Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Stoneco LTD (STNE -0.45%)
Q3 2021 Earnings Call
Nov 16, 2021, 5:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good evening, ladies and gentlemen. Thank you for standing by. Welcome to the StoneCo third quarter 2021 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 materials 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 the IFRS.

Reconciliations 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 everybody 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. Please note this event is being recorded. I would now like to turn the conference over to your host, Rafael Martins, VP of finance and investor relations officer at StoneCo.

Please proceed.

Rafael Martins -- Vice President of Finance and Investor Relations Officer

Thank you, operator, and good evening, everyone. Joining us here today, we have Thiago Piau, our CEO; Lia Matos, chief strategy officer; and Marcelo Baldin, our CFO. Today, we will present our third quarter 2021 operational and financial results, as well as discuss some recent trends that we are observing. Now, I will pass it over to Thiago so he can share the main highlights of our performance.


10 stocks we like better than Stoneco LTD
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.* 

They just revealed what they believe are the ten best stocks for investors to buy right now... and Stoneco LTD wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of November 10, 2021

Thiago Piau -- Chief Executive Officer

Thank you, Rafa, and good evening, everyone. As we start a new phase of our business with the full integration of Linx and as we complete three years as a public company, I want to start on Page 1 by talking about what motivates us to work hard every day, which is our purpose. Our purpose is to serve the Brazilian entrepreneurs, transforming their dreams into results. In our point of view, any person who wakes up every morning to build or run a business is an entrepreneur.

We want to help them think bigger and turn their dreams into business results by serving them with excellence and helping their business to thrive. We believe that serving entrepreneurs is the best way we can positively impact Brazilian society. We want to do this by promoting fair financial relationships, enhancing business productivity, and providing more sales options. We aspire to be a positive force to transform the retail and financial industry for more balanced relationships.

To achieve our goals, we decided to build the best financial operating system for Brazil entrepreneurs. Since our early beginnings, we have always strived to build our business around merchants. This has motivated us to build the hyperlocal distribution that enable us to be closer to our clients, the proprietary technology that provide cost efficiency and the reliability that our clients want, and the best customer service in our industry. With the acquisition of Linx and our current set of solutions for multiple retail verticals, we seek to build the best workflow tools to generate efficiency for our merchants and help them sell more through multiple channels.

We are only at the beginning of our journey in combining software and financial services to bring even more tangible results to our clients, and we are really excited with the opportunities ahead. On Page 2, we show that at the end of third quarter, our consolidated TPV reached 75 billion reais, representing 54% year-over-year growth and 26% quarter-over-quarter growth when excluding Coronavoucher volumes. More importantly, our active client base increased twofold when compared to last year, reaching 1.4 million clients, driven by our record-high net addition of clients in the quarter of 294,000. The number of active digital banking accounts grew at an even faster pace, surpassing 420,000 in the quarter.

In software, with the inclusion of Linx, we had over 200,000 clients using at least one of our solutions with annualized revenues close to 1.3 billion reais, up 17 times year over year. Even more encouraging, the retention rate at Linx Core stayed at high levels of 99%. Now moving to Page 3, we show that TPV growth was primarily driven by the MSMB operation, which is the combination of micro and SMB operations. The MSMB TPV grew at a two-year CAGR of 61% in the quarter, accelerating from 48% in the second quarter and 42% in the first quarter.

While the more mature SMB operation was able to grow TPV over 70%, the micro merchant volume surged to 3.4 billion reais in the quarter, nearly 23 times higher than the previous year. On Page 4, we show that the consolidated net adds in MSMBs also accelerated to approximately 290,000 in the quarter and, as a result, we reached over 1.3 million active payment clients, over two times higher than last year and 3.3 times higher than two years ago. We also posted a record high net adds when excluding the micro-segment with over 80,000, of which approximately 77,000 in MSMB segments, representing an 82% growth quarter over quarter. As Lia will detail further in the presentation, we balanced this accelerated growth with solid unit economics.

We reduced client acquisition costs, improved the average revenue per merchant, both in SMBs and micro, and kept payback periods under control, ranging from 11 to 15 months. Before I pass it over to Lia, I want to recap our main strategic movements and what lies ahead. As we indicated in the beginning of the year, we will keep investing heavily in our engineering, sales, marketing, and operational teams to expand our capabilities and deliver on our purpose. In the third quarter, we significantly increased the level of investment in our business.

We have invested approximately 120 million reais more opex in the growth of our operation and a new business when compared with the third quarter of 2020. This, combined with higher interest rates, impacted our margins. And even though we started to reprice clients, managing our payback strategy with discipline, we are doing this in a way that we keep good level of growth and don't jeopardize the relationship with our merchants, which is the most important thing given the opportunities we have. Looking ahead, we see several avenues of growth that reinforce each other to create more value to clients with good unit economics.

We still see a big room to expand our MSMB client base given that we estimate there are over 8 million SMBs and over 20 million micro clients in Brazil. Our ability to grow active base compounds with the potential to increase revenue per merchant over time by offering additional solutions to our clients. In credit, we envision three products to attend to different client needs. Our current credit products that we are turning around, credit card and overdraft, with continued focus on engineering, improvement of our operation, and the strengthening of the team.

We will start testing our credit product in small scale shortly. Additionally, I would like to welcome the team of Gyra+, a recent investment that we expect to close in the fourth quarter. We see the software opportunity in SMBs at the very beginning. Our footprint and distribution, combined with vertical knowledge and integration capability, provide the building blocks to our vision of software and integrated financial services in the SMB space.

When we look at Linx clients, they have approximately 350 billion reais in annualized GMV and we monetize only 0.3% of such value. Also, those clients have approximately 200 billion reais in annual TPV and mid-single-digit penetration with our payment solutions. We see plenty of room to grow organically in current verticals, expand vertical coverage for new investments, further help our clients with integrated financial services offers and with products to help them sell more through multiple channels. Lastly, we will always keep our eyes on the long-term opportunities, building a humble organization, eager to learn, devoted to serve our clients in the best way we can envision, and helping the team to reach its full potential through an ownership mentality.

