in the beginning of the quarter.

Especially in May, we noticed the deceleration in same-store sales of our clients, which is consistent with the lower growth for the overall market as reported by ABAC. We saw that ABAC reviewed the range of TPV growth, of the market growth in the year, so we think that, that's in line with the behavior that we saw within the base.

But still on a relative basis, we grew almost 4x more than the industry on average. Despite like Mateus said, keeping our pricing discipline unchanged. So we're pretty happy with the TPV performance that we saw.

And our July data shows early signs of improvement compared [technical difficulty] which really makes us comfortable with the guidance that we have provided and continuing to grow above industry and gain share within the segment.

I think another important thing to mention, Gabriel, is that looking at dynamics regarding PIX, we have seen a very strong growth of PIX P2M within the base.

If we look at overall trends in PIX growth within our base, it's similar to what has happened in the market, so there was a very strong initial growth of PIX P2P, but more recently, growth has been mainly driven by PIX P2M.

Just reminding everyone that PIX P2M is a payment method which we enable our clients to accept through a dynamic QR code in the POS, and we monetize that very much in line with debit card net MDRs. And when we looked at PIX P2M volumes in the quarter, they grew above 240% year-over-year.

And if we were to look at a consolidated growth considering credit cards -- card TPV, sorry, card TPV plus PIX P2M, we would see a yearly growth of 23%. So we think that there is not, per se, a cannibalization of PIX within the base when we think about debit volumes but PIX definitely seems to be taking away from the growth of debit volumes.

So this is a trend that we think is important to highlight. And that for us, it really -- it benefits us because we monetize it very much in line with debit cards. And it naturally benefits clients because for them, it's cheaper and settlement is instantaneous. So yes, I think that's what we can say regarding overall TPV trends..

Perfect. Thanks a lot..

The next question is from Antonio Ruette from Bank of America. Please go ahead..

Hi team. Congrats on the results, and thank you for your time. So two questions on my side. So first on expenses, I was just wondering if you could explain a little bit more the major drivers for the increase in the capitalization of expenses, and if we should continue to see this trend going forward in terms of CapEx.

And also, a broader question on strategy. If you could elaborate a little bit on execution. And if you look at today's challenges, you have a very competitive acquiring business, challenges to integrate Linx and also your banking product.

I'm just wondering when looking at all this, what do you consider to be your main execution challenges today? Thank you..

firstly, we standardized the software segment's capitalization process to equalize those within our Financial Services unit; and secondly, we reviewed all the ongoing projects in our tech team and identified a few more projects related to new features that were not being capitalized previously.

This resulted in a onetime positive effect of R$21 million in the quarterly cost of services, which should not repeat these dynamics in the future.

Now talking about CapEx, it's also important to highlight that as we indicated previously, our CapEx decreased sequentially from R$460 million in the first quarter -- in the previous quarter to R$332 million in this quarter. And we expect a slightly lower CapEx for the coming quarters. So it's not a general trend..

Pedro speaking here. Let me jump in. I think on the strategy side, I think throughout the rest of the year, we want to put a strong focus of the team in the integration, cost discipline, incentives alignment and streamlining our software portfolio. I think this would be the key drivers for the short term.

However, at the same time, we have several priorities in place regarding top line growth so we're attacking both sides of our P&L in some ways. The improvements we have to make in the software business, in reality, they are not a short-term challenge. It will take time, though I'm really confident that the rewards are worth it.

In the long term, our goal is really to build a unified commerce solution for our clients, and our software business is really an integral part of our strategic vision.

We believe that we have a lot of work actually ahead of us, but we're really excited on the path to become the only end-to-end integrated software and financial services provider for Brazilian merchants.

I think we'll be providing more flavor on this on the Investor Day by mid-November, how we set our long-term KPIs and our strategic view up until 2030. But I'll pass it over to Lia so that she can provide you maybe with more color on our key initiatives..

Sure, Pedro. Thank you. So just to elaborate a little bit more on those challenges, Antonio. I think on the banking side, we are very happy with the evolution that we have seen. So we have seen increased engagement of our clients with our banking solution. Of course, we see as a big value the fact that we combine our offering to clients.

In acquiring and banking, acquiring provides a powerful cash-in, which then can drive further engagement as we offer more features for our clients to solve their main business pain points. We have a lot of work to do on the banking side, so a lot of work being put into providing more and more features that address our clients' needs.

