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Operator
Good evening, ladies and gentlemen. Thank you for standing by. Welcome to the StoneCo third quarter 2023 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 online at investors.stone.co. Throughout this conference call, the company will be presenting non-IFRS financial information, including adjusted net income and adjusted net cash. These are important financial measures for the company but are not financial measures as defined by 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 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. 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, Roberta Noronha, Head of Investor Relations at StoneCo. Please proceed.
StoneCo
Thank you, operator, and good evening, everyone. Joining me today on the call is our CEO, Pedro Zinner, our Chief Financial and Investor Relations Officer, Matheus Scherer, and our Chief Strategy and Marketing Officer, Lia Matos. Today, we will present our third quarter 2023 results, discuss some recent trends, and provide an updated outlook for our business. I will now pass it over to Pedro so he can share some highlights of our performance. Pedro?
Pedro Zinner
Thank you, Roberta, and good evening, everyone. Overall, I was very pleased with the results delivered and the improvement we made within the organization. As I did in the previous quarters, I want to begin by making a brief evaluation of our performance related to the priorities set for the quarter. In our first priority, to grow with efficiency, we once again had very positive results. Total revenue increased 25% year over year to reach R$ 3.1 billion, exceeding our guidance by 2%. Combined with top line improvement, adjusted EBIT increased 3.3 times year over year, reaching R$ 545 million and surpassing our guidance by 16%. As a result, adjusted net income grew four times year over year to reach 435 million reais, the highest bottom line figure in our history. Our second priority was to generate cash. Adjusted net cash increased by 1.8 billion reais year over year and R$530 million quarter over quarter, reaching R$4.9 billion. Part of this excess cash was allocated in the repurchase program, as approved by the Board in September 2023, and totaled R$300 million. In our third priority, to expand financial services business, MSMB TPV continued to grow consistently at a strong pace, increasing 20% year over year and more than twice the industry rate. Combined with this, we have also presented a healthy client base increase and an improvement in monetization. Our MSNB client base increased 42% year over year, with a client net addition of 317,000 quarter over quarter, reaching almost 3.3 million merchants using our payment solutions. And at the same time, our MSNB take rate increased 28 pips year over year to reach 2.49%. We have also evolved in our banking and credit solutions. Banking active clients increased to 1.9 million with 4.5 billion reais in deposits, demonstrating the successful strategy on the development of our platform and client engagement with our solutions. And lastly, we have expanded our credit portfolio reaching R$ 113 million in this quarter and concluded the testing of many features in line with our expectations. In our fourth priority, to evolve our software business, we continue to improve our results, focusing on increasing efficiency as we promised. Software revenues reached R$388 million, with adjusted EBITDA increasing significantly to R$79 million, reaching a margin of 20.5%. This bottom-line evolution is a result of our continuous focus on improving operational leverage and integration plans with StoneCo. Lastly, we have recently taken important steps towards building our fit for purpose organization. In October, we announced our new management structure to better align the company around specific go-to-market strategies per client segment and to accelerate the integration of our software and financial solutions. We will further detail our strategic priorities in our investor day on November 15th, providing a better understanding on how the new organizational design will support us in executing our strategy. Before passing it over to Lia, I would like to say that I'm looking forward to meeting investors in our investor day in a few days from now. I believe it will be a great opportunity for us to share our views on the business and our long-term plans. Now, I'd like to pass it over to Lia to discuss our third quarter 2023 performance and strategic updates.
