StoneCo [STNE] Conference call transcript for 2022 q2
2022-08-19 14:12:03
Fiscal: 2022 q2
Operator: Good evening, ladies and gentlemen. Thank you for standing by. Welcome to the StoneCo Second Quarter 2022 Earnings Conference Call. By now, everyone should have access to our earnings release, and the company also posted a presentation to go along with this call. All material can be found at www.stone.com on the Investor Relations section. Throughout this conference call, the company will be presenting non-IFRS financial information, included 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 appears 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, VP of Finance and Investor Relations at StoneCo. Please go ahead.
Rafael Martins: Thank you, operator, and good evening, everyone. Joining us today on the call, we have our CEO, Thiago Piau; and our Chief Strategy Officer, Lia Matos. Today, we will present our second quarter 2022 results, discuss some recent trends and provide an updated outlook for our business. I will now pass it over to Thiago, so he can share some highlights of our performance. Thiago?
Thiago Piau: Thank you, Rafa, and good evening, everyone. In the second quarter, we demonstrated consistent execution combining strong growth with improving profitability. We produced this strong performance in both TPV and revenue growth, while improving our operating margins in both of our segments. We achieved total revenue of BRL 2.3 billion, which was 5% above our guidance and up 83% year-over-year, excluding the negative revenue impact from the credit product in the second quarter '21 in pro forma for Linx. On the profitability front, our adjusted EBITDA margins increased sequentially from 4% in the first quarter to 4.6% in the second quarter, driven by improved operating efficiency in our financial services and in our software businesses. As we noted previously, following the partial sale of our stake in Banco Inter, we decided to stop adjusting the bond financial expenses in our results from the second quarter onwards. As a result, our adjusted EBITDA in the second quarter reached BRL 107 million, 19% higher than our guidance of over BRL 90 million. In our Financial Services segment, we were especially encouraged by 5 factors. First, the strong evolution of our payments client base, which crossed the 2 million mark with an acceleration of net adds in the quarter. Second, the strong MSMB TPV growth of 78% year-over-year, driven by both our active client base growth and a continued improvement in go-to-market strategy for TON and Stone products. Third, we were able to continue increasing our take rates, while we increased our average TPV for both Stone and TON products sequentially. Fourth, the expansion of our banking platform, generating more engagement and increasing opportunity to monetize clients in the future. And finally, efficiency gains in costs and expenses. As a result, the Financial Services segment revenue grew 3.4x year-over-year and 102% excluding the effects associated with the credit product last year. At the same time, EBT margins in the segment increased 3.8% in the first quarter to 4.3% in the second quarter. In our Software segment, revenue growth pro forma for Linx reached 23%, mostly driven by a strong performance in our core software. I'm encouraged by the margin evolution is softer with sequential improvement of almost 300 basis points in EBITDA margin, which reached over 15% in the quarter. This improvement was the result of continued efficiency gains and back-off synergies, even though we continue to invest in our distribution, customer service and marketing capabilities. We expect to continue ramping up our software margins in the second half of the year. I'm pleased with the consistency and direction of our results in the second quarter, and I think this is a solid step forward to producing strong results by year-end. Looking to the second half of the year, we will maintain our focus on building on these achievements. With that said, I will now pass it over to Lia, who will provide more details about our second quarter performance and strategic updates. Lia?
