StoneCo Ltd. (STNE) Q2 2019 Earnings Call Transcript

StoneCo Ltd. (STNE 0.07%)
Q2 2019 Earnings Call
Aug. 14, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the StoneCo second quarter 2019 earnings conference call. By now, everyone should have access to our earnings release. The company also posted a presentation to go along with its call. All material can be found at www.stone.co on the Investor Relations section. Throughout this conference call, the company will be presenting non-IFRS financial information including adjusted net income and adjusted free cash flow. These are important financial measures for the company but are not financial measures as defined by IFRS. Reconciliation of the company's non-IFRS financial information to the IFRS financial information appears in today's press release.

Finally, before we begin formal remarks, I would like to remind everyone that today's discussion might include forward-looking statements. These forward-looking statements are not guarantees of future performance. And therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the company's expectations. Please refer to the forward-looking statements disclosure in the company's earnings press release. In addition, many of the risks regarding the business are disclosed on the company's Form 20-F filed with the Securities and Exchange Commission which is available at www.sec.gov.

I would now like to turn the conference over to your host Rafael Martins, Investor Relations Executive Officer at Stone. Please proceed.

Rafael Martins -- Investor Relations Executive Officer

Good evening, everyone, and thank you for joining us today. Joining me on today's call are Thiago Piau, our CEO; Marcelo Baldin, VP of Finance; and Lia Matos, Chief Strategy Officer.

As you know, on July 30th, we announced preliminary metrics for the second quarter of 2019 as well as our joint venture with Grupo Globo. On this call, we will present our full operational and financial results for the second quarter, update you on our strategic progress and give additional details on our company's evolution.

Thiago will start with some exciting strategic updates. Thiago?

Thiago Piau -- Chief Executive Officer

Thank you, Rafael. Good evening, everyone. Thanks for joining us today. Some remarks here.

During the second quarter, we made great progress on our strategic long-term plans. We have summarized the highlights on slide three. First, our business continued to grow fast and with profitability. In the second quarter, we reached almost 30 billion in TPV and preliminary industry data indicates we had our largest quarterly market share gain over the last year reaching approximately 7% of the total market. We also accelerated the pace of adding new clients. In the second quarter, we posted a record of more than 50,000 new clients bringing us to a total of over 360,000 active clients, 80% growth when compared to last year.

While accelerating our growth, we kept our take rates stable at 1.85. And despite heavy investment for future growth, our adjusted net margin was above 33% in the quarter. Our second-quarter results demonstrate the success of our business model and our team's execution capabilities. We have been able to combine high growth and profitability in a way that very few companies have. This was only possible because our clients see that in our services and in our products, which gives us the confidence to invest even more in the business and accelerate our expansion.

We dream very big and we want to accomplish much more to help our merchants. Before Lia and Rafael discuss our second-quarter results in more detail, I want to take a few minutes to talk about our strategic vision and plans for growth.

I'm pleased to report that in addition to second-quarter financial results, in July we reached three important milestones on our strategic growth initiatives. First, we have made great progress in growing beyond payment solutions. We have more than 70,000 clients with software subscriptions and that's more than twice the number of software clients we had just one quarter ago. It is important to highlight that's mainly organic growth.

Secondly, since we launched the credit solution at the beginning of March, we have already supplied credit to over 3,000 clients with a total disbursement of more than R$50 million. And finally, we have formed a joint venture with Globo, the largest media group in Brazil to go after the huge opportunity to serve micro-merchants in the country. These milestones represent significant progress toward achieving our goal of becoming the partner of choice for merchants, providing them a full range of solutions.

Today in Brazil as you see in slide 4, merchants must go to multiple providers to address these needs. You've heard us say many times that more and more we see the boundary zone on payments banking credit and software being broken down. We truly believe that our merchants deserve to fuel their transaction support needs with one single touchpoint within seconds. Stone is driving this breakthrough and we will continue to lead this evolution in Brazil.

On slide 5 we show how we are evolving our solution going forward in two different groups, our ABC platform, and software. The ABC platform is an expansion of the core payment business. Soon, we will offer our client access to acquiring banking services, credit, and prepayment in one single technology platform. This will give clients a holistic view of their cash flow and help them be more productive.

Under the software strategy, we provide horizontal and vertical-specific solutions to our merchants. We currently offer software through three verticals, food service, retail, and most recently beauty with a POS and ERP designed for beauty salons. We plan to grow our software client base mainly organically and we see great opportunities to cross-sell software to our payment client base as Lia will show in a second. With the combination of our ABC platform and our software solution, our clients will have pretty much everything they need to start, run, and grow their store either online or offline. Having a financial platform combined with software is core to our strategy.

We want to be leaders in providing integrated solutions on a large scale both from a technology and customer service point of view as shown on slide 6. Our vision is to help our merchants to better manage their store and sell more, bridging the gap between the digital and brick and mortar channels. As you can see on this slide, everything starts with our agent. We establish a very close relationship with our merchants and can help them with all of their financial needs with a single platform such as accepting all payment methods, having a bank account specifically designed for merchant needs, and having access to credit in a very simple and transparent way. Once we onboard a merchant on this platform, our Green Angel proves how dedicated we are in terms of support delivering our POS hardware in less than 24 hours.

More than our financial platform, through our point of sales software we help our merchants to better manage their store and we integrate their inventory with digital channels such as marketplaces, social media, and e-commerce. As our clients start selling online, our Green Angels go back to our merchants and help them with last-mile logistics saving them precious time, so they don't need to go to the post office for example. The great thing about this vision is that we can offer it with an unparalleled level of integrated customer service where we take our merchants phone call in four seconds or less and solve 92% of their requests on the line. We see a lot of untapped opportunities ahead of which we intend to pursue with financial discipline always keeping in mind the long-term goals of our company.

We look forward to reporting to you in the future our strategic progress and results in these areas. Now, I would like to hand the call over to Lia so she can give you more details on our financial and software solution and an update on the HUB strategy.

