StoneCo Ltd (STNE) Q1 2020 Earnings Call Transcript

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StoneCo Ltd (STNE 0.26%)
Q1 2020 Earnings Call
May 26, 2020, 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 First Quarter 2020 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 appear in today's press release.

Finally, before we begin our 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 in 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 Pereira -- Investor Relations Executive Officer

Good evening, everyone. Thank you for participating on the call, and hope all of you are safe. We have today in our call Thiago Piau, our CEO; Lia Matos, Chief Strategy Officer; and Marcelo Baldin, CFO. On this call, we will present our operational and financial results for the first quarter 2020 as well an update regarding operating metrics of our business in the beginning of the second quarter.

I'll pass it over to Thiago, so he can share with you the main highlights of our performance. Thiago?

Thiago Dos Santos Piau -- Chief Executive Officer

Thank you, Rafael, and good evening everyone. Thank you for joining us today. As we are facing unprecedented times with the outbreak of COVID-19 globally, I hope that all of you and your loved ones are safe and healthy. Before we start, I would like to highlight that we continue to be extremely confident in our business as it remains financially very strong and continues to grow double-digit year-over-year with healthy profitability.

We believe the tactical and strategic steps we've taken put us in the right directions to generate long-term value. In mid-March when the severity of the COVID-19 crisis became clear, we took quick actions to protect the health and safety of our team and clients to help SMBs navigate this crisis and continue conducting their business by providing financial reliefs and additional tools to help them sell online, to contribute to our community by funding public health initiatives, and developing tools to support local businesses and to keep our business financially strong, improving operational efficiency and allocating capital wisely.

Despite some short-term impact in our P&L, we believe we did the right thing to support our clients and community in tough times, which is consistent with our culture and beliefs, and we will strengthen our relationship with them over the long term. We've taken these actions during COVID-19 while maintaining our management diligence to make sure that this crisis will not compromise investments to support our future growth and long-term strategy.

Now moving to the presentation, I would like to start on slide 3 by providing you some highlighting in four main areas. Growth levels and financial position, measures we've taken to help our clients and community, important advancements in our financial platform and software strategy, and finally some updates on the second quarter trends.

The first quarter had two clear phases. Before the crisis, which had intensified in Brazil over the course of March, and a second phase after the outbreak, with its worst day in the second half of March, in which social distancing and store lockdown policies have significantly impacted retail activity and consequently, our transactional volumes followed by gradual but significant recovery in the month of April and May.

Before the outbreak we were investing heavily in our operation and our investments were yielding great results with an acceleration in TPV growth. TPV in the first quarter up to March 15th was growing 52% year-over-year, higher than fourth quarter levels, with the first half of March accelerating to 63% growth.

In the worst moment of economic activity which happened over the course of March, we've seen a sharp deceleration of our volumes with a 36% drop in the second half of March compared to the first half of the month and a decline of 4% compared to last year. Even though this situation has caused many of our clients to interrupt their operations either partially or completely, as I said before, we already see a gradual recovery with TPV in April, growing 9% year-over-year and up to May 23rd this has improved to 23% year-over-year growth.

Overall in the first quarter, we had a TPV growth of 42% year-over-year, and take rate remained stable at 1.81% even with approximately 6 basis points of impacts related to COVID-19. Impacts from COVID in our take rate are related to effects for a conservative approach to our credit product provisions, which we'll talk in more detail and to financial release provided to our clients in the form of temporary subscription exemption and lower prepayment pricing.

Regarding addition of new clients, despite the pace of growth been also significantly impacted in March by the lockdown dynamics, we still have a very healthy client base growth in the quarter, adding over 50,000 clients excluding micromerchants, reaching a client base of more than 530,000. It's important to note that from now on, we will report separately the number of clients that Stone and TON, our brand of micromerchants. Although, we ended up the quarter with 50,000 net addition of clients, prior to COVID outbreak, we were on track to grow net adds quarter-over-quarter as we have said before.

Our adjusted net income reached BRL162 million with an adjusted net margin of 22.6%. This result already incorporates approximately BRL61 million of one-off impact associated with COVID-19 about which we will give you more color during this call. We will keep reporting our adjusted net income in the same way as previous quarters. So, we have not adjusted our result for the one-off effects mentioned above. And we will give you color on one-off effects separately as we think this is useful information.

Given the uncertain scenario, during the first quarter we decided to strengthen our balance sheet which affected financial expenses. Our current liquidity ratio has improved to 1.7 in the first quarter with our cash position increasing 43% year-over-year and a little over BRL20 million compared to last quarter, reaching almost BRL4 billion at the end of March. This has enabled us to maintain our working capital solutions to our clients and become a liquidity safe harbor to them.

Unfortunately, we have also made the very tough decision to reduce our workforce by 20% in early May. We've conducted this difficult process with the same transparency, meritocracy and empathy to our team as always. We not only provided a generous package to those who left but we dedicated a team of human resource to help them find another good job for partnerships with other companies we admire. We will always treat with care those who dedicate their lives to the purpose of serving our clients with excellence.

Now I want to highlight the measures we've taken to help our clients and our community. As I said before, supporting our clients, team and overall communities are among our main priorities. Since the end of March, more than 90% of our team has been working from home. Also, we've provided BRL30 million in financial incentives to our merchants, committed BRL100 million in microlending, reprioritized our product pipeline and launched marketing and social commerce tools to help clients sell online.

We created a national campaign in a platform to encourage the public to buy locally and help small and medium businesses. The campaign called Compre Local, which means Buy Local in Portuguese, reached over 29 million views on YouTube. We donate 8,000 tests to a public hospital in Sao Paulo. Finally, we donated BRL5 million to finance the construction of a temporary hospital in Rio de Janeiro, which is the city where Stone was founded eight years ago, and is among the hardest hit locations in Brazil.

While supporting our communities and clients during this unprecedented times, we've made significant advancements with our integrated financial platform and the ecosystem of solutions to merchants. In this moment of crisis due to social distancing, online has become an important lever for business to continue to operate. We were born as an online payments company and we have many years of experience in the e-commerce space in previous companies before even forming Stone.

Since the beginning we have developed a complete set of online solutions from gateway and PSPs to processing and acquiring, focused on improving speed of transactions, availability, conversion rates, as well as providing settlement flexibility to adapt to different digital business model such as marketplaces. As a result of our continued efforts in the online space, we estimate based on eBIT data that during the beginning of COVID-19 outbreak in Brazil from mid-March to end of April, approximately 50% of all transaction in e-commerce in Brazil went through our platforms either through our online acquiring solution or through our agnostic gateway and PSP solutions.

Regarding digital banking, in April, we had a record number of accounts being opened with 35,000 new accounts in the month, reaching close to 160,000 accounts, as well as increasing level of transactional activity from our clients. Moving to our credit product, we have reached more than BRL386 million in total outstanding balance in the end of April, presenting a return on assets of 2.7% per month even after a conservative increase in provision for potential COVID impacts. In fact we have seen our April cohorts performing very well, which demonstrates our ability to adapt our credit policy to a new riskier environment.

Talking about our software initiatives. On top of the organic growth we've presented, we've made four new investments to help SMBs manage and grow their business. mLabs, a lead social media platform for SMBs in Brazil; Delivery Much, a food delivery marketplace focused on small and medium cities; Vitta, a health plan management and electronic medical record software company; and MVarandas, an ERP and POS software for food services with a strong presence in the Northeast of Brazil. These inorganic investments combined with our organic client base growth in software, will make the number of subscribed clients jump significantly. We will discuss a little more about those investments later in the presentation.

Given the unprecedented levels of uncertainty society is facing, this time we decided to exceptionally bring you the latest update on trends in our business and also share our view about the second quarter adjusted pre-tax margin. Regarding transactional volumes. Our TPV growth in the second quarter until May 23rd was up 15% year-over-year. When we double click in May alone until the 23rd, we were up 23% year-over-year.

Additionally, we were able to improve service levels in the second quarter by working from home. Two factors are helping our growth. One is the strength of our online businesses, which grew TPV 42% in April when compared to January levels with a strong growth in our online SMB client base. The second is the geographic diversification of our hubs with two-thirds of hubs volume being spread and see results outside the 27 state capitals where 50% of COVID cases in Brazil are concentrated.

Regarding margins, despite the second quarter being the most affected by COVID-19, we expect an adjusted pre-tax margin between 20% and 24% in the quarter already including one-off items such as severance costs related to our workforce reduction and incentives provided to clients among other factors. So, to be clear, as we said, we will keep reporting our numbers the same way as always with all cost and expenses included and we will give you color on one-off effects in the second quarter separately as we see this as useful information.