Lia Matos: Thank you, Thiago, and good evening, everyone. As Thiago just summarized the main financial and operating highlights, I will dive a bit deeper into the drivers of our performance. Starting on Slide 7, I will focus on our client base trends. During the quarter, we reached over 2 million MSMB clients with net adds of 196,000, driven by strong commercial performance in both TON and Stone products despite some churn impact from our continuous pricing initiatives. We have continued optimizing our commercial strategy to onboard smaller clients onto our TON product, while we focus the Stone product on bigger SMBs. This approach addresses our clients' needs more effectively and provide superior unit economics for us. As you can see on Page 8, this strategy has led to better quality in our client base for Stone and TON, both of which grew average TPV over 30% year-over-year. This, combined with our client base growth, resulted in an MSMB TPV of BRL 69.9 billion, 3% above our guidance for the quarter and 78% higher year-over-year. At the same time, we improved our monetization with take rates increasing sequentially from 2.06% to 2.09% in the second quarter. On Slide 9, we highlight the continued expansion and engagement with our banking platform. On top of the growth in number of clients actively using our digital banking account, I want to highlight the sequential improvement in ARPAC, which reached BRL 39 per month this quarter compared to BRL 33 last quarter and 3x higher year-over-year, mostly driven by higher interest rates on average deposits from clients bank accounts. I also want to briefly update you on the performance of our legacy portfolio. This quarter, we received BRL 134 million of cash inflows, which decreased the fair value of the credit portfolio on our balance sheet to BRL 129 million. On Slide 10, we will move on to our key accounts business. As we show on the left side of the page, TPV from key accounts had a slight decrease during the period as we continue to deprioritize sub-acquires. On the other hand, the TPV growth in platform Services was strong at 95% year-over-year. Due to this mix shift and the increase of CDI rates, take rates have increased sequentially to 0.86%. Now let's shift to our Software segment on Slides 11 and 12. Software revenue in the second quarter of '22 reached BRL 351 million, representing 23% year-over-year growth pro forma for Linx. At the same time, adjusted EBITDA also improved, reaching BRL 53 million with 15.2% adjusted EBITDA margin compared to 12.3% in the first quarter and 9.2% in the second quarter of '21 pro forma for Linx. We expect profitability improvements to continue throughout the year as we capture these efficiency gains and cost synergies even while we continue to invest on several fronts. On Slide 12, I want to highlight the main drivers of this performance and the progress of our software strategy. First, software revenue growth was driven mainly by core revenue growth that was up 28% year-over-year, driven by the higher number of POS and ERP locations and average ticket as well as the consolidation of . This result was partially offset by the digital business, which decreased revenues by 6%. In order to strengthen our strategy of helping our software clients to sell through multiple channels, we concluded the acquisition of Plugg.To, which streamlines integrations with marketplaces. We believe we have a huge opportunity here to help our clients become truly omnichannel and increase their sales. The second point I want to highlight is that we're gaining scale and improving margins. With annualized revenues of BRL 1.4 billion, we continue to generate operating leverage from our integration efforts and efficiency gains in costs and expenses, and we expect this trend to continue in the second half of this year. Finally, we see significant room to grow organically and through new investments in our core POS and ERP products, cross-sell financial services to our existing client base and help our clients sell more through multiple channels. Now I would like to pass it over to Rafa so he can discuss in more detail some of our key financial metrics. Rafa?
Rafael Martins: Thanks, Lia. Before I go over our financial results, I would like to clarify that as anticipated in our last earnings release from the second quarter 2022 onwards, we will no longer adjust our results for the financial expenses related to our bond. To allow for like-to-like comparison, we have included in our earnings material historical numbers in the same criteria that we are now adopting. That said, starting on Slide 13, I would like to highlight a few key points. As you can see, our results are consistently improving with revenue and margins from both our Financial Services and Software segments increasing sequentially. Our adjusted net income was BRL 76.5 million compared with BRL 51.7 million last quarter, a 48% sequential improvement. For the rest of the year, we expect profitability to keep increasing while balancing it with healthy growth levels. As we have already detailed our top line trends, I will move directly to Slide 15 to focus on our cost and expenses pro forma for Linx. Following the trend, we started seeing last quarter, we gained leverage in most of our cost and expenses lines both quarter-over-quarter and year-over-year with cost of services and selling expenses being the highlights for the quarter. We will focus on our quarter-over-quarter evolution, which better shows our current trends. Cost of services as a percentage of revenue decreased 540 basis points, driven mainly by lower data center cost, efficiency gains related to our registry business and lower D&A. In administrative expenses, we had a small gain in efficiency as a percentage of revenue. As our business kept growing, we had higher third-party services expenses, which was the main responsible for the absolute growth in this line. As we continue to rationalize G&A growth, we expect to continue gaining leverage in this line over time. Regarding selling expenses, this line decreased almost 400 basis points as a percentage of revenue as our marketing expenses returned to more normalized levels. We will keep investing in our growth through commercial efforts in the second half of the year. Financial expenses, with the bond included in the previous quarters for comparison purposes, presented a sequential growth of around 710 basis points as a percentage of revenue, mainly due to 3 factors: first, the further increases in CDI rates that increased, on average, 20% quarter-over-quarter; second, a larger mix of prepayment revenue; and finally, our decision to increase the duration of our funding lines. Lastly, other expenses as a percentage of revenue had an increase of almost 190 basis points, mainly explained by the write-off of assets from the discontinued Linx Pay business in the amount of BRL 16.6 million, the write-off of POS equipment and other smaller effects. We are encouraged by the trends we are seeing, and we will keep looking for opportunities to be more efficient in the second half of the year. In addition to our P&L evolution, this quarter, we continued to generate cash and improve our liquidity. Our adjusted net cash improved by BRL 195.6 million in the quarter and BRL 455.6 million in the first half of the year, reaching BRL 2.6 billion. With that said, I will pass it back to Thiago, so he can provide you additional updates about our team and our outlook for the third quarter. Thiago?