Lia Matos -- Chief Strategy Officer

Thanks, Thiago. I want to start by commenting on our progress in providing working capital solutions. You will see on slide 7 that our credit offering began to scale during the second quarter. It is actually growing ahead of our expectations. As of July, we had over 3,000 clients and dispersed a total volume of more than R$50 million.

The commonly available ways for merchants in Brazil to get working capital funding are through credit and prepayments. We see prepayment and credit as one single revenue pool with a total adjustable market of approximately R$80 billion. We currently only have 1% of this market and we see huge potential as it is still very overpriced and underserved by the current players.

Throughout the quarter, we started to offer preapproved credit lines for selected clients through our Stone portal improving the user experience. We have also obtained the SCD license from the central bank which allows us to offer credit on our own giving us more flexibility and room to grow our client offering in the future. The other part of our financial platform is our banking solution which is intended to be offered to clients in two different ways.

First, through our Stone digital account which is currently in prelaunch phase and has more than 10,000 accounts. The second is by allowing consumer-facing apps and other partners to connect to our platform via APIs and offer banking services to their own clients. With a client-centric approach, we are expanding the roadmap of features to offer the best digital account built for SMBs. The feedback to date has been incredibly encouraging.

Now, let's talk about our software solutions turning to slide 8. We have been adding hundreds of clients a day which allowed us to grow our number of subscribed clients from approximately 32,000 at the end of the first quarter to close to 70,000 in July, more than doubling in a short time. This growth has been virtually all organic. Also, as the graph on the right side of the slide shows, there is a clear opportunity to cross-sell software to our clients in payments. Among the 70,000 software clients, 46,000 are also our clients in payments and are included in the number of 360,000 active clients that we just reported.

We started our client relationship with payments achieving the best NPS in the country and now we are starting to offer software focusing on rolling out horizontal offerings at first. As we deepen our relationships with clients, we will offer them a more complete set of management tools in specific verticals creating stickiness and growing our client base organically. In addition to growth from our new banking and software solutions, we still have plenty of room to grow in our Hubs as you can see on slide 9.

Our market share in terms of merchant count continues to grow both in locations where we have a long-standing presence as in cities where we've entered more recently. In fact, we grew market share by more than 20% year to date in mature cities compared to five times increase in less mature ones which are both great results. This proves the power of our value proposition over time despite an environment of increasing competition.

Now I will turn the word to Thiago so that he can comment on the JV we announced in July that will allow us to enter a huge market.

Thiago Piau -- Chief Executive Officer

Great, Lia. Thanks a lot. As Lia just showed, we are very focused on building the best platform for our merchants. With the Hub strategy, we created a very solid business model for small and medium businesses where we still have a sea of opportunity to explore. As I indicated before, we will invest even more to accelerate growth and expand our successful business. At the end of '18, we de-contested and standardized our solution for a fast-growing segment in Brazil with over 20 million autonomous workers. We learned that a critical asset for success in this market is media and marketing capabilities. So, we are looking for the right partners to bring that to the table.

We are thrilled to form a JV with Grupo Globo, the biggest media conglomerate in Brazil. As shown on slide 10, we are creating a heavyweight contender in the micro merchant space combining the vast media and marketing experience of Brazil's top media company and Stone's expertise in technology, payments, and financial services.

In addition to its high penetration within micro-merchants and unique communication capabilities, Grupo Globo contributes an upfront investment of R$461 million in media. In addition to operational support, technology, and payment processing capabilities, Stone will contribute R$15 million in cash. The JV is expected to start their operations in the fourth quarter, and we will have a dedicated team with Caio Fiuza as CEO. Within Stone itself, we remain focused on SMBs and digital clients. We look forward to replicating our success in the SMB segment and providing a great experience to autonomous workers and micro-merchants all over the country. We're defining relationships between providers and clients in this segment.

A core value here at Stone is simply creating synergy by forming partnerships enable us to go far beyond what we can achieve alone. We are very happy to welcome our new partners and very confident that together we can address this huge opportunity with the talented and dedicated team of Grupo Globo.

With that, I will turn it over to Rafael to provide details on our second-quarter financial performance.

Rafael Martins -- Investor Relations Executive Officer

Thank you, Thiago. As previously mentioned, we continue to evolve our business, improve our solutions to merchants, and grow fast all with very healthy margin levels. On our previous conference call, we mentioned that we would increase investment in our operations and especially in our Hub strategy. As you know, when we invest in a Hub, we put costs upfront and later benefit from significant operating leverage as the Hub matures.

Although our investment is recent, we are already starting to see positive results in our main KPIs. As you've just heard, in the second quarter, we reached the mark of over 360,000 active clients with a record of more than 50,000 net adds in the second quarter of '19. It's important to highlight that the net adds improved each month within the quarter with 19,000 net adds in June alone. This gives us confidence that in the coming quarters we should see net addition of clients grow even more than the 50,000 that we presented in this quarter.

As you see on slide 11, in the second quarter of '19, we also achieved 61% year over year growth in TPV representing an increase from the previous quarter growth. Total revenue and income for the second quarter increased by 69% year over year to more than R$586 million compared with nearly R$348 million in the second quarter of 2018. This growth was driven by a year over year increase of 56% in net revenue from transaction activities and other services, a 60% increase in net revenue from subscription services and equipment rental, and a 62% increase year over year in financial income.

As you see on slide 12, cost of services was nearly R$101 million for the second quarter, an increase of 44% compared with the second quarter of 2018. Cost of services as a percentage of total revenue and income was 17.2%, an efficiency gain of three percentage points over the prior-year period and a 1.3 percentage point deleverage compared with the first quarter of 2019. The quarter over quarter dip was mainly due to higher logistics and customer service costs as we further invested in our operations as well as higher provision losses.

