StoneCo: 2021 Q2 Earnings – Key Points to Know!
- Rupam Deb
- Sep 8, 2021
- 6 min read
StoneCo – 2021 Q2 Earnings Results
On 30 August 2021, StoneCo (in short, Stone) announced its 2021 Q2 earnings results. Total payment volume grew 59% y/y, and total client base grew 45% with historical quarterly record and increasing adoption of its software and digital banking solutions. StoneCo also spent an amount more than its revenue to repurchase lots of shares.
However, revenue actually dropped 8%, due to a huge negative impact from its credit operations. This led to a negative adjusted income for the quarter, and Stone’s share price plummeted after the earnings. So, what exactly happened, and how should we interpret these?
Here are our key points from the earnings results and earnings call!
Consolidated total payment volume (TPV) in 2021 Q2 was BRL 60 billion, a 59% increase y/y. Consolidated TPV, excluding Coronavoucher volumes, grew 63% y/y. TPV of their core small and medium business (in short, SMB) operations, including the Stone, Pagar.me and TON brands, grew 104% y/y. Adjusted for the effect of a weaker baseline TPV in 2020 Q2 due to the COVID-19 pandemic, a two-year CAGR of TPV in 2021 Q2 was 48%, accelerated from the 42% in 2021 Q1.
Overall active client base from their SMB operations increased from 517k (i.e. 517 thousands) in 2020 Q2, or 858k in 2021 Q1 to 1.05 million clients in 2021 Q2, with an accelerating q/q net addition of clients of 188k (22% q/q growth), a historical quarterly record.
The 188k q/q increase consisted of 140k net adds from TON product (74% increase q/q achieving 330k clients in 2021 Q2), and 47k from Stone and Pagar.me SMB products (7% increase q/q achieving 717k clients in 2021 Q2).
Excluding TON, Stone’s total active client base grew new clients by 44k this quarter achieving an active client base of 766k clients, representing a 45% growth y/y. The quarterly net addition of 44k clients in 2021 Q2 was lower than the 60k a quarter ago mainly due to a better allocation of clients between the Stone and TON brands, aiming at maximizing unit economics while providing them with the solution that best fits their specific needs.
Looking at the unit economics, average TPV per client in SMB operations, excluding TON, has increased steadily over the quarters since 2020 Q2, to 119% of the 2020 Q2 level in 2021 Q1, then to 129% of the 2020 Q2 level in 2021 Q2. For TON, the average TPV per client has increased even faster since 2020 Q2, to 141% of the 2020 Q2 level in 2021 Q1, then to 226% of the 2020 Q2 level in 2021 Q2. TON has now moved from being an experiment and optionality to becoming a proven and high growth solution.
Total revenue in 2021 Q2 was BRL 613 million, an 8% decrease from BRL 667 million in 2020 Q1. The decrease was driven primarily by lower revenue from their credit business of BRL 397 million, as explained later. This effect was partially offset by their strong TPV growth of 59%, leading to higher transaction revenues. Excluding credit solutions, total revenue was BRL 1 billion, a 68% growth y/y.
The consolidated take rate was 0.91% in 2021 Q2, a 0.71% point decrease from 2021 Q1, or a 0.75% point decrease from 2020 Q2. This decrease was due to the BRL 397 million negative impact from their credit solution to their revenues. Excluding revenues from credit, their consolidated take rate was 1.57% in 2021 Q2, higher than the 1.50% in 2020 Q2. In SMBs, their take rate, excluding credit was 1.79%, lower than the 2% in 2020 Q2.
On revenue breakdown, net revenue from transaction activities and other services grew 58% y/y to BRL 359 million, driven by the growth in TPV.
Net revenue from subscription services and equipment rental grew 90% y/y to BRL 153 million, primarily driven by a higher active client base, combined with contribution from their software solutions. This was partially offset by lower average subscription per client for the point of sale device sales, as a result of additional new client subscription incentives.
