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I was expecting another bomb after the company rescheduled the earnings release. However, I believe stocks should trade higher on relieved shareholders — including myself.’
Overall results surprised the upside on revenues ~9,5% above GIROe, but very high expenses ~23% above GIROe drove the miss. Specifically, Opex was impacted by increased costs related to TAG, personnel/ S&M expenses, cloud expenses, investments in technology, and customer support.
Also, financial expenses continue to soar, reaching as much as R$688m in the 4Q21, up from R$331m in 3Q21 and R$64m in 4Q20, impacted by higher working capital needs related to the pre-payment of receivables, a higher Selic rate, and costs on the bond issued for the acquisition of Inter.
Stone’s adjusted EBT excludes R$66,2m financial expenses related to the bond issued to fund Inter’s shares acquisition. Probably management removed it to show only core operation’s performance, which is fair, but most sell-side analysts were considering the bond in the financial expense.
Therefore, the better disclosure would be considering the debt interest expense in the adjusted figure. This would imply a R$49m EBT loss in the 4Q21.
On credit exposure, no major news, provisions remained largely the same, and portfolio continued to shrink. As we know, Stone halted the credit operation in mid-2021.
TPV stood at R$88.7bn (ex. Coronavoucher) in 4Q21, up +55% YoY (in line with 54% YoY ex. Coronavoucher last quarter), with a growth of 87% for SMB TPV (vs. 81% in the previous quarter).
Take rate (excluding credit) increased from 1.68% in 4Q20 to 1.71% in 4Q21 as Stone started to adjust commercial policy in November amid the new CDI reality and as a result of mix effect due to more robust growth in micro-merchants.
Also, management mentioned that the take rate was increased to 2.02% in January 2022, bringing a new question if there is space for expanding the take rates.
Let’s assume the scenario where take rates increase to 2%, selling expenses increased from 20% of revenue to 25%, and applying the usual variable cost and financial expense (over much higher rates, though). I estimate that incremental EBT would be R$15,7m, though higher take rates without impact on TPV growth might sound too aggressive.
However, not surprisingly, in the 4Q21, net adds in SMB stood at 57k (vs. 70,5k in 4Q20), likely impacted by higher churn rates. This is interesting since the selling expense was higher than expected, indicating that the average cost per net add should have increased.
Churn and acquisition costs should be closely monitored by investors and may represent a risk to sustaining TPV growth in the upcoming quarters.
The market should welcome the company’s initiatives to restructure the business and provide higher earnings visibility.
Nevertheless, funding costs should continue to pressure results, especially considering that interest rates continue to edge higher.
In addition, the recent re-pricing initiatives should lead to higher churn rates and negatively impact net adds, which poses risks for TPV growth going forward.
Management mentioned that the adjusted net cash from operating activities in 4Q21 was R$366.0 million and the total Capex was R$547.7 million.
Stone decided to make unusually high purchases of POS in the quarter to increase the POS inventory, de-risking our 2022 growth amidst uncertainties with the supply chain and microchip components shortage.
According to my estimate, STNE 0.00%↑ should have no problem with the 1H22 regarding supply disruption, giving enough time for management for the 2H22.
Finally, Stone has recruited new talent and reorganized the company to execute better. According to the management, one of the big lessons learned last year was that they need to enhance our management team. So, Stone has made some organizational and operating changes that management expects to enable them to execute more effectively going forward.
Stone reorganized the company into Financial Services (Stone) and Software (integrating Linx and our Portfolio companies under one leadership team) to manage these business lines with greater focus and provide more operational transparency. While Stone will continue to create value by cross-selling and integrating solutions, it will begin to report these business lines as separate operating segments in the first quarter of 2022.
Comment: I don’t know if there is something special about this, but it sounds like the current model.
As Stone announced, they have also designated new leaders to focus on each segment and new leaders in essential business functions to strengthen the overall team. These changes will help them to execute more effectively in the long-term goals.
Investors will have to pay close attention to these changes. The new management structure has nine senior managers, of which four are newcomers.
New Management Structure
As a result of these changes, the Company’s Executive Committee will be composed of the following persons:
Thiago Piau – Chief Executive Officer
Caio Fiuza – COO of Financial Platform Division (newcomer)
Although Mr. Fiuza is a newcomer, he joined Stone in 2017, familiar with the operation.
Gilsinei Hansen – COO of Software Division (newcomer)
Channel checks suggest an enormous turnover inside the software division. I believe Mr. Gilsinei’s biggest challenge will be people’s attraction and retention.
João Bernartt – Chief Information Officer (newcomer)
A suitable example of the previous comment. Mr. Bernartt was relocated from Linx to Stone to fulfill a gap for the core business. I’m wondering who replaced Mr. Bernartt in his last position at Linx.
Diego Salgado - Head of Treasury (newcomer)
Finally…
Sandro Bassili – Chief People and Management Officer (newcomer)
Marcelo Baldin – Chief Financial Officer (newcomer)
Lia Matos - Chief Strategy Officer
Vinicius Carrasco – Chief Economist