StoneCo Reports Second Quarter 2020 Financial Results
StoneCo Ltd. (STNE) reported a 27.9% year-over-year growth in Total Payment Volume (TPV) for Q2 2020, reaching R$38.1 billion. The company experienced a significant rebound, with TPV growth accelerating to 128.8% in July. Despite economic challenges from COVID-19, Stone's revenue increased 13.8% year-over-year to R$667.4 million. The active client base rose by 48.6% annually, though it decreased by 11.9 thousand in the quarter due to pandemic effects. Adjusted Net Income was R$150.3 million, with a 29.9% adjusted pre-tax margin. Stone remains focused on expanding its SMB market presence.
- TPV grew 27.9% year-over-year to R$38.1 billion, with growth accelerating monthly.
- Revenue increased by 13.8% year-over-year to R$667.4 million.
- Active client base saw a 48.6% year-over-year growth.
- Adjusted pre-tax margin was strong at 29.9%, exceeding previous guidance.
- Active clients decreased by 11.9 thousand in the quarter due to COVID-19 impacts.
- Adjusted Net Income fell by 22.5% year-over-year to R$150.3 million.
GEORGE TOWN, Grand Cayman, Aug. 11, 2020 (GLOBE NEWSWIRE) -- StoneCo Ltd. (Nasdaq: STNE) (“Stone” or the “Company”), a leading provider of financial technology solutions that empower merchants to conduct commerce seamlessly across multiple channels, today reports its financial results for its second quarter ended June 30, 2020.
To our shareholders:
"As the world continues to face the public health and economic challenges caused by the COVID-19 crisis, Stone remains focused on our mission – and we continue to find ways to help merchants to thrive through the offering of best-in-class service and products delivered by an amazing and talented team of hard-working people who always put our clients at the center of everything we do.
Our Business is Strong and Fairly Resilient
In the second quarter of 2020, our business began to rebound and return to pre-COVID levels across all of our business lines. We gained an incremental R
Strong Performance in Digital Commerce
Not surprisingly, the strongest performing part of our business was in Digital Commerce, where we have made significant investments over the past 12 months. This strategy has served us well during the crisis. Our online TPV grew
HUBs and Integrated Financial Platform (ABC) Are Rebounding
Our HUBs and ABC Platform solutions have also rebounded.
Reinvesting in the Business
Given the strong re-acceleration of our business, we are intensifying investments, having begun to hire new employees in July and continued to invest behind our software, banking and credit initiatives.
Looking Ahead
Despite the tough challenges that we have all experienced over the past few months, we remain focused on our strategic priorities of expanding and consolidating our presence in the SMB market, becoming the main financial platform for our clients and investing in great solutions to help SMBs manage their businesses, grow and sell online.
We remain grateful to all Stone team members for their strong continued performance during these past few months and to all of our clients who have shown courage and perseverance during the crisis. While there is still a lot of work to be done in helping Brazil recover, we believe the future is bright and are excited to continue in our mission."
Thiago Piau, CEO
Operating and Financial Highlights 2Q20
| Total Payment Volume (TPV) R$ 38.1 BN up | Take rate Or | |
| Total Revenue and Income R An increase of | Active Client Base (ex-TON) of 519.4 K Total Active Clients were 519.4 thousand (excluding TON), an increase of | |
| Adjusted Pre-tax Margin higher than management's perspective of between | Adjusted Net Income R$ 150.3 MM with | |
| Net Income R$ 123.6 MM with Net Margin of | Adjusted EPS (diluted) R | |
| EPS (basic) R | Adjusted Free Cash Flow R$ 141.4 MM | |
Developments Related to COVID-19 Outbreak
Update on COVID-19 business-related trends
We are living unprecedented times with the COVID-19 outbreak. This crisis, which intensified over the course of March and resulted in social distancing and store lockdown policies throughout the country, led many clients to be forced to end their businesses or close their stores temporarily, affecting the whole economy as well as our business. Since the intensification of the pandemic happened in March, the second quarter was the most impacted quarter for businesses and the society.
Still, we were able to report solid results for the quarter and the recovery we are seeing so far is very positive. Since April, we have seen continued recovery in our transacted volumes, with TPV growing
Chart 1: StoneCo TPV Growth (y/y) (See PDF)
Chart 2: StoneCo TPV Evolution (See PDF)
To help the population, the government distributed a financial aid, named "Coronavoucher" targeting the most vulnerable part of the population as autonomous and informal workers and people without income, to help them through the crisis. As an acquirer, Stone can take part in Coronavoucher transactions mainly through its Integrated Partners, benefitting from Coronavoucher volumes, which although being a debit-like transaction and having lower take rates, yield good revenue results. Stone transacted R
Currently, both our clients in the hubs, as well as our digital clients and Integrated Partners already present TPV above what they reported in the first half of March (pre-COVID levels). In the second half of July, TPV was
The pandemic and store closure policies also had an immediate effect in our client base as clients had to close their stores at once. As we report our active client base on a 90-day basis2, we are currently seeing in June numbers the effect of stores who had to close in March but have not returned to operation yet. This resulted in our 11.9 thousand reduction in active client base (excluding TON) quarter over quarter. However, we already see continued upward trend in this number in July, as seen on chart 3 below, which indicates strong numbers for the third quarter of 2020.
Chart 3: StoneCo client base evolution (90 days) (See PDF)
Concerning our operation, with the reopening of businesses in many cities, we currently have approximately
Also, as we have seen a faster recovery than we previously anticipated and an encouraging performance in our hubs, we have already started to hire back people to take part of our team, while maintaining our productivity levels high.
COVID-19 estimated financial impacts to our business in the second quarter
In the second quarter, we had some impacts from COVID-19 related decisions in our Company that directly affected our results.
We estimate that these effects contributed to a negative impact of R
Management Perspective given for the Second Quarter 2020 and expectations for the Third Quarter 2020
Last quarter, we gave our management perspective on adjusted pre-tax margin in light of the level of uncertainty caused by the COVID-19 pandemic. At the time, we expected that our adjusted pre-tax margin would be between
As a result of a better environment than we outlined at the time, we were able to deliver an adjusted pre-tax margin of
Table 1: Profit before Income Taxes Bridge
| Profit before Income Taxes Bridge | 2Q20 | % Rev. |
| Profit before income taxes | 159.8 | 24.0% |
| Share-based compensation expenses (a) | 37.8 | 5.7% |
| Amortization of fair value adjustment (b) | 3.4 | 0.5% |
| Fair Value adjustments of assets whose control was acquired (c) | (3.0) | (0.4%) |
| Other expenses (d) | 1.7 | 0.3% |
| Adjusted profit before income taxes | 199.9 | 29.9% |
| (a) Consists of expenses related to the vesting of share-based compensation. | ||
| (b) On intangibles related to acquisitions. Consists of expenses resulting from the amortization of the fair value adjustment on intangible assets and property and equipment as a result of the application of the acquisition method, a significant portion of which relates to the EdB and Equals acquisitions. | ||
| (c) Consists of the gain on re-measurement of our previously held equity interest in Linked to fair value upon the date control was acquired. | ||
| (d) Consists of the fair value adjustment related to associates call option. | ||
For the third quarter, we expect to see strong recovery in our number of net addition of clients, as the strong impact from mid-March was already reflected in the second quarter numbers, and our active client base is trending upwards as seen on chart 3 above.