Thiago Piau: Thank you, Rafa. Before we move to our outlook for the third quarter, I would like to give you an update about some additional changes to our executive team. Marcelo Baldin, our Chief Financial Officer, is departing from the company after 5 years of services building out our finance functions and helping the company execute on its IPO. Baldin will be replaced by Silvio Morais, who was named as our interim CFO. Silvio, who has extensive experience in finance, including serving 20-plus years as controller at Ambev, will temporarily step down from our Board to assume his new duties. Also, Tatiana Malamud was appointed our Chief Legal Officer, a new role which will serve as part of the Executive Committee. Tatiana has 30 years of experience as in-house counsel and Head of Legal department for different financial institutions as well as deep experience in capital markets. We would like to thank Baldin for his valuable contributions to Stone over the past 5 years and wish him success in his new endeavors. I'm excited to have Silvio join the management team and benefit from his significant experience in finance. Also, I would like to welcome Tatiana to our team, and look forward to her developing this critical new role for the company. Finally, let's move to Slide 16, where we will share with you our third quarter outlook for the business. We expect a total revenue and income above BRL 2.4 billion, representing a year-over-year growth above 63.3%. For MSMB TPV, we expect volumes between BRL 73 billion and BRL 74 billion, with year-over-year growth between 41.4% and 43.3%. Finally, regarding adjusted EBT, we expect more than BRL 125 million without adjusting for the bond financial expenses compared to BRL 106.7 million for the second quarter. We still have a long path ahead of us, but we believe the consistent results achieved in the first half of the year demonstrates we are on the right track with an encouraging outlook for the second half of 2022, in which we continue to expand margins, while keeping strong growth levels. With that said, operator, can you please open the call up to questions.
Operator: And our first question today will come from Tito Labarta with Goldman Sachs.
Tito Labarta: A couple of questions. I guess, first on the take rate on MSMB take rate. So a little bit more expansion this quarter. Just help us think about -- are you done with repricing there? Is there any more room to reprice? Is this kind of the take rate that we should expect from here? Because you also saw net margin adds accelerate. Just help us think about with repricing versus sort of merchant adds and your ability to add more merchants, how is like the competitive environment still allow you to do that? And second question, good job on costs and expenses, definitely seeing some improvements there. Is there more to do? Help us think about how that can evolve from here, where else can you save on cost and control expenses to improve margins from here?
Thiago Piau: Tito, Thiago here. I will start with the first part of your question. Thank you for all the questions. If I miss something, please help me here to remind all the points. So first, regarding take rates, we have continued to reprice clients according to CDI. In the second quarter, repricing efforts were a little bit smaller than what we did in the first quarter. But now in the third quarter, we have intensified these repricing efforts. And so far, we are doing very well. We expect that in the third quarter, the improvement in take rates will be greater than the improvements that we had in the second quarter. So I think that we had the time to adjust our pricing policy to the value proposition of both TON and Stone products. And I think that we are performing well, the client base is performing well, and the net adds that we have shown this quarter, I think that proves our ability to navigate this environment. We are seeing a better performance in terms of commercial activities that we were expecting. So we expect better net adds for the third quarter too. Regarding competition, what I can say here is that in payments, it has been the same dynamics as always. We see the 6 main players in the market being rational regarding prices, which is good. In the banking credit, we continue to build capabilities to allow us to compete head-to-head with the incumbent banks. So we still have a lot of room in these additional financial services to our clients. And in software, competition tends to be more vertical specific and very fragmented, Tito. We continue to consolidate the industry given the strength of our solution and the strength of the team. So there's no big news in competition, but I think that the 6 main players in the market that dominate the majority of the market share are being rational in terms of pricing, and I think that this is positive for everyone. In terms of cost and expenses, we are improving discipline in the way we manage capital allocation in OpEx in our business. So we expect to continue to gain leverage in our lines. So we expect a better second half of the year in terms of discipline in managing OpEx.