With that said, I will pass it over to Lia. Lia?

Lia Matos -- Chief Strategy Officer

Thank you, Thiago, and thank you, everyone, for joining us today. I want to start on Page 5, talking about growth and engagement with our financial operating system. Active banking client base increased over fourfold when compared to last year, reaching approximately 423,000 clients, with the number of SMB clients who are settling transactions in the Stone account reaching 320,000. We also saw main engagement metrics improving on a quarterly and yearly basis, such as total accounts balance, which reached over 1 billion reais at the end of the quarter, a threefold increase year over year.

Net cash inflow from the legacy credit products in the third quarter was 483 million reais, which reduced the credit portfolio to approximately 1.6 billion reais from 2 billion reais in the previous quarter. The coverage ratio remained above 100%, and our legacy credit portfolio is performing as expected. This quarter, we have shifted most of the focus in the credit business to building the team, engineering capabilities, and operations so we can resume credit offerings to our clients. We envision building three credit solutions based on their most important business needs.

First, we're turning around our credit product by implementing improvements to our original short-term loan so we can carefully move forward in test mode, even with the registry system not working as expected. Such improvements are the inclusion of personal guarantees from business owners and other businesses they may have; a better risk scoring through additional data; implementing minimum and maximum monthly payments to facilitate early signs of default while providing more flexibility on payment terms; improving the product so that clients can better understand impacts on their future cash flows; and lastly, enhancing our early negotiation capabilities. Also, we're working to launch two short-term lower-ticket products: first, credit cards, which will provide our clients with a credit limit to use on day-to-day business expenses; second, overdraft, giving our clients the convenience when they need to pay for unexpected or emergency expenses and their cash flows are not enough to meet those needs. As a step toward strengthening our team, we are really happy to welcome the team of Gyra+, a data-driven SME lender, which operates under a fee-based, asset-light approach.

We plan to initiate a testing phase in small scale with short-term loans between the fourth quarter of '21 and the first quarter of '22, with focus driven toward getting feedback from engineering and improvements of the operation. Our insurance solution, though still in pilot mode, is showing encouraging initial results with 14,500 active contracts in which we earn a fee without underwriting risk. Merchants, their families, and employees have multiple insurance needs, and we're working to provide them superior financial protection. This is another important step toward our goal to be the best financial operating system for Brazilian merchants.

On Slides 6, 7, and 8, I will provide more color on unit economics and monetization opportunities we see ahead. In Slide 6, we show that we have been able to accelerate TPV growth and net addition of clients in the MSMB segments while keeping healthy levels of monetization. Average revenue per merchant in SMBs is around 365 reais while micro is 117 reais, showing improvement compared to last year. We also improved overall acquisition costs with CAC roughly stable for SMBs and 17% lower for micro-merchants and maintained a stable operational cost to serve but with higher funding costs.

As a net result, the payback period of new cohorts has ranged between 11 and 15 months. Due to the increase in the Brazilian base rate experienced throughout the past quarters, we have started to adjust our commercial policy to the new interest rate environment. In Slide 7, we show that in banking, we have been able not only to grow client base but also improve monetization for each client. Banking number of clients increased fourfold, and average revenue per user improved 30% year over year in the quarter.

The insurance product, which is still in pilot mode, also improved the average revenue per user since its inception. In Slide 8, we want to show the rationale behind our investments in growth. Taking a broader look at the monetization opportunity in SMB merchants, we see that the average revenue per merchant that uses payments is 340. And when they use our banking products with a prepaid card, they generate an additional 30 reais monthly.

If they decide to use the protection of life and business insurance, they generate an additional 40 reais monthly. Clients that have fully paid down their loans with us generated a monthly revenue of 327 reais when we look on an accrual basis. Lastly, the average monthly subscription for SMB clients currently using our POS and ERP solutions is 160 reais. In Page 9, we give a quick update on our key accounts business, which grew volumes by 10.5% backed by two different underlying trends: first, sub-acquirer volumes, which continue to decrease share in overall volumes and revenues, decreased when compared to last year.

Currently, our top two sub-acquirers represent only about 1% of our revenue, net of funding costs, down from approximately 3% the previous quarter. Conversely, platform services increased volumes by 55% and currently represent around 60% of key account revenues. Here, we enable third-party software providers and platforms to embed payments and financial services through API integration. On Slide 10, I want to shift to talk about our software business.

In the third quarter of '21, our consolidated software revenue was 314.8 million reais with 200,000 software clients. Revenue was 17 times higher than the third quarter of 2020 or 27.5% higher on a pro forma basis, considering Linx. Linx's recurring revenue grew 15.5% in the quarter, with core POS and ERP solutions increasing 21.2%, driven by both higher average tickets and an increase in the number of stores served. The consolidated software revenue from our portfolio ex Linx, which encompasses 10 companies, grew 182% year over year to 53.1 million reais.

On Page 11, we give an update on Linx integration and our priorities ahead. This quarter, we executed the new leadership organization, the integration of main back-office functions, especially finance, migrated half of Linx's base of acquirer clients with approximately 80% having already opted in, and we plan to conclude the process by the end of the year. We are now shifting focus to capturing the growth opportunities we see ahead and prioritize execution within different parts of the business. The first set of assets shown in the page is where we are investing in growth and quality.

We will continue to drive organic and inorganic growth within each vertical and invest to expand presence in new verticals. Our OMS and Impulse solutions are key assets to help our clients digitize their catalog, better reach consumers, and sell more through multiple channels. Linx's brick-and-mortar gateway and QR Gateway are important building blocks to enable software and payments integration, and we will continue to strengthen and improve such solutions. On Page 12, I want to highlight the strength and opportunities within the Linx business, with its deep knowledge of different verticals attracting a powerful set of loved brands within Brazilian retail.