We also expect significant improvement in our operating leverage through the rest of the year.
Update on Our Strategy Roadmap in 2Q20
Financial Platform - Payments, Banking, Credit
Despite the effects from COVID-19 throughout the second quarter of 2020, we were able to report solid performance in our acquiring business. TPV year over year growth accelerated every month since April resulting in a
Our banking solution, launched in October 2019, is evolving fast and with increased growth pace through the pandemic. We ended the quarter with 248,000 open accounts, double the previous quarter. In July, we further expanded the number of open accounts reaching 285,000. We have also been able to increase engagement with the number of transactions increasing by almost 2x quarter over quarter and almost one fourth of our clients liquidating directly in their Stone account. The Stone prepaid card has also shown very strong traction with TPV growing over
Chart 4: Banking Number of Accounts (Thousand) (See PDF)
A strong characteristic of our DNA is that everything we do as a product for our SMB clients, we want to do as a service for our larger clients and partners. With that in mind, our banking platform focuses on two fronts. First, we offer banking services to our SMB clients, improving their financial lives and offering them a single point of contact for them to solve their problems. Second, as we did with acquiring in the past, we offer our banking platform as a service for partners to connect, where they can use our technology and APIs to offer banking services to their clients. Both strategies have been performing well, adding value to both types of clients. As a result of the initial traction from our banking-as-a-service strategy, our banking Revenue has multiplied by 3.4x month over month in July and the number of transactions multiplied by 5x compared to June.
Finally, the number of clients in our ABC platform increased to 67,000 in July compared to 45,000 in April as we further convert clients from our banking-only platform to our integrated platform and onboard new clients with the ABC.
Regarding credit, we continue to evolve our product and credit scoring. We ended the quarter with 46,600 clients with our credit solution compared to 30,900 in the previous quarter and our credit portfolio accelerated to R
Chart 5: Credit Number of Clients (Thousands) (See PDF)
Chart 6: Credit Portfolio (R$mn) (See PDF)
We see our new cohorts coming in healthy, already presenting lower delinquency rates than previous ones as well as higher ROAs. Our portfolio delinquency is trending down and is currently at mid-single digit levels. Our portfolio is very diversified, with the top 100 clients representing only
Our Online Business - Acquiring, Payment Service Provider (PSP), Gateway and other solutions to help clients go online
The online trend accelerated over the lockdown period as many stores were obliged to close down physically during the pandemic and clients increased the demand for online channels. This accelerated trend resulted in strong growth of our online business, with total volumes processed by Stone in non-present card transactions
We count with a wide range of solutions for digital clients, serving from social sellers to large marketplaces. We saw strong revenue growth coming from the digitization of SMBs, with SMB ecommerce revenues accelerating through July and more than doubling since the start of the year, as shown on chart 7 below.
Chart 7: Total Online SMB Revenue (Jan-20 Indexed to 100) (See PDF)
Overall, the combination of our Integrated Partners and Digital clients increased from
Besides payments, we recently started to offer different solutions to our clients to help them make this transition to the online world. The Compre Local product, where clients can announce their businesses and be found by local people from their neighborhoods has over 30,000 clients and helped clients through the pandemic. We also offer our clients different software solutions to help them go online, by either helping them with social media management, advertising in marketplaces or establishing an online presence.
We believe we are on the right path for digitization of SMB merchants in Brazil, by offering them seamless payment solutions, as well as other solutions such as software to help them establish their presence online.
Software and additional solutions to SMBs
In software, we continue to evolve in our two-fold strategy of (i) integrating some of our software solutions into our core SMB operations and distribution model, and (ii) enabling our invested companies to integrate financial products into their offerings to provide software and payments integrated solutions.
In the second quarter of 2020, we advanced in building our ecosystem of software solutions for SMBs, reaching a total of 11 portfolio companies. This contributed to a total software client base of 283,000 by the end of the second quarter of 2020,
Chart 8: Number of Software Clients (Thousand) (See PDF)
As we advance in integrating our financial platform into our invested companies' products, these companies can provide a more complete offering to their clients while we benefit from their distribution channels and sales capabilities to increase our financial solution penetration in their base. Also, they can count on referrals from our team, to penetrate their software solutions into Stone's base of clients.
As an example, VHSys, a software company we invested in April 2019, is fully integrated with our acquiring and banking solutions, resulting in strong cross-selling opportunities for our ABC platform. At the same time, Stone refers clients to VHSys to whom they can offer their software solution.
Finally, our annualized pro-forma software revenue reached over R
TON - "Se liga no TON"
We are resuming our marketing investments in TON as we see continued improvement in the current environment. We believe that we are on the right direction in achieving the LTV/CAC ratio required to scale the business faster.
TON ended the second quarter with 35.2 thousand active clients3 compared to 23.2 thousand in the first quarter, representing a 12.0 thousand net addition of clients in the period.
Operating and Financial Metrics
Table 2: Operating and Financial Metrics
| Main Operating and Financial Metrics | 2Q20 | 2Q19 | Δ | 1H20 | 1H19 | Δ | |||
| TPV (R$ billions) | 38.1 | 29.8 | 75.7 | 56.2 | |||||
| Active Clients (ex-TON) (thousands) | 519.4 | 349.5 | 519.4 | 349.5 | |||||
| Period Net Additions (ex-TON) (thousands) | (11.9) | 43.9 | ( | 38.6 | 81.6 | ( | |||
| Take Rate | (0.18 p.p.) | (0.11 p.p.) | |||||||
| Total Revenue and Income (R$ millions) | 667.4 | 586.2 | 1,384.1 | 1,122.0 | |||||
| Adjusted Net Income (R$ millions) | 150.3 | 194.0 | ( | 312.6 | 380.3 | ( | |||
| Adjusted diluted EPS | 0.54 | 0.69 | ( | 1.12 | 1.35 | ( |
The Brazilian economy was strongly hit by the COVID-19 pandemic in the second quarter. Still, we were able to deliver solid results, with strong TPV recovery and accelerating year over year growth every month, which was supported by the gradual economic recovery as well as by our diversified client base and complete focus on helping our clients.
Active client base
In the second quarter of 2020, we reached an active client base4 of 519.4 thousand, or a
Chart 9: Active Client Base (Excludes TON/Stone Mais)5 (Thousands) (See PDF)
Client base in TON6 reached 35.2 thousand clients in the second quarter of 2020, over
Take rate
Our reported Take Rate was
Compared to the second quarter of 2019, the decrease in take rate is mostly explained by the COVID-19-related factors mentioned above for the quarterly comparison, as well as stronger volumes from Integrated Partners and Digital clients, higher debit over credit TPV mix and lower base rate impacting our prepayment prices for larger clients.
In the hubs, take rate increased
Chart 10: Evolution of Take Rate7 (See PDF)
TPV
Total Payment Volume (TPV) was R
Our TPV is showing a positive growth trend on a monthly basis since the outbreak started as we are seeing a faster recovery than expected. Our May TPV year over year growth accelerated to
The recovery in volumes is coming both from our SMB clients in the hubs, as well as from our integrated partners and digital clients, as all of them already present TPV above pre-COVID-19 levels.
