StoneCo(STNE) - 2023 Q4 - Annual Report

PART I Key Information This section details principal risk factors across business, regulatory, technology, financial, and macroeconomic areas that could materially harm StoneCo's operations Risk Factors The company faces intense competition, rapid technological change, system failures, extensive Brazilian regulatory oversight, macroeconomic instability, and Linx acquisition integration challenges - The company faces substantial and increasingly intense competition from traditional financial institutions, established payment processors, and non-traditional competitors, which may lead to pricing pressure and a potential decline in operating margins[89][96][98] - The business is subject to extensive and evolving government regulation in Brazil, particularly from the Central Bank. Changes in the regulatory framework for payments, credit, data protection (LGPD), and open finance could be costly, expose the company to liability, and require changes to business practices[89][156][166] - Brazil's economic and political instability, including fluctuations in interest rates, inflation, and exchange rates, could harm the company's business, financial condition, and the price of its Class A common shares[89][234][237] - The integration of the Linx acquisition presents risks, including potential disruption to core businesses, challenges in achieving anticipated synergies, and the assumption of unknown or contingent liabilities, which could adversely affect financial results[89][272][273] - Cybersecurity breaches, computer viruses, or other disruptions could lead to the unauthorized disclosure of sensitive data, exposing the company to liability, litigation, and reputational damage[89][209] Information on the Company This section provides a comprehensive overview of StoneCo's business evolution, dual-segment model, core competencies, market opportunities, and organizational structure History and Development of the Company StoneCo's history spans five strategic acts, from SMB payments to micro-merchants, banking, software integration, and credit, driving significant client growth - The company's strategic evolution is described in five phases: 1) Serving SMBs with payments, 2) Expanding to the micro-merchant segment with 'Ton', 3) Launching an integrated banking platform, 4) Moving upmarket by acquiring Linx for software integration, and 5) Relaunching credit products[317][326][327] - The company grew its active payments client base to approximately 3.5 million by December 31, 2023[324][336] - Between 2018 and 2023, StoneCo increased its total revenue and income at a compound annual growth rate (CAGR) of 49%[335] - In January 2024, StoneCo received a license from the Central Bank to operate a financial services company (Stone SCFI), enabling it to offer new products like time deposits[337][51] Business Overview StoneCo operates in Financial Services and Software, targeting MSMBs with a four-pillar model and growth strategies focused on market leadership and bundled solutions - The business is organized into two main segments: Financial Services (payments, banking, credit) and Software (POS/ERP solutions for various retail verticals)[340] - The business model is founded on four core competencies: Unique Culture, Comprehensive Merchant Platform, Tech-Enabled Distribution, and Superior Client Service[352] - Key growth strategies include winning the MSMB market, driving engagement through bundled financial and software solutions, and scaling efficiently via technology platforms[399] - The company estimates its Total Addressable Market (TAM) for MSMBs in Brazil to be approximately R$32 billion for payments, R$40 billion for credit, R$16 billion for banking, and R$8 billion for software[377][378] - StoneCo's market share in the Brazilian merchant acquiring industry was 11.0% in the fourth quarter of 2023, according to ABECS data[383] Organizational Structure StoneCo Ltd., incorporated in the Cayman Islands, operates primarily through Brazilian subsidiaries with main hubs in São Paulo and Rio de Janeiro - The parent company, StoneCo Ltd., is incorporated in the Cayman Islands, with its main operations conducted through subsidiaries primarily located in Brazil[505] - A simplified organizational chart illustrates the corporate structure, showing StoneCo Ltd. as the parent of various holding and operating subsidiaries, including STNE Participações S.A., Stone Holding Instituições S.A., and Linx S.A[508] Property, Plants and Equipment The company leases main operational hubs and data centers in Brazil and the US, operating numerous Stone Hubs across Brazil and Latin America - The company's principal operational hubs in São Paulo and Rio de Janeiro are leased, with lease agreements for the Rio de Janeiro facilities expiring in 2029[510] - StoneCo leases data center facilities in Rio de Janeiro and São Paulo, Brazil, as well as in Chicago, Illinois and Atlanta, Georgia in the United States[511] Operating and Financial Review and Prospects This section analyzes StoneCo's financial performance, liquidity, capital resources, and critical accounting estimates, highlighting revenue growth and profitability Operating Results This section reviews StoneCo's 2021-2023 financial performance, highlighting 25.7% revenue growth and a return to R$1.6 billion net income in 2023 Operating Results Summary | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total Revenue and Income | R$12,055.0 million | R$9,588.9 million | R$4,823.8 million | | Net Income (Loss) | R$1,600.4 million | (R$526.4 million) | (R$1,377.3 million) | | Adjusted Net Income | R$1,557.5 million | R$410.5 million | R$40.0 million | | TPV | R$408.3 billion | R$367.4 billion | R$275.4 billion | | Active Clients | 3,522.1 thousand | 2,584.0 thousand | 1,766.1 thousand | - Total revenue and income grew 25.7% in 2023, driven by a 29.8% increase in financial services platform revenues from client base growth and higher monetization in the MSMB segment[615][618] - Financial income increased by 34.3% in 2023 to R$6.2 billion, primarily due to higher prepaid