Before I pass it over to Rafael, I would like to summarize, as shown in slide 4. In the first quarter, we continued to invest heavily in our operations producing strong top line growth and evolving fast to become the partner of choice of Brazil SMBs, both in brick-and-mortar and online operations. When COVID-19 became a reality in Brazil, we took decisive actions to protect our team, clients and community. We've increased operational efficiency through redesign of processes and structure, rapidly reinforced our balance sheet and continue to wisely allocate capital in our strategic priorities.

Looking ahead, we keep focus on consolidating our presence in the SMB market as well as in the online space and we will continue to invest heavily to become the main financial platform for our clients, integrated with great solutions to help SMBs better manage their business, grow and sell online. We manage our company for the long term aiming at a much bigger future and every day more Stone becomes a technology company with financial service embedded into its roots.

With all that said, I will pass it over to Rafael. Rafa?

Rafael Martins Pereira -- Investor Relations Executive Officer

Thank you, Thiago. I wanted to start on page five by reinforcing what Thiago said that we started out the year seeing very strong growth in our core operation as well as initiating a new cycle of our company to solidify our position as the partner of choice to SMBs. Up to mid-March we were accelerating growth and investing heavily on the evolution of our platform with record investments in our technology team. When COVID-19 caused on March 11, the first local commerce locked down in Brazil.

On page six, we highlight some of the initiatives toward our clients, team and community. I would like to give emphasis to our actions in the health front, in which we provided a 24/7 telemedicine support to our team as well as protective equipment and instructions to those few that are still working on the streets, mainly logistics Green Angels. Additionally, we put emphasis through our campaign Cuide do pequeno negocio to provide tools for our clients to better navigate this crisis environment such as mLabs and Delivery Much as Thiago just mentioned.

Moving on to page seven, I want to detail some aspects about how we maintain a strong financial position through the onset of this crisis. We implemented different measures to manage cost and expenses and did a technical resizing of the organization to better balance revenue and investments through a redesign of processes. Since the crisis started, we maintain constant access to liquidity lines and kept our prepayment operations at full speed prepaying our clients around BRL11 billion through the months of March and April, while increasing our cash position by 43% year-over-year to almost BRL4 billion at the end of the quarter.

Our adjusted net cash position increased to BRL5.1 billion, demonstrating the strong financial profile of the business. We take cash flow management very seriously and we were impressed to see the hard work of our Treasury team reflected in our strong financial position. In our earnings release, we provide further details of our cash flow dynamics. On slide 8, we show the performance of our TPV so far in the year. We were accelerating our TPV growth until mid-March when COVID-19 hit Brazil. However, in April, we already started to see TPV resuming growth on a yearly basis and in May, up to the 23rd, this growth rate jumped to nearly 23%.

The right chart shows the evolution of our TPV for each period of 15 days starting in the first half of March which is indexed to a 100. As you can see, we have been able to consistently recover our TPV and we are seeing volumes in the first half of May being equivalent to 87% of the volumes in the first half of March.

As seen on slide 9, there are two main factors which contribute to the positive evolution of TPV. The first is our geographic footprint in the hubs, where more than 60% of our hub volumes are in areas less impacted by lockdowns. Additionally, approximately 41% of our volume comes from digital and integrated partners with more than 180 clients transacting at least BRL1million in TPV on a monthly basis as of April. On the graphs on the right, we show the strong growth of our online volumes, which grew 42% in April compared to January as well as a strong increase in the number of online SMB clients, which grew 29% in the same period and is a very profitable segment.

Now moving to slide 10, on the left, we want to show you the evolution of the productivity levels of our salespeople in the hubs up to May 15th indexed to 100. When the crisis hit as we could not be in the streets, our productivity dropped by around 40%. Once we better understood demand dynamics, we decided to put a relevant part of our team on vacation and we redesigned our lead generation and closing processes. So, we could better work through the phone in and chat. With that we brought our team back from vacation, tested the new processes and right-sized our sales operations. After those improvements we started to see the productivity of our team back on track.

Also, as shown on the charts on the right, we were able to increase our main KPIs in our customer service amid the crisis, reaching a record 72 NPS in April. Our logistic operation was also able to keep its service standards.

With that I'll pass it over to Lia, so she can talk about our strategic initiatives and the performance of our solutions beyond payments. Lia?

Lia Machado de Matos -- Chief Strategy Officer

Thanks, Rafa, and good evening everyone. I hope you're all safe and healthy. I want to start on page 11 by highlighting the strategic differentiators of our digital business starting from our foundation. In 2012, we started to build our proprietary payments platform first with the needs of digital businesses in mind, which assured the best conversion rates, availability and speed. Our end to end payments platform attempt to businesses of all sizes from SMBs to large enterprises, as well as different business models such as marketplaces, recurring businesses, e-commerce and digital apps, all through simple API integrations. So, in summary, we're able to offer enterprise level solutions to SMBs.

Our multi-party gateway served some of Brazil's largest e-commerce merchants, improving conversion rates, which translates into more sales, providing data analytics, reporting and auditing capabilities. Pagar.me, our PSP platform serves clients of all sizes including social sellers, SMBs and large marketplaces. Being a unique player in this segment with very distinct functionalities such as split payments. To demonstrate our relevance in digital we highlight on the right side of the page our market share in Brazil in e-commerce. As shown from eBit numbers when we consider only our base of e-commerce clients, we saw that more than 50% of the e-commerce market transacted through our platforms during the initial phase of the pandemic.

In the pre COVID-19 scenario, we were already experiencing two steady and powerful consumer trends that are now intensified in the new reality. First, an increasing volume in digital channels and second, the growing use of omnichannel commerce with more brick-and-mortar merchants establishing digital channels as part of their growth strategies. Given the differentiating factors outlined above, we will continue to work hard to drive this evolution and be the platform of choice to businesses looking to accelerate their path to becoming more digital.

Moving on to slide 12. In March, we just completed one year from the first credit given to our merchants and we can see the resilience and huge potential of that product and how it positively impacts our relationship with our clients. We ended the first quarter with nearly 31,000 clients and an outstanding balance of BRL332 million. In April we reached more than 34,000 clients and the portfolio grew to an outstanding balance of over BRL386 million, mainly due to our decision to provide BRL100 million in microlending to help our clients to navigate through the crisis. We've evolved our product within the quarter with the launch of a revolving credit feature giving more flexibility and allowing clients to roll their outstanding balances as they mature.

Due to the current economic scenario and short-term perspective, we expect higher delinquency rates in our credit portfolio, especially from older cohorts of clients. However, we have four key elements that help us keep healthy returns in that situation. First, we're very rigorous with selecting clients avoiding both high risk or higher impacted sectors. Second, we're investing heavily in our proprietary credit scoring model, which results in daily enhancements to our algorithms. Third, our merchant cash advance system provides a protection for us as we receive immediately when they engage in electronic transactions regardless of their payments provider.

And finally, the fourth element, our pricing management provides a significant protection against delinquency. Those elements combined have helped the return on assets of our portfolio to be at a healthy level of 2.7% per month even after we conducted a revision on expected delinquency levels in March to account for the current crisis. As you can see on the graph on the right side of the page, up to May 14th, all cohorts have already paid us more than we anticipated in our models with the only exception being the March cohort from which we have received 83% of the expected amount. In total, we have received a 108% of the expected amount within our consolidated credit portfolio with the April cohort representing down payments 50% above our expected levels.

On slide 13, we bring you an update on our banking and integrated platform. In our digital banking solution launched in October of last year, the number of accounts jumped from 62,000 to 122,000 in just one quarter. In April, we posted our record high number of new clients in banking in a single month reaching almost 160,000 open accounts at the end of April. Important to mention that we continue to see strong traction in the level of activity in our digital account with a substantial increase in the number of wire transfers, Boletos paid and average balance per account. As Thiago mentioned, becoming the primary financial platform for our clients is a longer strategic priority and these numbers indicate to us that we are in the right track.

As we discussed before, we are evolving to become an integrated platform that brings together acquiring banking and credit. As of April, the ABC platform counted with nearly 45,000 clients in its pilot program. As a client-centric company, we keep focus on working directly with merchants to develop the best products for them. This quarter we launched some new features including a cash and alternative with the Boleto Issuance and started piloting our QR code payments. We also launched two initiatives to help merchants sell online and digitalize their businesses; the Payment Link and the Stone Virtual Shop, which are both in pilot mode.