Table 3: Quarterly Statement of Profit or Loss
| Statement of Profit or Loss (R$mm) | 2Q20 | % Rev. | 2Q19 | % Rev. | Δ % | Δ p.p. | |
| Net revenue from transaction activities and other services | 227.5 | 34.1% | 177.3 | 30.2% | 3.8 p.p. | ||
| Net revenue from subscription services and equipment rental | 80.4 | 12.1% | 74.6 | 12.7% | (0.7 p.p.) | ||
| Financial income | 326.6 | 48.9% | 297.2 | 50.7% | (1.8 p.p.) | ||
| Other financial income | 32.9 | 4.9% | 37.1 | 6.3% | ( | (1.4 p.p.) | |
| Total revenue and income | 667.4 | 100.0% | 586.2 | 100.0% | 13.8% | 0.0 p.p. | |
| Cost of services | (198.7) | (29.8%) | (100.8) | (17.2%) | (12.6 p.p.) | ||
| Administrative expenses | (89.9) | (13.5%) | (77.4) | (13.2%) | (0.3 p.p.) | ||
| Selling expenses | (114.7) | (17.2%) | (87.3) | (14.9%) | (2.3 p.p.) | ||
| Financial expenses, net | (62.6) | (9.4%) | (78.8) | (13.4%) | ( | 4.1 p.p. | |
| Other operating expenses, net | (40.1) | (6.0%) | (32.3) | (5.5%) | (0.5 p.p.) | ||
| Loss on investment in associates | (1.5) | (0.2%) | (0.5) | (0.1%) | (0.1 p.p.) | ||
| Profit before income taxes | 159.8 | 24.0% | 209.1 | 35.7% | (23.6%) | (11.7 p.p.) | |
| Income tax and social contribution | (36.2) | (5.4%) | (37.3) | (6.4%) | ( | 0.9 p.p. | |
| Net income for the period | 123.6 | 18.5% | 171.9 | 29.3% | (28.1%) | (10.8 p.p.) | |
| Adjusted Net Income | 150.3 | 22.5% | 194.0 | 33.1% | (22.5%) | (10.6 p.p.) | |
Table 4: Quarterly Statement of Profit or Loss
| Statement of Profit or Loss (R$mm) | 1H20 | % Rev. | 1H19 | % Rev. | Δ % | Δ p.p. | |
| Net revenue from transaction activities and other services | 454.8 | 32.9% | 346.0 | 30.8% | 2.0 p.p. | ||
| Net revenue from subscription services and equipment rental | 173.6 | 12.5% | 145.8 | 13.0% | (0.5 p.p.) | ||
| Financial income | 685.9 | 49.6% | 548.6 | 48.9% | 0.7 p.p. | ||
| Other financial income | 69.9 | 5.0% | 81.5 | 7.3% | ( | (2.2 p.p.) | |
| Total revenue and income | 1,384.1 | 100.0% | 1,122.0 | 100.0% | 23.4% | 0.0 p.p. | |
| Cost of services | (348.7) | (25.2%) | (186.2) | (16.6%) | (8.6 p.p.) | ||
| Administrative expenses | (163.9) | (11.8%) | (142.1) | (12.7%) | 0.8 p.p. | ||
| Selling expenses | (226.5) | (16.4%) | (150.0) | (13.4%) | (3.0 p.p.) | ||
| Financial expenses, net | (211.0) | (15.2%) | (145.4) | (13.0%) | (2.3 p.p.) | ||
| Other operating expenses, net | (43.6) | (3.1%) | (43.8) | (3.9%) | ( | 0.8 p.p. | |
| Loss on investment in associates | (2.8) | (0.2%) | (0.5) | (0.0%) | (0.2 p.p.) | ||
| Profit before income taxes | 387.8 | 28.0% | 454.0 | 40.5% | (14.6%) | (12.4 p.p.) | |
| Income tax and social contribution | (105.5) | (7.6%) | (105.1) | (9.4%) | 1.7 p.p. | ||
| Net income for the period | 282.2 | 20.4% | 348.9 | 31.1% | (19.1%) | (10.7 p.p.) | |
| Adjusted Net Income | 312.6 | 22.6% | 380.3 | 33.9% | (17.8%) | (11.3 p.p.) | |
Total Revenue and Income
Total Revenue and Income was R
Excluding Other Financial Income, which is mainly comprised of interest on cash, our Total Revenue and Income grew
We estimate that our COVID-19-related client incentives impacted our Total Revenue and Income in the quarter by a total of R
Chart 11: Total Revenue and Income in the Quarter (R$mm) (See PDF)
Chart 12: Accumulated Total Revenue and Income (R$mm) (See PDF)
Net Revenue from Transaction Activities and Other Services
Net Revenue from Transaction Activities and Other Services was R
Net Revenue from Subscription Services and Equipment Rental
Net Revenue from Subscription Services and Equipment Rental was R
Financial Income
Financial Income was R
Revenue from our credit solution is accounted for at fair value and factors in expected delinquency rates.
Other Financial Income
Other Financial Income was R
Costs and Expenses
In the second quarter of 2020, despite the COVID-19 pandemic, we continued to invest in the technology of our ecosystem and in the growth of our new solutions, including banking, software, credit and TON, as well as to help our clients navigate through this crisis and go online.
Chart 13: Operating Leverage8 (See PDF)
Overall, Operating Costs and Expenses as a percentage of Total Revenue and Income increased by 15.2 percentage points year over year and 13.6 percentage points on a sequential basis to
We expect significant improvement in our operating leverage through the rest of the year.
Chart 14: Total Costs and Expenses as a Percentage of Total Revenue and Income Bridge (See PDF)
The one-off items impacting our second quarter 2020 results are as follow:
(i) severance costs related to the reduction of our workforce in May amounting to R
(ii) one-time fine from a card scheme in the amount of R
We do not expect the items above to repeat over the next quarters. We will, however, continue to invest in our business and new solutions going forward. Also, as we currently see an economic recovery faster than we expected at the time, we are already hiring people back to our Company.
Cost of Services
Cost of Services were R
Compared with the first quarter of 2020, Cost of Services increased as a percentage of Total Revenue and Income to
Administrative Expenses
Administrative Expenses were R
Compared with the first quarter of 2020, Administrative Expenses increased from
Selling Expenses
Selling Expenses were R
Compared with the first quarter of 2020, Selling Expenses as a percentage of revenues increased by 1.6 percentage points, explained by the same factors from the year over year comparison above.
Financial Expenses, Net
Financial Expenses, Net were R
Compared to the previous quarter, Financial Expenses, net as a percentage of Total Revenue and Income decreased from
Other Operating Expenses, Net
Other Operating Expenses, Net were R
Compared to the first quarter of 2020, Other Operating Expenses, net was R
Profit Before Income Taxes
Profit Before Income Taxes was R
Adjusted pre-tax margin was
Income Tax and Social Contribution
During the second quarter of 2020, the Company incurred R
Net Income and EPS
Adjusted Net Income was R
Adjusted Net Margin for the second quarter of 2020 was in line with the first quarter of 2020.