Linx's software solutions are present in over 106,000 locations, some of which are the main franchises of Brazilian retail, where the relationship with stores is similar to that of SMBs. Linx's store locations jointly transact close to 350 billion reais of GMV and around 200 billion reais of TPV, of which we have only mid- to single-digit payments penetration. On Page 13, we take a broader look at our software business, considering both Linx and Stone software portfolio and the representation from different client tiers. Key accounts currently represents 9% of total software revenues.

For this client segment, our execution is geared toward a high level of customization of large retailers' workflow. Given the digital omni-maturity of our clients, this is an important segment regarding partnerships we're building with consumer-facing companies related to marketplace integration. Mid- to large clients account for 80% of software revenues and, in this segment, vertical expertise is key. We see an attractive monetization opportunity by creating integrated financial services offerings specific to each vertical's needs.

Also, we see the opportunity to help these clients to sell more through multiple channels with an efficient omnichannel integration. SMBs account for 11% of overall software revenues. We have over 120,000 SMB clients using software and 1.3 million MSMB payments clients. We are working to leverage on our distribution capabilities to drive organic growth of software in this client segment.

On Page 14, we wanted to share some initial experience where we're working to improve the efficiency of our clients' processes through payments and open banking integrations with software. We highlight multiple benefits depending on their specific needs, such as enabling automatic settlement between service providers and hired professionals such as hairstylists and hair salons. This specific feature is possible through the integration of Trinks, our POS, and ERP for beauty with the Stone platform and saves our clients time and money by avoiding double taxation. Like this example, there are several others highlighted in the page that are brought by different integrated solutions.

We're only at the beginning of this journey, but we're very excited with the value we can bring to our clients in the future. Now I will shift it over to Rafael who will give an update on our financial performance in the quarter and the evolution since our IPO. Rafa?

Rafael Martins -- Vice President of Finance and Investor Relations Officer

Thanks, Lia. Now we are entering the last section of the presentation, the financial highlights. As shown on Slide 15, our total active client base grew over twofold, reaching nearly 1.4 million clients while micro merchant active base grew by over eight times to 545,000 clients, record net adds excluding micro of 80,000, ending the quarter with 847,000 clients. Our total revenue and income was 1.47 billion reais in the quarter, representing a 57% increase when compared to last year.

Linx's consolidation, which added 262 million reais in revenue, and the growth of our existing business contributed positively to this growth and the lack of revenue from our credit product contributed negatively. Our business, excluding Linx and our credit product, grew revenue by over 55% year over year. The credit product, on the other hand, which contributed with 156 million reais revenue in the third quarter last year, didn't contribute to our revenue this quarter because we temporarily paused new disbursements, as mentioned in our previous earnings call. Looking at our TPV, we reached 75 billion reais in the quarter or approximately 300 billion reais on an annualized basis.

This does not include Linx Pay volumes. TPV ex Coronavoucher grew 53.6% year over year. In Slide 16, we show our consistent market share gains in payments. Looking at the main players in the market with public available data, StoneCo reached nearly 13% of market share in TPV.

If we consider only our MSMB volumes, market share over total market volume is approximately 9%. More importantly, we can see that our MSMB business has been gaining share in a very consistent way with our highest-ever quarterly market share gain of over 1.3 percentage points, as you can see on the chart in the bottom right of the page. Moving on to Slide 17, we show the pro forma results with Linx, both including and excluding the credit product. As Thiago mentioned, the pro forma growth of our business was 46% when excluding the credit product and 26% when we see reported numbers with credit.

There are four elements I would like to highlight here. First, our business kept high growth levels after the acquisition of Linx. Interesting to highlight, our business model is protected against inflation, both in the payments business, which captures a take rate of nominal transactions; and in the software business, which has inflation-adjusted contracts. Second point to highlight is that in this quarter, we had significantly higher opex investment in growth and new solutions, as Thiago has mentioned previously.

So, you can see cost of services and selling expenses increased at a higher pace than our revenue. In cost of services, we have investments in TAG, our registry platform, and other data center costs to support the growth of our operation, incremental investments in our technology, customer service, and logistics teams. In selling expenses, we have investments in the expansion of our hub operations, higher marketing expenses, and higher investments in TON. The third point to highlight is that our administrative expenses increased significantly over 100% year over year.

Here, we had over 63 million reais in this quarter of one-off fees paid to advisors relative to the Linx and Banco Inter transactions besides higher amortization of fair value adjustments on intangible assets related to acquisitions and G&A expenses related to our software operations apart from Linx. Important to note that in this quarter, we have separately disclosed the mark-to-market results from our investment in Banco Inter. We had a loss of 1.3 billion reais this quarter, compared to a gain of 841 million reais in the previous quarter. The fourth point to highlight is financial expenses.

As Lia mentioned, basic interest rate has increased significantly in Brazil over the last quarters. This, combined with strong growth in our prepayment volumes, led to an increase in financial expenses pro forma for Linx of over 290%. We are adjusting our commercial policy to this new environment, balancing the pace we expand our business with healthy monetization, but we still see in the third quarter and in the fourth quarters of 2021 lower margins than usual because of that effect. As we mentioned a couple of times in the past, usually, there is a lag between changes in CDI and our commercial strategy adjustment.

As a result of those factors, our adjusted net income was 133 million reais in the third quarter. If we exclude our credit solution, adjusted net income was 152 million reais mainly because of the financial expenses we still had in our P&L related to our legacy credit portfolio. Now let's move on to Page 18, where we show our reported P&L. We grew revenue by 57%, with subscription revenue growing over 300%, mainly as a result of Linx consolidation.