In slide 14 we are bringing an update on the evolution of our ecosystem of software solutions. As I've already explained in previous calls, our strategy in software is two-fold. On one hand we have some solutions that can be deployed to our distribution and service model, integrating those offering to our core SMB operations. We also invest and acquire software companies with great people and scalable technologies, applying a management system to support them in their growth strategies and help them expand their offerings into financial services by integrating to our platform. We usually provide incentives related to the penetration of financial services to their client base to completely align interests over the long run.

In the graph, we present the evolution of the number of subscribed clients in our software solutions. We ended the year with 135,000 clients, most of them being distributed by Stone. In 2020, we were able to add over 40,000 clients until mid-May organically. We are very happy to invest in such great teams of entrepreneurs and bring to our ecosystem for great solutions. mLabs, a leading social media management platform that helps SMBs to digitalize their businesses and has the potential to evolve to a social commerce platform in the future.

Delivery Much, a food delivery platform present already in more than 230 small and mid-sized cities with a similar and synergistic expansion approach to Stone. Vitta, a health plan management and EMR software solution, which has 15,000 doctor network and manages 100,000 lives and can become an important provider of health plans for SMBs. And finally, MVarandas, a POS and ERP software for food service with a strong regional presence in the Northeast of Brazil and an expanding operations throughout the country.

We see a massive opportunity in the software space, creating a comprehensive ecosystem of solutions to our clients and we will continue to work on our two-fold strategy for that. We believe that the combination of great software solutions integrated with a complete financial platform, direct distribution and an excellent service level in a single technology company like Stone can transform the Brazilian SMB environment. We define ourselves by the clients we serve, not by the products we offer. That is one reason why our vision is to become more and more a software company that embeds financial solutions and a financial services company that provides software and services to help merchants better manage their businesses and sell more.

With this, I will pass it over to Rafael who will discuss our financial results for the first quarter in detail.

Rafael Martins Pereira -- Investor Relations Executive Officer

Thank you, Lia. As you can see on slide 15, we added more than 50,000 clients reaching a total of 531,000 active clients in payments with a year-over-year growth of 72%. Starting on the first quarter 2020, we are reporting clients under the TON brand separately in order to provide more transparency about the dynamics in our core SMB markets and in the micromerchant space. In addition, we have started reporting Stone active clients considering those who have transacted over the past 12 months, which is in line with the methodology adopted by its peers.

The rest of Stone's active client base, including SMBs continues to refer to clients that have transacted at least once in the preceding 90 days. Having said that, TON reported more than 23,000 active clients in the first quarter, which are not included in the chart on page 15. In line with previous disclosures past quarters include Stone Mais clients, which is our discontinued micromerchant brand.

In TPV, we grew 42% in the first quarter compared to the first quarter '19, reaching BRL37.6 billion. This represents an addition of BRL11.2 billion of TPV year-over-year, our highest historical figure for a first quarter. As Thiago mentioned before, we have seen some recovery in TPV during April and May compared to the second half of March levels and this recovery can be seen both in SMBs from our hubs, as well as in digital and integrated partner clients. Our total revenue and income was BRL717 million in the first quarter, an increase of 34% year-over-year, which was mostly a result of our operational revenue lines.

Excluding other financial income, mostly related to yield on cash, our total revenue and income grew 38% in the period. Also, total revenue and income was negatively impacted in the amount of BRL25.2 million related to the combined effect of COVID-related incentives given to clients and higher provisions for delinquency in our credit solution. Those effects had a negative impact of approximately 6 basis points in our take rate in the quarter which despite this was stable at 1.81%.

Now slide 16 shows our consolidated P&L for the quarter. Going through our cost and expenses line we see that cost of services was nearly BRL150 million in the first quarter, 75% higher than in the first quarter of '19 or 5 percentage points higher as a percentage of revenue. This increase was mainly due to higher depreciation and amortization costs, higher provisions and losses as a percentage of total revenue and income, investments in our customer service and last mile logistics operations, as well as investments in our technology team.

Administrative expenses were nearly BRL74 million in the first quarter or 10.3% of total revenue and income, showing mainly the dilution of our personnel expenses. Selling expenses were close to BRL112 million in the quarter, an increase of 78% year-over-year, mainly due to higher personnel and marketing expenses, in line with our growth strategy.

Financial expenses jumped 123% in the year to more than BRL148 million. This is the result of a few factors. First, we saw higher prepayment volumes during the quarter. Second, we decided to improve the company's liquidity given the uncertain scenario, which translated into selling longer duration receivables and increasing the liquidity pool in addition to incurring higher cost of funding for spot lines. Finally, we had mark-to-market losses from some short-term investments in bonds as a result of stronger market volatility amid the crisis.

We estimate that those items related to COVID-19 environment had a BRL35.8 million negative impact in our financial expenses. Combined with the BRL25.2 million impact on revenue that I just mentioned, this impact in financial expenses lead to an estimated BRL61 million of pre-tax impact for COVID-19 in our results this quarter. This does not include impact from lower TPV given the lower retail activity. As a result of the factors above, our adjusted net income for the quarter was BRL162 million with a margin of 22.6%, which includes the COVID-related impacts just mentioned.

As you can see on slide 17, our operating costs and expenses were 46.8% of revenue in the first quarter compared to nearly 40% last quarter. Our adjusted net margin was 22.6% in the quarter compared to 35% in previous quarter and also last year. In our first quarter 2019 earnings call prior to COVID-19 outbreak, we have mentioned we would continue to invest heavily in our operations and the strategic initiatives, especially in the first half of 2020. Besides the effects related to the crisis, such investments are one of the reasons why we have seen higher operating costs and expenses this quarter.

Moving to slide 18, we show the main driver for the decrease in our pre-tax margins year-over-year. Allied over 50% of the margin decline, 7.1 percentage points is related to pandemic effects as I have mentioned previously and we do not incorporate here the effect from less operating leverage coming from lower TPV volumes. We also had a 3 percentage points margin reduction related to selling investments especially hiring of new salespeople to support future growth and marketing as well as a 1.7 percentage point reduction related to investments in new products such as banking, software and TON. We also had 2.7 percentage point reduction related to the optimization of capital structure using more third-party capital to support growth of our prepayment operation, which tends to provide us higher return on equity.

As Thiago said before, for the second quarter, we expect an adjusted pre-tax margin between 20% and 24% already including one-off items. So, the only adjustments that we are including in this outlook compared to IFRS metric of profit before income taxes margin is the share-based compensation and amortization of fair value adjustments related to acquisitions just the same way we have been reporting.

Finally on slide 19, we show our adjusted free cash flow, which was negative BRL122 million in the first quarter 2020. Excluding two items that we believe are exceptional, our adjusted free cash flow was positive BRL30.7 million. The three main items that have affected our free cash flow this quarter were the following. First, BRL100 million in prepaid marketing expenses from TON to Globo in connection with a specific attractive media negotiation which dates pre-COVID and in which we have three years to use that amount.

The amount was fully funded by the upfront cash contribution from Grupo Globo in TON, which is not accounted for in our free cash flow calculation and appears only in our cash from financing activities. The second component affecting our free cash flow was an eight-day undue temporary tax withholding of BRL53 million, which was released in the first week of April. Besides those two exceptional items, our free cash flow was also affected by higher capex, in line with our strategy to grow our base of clients.

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

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions]. Our first question today comes from Tito Labarta with Goldman Sachs.

Tito Labarta -- Goldman Sachs -- Analyst

Hi, good evening. Thanks, Thiago, Rafael and Lia for the call. A couple questions. Thanks for all the information on the presentation. First, I mean you gave some good color in terms of your online exposure and how much of the volumes are going to you, but can you just remind us what percentage of your TPV is online? And is there -- what is the take rate on the online TPV compared to the offline? It doesn't have to be exact number, but if you can give some color on that would be helpful.

And then the second question also on the take rate, you mentioned, the 6 basis point impact because of COVID-19. But I guess to understand excluding the COVID-19 impact, what drove the increase in the take rate? Is that because of you were doing more credits or just understand before COVID-19 what was driving the take rate higher because you had been pretty stable on the take rate, so interesting that you had been able to increase it before COVID-19. So if you can give some more color on that would be very helpful. Thank you.

Thiago Dos Santos Piau -- Chief Executive Officer

Hi, Tito, Thiago here speaking. Thank you very much for your questions. Rafael, do you want to go ahead and take this first question?

Tito Labarta -- Goldman Sachs -- Analyst

Hello?

