StoneCo Ltd. — FY2020 Form 20-F Summary
Business context and reporting period
StoneCo is a Cayman Islands holding company whose principal operations are in Brazil. It provides merchant acquiring, payment processing, digital banking, working-capital and credit solutions, software, and related services to merchants and integrated partners. The filing covers the fiscal year ended December 31, 2020, with audited consolidated financial statements prepared under IFRS as issued by the IASB and presented in Brazilian reais.
Stone served approximately 652,600 active clients and 260 integrated partners at year-end, supported by approximately 350 operational hubs. The company reported an NPS of 64 based on an external November 2020 survey.
Key financial and operating metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Total revenue and income | R$3,319.8 million | R$2,576.0 million | +28.9% |
| Net revenue from transaction activities and other services | R$1,144.1 million | R$770.3 million | +48.5% |
| Subscription and equipment rental revenue | R$388.0 million | R$331.6 million | +17.0% |
| Financial income | R$1,647.0 million | R$1,287.8 million | +27.9% |
| Net income | R$837.5 million | R$804.2 million | +4.1% |
| Net income attributable to owners | R$854.1 million | R$803.2 million | +6.3% |
| Adjusted net income | R$958.2 million | R$857.1 million | +11.8% |
| TPV | R$209.9 billion | R$129.1 billion | +62.6% |
| Active clients | 652.6 thousand | 480.9 thousand | +35.7% |
| Take rate | 1.51% | 1.85% | Down 34 basis points |
Net margin was approximately 25.2% in 2020, compared with 31.2% in 2019. Adjusted net margin was approximately 28.9%, compared with 33.3%. The filing attributes the lower take rate and margin pressure primarily to lower-yielding Coronavoucher volumes, lower Brazilian base rates affecting prepayment pricing, COVID-19 effects, higher provisions and losses, technology and customer-service investment, a R$14.0 million card-scheme fine, share-based compensation, and transaction-related expenses.
Cost of services increased 80.3% to R$769.9 million, or 23.2% of revenue versus 16.6% in 2019. Administrative expenses increased 37.3% to R$392.5 million, and selling expenses increased 40.3% to R$505.9 million. Net financial expenses declined 3.9% to R$339.8 million. The effective tax rate was approximately 25.7%.
Cash flow, liquidity and debt
- Cash and cash equivalents were R$2,447.0 million at December 31, 2020, compared with R$968.3 million in 2019.
- Short-term investments were R$8,128.1 million, up from R$2,937.0 million.
- Accounts receivable from card issuers were R$16,307.2 million, while accounts payable to clients were R$9,172.4 million.
- Operating cash flow was positive at R$56.5 million, compared with negative R$2,651.8 million in 2019. Working-capital investment remained substantial, including a R$2,081.9 million cash outflow from higher card-issuer receivables and a R$1,362.4 million outflow from trade receivables and other assets, partly related to the credit offering.
- Investing cash flow was negative R$5,809.0 million, mainly due to R$5,069.1 million invested in short-term securities, R$455.1 million of capital expenditures, and R$291.9 million for acquisitions and investments.
- Financing cash flow was positive R$7,216.2 million, principally reflecting R$7,832.6 million of net proceeds from the August 2020 follow-on offering.
- Total debt and FIDC quota-holder obligations were approximately R$6,083.8 million at year-end, compared with R$6,746.3 million in 2019. Most borrowings bear floating rates linked to CDI.
- Management reported approximately R$1,220 million of unused borrowing capacity under revolving credit lines and stated that current working capital was sufficient for present requirements.
- Adjusted net cash, a company-defined measure including cash, investments, card-issuer receivables, loans at fair value and certain liabilities, was R$13,456.5 million, compared with R$4,984.8 million in 2019.
Capital expenditures were R$455.1 million, including R$372.1 million for property and equipment, primarily POS equipment, and R$83.0 million for software and other intangible assets. The company expected capital expenditures to increase in 2021 to support growth.
Material changes and unusual items
- TPV grew substantially faster than revenue, while the take rate declined to 1.51%. Stone processed R$30.7 billion of Coronavoucher volume, which carried lower take rates.
- COVID-19 caused merchant closures and operational disruption. Stone reduced its workforce by approximately 1,300 employees, or about 20% of the workforce at the time, in May 2020, while also expanding remote work and online-commerce activity.
