XP Inc. Form 20-F Summary
Business context and reporting period
XP Inc. is a Cayman Islands holding company whose principal operations are in Brazil. The group provides brokerage, investment advisory, asset management, banking, private pension, insurance, issuer and financial education services through XP Investimentos, Rico, Clear and related platforms. The filing covers the fiscal year ended December 31, 2019 and presents audited consolidated financial statements under IFRS as issued by the IASB, with Brazilian reais as the presentation currency.
XP Inc. was incorporated in August 2019 to effect its Nasdaq initial public offering. The corporate reorganization contributed XP Brazil to XP Inc., followed by a four-for-one reverse share split. Class A shares trade on Nasdaq under “XP”; Class B shares carry 10 votes per share.
Revenue, profit, cash flow, margins, debt and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Gross revenue and income | R$5,518 million | R$3,216 million | +72% |
| Total revenue and income | R$5,128 million | R$2,958 million | +73% |
| Net income | R$1,089 million | R$465 million | +134% |
| Net income attributable to parent | R$1,080 million | R$461 million | +134% |
| Income before tax | R$1,544 million | R$641 million | +141% |
| Adjusted EBITDA | R$1,569 million | R$662 million | +137% |
| Adjusted net income | R$1,074 million | R$491 million | +119% |
| Gross margin | 68.7% | 68.2% | +0.5 percentage points |
| Net margin | 21.2% | 15.7% | +5.5 percentage points |
| Adjusted net margin | 20.9% | 16.6% | +4.3 percentage points |
| Cash and cash equivalents | R$888 million | R$627 million | +42% |
| Total debt, including lease liabilities | R$1,473 million | R$876 million | +68% |
| Net debt | R$585 million | R$249 million | +135% |
| Total equity | R$7,156 million | R$2,092 million | +242% |
Revenue growth was driven by retail expansion, higher brokerage commissions, management fees, securities placement revenue, institutional trading and issuer services. Retail gross revenue increased 56% to R$3,676 million; institutional revenue increased 66% to R$802 million; issuer services increased 185% to R$507 million; and digital content increased 108% to R$112 million.
Retail assets under custody increased 103% to R$409 billion, active retail clients increased 91% to 1.702 million, and retail assets under management increased 74% to R$44.7 billion. Net new money inflows were R$159 billion, up 134% year over year. The company’s reported Net Promoter Score increased to 73 from 64.
Cash flow from operating activities was negative R$3,814 million, compared with negative R$457 million in 2018, primarily because of increased securities, repos, derivatives, floating balances and private pension liabilities. Excluding these balance-sheet movements, management reported adjusted operating cash flow of R$1,527 million, compared with R$504 million in 2018. Investing cash outflow was R$161 million, and financing cash inflow was R$4,234 million, including approximately R$4.482 billion of IPO proceeds.
Debt consisted of R$382 million of borrowings, R$255 million of lease liabilities and R$835 million of debentures. The company was in compliance with its debt covenants and regulatory capital requirements at December 31, 2019. Contractual obligations totaled R$1,472 million, including R$552 million due within one year.
Material changes versus the prior comparable period
- Total revenue and income grew 73%, while net income grew 134%, reflecting substantial operating leverage.
- Operating costs increased 71%, primarily from higher IFA commissions and clearing fees. Selling expenses and administrative expenses each increased 61%, reflecting investments in marketing, personnel, technology and infrastructure.
- Employee headcount increased from 1,593 to 2,429, while technology personnel and platform investment expanded materially.
- Other operating income improved to R$153 million from a R$31 million expense, benefiting from R$70 million of recognized PIS/COFINS credits and R$102 million of B3-related incentives.
- The effective tax rate increased to 29.44% from 27.20%.
- Adjusted net income was below statutory net income because the company recognized a one-time R$71 million tax claim benefit, partially offset by IPO expenses of R$22 million, share-based compensation of R$8 million and related taxes.
- The company completed its Nasdaq IPO in December 2019 at US$27 per Class A share. The offering included newly issued shares and shares sold by existing shareholders; the company did not receive proceeds from the secondary sale.
- IFRS 16 was adopted in 2019 using the modified retrospective method, resulting in recognition of right-of-use assets and lease liabilities without restating prior periods.
Guidance, outlook, management commentary, risks and unusual items
Management did not provide numerical revenue, earnings or margin guidance in the filing. Its stated strategy is to increase share of wallet, expand the retail client base and IFA network, broaden investment and banking products, develop insurance and pension offerings, grow issuer and institutional services, and enter adjacent areas such as cards and lending. Banco XP began limited operations in late 2019 and expanded services to clients in 2020. A Visa agreement announced in March 2020 contemplated debit and credit card offerings.
The filing identifies COVID-19 as a significant subsequent-event risk. Management expected market declines and volatility to affect asset values, performance fees, issuer services, investment flows and client preferences, but stated that the ultimate impact could not yet be predicted. The 2020 EXPERT event was cancelled, with a digital alternative being considered.
- Brazilian economic, political, interest-rate, inflation and foreign-exchange volatility may affect trading volumes, asset values, client inflows and revenue.
- Competition from traditional banks, digital platforms and other financial institutions could pressure pricing, client retention, IFA recruitment and margins.
- The business depends materially on XP CCTVM, B3, institutional clients, dealer counterparties, independent financial advisors and external technology providers.
- Cybersecurity breaches, system failures, data loss, fraud and service interruptions could result in litigation, regulatory sanctions, client losses and reputational damage.
- Regulatory, tax, antitrust, data-protection and licensing requirements are extensive and evolving. The Brazilian LGPD was scheduled to take effect in 2020 or potentially 2021, with significant possible penalties.
- The company disclosed material weaknesses in access controls, end-user computing controls, and revenue recognition controls. Management stated that the weaknesses had not caused a material misstatement and that remediation was in progress, but disclosure controls were not effective at year-end.
- Legal proceedings included R$15 million of provisions and R$18 million of judicial deposits. Possible-loss contingencies totaled approximately R$154 million, including R$69 million of tax matters and R$81 million of civil matters.
- XP Controle held 64.61% of Class B shares and approximately 54.79% of voting power. The dual-class structure, shareholder agreement and related veto rights significantly limit the influence of Class A shareholders.
- The company has no established dividend policy. Dividends depend on board and shareholder decisions, subsidiary distributions and applicable regulatory restrictions.
Most important facts for investors to verify
- Reconcile statutory net income, adjusted net income and the effect of the one-time PIS/COFINS tax credit and IPO-related costs.
- Assess the sustainability of the 2019 revenue growth, particularly securities placement, performance-based management fees, B3 incentives and other operating income.
- Distinguish recurring operating cash generation from balance-sheet cash movements related to client floating balances, repos, securities and pension liabilities.
- Review debt maturities, CDI-linked interest exposure, covenant headroom and liquidity available for the R$435 million of debentures due within one year.
- Monitor remediation of the disclosed material weaknesses and whether subsequent filings conclude that disclosure controls and internal control over financial reporting are effective.
- Track the financial effects of COVID-19, market volatility, client inflows, asset values, trading volumes and issuer-services activity.
- Evaluate possible litigation and tax exposures, including the R$154 million of contingencies classified as possible losses.
- Consider governance and minority-shareholder implications of the dual-class structure, controlling shareholder concentration, shareholder agreement veto rights and potential future share sales.
- Verify the filing’s IPO share-count and proceeds disclosures against the audited financial statement notes and subsequent SEC filings, as the text presents differing descriptions of shares sold and issued.