volumes and floating interest from banking solutions[615][621] - The company returned to profitability in 2023 with a net income of R$1.6 billion, compared to a net loss of R$526.4 million in 2022, mainly due to revenue growth and the absence of significant mark-to-market losses from the Banco Inter investment[615][633] Liquidity and Capital Resources This section details StoneCo's liquidity sources, including R$1.65 billion operating cash flow, R$5.5 billion debt, and R$1.21 billion capital expenditures in 2023 Cash Flow Summary | Cash Flow (R$ million) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 1,647.7 | 1,683.7 | 3,606.9 | | Net cash used in investing activities | (845.4) | (1,871.1) | (2,977.2) | | Net cash (used in) from financing activities | (148.8) | (2,810.1) | 1,419.4 | - As of December 31, 2023, the company had outstanding debt and FIDC quota holder obligations totaling R$5.52 billion[667] - Capital expenditures in 2023 were R$1.21 billion, primarily for the purchase of POS equipment (R$736.2 million) and the development of intangible assets like software (R$474.1 million)[672] - The company explains that different funding sources for its prepayment business (e.g., sale of receivables vs. issuance of FIDC quotas) have different impacts on its operating and financing cash flows[661][662] Critical Accounting Estimates This section outlines key accounting estimates, including FIDC consolidation, ECLs, revenue recognition, asset useful lives, goodwill impairment, and share-based payments - The company consolidates several structured entities (FIDCs) where it holds subordinated quotas and has significant decision-making authority[682][683] - The measurement of Expected Credit Losses (ECLs) for loans and receivables is a significant estimate, based on historical data, forward-looking economic conditions, and risk profiles[684][687] - Goodwill is tested for impairment annually at the Cash Generating Unit (CGU) level. The recoverable amount is determined using a value-in-use calculation based on a five-year discounted cash flow model[698] - The annual impairment test as of October 31, 2023, for the company's CGUs, including the significant Software CGU (goodwill of R$5.1 billion), did not result in any impairment losses[699][1158] Directors, Senior Management and Employees This section details StoneCo's Board of Directors, senior management, compensation, committee structures, employee statistics, and share ownership Directors and Senior Management This subsection lists current Board and executive team members, their biographies, and recent leadership changes in 2023-2024 - As of April 2024, the Board of Directors is composed of 7 members, with Mauricio Luis Luchetti serving as Chairman and Gilberto Caldart as Vice-Chairman[708][709][711] - Pedro Zinner has served as Chief Executive Officer since March 31, 2023[719][729] - The report provides detailed biographies for each director and executive officer, outlining their professional experience[709][711][712] Compensation Aggregate compensation for directors and executives was R$151.1 million in 2023, including share-based awards under the expanded LTIP - The aggregate compensation for members of the Board of Directors and executive officers was R$151.1 million for the year ended December 31, 2023[734] - In May 2022, the Board approved a new equity-based incentive pool of 19.2 million shares under the Long-Term Incentive Plan (LTIP) to be granted as RSUs and PSUs[744] - As of December 31, 2023, there were outstanding RSUs, PSUs, and stock options corresponding to 20,779,764 Class A common shares[746] Board Practices The Board has four standing committees, and as a foreign private issuer, StoneCo follows Cayman Islands governance practices, exempting it from some Nasdaq rules - The Board of Directors has four standing committees: Audit, People and Compensation, Finance, and Risk[750] - The Audit Committee consists exclusively of independent directors, and three members are considered 'audit committee financial experts'[751] - As a foreign private issuer, the company follows Cayman Islands corporate governance practices, which exempt it from certain Nasdaq rules, including the requirement for a majority-independent board and a fully independent compensation committee[755] Employees StoneCo had 17,091 full-time employees as of December 31, 2023, primarily in Brazil, distributed across Sales, Tech, Operations, and Admin functions Employee Distribution by Function (2023) | Function | Number of Employees (2023) | % of Total | | :--- | :--- | :--- | | Sales and Marketing | 5,592 | 32.7% | | Technology and Product Development | 4,800 | 28.1% | | Operations | 4,472 | 26.2% | | Administrative | 2,227 | 13.0% | | Total | 17,091 | 100% | - The total number of full-time employees increased to 17,091 as of December 31, 2023, compared to 16,685 in 2022 and 17,685 in 2021[756] Share Ownership This subsection details beneficial ownership of Class A and B common shares by directors and senior management, with André Street holding significant voting power - As of March 31, 2024, André Street de Aguiar beneficially owned shares representing 36.36% of the total voting power[761] - All directors and senior management as a group beneficially owned shares representing 36.80% of the total voting power[761] Major Shareholders and Related Party Transactions This section details StoneCo's ownership structure, major shareholders, the Shareholders Agreement, and policies for related party transactions Major Shareholders Major shareholders include founder-affiliated entities and institutional investors, with HR Holdings holding 31.30% voting power, governed by an amended Shareholders Agreement Major Shareholders Overview | Shareholder | % of Total Voting Power | | :--- | :--- | | HR Holdings LLC | 31.30% | | Madrone Partners L.P. | 5.30% | | BlackRock, Inc. | 4.49% | | The Pontes Family Trust | 3.85% | | VCK Investment Fund Limited SAC A | 3.14% | - The Shareholders Agreement grants founder shareholders certain rights, including consent over major corporate actions, as long as they own at