Excluding Linx, subscription revenue grew 64%, largely driven by higher active client base combined with higher contribution from our software solutions. Transaction revenue grew less at 23%, mainly because of Coronavoucher revenue in the third quarter of last year. Excluding those, transaction revenue grew a little over 47% year over year. Our financial income grew by 32% year over year, including revenue from our credit solution, which contributed to 156 million reais in revenue in the third quarter of 2020 and virtually zero to this quarter's results.

Our prepayment business continues to grow at a strong pace, with our financial income, excluding credit and Linx, growing by approximately 100% year over year. Lastly, other financial income increased 96.7%. This increase was mostly because of the higher base rate in Brazil, which was partially compensated by lower average cash balance. Cost and expenses increased mainly because of Linx consolidation and for the reasons I have just mentioned before in the previous page.

In our press release, we give more details of the growth drivers, excluding Linx consolidation. Moving on to Slide 19. We can see the evolution of adjusted net income, which reached 133 million reais in the quarter. Also, as we have mentioned in our earnings release last quarter, we have now evolved our managerial view of adjusted free cash flow and other cash flow metrics.

We believe this provides a more assertive way to look at cash flow, especially given the dynamics of prepayment and credit solutions, as well as additional disclosure to investors to understand our business. In our earnings release, we detail the changes we have made. So, looking at the table on the right-hand side of the presentation, we see that our adjusted free cash flow, which does not take into account our cash flow from credit and prepayment operation, remained relatively stable year over year despite a strong increase in investments. We have generated 238 million reais of adjusted free cash flow in the quarter, slightly higher than last year.

The increase was mainly driven by a much higher cash net income, which grew by 168%, and lower capex, partially offset by lower cash flow from working capital variations. In the quarter, our prepayment business has required 2.5 billion of cash reais, which we funded mainly through sale of receivables. Our credit business has released over 480 million reais in cash flow as we are collecting loans from our legacy portfolio with no new disbursement. Also, we have disbursed 4.7 billion reais in the quarter for the acquisition of Linx, which was funded by our follow-on offering in the third quarter of 2020.

Moving to Slide 20. Three years have passed since we became a public company, and we believe it is a good moment to come back to some of the messages we have provided by our IPO, what we have done since then and what we are doing now. By that time, we intended to develop solutions in the banking space and to serve micro-merchants. Since then, our solutions in banking and micro merchant space have gained significant scale despite being still in early days.

Active clients in banking have surpassed 420,000, and we have surpassed the mark of 0.5 million merchants with our TON solution. Looking ahead, we aim to be the best financial operating system for Brazilian merchants, as Thiago has mentioned in the beginning of our call. Also, we have mentioned back in 2018 that we would selectively pursue acquisitions, especially in the software space. Since then, we have invested in 12 companies, being today the No.

1 company software for retail management in Brazil. And looking ahead, we aim to be the best workflow tool for Brazilian merchants and help them drive sales through multiple channels. By the IPO, we also said that we intended to continue to grow our base of Stone hubs. We have increased from 180 proprietary hubs in 2018 to over 450 hubs today, gaining density of coverage.

Our client base increased from a little over 230,000 by the third quarter of 2018 to 1.4 million clients now, of which 1.34 million are MSMBs. As Thiago said, we believe there is still plenty of room to grow with nearly 30 million MSMBs in Brazil. Following to the next slide, we show how our metrics changed since our IPO. We grew our client base at over 80% three-year CAGR and our TPV and revenue in a 50% and 53% three-year CAGR, respectively.

Our adjusted net income has increased from 89 million reais in the quarter to 133 million reais now, although we continue to invest heavily in our business. We improved our ability to recruit talent with over 130,000 applications to our Recruta program this year. We maintained very high service levels with calls rated as excellent in our customer support, roughly stable at 92% and the SLAs from our logistics at 96%. Also, we have raised the bar for ourselves, whereas in 2018, we had the goal to pick phone calls in 20 seconds, we now do it in five seconds.

We are proud of what we achieved since we got our first client in 2014, but we are much more excited with the opportunities ahead of us. We are just in the beginning of our journey. With that said, operator, can you please open the call up to questions?

Questions & Answers:


At this time, we're going to open it up for questions and answers [Operator instructions] Our first question will come from Tito Labarta with Goldman Sachs. Please go ahead.

Tito Labarta -- Goldman Sachs -- Analyst

Hi. Good evening. Thanks for the call and the presentation and taking my questions. A couple of questions.

One, maybe just to understand a little bit on Linx and some of the opportunities that you see there. I mean, you gave some color in terms of what you're looking to do. But I was curious on the payment volumes that you highlighted from Linx, around 200 billion reais. Any indication on potentially capturing those volumes over time? And also, on the omnichannel strategy, as you get some of the software to your merchants, any color you can give in terms of like the potential synergies that can arise? And then the second question, I guess, in terms of your margin.

I understand your financial expenses went up. You're investing a lot in the business. I think you said margin could fall again in 4Q. Your margin today is 9%, well below historical levels.

Do you think you're going to continue to see pressure on that because of the higher financial expenses and investments in the business? Any pathway to get back to those historical margins that you had in the past? Any color on that would be helpful. Thank you.

Lia Matos -- Chief Strategy Officer

Hi, Tito. This is Lia. Thank you so much for the question. I will get started and then pass it on to Thiago.

So, regarding Linx, Tito, I think the big message here is we do see a bigger pool of TPV than we anticipated prior to actually administering the company. And in many ways, we see more opportunities to add value to our clients here. But our focus is really about thinking more deeply about each vertical. And I think we try to illustrate a little bit these initial tests and pilots that we are running.

So, the direction that we will go here is not to think about pure commodity payments penetration but thinking how we can really add value to our clients and where, in the workflow of those clients, we can actually simplify their lives through these payments and open banking integration. So, we want to help our investors to see these opportunities as we see them, but we're not really ready to provide any synergy guidance at this point. I think, yes, omnichannel is the second part of your question. So, I think in omnichannel, the big focus is when we show that pyramid where we show the Linx clients by tier.