Lia Machado de Matos -- Chief Strategy Officer

Hi, everyone. I'm going to take Rafa's -- I'm going to take the question because it seems like Rafa is having a hard time connecting. So, regarding digital volumes, Tito. So, what we mentioned before, as we consider our integrated partners and digital part of the business together, we haven't disclosed exactly that share of TPV. What we can say is that that part of the business has been growing significantly and with a larger growth even after the onset of the COVID crisis.

We expect this to continue to happen moving forward. Regarding take rates, what we can say that within digital those take rates are pretty much equivalent to our take rates in the hubs. And regarding integrated partners, given the larger mix of large clients that they create tends to be a little smaller but within digital it's pretty much equivalent to our take rates in the hubs.

Thiago Dos Santos Piau -- Chief Executive Officer

Lia, if I may add. Tito, it's Thiago here speaking. So we have -- we tried to provide more color in our numbers in this -- in this release and in this presentation. So, I will start saying that we continue the same level of TPV spread between hubs and digital integrated partners. It's difficult for us to, to separate sometimes digital integrated partners because sometimes you have transactions from marketplaces, from wallets, from e-commerces. So we decided to put all together into the same bundle of TPV.

But what I can tell you and give you more color about this is that when you add our digital integrated partners' clients, we have around 40,000 clients in which more than 180 clients transact more than 1 million per month, and we are seeing a strong growth in terms of our SMB online operation as well as some platforms that integrates to our platform through our integrated platform channels.

Regarding take rates when you compare take rates in online clients, in the SMB online clients, they're pretty much the same we charge in the -- in our hubs. So, take rates are much more a effect of size of clients than if they are connecting through our hub operation or through our online gateway and our online strategy. And regarding take rates, actually our take rates is stable, mainly because we keep the same strategy regarding pricing. We were actually expecting higher take rates for this quarter, as we said before, but as we decided to be conservative and put higher provisions into our credit product, we reduced our revenue from credit thus impacting the take rates that stayed at 1.81%.

If it wasn't the effects of this higher provisions in our, in our credit products and some relief that we have given to our clients then take rates would be bigger. So, I think that we've always said that we can manage take rates between different products in the way that's the best fit for our clients and we try to provide some color in terms of our return on assets in our credit products. So, we are always trying to provide more color in a way that we can charge our additional solutions such as software, the banking.

So, we will keep our strategy of providing an integrated set of solutions to our clients with a level of price that can be much better for them when you see all the products combined which helped profitability to our firm. So, I'm very happy with the pricing strategy that we have. I think there is a good balance between the value that we generate to our clients and how do you perceive this in the price that they pay for our products.

Tito Labarta -- Goldman Sachs -- Analyst

Great. Thanks Thiago and Lia, very helpful. I guess it looks like the take rate was increasing except for the higher provisions which impacted in the quarter and you saw -- you showed some good loan growth there like BRL386 million already in April. How large do you think that that loan portfolio can get by year-end considering the additional risk as well?

Thiago Dos Santos Piau -- Chief Executive Officer

It's very difficult to provide -- to provide an outlook about this Tito, but we still expect a huge room to grow this year. I think that in the next three or four quarters, we can double the amount of our outstanding credit balance and using a conservative approach, mainly because I think that as our business evolves in the way that we created these products, we know pretty much the transactional behavior of our clients, we are very conservative in the way that we have built our scoring process and we invest a lot to keep evolving the intelligence behind our algorithms on a daily basis. And now I think that with the regulation being the right place regarding the lack of receivables, we can still use -- we can already use credit sometimes as a first relationship with our clients, because now we have the ability to lock receivables of other payment providers.

So, those receivables they are mainly backed by future sales. So, the risk that you take is that the clients will be able or not to transact in the future in any type of different payment method. So, once you select the clients that are in activities that continue to operate even though the COVID scenario and they have ability to grow their volumes, once you understand their pattern in terms of transactional data, it becomes a very good product that you on a conservative way can generate good profits.

Tito Labarta -- Goldman Sachs -- Analyst

Great, thank you, Thiago. And just one clarification, going back to the online volumes, you said it mostly comes from the digital and integrated partners and in the past you had said that digital and integrated partners were roughly between -- can be 30% to 40% of volume. Is that correct?

Thiago Dos Santos Piau -- Chief Executive Officer

Yes, if you add it up digital integrated partners, we still have 40% of our volumes coming from both channels. But we are seeing an increase in growth during COVID scenario in those channels, either because of e-commerce's clients or SMB clients that are setting up e-commerce of operations or the platform and marketplaces that we attend that are getting better volumes, but in average I think that we keep the same trend that our profitability comes from our SMB online partners, but we have scale within some large clients that we have. We decided to show this new number of 180 clients that transacts more than BRL1 million monthly to show that this business actually has some diversification in terms of clients that maintain on a very healthy level.

Tito Labarta -- Goldman Sachs -- Analyst

Alright. Thank you very much.

Lia Machado de Matos -- Chief Strategy Officer

Tito just to clarify, there's data on this breakdown on page nine of the presentation.

Tito Labarta -- Goldman Sachs -- Analyst

Okay. Thank you, Lia.

Operator

Our next question comes from Felipe Salomao with Citibank.

Felipe Salomao -- Citibank -- Analyst

Hi, Thiago, Lia, Rafael. Thanks for the opportunity to ask questions. I have two questions. One is also about take rate. I know that there are a lot of moving parts here. I mean change in volume mix, different clients -- clients being different, different prices. There is also the impact of credit of provisions for future credit losses, but would it be possible to share your thoughts about how take rate should look like in the 2Q of this year given these things that I mentioned to you?

And the second question is a question from a statement on the press release. You mentioned that you decided to negotiate an upfront media package of BRL100 million for TON, a very attractive media deal to be used in the next three years. So, just wanted to clarify, is BRL100 million, the expected marketing budget for TON to be used in the next three years or this is just one specific, let's say marketing facility that you decided to pay upfront but investments could be above that level? So, these are my two questions. Thank you.

Rafael Martins Pereira -- Investor Relations Executive Officer

Hi, Felipe, can you hear me now?

Felipe Salomao -- Citibank -- Analyst

Yes, Rafael, I can hear you well.

Rafael Martins Pereira -- Investor Relations Executive Officer

Sorry, my connection was bad in the first question. So, regarding the take rate, as we have mentioned, we see our take rates over the medium to long term going up. We have many initiatives that -- and also answering a little bit of Tito's questions before, regarding the credit, the banking software solutions. When you bundle everything together our proposition becomes more and more attractive to clients even though we're emerging less than the competitors in each one of those segments. We see it as that is accretive to our take rates.

So, regarding the second quarter, it's still difficult for us to, to make a more precise comment because I mean there is a lot of moving parts there, especially in June, right. It's too early for us to talk about this. We do see healthy take rates evolving. So, if you look at our take rates, excluding 6 basis points impact, we would have an increased take rate year-over-year as we did have quarter-over-quarter. So I think that our strategy to monetize the clients and look at as a whole not in each line, this has been proving the right thing because we provide a choice for clients to -- we charged the way that fits better for each one.

And regarding the TON question. This, the BRL100 million, it's not their whole marketing budget. This is just a part of what will be marketed through Globo. So, we have two other parts there. Marketing in Globo that go beyond that BRL100 million and also marketing through other media like social media, for example, that is not in budget. So, this is a package that is common in the marketing industry. You negotiate a certain package and when you pay upfront, you have an attractive discount. So, this is not the whole budget, it's only a part of it.

Thiago Dos Santos Piau -- Chief Executive Officer

Rafa, if I can add some comments. Salomao, Thiago here speaking. It's very difficult to say about take rates in second, third quarter. I think that we are living on very uncertain scenario here, but what I can tell you is that I believe in our strategy of providing more solutions to our clients over the long run. That's why we have invested to keep a relevant client base and we are investing heavily to grow our client base as we have said before and I believe in our ability to have better take rates next year than this year.

So when you look to more, difficult to say about the next quarter, but when we think about 2021, I believe in our strategy to have better take rates than 2020 mainly because of the penetration of new products and we decided to provide this color on the return on assets of credit, as an example where we can move pricing strategy with different products. So when we see banking software, credit and payments, you will see our strategy of always trying to put parts in -- on monthly subscription, you will see part on the transaction activity, you will see part on our financial revenue lines. So, I think that we have the ability to grow take rates over time.

And regarding TON, I think that is exactly what Rafa had said. This is just the first negotiation that we did. We know that the industry negotiates with these accounts when you have better volumes to negotiate. So, we actually could have access to do a better discount than regular prices because we did this prepayments right before COVID and we have three years to use it. So, I think that was a great negotiation. This was funded by the upfront amount of Group Globo. So actually, was not an real impact to our cash position and we are happy to have just three years to use it.