Chart 15: Adjusted Net Income in the Quarter (R$mm) (See PDF)
Chart 16: Adjusted Net Margin in the Quarter (See PDF)
Chart 17: Accumulated Adjusted Net Income (R$mm) (See PDF)
Chart 18: Accumulated Adjusted Net Margin (See PDF)
Net Income was R
Adjusted diluted EPS for the Company was R
Table 5: Adjusted Net Income Reconciliation (Quarter)
| Net Income Bridge (R$mm) | 2Q20 | % Rev. | 2Q19 | % Rev. | Δ % | Δ p.p. | |
| Net income for the period | 123.6 | 18.5% | 171.9 | 29.3% | (28.1%) | (10.8 p.p.) | |
| Share-based compensation expenses (a) | 37.8 | 5.7% | 28.4 | 4.8% | 0.8 p.p. | ||
| Amortization of fair value adjustment (b) | 3.4 | 0.5% | 4.3 | 0.7% | ( | (0.2 p.p.) | |
| Gain on previously held interest in associate (c) | (3.0) | (0.4%) | 0.0 | 0.0% | n.a. | (0.4 p.p.) | |
| Other expenses (d) | 1.7 | 0.3% | 0.0 | 0.0% | n.a. | 0.3 p.p. | |
| Tax effect on adjustments | (13.3) | (2.0%) | (10.5) | (1.8%) | (0.2 p.p.) | ||
| Adjusted net income | 150.3 | 22.5% | 194.0 | 33.1% | (22.5%) | (10.6 p.p.) | |
| GAAP basic EPS (e) | 0.46 | n.a. | 0.62 | n.a. | ( | n.a. | |
| Adjusted diluted EPS (f) | 0.54 | n.a. | 0.69 | n.a. | ( | n.a. | |
| Basic Number of shares | 277.4 | n.a. | 277.4 | n.a. | n.a. | ||
| Diluted Number of shares | 282.0 | n.a. | 282.4 | n.a. | ( | n.a. | |
Table 6: Adjusted Net Income Reconciliation (Accumulated)
| Net Income Bridge (R$mm) | 1H20 | % Rev. | 1H19 | % Rev. | Δ % | Δ p.p. | |
| Net income for the period | 282.2 | 20.4% | 348.9 | 31.1% | (19.1%) | (10.7 p.p.) | |
| Share-based compensation expenses (a) | 39.9 | 2.9% | 38.5 | 3.4% | (0.5 p.p.) | ||
| Amortization of fair value adjustment (b) | 6.9 | 0.5% | 8.1 | 0.7% | ( | (0.2 p.p.) | |
| Gain on previously held interest in associate (c) | (3.0) | (0.2%) | 0.0 | 0.0% | n.a. | (0.2 p.p.) | |
| Other expenses (d) | 1.7 | 0.1% | 0.0 | 0.0% | n.a. | 0.1 p.p. | |
| Tax effect on adjustments | (15.1) | (1.1%) | (15.2) | (1.4%) | ( | 0.3 p.p. | |
| Adjusted net income | 312.6 | 22.6% | 380.3 | 33.9% | (17.8%) | (11.3 p.p.) | |
| GAAP basic EPS (e) | 1.03 | n.a. | 1.26 | n.a. | ( | n.a. | |
| Adjusted diluted EPS (f) | 1.12 | n.a. | 1.35 | n.a. | ( | n.a. | |
| Basic Number of shares | 277.4 | n.a. | 277.3 | n.a. | n.a. | ||
| Diluted Number of shares | 281.9 | n.a. | 282.4 | n.a. | ( | n.a. |
| (a) Consists of expenses related to the vesting of share-based compensation. | |||||||
| (b) On intangibles related to acquisitions. Consists of expenses resulting from the amortization of the fair value adjustment on intangible assets and property and equipment as a result of the application of the acquisition method, a significant portion of which relates to the EdB and Equals acquisitions. | |||||||
| (c) Consists of the gain on re-measurement of our previously held equity interest in Linked to fair value upon the date control was acquired. | |||||||
| (d) Consists of the fair value adjustment related to associates call option. | |||||||
| (e) Calculated as Net income attributable to owners of the parent (Net Income reduced by Net Income attributable to Non-Controlling interest) divided by basic number of shares. For more details on calculation, please refer to Note 17 of our Unaudited Interim Condensed Consolidated Financial Statements, June 30th, 2020. | |||||||
| (f) Calculated as Adjusted Net income attributable to owners of the parent (Adjusted Net Income reduced by Net Income attributable to Non-Controlling interest) divided by diluted number of shares. Adjustments consider share-based compensation expenses and amortization of fair value adjustments, in line with previous disclosures. | |||||||
Cash Flow
Because of the nature of the prepayment and credit businesses of the Company, the dynamics of the sale of receivables in Brazil, Stone management looks at Adjusted Net Cash Provided by/ (Used in) Operating Activities and Adjusted Net Cash Provided by/ (Used in) Financing Activities, both non-IFRS metrics. These metrics consist of transferring the following four working capital items9 from our operating cash flow to our financing cash flow: (i) changes in Accounts Payable to Clients; (ii) changes in Accounts Receivables from Card Issuers; (iii) Interest Income Received, Net of Costs10, which is shown separately in our Cash Flow Statement but is directly linked to the funding of our prepayment operation and (iv) Loans Held for Sale related to our credit operation (see Appendix "Notes on Cash Flows" for further details).
The table below is a summarized version of our Statement of Cash Flows and Adjusted Free Cash Flow (a non-IFRS metric), along with a reconciliation of these metrics with our managerial (non-IFRS) view of them, as well as reconciliation of Adjusted Net Cash Provided by/ (Used in) Operating Activities and Adjusted Net Cash Provided by/ (Used in) Financing Activities to Net Cash Provided by/ (Used in) Operating Activities and Net Cash Provided by/ (Used in) Financing Activities.