Tito Labarta: Great. That's very clear. Maybe just one quick follow-up on the competitive environment. You mentioned that everybody is being more rational now. How long does that rationality last? I mean, do you think once rates come down, do people start to get more aggressive again? Is everybody just kind of normalizing for the higher interest rates? Just help us think kind of long term how competition can evolve just given how competitive it's been in the past.
Thiago Piau: All players were impacted by the CDI almost in the same way. There are some difference in terms of capital structure between players. But in the end of the day, I think that when the interest rates were moving up very, very fast and the competitors are trying to see what each other were doing, there are some delay on the pricing strategies of all the players. But I think that now this is behind us, we are not pricing our products based on competition. We are pricing our products based on the relationship we have with our clients and the evolution of our solutions for them. But we are seeing that the other players are more stable in relation to price and their strategy. So I think that these dynamics we have today will continue. If interest rate goes down, of course, some of that, it will be moved to clients. But I think that the industry will keep margins when interest rates ease. Thatâs what I expect.
Operator: And our next question will come from Josh Siegler with Cantor Fitzgerald.
Josh Siegler: So the average revenue per active client in banking continues to trend higher. Do you believe there's more room for it to expand in the back half of 2022 as interest rates remain elevated?
Lia Matos: Josh, this is Lia. Thank you for the question. I think the short answer is yes. So as we continue to see our clients engage further with our banking solution, I think there's a few drivers there, right? Number one is average deposits are, of course, a big impact in the ARPAC, as I just mentioned, the evolution in the quarter. And that is correlated with interest rates. So as long as interest rates go up, that monetization will improve, but also average deposits are trending upwards. And also, as we deploy more features and help our clients in new banking solutions that also will contribute positively to monetization. So I think the trend in monetization in banking as we see it is very positive going forward.
Josh Siegler: Great. And then if I could just have a follow-up. MSMB TPV came in above your expectations this quarter. Was that largely driven by higher TON adds? Or did average spending per merchant also surpassed your original outlook?
Thiago Piau: Josh, Thiago here. I think that the positive surprise was the average TPV on both products. We were already expecting these improvements in net adds and we are adding net adds in all client tiers from the micro merchant space to the SMB and the medium clients. In all tiers of clients, we have a positive net add. But the average spending per merchant on both Stone and TON products came a little bit above our expectations, and this was a positive. I think that the client base has a better quality now. Letâs see how this movement will continue for the second half of the year. As I said, we expect to continue improving our net addition of clients because I think that we are managing the client base and the new sales much better now. So letâs see how the average will behave, but I think that this trend will continue.
Operator: And our next question will come from Mario Pierry with Bank of America.
Mario Pierry: Congratulations on the results. Let me ask you 2 questions. One is on the efficiency gains that you talked about. I would assume a lot of this gain is coming from the incorporation of Linx, right, and there was a significant overlap. Can you talk about how much of the Linx's cost base has been reduced or how much do you expect to reduce? And just trying to get a better feel here for how much more cost savings we can see. And the second question is related to financial expenses, right. They are running close to BRL 1 billion per quarter now. But it seems to us that interest rates in Brazil are close to a peak. So just -- can you give us some type of sensitivity of your financial expenses to movements in interest rates in Brazil? That will be very helpful.
Rafael Martins: Mario, Rafael here. Thank you for the question. So regarding your first question of efficiency, I think it's important to highlight that we are gaining efficiency not only in Linx and Software business, but also in the Financial Services front. So if we look at both segments, we are having OpEx efficiencies there. We do have an improvement in margins in software, right? The EBITDA margin went up from 12% to 15% this quarter. So yes, we are capturing cost savings in the software front. But also if some of the cost efficiency we had. For example, we had lower data center cost efficiencies with our registry business, our banking business also some cost efficiencies. So we do have cost efficiencies related to the whole business. And as Thiago said, this is something that refers to the whole Stone goal. When we think about financial expenses, as you said, our financial expenses, they tend to increase both with the average interest rates in Brazil and also the growth of our business. So if you look at our TPV, the consolidated TPV grew 9% quarter-over-quarter. The CDI increased on average 20% quarter-over-quarter. And if you add up those 2 changes, you'll see that it's pretty much what our financial expenses increased. So as the CDI rate tends to flatten, of course, it does have a benefit into financial expenses. But of course, as Thiago said, we do adjust pricing policies also accordingly. So I think that over time, you should see financial expenses stop increasing as a percentage of revenue as we have seen over the last year when the CDI sort of flattens.