Felipe Salomao -- Citibank -- Analyst

Okay, Rafael, Thiago, thank you very much for the answers.

Thiago Dos Santos Piau -- Chief Executive Officer

Thank you, Felipe. Thank you very much.

Operator

Our next question comes from Craig Maurer with Autonomous Research.

Craig Maurer -- Autonomous Research -- Analyst

Yeah, hi, thanks for taking the questions and good to hear everybody's voices. I wanted to dig in on the volume acceleration that we saw in May. Can you comment on how much of this was driven by processing for MercadoLibre? And if MercadoLibre was an increased portion of volume during second quarter if that's going to weigh on take rates in the second quarter?

And then secondly, with the decision to slow investment in TON right now, while you -- while you experiment with different channels and find optimal LTV to CAC, does this present a missed opportunity considering the way the government and others are trying to accelerate benefits through the likes of tax to grow and therefore driving new account acquisition right now? Thanks.

Thiago Dos Santos Piau -- Chief Executive Officer

Hi, Craig, Thiago here speaking. Thank you very much for your question. It's great question actually. So, let me start with the first question. So, it's -- we don't want to, we don't like very much to talk about volumes of, of other companies, but what I can tell you is that we are not seeing relevant changes in terms of volumes from these specific clients that we have. And keep in mind that the majority of volumes that we process of this client is from the brick-and-mortar operation, their machines. Right. So the majority of their online volume do not passes through our platform. So, this is mainly being -- this recovery has mainly been driven by our hubs in our SMB digital operation as well as other integrated partners platform that has online transactions to use. And our hubs have presented consistent recovery through April and May.

Talking about TON, actually what we saw was that creating a brand in a new business in an environment as this can be challenging. I don't think that it's the best moment for you to allocate a lot of capital in terms of creating a bend in a moment that you already have many different messages going on. So we decided to be conservative, keep our, our cash position strong under TON and continue to use different channels to test our LTV to CAC ratio to make sure that once we accelerate our investments on TON, we will do this in a cost and LTV to CAC ratio that we will provide the growth in margins that we expected.

So, we decided this beginning of the business because of COVID to be a little bit more conservative and once we think that we have the right environment, we will invest more. But we keep developing the platform, we keep developing our channels and we use part of our money to test this CAC to LTV ratios and once the scenario was a little bit better, we will invest to scale this business.

Craig Maurer -- Autonomous Research -- Analyst

Thank you.

Lia Machado de Matos -- Chief Strategy Officer

Now, can I just --

Craig Maurer -- Autonomous Research -- Analyst

Sure, go ahead, sorry.

Lia Machado de Matos -- Chief Strategy Officer

Can I just take a continue on the answer Craig regarding the government incentives. So, what we want to say about that is that we are ready and we will enable acceptance of corona vouchers as payment methods within our network of terminals, Stone terminals as well as online. So, we will be technically ready to accept through our terminals within a couple weeks and we are already as we speak within digital transactions. So, just to complement Thiago's answer.

Craig Maurer -- Autonomous Research -- Analyst

Thank you. Just one follow-up. Should we expect -- what degree of severance costs should we expect to impact second quarter? Thank you.

Rafael Martins Pereira -- Investor Relations Executive Officer

Hi, Craig, Rafael here. So, I think what we are not making comments here still about a severance package. It's a couple of million reais, right. So, that's why we decided to provide our pre-tax already includes in those costs and then you can, you can see it. There is two components of the severance cost. One is the -- like legal mandatory cost that we have and the other one is the discretionary package that we have provided to help those people. I mean, thanking them for participating in everything that they have built. So, there will be, those two components and we will provide more details when we disclose the effect of that reduction in our workforce next quarter.

Craig Maurer -- Autonomous Research -- Analyst

Okay. Thank you very much.

Thiago Dos Santos Piau -- Chief Executive Officer

Just to be clear Craig, Thiago here again. So, in the adjusted pre-tax margin that we have disclosed that an outlook for the second quarter, we already have these numbers incorporated. So, this outlook incorporates all the costs and expenses as our previous reporting and in second quarter, we will give detail about potential one-offs that we will disclose separately as we did in this first quarter release.

Craig Maurer -- Autonomous Research -- Analyst

Okay. I appreciate that. Thank you.

Thiago Dos Santos Piau -- Chief Executive Officer

Thank you very much, Craig.

Operator

Our next question comes from Jorge Kuri with Morgan Stanley.

Jorge Kuri -- Morgan Stanley -- Analyst

Hi, good afternoon, everyone. Good to hear everyone. Two questions if I may. The first one is on your TPV. You mentioned you are at 87% in the first half of May versus the first half of March, mostly driven by new clients. Could you share with us what would be that same percent if you look at it on a same store basis. Just to understand what has been the real impact of closures on your existing business?

And the second question is on net adds, which evident we're very strong in the first quarter, 50,000 and the driver of that pretty [Phonetic] 87% number that I talked about, could you tell us now what the net adds are looking like post COVID, say April or May relative to that 50,000 run rate that you had in the first quarter and in the fourth quarter. Thank you.

Rafael Martins Pereira -- Investor Relations Executive Officer

Thank you, Jorge for the question. Rafael here. So, to your first question, when you look at the index number of 87% in the first half of May, most of the effect here of the recoveries is from the base, right? And not from new clients, especially because when you add new clients, it takes a while until those new clients generates their TPV. So basically the biggest, the vast majority of the impact here is really from the base recovery and also all the channels that -- regarding online sales that Thiago just mentioned. So I think we have seen new clients also contributing to this, but I think the main part is regarding the base. And then Thiago, can you please answer the second part of the question. Thank you.

Thiago Dos Santos Piau -- Chief Executive Officer

Yeah. Hi, Jorge. Thank you very much for your question. Very good to hear your voice. So let me try to provide some color regarding net adds. I will start saying that once we first had was with this COVID situation, we decided to more net adds on a seven days basis as a leading indicator of what would happen in our management's view of 90 days as we disclose it. So when we see this leading indicator of 90 days net -- seven days net adds, I'm sorry. What we can see was a decrease in terms of net adds in the beginning of March that became negative in the second half from March 15 to March 30, it became negative. But then in the beginning of April it turned positive again and stayed positive every day since then until now.

It's very difficult to say about net adds going forward, but -- and mainly regarding second quarter because we still have many moving parts here and the impacts of the lock down on March will be mainly presented on the number for June, right, because of this 90 days effect that we disclosed. But we expect that in third quarter, our levels of net adds in terms of 90 days view that we disclosed, we will already be above our first quarter level and we will continue to increase after that, as we said before.

So in summary, we put in front of us a lead indicator, which is net adds in seven days, we saw a decrease in the beginning of March, it became negative from March 15 to March, 30. On April 1 it turned positive again and stated positive since that until now. And when we see the 90 days that we disclosed to you, very difficult to talk about second quarter because the impacts on March will be presented in the June numbers, but we expect third quarter of net addition of clients higher than first quarter already and then increasing net adds throughout the other quarters as we've had said before.

Jorge Kuri -- Morgan Stanley -- Analyst

That's great. Thanks a lot, Thiago and congrats on the numbers.

Thiago Dos Santos Piau -- Chief Executive Officer

Thank you, Jorge. Thank you very much for your question.

Operator

Our next question comes from Victor Schabbel with Bradesco BBI.

Victor Schabbel -- Bradesco BBI -- Analyst

Good evening, everyone. Thanks for taking my question. So, sorry if I'm missing something, but the tone of few guys have been generally constructive during this call. So you were talking about resilient take rates, growing loan portfolio, recovering volumes as you show in your presentation, right, with volumes for May already recovering and growing on a year-over-year basis. So why have you guys decided to lay off 20% of the company in mid-May when you have the numbers already recovering and all these, let's say, more constructive tone being conveyed now. So what is the reasons behind the layoffs? What are you guys seeing that is different now that may be justified firing 20% of the staff, would this be a risk for you in a way that it could put at risk the environment -- the work environment of you guys that is known for being very good and very strong. So I just wanted to understand more properly, what were the reasons for the layoff given these somewhat constructive tone that you are right now conveying. Thank you.

Thiago Dos Santos Piau -- Chief Executive Officer

Hi, Victor. Thiago here speaking. Thank you very much for your question. It's an excellent question. When we took this very, very difficult decision, we decided to talk openly about this and we put a release into our website to talk about this. And we -- I wrote down a letter that I provided to all of our team and some of the clients that sought this publicly. We are living in a very uncertain scenarios and our assessment was that we had a mismatch between revenues and level of investments. As you know, we have to put investments upfront and we have a kind of vertical business strategy in which all of our sales team, our customer service, our logistics, they are all in-house and we already invest more than we need for the moment because of future growth that we expect in order for everybody to be trained and to be ready.