Moving on to administrative expenses. In the second quarter of 2019, they increased by approximately 32% year over year to R$77 million. Administrative expenses as a percentage of total revenue and income were 13.2% in the second quarter of '19 compared to 16.8% in the second quarter of 2018, an efficiency gain of 3.6 percentage points in the period as the company dilutes its fixed costs. Compared with the first quarter, administrative expenses as a percentage of total revenue and income increased by 1.1 percentage points explained mainly by higher third-party services.

Selling expenses grew by 99% year over year reaching over R$87 million in the second quarter of '19. This increase was primarily due to additional headcount in our sales team in line with our commitment to accelerate investment in Hubs.

Financial expenses were nearly R$79 million, 6% higher than the second quarter of 2018. Financial expenses as a percentage of financial income fell from 40.3% in the second quarter of '18 to 26.5% in the second quarter of '19. This decrease resulted from a lower cost of funds due to lower base rates, cheaper funding length, and the use of more own cash to fund prepayment operations combined with higher financial income. Compared with the first quarter, financial expenses increase 18% in line with financial income.

As you see on slide 13, our second-quarter adjusted net income was R$194 million with a margin of 33.1% compared with R$71 million adjusted net income and a margin of 20.5% in the second quarter of 2018. The main factors that contributed to the growth in adjusted net income year over year were an increase in total revenue and income, operating leverage in costs of services and administrative expenses, and reduced cost of funds as we gain access to cheaper funding and increase the use of own cash to fund the prepayment operations. Compared with the first quarter of 2019, our adjusted net margin was negatively impacted by higher investments in our operations, partially offset by lower tax rates mainly due to interest on capital and R&D tax benefits.

During the second quarter, we invested more than R$30 million in expanding our operations and in training to our employees which led our cost and expenses to increase as a percentage of total revenue and income from 39.7% in the first quarter to 45.3% in the second quarter in line with our strategy of increasing the investment in our operation to expand growth.

Overall, in a time when the market keeps competing solely on prices, we were able to maintain our take rate flat at 1.85% balancing growth and profitability. Achieving the right balance between investments and profitability is key to generating a higher return to our long-term investors.

Finally, let's look at cash flow. As shown on slide 14, we generated almost R$80 million of adjusted free cash flow in the second quarter of 2019 compared with nearly R$13 million of negative free cash flow in the second quarter of '18. The main reason for the increase was an improvement in our adjusted net income year over year which was partially offset by higher outflows from income tax paid, labor and social security liabilities, and other accounts receivable.

With that said, Operator, please open the call up to questions.

Questions and Answers:

Operator

Thank you. We will now begin the question and answer session. If you have a question, please press *1.

Our first question comes from Eduardo Rosman from BTG Pactual. You may proceed.

Eduardo Rosman -- BTG Pactual -- Analyst

Hi, everyone. Congrats on the results. Congrats on the partnership with Grupo Globo. I have two questions. The first one, I'm trying to understand here the dynamics of net adds. You can see here that you a great achievement during the quarter, but we saw as well that -- we saw a big evolution throughout the months. So, it seems that in April I think you got like 15,000 and then at the end of June 19,000. I just wanted to understand if something changed during the quarter if you suffered from any special event. We had HeJune announcing the D plus two. I'm not sure if you suffered anything from that or if you had to change somehow the strategy during the quarter to accelerate the growth. So, I just wanted to understand how these dynamics worked during the quarter. That's question number one.

Question number two is on your opex. On a year on year basis you continue to improve your margins but when compared to the previous quarter expenses picked up. So, we can clearly see that you are investing to grow. So, I just wanted to understand if you are still kind of opening one new Hub per week. I also want to understand if this kind of pick up in growth, how much is related to the current business of acquiring and growing the Hubs and how much it is related to new initiatives such as the software, digital banking, etcetera? Thanks a lot.

Rafael Martins -- Investor Relations Executive Officer

Hi, Rosman. Rafael here. Thank you very much for the question. So, regarding your first question of net adds, nothing specific in the quarter. So, we have continued investing in the business. That increased net adds within the quarter is something that we are already planning and is a result of our investments. So, our expansion in the Hubs and our continued productivity within each Hub. This is nothing very specific or regarding competition and nothing related to that.

To your second question in opex, you are right. As we said in the last quarter, we invested this quarter in our growth. That's why you see the opex increasing quarter over quarter. When you look at each line item, you see that the investments that we have made to grow, if you exclude that you would see pretty much the same percentage of revenue in those costs and expenses. So, as an example, if you see our COS, our cost of services, it has increased a little bit as a percentage of revenue but for example transaction costs they have decreased as a percentage of revenue. And the same way with administrative expenses. If you look, we are having operational leverage with our personnel in that line as well. So, the big part there is an investment in the Hubs, customer service, logistics, and technology. That was the bulk of it.

And regarding still your first question in net adds. I think nothing very new in the competitive environment. I think that Thiago can address that point.

Thiago Piau -- Chief Executive Officer

Perfect. Thank you, Rafael. Thank you, Rosman, for the questions. It is a great question. One comment about net adds is that we expect net adds to continue to grow quarter over quarter. As you can see, we are growing June our net adds more than we were in April and we expect this trend to continue with bigger net adds quarter over quarter.

So, regarding competition, I will take this opportunity to talk about two specific comments regarding short-term dynamics and long-term dynamics. First is that I understand that capital markets are worried about competition impacting our take rates in the short-term and announcements of our competitors. To help our investors understand our perspective on these worries, what I can say is that I don't expect significant changes in take rates in the next quarter. Take rates can go up or down two or three basis points because of client mix. As you know, we have digital channel integrated partners with some large account clients and we have our Hubs. But we are not concerned with competition for incumbents impacting our Hub strategy or our ability to grow. That's the first comment.

