StoneCo Ltd. — FY2019 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, subscription and equipment rental, digital banking, working-capital prepayment, credit, software and reconciliation solutions through in-store, online and mobile channels. The filing is an annual report for the fiscal year ended December 31, 2019, rather than a standalone quarterly filing. Fourth-quarter operating metrics are included where disclosed.
The consolidated financial statements are audited and prepared under IFRS as issued by the IASB, with the Brazilian real as the presentation currency. The company reported approximately 495,100 active clients, more than 350 Stone Hubs and 116 integrated partners at year-end.
Key financial and operating metrics
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Total revenue and income | R$2,576.0 million | R$1,579.2 million | +63.1% |
| Net revenue from transaction activities and other services | R$770.3 million | R$514.6 million | +49.7% |
| Subscription and equipment rental revenue | R$331.6 million | R$213.7 million | +55.2% |
| Financial income | R$1,287.8 million | R$801.3 million | +60.7% |
| Net income | R$804.2 million | R$305.2 million | +163.5% |
| Adjusted net income | R$857.1 million | R$342.8 million | +150.0% |
| TPV | R$129.1 billion | R$83.4 billion | +54.8% |
| Active clients | 495.1 thousand | 269.1 thousand | +84.0% |
Net margin was approximately 31.2%, compared with 19.3% in 2018. Adjusted net margin was approximately 33.3%, compared with 21.7%. Profit before tax was R$1,090.7 million, or approximately 42.3% of total revenue and income. Basic and diluted earnings per share were R$2.90 and R$2.85, respectively.
Cost of services declined to 16.6% of revenue from 20.5%, while administrative expenses declined to 11.1% from 16.0%. Selling expenses increased to 14.0% of revenue from 12.0% as Stone expanded its sales organization and Stone Hub network. Financial expenses, net, were R$353.5 million and represented 27.4% of financial income, down from 37.6% in 2018.
Cash flow, liquidity and debt
- Cash and cash equivalents were R$968.3 million at December 31, 2019, compared with R$297.9 million at December 31, 2018.
- Short-term investments were R$2,937.0 million, producing cash and short-term investments of approximately R$3.9 billion.
- Net cash used in operating activities was R$2,651.8 million, primarily because accounts receivable from card issuers increased by R$4,779.5 million as TPV and prepayment activity expanded.
- Net cash used in investing activities was R$437.6 million. Capital expenditures were R$399.9 million, including R$333.6 million for property and equipment and R$66.4 million for intangible assets.
- Net cash provided by financing activities was R$3,757.9 million, including R$1,640.0 million from FIDC quota holders and R$2,157.0 million of net borrowings.
- Total debt and FIDC quota-holder obligations were R$6,746.2 million, compared with R$2,837.0 million in 2018. Approximately R$5,038.7 million was classified as current.
- Management stated that current working capital was sufficient for present requirements and reported approximately R$770 million of unused borrowing capacity under revolving credit lines.
- The company’s adjusted cash less adjusted debt measure was positive at approximately R$4,984.8 million; this measure includes client payables and card-issuer receivables and is not equivalent to unrestricted net cash.
Material changes versus the prior comparable period
- Growth was driven by higher TPV, rapid SMB client additions, increased financial income from prepayment solutions and continued expansion of subscription and equipment rental services.
- Operating leverage improved cost-of-services and administrative margins, while selling expense growth reflected continued Stone Hub and sales-force expansion.
- Funding costs improved because of lower Brazilian base rates, less expensive funding arrangements and greater use of company cash, although debt increased substantially to support working-capital solutions.
- Stone acquired additional interests in Linked Gourmet, reaching 48.56%, and invested in Collact, VHSYS, Tablet Cloud and Trinks. These investments broadened its software and vertical-market ecosystem, with options to acquire additional interests in several entities.
- Stone SCD received a Brazilian Central Bank license in July 2019 to offer credit using its own capital. FIDC SOMA was launched in October 2019 to help fund credit operations.
- The company adopted IFRS 16 using the modified retrospective method. At January 1, 2019, it recognized R$40.9 million of right-of-use assets and lease liabilities; 2018 comparatives were not restated.
Guidance, outlook, commentary and risks
No formal numerical revenue, earnings or TPV guidance is provided in the filing. Management expects continued investment in Stone Hubs, technology, software, digital banking, credit, customer support and capital expenditures to support growth. The company expects 2020 capital expenditures to be funded by existing cash and operating resources, although it also expects capital expenditures to increase as the business expands.
Management highlights Brazil’s underpenetrated electronic-payments market, increasing digital and omni-channel commerce, expansion into small and medium-sized cities, and cross-selling opportunities across payments, software, banking and credit. Fourth-quarter 2019 NPS was 68, unchanged from the prior-year period; 87% of customer-service callers reportedly received first-call resolution.
The filing identifies COVID-19 as a significant subsequent risk. It states that by the filing date, client store closures, reduced economic activity, higher capital costs and remote working had adversely affected client sales, TPV and working-capital margins. Potential effects include lower transaction volumes, higher credit defaults, liquidity pressure and reduced customer-service capabilities.
- High working-capital intensity and negative operating cash flow as card-issuer receivables grow.
- Substantial debt and FIDC obligations, predominantly linked to variable CDI rates, with significant near-term maturities.
- Credit, chargeback, fraud and merchant-default exposure, including risks from the company’s expanding credit products.
- Competition from bank-owned acquirers, PagSeguro, Adyen and other payment, software and financial-services providers.
- Cybersecurity, data-protection, system-outage and third-party service-provider risks.
- Brazilian regulatory uncertainty, including licensing, receivables registration, instant payments, open banking, AML requirements and the LGPD data-protection regime.
- Foreign-exchange, interest-rate, inflation, political and macroeconomic risks in Brazil.
- Possible dilution and governance limitations from the dual-class share structure. Class B shares carry ten votes per share, and founder shareholders controlled approximately 66.3% of combined voting power as of the filing’s ownership disclosures.
Most important facts for investors to verify
- Reconcile the reported R$804.2 million IFRS net income with the R$857.1 million adjusted net income and assess whether the excluded items are recurring.
- Review the sustainability of negative operating cash flow, the growth in card-issuer receivables and the economics of prepayment financing.
- Verify debt maturities, CDI-linked borrowing costs, collateral requirements, covenants and refinancing capacity, particularly the R$5.0 billion current portion of debt.
- Assess the actual financial impact of COVID-19 on TPV, merchant losses, credit defaults, funding costs and liquidity after year-end.
- Monitor regulatory approval for Pagar.me, compliance with Brazilian payments and data-protection rules, and the effect of instant payments and receivables-registration reforms.
- Evaluate acquisition and minority-investment performance, including the exercise terms and potential cash requirements of options to increase ownership.
- Confirm the treatment and recoverability of deferred tax assets, goodwill and other intangible assets; the filing reports R$373.7 million of intangible assets and no 2019 goodwill impairment.
- Consider governance and shareholder-alignment implications of founder control, related-party expenses and the absence of anticipated cash dividends.