Once the COVID-19 happens and we saw the sharp decrease that happened in March and some partial recovery, we saw that the level of certainty required to us to be a little bit more -- work with a little bit more austerity in terms of how we manage our business models. So we decided to improve our level of productivity in many fronts of our company, and we did a technical resizing of our operation. So we looked for efficiency in our back office in many different areas of our firm. And just to give you an example, as we cannot be in the streets at this moment to sell as we do regular through the hubs, we decided to consolidate some of our routes and now we can be actually much more productive, because we don't have to move our sales between different clients. So through the phone we can be much more productive in terms of selling. So we decided to keep our team in the level of productivity that we think that fits best for this moment and we can open opportunities to our people when the economy is is back on track and I think that in two or maybe three months we can establish the size of our sales team in the same level that we had before. And we have the optionalities, higher back our team. So it was very, very difficult decision we always take care and we give a lot of attention and we think properly about this because we are talking about our team lives. It's very difficult, but we also have to manage on a diligent way with discipline our business. So with all that said and given the uncertain scenario that we have ahead that we expect that this trend of recovery continue, but there are some of the things that we don't -- we do not have under control, we decided to look for a better balance between our investments and our revenue.

So I think that we could take care of the people that, unfortunately are not part of our company now, and we just have to say a big and warm thank you to them. We expect to generate this opportunities in a few months, and it may be hire back some of our people. But at this moment, I think that it was the right decision to balance investments, the results that we are seeing. So you can see some impact in our profits in first quarter. We know that second quarter -- we've provided our outlook, but it's a quarter that we have challenges in the way that we have a relationship for our clients and everything that we are doing in many different fronts. Our company has a financial component, which is important. So we want to keep a strong balance sheet and level of profitability to make sure that we will have all our funding lines working in the way that we need. So given all that said, I think that it was a very difficult, but the right movement with the level of information that we had.

Victor Schabbel -- Bradesco BBI -- Analyst

Thank you. And just to make sure I got it. So, given the high level of uncertainty that we still have out there. Questions about the recovery in June, July. This is why you basically took the tough decision of laying off 20% off your staff in May. Right?

Thiago Dos Santos Piau -- Chief Executive Officer

Yes.

Victor Schabbel -- Bradesco BBI -- Analyst

Okay. Thanks for the question and congratulation on the transparency when deciding to take this tough decision in May.

Thiago Dos Santos Piau -- Chief Executive Officer

Thank you very much, Victor. I can tell you that it was one of the most difficult decisions that we have to make, we built this company from the scratch so we feel the commitment to each and every one that works within Stone and is part of our quarter. So it was very, very, very difficult to everyone here, but it was for a better, good for a company and our clients. And in a short period of time, I think -- I know that we'll have the optionality to and the ability to provide the opportunities for everyone back. And we hope that we will recover as a society from this COVID experience and we will become stronger after this.

Operator

Our next question comes from Mario Pierry with Bank of America.

Mario Pierry -- Bank of America Merrill Lynch -- Analyst

Hello, everybody. Thank you for your presentation. Let me ask you two questions. First one is related to the cost savings you expected to get, right? You're laying off 20% of your workforce. But how much does this represent of your total cost base?

And then the second question is more related to your business model, right. Your business model -- your key -- one of your key differences from your competitors was your face-to-face interaction with your clients, was the white-glove treatment that you provided. How do you adapt your business model to dispose COVID environment? Does it mean then that we see a continuation of these trends that we saw this quarter that you have more volumes coming online than hubs? Does it mean that you need to close some of your hubs. So I would like to understand then, how are you thinking about adapting your business plan. Thank you.

Thiago Dos Santos Piau -- Chief Executive Officer

Hi, Mario. Thiago here speaking. Thank you very much for your question. So in the beginning, as we said, we will provide more color in the second quarter on the initiatives that we took in terms of cost and expenses management. We are basically trying to renegotiate third party contracts that we do have, we are improving efficiency in many different areas of our firm. In terms of resizing, I think that we did everything that we had to do. So we are not targeting any other movement of that, that's done, now we are targeting third-party contracts, facilities that we can improve and there is many items in our cost and expenses that we can work to find better efficiency in terms of cost and expense management.

Regarding the business model, actually I have received this question from other investor about hub model versus digitalization trend and the comparison. We don't have to choose, actually we execute both. Keep in mind that we were the one that started this trend of digitalization of brick and mortar SMBs. If you may remember, on the second quarter '19 earnings presentation, actually on page six, we presented our vision regarding our strategy of helping merchants to sell more through many different digital channels. In that presentation, I talked about the importance of the POS and the ERP software and how we integrate with social media and marketplaces to help our merchants to manage their inventory combined. And our investments on MLabs and Delivery Much are 100% aligned with this vision. So we already -- we always executed the digital and the brick and mortar part of their businesses in the same intensity.

I think that we have now the level of technology in our operation that provide us the ability to continue to serve our clients from a home office with the same level of efficiency, as you see, or NPS. And there is one thing that I think it will not change, our clients likes to have us in the counters of their stores. So once we are -- we will have the ability to be in the streets again. Our clients can count on us, we will be at the doorsteps with all of our solutions and our business has the cost of acquisition and lifetime value ratio that gives us the ability to have this direct distribution throughout Brazil. And I think that this is a powerful differentiation that we do have. So we will keep our distribution. There is no change in terms of the long trends of our hubs, we will keep investing heavily in additional solutions that help our merchants to sell more, either at their store or online, as we had already said before. And our long-term vision of integrating the online and the brick-and-mortar remains as a focus to us. And that's why we decided on the second quarter '19 start talking about this vision that we have been executing from that time. So I believe that our company is very well positioned to this trend of digitalization that will only accelerate. It was already presence, we were the ones investing heavily on that front. We will -- it will accelerate a little bit better. And I think that we have the right business model to pursue this trends and provide great results for our clients and for our shareholders.

Mario Pierry -- Bank of America Merrill Lynch -- Analyst

Thank you. That's clear. Let me ask you then -- related to laying off 20% of the people. What does that mean in terms of hub closures. Because, again, right, you coming through heavy investment phase, growing your hubs quite aggressively, hiring people. Now once you layoff people, does that mean that you closed some of these recent hubs. And if you do, how do you make the decision of closing regions, of the country, in big cities, in small cities. If you can give us some color on that will be helpful. Thank you.

Thiago Dos Santos Piau -- Chief Executive Officer

Of course, Mario. Thiago here again. So just to make sure, don't make the assumption that the majority of the people that unfortunately has to not be with us now is from our hubs, right? There is a part of that, but we have other fronts of our company. And we actually -- we didn't and we will not close any of our hubs, actually what we did is that, we improved a little bit our efficiency in all of our hubs. So we keep the same level of hubs that we had in all the regions, we didn't close any of our operations. We are operated through the phone and chats to provide services to our clients. And to sell more we are using digital channels to generate demand, we are asking clients to make recommendations to clients that are operating delivery or in CDs that they can be sometimes with their stores open because this lock down dynamics -- if there is a different dynamics between different cities, that's why we decided to show you the level of TPV that we have in main cities that are most impacted by locked down, but we have the majority of our volume out of the main cities.

So we have clients that are open. So we keep the same number of hubs, we keep with the same routes, we just improved our efficiencies in the way that we operate, mainly because we don't have to invest so much time to move from one place to the other. And in the end of the day to go to the office and then go back to our home. So we have more time to be more productive. So we can take care of our clients, as I said, we are -- we had an impact in March, but we are back in our growth in terms of net adds. And it's just a matter of improving productivity. And once we have the ability to be in the streets we will keep growing our hubs as we did prior to COVID. And actually, I'm very happy to see the level of engagement of our team during this crisis. Thanks for the ability of this team to adapt to challenging times, keeping this strong culture, the level of dedication, improvement in terms of efficiency is incredible. I'm very healthy and grateful to see the efforts of everyone in our firm toward the purpose of serving the SMBs, which are the ones that really needs the attention and our care, because we are now the -- we know that many of our clients are facing challenging times.

Mario Pierry -- Bank of America Merrill Lynch -- Analyst

Very clear. Thank you and congratulations.

Thiago Dos Santos Piau -- Chief Executive Officer

Thank you very much, Mario.