Table 7: Summarized Statement of Cash Flows and Free Cash Flow
| Summarized Statement of Cash Flows (R$mm) | 2Q20 | 2Q19 | ||||||
| IFRS | (+) Adjustments | Managerial (Non-IFRS) | IFRS | (+) Adjustments | Managerial (Non-IFRS) | |||
| Net Income | 123.6 | 123.6 | 171.9 | 171.9 | ||||
| (+) Adjustments to Net Income | 137.0 | 137.0 | 111.0 | 111.0 | ||||
| (+) Working capital adjustments | 860.7 | (868.6) | (7.9) | (2,166.5) | 2,043.3 | (123.2) | ||
| (+) AR, AP, interest income received, net of costs (a) | 1,067.1 | (1,067.1) | 0.0 | (2,043.3) | 2,043.3 | 0.0 | ||
| (+) Changes in Loans Held for Sale | (198.5) | 198.5 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| (+) Other working capital changes | (7.9) | (7.9) | (123.2) | (123.2) | ||||
| (=) Cash provided by (used in) operating activities | 1,121.3 | 252.7 | (1,883.6) | 159.6 | ||||
| (-) Capex (b) | (111.3) | (111.3) | (80.1) | (80.1) | ||||
| (+) Other investing activities | 1,553.9 | 1,553.9 | (24.6) | (24.6) | ||||
| (=) Cash provided by (used in) investing activities | 1,442.6 | 1,442.6 | (104.7) | (104.7) | ||||
| (+) Debt/FIDC issuance (repayment) | (1,274.3) | (1,274.3) | 2,063.4 | 2,063.4 | ||||
| (+) Working capital related to credit operation | (198.5) | (198.5) | 0.0 | 0.0 | ||||
| (+) Working capital related to AR/AP | 1,067.1 | 1,067.1 | (2,043.3) | (2,043.3) | ||||
| (+) Capital events (c) | (29.0) | (29.0) | (0.2) | (0.2) | ||||
| (=) Cash provided by (used in) financing activities | (1,303.3) | (434.7) | 2,063.2 | 19.9 | ||||
| (+) Effect of foreign exchange on cash and cash equivalents | (2.4) | (2.4) | (1.2) | (1.2) | ||||
| (=) Change in cash and cash equivalents | 1,258.2 | 1,258.2 | 73.7 | 73.7 | ||||
| Free Cash Flow (R$mm) | 2Q20 | 2Q19 | ||||||
| Cash provided by (used in) operating activities | 1,121.3 | (868.6) | 252.7 | (1,883.6) | 2,043.3 | 159.6 | ||
| (-) Capex (b) | (111.3) | (111.3) | (80.1) | (80.1) | ||||
| Free Cash Flow | 1,010.0 | 141.4 | (1,963.7) | 79.6 | ||||
| (a) Includes changes in accounts receivables from card issuers, accounts payable to clients and interest income received, net of costs. | ||||||||
| (b) Includes purchase of property and equipment, plus purchases and development of intangibles assets. | ||||||||
| (c) Includes capital increase, repurchase of shares, acquisition of non-controlling interest and cash proceeds from non-controlling interest | ||||||||
Adjusted (non-IFRS) Free Cash Flow
The Company defines Adjusted Free Cash Flow11, a non-IFRS metric, as Adjusted net cash provided by (used in) operating activities (non-IFRS), less purchase of property and equipment and purchases and development of intangible assets ("Capex").
The Company reported Adjusted Free Cash Flow of R
Net Cash Provided by (Used in) Operating Activities
In the second quarter of 2020, Net Cash Provided by Operating Activities was R
Adjusting for the effects on table 7 above, our Adjusted (non-IFRS) Net Cash Provided by Operating Activities12 was R
Net Cash Provided by Investing Activities
Net Cash Provided by Investing Activities was R
Net Cash Used in Financing Activities
Net Cash Used in Financing Activities was R
Net Cash Used in Financing Activities was also affected by the repurchase of shares of R
Adjusting for the effects on table 7 above, our Adjusted (non-IFRS) Net Cash Used in Financing Activities13 was R
Adjusted Net Cash
Management assesses net liquidity of the Company by Adjusted Net Cash, a non-IFRS metric. It consists of the items detailed in the Table 6 below:
Table 8: Adjusted Net Cash
| Adjusted Net Cash (R$mm) | 2Q20 | 4Q19 |
| Cash and cash equivalents | 2,776.8 | 968.3 |
| Short-term investments | 788.7 | 2,937.0 |
| Accounts receivable from card issuers | 12,921.0 | 14,066.8 |
| Loans held for sale | 506.9 | 124.7 |
| Derivative financial instrument (b) | 2.4 | 12.3 |
| Adjusted Cash | 16,995.7 | 18,109.2 |
| Accounts payable to clients | (6,940.2) | (6,500.1) |
| Loans and financing (a) | (2,297.7) | (2,912.0) |
| Obligations to FIDC quota holders | (2,587.0) | (3,710.9) |
| Derivative financial instrument (b) | (16.5) | (1.4) |
| Adjusted Debt | (11,841.5) | (13,124.4) |
| Adjusted Net Cash | 5,154.2 | 4,984.8 |
| (a) Loans and financing were reduced by the effects of leases liabilities recognized under IFRS 16. | ||
| (b) Refers to economic hedge of cash and cash equivalents and short-term investments denominated in U.S. dollars | ||
Accounts Receivable from Card Issuers and Loans Held for Sale are accounted for at their fair value in our balance sheet.
As of June 30, 2020, the Company´s Adjusted Net Cash position was R
This increase can be explained by the following factors:
- Cash and Cash Equivalents plus Short-term Investments decreased by R
$339.9 million , from R$3,905.4 million on December 31, 2019 to R$3,565.5 million on June 30, 2020; - Loans and financing plus Obligations to FIDC quota holders decreased R
$1,738.2 million from R$6,622.9 million on December 31, 2019 to R$4,884.7 million on June 30, 2020 as the company was able to partially amortize its FIDC and debt obligations; - This amortization was mostly funded with higher sale of receivables, which can be seen by the fact that Accounts Receivable from Card Issuers, net of Accounts Payable to Clients decreased R
$1,586.0 million , from R$7,566.7 million on December 13, 2019 to R$5,980.7 million on June 30, 2020. - The Company invested R
$382.3 million in its Loans Held for Sale, going from R$124.7 million on December 31, 2019 to R$506.9 million on June 30, 2020. As soon as the market conditions improve, the Company expects to fund its Credit business with third-party funding. - Finally, derivative financial instruments net position decreased from R
$11.0 million on December 31, 2019 to a negative position of R$14.2 million on June 30, 2020.
Combined, these factors generated R
Other Information
Conference Call
Stone will discuss its second quarter financial results during a teleconference tomorrow, August 12, 2020, at 7:00 AM ET / 8:00 AM BRT. The conference call can be accessed at +1 (412) 317 6346 or +1 (844) 204 8586 (US), or +55 (11) 3181 8565 (Brazil), or +44 (20) 3795 9972 (UK).
The call will also be broadcast simultaneously on Stone’s Investor Relations website at https://investors.stone.co/. Following the completion of the call, a recorded replay of the webcast will be available on Stone’s Investor Relations website at https://investors.stone.co/.
About Stone Co.
Stone Co. is a leading provider of financial technology solutions that empower merchants to conduct commerce seamlessly across multiple channels and help them grow their businesses.
Investor Contact
Investor Relations
investors@stone.co
Forward-Looking Statements
This press release contains "forward-looking statements" within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are made as of the date they were first issued and were based on current expectations, estimates, forecasts and projections as well as the beliefs and assumptions of management. These statements identify prospective information and may include words such as “believe,” “may,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “forecast,” “plan,” “predict,” “project,” “potential,” “aspiration,” “objectives,” “should,” “purpose,” “belief,” and similar, or variations of, or the negative of such words and expressions, although not all forward-looking statements contain these identifying words.
Forward-looking statements are subject to a number of risks and uncertainties, many of which involve factors or circumstances that are beyond Stone’s control.