The second comment is that in our calls we have talked a lot about competition with incumbent payment players. But in reality, we see our market in a different way. Our clients today, they pay about 2% take rates in our payment product and if you consider a R$20,000 on average TPV, this represents R$400 a month that our clients pay to use. While the market is worried about where this R$400 can get to, we see that our clients pay to R$200 fees monthly for POS in our peer solution that really don't have high-quality. More than that, accounting many times is a nightmare for our clients. They pay R$800 or R$1,000 a month for accounting services. Beyond that, every time someone brings a new sale for them such as marketplaces or food delivery platform, they pay 16% to 20% in fees in this new sale.

So, in our vision, we seek to provide all the service our clients need to run their operation, integrate them with digital channels and marketplaces, and help them with last-mile logistics using our 100% integrated platform and with a customer experience where we can solve all of their problems in one simple phone call in four seconds. Our team is more than happy to be there for them whenever they need. So, I'm proud to say that we have an incredible team that quarter over quarter protects our core business. We are expanding our vision. We are evolving our strategy, 100% oriented to our client's needs. This obsession of over customers and the fact that we see many opportunities in the business of our clients is something really unique which you don't see other places trying to build.

So, that's my take with regarding the competitive dynamics during the quarter. Thank you very much for your question, Rosman.

Eduardo Rosman -- BTG Pactual -- Analyst

Thank you very much.

Operator

Our next question comes from Chetan Dhadankar, Goldman Sachs.

Chetan Dhadankar -- Goldman Sachs -- Analyst

Hi. Good afternoon. Thanks for the call. I have a couple of question as well. One, just following up in terms of your growth in clients and also with TPV. We're seeing clients grew 80% but TPV is growing around 61%. I understand that you're probably going into more smaller merchant and more into your core business. Should this trend continue where clients grow faster than TPV? How should we think about that evolution?

And then the second question in terms of the new products with credit and software. How should we think about that? I guess on the credit side what percentage of your financial income will come from credit versus prepayments? Any color you can give on that? I know it is still kind of early but I just want to get a sense of how we should forecast that into our number. Then, also, with the software, how much can you reach in terms of potential penetration? If you have 70,000 clients now, how fast does that grow? Thank you.

Rafael Martins -- Investor Relations Executive Officer

Hi, Chetan. Rafael here. Thank you very much for the question. Regarding your question for TPV, you still see a slight decline in TPV per client and that's mainly because of the mix of clients still. So, whenever we go to the countryside in Brazil, you have the same type of clients selling a little bit less. So, that's still the effect you see here. Despite that, we were able to grow 60% TPV. When you look at the market share in that quarter, this is the quarter where we gained more share if you look at the last year all of the four quarters. So, I think we have been able to grow TPV at a healthy pace.

Over the long-term, of course, this trends when you look at the FNB in the country you should have more aligned growth. So, this is what we are seeing from a TPV perspective. Regarding your next question, Lia is going to answer.

Lia Matos -- Chief Strategy Officer

Thank you for the question, Chetan. So, talking a little bit about new products and specifically about the financial services part of those products. As we said, we were incredibly encouraged with the growth of our credit offering. We started piloting it and it's been growing way ahead of our plans. Like we mentioned, we launched credit and banking this year and when we did that our core payments platform was already pretty evolved. So, we launched those three solutions separately. What we're seeing, and because of the very good feedback that we're getting from our clients, is that natural evolution is to really integrate these three offerings into a single financial platform that we are calling ABC as you saw in the presentation. So, we will naturally evolve to offering one single financial platform where our clients can use multiple sets of financial services.

Like we also said, regarding prepayment and credit, we see this as part of the same revenue pool. So, we see that there is a humungous opportunity. We've tapped so far 1% of this addressable market. We see a lot of leeway for growth in the future.

Thiago Piau -- Chief Executive Officer

Just to add in terms of credit and prepayment dynamics. As Lia said and was shown on slide 7, the total markets in terms of financing merchants in Brazil with credit and prepayments is very big. Every time merchants need money to match accounts receivable and payables, we can do this by prepayment. And every time they need money to grow, to buy more inventory, or to open a new store, we can do this using our credit solution. We don't seek to bear risks in our balance sheet in terms of this credit operation. So, we see an opportunity to have partners in terms of this credit opportunity in which we can originate the credit, we can have our relationship with the merchant to help them understand exactly how much they are paying. The ability of the merchant to pay as a part of their volume but not bearing the risk of this credit and having a strategic partner to bear this risk. That's the only comment because now we have the license of the SCD which is an entity in Brazil that gives the ability to give credit directly to our merchants, but our strategy is not to bear the risk of this credit in our balance sheet.

Chetan Dhadankar -- Goldman Sachs -- Analyst

Great. That's very helpful. Maybe if I could just follow up. Just in terms of helping us think about the growth or how quickly it grows. If you're growing financial income today roughly around 50%, can that growth accelerate from here given these additional products? Is that how we should think about that?

Thiago Piau -- Chief Executive Officer

It's very difficult for us to say forward-looking statements about this. We don't like to give guidance in terms of the future. The credit opportunity is very, very big as we already said. We are mainly focused at this point on three fronts. Which is integrating all the offering of payments, banking, credit as you can see on slide 5 to have one single platform for all of our clients? That's the first focus. The second one is rolling out the software for our entire base. The third one is growing credit. So, we see that software is the strategy to reduce churn and create more stickiness and definitely credit is the way that we can have more yields in the future. It's really a big opportunity. We will invest heavily on that, but we don't want to take the risks of the client. We will evolve this looking for these topics that I just told you.

Chetan Dhadankar -- Goldman Sachs -- Analyst

Okay. Great. Thank you.

Operator

Next question comes from Mario Pierry with Bank of America.

Mario Pierry -- Bank of America Merrill Lynch -- Managing Director

Hi, everybody. Congratulations on the quarter. Let me ask you also a couple of questions, please. The first one of the Globo partnership here. If you could be more specific on how you're planning on addressing the micro merchant segment. How are you going to price your products? You already have one competitor that is very present there. They have a very transparent pricing structure. I was wondering if you're going to try to replicate the model or if you have a completely different strategy if you're going to be using the same Stone brand or are you going to differentiate? Also, when I look at your client base today, what percentage of your clients do you think are already these micro merchant segment?

