StoneCo Ltd (STNE) 2018 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the StoneCo Fourth Quarter 2018 Earnings Conference Call. This conference is being recorded today, Monday, March 18, 2019.

By now everyone should have access to our earnings release. The company also posted a presentation to go along with this call. All material can be found at www.stone.co on the Investor Relations section.

To follow this conference call, the company will be presenting non-IFRS financial information, including adjusted net income and adjusted free cash flow. These are important financial measures for the company but are not financial measures as defined by IFRS. Reconciliations of the company's non-IFRS financial information to the IFRS financial information appear in today's press release.

Finally, before we begin our formal remarks, I would like to remind everyone that today's discussion will include the forward-looking statements. These forward-looking statements are not guarantees of future performance and, therefore, you should not 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 on the company's final prospectus for the initial public offering filed on Form 424B4 with the Securities and Exchange Commission, which is available at www.sec.gov.

I would now like to turn the conference over to your host, Rafael Martins, Investor Relations Executive Officer at Stone. Please proceed.

Good afternoon, everyone, and thank you for joining us today.

Today, I have here with me Thiago Piau, our CEO; Marcelo Baldin, VP of Finance; and Lia Matos, Chief Strategy Officer.

Before I comment on the fourth quarter and 2018 results, I would like to turn the call over to Thiago. Thiago?

Thank you, Rafael. Good afternoon, everyone, and thanks for joining us for our fourth quarter and year-end 2018 earnings call.

First, I would like to provide some highlights of our business performance. We believe that 2018 was a great year for us. We were able to more than double our base of active clients, which increased by 104% to 268,000 by the end of 2018. We grew our revenue by over 100%, both in the fourth quarter and in the year, while at the same time significantly improving our margin with almost 30% adjusted net margin in the fourth quarter of 2018. We think this shows a combination of growth and profitability that is unique.

Continuing our strategy of hyper-local distribution, we currently have more than 245 active hubs across Brazil, covering around 1/3 of Brazilian cities, which we think shows that there is still a fair amount of white space to reach. Despite our investments in the future of our business, we were able to generate more than BRL 300 million in adjusted free cash flow in the year.

We remain focused on improving the client experience. Our NPS is 65, the best in the industry, compared to our competitor's weighted average NPS of 4.

Our results in 2018 highlight the success of our business model. However, we are still in the early stages of our mission, which is to serve merchants better, helping them sell more and become more productive.

The overall company performance has improved throughout 2018. We saw our churn levels decrease in the second half of the year with churn rates in the fourth quarter decreasing by around 10% compared to the third quarter. This reflects a superior value proposition perceived by our clients, the best NPS in the industry, a client-driven culture as well as proprietary technology that leverage on client data to prevent churn.

Over the past few years, we've been consistently adding software capabilities to our platform to help our clients manage their business better and sell more. This includes Equals, our reconciliation software; Linked Gourmet, our ERP and POS solution focused on the foodservice vertical; as well as online and offline gateways. More recently, this February, we also made a strategic investment in a company called Collact, focused on CRM and loyalty, which enables merchants to increase their sales by improving recurrence while also leveraging own data.

The offering of software increases the lifetime value of the client, improving stickiness and giving us data to enhance our financial products. Nearly 14,000 clients already use at least one software offered by us and we have an objective to increase this number of clients in the future. A much larger of number of clients use the client portal dashboard and mobile app.

We expect to invest inorganically in additional software verticals over time. The main criteria for us to make new investments are we have to find a passionate entrepreneur who deeply understand the pain points of the client. Combined with our cloud-based technology and an API-driven mindset of the technology team, we consider this set of characteristics essential to provide a complete and integrated client experience to our merchants. Our strategy is to create a complete ecosystem combining payment and software, which enables the company to access more data from clients and offer better financial products with a fair price like banking services and credit.