Stone’s actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including but not limited to: more intense competition than expected, lower addition of new clients, regulatory measures, more investments in our business than expected, and our inability to execute successfully upon our strategic initiatives, among other factors. In particular, due to the high level of uncertainty with respect to the duration and scope of the COVID-19 crisis, the quantification of impacts on our financial and operating results cannot be reasonably estimated at this time.
About Non-IFRS Financial Measures
To supplement the financial measures presented in this press release and related conference call, presentation, or webcast in accordance with IFRS, Stone also presents the following non-IFRS measures of financial performance: Adjusted Net Income, Adjusted EPS (diluted), Adjusted Net Margin, Adjusted Net Cash Provided by / (Used in) Operating Activities, Adjusted Net Cash Provided by (Used in) Financing Activities, Free Cash Flow and Adjusted Free Cash Flow, Adjusted Net Cash / (Debt) and Adjusted Pre-Tax Margin.
A “non-IFRS financial measure” refers to a numerical measure of Stone’s historical or future financial performance or financial position that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with IFRS in Stone’s financial statements. Stone provides certain non-IFRS measures as additional information relating to its operating results as a complement to results provided in accordance with IFRS. The non-IFRS financial information presented herein should be considered in conjunction with, and not as a substitute for or superior to, the financial information presented in accordance with IFRS. There are significant limitations associated with the use of non-IFRS financial measures. Further, these measures may differ from the non-IFRS information, even where similarly titled, used by other companies and therefore should not be used to compare Stone’s performance to that of other companies.
Stone has presented Adjusted Net Income to eliminate the effect of items from Net Income that it does not consider indicative of its continuing business performance within the period presented. Stone defines Adjusted Net Income as Net Income (Loss) for the Period, adjusted for (1) non-cash expenses related to the grant of share-based compensation and the fair value (mark-to-market) adjustment for share-based compensation classified as a liability, (2) amortization of intangibles related to acquisitions, (3) one-time impairment charges, (4) unusual income and expenses and (5) tax expense relating to the foregoing adjustments. Adjusted Net Margin is calculated by dividing Adjusted Net Income by Total Revenue and Income.
Stone has presented Adjusted Net Cash Provided by/ (Used in) Operating Activities, in order to provide an addition view of cash flow from operations without the effect of funding decisions related to our financial solutions, that include prepayment business and credit solutions. Stone has presented Adjusted Free Cash Flow metric, which has limitations as it omits certain components of the overall Cash Flow Statement and does not represent the residual cash flow available for discretionary expenditures. For example, this metric does not incorporate the portion of payments representing principal reductions of debt or cash payments for business acquisitions. Therefore, the Company believes it is important to view Free Cash Flows measures only as a complement to our entire consolidated Statements of Cash Flows.
Stone has presented Adjusted Net Cash metric in order to adjust its Net Cash / (Debt) by the balances of Accounts Receivable from Card Issuers, Loans Held for Sale and Accounts Payable to Clients, since these lines vary according to the Company’s funding source together with the lines of (i) Cash and Cash Equivalents, (ii) Short-term Investments, (iii) Debt balances and (iv) Derivative Financial Instruments related to economic hedges of short term investments in assets, due to the nature of Stone’s business and its prepayment and credit operations.
Guidance for third quarter 2020, where adjusted, is provided on a non-IFRS basis. Stone cannot reconcile its expected Adjusted Pre-Tax Margin, calculated as profit before income taxes excluding share-based compensation expenses, amortization of fair value adjustments and other expenses divided by total revenue and income, to expected profit before income taxes under “Management Perspective given for the Second Quarter 2020 and expectations for the Third Quarter 2020” without unreasonable effort because certain items that impact profit before income taxes and other reconciling metrics are out of Stone's control and/or cannot be reasonably predicted at this time, which unavailable information could have a significant impact on the Company’s IFRS financial results.
Unaudited Consolidated Statement of Profit or Loss
Table 9: Unaudited Consolidated Statement of Profit or Loss
| Statement of Profit or Loss (R$mm) | 2Q20 | 2Q19 | 1H20 | 1H19 | |
| Net revenue from transaction activities and other services | 227.5 | 177.3 | 454.8 | 346.0 | |
| Net revenue from subscription services and equipment rental | 80.4 | 74.6 | 173.6 | 145.8 | |
| Financial income | 326.6 | 297.2 | 685.9 | 548.6 | |
| Other financial income | 32.9 | 37.1 | 69.9 | 81.5 | |
| Total revenue and income | 667.4 | 586.2 | 1,384.1 | 1,122.0 | |
| Cost of services | (198.7) | (100.8) | (348.7) | (186.2) | |
| Administrative expenses | (89.9) | (77.4) | (163.9) | (142.1) | |
| Selling expenses | (114.7) | (87.3) | (226.5) | (150.0) | |
| Financial expenses, net | (62.6) | (78.8) | (211.0) | (145.4) | |
| Other operating expenses, net | (40.1) | (32.3) | (43.6) | (43.8) | |
| Loss on investment in associates | (1.5) | (0.5) | (2.8) | (0.5) | |
| Profit before income taxes | 159.8 | 209.1 | 387.8 | 454.0 | |
| Income tax and social contribution | (36.2) | (37.3) | (105.5) | (105.1) | |
| Net income for the period | 123.6 | 171.9 | 282.2 | 348.9 | |
Unaudited Consolidated Balance Sheet Statement
Table 10: Unaudited Consolidated Balance Sheet Statement
| Balance Sheet (R$mm) | 31-Jun-20 | 31-Dec-19 |
| Assets | ||
| Current assets | 17,699.3 | 18,404.9 |
| Cash and cash equivalents | 2,776.8 | 968.3 |
| Short-term investments | 788.7 | 2,937.0 |
| Accounts receivable from card issuers | 12,921.0 | 14,066.8 |
| Trade accounts receivable | 662.2 | 249.4 |
| Recoverable taxes | 127.5 | 50.4 |
| Prepaid expenses | 119.9 | 12.5 |
| Derivative financial instruments | 2.4 | 14.1 |
| Other assets | 301.0 | 106.3 |
| Non-current assets | 1,560.9 | 1,200.9 |
| Receivables from related parties | 7.7 | 12.8 |
| Deferred income tax assets | 155.9 | 192.8 |