And when we think about the big clients, right, the key account clients within Linx, those are naturally the clients that are more digitally mature. All of them already have -- most of them already have omnichannel operations. And our initial focus will be on helping those clients connect to different consumer ecosystems, and I think Inter is an example, right? And I think as a second step on the mid, large clients, we do see a huge opportunity as well to help them in a more simplified way to become omnichannel and digitize and be able to sell through multiple channels. And I think when we talk about the SMB opportunity, that's a slightly more long-term opportunity that we see.

Thiago, you want to talk about margins?

Thiago Piau -- Chief Executive Officer

Yes, Lia, thank you. Tito, Thiago here. Thank you for the question. I'll try to be helpful about Linx, too.

I think that we are executing the first phase when we think about the payments and financial services, which is really migrating clients from the platform of Linx Pay to our own platform and planning the execution with the integration and all the sales process in order for us to implement the strategy we believe into the client base of Linx. So, as we said, 80% of the clients already accepted to migrate. We are focusing on making this migration in the best way possible. And we want to end this in this fourth quarter, maximum in the beginning of first quarter.

And we're implementing all the processes needed to penetrate the client base we have. We are happy to see that Linx is much more concentrated around the medium and small clients that we believe previously, so we see good opportunities here. In terms of omnichannel, as Lia said -- Page 12. There are some examples of very good brands.

Can you hear me? Yes, working?

Tito Labarta -- Goldman Sachs -- Analyst

Yes. I can hear you now.

Thiago Piau -- Chief Executive Officer

OK. So, what you see on Page 12, you can see some of the brand -- I'm sorry, the team was saying that it was not working here, sorry. So, we show some of the brands that we have here. But much more than this, I think that those clients, they are much more concentrated into brick-and-mortar sales.

If we can, in a very simple way, bring them the ability to sell through multiple channels, through e-commerce platforms, through conversational platforms, through social, we will really bring new sales for them, and that's where we really change the relationship with merchants. We are really focused toward that. Talking about margins, as you said, I think that we have unusual margins. And in the short term, you should see margins a little bit -- we should see margins lower than usually.

And we see this as a temporary, not structural. Some elements here to have in mind when we think about margins. First, we've decided to set our company to be much bigger in terms of scale, and we are investing heavily with unit economic discipline. So, as we grow, Tito, we will get the benefit of operational leverage.

Given that we see good returns on the investments we are doing, and we are trying to show this by the payback period that we experienced in the MSMB, we think that's worth it to keep high levels of growth in the business. Second is that we are investing in new fronts to serve our merchants. So, you can see the additional products. In a very accretive way, we are trying to show what we want to build for the future to enhance the relationship with our merchant in Slide 14 and Slide 8.

So, as we progress toward our mission, we expect our margins to considerably expand. Third, our business has some exposure to macro environment, as Rafael said, in a positive and negative way. We are positively exposed to inflation given that it increased TPV, and the software contracts are naturally adjusted by inflation. But we are negatively impacted by interest rates as funding is a very important resource to grow our company.

The way to mitigate this negative exposure is really through products and the right pricing strategy. So, when we scale our banking solutions, we have more outstanding balance of our clients. Today, we have over 1 billion reais in outstanding balance. And we are here building a natural hedge.

And although there is a lag between interest rates increase and our repricing strategy because we don't want to jeopardize the relationship with our clients and keep good level of growth, you can see that our strategy will move forward fast, but there is this lag that we have to pay attention. So, moving forward, we expect our margins to increase by the facts that I just told you.

Tito Labarta -- Goldman Sachs -- Analyst

Thanks, Thiago. That's helpful. Just to understand, going forward, does that mean next quarter, next year? Is that a longer time frame in terms of those margins increasing? And you also said you'll remain sort of below historical levels. Now is there a downside from the 9% margin we saw this quarter, or you just mean relative to the near 25%, 30% margins, you should be below that? Just trying to quantify a little bit some of the evolution because, you know, big delta from where you were to where you are today.

Thiago Piau -- Chief Executive Officer

Yes, Tito. So, we are already executing the repricing strategy, both in sales and in the current client base we have. We are taking a cautious approach, as we said, not to jeopardize the relationship but we are doing well. So, we are executing this with discipline throughout November and December, and I think that we are moving well.

When we think long term about margins, we expect to have a high-margin company, mainly because we believe in our ability to drive much more engagement of our clients with the solutions we are building, keeping the cost to serve under control. So, we think that it's worth it to expand the base we have because of the strategic road map we see in front of us. So, I think that very short term, you will see level of margins higher than what we had one year ago. But midterm, we expect a very high margin company because of our expectations in terms of products.

Tito Labarta -- Goldman Sachs -- Analyst

OK. Thank you, Thiago.


Our next question will come from David Togut with Evercore ISI. Please go ahead.

David Togut -- Evercore ISI -- Analyst

Thank you. Good evening. Could you expand upon your expected timeline to restart credit origination, how the integration with the registry of receivables is going, and when we might start to see some operating leverage in the credit business?

Lia Matos -- Chief Strategy Officer

David, Lia here. Thank you for the question. So, as I mentioned, we expect to start retesting our original product, which is short-term loans, between the fourth quarter of '21 and the first quarter of '22. We're implementing in this product several improvements so that we can start to test and test the impact of those improvements without needing to rely on the registry systems fully functioning.

So, those improvements are, for example, the inclusion of personal guarantees from the business owners and potentially other business they may have, improve risk scoring through additional data. And part of that has to do with a very important fact that I didn't detail much, which is incorporating hub operation into the credit much better than we did before. So, part of that data has to do with the thousands of interactions that our sales agents, our Green Angels, and our customer service team have with our clients every day; implementing some product adjustments as well, so minimum and maximum monthly payments that really facilitate and make it more flexible for our clients to pay and enables us to actually identify earlier signs of default, and improving better, just UX, right, better experience for those clients that they can really interact with the product throughout its life cycle in a much better way; and enhancing our early negotiation capabilities, this also has to do with incorporating hubs better into the process. So, we really will test all of these improvements as we start testing in the fourth quarter and the first quarter of 2022.