- Stone completed or obtained control of several software, health-tech, education, social-media and credit-bureau businesses, including Linked, MVarandas, Vitta, MLabs, Questor, Sponte and Creditinfo Caribbean. The acquisitions added approximately R$510.9 million of goodwill and R$146.4 million of identifiable intangible assets based on the disclosed purchase-price allocation, with certain valuations still preliminary.
- Stone issued R$580.0 million of FIDC SOMA III quotas, raising R$493.0 million of third-party capital for its credit solution, of which R$246.5 million was received in 2020. The senior and mezzanine tranches bear returns of CDI plus 4.0% and CDI plus 7.0%, respectively.
- The company completed a primary follow-on offering of 31.5 million Class A shares at US$47.50 per share, generating net proceeds of approximately US$1,457.4 million, or R$7,872.6 million after expenses and underwriting discounts.
- Share-based compensation expense increased to R$120.8 million from R$64.5 million. The company also recorded higher COVID-19 donations, Linx transaction expenses and other unusual items.
- Management changed the estimated useful life of POS equipment from three years with a 30% residual value to five years with no residual value, reducing 2020 depreciation expense by approximately R$14.5 million.
Guidance, outlook, risks and contingencies
The filing does not provide quantified revenue, earnings or margin guidance. Management expects to expand its hub network, software and financial-product offerings, invest in technology and capital expenditures, and increase cross-selling of banking and credit products. The company expects to fund planned capital expenditures through operating cash flow and existing cash and equivalents.
The pending Linx transaction was expected to require approximately R$6.8 billion of consideration. As of the filing date, it remained subject to final CADE approval and other conditions. If the transaction was not approved, Stone could owe a compensatory break fee of approximately R$453.8 million. The transaction also carried integration, financing, dilution, goodwill and contingent-liability risks.
- COVID-19 may continue to affect merchant activity, TPV, credit losses, employee productivity, cybersecurity and operating costs. Coronavoucher-related volume may not recur.
- Competition, payment-scheme pricing, debit-card interchange caps, Pix, Open Banking and card-receivables registration could pressure pricing, volumes and take rates.
- Credit expansion exposes Stone to client defaults, fraud, chargebacks and uncertain loss provisioning. Loans designated at fair value totaled R$1,646.7 million at year-end.
- Approximately R$5.9 billion of debt and FIDC obligations were subject to variable interest or return rates, creating interest-rate and funding-cost exposure.
- Brazilian regulatory, tax, data-protection and licensing requirements remain evolving. Pagar.me’s Central Bank authorization request remained pending, and the company was required to complete adjustments to its AML/CFT program.
- Legal-proceeding provisions were R$10.2 million, with judicial deposits of R$20.4 million. Additional civil and labor matters assessed as possible losses totaled R$61.2 million and were not provisioned.
- The company identified past material weaknesses in internal controls, although management and Ernst & Young concluded that internal control over financial reporting was effective as of December 31, 2020. Controls at several businesses acquired during 2020 were excluded from the assessment.
- The Brazilian real depreciated 22.4% against the U.S. dollar during 2020, increasing currency volatility and affecting translated results, equipment costs and funding exposures.
Most important facts for investors to verify
- Whether TPV growth remains organic and sustainable after separating Coronavoucher volume and other lower-yielding transactions.
- Whether the take rate and adjusted margin stabilize or continue to decline as Pix, competition and lower prepayment pricing affect revenue yield.
- Credit-loss, delinquency, chargeback and fraud trends as Stone scales its credit and banking products.
- The maturity profile, collateral, covenants and refinancing requirements of the R$6.1 billion debt and FIDC obligations, particularly floating-rate exposures.
- The final status, consideration, funding, break-fee exposure and integration consequences of the Linx transaction.
- The final purchase-price allocations and impairment sensitivity for the 2020 acquisitions, including approximately R$654.0 million of goodwill and R$1,039.9 million of intangible assets at year-end.
- Whether cash and short-term investments are available for general corporate use or restricted by client-fund safeguarding, regulatory, collateral or FIDC requirements.
- The completeness of internal controls over recently acquired businesses and the company’s continuing compliance with Brazilian payment, AML/CFT and data-protection regulations.