Regarding our banking solution, the pilot is performing in line with our expectations. There is a huge addressable market in that front and is very similar to the acquiring market when we began, very poor services and high rates. We want to offer more friendly and convenient services at a fair price. We now have nearly 2,500 accounts in our pilot. We are still not making specific commitments with the timing of the full rollout of our banking products because we want to make all the necessary adjustments before that. In the medium and long term, we really believe that these solutions will be very important for the company.

We started 2019 in line with our expectation and our business continued to improve. We remain committed to the execution of our growth strategies which are based on high-quality products, the best client service in Brazil, a proprietary distribution channel and building of an entrepreneurial and decentralized business culture with leaders that really think about the long-term.

We are also encouraged by the recent regulation in our industry and what that means for us and our clients. We look to grow in this market by executing our core strategy, opening more hubs, further penetrating our existing hub, strengthening our digital strategy, increasing share of wallet and connecting to new integrated partners. We also look to continue to implement our disruptive model by upselling new products and solutions to merchants, multiplying our total addressable market.

As outlined in Slide 5 of our presentation, we still have a huge headwind to grow in the merchant-acquiring space in Brazil. We have only 6% market share in a market that has less than 30% card penetration.

Besides, our future is certainly not only in merchant-acquiring. As Slide 6 shows, we estimate that the combined total addressable market of new solutions, which are mainly banking, credit and software, is much larger than the merchant-acquiring addressable market.

Before I turn the call back over to Rafael, I wanted to say a big thank you to our team members at Stone. You are a huge part of what makes our company so special.

With that said, I would turn the call back to Rafael.

Thank you, Thiago.

As Thiago mentioned, we were able to more than double the number of active clients, which grew 104% in December 2018 compared to December 2017, reaching 268,000 clients. This number does not include clients of Stone Mais, our solutions for micro-merchants. We haven't included this because, in the fourth quarter, we were still in the test phase of the product. Beginning in the first quarter of '19, we will include those clients in our reported number of active clients. As we have mentioned in the past, this is not a strategic focus for our company, but rather a complement to our current offerings.

Total revenue and income increased by 114% to BRL 529 million in the fourth quarter of 2018 compared to BRL 248 million in the fourth quarter of 2017. This was mainly driven by a year-over-year increase of 109% in net revenue from Transaction Activities and Other Services, a 138% increase in net revenue from Subscription Services and Equipment Rental and a 98% increase year-over-year in financial income.

Cost of services was BRL 101 million for the fourth quarter of 2018, an increase of 38% compared to the fourth quarter of 2017. Cost of services as a percentage of total revenue and income was 19.1% in the fourth quarter of 2018, an efficiency gain of more than 10 percentage points from 29.7% in the fourth quarter of 2017. This efficiency gain was seen in most lines, especially transaction costs, deployment costs and personnel, as the company dilutes the costs related to its proprietary platform and gains operating leverage in customer service and technology.

Administrative expenses in the fourth quarter of 2018 increased by 17% year-over-year to BRL 73 million. The increase in administrative expenses is primarily attributed to growth in personnel expenses and depreciation and amortization. Administrative expenses as a percentage of total revenue and income was 13.9% in the fourth quarter of 2018 compared to 25.3% in the fourth quarter of 2017, an efficiency gain of 11.4 percentage points in the period.

Selling expenses grew by 74%, reaching BRL 59 million in the fourth quarter of 2018. This was primarily due to an increase of BRL 21 million from additional headcount in our sales team, in line with our strategy to grow in the hubs.

Financial expenses were BRL 75 million, 22% higher than the fourth quarter of 2017. This increase was primarily driven by an increase in funding of BRL 12.5 million due to higher prepayment volumes. Financial expenses as a percentage of financial income reduced from 47.6% in the fourth quarter of 2017 to 29.3% in the fourth quarter of 2018. This reduction is explained by a higher financial income and especially by lower cost of funds due to lower base rates, cheaper funding lines contracted by the company and use of a higher amount of owned cash to fund prepayment operations.