We will not wait for the registry to be fully functional, and we want to do this without having to rely on that. But that said, we do expect that long term, the registry systems will work and that will get into regime eventually.

David Togut -- Evercore ISI -- Analyst

Thanks for that. Just as a follow-up, when do you think you'll start to originate credit and volume? In other words, you talked about starting to retest in the fourth quarter this year and the first quarter of next year. But when do you think your lending product will be back at volume levels that we saw prior to halting the origination of credit?

Thiago Piau -- Chief Executive Officer

Hi, David. Thiago here. I think that we are not ready to provide a specific guidance in terms of scaling the credit. We are really focused toward engineering and getting the feedback of clients and all the clients' experience that we have learned throughout this.

We're near executing the credit. We expect to start disbursing this quarter. And we think that this mindset toward engineering, toward client experience, making sure that all the negotiation and renegotiation process works in the best way possible for clients is the mindset that we need to have today. I think that by maybe the end of the first quarter or beginning of first quarter, it would be easier to provide you some guidance.

In terms of scale, we want to keep our minds now toward engineering and getting the product in the way we want.

David Togut -- Evercore ISI -- Analyst

Understood. Thank you.

Thiago Piau -- Chief Executive Officer

Thank you, David.


Our next question will come from Mario Pierry with Bank of America. Please go ahead.

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

Hi, everybody. Good evening. Thanks for taking my questions. Two questions as well.

A little bit repetitive, but I wanted to be clear. So, on Linx, when you first announced the acquisition, you expected Linx to be EPS accretive in the first year. Is that still the case? When we look at Linx, right, the revenues are annualizing close to 1 billion reais. Are you seeing -- should we expect any meaningful acceleration in revenues of Linx then in the next 12 months? And especially also on costs of Linx, right, as you mentioned, you have been investing a lot make sure that you migrate clients into your platform.

So, I wanted to understand then a little bit better, is this transaction EPS accretive or not in the first year? And then the second question is about your ability to pass on higher prices as you have higher financial expenses, right? I understand that other players are in the same position as you are, given the wholesale funding of the business. However, my concern is that some of the incumbents might see this as an opportunity to regain market share, might be reluctant to pass prices. So, can you discuss a little bit about the market dynamics and your ability to pass on higher prices going forward? Thank you.

Rafael Martins -- Vice President of Finance and Investor Relations Officer

Rafael here. Thank you for the question. So, regarding your first question of EPS accretion. So, Linx is a very healthy business in terms of margins, so EBITDA margin is very healthy.

When we look at interest rates right now, Linx bottom line today is contributing negatively to our results, so we are reassessing in our rebudgeting for next year and the opportunities that we see, the EPS accretion. We do believe that this is a very accretive business. Regarding the timing of when this should be accretive, we'll come back to you in more details with the synergies. But I think that the interest rate scenario makes the bottom line in terms of net income and EPS slightly lower than we expected.

But when we look at other opportunities, for example, as Linx Core growth is performing better than we had expected when we did the deal. So, I think it will be a trade-off. The opportunity here is not maximizing Linx bottom line but rather building to the future that Lia mentioned. So, we are testing already integrations in different segments of clients.

And one important thing I think to mention is when we talk about penetrating financial services and Linx clients, we are much more focused on rather than going to the big clients and selling payments and penetrating payments with small fees, we are trying to have a deep knowledge on what product fits best for each vertical and client profile. And from the conversation we have been with the team, there is a lot more to explore than we thought, and this will be very accretive. So, this is the update on Linx.

Thiago Piau -- Chief Executive Officer

Mario, it's Thiago here. Mario, just a quick comment on Linx. If you see Slide 11, we tried to break down what we see in Linx in terms of solutions in three buckets. So, first bucket, I think it's about the core.

We are positively impressed by how strong the core of Linx is. So, we were surprised by the growth of the core, the POS and ERP solutions, the growth of OMS, the TAF solution, which is the brick-and-mortar gateway. And in here, we really want to invest in growth and quality, and we will see the combination of distribution channels that Linx has built through own force franchises and what Stone has built with the hubs, with franchises, and all the channels we use. I think that we will have a greater chance of accelerating our software strategy with the combination of both teams.

So, we really like the execution of those assets. And we believe that this opportunity in terms of growth in software is bigger than what we thought in the beginning. When we think about the e-commerce platform, I think there's a turnaround here that we have to invest more in terms of scalability and feature and worth it. So, we are taking the time to help the team to turn around the e-commerce platform.

We have a two-year CAGR of 39%, which is interesting to see because 2020 was a huge growth because of the pandemic, so there is a good movement and traction. But we believe that in order to get the e-commerce platform where we want, there are investments in terms of technology to do here. And I think that the negative surprise was the payments platform that we decided to shut down as fast as we could because we think that the quality of the platform and the risks involved was worse than we thought in the beginning. So, we decided to put our energy toward migrating clients -- and I think that it delayed a little bit of our plans in terms of penetration, but it hasn't changed our plans and the opportunities we see.

When we think about the ability to reprice, we already changed prices in terms of new sales, and we started small but we already started repricing the client base. So, I'm seeing that we are moving toward the direction that we want, having the discipline to balance payback period and contribution margin for each client. We don't talk too much about repricing because it's very sensitive in terms of competition. What I can tell you is that we always -- every time that we have to talk about repricing with clients, we have to do it in a very granular way, seeing client by client, the segment, the size, the products they use and really create the best proposal that we can do for them.

So, we are not rushing because we want to protect our client base. But the first results that we are seeing shows that we have the ability to execute the repricing without jeopardizing the relationship. So, we are doing it in a balanced way.

