Business Context and Reporting Period
Company: StoneCo Ltd. (StoneCo)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2018
Jurisdiction: Cayman Islands (incorporated); Principal operations in Brazil
Business Overview: StoneCo is a leading provider of financial technology solutions in Brazil, empowering merchants and integrated partners to conduct electronic commerce across in-store, online, and mobile channels. The company operates a proprietary "Stone Business Model" featuring a cloud-based technology platform, hyper-local distribution via "Stone Hubs," and on-demand customer service. As of December 31, 2018, StoneCo served approximately 267,900 active clients, primarily small and medium-sized businesses (SMBs).
Key Financial Metrics
Financial data is presented in Brazilian Reais (R$) and U.S. Dollars (US$) for the year ended December 31, 2018. The exchange rate used for translation was R$3.875 to US$1.00.
| Metric | 2018 (R$ millions) | 2018 (US$ millions) | 2017 (R$ millions) |
|---|---|---|---|
| Total Revenue and Income | 1,579.2 | 407.5 | 766.6 |
| Net Income (Loss) | 305.2 | 78.8 | (105.0) |
| Adjusted Net Income | 342.8 | 88.5 | 45.1 |
| Total Payments Volume (TPV) | 83.4 billion | 21.5 billion | 48.5 billion |
| Active Clients (in thousands) | 267.9 | n/a | 131.2 |
| Take Rate | 1.83% | n/a | 1.53% |
| Cash and Cash Equivalents | 3,068.5 | 791.9 | 843.7 |
| Total Debt & FIDC Obligations | 2,837.0 | 732.1 | 2,081.9 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue and income increased 106.0% year-over-year (YoY), driven by a 71.8% increase in Total Payments Volume (TPV) and a strategic shift toward SMB merchants which improved the take rate from 1.53% to 1.83%.
- Profitability Turnaround: The company transitioned from a net loss of R$105.0 million in 2017 to a net profit of R$305.2 million in 2018. Adjusted net income grew significantly from R$45.1 million to R$342.8 million.
- Client Base Expansion: Active clients grew 104.2% YoY, doubling from 131,200 to 267,900. This growth was fueled by the expansion of Stone Hubs and the integration of acquired entities.
- Acquisitions: In September 2018, StoneCo acquired the remaining 44% interest in Equals S.A., making it a wholly-owned subsidiary. This acquisition contributed to the consolidation of financial results and the recognition of a gain on re-measurement of previously held equity interests.
- Cost Efficiency: Cost of services as a percentage of total revenue improved from 29.2% in 2017 to 20.5% in 2018, reflecting operating leverage and efficiency gains in logistics and customer service.
Guidance, Outlook, and Risks
Management Commentary and Outlook: Management expects to continue investing in the business, including expanding the network of Stone Hubs, developing new software solutions (e.g., investments in VHSYS and Tablet Cloud announced in March 2019), and growing financial solutions like digital banking and credit. The company anticipates capital expenditures for 2019 will focus on POS equipment and IT infrastructure to support growth.
Key Risks and Contingencies:
- Regulatory Environment: The business is subject to extensive regulation by the Brazilian Central Bank. Recent regulations capping debit card interchange fees and potential changes to payment cycles could impact working capital solutions and margins.
- Cybersecurity: As a payment processor, StoneCo faces risks related to data breaches, fraud, and system disruptions. A significant breach could result in fines, loss of licenses, and reputational damage.
- Macroeconomic Factors: Operations are heavily dependent on the Brazilian economy. Risks include political instability, currency fluctuation (the Real depreciated 17.1% against the USD in 2018), inflation, and changes in interest rates affecting funding costs.
- Competition: The market is highly competitive with traditional banks and other payment processors. Price competition could pressure margins.
- Internal Controls: The company previously identified material weaknesses in internal controls over financial reporting (related to tax, stock-based compensation, and acquisition accounting) but believes these were remediated as of December 31, 2018.
Important Facts for Investor Verification
- Revenue Recognition: Verify the impact of IFRS 15 adoption (effective Jan 1, 2018) and the classification of revenue as net of interchange fees (agent model).
- Adjusted Net Income: Review the reconciliation of Adjusted Net Income to Net Income, specifically the add-backs for share-based compensation (R$60.8 million) and amortization of intangibles (R$12.6 million).
- Funding Structure: Examine the reliance on FIDCs (Fundo de Investimento em Direitos Creditórios) for funding working capital solutions and the associated interest rate risks (indexed to CDI).
- Debt Obligations: Confirm the maturity profile of the R$2.8 billion in debt and FIDC senior quota holder obligations, noting that a significant portion matures in 2020.
- Legal Proceedings: Review the status of ongoing civil and labor proceedings, including the lawsuit with Elo Serviços S.A. regarding guarantee amounts, which could result in material liabilities.
- Share Structure: Note the dual-class share structure where Class B shares (held largely by founders) carry 10 votes per share, giving founders significant control over corporate matters.