As a result, our adjusted net income was BRL 156 million in the fourth quarter of 2018 with a margin of 29.5% compared to BRL 20.9 million in 2017 and a margin of 8.4%. The main factors that contributed to the growth in adjusted net income were: Increase in total revenue and income, primarily due to higher TPV and focus on growing the company's base of SMB merchants; operating leverage in most lines, especially cost of services and administrative expenses; and reduced cost of funds as the company switched to cheaper funding and increased the use of own cash to fund the prepayment operation.

Overall, we have seen strong operating leverage. Our cost and expenses have decreased from 68.5% of total revenue in the fourth quarter of '17 to 44% in the fourth quarter of '18.

Important to highlight that our P&L carries investments in selling expenses related to hubs that have not yet fully contributed with their revenue potential. On Slide 10, we show how the operational leverage plays out when we look on a same-hub analysis. Those charts show the evolution of revenue and sales people for a fixed number of hubs, namely all those that were active at the beginning of the fourth quarter of 2017. We believe that this is helpful to illustrate the healthy growth of older hubs as well as the operating leverage on a same-hub perspective.

Also, in our hubs, we have seen continued ramp-up in the number of clients as our hubs get more mature. As you'll see in our presentation in Slide 11, our hubs that have been open for 9 quarters have more than 7x the number of clients than the hubs that have been opened for one quarter.

And finally, the company generated BRL 304.2 million of adjusted free cash flow in 2018 compared to negative BRL 29.6 million in 2017. The main reason for that increase was an improvement in our adjusted net income from BRL 45 million in 2017 to BRL 343 million in 2018 despite the increase in noncash depreciation and amortization expenses from BRL 57 million to BRL 92 million in 2018.

With that said, operator, we'll open the call up to questions.

(Operator Instructions) The first question comes from Felipe Salomao with Citibank.

I have just one question. And again, I'm sorry to insist on this topic, but I guess, this is the #1 debate on the industry to-date. It's about competition.

So we recently met one of the larger merchant acquirers in Brazil in terms of market share and they mentioned that data from February and March in terms of net client adds is already showing somehow improvements. So that said, I would kindly ask you guys to, if possible, to share an update on how the first Q '19 quarter looks like so far in terms of, I mean, churn, net adds, TPV growth, I mean, everything possible. Of course, you can't say anything you can't and -- that's my question.

And by the way, congratulations for very strong results. Congratulations.

Hi, Felipe. It's a great question. So regarding competition, we have nothing new. I think the dynamics is the same. The competitors are trying to push price, but we keep talking about value proposition with our clients.

So let me talk to you about net new adds, take rates and churns. So first, I'm going to talk about net new adds in the fourth quarter of '18. So in the fourth quarter, there was less working days because of holidays and the fact that we gave collective vacation to the sales team in the last week of December and the first week of January. Also, we were focused to a higher quality of clients as you can see by the average TPV per client. So we have added BRL 4.8 billion in TPV in the fourth quarter of '18 versus of BRL 3.2 billion in the fourth quarter '17. And with this, we managed to keep net new adds at the same level of the third quarter '18 with much more volume, which represents an increase in productivity of around 10% in the fourth quarter '18 with better quality.

Regarding take rates, we have -- as we have discussed previously, our prime strategy is defined by value proposition and not by competition. So in fourth quarter '18, our take rates remain roughly stable. But talking about the short and medium strategy, we can reinvest take rates to increase lifetime value and create a better environment for our multiproduct strategy. However, in the long run, we still expect overall take rates to increase given our strategy to offer new products and improve yields.

Just talking about churn. We have seen a reduction in churn of around 10% in the fourth quarter '18. So we are very confident that we are in the right track regarding the value proposition and the business model of the company.

If I may add to what Thiago just said regarding the '19 results, so what we see so far in the year is that we are performing according to our plan. So this is a very important message. The company continues to improve in all areas and we are very happy to see that our results in the beginning of '19, they will be reflected in our margins because the operating leverage still continues to be very strong, right?