Operator

Our next question comes from Jeff Cantwell with Guggenheim Securities.

Jeff Cantwell -- Guggenheim Securities -- Analyst

Hey, thanks guys for taking my questions. I just wanted to ask you another one on your e-commerce TPV. Maybe just drill down a little bit more there for a second. So you have 51% of the total e-comm volume on your platform early March and April, that's impressive. So you're also talking about a huge online opportunity looking ahead and mentioned that e-commerce is still only about -- it's like a mid-single digit percentage of total retail sales in Brazil. So maybe you could just drill down, because we can see that you're acquiring online TPV increased by 43%, which again is quite good. So as we think about your e-commerce volumes and what they might look like in two to three years. Just on some rough math, should we maybe expect to see that TPV double over two to three years, because that would seem to be the growth trajectory that you're on. And obviously what you're saying is, there is a huge opportunity you're saying in commerce going forward. I would just love to hear any thoughts there and help us think through your growth trajectory and e-comm. Thanks.

Lia Machado de Matos -- Chief Strategy Officer

Yeah, so -- Hi, Jeff. Thanks for the question. I'm going to start answering and then maybe Hafa can complement. Like Thiago has already mentioned, we believe that this digitization trend will continue. So overall penetration of digital in Brazil is still relatively small, right, if you compare to US, UK, any other country which is more developed on that front. So we expect this penetration to continue and we believe we're very well positioned because of two factors. First of all, we really were pioneers within the digital payments space in Brazil. So from our foundation we started to develop our platform thinking about the needs of the digital clients in mind. So our platform is very well prepared. We have an enterprise level solution that works from -- anywhere from SMBs, all the way to very large clients and when we combine the power of our payments platform with our software solutions, we believe that we can drive, we can really help drive this continued digitalization of brick-and-mortar in Brazil.

So we expect this as a trend to continue. Of course, as a consequence of the COVID scenario, this has intensified. And I think the big message here is, we think that we're very well positioned to continue to drive this evolution. So all the data regarding our digital volume breakdowns and growth are in the presentation. I don't know that there is much more to say about those, but we really believe that this trend will continue and that we are very well positioned to help -- both help drive the digitalization of our clients and be a part of this evolution.

Thiago Dos Santos Piau -- Chief Executive Officer

Hi, Lia. Can I add two comments. Hi, Jeff Thiago here back again. Just two comments about this. So first, we never talked about our gateway volumes before and we decided to disclose this at this time to give clarity to everyone, because online is a very important part of our business. We were born actually as a online payment company, right in the beginning of -- the beginning of our businesses. And we had few experience, even before building Stone as entrepreneurs, we built other gateways and acquired companies. So we understand pretty much how the online space works. We decided to create Mundipagg from the scratch as a gateway to improve conversion rates and have faster transaction speeds. As well as we invested in Pagar.me and then made the acquisition, because we saw a level of technology credible in terms of the ability to provide solutions for small clients. And for big ones the way that Pagar.me has its functionality in terms of split payments for marketplaces. So we decided to invest and grow this business. So I think that we have a very strong digital business when you see the volumes of gateway. I see that this as an opportunity to further penetrate payments into that base of clients. So we expect to continue to grow our online businesses, as we have done in the past. And yes, I expect good level of growth for the next years on that.

One additional comment there would like to say Jeff to everyone. I would just apologize that we already have 1 hour and 25 minutes of questions. And we have some other questions. We understand that this is a moment of uncertainty. So we want to take the questions of everyone. So I would like to ask for us to continue a little bit more and take more questions, because it's important to give transparency and information to everyone.

Operator

Our next question comes from Neha Agarwala with HSBC.

Neha Agarwala -- HSBC -- Analyst

Hi. Thank you for taking my questions. I really appreciate the time that you're spending answering all the doubts. My question is on the e-commerce volume once again. You mentioned [Indecipherable] kind of the e-commerce volumes in Brazil [Indecipherable] Stone's platform, how does this compare to the previous quarters? Have you seen an increase or decrease? And how should we think about this going forward?

My second question is on your credit business, we saw that the credit book has more than doubled since December of last year. Should we expect similar kind of accelerated growth in the credit business? Or was this more temporary due to the pandemic you wanted to roll out more credit that would be helpful?

And lastly, how much are the non acquiring revenues from credit from your banking platform software, how much do these comprised as a percentage of your total revenue? And what kind of TPV is generated through these non-acquiring activities. I believe that is not included in your total TPV. So if you can give us any color on the revenue and the TPV you're making through these non-acquiring businesses that would be very helpful. Thank you.

Thiago Dos Santos Piau -- Chief Executive Officer

Thank you, Neha. Thiago speaking. I would try to address all the questions. So, first regarding digital, it's always very difficult to compare our volumes in our market share, because it's difficult to see when the reference number, it's include the airlines are not, wallets or not. So this time, we saw the number of EBIT and by the activities that EBIT listed in this 8.4 billion [Phonetic], in e-commerce, we could take the exactly same type of transactions in our e-commerce part of the business and we could disclose this market share to you.

I think that is pretty consistent with our market share in this space. Mundipagg is a relevant gateway and Pagar.me is growing a lot in that segment. So we expect to have -- to keep have irrelevant presence in digital as we all had. I think regarding credit, we expect to keep the trend of growth in our credit, we have to change a little bit segments in which we operate, incorporate new type of information regarding trends of our clients, but given that we had majority of our clients that [Indecipherable] we have a new clients coming in, we have the ability to lock the receivables and to have this way that our clients pay as they sell, which is very aligned with their business model.

I think this is a very protected business model of our credit. We will not rush to increase our outstanding balance, if we think that we will keep the same pace of growth that you have seen in the previous two quarters and we are very confident in our ability to align interest for our clients and help them grow by investing in their business and provide a little bit more liquidity combined with prepayments that we did. So our expectation is to keep our trends in terms of growth of credit that we -- as we had in our two previous quarters.

Hafa, can you help me with the other parts of the questions please?

Rafael Martins Pereira -- Investor Relations Executive Officer

Hi Thiago. Hi, Neha. Thanks for the question, Neha. So, regarding your third question about the new solutions. I think over time, we see the contribution from new solutions becoming bigger and bigger in our results. I mean this is still a small, right, we are still in the early beginnings of the new solutions. If you look, for example, at credit, which is the one that contributes more to the P&L right now. We have a transactional model in which we receive as our clients sell. So in a way or in another it is related to the volumes that we have with them, right. So it's despite being credit the product itself is designed in a way that it follows the TPV that our clients have with us. So I think as we grow those solutions. We will provide more and more disclosures. But we are already seeing the contribution for our new solutions in our results. And we think and we are very confident that this will increase over time. So the percentage of contribution from those new solutions, we expect this to increase over time.

Neha Agarwala -- HSBC -- Analyst

Thank you so much.

Operator

[Operator Instructions] Our next question comes from Domingos Falavina with JP Morgan. Hey, good evening, everyone. Thank you also for taking the question. And at least to us here. Surprisingly good numbers in light of COVID and all. My question was more, I think, strategy-wise. So everybody seems to be refraining from heading their workforce deployed on the streets, given the risks, but your business model, to a certain extent, relies on that, right? So my question is, what's kind of -- I know you guys usually have strategies for the short, medium and long-term. So my question is, October, November, some of those restrictions get listed in cities. How are you guys thinking about going back to business, like, what's the game plan and also timeframe. What's going to be the sales strategy, just so that we understand a little bit more how you envision the company operating. That's my question.

Thiago Dos Santos Piau -- Chief Executive Officer

Hi, Domingos. Thiago here speaking. Thank you very much for your question. Excellent point. As I said, this moment we are in the right-sizing for the scenario that we have in front of us and we have different perspective regarding lock down measures and the health -- overall health situation in different cities. So there are cities that we can be better working because we don't have a lot of -- we don't have big numbers of infection in cities that are more challenging ones, but we decided to have more than 90% of our team working from home. And the level of technology that we have in the brand that we created give us the ability to proper work for home, either because we are much bad in terms of allocating capital market to generate demand, either because of our clients provides recommendation to other clients to be part of our ecosystem.

And I think that everything that we did in terms of our actions toward society and the level of investments to ask society to buy at local businesses, help and resonate before our brand. So that's why we keep with strong demand in this scenario as we said. [Speech Overlap]

Domingos Falavina -- JP Morgan -- Analyst

You don't have to pay back 20%. You don't have like a 20% workforce by September or 50% by October, November, like you don't have a of lay down plan for coming back.