And I think like Pedro said, on the software side, this is really a multiyear journey. But we have, I think, started to take some very important steps this year regarding having the right setup in terms of organization, of having the right incentives, of really prioritizing what we feel are the most important initial steps that we have to take.

So just to give a little bit of color on that, we have prioritized what we see as the key verticals for us to address as opportunities for cross-selling financial services to software clients. And the initiatives that we're undertaking regarding those verticals are initiatives around product bundles, product integration, go-to-market initiatives.

When we look at the cross-sell today, about 17% of our software clients use our financial services. That's up from about 15% at the beginning of the year. It's very early stages but we started to see some initial traction, and we're very confident with the direction that we're taking. So just to give a little bit more color on those evolution points..

That's great. Thank you, Lia and Pedro..

The next question is from Josh Siegler with Cantor Fitzgerald. Please go ahead..

Hi guys, thanks for taking my question and congratulations on the execution this quarter. I wanted to dive a little bit deeper into what you guys were just talking about, which is on the software side. So there was some noticeable improvement in the software revenue this quarter.

Can you help us understand how you achieved such a strong improvement in the number of active locations and how you got that cross-selling flywheel to really start spinning between financial services and software..

Yes. Thank you for the question, Josh. So we're really putting -- focusing the investments in growth within our software business around our less mature channels, so namely, franchises inbound and inbound.

Those channels, they really address kind of the middle of the pyramid in terms of client segments, right? So remember that Linx has a strong presence in the enterprise segment and is growing more and more in the middle of the pyramid, what we call mid- to large clients. So that's really what drove the growth in locations.

And that's an area where we will continue to invest going forward because it is very strategic for us when you think about the opportunity to combine software and financial services to offer a more -- a stronger value proposition to our clients. So I think regarding the cross-sell, not much more to say than what I have already said.

I think we've -- we're organizing a lot more around that front this year and really having kind of a financial services team and software team aligned on the objective to achieve this cross-sell and making sure that we have initiatives around product, around offering, around go-to-market in a very structured way. There's a lot of opportunities.

There are several verticals for us to address within Linx.

So we really started focusing on the ones where we see there's the largest opportunity within our software client base today and within the market overall, right? So we want a big verticals that have a large TAM for us to address in the market and that have a relevant client base and software for us to tackle.

So this is pretty much where we're focused on. And yes, that's the color that we can provide right now. We'll be able to give more color on this, like Pedro said, at Stone Day in November..

Great. Thank you, Lia. And looking forward to that additional color. I also want to ask about the rollout of the new credit card product.

What's the timing on actually getting that fully to market? And do you believe the mix of credit cards will have a significant impact on your banking segment moving forward?.

Yes. So like we said, we are piloting the credit card products, and we hope to be able to scale towards the end of this year. Yes, not much more to say at this point. I don't know, Pedro, if you want to add a little bit more color..

Yes.

I think you might remember that in the last call, we actually highlighted that we're taking a conservative approach in some ways, a conservative and disciplined approach toward the expansion of our credit book, taking the necessary time to observe the full cohort performing and also being mindful that the current macroeconomic environment conditions were not the best ones to quickly expand the credit book, right? So we're keeping the conservative approach in some ways, but you see a bit more scale-up over the next semester.

And I think regarding our portfolio performance, I think it's premature to draw definitive conclusions. I think initial results are a bit better than expected by our models, and I think that's pretty much that we have to say at this point..

Great, thank you very much for the color, guys, I appreciate it..

The next question is from Neha Agarwala with HSBC. Please go ahead..

Hi, thank you for taking my question. My first question is on the MSMB segment. You seem to continue to gain market share in that particular segment.

Is that right? And what's allowing you to gain market share, especially in the SMB segment, which is -- which has always been so competitive, but currently, all players are very keenly focusing on that segment. And is there any particular player from whom you are gaining market share? My second question is on the long tail.

There was a decline in the active clients. I presume it's due to the long-tail segment. If you could elaborate on that. And we also hear that you probably are a bit more price aggressive in the long-tail segment.

Is that right? And how do you expect to continue gaining share in the long tail?.

Thank you so much..

Neha, I think there were -- Lia here. Thank you for the question.