StoneCo
Thank you, Pedro, and good evening, everyone. As Pedro mentioned, we had an important evolution over the last years in terms of balancing growth and profitability, which you can see on slide five. We increased consolidated revenues by 25% while improving our adjusted net margin by around 10 percentage points in a one year period. As Mateus will detail further, this amazing margin improvement was a result of operational leverage across all main P&L lines. Moving to highlights of our financial services segments on page six. In the third quarter of 23, revenue in the segment increased to 2.7 billion reais, a 29% year-over-year growth, mainly driven by our consistent performance in the MSNB segment, with above industry MSNB TPV growth and higher take rates. This, coupled with operational leverage in costs and expenses, led to a 3.6 times increase in the segment's adjusted EBT, to reach R$ 485 million with a 17.7% EBT margin, an increase of 2.1 percentage points sequentially. Moving to slide 7, we will deep dive on our MSNB performance. MSNB payments client base increased 42% year-over-year to reach 3.3 million active clients. Sequentially, this represented a net addition of 317,000 clients, driven by our continued investments in performance marketing, combined with better levels of churn. Also, through strategic optimization of our tone and stone offerings across our sales channels, we continue to see positive trends in our client base across all tiers within the MS&B segments. We believe this approach is unique and has led us to profitable TPV growth, as I will show on the next page. On slide eight, we show that MSNB TPV increased 20% year over year, a growth twice above the industry, demonstrating our continued ability to win new clients due to our competitive advantages around distribution, service, and our combined financial services offerings. This TPV performance was above our guidance of between 87 and 88 billion reais. Also, we were able to produce that growth while increasing our take rates by 28 basis points year over year and one basis point sequentially to 2.49%. The yearly take rate improvement was a result of our continued financial services offerings expansion, strong pricing execution and client mix. Now on slide nine, I will briefly update you on our key accounts performance. Key accounts TPV decreased 22.8% year over year and was stable sequentially to reach 14.4 billion reais as we have continued to deprioritize and off-board low margin clients. Year over year, key accounts take rates increased 18 basis points, as a result of the adjustment in our commercial policy and a mixed shift within the segment. Now let's shift to our banking performance on slide 10. Banking active client base increased 3.4 times year over year to 1.9 million active clients. This evolution was a result of the launch of Super Contatom in the first quarter of 23 and the continued activation of banking combined with acquiring solutions for stone clients. The growth in banking active clients combined with an increase in engagement led deposits to reach 4.5 billion reais in the quarter, a 51% year-over-year growth, which outpaced our MSNB-TPV growth by 30 percentage points. Since TPV is the main source of cash and volumes to our banking solution, this relative performance is a strong illustration of our continued ability to improve engagement as we launch new features and offerings. In our upcoming investor day, we will give more color on how we are evolving our value proposition around our combined solutions for MSNBs. On slide 11, let me give a brief update on our credit offering. Until September, we reached a portfolio of 113 million reais, a 6.1 times quarter over quarter increase. The performance of our vintages is above our expectations, with NPL 15 to 90 days of 0.4% and NPL over 90 days of virtually zero. I would like to note that this is a recently launched portfolio, so the ratio of past due loans should increase as our portfolio matures. We will gradually accelerate disbursements by extending the credit offering to a larger number of clients without changing our diligence towards risk assessment and close monitoring of market conditions. Lastly, this quarter we have concluded the main improvements in our product features, as we have finalized rebuilding our renegotiation process. Now, on slide 12, we will discuss our software segment. Software revenue increased 6% year-over-year to R$388 million. driven by the continued organic active store expansion in our core POS and ERP business, especially in the SMB segment. Softer revenue growth decelerated compared to the previous quarters because of weaker performance of our transactional revenues within our digital business, combined with lower average inflation, which affects price adjustments, especially in enterprise accounts contracts. Software segment adjusted EBITDA increased 50% year over year to reach 79.4 million reais with a margin of 20.5%, an increase of 3.1 percentage points compared to the second quarter of 23. This strong figure was a result of higher revenue in the period and lower administrative expenses, especially as a result of more normalized levels of personnel expenses after a reduction in headcount in the second quarter of 23. On the strategic front, we have prioritized four verticals to focus to drive financial services and software bundles. During our investor day, we intend to share additional details about how we see this opportunity ahead. Now, I want to pass it over to Mateus for him to discuss some of our key financial metrics. Mateus?