| Other assets | 81.3 | 44.7 |
| Investment in associate | 20.1 | 28.2 |
| Property and equipment | 601.3 | 548.6 |
| Intangible assets | 694.6 | 373.7 |
| Total Assets | 19,260.2 | 19,605.7 |
| Liabilities and equity | ||
| Current liabilities | 11,286.4 | 11,872.5 |
| Accounts payable to clients | 6,940.2 | 6,500.1 |
| Trade accounts payable | 125.0 | 97.8 |
| Loans and financing | 1,193.7 | 2,947.8 |
| Obligations to FIDC quota holders | 2,587.0 | 2,090.9 |
| Labor and social security liabilities | 126.7 | 109.0 |
| Taxes payable | 80.6 | 44.9 |
| Derivative financial instruments | 16.5 | 1.4 |
| Other accounts payable | 216.6 | 80.6 |
| Non-current liabilities | 1,494.0 | 1,760.2 |
| Loans and financing | 1,233.6 | 87.5 |
| Obligations to FIDC quota holders | 0.0 | 1,620.0 |
| Deferred income tax liabilities | 20.4 | 10.7 |
| Provision for contingencies | 9.7 | 9.6 |
| Labor and social security liabilities | 26.1 | 27.4 |
| Other accounts payable | 204.3 | 5.1 |
| Total liabilities | 12,780.4 | 13,632.7 |
| Equity attributable to owners of the parent | 6,386.6 | 5,972.4 |
| Issued capital | 0.1 | 0.1 |
| Capital reserve | 5,623.7 | 5,443.8 |
| Treasury shares | (76.4) | (0.1) |
| Other comprehensive income | (47.1) | (72.3) |
| Retained earnings | 886.4 | 601.0 |
| Non-controlling interests | 93.2 | 0.6 |
| Total equity | 6,479.8 | 5,973.0 |
| Total liabilities and equity | 19,260.2 | 19,605.7 |
Unaudited Consolidated Statement of Cash Flows
Table 11: Unaudited Consolidated Statement of Cash Flows
| Cash Flow (R$mm) | 2Q20 | 2Q19 | 1H20 | 1H19 | ||
| Net income for the period | 123.6 | 171.9 | 282.2 | 348.9 | ||
| Adjustments on Net Income: | ||||||
| Depreciation and amortization | 63.2 | 34.1 | 123.4 | 63.8 | ||
| Deferred income tax and social contribution | 43.4 | 35.7 | 35.2 | 30.4 | ||
| Loss on investment in associates | 1.5 | 0.5 | 2.8 | 0.5 | ||
| Other financial costs and foreign exchange, net | 55.1 | 28.9 | 56.7 | 27.3 | ||
| Provision for contingencies | 0.7 | 0.9 | 1.7 | 1.7 | ||
| Share based payments expense | 0.6 | 8.9 | 7.7 | 17.0 | ||
| Allowance for expected credit losses | 11.3 | 15.7 | 21.0 | 20.2 | ||
| Loss on disposal of property, equipment and intangible assets | 2.5 | 1.5 | 14.3 | 2.9 | ||
| Fair value adjustments in financial instruments at FVPL | (12.5) | 0.0 | (5.1) | 0.0 | ||
| Fair value adjustment in derivatives | (26.0) | (15.2) | 20.7 | (7.6) | ||
| Remeasurement of previously held interest in subsidiary acquired | (3.0) | 0.0 | (3.0) | 0.0 | ||
| Working capital adjustments: | ||||||
| Accounts receivable from card issuers | (271.2) | (2,128.2) | 1,263.5 | (3,302.8) | ||
| Receivables from related parties | 15.1 | 1.0 | 7.7 | 3.0 | ||
| Recoverable taxes | (26.7) | (56.9) | (75.1) | (59.4) | ||
| Prepaid expenses | (1.1) | 6.0 | (107.4) | (7.6) | ||
| Trade accounts receivable and other assets | (216.0) | (33.3) | (509.4) | (40.1) | ||
| Accounts payable to clients | 1,026.7 | (228.4) | (301.1) | 241.4 | ||
| Taxes payable | 96.9 | 76.1 | 173.6 | 127.7 | ||
| Labor and social security liabilities | 5.2 | (12.6) | 14.2 | 8.3 | ||
| Provision for contingencies | (0.2) | 0.1 | (1.6) | 0.1 | ||
| Other liabilities | 24.6 | 3.9 | 13.4 | (22.6) | ||
| Interest paid | (55.0) | (66.1) | (110.3) | (86.6) | ||
| Interest income received, net of costs | 311.5 | 313.2 | 661.1 | 547.9 | ||
| Income tax paid | (49.3) | (41.4) | (102.5) | (92.9) | ||
| Net cash provided by (used in) operating activity | 1,121.3 | (1,883.6) | 1,483.8 | (2,178.5) | ||
| Investing activities | ||||||
| Purchases of property and equipment | (90.8) | (62.4) | (181.0) | (117.0) | ||
| Purchases and development of intangible assets | (20.5) | (17.7) | (42.5) | (29.7) | ||
| Acquisition of subsidiary, net of cash acquired | (57.4) | 0.0 | (57.4) | 0.0 | ||
| Proceeds from (acquisition of) short term investments, net | 1,619.3 | (18.8) | 2,220.5 | 138.4 | ||
| Proceeds from the disposal of non-current assets | 4.8 | 0.6 | 4.8 | 0.9 | ||
| Acquisition of interest in associates | (12.9) | (6.5) | (7.5) | (7.0) | ||
| Net cash provided by (used in) investing activities | 1,442.6 | (104.7) | 1,937.1 | (14.4) | ||
| Financing activities | ||||||
| Proceeds from borrowings | 567.7 | 450.0 | 3,456.8 | 450.0 | ||
| Payment of borrowings | (1,217.1) | (1.2) | (4,087.1) | (1.4) | ||
| Amortization to FIDC quota holders | (616.6) | 0.0 | (1,116.6) | 0.0 | ||
| Proceeds from FIDC quota holders | 0.0 | 1,620.0 | 0.0 | 1,620.0 | ||
| Payment of leases | (8.3) | (5.4) | (14.5) | (11.4) | ||
| Repurchase of shares | (28.8) | 0.0 | (76.3) | 0.0 | ||
| Acquisition of non-controlling interests | (0.3) | (0.2) | (0.5) | (0.5) | ||
| Cash proceeds from non-controlling interest and gain on dilution | 0.0 | 0.0 | 230.5 | 0.0 | ||
| Net cash provided by (used in) financing activities | (1,303.3) | 2,063.2 | (1,607.7) | 2,056.8 | ||
| Effect of foreign exchange on cash and cash equivalents | (2.4) | (1.2) | (4.7) | (1.2) | ||
| Change in cash and cash equivalents | 1,258.2 | 73.7 | 1,808.4 | (137.3) | ||
| Cash and cash equivalents at beginning of period | 1,518.6 | 87.0 | 968.3 | 297.9 | ||
| Cash and cash equivalents at end of period | 2,776.8 | 160.6 | 2,776.8 | 160.6 | ||
Note on the impact of different funding sources for prepayment in the financial statements
A natural consequence of TPV growth is the corresponding increase in both Accounts Receivable from Card Issuers and Accounts Payable to Clients. When the Company makes a prepayment to its clients as part of its working capital solutions offering, it reduces accounts payable by the corresponding prepaid amount plus fees earned by providing such prepayment service. In order to fund the prepayment operation, the Company predominantly uses one of the following sources of funding: (i) the sale of its receivables from card issuers to third-party banks or financial institutions, (ii) the issuance of senior and/or mezzanine quotas by FIDCs to institutional investors, (iii) the issuance of debentures and private loans or (iv) its own capital from capital contributions or cash flows from operations. These funding options lead to different effects on the Company’s statements of balance sheet and cash flows:
- Sale of receivables: the true sale of receivables results in the derecognition of Accounts Receivable from Card Issuers. As a result, when a prepayment operation is funded through the true sale of receivables, both Accounts Receivable from Card Issuers and Accounts Payable to Clients are derecognized from the balance sheet in the same amount and the combined effect to the cash flows is a positive operational cash flow equivalent to net fees earned by providing such prepayment service.