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

Now that's very clear. Thank you very much.

Thiago Piau -- Chief Executive Officer

Thank you, Mario.


Our next question will come from Jamie Friedman with Susquehanna. Please go ahead.

Jamie Friedman -- Susquehanna International Group -- Analyst

Hi. Good results here, guys. I'll just ask my two upfront. So, about the Slide 11, Thiago and Lia, with your comments, when you say 50% of the clients in sub-acquiring migrated to Stone, 81% opted in, my understanding was that you were targeting 20% in Year 1 run rate.

Am I just mixing things up here? Like what is sub-acquiring as a percentage of the TPV, I guess is my question? That's the first question. And then Thiago, I thought you said earlier, and maybe I misheard, I really apologize if I misheard, that you thought that the margins would be higher in the short term. I realize you guys don't give guidance, but if you could just clarify that because that seemed different than what I would have thought. Thank you.

Lia Matos -- Chief Strategy Officer

Hi, Jamie. I'll take the first part of the question and then pass it to Thiago. So, yes, let me clarify your question regarding migration versus the synergy in terms of penetrating Linx's base. So, the number that we give here relates to Linx Pay.

So, Linx had a sub-acquirer within its Linx base set of assets. And that's where we put the first focus of the team because we saw some risk there related to regulatory compliance, things like that. So, we really prioritized very quickly to migrate that volume. But that volume wasn't that large, about 2 billion in the quarter, so that's pretty much a process that we're completing by the end of the year.

Where we really see the opportunity is when we talk about the 200 billion TPV that Rafa mentioned. And that's where we're really looking into. Sort of vertical by vertical, we're coming in, the teams are coming in, and really understanding from clients where the opportunities are and where we can create value through payments, open banking, PIX. So, several different types of integrations between our financial services platforms and Linx's software.

So, that's really where our focus is. And then that's where we look ahead to penetrate that opportunity in terms of TPV. Was that clear, Jamie?

Jamie Friedman -- Susquehanna International Group -- Analyst

Yeah, that totally cleared it up, Lia. Thank you very much. I got it.

Lia Matos -- Chief Strategy Officer

Thank you.

Thiago Piau -- Chief Executive Officer

Hi, Jamie. Thiago here. So, regarding margins back again, I think that I didn't say it in the right way, actually. So, what we see is, in the short term, our margins are lower than the margins we had historically, right? And interest rates was going up much faster than what we thought in the beginning, and we decided to accept a little bit lower margins during a short period of time, not to jeopardize the client base, and we are repricing the new sale in a way that we don't decrease level of growth too fast.

So, we took the time to learn the dynamics of the market, the dynamics of the client base, and we accepted lower margins in the very short term because of that. I don't want to make promises now about the margins next quarter. But what I can say is the quarters ahead, the very short terms of quarters ahead, we will have margins lower than what we have historically. But our ability to drive margins in our business model in the medium term, it hasn't changed.

So, I think that we are balancing investments in terms of growth, looking to pay back contribution margin from our clients, understanding what is our ability to drive more value and more unit economics for each segment and size, give the strategy in terms of product road map we have. And now we are executing this with a lot of discipline. So, we believe that's worth it, in the very short terms, to have margins that are lower than the historical margins that we had in order to gain much more scale and have a much stronger business model in the future. And we are doing this with discipline.

But over the medium to long term, we expect to have a high-margin business with strong cash flow generation.

Jamie Friedman -- Susquehanna International Group -- Analyst

Got it. Thank you so much.

Thiago Piau -- Chief Executive Officer

Thank you, Jamie, again.


[Operator instructions] Our next question will come from Neha Agarwala with HSBC. Please go ahead. Your line might be muted.

Neha Agarwala -- HSBC -- Analyst

Oh, sorry. Sorry. Yes, I was muted. Apologies for that.

Could you give us a bit more color regarding competition? How do you see competition in the core SMB market? You say that you have 9% market share. Where do you see that going in the next two to three years? And also, a bit more color on the long tail segment. How has the progress been? Is it encouraging in terms of -- you gave us the number for the payback period. But is that a segment where you see you're already at the breakeven? And how do you see the profitability going forward in that segment? Thank you so much.

Lia Matos -- Chief Strategy Officer

Hi, Neha. Thank you for the questions. I'll take the first part and then pass it over to Thiago perhaps to talk a little bit about the long tail. Neha, so regarding our SMB penetration, right, so I think the number to keep in mind here is over 8 million SMBs in Brazil.

Rafa showed the page where he was comparing the number of hubs we have today versus the number of hubs we had at the IPO. We still see opportunity to continue to open hubs and to increase penetration in the locations where we already have coverage because remember that it's important to have coverage but also to have density. And when you look at the size of our active base today versus the number of SMBs that exist, I think we're not yet at the point where we see the end of the road in terms of growing client base. So, I think there, we still see a lot of opportunity, and we continue to expand with our hub strategy.

I think in the long tail, I'll make just a quick comment, thinking about the market and then passing it over to Thiago. There's a lot of greenfield opportunity here, right, because autonomous workers, they are born every day, so to speak. So, we see a lot of opportunity when we think about the market itself, our market share there. When you think about penetration and the size of micro clients we have today versus the number of autonomous works that exist in Brazil, we're still low single digits in that journey.

So, we still see a lot of room to continue to invest in growth. And maybe I can pass it over to Thiago to talk a little bit about breakeven and how we see this operation. Thiago?

Thiago Piau -- Chief Executive Officer

Thank you, Lia. Hi, Neha. Thiago here speaking. So, regarding competition, no update in terms of everything that we have said in the previous two quarters.

But I would like to take a moment to talk briefly about medium term. I think that when we see our industry and our business and what we are building to Stone, I think that this is really a lifetime opportunity. It's incredible to see the changes in terms of the merchant needs, in terms of how the industry is evolving. So, we took the challenge of moving from the payment relationship that brought us here to build the entire financial platform that our clients need in other for us to be the only relationship when they think about financial services.