Thiago Piau: Rafa, can I add some comments here? Mario, Thiago here speaking, just to make 100% clear. When interest rate goes down, if it happens, we expect that we are close to the peak, as you said. If the trend in interest rates change and interest rate goes down, we expect direct POS contribution to our margins. So if we have an ease in interest rates, we expect to capture this as benefits in our margins in our results.
Mario Pierry: Okay. That's clear. Just a follow-up then. On your headcount, can you talk about your total headcount today versus like 2 quarters ago or versus 1 year ago when you integrated Linx?
Rafael Martins: Mario, Rafael here. Yes. So the head count today is a little over 14,000 people. It's pretty much flattish over the last half year. This is a result we commented on OpEx discipline, right? So the headcount is pretty much flattish. The increase in personnel expenses that you see in our results is pretty much the adjustments we have to do both legally and bringing new talents and more senior people. But overall, headcount is pretty much flattish.
Mario Pierry: Do you see -- sorry, Thiago, go ahead.
Thiago Piau : Thiago here. Just a comment. As I told you last quarter, I think that we already have the infrastructure we need in terms of people, both in distribution, logistics, customer service to attend our client base, and the growth that we have projected for the medium short term, and we are improving our productivity in the way that we design our processes. And now we have a new wave of growth, adding more products to our clients that we have not to increase our number of people. So we expect to continue to gain leverage in the personnel expense line.
Operator: And our next question will come from Kaio Prato with UBS.
Kaio Prato: So I have two here on my side, please. I think you completed a new partial sale of your stake in Banco Inter this quarter. The first one is, can you please confirm this to us? What was the impact in our earnings and cash? And what is your current stake in Banco Inter today? And what is your strategy on this going forward? And the second, we see that your cash generation was negative in this quarter again, and it's close to BRL 700 million cash burn year-to-date. So just wondering if you can please share with us what's your view about that. When do you expect to return to a positive cash generation? And what should be the main drivers for these going forward, please?
Rafael Martins: Kaio, thank you for your question. So regarding the partial sale of the stake in Banco Inter, you're right. We have -- we had a little under 5% stake of Banco Inter. We have today around 4%. So basically, we sold that 1% stake that we had before. This was -- we received those proceeds at the end of June. So there is a very small effect in terms of those proceeds. And of course, when you look at the mark-to-market that we have, after we have sold, the mark-to-market refers to the stake we have remained. So as we have mentioned in the past, this is an investment we have made back then. And this is like not the core of our strategy right now to look at it. We have admiration for the Inter team, but this is not a big focus now. And we keep the stake we have in the Banco Inter. Regarding your second part of the question, we have actually generated cash and increased liquidity this year, almost BRL 0.5 billion. So our adjusted net cash position has led to BRL 2.6 billion. So that's the -- when we expect, of course, to continue to generate cash, our lower CapEx in the second half of this year versus the first half. And the idea is that our business continues to generate cash.
Thiago Piau: Kaio, Thiago here. Just an additional color. We made just 1 partial sale of Banco Inter when we choose to receive the cash option when they migrated to NASDAQ. So there was â we have no news in our investment in Banco Inter. We remain at the same position we had, and we talked to the market in the last earnings call. So thereâs only 1 sale when we choose the cash option in their migration in NASDAQ, and no updates on that.
Operator: And our next question will come from Geoffrey Elliott with Autonomous.
Geoffrey Elliott: You mentioned being 5% ahead of the outlook you provided. But in the sense, you were kind of further ahead really in June because the outlook was given at the start of June, and I guess, at that point, you had pretty good visibility into the April and May numbers. So can you help us understand where did you perform better than expected? And was it a particularly strong June? And then is there anything we can read into that as we look out into the third quarter?
Rafael Martins: Geoffrey, Rafael here. Thank you for the question. So I think, yes, along the lines that what Thiago mentioned regarding the TPV that we saw a better performance than expected, I think we did see a strong June, as you mentioned. And that's pretty much the reason why we delivered a number that is higher than the previous guidance. So yes, when we look at top line, both TPV and revenue, they came above what we initially expected.
Geoffrey Elliott: And given the strength in June, is there anything we can extrapolate from that? I guess, were you performing better than you expected in June? And can we kind of read through from that into July, August, September?
Rafael Martins: Yes, I think that we -- the guidance we have provided for the third quarter already has some of those improvements versus the initial expectations. So as Thiago mentioned, when we look, for example, at the take rate evolution, we see a bigger evolution in the third quarter compared to the second versus the evolution we had now from the second versus the first. So I think we have incorporated those effects already in our guidance, and we are very committed to that guidance.