Pedro
Thank you, Lia, and good evening, everyone. I would like to begin on slide 13, where we discuss the quarter-on-quarter evolution of our costs and expenses on an adjusted basis. Cost of services reached 773 median, increasing 15.2% year on year and decreasing 220 basis points as a percentage of revenues due to operating leverage gains. Quarter on quarter, cost of services increased 12.9% and 140 basis points as a percentage of revenues. The sequential increase in cost of services is explained by higher provision for losses and increased investments in technology and logistics as we continue to expand our business and client base. Administrative expenses decreased 3.3% year on year and 9.5% sequentially, leading to 130 basis points reduction as a percentage of revenues when compared to second quarter 23. This improvement can be attributed to more normalized levels of personnel expenses in our software segments, following a reduction in headcount in second quarter 23, combined with higher than usual provisions for variable compensation last quarter. I am very happy to see that we are starting to collect the benefits of the initiatives we implemented more than a year ago around zero-based budgeting and integration of back-office functions in our software segments. Increasing efficiency in administrative expenses will continue to be a priority going forward and will give additional details around that in the investor day. Selling expenses increased at 7.4% quarter on quarter and 20 basis points as a percentage of revenues due to higher investments in our distribution channels, mainly with partner commissions, combined with increased investments in performance marketing. Financial expenses decreased 1.4% quarter-on-quarter, with a reduction of 260 basis points as a percentage of revenues, reaching 33.3%. This evolution was driven by lower interest rates in the period, coupled with our decision to reinvest our cash generation towards funding our operation, and was slightly offset by quarterly TPP growth. Lastly, Other expenses increased 11.8% sequentially and 20 basis points as a percentage of revenue as a result of normalized levels of share-based compensation expenses. As in second quarter 23, we incurred in a non-recurring positive net effect of 19.6 million. Moving to slide 14, our adjusted net cash increased by 1.8 billion year-on-year and 530 million in the quarter. reaching 4.9 billion reais. This strong sequential increase is a result of our strong cash flow from operations, as well as a sequential decrease in capex, as expected. As Pedro mentioned, given our strong cash flow generation and our long-term perspectives for the business, in September, our board approved a share repurchase program of 300 million reais, which was already fully executed. With that said, operator, can you please open the call up to questions?
Operator
Okay, at this time we are going to open it up for questions and answers. If you have a question, please write it down in the Q&A section or click on Raise Hand for audio questions. Please remember that your company's name should be visible for your question to be taken. We do ask that when you pose your question that you pick up your headset to provide optimum sound quality. Please hold while we pull for questions. Our first question comes from Tito Labarta from Goldman Sachs. Your microphone is open.
Raise Hand
Hi, good evening. Thank you for the call and taking my question. A couple of questions, I guess, to start. Maybe, you know, good growth on the TPV, right? Continuing to take market share there, it seems. Um, maybe can you give some color on, on the, do you think you'll be able to continue to take share in particularly between the micro merchant segments and SMB? Are you getting more share? I imagine maybe a micro merchant since it's smaller for you, but just the different dynamics between the micro and the SMB. Um, and, and also with the, the take rates, um, beginning to stabilize there. How do you see the take rate, uh, evolving from here, particularly as rates start to come down? And then if you can just give an update on sort of the regulatory environment, particularly, you know, talks of changes to interest-free installments. There's also recently some news about not being able to potentially monetize PICs. Any thoughts you have on that, given the ongoing discussions there? Thank you.
StoneCo
Hi, Tito, Alia here. Thank you for the question. I'm going to take the first part and then pass it on to Pedro. So a few thoughts regarding TPV growth, both ours and the industry. So BEX just released numbers for market growth this quarter, 9% growth in the quarter. And they continue to guide the year between 9% and 11%. So this implies that TPV growth will be slightly higher in the market for the fourth quarter. Looking ahead, we expect industry growth to be slightly higher next year because we do see a recovery in credit card limits after delinquency reached a peak. And regarding your mention on PIX, more and more we see PIX P2M volumes as part of the market, right? That's a volume that it is a payment method, which we enable our clients to accept, and it is a driver of TPV growth. If you consider our 20% TPV growth this quarter, and you include in that number fixed P2M volumes, that growth would have been higher, around 24%. So we see this as a healthy level of growth. And I think regarding overall trends, Tito, we continue to gain share within the MS&B segments. We continue to allocate capital towards growth in both micro and SMB segments. And we do see positive trends in all client tiers. And we think this has to do with the elements of differentiation that we provide clients around the offers that we provide them, the service, the distribution model. So it's really about a combination. And the overall message is we continue to gain share across the MSNB segments. Pedro, you want to take on the regulatory?
Pedro Zinner
Yes. Hi, Tito. Well, thank you all for taking the call. I think there has been a lot of debate around the interest rate caps on revolving loans, delinquency rates and interest free installments. And I think I'll just extend a bit myself and try to highlight a few messages around the topic. So first, we believe that imposing limitations on interest fee installments violates the principle of free competition. Any issuer as of today is already capable of deciding to limit, restrict, or increase the offering of installments. And that's really an economic decision. Just to give you an example, we've seen a few Black Friday offers this week where large issuers have substantially increased the maximum number of installments to differentiate their own offers. Second, contrary to what has been said, there is strong empirical evidence that there is no relationship between the number of installments and delinquency levels. And just to give an example, according to a study that has been sponsored by Abipagi, using frontier empirical methods and over a media observation of consumer purchase behavior, if any, the relationship between installment-free transactions and delinquency rates is actually negative. Therefore, again, I think this reinforces our view that there shouldn't be any regulatory measures Great free installments.