I think there were a few questions within your question, so let me start answering and then let me know if there's -- if I covered it all, okay? So I think regarding market share gains in the MSMB segment, just going back to fundamentals here, we created a model centered around providing the best service and really owning the touch points with our clients from distribution to service and logistics.

Regarding distribution, we continue to see white spaces where we have room to grow across Brazil in our hubs and also to further allocate capital in marketing to grow in the micro segment. So I think that's an important point to highlight that we continue to invest in growth both in SMB and micro segments.

A second important point is that over the past years, we have invested in expanding our product offering to clients. That's another layer that really strengthens our value proposition, and we did this while we continued to expand distribution footprint, and at the same time, sustain the best customer service in the market.

And I think a third important factor, which is part of your question, is our ability to optimize Stone and TON offerings across our multiple channels, gave us an assertiveness and allowed us to optimize unit economics for different client tiers and maximize our ability to gain share in both micro and SMB segments with attractive economics.

So I think that, that's an important point, right? We've said this many times, but it's very important for us to balance this growth with profitability.

In the end, it's the combination of these factors that I mentioned that creates a strong value proposition and sustains our ability to continue to win clients every day across the spectrum of client profiles with attractive economics. So I think that's our take on market share evolution, Neha..

Perfect.

And in terms of the decline in the active clients?.

Yes, sure. So that's because in the first quarter, we had a big marketing campaign around Big Brother Brazil, a reality show in Brazil that had -- it's almost like you had a stronger impact in net adds in the first quarter due to these targeted marketing campaigns that subsided within the first quarter. So that's the reason why we saw this evolution.

Any color Mateus, you want to add?.

I want to complement, the active client base itself is still growing. So we grew from 2.7 million in the first quarter '23 up to roughly 3 million active clients in the second quarter. What decelerated was the net addition of clients and like Lia said, this was related to the marketing campaign that we ran in the first quarter..

Okay, perfect. That's great, thank you so much, and congratulations on the quarter..

Thank you, Neha..

The next question is from John Coffey with Barclays. Please go ahead..

Hi, thank you very much for taking my question. The question I have is a bit of a follow-up on Neha's question, and it was regarding the MSMB TPV growth of 19%. I was wondering if you could just maybe paint that growth in some broad strokes.

When we think about this, is a lot of this coming from -- is any of this coming from green space? Is it taking away market share from more like some of the incumbents like the acquirers have been in Brazil for some time? Or maybe some of the newer fintechs? Just trying to get an idea of where this is coming from, again, especially as you said that it almost quadrupled the overall market growth.

And then just my last follow-up is, it looks like on a sequential basis, key accounts, their TPV was only down about 3%. Are we nearing the bottom here where we can start to see some growth in known account -- or sorry, key accounts TPV? That's it..

John, Lia again here.

So I think -- sorry, the first part of your question was around TPV dynamics, right?.

Yes, for MSMBs and where that's coming from, greenfields, old incumbents, fellow fintechs?.

Yes, it's really a mix. So first message is we've always taken market share from competitors, right, since day one of our existence. So that's always a very strong dynamics that drive our TPV growth. TPV growth also is impacted by same-store sales growth within the base.

But as long as we can continue to win new clients and sustain those relationships over a healthy lifetime, that will allow us to continue to gain market share. I think I just explained on Neha's question the reasons behind this continuous market share gain, but it's really a combination of same-store sales growth, new client wins.

And I don't see that the competitive dynamics in terms of players has really changed much recently. I don't think that there's any difference in terms of who are the main competitors. It varies by region, it varies by client segment, but there hasn't been really significant changes recently..

Okay. Thank you.

And is the pain over for key accounts as far as quarter-over-quarter declines in TPV?.

I think we can expect to see these TPV dynamics stable from now on. Like we said, this is an opportunistic segment for us. So yes, not much to say there. I think we can expect stable TPV behavior..

Perfect. Thank you very much..

Thank you, John..

The next question is from Guilherme Grespan with JPMorgan. Please go ahead..

Hello, thank you, everyone, for the call. Two questions on my side. The first one is related to the long tail. You talked a little bit about the competition on SMB that seems still healthy. We did saw some marketing campaigns on the long tail a little bit more aggressive this quarter.