And regarding competition, we don't have nothing -- we have nothing new to say, I mean, as Thiago mentioned, nothing that calls our attention that is very different from what we expected. So this is the basic message of '19. We are not making specific comments about specific metrics in this quarter. We will probably discuss them in the next earnings call, but I would like to give that message in a simple way for you to see and have a view on how we started this year.

Our next question comes from Eduardo Rosman, BTG Pactual.

Two questions from my side, first on how the business is structured in Brazil. Do you fear anyhow, let's say, if your competitors start paying clients in [D plus 2]? And does this -- do you think this is a threat and this could change the industry? So it would be interesting to know your thoughts if you think that this is a possibility and what this could mean for the acquiring industry in Brazil.

And my second question is on, let's say -- is how big you think you can be in Brazil on the acquiring market? And when do you think you're going to feel comfortable in expanding to outside Brazil, what you've been learning in the country?

Rafael here. Regarding the -- your first question, I think that [D plus 2] discussion, we have tapped this. And if you consider that a competitor may offer it for free, this is basically a discussion of price, right, because both ourselves and our competitors, we already offer D plus 2 to many, many clients.

And regarding the pricing strategy of the competitors, we prefer not to comment on that. As Thiago mentioned, our pricing strategy is driven by value proposition. It's not by the competitors. So I don't think that D plus 2 discussion is very relevant right now and I wouldn't comment on their strategy, right, so...

Just to complement Rafael, Rosman, it's Thiago here. I believe that the discussion regarding [D plus 2] in terms of regulation, we have already moved this discussion as this is not good for society. So for us, it makes no sense to change a working capital structure based on an asset-backed security with the receivable in which the merchants use that to have a better rate in terms of working capital and put it within the price. We see that makes no sense to change it for a structure in which the bank pays upfront and charge very high rates from the consumer. And we have discussed about this with the very -- regulator in a very technical way. So I think that in terms of regulation, there's some players -- one player trying to be vocal about this, but that's not good for society. And I do not see, at this time, competitors paying D plus 2 without charging. It is not -- we don't see rationale behind it. So I'm just going to pass back to Rafael to talk about market share and addressable market.

So to your second question, how big we can become, I think we see it -- 2 things, right? So the first, the payments market, we still have only 6% market share today. We see a huge headroom to grow in that market specifically a lot. When you look at the growth volumes in the whole industry, what we see is that we are taking about 20% to 30% of the incremental volumes and so -- and as well as in the regions where we are present, we see also very strong market share. So given that, we believe that, as we have previously mentioned, we can reach 25% to 30% market share. I mean, we believe that's a very feasible objective, right?

This is regarding the payments. And regarding the new solutions that we are just starting right now, we see that the total addressable market is really huge as we have shown in our presentation and that basically, when you see the addressable market of payments is less than 20% of the -- all the markets that we are entering, so we see 2 headrooms to grow. First is payments and the second one is the additional solutions.

So just to complement on that, so to summarize, we have approximate 6% of the payment market and that represent less than 20% of the total addressable market that we are targeting. We are seeing a total addressable market of BRL 20 billion in acquiring, BRL 75 billion in credit, BRL 10 billion in banking and BRL 9 billion in software. So we really believe that in 5 years from now, our company will be completely different and this separation between payments, software and technology will be overcome and we will become the partner of choice of SMBs in all of their needs. So it's still a lot of room to grow, both in payments and the other products.

Our next question comes from Craig Maurer with Autonomous Research.

First, I hate to ask you to do this, but would you repeat your commentary regarding how you started first quarter '19? But beyond that, I wanted to ask you a little more qualitatively about the competitors, about the incumbents. Obviously, they were quite loud in their intentions to cut price, take back market share late in the year, but from your estimation, what's gone wrong? I mean, I understand your discussion of leading with value, but at some point price does matter. And so I think the stock is reacting the way it is because people are genuinely surprised that the incumbents have failed so badly to this point to slow your growth.