Raise Hand
Great. Thanks.
Pedro Zinner
No, I think just a few more points because I think it's important for ourselves to position. And I think third, a regulatory change that takes away from merchants the possibility of offering installment transactions in Brazil would significantly impact private consumption and consequently the overall economy. So I think just to provide some data, and according to the central bank, credit card transactions represented about 20% of the country's GDP in 2022. Of the total, about half was executed in interest-free installments, just showing the relevance of this payment method to the country. So I think for these reasons, I think it's important It's quite clear why we continue to hold our position that there shouldn't be any restriction on interest rate free transactions. And
Pedro
Pedro, if I may only add, I think Tito also asked about the prohibition of charges in any kind of PIX transactions. On that discussion, there were indeed some rumors about this discussion, but our understanding is that this debate didn't advance, and we think it's unlikely that any regulation will prohibit charges on PIX as a whole.
StoneCo
Perfect. And Tito, you also asked about take rates, and I left that out of the answer. So regarding take rates, we didn't change our pricing policy this quarter, and we do not intend to change it anytime soon. Competitive dynamics remains the same. If anything, we see more rational behavior in the market as a whole. When we look at take rate trends this quarter, we had a sequential improvement, which was small, one basis points, which was driven by roughly stable prices, a small positive impact from mix, which was slightly offset by a higher debit mix. So regarding prices, we're not changing our strategy at all. We don't intend to do so.
Raise Hand
okay no that's great thanks leo pedro and mateos leo maybe just one quick follow-up on that do you think the mix can continue to benefit the the take rate from here if you're growing more say micro than an smb yeah i think that uh that is correct tito okay great thank you
StoneCo
We're going to give more color on these trends on the investor day, so we intend to provide a little bit more of a long-term perspective on take rates evolution.
Raise Hand
Great. We'll see you then.
Operator
Our next question is from Mario Pieri from Bank of America. Your microphone is open.
Mario Pieri
Hi, guys. Can you hear me?
StoneCo
Yes, we can hear you. Yep.
Mario Pieri
Perfect. Um, congratulations on the quarter. Uh, it looks looks quite good. Let me ask you 2 questions also on software. We saw a slow down in revenue generation, right? Like, revenues growing 6% from 9, but on the other hand, it'd be done up 50%. You talked about some headcount reductions. Can you specify the size of these reductions? Do you expect to make more? Or have we already seen the full benefit of these cost reductions? And then on the credit side, as you talked about, you increased disbursements, or you made disbursements of about 100 million reais. I'm calculating here about 33,000 real per client. Can you give us a little bit more of a perspective? What type of clients are you targeting, specific regions, specific characteristics? What is the interest rates that you're charging on these loans as well? And how big do you think this portfolio can get to within a year? Thank you.
StoneCo
Thank you, Mario, for the question. I'm going to take the first part on top line trends in software and then pass it over to Mateus to elaborate on margin evolution and credit. So regarding top line growth, if we sort of double click on the drivers of software revenue evolution, First, we really are focusing on allocating capital to grow where we see the biggest opportunity, which is in the verticals that we have prioritized and within the MSNB segments. There, we're happy with the level of growth that we are seeing, and we remain optimistic with the opportunities that we have ahead. We will give more color on this in the investor day. The biggest detractors to growth in software are the transactional revenues in our digital business and the enterprise business itself. Let's remember that in the enterprise business specifically, we already have a very high market penetration. And our focus there is a lot more towards driving efficiency and cash generation. And I want to also highlight that, yes, we do monitor top line growth and it is important for us and we are allocating capital to grow where we see opportunity. But there is also a disproportionate value to be captured in the installed base of software clients. So more and more we are driving our execution towards providing software and financial services bundles and really capturing the financial services opportunities that exist within the client software clients that we already have. And there is a very attractive opportunity in the priority verticals that we will have a chance to talk more about in the investor day within the MSNB segment, which is our focus. So that's a little bit on trends on top line. Maybe Matheus can elaborate more on the efficiency side.