There was also some news flow on one specific player focusing on the segment. I think they are targeting to grow in the segment going forward. So just separating here the SMB from the long tail, if you still see the same economics, how has been the competitive dynamics? And the second one is just to cross-check.

You mentioned the chargeback impact on the banking deposits. If you can just clarify a little bit what is this impact. Wasn't 100% clear to us. Thank you..

Okay. Guilherme, thank you. I'm going to take the first part of the question and then pass it over to Mateus. So regarding micro segment, I think one key point to highlight here is our ability to really optimize strategically our TON and Stone offering to maximize market share gains with attractive economics within the MSMB client segment.

Regarding -- our target within the micro segment is really about how we structure offerings in a way that we attract the healthy economic clients within the micro segment. So our clients' profile within micro is a client profile of higher average TPV. And we do, like we said many times before, return hurdles for all client segments and products.

So we're able through the offerings to really optimize the clients that we bring. So dynamics that we can say regarding micro segments. Maybe Mateus can take the second part of the question on banking..

Yes, for sure. So like you mentioned, we indeed had a one-off in the quarter with a negative impact of R$286 million in deposits but without any P&L impact. And this impact was associated with a shift in our chargeback and cancellation collection process.

Just to give you a little bit of more color, whenever we receive the chargeback or cancellation associated with a TON merchant, we use it to block the same amount from the merchant's outstanding deposits to guarantee the collection.

In the process of migration from TON's old merchant accounts to Super Conta TON, we settled this amount instead of only reserving them, which had a onetime negative impact on deposits but no P&L impact whatsoever.

Also important to highlight that adjusted -- our deposit base would have seen a 7.8% sequential growth, which outpaces the 5.6% growth in MSMB TPV, which we think illustrates the continued increase in client engagement that we are seeing within our banking products..

Super clear. Just one follow-up, if I may, on the banking side. I was also looking at the presentation. You mentioned that the performance of the early vintages has been in line with the credit underwriting standards.

Can you share to us what is the expected credit loss in this product that you were working with at maturity, not necessarily now but like on a sustainable basis? What do you believe is the loss ratio for this type of working capital loan?.

Yes, for sure. So it's still too early to talk about definitive conclusions regarding the portfolio performance. But what we can share is that currently, our model predicts an expected loss slightly below 10%. We are conservatively provisioning nearly 20% due to the limited track records of our models and also prevailing market benchmarks.

But the performance itself of the cohorts has been better than what the model forecasts. Again, it's too early to draw any big conclusions on this, but as the portfolio grows over time, we will improve the disclosure on our credit performance so you can also track the progress..

Perfect. Thank you..

The next question is from Kaio Prato with Banco UBS. Please go ahead..

Hello, everyone. Good evening. Thanks for the opportunity. I have a question related to the competitive dynamics on the commercial teams in the industry today. So while we saw you and other players talking about the still rational behavior in terms of price, we have been seeing some players talking about an increase in sales force.

So in this front, I would like to get your sense about the view on the industry sales force, if you are indeed seeing higher competition in that front or not, if that concerns, and what do you think about your current sales force today if we could expect any expansion? Or actually the opposite, given your head count is way higher than some peers.

So just a few thoughts here would be good. Thank you..

Yes. Kaio, Lia again. So I think on the dynamics regarding what perhaps competitors have been saying regarding hiring sales people, we like to highlight this in our calls to remind our investors that it's not only about distribution, right? Our model is not only about putting salespeople on the street. It's about the combination of several factors.

It's about our agents that actually have a role not only in the sales process but also in the lifecycle process of our clients.

The fact that we have this combined with last mile logistics, customer service and that we have an operation, which is really integrated through technology, that technology enables us to gain efficiency and provide intelligence to the way that we serve clients.

We think that the results of this is really the level of satisfaction that our clients have with us, both in Stone and TON products. And as much as we see these efforts to kind of copy the distribution aspect of the model, the model is about more than that.

Now regarding the opportunities that we see, the fact that we have this technology that supports our operation gives us a very granular level of data that enables us to identify at a very local level where the white spaces are.

So we can take a route, a city, a hub and see exactly what the competitive -- vision of whether or not we allocate more sales teams to that specific hub, to that specific city. So when we look at it from that broad perspective, thinking about the vast geography of Brazil, we still see a lot of white spaces where we can grow.