Then the second question that I have is when we look at the growth in software clients, this big growth. Is this because your clients are more aware of your product or is it because you're launching new products and clients are seeing the value? I'm just trying to understand here because you made a few acquisitions during the quarter of software providers. So, I was wondering what is attracting the clients here. Is it new products that you're introducing or it just that they are aware of your products now? What are you doing to get people more interested in signing up and using your software products? Thank you.

Thiago Piau -- Chief Executive Officer

Great, Mario. Thank you very much for the question. It's a great question. I will start answering the question regarding the JV with Globo and then Lia will talk a little bit about the software part. So, to your question, we will have a separate brand for this operation. So, we are looking to launch this in the fourth quarter. We are creating this brand. It will be linked to Stone, but it will be a separate brand and we are creating here with Grupo Globo. We are happy to see that we will be a heavyweight contender, a top player in this market. We think that the market is very big. It has space for everyone, but we seek to be a top player in the market. Our differentiation will be in three main areas.

First, we will redefine customer service for micro-merchants as we already do for SMBs. The second part is that the level of marketing data and consumer intelligence of Grupo Globo will allow us to be very efficient in customer acquisition and the distribution of this product will be mainly through digital channels. As we already have an efficient operation and a best-in-class technology as you know for our core business, we think this will create the ability for us to pass part of these efficiencies to our clients using price. So, pricing something that we can use. Those are the three main areas that we are looking in terms of this joint venture with Grupo Globo. We will have more details about our solution, including the price, brand, and feature to disclose to the market when we officially launch the JV. And we are planning to report this joint venture separately once we launch the operation. So, that's something that we are talking with our auditors, but we seek to report the joint venture separately.

The client base in terms of micro-merchants at this point is very, very small. It's almost irrelevant. Very low single-digits. So, it's very, very small as we said in our earnings call before. Those are the takeaways regarding the JV with Globo. Lia, do you want to talk about the software part?

Lia Matos -- Chief Strategy Officer

Sure. Mario, to highlight a couple of points in software and especially the recent organic growth that we saw in software. I think the first thing is this organic growth speaks to the power of our distribution. So, the fact that we can own distribution on all fronts and that interact directly with our merchants really gives us a very good position in terms of being able to offer anything beyond payments, really. So, anything that our merchants need. I think that's the first important point.

And the second is our ability through technology integrated software offerings, through our core payments offerings, this really allows us to offer software in a very simple way. I think the other very important points is that all of our merchants as we see it, they use software today. They interact with thousands of local providers that are spread out throughout Brazil. So, this is a very, very fragmented market. These solutions tend to be relatively low-quality on-premise solutions. So, there is a huge untapped opportunity, as Thiago has already mentioned, and I think those are the elements that really explain our ability to have been able to grow organically in software.

Thiago Piau -- Chief Executive Officer

Let me just go back to the joint venture with Grupo Globo again because I know that there are some questions about the client base. I just want to make sure that I address this right.

We are not entering the micro merchant space because we see competitive pressure in the SMBs. It's actually the opposite. We continue to be extremely excited with the SMB opportunity as we communicated in our vision. We also see a lot of opportunities in the micro merchant space. That's why we want to have both operations separately and we will report separately for the market to see net adds take rates, and all the KPIs of both operations separately. But our focus continues to be 100% on the SMBs. We are very excited about everything that we can do for our merchants from now on. We expect to continue to grow net adds quarter over quarter as we have done so far.

Mario Pierry -- Bank of America Merrill Lynch -- Managing Director

Perfect. Very clear. Thank you very much.

Operator

The next question comes from Felipe Salomao with Citibank.

Felipe Salomao -- Citibank -- Analyst

Hi. Goodnight, Thiago, Rafael, Lia. Thanks for answering the questions. I have two questions. One is a follow-up from Mario's question and then I will make a different one. The first one is about the new software offerings. Stone had a very strong organic growth of 35,000 new clients. My question is are most of these clients paying an additional fee for these software services or the offering of these software services is actually embedded within the subscription fee that Stone was already charging from all the SMB clients since day one? Are these new software offerings generating additional revenues or just helping to keep the take rate stable? That would be my first question.

And the second question is about the TPV per average client. So, the TPV per average client was down 13% year on year and 3% quarter on quarter. Would it be possible to get a better sense on what are the key reasons behind this marginal decrease? Should we not expect TPVs per merchant to actually grow given that merchants are becoming more familiar with Stone's services and are willing to increase the usage of Stone's POS devices while no longer using increment payers? So, I just want to get a better sense of this specific trend. Thank you very much and congratulations on the very strong results.

Lia Matos -- Chief Strategy Officer

Thank you, Felipe. I'm going to take the first part of the question and then Rafael is going to answer the second. So, regarding software, again, in the context of subscription revenue like we mentioned we are offering this software as an integral part of our offering. So, we do not at this point charge beyond the subscription revenue. We are focusing on sustaining stable take rates. Most importantly, on growing the base of merchants that use software integrated with payments, what we are seeing is very encouraging early results in churn reduction for the clients that actually use our software offering. So, I hope that answers your question and I'll pass on to Rafael to answer the second part.

Rafael Martins -- Investor Relations Executive Officer

Hi, Felipe. Thanks for the question. So, regarding the TPV per client, as you mentioned it decline 3% quarter over quarter. We still see the dilution of large clients we have in our base because when you look how fast we are growing the SMB space and if you see in a Hub the average TPV is a little over 20,000. So, it's lower than our average TPV today. You still have that effect. It's not migration or the clients leaving us. That's the main reason. We still see the dilution of large clients there.

Felipe Salomao -- Citibank -- Analyst

Okay. Thank you, Lia. Thank you, Rafael, for the answers.

Operator

The next question comes from Daniel Federle with Credit Suisse.