Pedro
Yeah, for sure. So regarding the margin evolution on software, you are correct. I think most of the evolution quarter on quarter came from more normalized levels of personal expenses in the software segments. And I think this is related to something that we disclosed last quarter, which was basically a reduction in headcount that had a negative impact on the second quarter of 6.5 million in severance costs. And now we are basically collecting the benefits from this reduction. Now, when you look ahead, I think it's important to highlight that we still see additional room for improvements in software margins overall. It's not necessarily 100% related to personal expenses, but I think in general, we see more benefits to come from the integration between the two platforms. I think the second question regarding credits. So you're also right, we scaled the portfolio from 19 million in the second quarter to 113 million this quarter. In terms of who we're focusing at this time, I think the offering is mostly focused on our SMB segments. So when we look at that volume of around 30,000 reais per operation, we're basically talking about around one month of the client's TPV. So it's still a very conservative approach. But regarding the evolution in terms of sizing of the portfolio and the rates that we're charging, I think the idea is to provide more color on the overall performance and strategy of the credit business on the investor day. So I think we have to wait a little bit to give more details on that. All right, guys.
Mario Pieri
No, that sounds good. So we'll be there on Thursday. Thank you.
Operator
Thank you, Mário. Our next question is from Jeffrey Elliot. Your microphone is open.
Jeffrey Elliot
Hello, thanks very much for taking the question. In terms of the debit share increasing, what was behind that? Is that seasonality? Is that an industry trend? Is that... Specific to you, and is that something that continues? I know you have more debit in the fourth quarter, but looking further ahead, I'm just curious why debit was higher this time.
StoneCo
Hi, Jeffrey. Leah here. So this is a market trend. It hasn't to do with us specifically. We believe that this, from what we have seen in terms of other players releasing their results, this has been a trend in the market. Our hypothesis for this is credit delinquency still limiting credit limits on credit cards. We think that this trend will improve going forward.
Jeffrey Elliot
Got it. And then if I could squeeze it in on the buyback, you did the 300 million very quickly. Do you kind of see that as the beginning of a process? Should we be looking out for more of these going forward?
Pedro
Yeah, so good question. Maybe taking a step back to give you some context on how I think about the topic. So when you look at the third quarter results, we can see that the company is generating strong cash flows. We generated 530 million net cash in this quarter, even after increasing the credit portfolio and also even after investing for future growth. And as our business evolve, we do expect our profitability to continue to increase and this should drive even more cash generation. So I think the decision of how we're going to allocate this cash is becoming increasingly important for us. And if you look at the past few quarters, our decision was basically to reinvest most of this cash generation towards strengthening our capital structure. And when we look ahead, we still see a lot of room to reinvest in the business in general. So even when we expand the credit business or the banking solutions, there is still room to move money towards that. But whenever we feel there is a good opportunity to allocate excess cash, for example, towards repurchases, we're certainly going to evaluate this option. And again, I think this is a common trend in the call, but we're going to share more details about our philosophy for capital allocation in the investor day. But it is an option that we are constantly evaluating here.
Jeffrey Elliot
Great. Well, I'll see you next week and hear more about it then. Thanks very much.
Gabriel Gussan
Thank you.
Operator
Our next question is from Gabriel Gussan from Citi. Your microphone is open.
Gabriel Gussan
Hey, guys. Good evening. I hope the answer to my question is not that you'll talk about it in the investor day next week. But can you please share if you have plans to go full banking in your release and in our discussions? It seems that having this service become bigger and bigger to our client base makes sense. At this point, you probably have about two million clients in the micromartian segment. So going for banking license all makes sense. Thank you.
Pedro
Yep. So I think in terms of the banking license, we are in the process to obtain this license. We don't control the full roadmap, but I think we are in the last stages of the regulatory approval, and we should have access to the license soon. Now, when I think about what does that license allows us to do, I think it's mostly using the deposits that we have as another funding lever. In terms of the products, we're going to discuss a lot in the investor data roadmap and how we're thinking about the banking product evolution. There's certainly a lot of potential there, but I think the license itself is not a restriction in our roadmap. It's more about enabling us to use the deposits going forward. Thank you.
Lynx
next question from niha agarwala from hsbc your microphone is open hi congratulations on the results and thank you for taking my question my first question is is on capex we saw a nice decline quarter quarter in your capex uh despite strong jump in your net ads could you give us some color as to How can you break down the net ads between SMB and long tail? And is the Capex trend that we saw in this quarter, should that be maintained? Should there be continued downtrend at this level? Is what to expect in the coming quarters. And my second question is on LINX. Could you give us a sense of what percentage of the LINX clients, LINX merchants are now using Stone acquiring? How are you trying to cross-sell bundles to some of the large clients which came from Lynx? So some granularity on that would be helpful. Thank you so much.