So I think that's the message regarding sales headcount and dynamics going forward..

Okay. Thank you very much. And if I may, just a quick follow-up on the key accounts TPV. We saw it contracting more than 30% this quarter, so just would like to understand how much of your TPV on key accounts is still related to the sub-acquiring business.

And on the Platform Services, what is the perspective going forward if this is a focus of the company or not? and if competition has been increasing here? Thank you..

Yes, Kaio. I mean, like I said, no big news there. I think we expect a more stable TPV dynamics. We can provide more on the sidelines but we don't expect different -- very different dynamics going forward. More and more volumes have contributions from Platform Services as opposed to sub-acquirers, but not much more to say here..

Okay, Lia. Thank you very much..

The next question is from William Barranjard with Itaú BBA. Please go ahead..

Good night, everyone. Thanks for the question. So I would like to pick your brains here on the new cohorts of clients. So I would like to understand how these new cohorts, they compare to your current pace in terms of take rates, especially in the MSMB segment.

So I guess in other words, how much smaller is the average volume of those new clients versus the current pace? And if it's fair to assume that only by maintaining the current mix of added clients, we should see an improvement in take rates ahead..

Thank you for your question, William. I'm going to take the first part and then maybe pass it over to Mateus to talk a little bit about the pricing side.

But I think on the first part -- sorry, what was the first part of your question again? Can you repeat?.

Yes, sure. Just....

Sorry, average TPV, yes. So I think trends that we can expect going forward, there's more and more we're focusing our hub operation on larger SMBs. So more and more, we're onboarding average TPVs that are larger than the average TPV of the base within SMB clients.

Of course, when you look at average TPV in the MSMB on a consolidated basis, there is a big mix shift effect that comes from micro versus SMB. But I think important to say is regarding our strategic evolution within our SMB strategies that we're more and more focusing on the larger SMBs within the segment.

So that's not going to show up in the overall average TPV number, but that's a trend that we are seeing when we look within the hub strategy and the SMB client segment itself..

Yes. And just complementing regarding take rates, since the micro segment is still growing faster than the SMB segment, we do have some effect in terms of mix in the take rate. If we look at the evolution of take rates between the previous quarter and this one, this mix shift accounted for 4 bps in the increasing take rates..

Okay. That's very clear. Thank you..

The next question is from Jamie Friedman with Susquehanna. Please go ahead..

Hi. Thank you. And let me compliment you on the investor presentation. I like the new format. I wanted to ask first about the software and I realize others are as well. And Lia, I understand you're saying that it's a multiyear journey, but the deal was announced August 11, 2020, so this is multiple years.

So I was hoping either you or Pedro, could share your perspective on what has gone less than right or what's gone wrong? 9% growth is okay, but I don't think that, that was what you aspire to at the time of the Linx merger. And right now, it's actually dilutive to growth.

So, I think I understand what you're going to try and do going forward, because you said it. I'm just curious what's gone wrong..

Hi. Jamie, it's Pedro speaking. Thank you for the question. Well, to be honest, I think that was a decision made by the company in the past. I think you are right in some ways. I think the acquisition actually happened two years ago.

But when you look back, I think a lot had happened within the company over the past two years, right? I think there was the whole credit situation in some ways. Interest rates went all the way up, and I believe that the company was not that well-prepared to deal with these new interest rate dynamics and pass-through on prices.

So, the decision at that point in time was really to focus on putting the company on track into the Financial Services business. In my view, it was the right one. I think Linx was our stand-alone business, was running by itself, and the decision was to leave the decision to integrate for a later point in time.

And I think this is exactly what we're doing as of today, right? And I think there the part of the question is also focus, right? I think you cannot do everything at the same time. And when you look back even a couple of months ago, I think the company had over 100 initiatives being run at the same time.

We downplayed this to 20 or 21, which is still a big number. But we're more in terms providing focus within the company. So that we set the stage and the plan to do what we want. Lia gave you some flavor in terms of the verticals we are prioritizing. Again, a good example of focus.

And I think we're moving to the right direction and how we set the stage for the long-term. I really would invite you to wait up until the Investor Day presentation, because we're going to provide a full picture on that..

Okay, that's a good answer. Thank you, Pedro.