I'm seeing that the team is really evolving fast. We are now focused on the engineering side to take the credit right because we think that credit is a very important product to help our clients to sell more. And I still see some of the players in the market trying to do the same, evolving to the whole financial platform. But I think that in the end of the day, we have the best service level.

We have the best team. We have the best execution. I really believe in what our team is doing. And there's one challenge that we took, and I think that nobody took the challenge yet, which is to win on the software side of the industry, to really drive efficiency in the operation of our merchants and taking the challenge to bring additional sales for our merchants in the scale that we are doing.

So, we believe that in the medium term, the importance of the software and our ability to connect the brick-and-mortar operation of our clients with multi-storefront operation with the digital channel is something that will really transform our business in the next three to five years. So, I'm confident with our ability to win on the MSMB space. I'm confident with the ability of the team to build the whole financial platform, to change the way we have relationship with our clients, and to win on the software side to bring more sales to our clients. We want to create a company which is humble to learn.

And we made mistakes in the past, we learned from them. We are much more stronger now, but the opportunities in the industry are very, very big. In the micro-segment, what I'm happy to see and we have disclosed this here on Page 6, is the average revenue per merchant is actually better than we thought in the beginning, and we had the ability to decrease the cost of acquisition of clients. And those are two very important factors for us.

So, we are confident in our ability to execute in the micro-segment. I think that the team is really performing well. And the capital allocation we did, I think that is on track in terms of our plans. So, we will continue to drive growth, and we will continue to invest in the micro merchant segment because we believe in our ability to offer better products and better service to micro-merchants in Brazil and to help them to dream bigger.

I think that this team is capable to do it and to win in this market.

Lia Matos -- Chief Strategy Officer

Thiago, if I could quickly complement one important aspect related to your question, Neha, about market share, right? So, I think what Thiago is saying is really important from the perspective of the number we show there has to do with market share in acquiring. But the way that I think is perhaps better to talk about this, and Thiago talked a little bit about this at the beginning of the call, I think we really see a flywheel in terms of growth where the first element is the ability to grow client base, right, and then acquiring is the entry point of that relationship. But when we talk about market share, it's important to understand that there are other addressable markets, right? There are other pools of opportunity that we also see ahead as we further offer more products, more solutions to our clients. So, I think it's really about the combination of our ability to grow client base by bringing the best service to those merchants.

And we talked about that, right, how we built that model where we built the distribution, we built the capabilities in terms of customer service, that we could actually serve those merchants really well. And acquiring is the entry point of that relationship. But then over time, we will offer more solutions, right? And I think when you think two, three years down the road and thinking specifically about our distribution capabilities, I think that we will see a much, much different set of distribution capabilities as we have today, right? Because nowadays with the acquisition of Linx, we have a powerful distribution within Linx for software. And now we have within Stone not only the hub strategy but our distribution capabilities in the micro merchant space.

And more and more, we're starting to think about how we could combine and really think about the best way to offer the right products to the right clients, to the right channels, right? So, I think there's a lot of work to do here. Like Thiago said, we're at the beginning of this journey, but I think two or three years down the road, we're going to be a very different company in terms of set of distribution assets that we have and the offerings that we bring to our clients. So, I think I just wanted to compliment on that because I think that's an important aspect to think about.

Neha Agarwala -- HSBC -- Analyst

Understood. Thank you so much, Lia and Thiago. If I can have one additional question, how easy do you think it will be to reprice and pass on this higher funding cost to your customers? Because if I understand correctly, for the hub business, it also depends on what your competitors are doing. So, how much of the higher funding costs do you think you can pass on to your customers? Thank you so much.

Thiago Piau -- Chief Executive Officer

Hi, Neha. I think that when we have a client base in the size we have and when we grow in the pace we are growing, it's never easy to make changes in terms of the pricing, right? But I think it's not about being easy or not. I think it's really about providing the best value proposition for each one of our clients because the way we think about pricing is that pricing depends on the products our clients really use and the level of engagement they have with each one of our products. So, we are taking the time to use the relationship we have with them, and we are very close, the data that we can see in terms of engagement with the multiple products we have, and the price point we want to execute in order to maximize the base we have with the capital allocation strategy and the contribution margin that we expect for each one of the clients.

So, I think that it's much more about taking the time to follow the plan and not to rush and hurt the pace or hurt the growth. So, interest rates went up very, very fast. I understand that there is somehow an anxiety to pass along this fast, but we have to put relationship with our clients first place and execute a plan based on the relationship we have, the projects we are offering, and balancing these well. So, I believe in the ability of the team to execute the plan.

We will bring much more information about this in the fourth quarter as we are putting the efforts of the repricing in November, December. I think that October was a month to plan. November, December is a plan to execute. So, it will be easier to talk about this in the end of the fourth quarter.

But I'm confident with the plan we have in hand.

Neha Agarwala -- HSBC -- Analyst

Great. Thank you so much. Very helpful.

Thiago Piau -- Chief Executive Officer

Thank you very much, Neha.


There are no questions at this time. This concludes the question-and-answer session. I will now turn it over to your host for final considerations.

Thiago Piau -- Chief Executive Officer

Thank you, everyone, for having the time to be here with us and see you next quarter. Bye-bye.


[Operator signoff]

Duration: 70 minutes

Call participants:

Rafael Martins -- Vice President of Finance and Investor Relations Officer

Thiago Piau -- Chief Executive Officer

Lia Matos -- Chief Strategy Officer

Tito Labarta -- Goldman Sachs -- Analyst

David Togut -- Evercore ISI -- Analyst

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

Jamie Friedman -- Susquehanna International Group -- Analyst

Neha Agarwala -- HSBC -- Analyst

More STNE analysis

All earnings call transcripts