Pedro
Thank you, Neha. I'll take the first question regarding Compacts, and then maybe Leah can give some color regarding Lynx.
StoneCo
And it adds, I think there was a question on it. I'll take it.
Pedro
So talking about CapEx first, a few things to highlight here. So usually there are differences between the cash outflow and the activation of PP&E. As for example, we can purchase PP&E and pay it later as a result of negotiations with suppliers or maybe pay down purchases of PP&E related to previous periods. We give a lot of data about the dynamics in the financial statements, the footnote 18.5. So when you look at this quarter, we added 232 million of PP&E and intangibles, but the actual cash outflow was 176 million. As part of the additions that we did this quarter will be effectively paid in a future period. So that's part of the explanation. But in any case, when you take a longer term perspective, I think the comes of CapEx management. So just to give you a little bit more color on that. When you look at CAPEX as a percentage of revenues, for example, it has been trending downwards from 7.9% in the nine months of 2022 to 5.7% in the nine months of 2023. And I think that has a lot to do with the efficiencies that we have been seeking in our logistics operation. Again, not to spoiler too much, but it's another topic that we're going to give additional details in Investor Day next week.
StoneCo
great yeah so niha on net ads and then i'll talk a little bit about software i believe your question was around cross-selling bundles um in that ads so uh what we can say is the following year to date we have consistently invested in selling both in our hubs and distribution channels that are focused on smbs but also performance marketing to drive growth in in micro clients while our investments in selling expenses in the hubs they have a more stable evolution performance marketing capital allocation can be more volatile quarter of a quarter But the message here is those investments have been yielding great returns and they have enabled us to continue to invest and to continue to grow. But we also want to highlight that net additions in itself is not a target per se. um we do allocate towards growth in tpv and gaining share across the msmb segment as a whole and most importantly with discipline on pricing execution and healthy levels of return so that this tpv growth can also drive profitable growth so i think that's the message regarding um net ads trends When we talk about software and we will give more color on this, but let me qualify a little bit. When you look at the TPV pool, so as a proxy of the financial opportunity that exists within a software client base, Around 60-40 is between MSNB versus enterprise or key accounts, right? So there is a significant opportunity in terms of not only payments, but also banking and eventually credit on some verticals that we have prioritized our execution towards. Today, our penetration of financial services within these verticals is still small. We're at the beginning of that journey, but we're seeing extremely positive results in terms of number one, our ability to offer a better value proposition by combining software and financial services. I think the big example here is gas stations, where we have started very recently a big effort across the company, across all of our channels, around offering embedded software and payments and banking solutions to gas station clients, which is a relevant vertical within Lynx. But there are other verticals that we will deploy this execution as well. And when we look at clients that are actually using those solutions, not only is that a lever of growth because we bring in more TPV and more deposits from banking, but it's also a strong monetization lever because when we look at the unit economics of these clients, it is significantly better and the unit economics of clients that use only financial services. So the message is we are excited. We're at the beginning of the journey. We really feel that now we have the right organizational elements in place to continue to advance on this. But it is very early days. We will give more color in this, both on where we are and what are sort of our long term perspectives on this next Wednesday. Perfect. Very helpful.
Lynx
Thank you so much.
StoneCo
Thank you, Neha.
Operator
Our next question is from Carlos Gomez Lopez from HSBC. Your microphone is open.
StoneCo
Maybe we can move on to the next, and if Carlos wants to go back to the line, he can.
Operator
Okay, our next question is from Sariq Sumar from EveryCore ISI. Your microphone is open.
Sariq Sumar
Hey, can you hear me now?
StoneCo
Yeah, Sariq, we can hear you.