Craig. So first, regarding the first quarter highlights, what we have to say that we started '19 according to our plans and the company continued to improve in all areas. So we are very happy to see results in first quarter. We are very happy to see that the operational leverage is increasing and that should be reflected in the margins of the quarter.

Regarding competition, as we said, it's only based on price. We decided not to engage in price war. I cannot comment what is happening on the competitors. We don't want to talk about the competitors. They have to talk about it, but what we can see is no change in terms of business model. So we are used to competition since day one. Since the early beginnings, our broad client base were taken from the incumbents. So we learned how to deal with that. We decided to bake our company based on customer advocacy and value proposition. So we will not engage in any type of price war mainly because we do not need to do this. We believe that there is a very huge opportunity to put much more products for the same clients and create value over time.

So with that said, I just would like to pass the word to Lia just to say a little -- a few words about strategy and new products. Lia, please.

Hi, Craig. Thanks, Thiago. Just to mention and emphasize what Thiago just said before regarding our strategy, we believe that we really developed a strong set of proprietary assets, which is our own distribution, our technology platform and our service model, that puts us in a unique position to really become the partner of choice to provide multiple solutions to SMBs. And we think that with this way, we can capture many future growth opportunities.

We developed these proprietary assets by first offering payments and we're now focusing on complementing the software with software banking and credits. And we are now really increasing the speed of rollout of our software solution because we think that this can really increase lifetime value, provide more stickiness and also, to us, provide more data to be able to be more assertive in offering our financial products. And we are continuously exploring new investment opportunities in software.

In parallel to software within financial products, we've seen very encouraging early results in banking and we think that banking and credit will really be the next material growth and improve yield for us. Like we said before, we're still in pilot mode in banking with 2,500 clients, but we are really encouraged by the early results and we don't want the rest to roll out until we really are sure that we have the perfect offering. And we're also very happy with our very early understanding of the opportunities in credit.

So in summary, Craig, we think that, with respect to competition a lot, we are very humbled to learn continuously about how the market evolves and the strategies of the competitors, but we decided to keep our mind and our hearts in our clients to really understand their needs and evolve our solution over time to continue to delight customers, so that's our strategy.

That's all very helpful. Just one addition to that. If you could elaborate on the decision to pursue the micro-merchant market, that would be helpful.

Great. Regarding the micro-merchant, we saw that the lifetime value to cost of acquisition ratio is much different than our business model, which is mainly focused on SMBs. So we decided to be specialists and the main partner for SMBs with different products so we still have a lifetime value to cap ratio of around 10 and we are investing our capital in channel -- in distribution channels. We see that, in the SMBs, the game is all about growing the lifetime value while, in the micro-merchant space, the game is all about driving down the cost of acquisition. So it's a different kind of need using different kind of operation, so we decided not to invest heavily on that. We have the product as an obligation on our shelves because we have to protect our -- and branded some hubs, but we decided not to target this market and we would rather keep focused on SMBs because we still have a lot of room with the focus that we have.

Okay. So the product is available, but you're not actively pushing it very aggressively?

Yes.

Next question comes from Domingos Falavina, JPMorgan.

I'm just interested in clients and I would like to also chime in with the same question as before, but I don't know -- like I'm a little lost because I'm getting also discrepant information between what I've been hearing here from locals and the message. So if you could even qualitatively mention -- specifically churn, so you gave very good quality data on the 4Q. Churn had decreased I understood around 10% Q-on-Q on the fourth Q. First Q1 -- first month and second month, January and February, are you seeing net addition decelerate within SMBs or how is churn behaving versus the 4Q? Because at least like most of the local news I've been hearing here, they've been -- the local news here that the churn would have increased within your clients and the incumbents will be able to capture some of those clients. So if you could elaborate even qualitatively, January and February, exits of clients vis-à-vis what is on the 4Q.