Thiago Piau: Can I add a comment here? Jeffrey, Thiago here speaking. Thatâs a great question. I think that in our outlook for the third quarter, what weâre assuring here is that although we are comparing our growth to tougher comps because every quarter, it is harder to continue to grow at the same pace because the base of TPV is big. But we are saying that at the top of the range, we will be growing 3% on MSMB TPV, but total revenue would be growing at 63.3% at the top of the guidance. So I think that here, we show our ability to improve take rates through this guidance, and we are committed to the top of the range of the guidance.
Operator: And our next question will come from Neha Agarwala with HSBC.
Neha Agarwala : Could you please give us an update on your software business? How are you indicating the Linx products to your own SMB client base? Have you started cross-selling some products to your client base? And how is that process going? And the second question is on your credit business. Is that something -- you already mentioned that you are trying to design a product and do a pilot. How is that coming along?
Lia Matos: Neha, Lia here. I understood you made 2 questions, 1 regarding software and 1 regarding credit, right?
Neha Agarwala: Yes, Lia. Perfect.
Lia Matos: Good. Good. Good. Okay. So let me start first with software and how we see penetration of financial services evolving into our software client base. So the penetration of financial services into our software client base has evolved sequentially, and this had a positive impact on the growth of platform services TPV, the 95% growth year-on-year on platform services TPV, because that's where we account for the TPV within our software client base. But to be clear, we still see a lot of opportunity not only in acquiring, but in integrating banking to the ERP. And when the time is right, in credit. So a few updates on the product side, Neha. We have made good recent advancements in product integration. So regarding fixed integration to the POS, which is when PIX is integrated as a payment method and it can be reconciled as a payment method, which greatly facilitates reconciliation for the clients, we have a big coverage of Linx POS with PIX enabled. The second point is a native integration of Stone banking into the ERP. This is in advance -- is a recent advancement that we have made. In the majority of the verticals, we have integrated the ERP to our strong banking, and it really facilitates clients' cash management workflow. We also have integrated our reconciliation platform to most of the vertical ERPs. And we have made also advancements in integration of mobile POS in some verticals where this really improves productivity in the store by streamlining checkout process. So these are examples of recent advancements we've made in integrations, and we expect naturally that these will help strengthen our software value proposition in the verticals that we offer them. When we think about credit within the software base, we think that this is an opportunity to address a little bit longer term because our priority in credit right now is focused on SMB clients within the Stone product. But if you -- I think we've talked about this before, right? If you look at the Linx client base, there is a big fraction of clients that are middle of the pyramid there. So what we call within the SMB space, and we think that there's an opportunity there to leverage the software data to be more assertive in giving credit to those clients. And regarding where we are on credit itself, I think the message is the same that we gave last quarter. So on the working capital product, we started testing in a very small scale, the product and the system improvements that we have made. We're really in test mode right now to test systems, collateral, the user experience, some features and enhancements that we've done in the product. And the idea is to continue these tests to run a full cycle before we actually decide to scale. So I think our plans haven't changed, and we are on track regarding those plans. We're also on track to start a pilot very soon with our credit card products and continue this pilot throughout the second half of the year. So I think those are the main messages regarding software and credit, Neha.
Neha Agarwala: Could you also update us if the registered receivables, which had some operations problems, is that working better now? Is that something that you are keeping an eye on to see how that is improving?
Thiago Piau: Neha, Thiago here. Can I go on Lia?
Lia Matos: Go ahead.
Thiago Piau: Okay. So Neha, regarding the registry of receivables, I think no big update here. We continue to follow the evolution of the 3 main players closely. We are integrated with the 3 of them, both in terms of our credit products and now we are starting to pay more attention in using the registry receivable to create projects to prepay receivables for our clients with acquirers. But we donât feel that we have the system that is stable enough in order for us to incur in the risk only looking to that receivables that are being processed by the register. So we are still being careful on that. But I think that in the second half, that industry will evolve, and it will open big opportunities for us, both in terms of prepaying receivables that clients have with other acquirers, and this is a very big opportunity for Linx, for example, and to improve our collaterals in the credit project. So letâs see what the second half of the year will bring.
Operator: And our next question will come from Pedro Leduc with Itau BBA.