Sariq Sumar
Can you hear me? great uh sorry about that uh so i just wanted to ask about the about the financial expenses how should we think about for the fourth quarter i mean depending on like given the fact that brazil's inflation rate has come down uh how should we think about the mix of using cash versus uh third party deposits and also some of the other levels within the overall expenses uh to drive margins higher i mean i know you talked about uh lowering some headcount within the software business but what are the other measures that you could think about uh in the for the fourth quarter and in 2024 that you would put yep thank you shariq so maybe starting talking about financial expense i think we've mentioned this in the past but uh we think over the medium term
Pedro
our financial expense should be driven by three factors, basically. First one being the interest rates in the country, second one being the overall cash generation, and the third one being TPV growth. I think when we look at the evolution this quarter, the slight decrease that we had in financial expenses was basically a function of these three factors. So in the third quarter, we saw CDI rates in Brazil reducing from 13.65% to 13.27% on average. Secondly, we basically decided to reinvest our cash generation towards funding the operation. And third, I think these two factors were slightly offset by the quarterly PV growth. When you look forward, I think the perspective is to have some reduction in terms of the CDI rates. So we're going to have that tailwind going forward. And the business, I think, like we mentioned in the earlier question, continues to generate a lot of cash. So this should also contribute to the overall trends. I think the second question regarding overall costs and expenses levers for the company, something that we mentioned in the call It's the general trends in terms of administrative expenses. I think it's something that we also highlighted a few quarters ago. But if you look at a long-term trend for this line, after the fourth quarter of 22, we started implementing a lot of measures in the company in terms of zero-based budgeting, implementation of shared services center, and also advancing the software integration. And I think this has led this line to decline in a nominal basis since the beginning of the year, declining from 296 million for a quarter last year to around 240 million this quarter. And we still see room to improve this line as a percentage of revenue going forward. I think the idea is to keep these expenses at control while we scale the business. But another very important trend when we look at cost to serve, I think we gain more than two percentage points in terms of margins in a yearly basis when you look at that line. And when we deep dive in this line, we're really seeing gains across all the main lines of the business, be it logistics, customer service or losses, for example. I think the only different trend that we are starting to see and that it's important to highlight is that as we expand our credit book, we're booking the provision for losses upfront due to IFRS 9. So in this quarter alone, as we expanded the book from 19 million in the third quarter to 113 million in this quarter, we are provisioning at 20% because we don't have enough data in our models to provision more aggressively. So when you look at this effect alone, it impacted negatively our cost to serve by 18 million reais, which is around 50 basis points as a percentage of revenue. So I think overall, when we look forward, the idea is to continue to gain efficiency in all the main lines, but we have to bear in mind that we're going to have this effect from credit as we scale this business.
Sariq Sumar
Thank you so much. That was super helpful. I just wanted to double click on the previous question on the ads in MSNBC, sorry, MSNBC. Is there like any particular vertical that you saw in particular sprint or is it like prior to the holidays coming in, you had more people sign up for that? And what is the early read for fourth quarter? Like, are you seeing the same level of activity or has it kind of slowed down?
StoneCo
Patrick, you were chopping up a little bit. So if I didn't understand your question, please repeat it. I believe it was about net ads, correct?
Sariq Sumar
That's right, yeah. I'm sorry about the background noise.
StoneCo
No, no, that's OK. So I talked a little bit in a prior question that Neha made, I believe, around net ads evolution. So our main sort of objective function here is to continue to grow and gain share in a profitable way. So it is true that net ads may fluctuate from quarter to quarter, but that's going to be our driver. As long as we can continue to see opportunities to allocate investment in growth in a profitable way, we'll continue to do so. So I think this is more or less we can say in terms of color around net ads evolution. The metric that we like to track really closely is the evolution of our TPV and market share and that this TPV comes in at healthy level, providing healthy levels of return.
Sariq Sumar
Thank you so much. That's it.
Operator
Next question from Yuri Fernandez from JP Morgan. Your microphone is open.
Yuri Fernandez
Hey guys, good night and congrats on the results and on the PIX disclosure. Well, we like it. I would like to ask on taxes here. It was lower this quarter. You mentioned more revenues coming from entities abroad, among other things. What are those results coming from abroad? I'm asking this because we see some peers booking, you know, having some FDICs abroad. So just would like to check if that's the case for you also. And on taxes, what should we think about this line? Should we remain low? What is your view here? Thank you.