Daniel Federle -- Credit Suisse -- Analyst

Hi, everyone. Thank you very much for taking my questions. The first one is to try to understand a little bit better the dynamics in the prepayment revenues. We continue to see prepayment revenues growing pretty healthy in spite of some competitors offering the prepayment of single installment transactions for free. My question is if Stone is not suffering or feeling any pressure in reducing the interest rates for single installment transactions, or if Stone is offsetting these with higher fees in multi-installment transactions or with higher volume? And my second question is a follow-up on the strategies in the micro merchant segment. I'm just trying to understand if I understood correctly and Stone is seeing an opportunity to practice lower prices in this segment? Thank you very much.

Thiago Piau -- Chief Executive Officer

Hi, Daniel. Thiago here. Thank you for your question. Very good question. First, regarding the prepayments. We are not using higher rates in the client base to offset these announcements of competition as you have asked us. Actually, we said many times that our business model is very protected from competition because of the value proposition that we offer. Having our agent close to our clients, having our customer service with such high-quality service that we offer to our merchants. And I think that the results of this quarter prove the ability of these teams to protect its core business and how strong our business model is. Actually, we continue with the same level of prepayments and the same strategy. We are really not suffering from this effect that you just mentioned.

And the second part of the question is regarding --

Lia Matos -- Chief Strategy Officer

Micro merchants.

Rafael Martins -- Investor Relations Executive Officer

Is your question on micro-merchants regarding price? Is that right?

Daniel Federle -- Credit Suisse -- Analyst

Yes.

Thiago Piau -- Chief Executive Officer

Yes. We do have the option to use price. So, it's something that we will take into account as we launch this operation. We believe that we already have a technology platform that is very high quality and makes a difference for our clients and that service is something that our clients do see the value. So, those are the first ones that we will use. But if needed, we have price to use because our operation is very, very efficient. That's something that we will have in mind.

Daniel Federle -- Credit Suisse -- Analyst

Perfect. Thank you very much.

Lia Matos -- Chief Strategy Officer

Thanks.

Operator

Our next question comes from Joseph Foresi with Cantor Fitzgerald.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Hi. A couple of questions from me. Could you provide us with an update on your Stone Hubs buildout and what your targets are for this year? And then maybe you could also give us a little bit more color on some of the financial options for the merchants and how you expect that to change as you move more to micro merchant level. And then, finally, I just wanted to get some general comments around the central bank and some of the moves toward real-time payments and technology and the pricing environment. Thanks!

Lia Matos -- Chief Strategy Officer

Yeah. Thank you, Joseph, for the questions. Regarding Hubs, what we can say is that we continue to accelerate our Hub openings. So, over the second quarter, we opened over two Hubs every week. Although we don't give any guidance in terms of the number of Hubs that we expect to reach in the long-run, what we can say is that we continue to see a lot of opportunities both in opening new Hubs as well as to further penetrate the Hubs that we are already in as you could see on page 9 of our presentation. That's regarding Hubs. I'm going to skip to the third question and then I'm going to ask you to please repeat the second question because I think we didn't get it very clearly.

I believe your third question was regarding SaaS payments, right? So, we see SaaS payments as a certain evolution. In Brazil we see the regulator creating a framework to talk about SaaS payments and that opportunity. Like we said before in previous calls, we have our open platform that is very adapted to the reality of where regulators are pointing in terms of that evolution in Brazil, which is very similar the kind of evolution that happened in Europe. We see the SaaS payments as just one more payment method. It's likely to disrupt debit and cash and we see this disruption happening much more on the consumer side than on the merchant side. So, the merchant side of the business in Brazil has already been significantly disrupted and we believe that our role here is to really help merchants accept any type of payment method.

Brazil has a large complexity of payment methods already in existence. So, debit and credit cards, vouchers, Boletos, and now SaaS payments is yet another form of payment. We will enable our merchants to accept that as well as another form of payment. And most importantly, through software and our tools, to reconcile all of those payments to make their life and their cash management pretty easy. And if I may just ask you to repeat the second question again?

Thiago Piau -- Chief Executive Officer

Lia, may I just add one comment on the SaaS payment part?

Lia Matos -- Chief Strategy Officer

Sure.

Thiago Piau -- Chief Executive Officer

So, we don't believe that in Brazil we will have very big closed look schemes as you have in other countries mainly because of regulation. We have a rule that if a scheme goes over R$20 billion in volume in 12 months, it is obligated to be an open scheme which represents that every payment company that onboard merchants will have the ability to onboard their merchants into this payment scheme and every issuer will have the ability to issue these payment methods. So, that's a rule that the central bank put it the market. So, we don't think we will have in Brazil an environment with big closed loops schemes as exist in other countries. So, for us, it will be this new payment method, SaaS payment methods will be one more payment method for us to help our merchants to accept and manage all the cash flow in a single platform.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Got it. And my second question was around slide number 7. You had talked about working capital and for us in the US market installment payments and some of the commentary around that and the financing aspect of what you do is fairly new. So, I wanted to get your feedback on sort of the trajectory of that and how it might change as you move more to micro merchant level.

Thiago Piau -- Chief Executive Officer

Great. So, we don't expect big changes in terms of how this operation works. Mainly because prepayments in Brazil is the way that our merchants use these products to fund their clients for them to purchase more. Because interest rates for consumers in Brazil are very big so our merchants prefer to offer installments and they imbed the cost of this prepayment in the price of their product and that's the best way to finance this purchase because they are combining many transactions and they are negotiating funding with acquirers and banks as an asset-backed security. So, based on the receivables that they have. That's why the interest rates for the merchants to do this are much, much lower than the interest rates charged to consumers.

So, we don't expect changes in terms of this prepayment operation. And in the micro merchant space, the dynamics is quite the same. So, clients, they like to offer credit for their clients to buy more and they fund this with prepayments and taking credit from the banks.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Thank you.