Pedro Leduc: Two for me, please. One, just seeing your guidance figure for 3Q revenues, BRL 2.4 billion. It's almost flat in respect to 3Q, mid-single, low single-digit expansion at most, which maybe it's just you guys have been conservative because of what we just heard net add strong, further repricing business evolving. It seems like this deceleration, I can't really reconcile them unless there's a big drop in the key accounts to come. So I just like to pick your brains around this, if maybe it's just conservatism or what you're seeing so far in the quarter. That's that.
Rafael Martins: Pedro, Rafael here. Thank you for the question. So I think that we -- as you said, I think it's an important point. When we look at our revenue, we do have MSMB revenues and key accounts revenue in the financial services. Of course, key accounts revenue, they are more volatile, and also we are discontinuing some sub-acquiring business. So they can be more volatile. And of course, we want to make sure that we'll reach the guidance that we give. And of course, the guidance is above 2.4%. But I think that this is the best number we have right now that we are very confident that we will reach. But overall, when we look at the growth that this guidance implies, it's still a very strong growth year-over-year, over 60% growth in revenue that we think is a healthy pace versus the improvement in profitability that we want to have. So as Lia and Thiago mentioned, we are balancing growth and profitability in the second half of this year still, and we want to keep that consistent pace. So this is sort of the net effect of all those elements in our business.
Pedro Leduc: Super clear. And the other question is a little more on the strategic business side. You recently saw -- you guys bring in Rodrigo Cury, former BTG banking, like retail or digital banking lead. Former -- before that, he was a part of big retail bank as well. And I've seen you guys mention banking services a couple of times in this call. I can't avoid thinking that you have all this budget to spend with global, maybe to boost that avenue as well. Am I correct in the line of thinking that this should be a major attention point for you guys in the near future?
Thiago Piau: Thiago here. Yes, you are right in the line of thinking. We want to be a protagonist in financial services for merchants in Brazil. We are creating big efforts to improve our client base with the main projects. But on top of that, transform the company being perceived from our clients as the main financial provider to all their needs. And one of the big steps we are doing is improving our team and improving our ability to create new products, integrate it in a very simple way for our clients. So I think we have the capability, the distribution, the culture and how the team to execute. So let's see how we will evolve for the next 6 months and a year. But I believe that the new thing that we are bringing out Redrigo, João, Marcos combined with the pool of talent we have here and with Gregor will be a big boost in our strategy and our evolution. So yes, that's the direction we are heading.
Operator: And our next question will come from Domingos Falavina with JPMorgan.
Domingos Falavina: My question is just kind of trying to pick your brains on the pricing and what you guys take into consideration. So when we look at your MDR revenues, it basically grew about 9% Q-on-Q, which is good, is about in line with what we saw TPV growth. But when we add financial expenses, it basically shrink 1% Q-on-Q. And the part I struggle a little bit is hearing you say that your price not based on competition, which has, from what we hear, improvement in margin, but instead based on the relationship with your existing clients. So I guess my question is, when you're pricing is -- or you're baking in this rise in financial expenses, and I'm adding all the financial expenses because it's pretty hard to allocate managerially, where you're booking prepayment versus debentures or other weighted average cost of funding. And I guess, to a certain extent, like if you're not really pushing that hard on this price adjustment, if you're go seeking that kind of take rate all inclusive, inclusive in costs, if that's a figure you're satisfied because we did see good compression Q-on-Q. And lastly, like what exactly is your senior management's main goals or remunerated on? If this is on TPV growth or if it is on profitability because obviously, we're seeing a big shift in investor sentiment on that kind of position?
Rafael Martins: Domingos, Rafael here. Very, very good question regarding the financial expenses. So when we look in the second quarter, we saw less contribution. If you look at the change in our pretax profits, we saw less contribution from revenue, net of financial expenses and the improvement in profitability was mainly from OpEx discipline. I think that in the third quarter, these dynamics will be a little different because we have -- we expect a better dynamics of revenue net of the financial expenses and there is always some lagging effect between how the CDI evolves and brings the financial expenses versus our pricing. What we try to do is always to look -- and to your question about how we see it, we look at the unit economics of our clients and the returns we have from investing our tack there. And we have some hurdles that we look. So after the CEI increases, we do adjust prices to adjust accordingly. So I think that lighting effect may have some impacts there. I think one other effect that you have in financial expenses this quarter, we have taken the decision to have a little longer funding line. So this also has some negative effect there. So it's not 100% the funding cost that we have in our clients. So this also has impacted there. And I think Thiago would like to add to that answer.
