Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the StoneCo second quarter 2019 earnings conference call. By now, everyone should have access to our earnings release. The company also posted a presentation to go along with its call. All material can be found at www.stone.co on the investor relations section. Throughout this conference call, the company will be presenting non-IFRS financial information, including adjusted net income and adjusted free cash flow. These are important financial measures for the company, but are not financial measures as defined by IFRS. 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. Please refer to the forward-looking statements disclosure in the company's earnings press release. In addition, many of the risks regarding the business are disclosed in the company's Form 20-F, filed with the Securities and Exchange Commission, which is available at www.sec.gov. I would now like to turn the conference over to your host, Rafael Martins, Investor Relations Executive Officer at Stone. Please proceed.
Good evening, everyone, and thank you for joining us today. Joining me on today's call are Thiago Piau, our CEO, Marcelo Baldin, VP of Finance, and Lia Matos, Chief Strategy Officer. As you know, on July 30th, we announced preliminary metrics for the second quarter of 2019, as well as our joint venture with Grupo Globo. On this call, we will present our full operational and financial results for the second quarter, update you on our strategic progress, and give additional details on our company's evolution. Thiago will start with some exciting strategic updates. Thiago?
Thank you, Rafa. Good evening, everyone. Thanks for joining us today. Some remarks here. During the second quarter, we made great progress on our strategic long-term plans. We have summarized the highlights on slide three. First, our business continued to grow fast and with profitability. In the second quarter, we reached almost BRL 30 billion in TPV. Preliminary industry data indicates we had our largest quarterly market share gain over the last year, reaching approximately 7% of total market. We also accelerated the pace of adding new clients. In the second quarter, we posted a record of more than 50,000 new clients, bringing us to a total of over 360,000 active clients, 80% growth when compared to last year. While accelerating our growth, we kept our take rates stable at 1.85%. Despite heavy investment for future growth, our adjusted net margin was above 33% in the quarter.
Our second quarter results demonstrate the success of our business model and our team's execution capabilities. We have been able to combine high growth and profitability in a way that very few companies have. This was only possible because our clients see value in our services and in our products, which give us the confidence to invest even more in the business and accelerate our expansion. We dream very big, and we want to accomplish much more to help our merchants. Before Lia and Rafael discuss our second quarter results in more detail, I want to take a few minutes to talk about our strategic vision and plans for growth. I'm pleased to report that in addition to second quarter financial results, in July, we reached three important milestones on our strategic growth initiatives. First, we have made great progress in growing beyond payment solutions.
We now have more than 70,000 clients with software subscriptions, that's more than twice the number of software clients we had just one quarter ago. Secondly, since we launched the credit solution at the beginning of March, we've already supplied credit to over 3,000 clients with a total disbursement of more than BRL 50 million. Finally, we have formed a joint venture with Grupo Globo, the largest media group in Brazil, to go after the huge opportunity to serve micro-merchants in the country. These milestones represent significant progress toward achieving our goal of becoming the partner of choice for merchants, providing them a full range of solutions. Today in Brazil, as you see in slide four, merchants must go to multiple providers to address these needs.
You've heard us say many times that more and more we see the boundaries among payments, banking, credit, and software being broken down. We truly believe that our merchants deserve to fuel their transaction support needs with one single touch point within seconds. Stone is driving this breakthrough, and we continue to lead this evolution in Brazil. On slide five, we show how we are evolving our solution going forward in two different groups. Our ABC platform and software. The ABC platform is an expansion of core payment business. Soon, we will offer our clients access to acquiring banking services, credit, and prepayment in one single technology platform. This will give clients a holistic view of their cash flow and help them be more productive. Under the software strategy, we provide horizontal and vertical specific solutions to our merchants.
We currently offer software to three verticals: food service, retail, and most recently, beauty, with a POS and ERP designed for beauty salons. We plan to grow our software client base mainly organically, and we see great opportunity to cross-sell software to our payment client base, as Lia will show in a second. With the combination of our ABC platform and our software solution, our clients will have pretty much everything they need to start, run, and grow their store, either online or offline. Having a financial platform combined with software is core to our strategy. We want to be leaders in providing integrated solutions on a large scale, both from a technology and customer service point of view. As shown on slide six, our vision is to help our merchants to better manage their store and sell more, bridging the gap between the digital and brick-and-mortar channels.
As you can see in this slide, everything starts with our agent, who establish a very close relationship with our merchants and can help them with all of their financial needs with a single platform, such as accepting all payment methods, having a bank account specifically designed for merchant needs, and having access to credit in a very simple and transparent way. Once we onboard our merchant on this platform, our Green Angel proves how dedicated we are in terms of support, delivering our POS hardware in less than 24 hours. More than our financial platform, through our point of sale software, we help our merchants to better manage their store, and we integrate their inventory with digital channels such as marketplaces, social media, and e-commerce.