Domingo, it's Rafael here. So regarding the first quarter, just to be clear, we aren't seeing our growth plans and, I mean, being hindered by competition. We are not making specific comments on any metric off the first quarter, but what I can tell is that the first quarter started strong with our growth plans on track, with our operational efforts on track and that's why we don't see any relevant news, anything on that regard. So I'm just going to have to be disciplined here not to comment any specific metric, but that's our comment, that's all that we have.

Just to complement that, Domingos, so as we said, our churns in the fourth quarter compared to third quarter decreased 10%. In first quarter, we are very happy to see the operational metrics that we have. And most importantly, the way that we measure our productivity, it's basically number of active clients added by sales personnel per working day. So keep in mind that in fourth quarter, you have holidays with Christmas and New Year's Eve and we did collective vacation to our sales force in the last week of December and first week of January mainly because that's the least productivity time of the year. So when we adjust the net new adds per working day, we see that our productivity went up by almost 10% in the first -- in the fourth quarter of '18 and we keep in -- within our plans regarding growth of first quarter. So we are very confident with the results of first quarter.

Okay. And just on the revenue opportunity on the bank side, I mean, we do see some risk in current account fees. And it seems the strategy of most players like (inaudible) bank and some others had been of offering free accounts which, when you compare an addressable market, it looks thick on the bank side in terms of revenue generated, but once you try to convert them to you, you would imply in offering some level of discounts, and plus, banks do have a substantial number of individual clients. So my question is like what kind of package are you planning on offering your clients? Is it going to be a free current account? Or are you planning on charging for that as well? Just so that we start having an assessment of -- if you have 300,000, 400,000, 500,000 clients, what kind of revenues we could you see with banking-related products.

Great, Domingos. Great questions. So in terms of banking, our strategy, just keep in mind, it's targeting only solutions for merchants and on that, we are targeting transactional activities such as wire transfer, (inaudible) issuance, bill payments, tax payments, payroll solution that really help merchants to manage their operation better. So we see that, when you take into account the incumbent banks, there's a huge slot pool regarding the transactional activity and that's what we are targeting. So the plan here is basically not charging for the account, but charging for the transactional activities. So we see a huge opportunity to be the only one provider for merchants with software banking and payments. So we are targeting the transactional activities. If you break down the P&L of the big banks and you take the transactional activities for merchants, you will see this addressable market of around BRL 10 billion that we are showing here in our presentation.

If I may add to Thiago, Domingos, if you see the P&L of the banks, you can see over BRL 30 billion in revenue, but this is -- not all of those is the focus of our company, so that's why we only show BRL 10 billion here.

Next question comes from Felipe Salomao, Citibank.

I would like to ask if you could share an update on the debate regarding the new banking lock rule, the bank postponing the implementation of the new rule by roughly 100 days. And according to local press, there has been a lot of debates if there will be just one, let's say, infrastructure behind the banking locks, which would be both FIDC, or why other players prefer to have more than one infrastructure behind the way the new banking lock agreement would work. So there's a lot of moving parts. It's even difficult to summarize. But if you could, if possible, give an update on how the debates have evolved about how the new banking lock system will work and the opportunity that the new model could bring to you, that would be great.

Great, Felipe. Great question. Thank you for the opportunity to talk about this new regulation regarding what we are calling the new SCD, right? So we believe that it would be a net positive for us. As competitors, we're always able to accept our client base with bundle offer of credit plus payment, but we couldn't offer payments to their clients with credit mainly because if we did it, the bank immediately required their clients to pay down those loans, creating a big hassle for them. So for that reason, we lost several growth opportunities in the past, but now, it will be easier for Stone to onboard clients with bank loans given that the banks cannot have a credit relationship on a discretionary manner. We will be able to prepay all merchant receivables, even those with credit, as they can -- and they can use those funds to pay back their loans and further fund their operation with prepayments. So there would be a big competition between prepayments and credit that could not happen before. As you can see by market data, prepayment fees are significantly lower than credit fees and, therefore, we believe prepayments do actually gain share over credits in the market. So as a result, we believe that this will be net positive for our company.