And then Mateus, if I could just ask, what level of provisions is contemplated in the operating margin of 15.3% at the midpoint of the Q3 guidance?.

The same level that we are provisioning nowadays, which is 20%..

Okay.

And did you say what the originations would be?.

No, no. We are not disclosing the outstanding portfolio for the next quarter..

Okay. Thank you. Thank you all..

The next question is from Soomit Datta with New Street Research. Please go ahead..

Yes. Hi there. Thanks. Fair enough. Just a quick one, please. I just wanted to go back to the - briefly to the discussion on debit volumes and PIX P2M. And first of all, can I just double check, I think you gave an indication as to what the contribution of those volumes is for Stone you don't include in your TPV, but it would be great to get that number.

And then just a sense check following kind of idea really, because if P2M in the industry is being monetized in line with debit.

The current narrative around soft card volumes in the sector is pretty misleading, isn't it, for the acquirers, because when we look at the BCP data on PIX P2M and we look at [ABAC] and put them together, actually, those volumes in entirety are growing at a healthier level around 20%. So I just wanted to see if I was on the right track with that.

And then finally, again, if P2M continues to be relevant, isn't this super supportive for gross margins going forward and maybe already supportive for current gross margins? Thanks very much..

Hi. So I think, I've given the overall numbers regarding PIX P2M evolution. So, if you consider overall TPV including PIX, the 19% growth would increase to 23% - slightly over 23% growth, and that's because of much stronger growth of PIX P2M volumes. That trend that we have seen within the base is similar to the trend we've seen in the market.

Some players do disclose TPV including PIX. We have not made the decision to disclose TPV including PIX, but it is a trend going forward that is here to stay. We saw a very quick early adoption of PIX P2P, and then now more recently, we've seen more adoption of PIX P2M. So, I think that's a point that we will - see going forward.

And yes, it is a solution that is a payment method that many consumers decide to use and that many merchants may want to incentivize, because of the settlement characteristics, and the economics associated with accepting these transactions.

But naturally, there's a usability around PIX that is still, I would say, not at the level of cards, right? So this is an evolution. We still have to see how this is going to play out, but more and more, we were going to - we are going to give color on this..

And just to double check, it is currently - if it's being priced at the same level as debit, it's a much higher gross profit business at the moment, right?.

Yes. Go ahead, Mateus..

When we see price similar to the EBIT, we mean on the net MDRs of the EBIT. So it contributes to take rates, but it's not that accretive to gross margins..

Yes similar..

Okay. Correct. Thanks..

And our final question today is from Nicolas Riva with Bank of America. Please go ahead..

Thanks for the chance to ask questions. I wanted to ask on your debt. I see that the balance outstanding of the FIDC continue to decline in the quarter to R$318 million.

So I wanted to ask about your ability to access the FIDC, and in general, the local debt market in Brazil? And then second, one thing that Tito Labarta asked about was your funding cost, your financial expenses, which increased 16% in the quarter to R$1.1 billion despite total debt not increasing in the quarter.

And you mentioned some changes in your fund mix driving this increase in financial expenses. I wonder if you could talk, a bit about now that the Central Bank in Brazil has started to cut reference rates, and more is expected in this regard.

How we should think about funding costs and in general, the overall profitability of the prepayment business going forward? Thanks..

Yes. So Mateus here. Thanks for the questions. So talking about the mix of debt versus sale of receivable, I think we mentioned when we talked about financial expenses - that one of the reasons why financial expenses increased more than MSMB TPV was, because we did more sale of receivables compared to debt in the quarter.

And that's one of the reasons why when you look at our balance sheet, you see total debt decreasing but financial expenses increasing. This decision was made mostly, because it was the better economic decision, so because the spreads for sale of receivables were better in this quarter. But this is not an overall trend or a long-term trend.

Like we mentioned in the past, when we look at longer-term trends for financial expenses, we think that this line should trend with the yield curves in Brazil, and also with the growth in TPV. So as the yield curve in Brazil is decreasing, we expect financial expenses to have some positive effect from that in the future..

Okay. Thanks Mateus..

Thank you. This concludes our question-and-answer session. I will now turn the call over to Pedro Zinner for final considerations..

Thank you, all. And thank you all for participating on the call, and I hope to see you again in the next quarter. Thank you. Have a good night..

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