- Issuance of FIDC14 senior and/or mezzanine quotas: when the Company launches a new FIDC in order to raise capital, the amount raised from senior and/or mezzanine quota holders less structuring and transaction costs will be recognized on its balance sheet as cash and as a liability to senior and/or mezzanine quota holders. The Company then transfers its receivables from card issuers in its operating subsidiary to the FIDC and uses the cash to fund the prepayment operations. As a result of consolidating the FIDC in the Company’s financial statements, the Accounts Receivable from Card Issuers held by the FIDC remain on its consolidated balance sheet. This set of transactions generates a positive impact on the Company’s cash flows from financing activities in the amount received by the FIDC from senior and/or mezzanine quota holders less structuring and transaction costs. However, since Accounts Receivable from Card Issuers remains on the balance sheet but the Accounts Payable to Clients are derecognized, these transactions also cause a negative impact on our cash flow from operations. The net effect of impacts in cash flow from operations and cash flow from financing activities is positive.
- Debentures and private loans: when the Company issues a debenture or takes a private loan, the effect on the Company’s statements of balance sheet and cash flows is similar to the issuance of FIDC senior and/or mezzanine quotas.
- Deployment of the Company’s capital: when the Company uses its own capital to fund prepayment operations, it does not sell its receivables from card issuers and they remain on its balance sheet. However, its Accounts Payable to Clients are derecognized, and therefore these transactions cause a negative impact on the Company’s cash flow from operations.
Note on the impact of different funding sources for our credit solution in the financial statements
Besides the prepayment operation, the Company has recently started to offer credit solutions to clients, which also require funding. In addition to the sale of receivables, debentures and private loans mentioned above, the Company has the following main funding alternatives for the credit business:
- Bilateral agreements with third-party financial institutions: the company may enter into agreement with third-party financial institutions, so that such institutions are the lenders of record for Stone´s clients. In such case, the third-party financial institution would bear the funding need and the credit risk of the transaction and the Company would recognize a fee for rendering services related to the transaction. This was the alternative the Company opted for its initial pilot phase of the credit solution, which has a positive effect in cash flow from operations.
- Issuance of Credit FIDC senior and/or mezzanine quotas: in that case, the company raises funds in the capital markets and issues senior and/or mezzanine quotas to investors, while keeping a very small amount of own cash invested in subordinated quotas. Besides providing most of the funding needed for the credit offering, this alternative also reduces the Company´s overall exposure to credit risk. The impact in our consolidated statement of cash flows has similar logic as the issuance of FIDC senior and/or mezzanine quotas mentioned in the section “Note on the impact of different funding sources for prepayment in the financial statements” above.
- Deployment of the Company’s capital: if the Company uses its own capital to fund its credit operations, it decreases its cash balance and recognizes loan assets in its balance sheet. If the Company increases the amount of such loan assets, this has a negative impact in our Net Cash provided by/(used in) Operating Activities.
- Sale of loan assets: the true sale of loan assets results in its derecognition from our balance sheet, impacting positively our Net Cash provided by/(used in) Operating Activities.
As of June 30, 2020, the credit portfolio outstanding to Stone´s clients was R$491.1 million . The Company funded R$26.9 million from a third-party financial institution through the funding model explained in the topic (1) above and R$464.3 million is funded by the Company’s own capital through an investment in a FIDC and this amount is recognized in Loans Held for Sale in the Company´s balance sheet. The Company, however, intends to scale its credit operation mainly through third-party funding, especially alternative (2) mentioned above.
Loan assets held in the Company´s balance sheet are accounted for at their fair value, which factors in market discount rates and expected delinquency, thus representing the value that the Company would most probably be able to sell such assets.
_______________________________
1 Consists of incentives given to clients, the construction of a campaign hospital and severance costs related to the layoff of 1,300 people in May. Does not include COVID-19 impact on TPV.
2 Clients that have transacted at least once over the preceding 90 days
3 Clients that transacted at least once in the last 12 months.
4 Excludes TON clients.
5 Active clients mean clients that have transacted at least once over the preceding 90 days.
6 For clients of TON, Active Clients mean clients that have transacted with TON or Stone Mais solution at least once over the last 12 months.
7 According to IFRS 15, subscription revenue is accounted for over the expected life of merchants on a linear basis. As part of the annual assessment of assumptions for linearization of subscription revenue, life of merchants was revised upwards in 3Q19, contributing positively 3 bps to 3Q19 take rate of
8 Includes Cost of Services, Administrative Expenses and Selling Expenses as a percentage of Total Revenue and Income. Quarterly unaudited data.
9 Investments in TON, banking and software solutions, including marketing expenses for our Compre Local campaign.
10 R
11 R
12 Includes extra facilities expenses related to the return of workspaces and third-party services expenses, among others.
13 Each “Accounts Payable to Clients” recognized as a liability on our balance sheet is directly linked to an “Accounts Receivable from Card Issuers” recognized as an asset in our balance sheet. The Company receives payment from issuing banks first, and only then pays its clients, thus having no working capital requirement. When a client opts to be paid early (prepayment), the Company has a working capital requirement. However, the Company has the option to sell the receivables related to those payables from card issuers in order to meet such working capital requirements. The combined effect to the cash flow is a positive operational cash flow equivalent to net fees earned by providing such prepayment service. Whenever management opts to fund its prepayment operation with sources other than the sale of its own receivables, Net Cash Provided by/ (Used in) Operating Activities may be affected, as discussed in “Note on the impact of different funding sources for prepayment in the financial statements” in the appendix. However, management does not view such decision as translating into higher or lower ability of our business to generate cash operationally. In addition to prepayment, the Company has started to offer credit solutions to clients. The Company intends to fund its credit operation primarily through third parties (i.e. FIDC and debt), as well as with some own cash. Given the operational nature of our credit business, as in the case of prepayment mentioned above, management does not view related funding decision as translating into higher or lower ability of our business to generate cash operationally.
14 Interest Income Received, Net of Costs, consists of two items: (i) financial income from our prepayment activity, less (ii) financial expenses related to the sale of receivables. The first item has direct influence on the level of Accounts Payable to Clients in our balance sheet; the second item has direct influence on the amount of Accounts Receivables from Card Issuers on our balance sheet.
15 Adjusted Free Cash Flow is a non-IFRS measure. Refer to the discussion on non-IFRS financial measures and reconciliations included in this release.
16 Adjusted Net Cash Provided by (Used in) Operating Activities is a non-IFRS measure. Refer to the discussion on non-IFRS financial measures and reconciliations included in this release.
17 Adjusted Net Cash Provided by (Used in) Financing Activities is a non-IFRS measure. Refer to the discussion on non-IFRS financial measures and reconciliations included in this release.
18 Receivables Investment Fund (Fundo de Investimento em Direitos Creditórios) is an investment fund legal structure established under Brazilian law designed specifically for investing in credit rights receivables.
A PDF accompanying this announcement is available at http://ml.globenewswire.com/Resource/Download/d9f4fbcb-41b6-4e3c-9719-e5b832f73134
FAQ
What were StoneCo's financial results for Q2 2020?
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