Domingos Falavina: So if OpEx surpassed to the positive here still, so congrats on that. But if I understood you're right, basically, the wave of price adjustments comes a little bit behind slake. So when I look at that take rate inclusive of financial expenses, if nothing drastic happens, the expectation is that it moves up. So you continue to recompose that margin.
Thiago Piau: Yes. Domingos, itâs Thiago here. Let me add on that. So first, let me talk about the cadence of repricing. We did a significant improvement in the first quarter, and we donât want to create too much stress both in our client base and our team. So the improvements that we did in the second quarter was smaller because itâs hard for you to keep improving prices frequently in your client base without stressing the relationship. Thatâs why we took longer for the clients to adapt to this new reality. And now on July and August, but basically on August, we did another significant movement already. And I think that we did it well. So creating some space from those 2 big movements I think that was good to the client base and to the team. So I think that we are now creating more predictability in the way that we execute our price strategy. And with a big client base, thatâs really important. So it was a big jump in the first quarter, a little bit smaller on the second quarter and now we improved at the pace back again in the third quarter. And I think that, that strategy is performing well, both in the base and in commercial activity. So that's the scenario you're seeing. And you are right when you see that revenue less funding cost was basically in line with last quarter. And thereâs this effect that Rafa just mentioned. But we increased the duration of our funding lines a little bit too, mainly because of the microenvironmental actions in Brazil, we think that it was good to be a little bit conservative and improve duration in our funding lines, so we did it. So thereâs some of that effect in that line, too. You will see in third quarter a different effect. So you will see in the third quarter, revenues growing faster than funding. So we are managing this, I think, appropriately. Domingos, one last comment â sorry, Domingos, just your last question, you asked what is the focus of management, if itâs TPV or revenue or profitability? We are focused on the quality of the client base and we are focused on profitability. We will continue to grow at a fast pace. You see that we are committed to net adds. But if we have to choose today our focus, our focus is to improve profitability, balancing better our growth with profitability, and I think that we are delivering that. So we will continue to evolve on our pricing. So thatâs where we have our minds here. Iâm sorry that I forgot to answer previously.
Operator: And the next question will come from Jeff Cantwell with Wells Fargo.
Jeff Cantwell: I wanted to ask you about your software revenue and really about your software EBITDA, which it looks like it's up about 300 basis points sequentially to 15%. So can you just sort of give us a little more color on what's driving that expansion in the margin there? And then any color you can give us on the go forward from a margin perspective for the software piece of it would be great?
Thiago Piau: Jeff, Thiago here. Two main things. One, we are integrating our portfolio of companies into Linx management system, creating 1 big business units that combines all of our software businesses. And I think that this provides us an ability to continue to grow at the pace we are. I think that in the medium term, we expect to continue to grow at this pace, but improved margins. We got to 15% EBITDA, which was -- I think that we can get to 20% quickly. I expect to have positive news about margins close to 20% at the end of the year. So I think that the discipline that the team has to provide efficiency to all of our software products and continue to invest behind growth and improve our customer service to clients in software is really performing well. So if we continue to grow at this pace, which is I think it's a help level to the medium term and continue to improve margin, and I believe in our ability to get close to 20% EBITDA margin in the end of the year, it will be a very good first step. And in next year, we have to continue to improve our efficiencies and continue to improve our cross-sell in our base. So I think that those are the 2 main things.
Jeff Cantwell: Okay. Great. And just a follow-up on that. Can you sort of prioritize or explain what are the biggest drivers to get from 15% to 20%? Is that top line growth? Is it something with the efficiency that we should be aware of? I just wanted to drill down on that area to the best we can.
Rafael Martins: Jeff, Rafael here. So I think it's a combination of those elements. So the fact that we are able to grow -- have strong growth organically does help to dilute G&A expenses. I think this is number 1. We have been able to improve efficiency in some costs, like, for example, cloud cost negotiation. So I think those are the main drivers of the margins there that we see. And of course, when we do have less mature solutions in our software business, not only Linx. And as those solutions mature and grow and we expand them and integrate into Linx itself, I think that this also contributes to a higher margin. So remember that we have invested in software solutions in the past that were basically 0 margins. And as we evolve those solutions, big in traction, we are able to get more mature and also increase margins. So I think those are some of the main elements that should help us there.
Operator: And this will conclude our question-and-answer session. I'd like to turn the conference back over to Thiago for any closing remarks.
Thiago Piau : I would just like to say a big thank you to our team for the amazing work in the quarter and for the support of our shareholders. We expect a very good second half. We are very excited of our business and see you next quarter. Thank you very much. Bye-bye.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