Lia Matos -- Chief Strategy Officer

Thanks.

Thiago Piau -- Chief Executive Officer

Thank you.

Operator

The next question comes from Craig Maurer of Autonomous.

Craig Maurer -- Autonomous Research -- Analyst

Yeah. Hi. Thanks for taking the questions. First, I was hoping you can comment on something that you said earlier. You said that SMB volumes are diluting the volumes from large merchants, which is expected from Stone. However, that doesn't necessarily line up with the take rate being flat or the transaction take rate as best we can see falling. You would expect the opposite. You would expect a rising take rate if SMB was becoming a larger portion of the TPV. So, I was hoping you could talk through why the take rate isn't rising if SMB is growing as a component.

Secondly, on the entrance into micro, I believe it was a R$461 million investment from Grupo Globo into what theoretically should be marketing, and advertising spend. The reason why I'm asking about that is that's effectively a little more than one year of the budget at Pax Seguros. So, how should we expect the move into micro to impact the rate of growth in expenses around selling and advertising? Thanks.

Rafael Martins -- Investor Relations Executive Officer

Hi. Thanks for the question, Craig. Rafael here. Regarding your question of take rates and SMBs. We see a very competitive dynamic in the large accounts in Brazil. What we are seeing is incumbents putting pricing pressure in the big accounts. So, if you look at that you should see that our take rates should go down. We do have still a positive effect from the mix in SMBs and always as a whole in the company we balance the take rate with the LTV: CAC as we have always mentioned. Which is basically whenever I have a client that has a certain volume, we might decrease a little bit of take rate on that client for that client to bring more volume and generate more LTV. So, we never manage the take rate alone. We manage it together with our growth levels, LTV: CAC. That's the way we see things and that's why you don't see the take rates going up as you mentioned.

Thiago Piau -- Chief Executive Officer

As Rafael said, yes you would expect take rates to go up with the new addition of clients in the Hubs, but what is happening here in terms of take rates is that we have big clients as marketplaces and some sub acquires. In that business, we see that competition tries to use prices as a weapon so sometimes we adjust. But it's not a concern in terms of take rates in the Hubs at this point.

Regarding the investment of Grupo Globo and our investment in this operation. We think that having an initial investment of R$500 million in this business that we already have all the operation working, the products done. We think that we have enough capital to start this and prove that this business model has a cost of acquisition lifetime value that justifies having more investments. We don't expect that this operation will change the dynamics of the SMBs in terms of investments. That's why we will report separately. We see that this is a huge opportunity. We are allocating capital with a side pocket to this opportunity and we think this initial R$500 million will give us the ability to be in a very good position in terms of proving our ability to create a very strong business model for this operation.

Craig Maurer -- Autonomous Research -- Analyst

Thank you so much.

Thiago Piau -- Chief Executive Officer

Thank you.

Operator

Our next question comes from Julie Chariell with Bloomberg.

Julie Chariell -- Bloomberg-- Analyst

Good evening and thanks for taking my question. I just had a few more on the credit side of the business. I'm wondering if the offering has been rolled out publicly or if it's just sort of in a more mature initial phase. As part of that, are you targeting the merchants who you're going after for credit or are they coming to you at this point? I'm wondering since you're able to kind of get a view into the TPV flow for these merchants if you're still at the point of going after or pursuing the ones who you think are most creditworthy and if you could put some numbers around that. How many clients have you identified so far? How many clients are getting credit right now? How many do you feel are most eligible out of that very large client base? And lastly on the partnership for the credit risks, if you have a timetable for when you might find or announce a partner? Thanks.

Lia Matos -- Chief Strategy Officer

Hi, Julie. I'll start answering that question. If I don't get everything, please repeat the question, OK? But regarding our offer, what we do is we preselect the group of clients from within our base and we actually preapprove that credit amount and we offer it through our portal. So, this is pretty much kind of a self-service type of flow. Those clients can order that credit either through the portal or by calling us. So, the way we actually analyze whether those clients are creditworthy is looking at their transactional history. That's a huge advantage that we have. We can see how they have transacted with us over the last 12 months. That's how we base the credit offering to those clients.

Regarding partners, yes, we are exploring new partnerships so that we can continue to grow. As we said, we are incredibly encouraged, and we have tapped only a small part of the opportunity even looking within our own client base.

Julie Chariell -- Bloomberg-- Analyst

Can you share anything on the eligible number of the creditworthy clients that you see in your client base and then maybe the terms of the credit that you're offering, the rates specifically?

Lia Matos -- Chief Strategy Officer

Not at this moment. We are still in the initial phase like we said. We are incredibly encouraged but we're not disclosing anything beyond what we have disclosed at this point.

Julie Chariell -- Bloomberg-- Analyst

Okay. Understood. Thank you.

Lia Matos -- Chief Strategy Officer

Thank you, Julie.

Thiago Piau -- Chief Executive Officer

Thank you, Julie.

Operator

The next question comes from Neha Agarwala with HSBC.

Neha Agarwala -- HSBC-- Analyst

Hi. Thank you for taking my question. Most of them have been answered but I have a few more. First, on the tax rate, it was quite low this quarter. How should we think about it in the coming quarters? And how should we think about it for the year as a whole? My second question is on the POS platform that is being offered by your competitors. They are offering payment solutions to technology which would not require a POS terminal. Do you have a similar solution and what are your thoughts regarding the impact of such a move for the system as a whole? And on your credit business, I understand you're not giving too many details but any idea of the term that you're offering for credit? Is it two months, three months? And also, when you look at your customer base if you analyze say 100 customers, how many of those, what percentage if you can give us a rough estimate do you think are eligible as per your standards to receive credit? Thank you so much.

Rafael Martins -- Investor Relations Executive Officer

Hi, Neha. Rafael here. Thank you very much for your questions. So, your first question regarding the tax rate. This was mainly a result of our tax planning this quarter. Some effects of this are going to remain and some were higher than usual in this quarter. So, these two effects what we call in Brazil is interest on capital and some R&D tax benefits. Regarding the following quarters, I think Marcelo Baldin can talk a little bit about.