Next question from (inaudible), HSBC.

I'm going to follow-up on Domingos' question regarding the credit business. Is it fair to say that in the initial months or probably years of operation, you would look more transactional -- toward more transaction activities and the actual revenue generation from opening new accounts and on-boarding more clients would be limited to the contribution towards the earnings will be limited from the credit pay out? That is my first question.

My second question is more operation-related. Could you give us an idea for the total number of employees that you presently have? I understand that you have about 245 hubs currently. What is the plan for the coming year? And in the coming 3 years, how many hubs would you like to have?

(inaudible). Rafael here. So regarding your question in banking, our idea is to generate revenue in that market mainly regarding transaction activities, not monthly fees, for their accounts. So the clients should not pay a fee for having the accounts open. So as Thiago mentioned, payroll, wire transfers, bullet reasons and so on. So we should track charge on a transaction basis. So that's why, in that addressable market that we put here, we include only those checking accounts transactions. We don't include other services and fees that banks usually charge at merchants. So that's the -- to your first question.

To your second question, we are currently around 4,000 people. We will have probably the exact number soon in our 20F, so that's the ballpark number of current employees.

Regarding the hubs, we still see a lot of room to grow in the hubs. So if you'll see today, our hubs cover around 1/3 of Brazilian cities still, so we see a lot of headroom there. We don't provide specific guidance regarding the number of hubs, but what we see is that there is still a lot of white space in the country for us to cover, right, a lot of potential.

And one more question. Among your competitors, which one would you -- if you can point out if there is any one specifically that you see as more aggressive? Or who mostly do you consider as your competition?

I think we would prefer not to comment on any specific player, (inaudible). We see the market dynamics over time over the past years that sometimes, there's a specific competitor that is more aggressive, sometimes it's other one, so this may change over time. We wouldn't comment on a specific competitor that is being more aggressive because this may change over time. So it's very seasonal.

(Operator Instructions) Our next question comes from Pierre Safa of Silver River Capital.

So just going back to a statement you made on the prepayment fees or the prepayment cost being significantly lower than credit, how sustainable do you view that to be? Because effectively, the financial institution providing credit to the customer is taking all of the risk and you're not. So how do you foresee effectively this evolving and the sustainability of a model where you're providing capital but see effectively limited or no risk, right? So I understand the value you're playing here, but I'd like to hear a little bit about your views here.

Rafael here. I think when we look at the prepayment rates, we have seen in the deck that the prepayment rates, they have already undergone some pricing pressure in the past with the entrance of new players. Debt prepayment rate is still much lower than the credit opportunity that the merchants have. Usually, the way you have to look at sort of the opportunity cost of the merchant, right? And today, we see that with the new regulation and everything that we see on the field is that probably prepayment would grow its share of funding in the society overall, especially for those SMBs. So it's very difficult for us to comment on the very long term future and how things will play out, but that's what we have seen so far, right? So we don't see a reason for merchants to not use prepayments to try to compete with more extensive credit that they have to fund working capital, for example.

And just -- Pierre, it's Thiago here, just an additional comment. We are in the very early beginnings of this credit strategy. So we are studying a lot about how the market works. We believe that this will be a new frontier of competition and the level of assets that we have with the distribution, the technology, and the service put us in the best position possible to compete against the incumbents, but it's still very soon to say about credit. Over time, on a quarter-by-quarter base, we will give you more updates and color about how we are going to evolve on that front.

There are no questions at this time. This concludes the question-and-answer session. I will now turn you over to Mr. Rafael Martins for final considerations.

I would like to thank everyone for participating on our call. We are very happy with our results, very enthusiastic about the future opportunities that we have in front of us. Thank you very much for your time and see you next quarter.

This concludes the Stone presentation, you may disconnect your lines now. Thank you.