Financial income was BRL 40 million in 2021 Q2, an 88% decrease y/y due to the BRL 397 million negative impact from their credit solution, mainly as a result of a significant fair value adjustment and lower disbursements. On the other hand, their prepayment business continues to grow strongly. Excluding revenues from credit products, their financial income grew 67% y/y.
Regarding their banking and credit business, their number of active clients in banking increased 43% q/q to 340k client base in 2021 Q2. In addition, the number of clients settling their sales directly in their Stone account reached 273k, a 45% growth over the 188k in the previous quarter. The banking clients also continue to engage with different types of money-in and money-out transactions, with different transactions growing at 440% to 550% y/y.
However, their credit business was strongly affected by the implementation of a new Brazil credit receivables registry system. During the implementation by the government, there was some technical malfunctioning of the system, which enabled merchants to shift transactions to other acquiring services, bypassing the collateral guarantees given to Stone. Although this was a nationwide industry issue (affecting other banks or credit providers too), Stone’s management admitted their mistake of not foreseeing how the malfunctioning of the registry system could harm their business. In addition, they were also facing higher levels of NPLs, and had lower expectations regarding recovery of non-performing clients, mainly due to the potential loss of collateral guarantees.
As a result, Stone decided to temporarily stop disbursing credit, and take a cautious approach to make a significant downward adjustment in the fair value of their credit portfolio, by increasing coverage for potential losses). Additionally, they decided to change the accounting method of their credit portfolio for the new contracts originated from 2021 Q3 onwards, by moving from a fair value method to an accrual basis method, to provide better transparency.
All these changes led to a BRL 397 million negative impact from their credit solution to their total revenues in this quarter. From the total outstanding credit portfolio balance of BRL 2 billion as at June 30, 2021, 35% (BRL 699 million) related to loans from clients that have not been able to amortize (i.e. pay down) their principal for 60 days, and 19% (BRL 373 million) related to loans from clients who have not been able to pay either interest or principal during the last 60 days.
After the fair value adjustment, Stone had recognized an accumulated amount of approximately BRL 781 million of provisions for losses related to their current outstanding balance (39% of total balance). In other words, Stone had basically written off more than all the loans from clients that have not been able to amortize their principal for 60 days (35% of total balance), even if they were paying the loan interests. If in the next few quarters Stone does not write off even more of the credit portfolio, then the negative BRL 397 million impact on credit revenue recorded in 2021 Q2 should be one off and not recur (at least to this large extent) in the future.
Not all management would openly accept their mistake, but Stone’s management is the one doing so. Thiago Piau, Stone’s CEO admitted their mistake and remarked “We recognize that we made mistakes in our execution in credit, especially not foreseeing how the malfunctioning of the registry system could harm our business. However, this situation has also brought an impressive amount of learnings that we will use as fuel to boost the construction of what we envision as being a much better credit solution aimed at serving good merchants better.”
Stone’s management said that they would continue to refine their products and improve their recovery processes. They plan to resume their credit solutions once they see the new registry system is working properly, or once they see other risk-appropriate opportunities to pursue. Looking ahead, they will keep working towards their vision for “Stone Capital”, an asset-light model, in which funding and underwriting risk for credit stays with multiple partners that consolidate the credit portfolio in their balance sheet, combined with a credit product that is completely embedded in Stone’s solutions and leverages on the strength of Stone’s SMB operation and software capabilities. The management believed that the new card receivables registry system will be transformational for Brazil as it creates the basis for a much bigger market for collateralized credit.
Operating costs and expenses were 106% of total revenue, higher than previous quarters, due to an impact from the deleverage effect from their credit revenue, which reduced their total revenue by BRL 397 million in this quarter. In terms of breakdown, cost of services increased 52% y/y, selling expenses increased 95% y/y, and administrative expenses increased 36% y/y.
Stone continued to invest in the growth of their operations, by increasing their headcount for salesforce by 98% y/y, operations personnel by 88% y/y, and technology by 91% y/y, and increasing their marketing investment by 231% y/y.
Stone also continued to invest in new solutions, including banking, software, TON, as well as their registry of receivables platform, TAG.
For the remaining points of this earnings summary, check them out at our Multibagger Research Series (linked below).
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