Marcelo Baldin -- Vice President of Finance

Hi, Neha. For the following quarters, we expect effective tax rates to stabilize between 25% and 30%. And then the near-term rate.

Lia Matos -- Chief Strategy Officer

Yeah. I think you had a question, Neha, regarding NFE. Really, really early to say anything about it. We see a lot of different models out there. We see a lot of wallets that use QR codes to enable the transaction. NFE is just another way to enable the transaction. Again, for us, this is a matter of discussion about technology and it's not a barrier to implement. What we are worried and what we are concerned about is what our clients actually need. We will be closely monitoring what our clients need and prepare ourselves to be able to offer that. So, there's not anything much we can say beyond that.

Thiago Piau -- Chief Executive Officer

And regarding the credit question about the terms. At this moment, we have terms around six and 12 months but the main part of our client base we offer six-month duration of the credit. So, it's really a short-term credit.

Neha Agarwala -- HSBC-- Analyst

Thank you. If I could ask one last question? Do you have any plans to open a bank? I know you have a digital account but the way a competitor created a bank, do you have any such plans for Stone? Thank you so much.

Thiago Piau -- Chief Executive Officer

Thank you, Neha. Actually, we don't have plans to have a banking license. As you may know, in Brazil a banking license creates an obligation for you to have capital requirements that at this moment we don't meet mainly because we are offering transactional activities of this banking strategy. So, we are not actually leveraging the deposits that we have. We don't need a banking license and we don't want to have it at this moment the level of capital requirement that a banking license needs. So, we will continue to be a payment company licensed by the central bank and with the license that we have, we can take deposits. We can do all the transactional activities such as issuing Boleros, paying bills, doing payroll payments. We just can't leverage the money that we have in our balance sheet of our clients, so this money has to be in cash or in treasury bonds. So, that's why we are not looking for a license to be a bank.

Neha Agarwala -- HSBC-- Analyst

Great. That's very clear. Thank you so much.

Rafael Martins -- Investor Relations Executive Officer

Thank you, Neha.

Thiago Piau -- Chief Executive Officer

Thank you, Neha.

Lia Matos -- Chief Strategy Officer

Thank you, Neha.

Operator

Our next question comes from Domingus Falavina with JP Morgan.

Domingus Falavina -- JP Morgan -- Analyst

Thank you, Rafael and everybody, also for taking the questions. Two quick questions. The first one is I noticed you mentioned allowance for doubtful accounts and looking at your cash flow statement it seems that number came up to R$15 million versus R$3 million to R$4 million run rate in first Q or even one year ago. Can you explain a little bit what exactly are those losses? Is that associated with loans? Supposedly, once you approve the transaction you should be very close to zero on P&L. The second question is we were positively surprised by the subscription revenues growing Q on Q which is a pretty good signal of you indeed differentiating as higher quality service. You mention a little bit the products that you offer but if you could touch a little bit more detail as far as if the exemptions are being given on a more widely spread basis or if this growth came predominantly from new clients or just being able to pass on price increases in those subscriptions? Just trying to get a bit more sense on how receptive clients are.

Thiago Piau -- Chief Executive Officer

Hi, Domingus. Thanks for the questions. Regarding your question of the embedded allowance. This is regarded as the merchant acquiring operations nothing related to the credit part. So, this is an increase in our operations mainly related to digital chargebacks. This is part of our business, nothing related to credit. And regarding your second question, as we have mentioned previously, we are charging the software within our plans. This is the way we are doing it. Sometimes we charge incremental amounts in those plans and sometimes we charge less. So, I think Lia can compliment a little.

Lia Matos -- Chief Strategy Officer

Yeah. I think just to compliment that, we're really much more focused on making sure that the software strategy is something that we can see gain scale. So, we've been really offering this in the context of the subscription revenue within a bundle to clients. As we evolve and like we mentioned in the presentation, we are really encouraged to furthering our software offering to a more complete platform. As we do that, in the medium-term we do expect positive impacts in subscription revenue. But in the short-term, our real focus is making sure that we scale software and that we can see the piece of churn reduction and LTV increase in the clients that use the software.

Domingus Falavina -- JP Morgan -- Analyst

Super clear. And one last one to make sure I didn't miss anything. I didn't see any cash outflow from the acquisition of shares. So, is it fair to assume that there was no share buyback performed this quarter?

Rafael Martins -- Investor Relations Executive Officer

Hi, Domingus. That is correct. We have not done any share buyback in the quarter.

Domingus Falavina -- JP Morgan -- Analyst

Super. Thank you.

Thiago Piau -- Chief Executive Officer

Thank you, Domingus.

Lia Matos -- Chief Strategy Officer

Thank you, Domingus.

Operator

There are no questions at this time. This concludes the question and answers session. I will now turn it over to Mr. Rafael Martins for his final consideration.

Rafael Martins -- Investor Relations Executive Officer

I would like to thank everyone for participating in the call. See you next quarter. Thank you.

Lia Matos -- Chief Strategy Officer

Thank you all!

Duration: 70 minutes

Call participants:

Rafael Martins -- Investor Relations Executive Officer

Thiago Piau -- Chief Executive Officer

Marcelo Baldin -- Vice President of Finance

Lia Matos -- Chief Strategy Officer

Eduardo Rosman -- BTG Pactual -- Analyst

Chetan Dhadankar -- Goldman Sachs -- Analyst

Mario Pierry -- Bank of America Merrill Lynch -- Managing Director

Felipe Salomao -- Citibank -- Analyst

Daniel Federle -- Credit Suisse -- Analyst

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Craig Maurer -- Autonomous Research -- Analyst

Julie Chariell -- Bloomberg-- Analyst

Neha Agarwala -- HSBC-- Analyst

Domingus Falavina -- JP Morgan -- Analyst

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