least 15% of the voting power[771] - In April 2023, the founder shareholders executed an irrevocable waiver of certain rights, and the Shareholders Agreement was amended to reflect these changes and grant certain other nomination rights[771][772] Related Party Transactions The company engages in related party transactions, including R$2.5 million in loans to investees, subject to audit committee approval - As of December 31, 2023, the company had outstanding loans with some of its investees amounting to R$2.5 million[774] - The company has a related person transaction policy requiring that any such transaction be approved or ratified by the audit committee[785] - Indemnification agreements are in place with directors and executive officers to the fullest extent permitted by law[786] Financial Information This section details StoneCo's legal proceedings, including a securities class action, and its policy to retain earnings for growth rather than paying dividends Consolidated Statements and Other Financial Information StoneCo faces various legal proceedings with R$208.9 million in provisions, including a securities class action, and plans to retain earnings for growth - As of December 31, 2023, the company had provisions for legal proceedings totaling R$208.9 million for probable losses from civil, labor, and tax matters[793] - A putative securities class action was filed against the company in November 2021, alleging misrepresentations regarding its credit product. The company moved to dismiss the complaint and believes the suit lacks merit[799][800][801] - The company does not anticipate paying any cash dividends in the foreseeable future, intending to retain earnings to fund business development and growth[802] Additional Information This section details StoneCo's corporate structure, dual-class share system, and compares Cayman Islands and U.S. corporate governance laws Memorandum and Articles of Association This subsection details the dual-class share structure (Class A: 1 vote, Class B: 10 votes) and compares Cayman Islands and U.S. corporate law - The company has a dual-class share structure. Class A common shares have one vote per share, while Class B common shares have ten votes per share[818][823] - Each Class B common share will automatically convert into one Class A common share upon most transfers or if the total voting power of all Class B shares falls below 10% of the aggregate voting power[826] - The report provides a detailed comparison of corporate governance and shareholder rights under Cayman Islands law versus U.S. (Delaware) law, noting differences in areas such as director fiduciary duties, shareholder proposals, and transactions with interested shareholders[895][946][955] Quantitative and Qualitative Disclosures About Market Risk This section details StoneCo's exposure to foreign currency, interest rate, liquidity, and credit risks, and its use of derivatives and VaR for management - The company is exposed to foreign currency risk as it holds assets and liabilities in foreign currencies and incurs significant capital expenditures in U.S. Dollars and Euros. It uses hedging instruments to mitigate this risk[1006] - Interest rate risk arises from a mismatch between assets (like prepayments) originated at fixed rates and funding liabilities tied to the floating CDI rate. The company may use derivatives to mitigate this exposure[1010][1362] - Credit risk arises from potential defaults by counterparties, including card issuers and clients of its credit solutions. The company manages this through internal policies and monitoring[1014] Value-at-Risk (VaR) Analysis | Risk Factor | VaR (1 day, thousands) | VaR (10 days, thousands) | VaR (60 days, thousands) | | :--- | :--- | :--- | :--- | | Interest Rates | 297 | 941 | 2,304 | | Foreign Currency Exchange | 6 | 19 | 46 | Controls and Procedures This section confirms the effectiveness of StoneCo's disclosure controls and internal control over financial reporting as of December 31, 2023 - Management, including the CEO and CFO, evaluated and concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[1040][1041] - Management's annual report concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework[1042] - The independent registered public accounting firm, Ernst & Young, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023[1044][1154] Corporate Governance and Other Matters This section covers corporate governance, audit fees, Nasdaq exemptions, share repurchase programs, and the cybersecurity risk management framework - Audit fees paid to Ernst & Young totaled R$6.7 million in 2023[1048][1049] - The Board of Directors approved a new share repurchase program in November 2023, authorizing the repurchase of up to R$1.0 billion of its Class A common shares[1058] - The company has a cybersecurity risk management program overseen by the Board's audit and risk committees, with day-to-day management led by the Chief Information and Security Officer (CISO)[1072][1073][1074] - The company has adopted a clawback policy to recover erroneously awarded compensation in the event of an accounting restatement[1066] PART III Financial Statements This section presents StoneCo's audited consolidated financial statements for 2021-2023, including auditor's opinion and detailed notes Consolidated Statement of Financial Position | (In R$ billion) | As of Dec 31, 2023 | As of Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | 48.69 | 42.25 | | Total Liabilities | 34.02 | 29.30 | | Total Equity | 14.68 | 12.95 | Consolidated Statement of Profit or Loss | (In R$ billion) | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Total revenue and income | 12.06 | 9.59 | | Net income (loss) for the year | 1.60 | (0.53) | - The independent auditor, Ernst & Young, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[1153][1168] - A critical audit matter identified was the impairment testing of goodwill for the Software cash generating unit, due to the subjective estimation required in determining its value in use, particularly the sensitivity to the pre-tax discount rate[1157][1158][1159]