Pedro
Thank you for the question, Yuri. So regarding taxes, we mentioned in the past that we see our normalized tax rate as being between 20% to 25%. But over the past few quarters, we were operating closer to 27%. So I think what happened in the third quarter is that we basically reverted back to what we see as the normalized trend for the business. What's also worth mentioning here is that in this quarter we had a one-off effect, also in taxes, related to the recognition of deferred tax assets in the amount of 23.5 million, as we reverted losses in some subsidiaries that had accumulated tax credits related to losses during previous periods. I think the footnotes 7.1 and 7.3 of the financial statements bring more detail on this topic. So the first part of the question, we basically see when we look ahead, the effective tax rate continue to be within the 20 to 25% level. As to the second part of the question, we do have a part of our FDICS offshore as we are a key one entity, and this indeed contributes to a bit of our tax rates. But when we look at the general trend, I think our tax rate is not unusual when we compare it to all the benchmarks.
Yuri Fernandez
That's super clear. Can you share how much is FDICS abroad and how much are local based?
Pedro
I think we do have this disclosure in footnote 7.1 until 7.3. But basically, when I show the profits on offshore entities, it's all related to FDICS. Amazing, Matheus.
Yuri Fernandez
Super clear. I'll check this note. Thank you.
Operator
Next question from John Coffee from Barclays. Your microphone is open.
John Coffee
Oh, sorry, where was I?
StoneCo
I think you were on mute.
John Coffee
Sorry.
StoneCo
All right.
John Coffee
OK, I'll start over. So I saw one thing, one new disclosure you had in your press release was PIC's TPV was $5.5 billion, which is quite a bit of your overall TPV, about 5% or a little bit more. I was wondering, If you could just sort of provide some general comments about where you're seeing those PICS volumes, any kind of verticals or kinds of merchants. And furthermore, could the PICS volumes be one contributor to the higher take rate? Because as I understand it, you don't include PICS TPV in your overall TPV numbers, but you do include the revenues that do come from PICS.
StoneCo
Hi, John. So yeah, giving a little bit more color on PICS. More and more, we believe it is important to provide visibility to the impact of PICS because it is becoming more and more significant. So I think big messages on where it's relevant. So PICS P2M is more relevant in the SMB space. Why is that so? Because PIX-P2M is essentially a payment method that our clients need to reconcile just as any other payment method. The capture method that we offer in PIX P2M is a dynamic QR code that the transaction can be reconciled in the dashboard. So that for larger SMBs, more sophisticated clients that have multiple SKUs, that's important. And that's a monetization driver for us, like you mentioned. You are correct that because we don't consider PIX P2M TPV and the overall TPV, that this does have a slightly accretive impact on take rates. So we see PIX as an important driver of overall market growth going forward. The way that we look at it is overall household consumption and mixed by payment method. And we do see PIX P2M taking away not only from cash, but from growth in debit volumes itself. For us, this is sort of net neutral because we monetize PIX P2M in line with debit net MDRs. But for our clients is much better because for our clients, they get money settled instantaneously and they do not pay interchange. um we think there there is um evolution to happen around the ux and the user experience it's not fantastic yet because for example uh pixnfc doesn't exist but um as product uh usage and functionality evolves and and the central bank is is likely pointing that roadmap forward in the next years, PIX will become more and more relevant. And for us, we've said this many times before, more and more we see PIX as an opportunity and a way in which we can leverage the PIX rails to develop new products, new offerings to our clients. So to us, the message is that we see this as a positive trend.
John Coffee
All right, thank you. I just want to have one follow up just on take rates in general. As we look out next quarter and the quarters ahead, could you help contextualize the effects of competitive effects, which could pressure take rates, the move you're having down to smaller merchants, which could push them up, as well as just the seasonality, which I think generally in Q4, Gabbit is bigger in Brazil. Just kind of try to evaluate the pressures going up and down on your take rates going forward.
StoneCo
Sure, John. So I think aside from sort of short term fluctuation in in debit versus credit that has seasonality effects, like you mentioned, fourth quarter, we always expect debit mix to be higher. Aside from that, I think the overall trends that we can point to and sorry to give continue to give these spoilers, but we will provide a little bit more color on this in the investor day is that we continue to execute our pricing strategy, as we have said. We will not change our approach to pricing discipline. We do not have that in our plans. More and more new monetization drivers come into the picture, not only PIX, but overall banking. And the more that we evolve on our banking solution, the more we have levers to monetize the relationship with our clients. So we do see that as a positive trend. in overall take rates going forward. I don't think we're going to see too many changes in terms of mix shifts, to be honest, because I think that the pace of growth is more or less, if you look at longer time horizons, it's more or less stable across tiers. So I think that the trends that we can think of are pricing execution and more and more monetization drivers from banking, other solutions.
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