Thiago Dos Santos Piau -- Chief Executive Officer

Unfortunately I don't. And I would tell you why, it's based on healthy situation here in Brazil. So it's really, really difficult to properly say what will be our ability to be back in the streets. We hope that on a short-term, we will be back there, but it's difficult to tell this. What I can tell you is that, once we have the ability to be safe in the streets we will be very fast to routes again be at the doorstep of our clients. And while that we are operating through the phone and chat very well. So we have the ability to increase our workforce fast, because we have an investment that we did in our HR departments, we have a machine in terms of our human resource strategy here in terms of finding the right people, training them, the on-boarding process. So once we have the ability to expand the streets, we will be the first movers. But we have to see that our people will be safe and protected. We have at this moment our Green Angels working, but with the proper equipment and instructions to make sure that they are safe. So we have to absorb -- we have to see what the dynamics will be.

We have been positive in terms of the recovery, mainly because of the volumes that we are seeing for our clients and small cities -- and how cities are behaving to this. So we are trying to be on a positive side of this, but we have to be rationale and diligent in terms of taking care of our people. But once we have the ability to be on the streets than we were before, we will give this information upfront to everyone. But now I think that it's a moment to watch. And then there's exactly what the health situation will be.

Domingos Falavina -- JP Morgan -- Analyst

Very clear. Thank you very much.

Thiago Dos Santos Piau -- Chief Executive Officer

Thank you very much, Domingos.

Operator

Our next question comes from Jamie Friedman with Susquehanna.

Jamie Friedman -- Susquehanna -- Analyst

Hi, it's Jamie at Susquehanna. I just wanted to ask -- I'll make it brief, but the -- in terms of the Q2 guidance, does that contemplate continuation of the May levels, Lia, that you had articulated? Does it assume some improvement? Does it assume we stay here? I'm just trying to understand better the Q2 guidance inputs. Thank you very much.

Rafael Martins Pereira -- Investor Relations Executive Officer

Hi, Jamie. Thanks for the question. Rafael here. So we do see the improvement, right, as we have mentioned that during this call. So what we have decided to do and I think that we have to be responsible also with the guidance. So we do assume that trend is continuing. And when you look at the 87 index that we provided up to May 15. If you look at few days after, we continue to see this number go up slightly. So I think we are providing that outlook with information that we have in the present. And with very, I mean, granular data that we take every single day on the ground and we were comfortable to provide that outlook for the second quarter. So we have many KPIs that we track every single day in a very detailed manner. So -- and we saw that given the scenario we could be comfortable to provide that outlook for the second quarter yeah.

Jamie Friedman -- Susquehanna -- Analyst

Thank you.

Thiago Dos Santos Piau -- Chief Executive Officer

Just to add, James. I think that what we decided to do here exceptionally because the situation is and exceptional situation. To provide everyone and all of our shareholders the same level of information that we have in our front now. So that's why we updated some top line trends until May 23. And we provide more color about the net adds behavior of March and April and some of the May. So it's difficult actually to assure what will happen from now, there is a lot of uncertainty in the table, but in terms of what we control and the level of investments that we do for the future and how we manage our costs and expenses. We are very confident with the adjusted pre-tax margin that we have gave to the market. And I think that as we see our business model as a strong business model and we have many of the parts of our cost and expenses under our control and we decided to proactively take that tough decision that we set and it's done. We are not making any movement on that front.

Just to be clear, we are confident with the adjusted pre-tax margin that we have disclosed. And by second quarter as we did in the first quarter, we will provide one-offs in FX, on topline, and cost and expenses as we did in the first one in order for all our investors to understand the behaviors and the trends in our business.

Jamie Friedman -- Susquehanna -- Analyst

Thank you.

Operator

Our next question comes from Marco Calvi with Itau BBA.

Marco Calvi -- Itau BBA -- Analyst

Hi. Thank you for taking my question. My question is actually regarding the financial expenses. You guys highlighted two effects that combined resulted in a $36 million increase in the financial expenses. The first one related with the sale of receivables. And the second one, related with higher cost of funding. My question is, are you expecting that to happen during the second quarter. Those effects continue to happen. And if so, is this included in your informal guidance for the second quarter EBITDA margin. Thank you.

Thiago Dos Santos Piau -- Chief Executive Officer

Hi, Marco. Thank you very much for your question. Thiago here speaking. So I'll start to say that, yes, everything that will be in our P&L is included in the outlook that we have provided to you. So there will be no one-off items outside that margin. So when we say that adjusted pre-tax margin in that level, it's already accounts for everything that we think that will happen here. That's the first thing. And then we will give you one-off effect separately, but that outlook has everything inside. Okay. That's the first thing.

Regarding financial expense. Let me try to explain a little bit about the dynamic. So we were already -- we are always very conservative in the way that we measure our treasury. That's why we decided to have more cash than sometimes needed for our company. And what we saw was in the beginning of this when we had this -- that level of could breaks that you may remember in the beginning of March. From the beginning that we saw how capital market were behaving and the credit market were behaving, we decided to manage our cash position every single day and our Treasury team was incredible in terms of working around all the credit lines that we had. I think that our team did the great job. So we decided to sell more receivables than normal in order to improve liquidity and we decided to sell with longer duration. We have a conservative approach of improving our liquidity.

We saw some pressure in terms of spot lines during the secret break scenario and we decided to balance this with a little bit of our own cash to put the negotiations on the right places. And with that we changed some of the lines that we have here within our firm. So we put an extensive cash flow disclosure in our release with all the movements that we did throughout that period. So you will see that on a short-term period we did many movements in terms of strategy to make sure that we would be financially strong. Because our clients see Stone as a liquidity safe harbor. So keep in mind that during this secret brick scenarios and all the the challenging and volatile scenario that we saw in capital markets than in the credit markets of COVID, we were the ones prepaying more than BRL11 billion rise to our clients and extending credit to them in a safe operation. So to beat this liquidity Safe Harbor to our clients is something very important. It's a brand creation for the future that we did, then we work it hard to make sure that we were managing our treasury team in the best way possible.

So those are basically the effects, despite this decrease in overall rates in base rates that we see it, the combination of the additional sale receivable, the longer duration and there is some spot lines cumulated in that negative impact that we had disclosed and we decided to absorb this one-off effects and keep the strength of our business model. So we already have in May a stable funding prices. I think that -- or in May, the situation is much better than we saw in the beginning of March and April. So the scenario in terms of funding lines, price are much more stable than before. And we keep a strong cash position and liquidity ratio to our firm because it's important to provide all the prepayments in the credit operation that we give to our clients.

Marco Calvi -- Itau BBA -- Analyst

Thank you very much. Very clear.

Thiago Dos Santos Piau -- Chief Executive Officer

Thank you very much. Marco. I think we don't have -- Do we have any other questions.

Operator

We have no more questions.

Thiago Dos Santos Piau -- Chief Executive Officer

Okay, thank you very much, operator. I would just say as final remarks, I would like to thank you very much everyone here in the call. Thank you for the amazing questions. Thank you our long-term shareholders that have supported us throughout this challenging times. We have received many emails by our shareholders supporting us. And I think that the most important message is that, we are very grateful to all of our Stone team members, because of the extraordinary efforts during this crisis. And as I said in the letters that we wrote to our shareholders, we believe that together, business and society will find new and innovative ways to conquer COVID-19 and its effects using technology, care, humanity, that's part of our life, and our SMB clients and all of our clients can count on us with our efforts to improve their lives and find new ways to win this situation. We keep strong, we think that our business is very strong, we keep excited with the opportunities to grow our business over the long run, we have tremendous opportunity ahead of us and we will keep this plain discipline, working hard to help SMBs strive in their entrepreneur road. So thank you all and see you next quarter.

Operator

[Operator Closing Remarks]

Duration: 105 minutes

Call participants:

Rafael Martins Pereira -- Investor Relations Executive Officer

Thiago Dos Santos Piau -- Chief Executive Officer

Lia Machado de Matos -- Chief Strategy Officer

Tito Labarta -- Goldman Sachs -- Analyst

Felipe Salomao -- Citibank -- Analyst

Craig Maurer -- Autonomous Research -- Analyst

Jorge Kuri -- Morgan Stanley -- Analyst

Victor Schabbel -- Bradesco BBI -- Analyst

Mario Pierry -- Bank of America Merrill Lynch -- Analyst

Jeff Cantwell -- Guggenheim Securities -- Analyst

Neha Agarwala -- HSBC -- Analyst

Domingos Falavina -- JP Morgan -- Analyst

Jamie Friedman -- Susquehanna -- Analyst

Marco Calvi -- Itau BBA -- Analyst

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