As our clients start selling online, our Green Angels go back to our merchants and help them with last-mile logistics, saving them precious time, so they don't need to go to post office, for example. The great thing about this vision is that we can offer it with unparalleled level of integrated customer service, where we take our merchant's phone call in four seconds or less and solve 90% of their request on the line. We see a lot of untapped opportunities ahead of us, which we intend to pursue with financial discipline, always keeping in mind the long-term goals of our company. We look forward to report to you the future, our strategic progress, and results in these areas.
I would like to hand the call over to Lia, so she can give you more detail on our financial and software solution and an update on the hub strategy.
Thanks, Thiago. I want to start by commenting on our progress in providing working capital solutions. You will see in slide seven that our credit offering began to scale during the second quarter. It is actually growing ahead of our expectations. As of July, we had over 3,000 clients and disbursed a total volume of more than BRL 50 million. The commonly available ways for merchants in Brazil to get working capital funding are through credit and prepayment. We see prepayment and credit as one single revenue pool with a total addressable market of approximately BRL 80 billion. We currently have only 1% of this market. We see huge potential as it is still very overpriced and underserved by the current players. Throughout the quarter, we started to offer pre-approved credit lines for selected clients through our Stone portal, improving the user experience.
We have also obtained the SCD license from the Central Bank, which allows us to offer credit on our own, giving us more flexibility and room to grow our client offering in the future. The other part of our financial platform is our banking solution, which is intended to be offered to clients in two different ways. First, through our Stone digital account, which is currently in pre-launch phase and has more than 10,000 accounts. The second is by allowing consumer-facing apps and other partners to connect to our platform via APIs and offer banking services to their own clients. With a client-centric approach, we are expanding the roadmap of features to offer the best digital account built for SMBs. The feedbacks to date have been incredibly encouraging. Let's talk about our software solutions, turning to slide eight.
We have been adding hundreds of clients a day, which allowed us to grow our number of subscribed clients from approximately 32,000 at the end of the first quarter to close to 70,000 in July, more than doubling in a short time, and this growth has been virtually all organic. Also, as the graph on the right side of the slide shows, there is a clear opportunity to cross-sell software to our clients in payments. Among the 70,000 software clients, 46,000 are also our clients in payments and are included in the number of 360,000 active clients that we just reported. We started our client relationship with payments, achieving the best NPS in the country. Now we are starting to offer software, focusing on rolling out horizontal offerings at first.
As we deepen our relationships with clients, we will offer them a more complete set of management tools in specific verticals, creating stickiness and growing our client base organically. In addition to growth from our new banking and software solutions, we still have plenty of room to grow in our hubs, as you can see on slide nine. Our market share in terms of merchant count continues to grow, both in locations where we have a longstanding presence, as in cities where we've entered more recently. In fact, we grew market share by more than 20% year to date in mature cities, compared to a five times increase in less mature ones, which are both great results. Position over time, despite an environment of increasing competition.
Now, I will turn back the word to Thiago so that he can comment on the JV we announced in July, that will allow us to enter a huge market.
Great, Lia. Thanks a lot. As Lia just showed, we are very focused on building the best platform for our merchants. With the hub strategy, we created a very solid business model for small and medium business, where we still have a sea of opportunity to explore. As I'd indicated before, we will invest even more to accelerate growth and expand our successful business. At the end of 2018, we began testing Stone Mais, our solution for a fast-growing segment in Brazil, with over 21 million autonomous workers. We learned that the critical asset for success in this market is media and marketing capabilities. We looked for the right partners to bring that to the table. We are thrilled to form a JV with Grupo Globo, the biggest media conglomerate in Brazil.
As shown on slide 10, we are creating a heavyweight contender in the micro merchant space, combining the vast media and marketing experience of Brazil's top media company and Stone's expertise in technology, payments, and financial services. In addition to its high penetration within micro merchants and unique communication capabilities, Grupo Globo will contribute an upfront investment of BRL 461 million in media. In addition to our operational support, technology, and payment processing capabilities, Stone will contribute BRL 50 million in cash. The JV is expected to start operations in the fourth quarter and will have a dedicated team with Caio Fiuza as CEO. Within Stone itself, we remain focused on SMBs and digital clients.
We look forward to replicating our success in the SMB segment and providing a great experience to autonomous workers and micro merchants all over the country, redefining the relationship between providers and clients in this segment. A core value here at Stone is team play. Creating synergy by forming partnerships enable us to go far beyond what we can achieve alone. We are very happy to welcome our new partners and very confident that together we can address this huge opportunity with the talented and dedicated team of Grupo Globo. With that, I will turn it over to Rafael to provide details on our second quarter financial performance.
Thank you, Thiago. As previously mentioned, we continue to evolve our business, improve our solutions to merchants, and grow fast, all with very healthy margin levels. On our previous conference call, we mentioned that we would increase investment in our operations and especially in our hub strategy. As you know, when we invest in a hub, we put costs up front and later benefit from significant operating leverage as the hub matures. Although our investment is recent, we are already starting to see positive results in our main KPIs. As you've just heard, in the second quarter, we reached the mark of over 360,000 active clients with a record of more than 50,000 net adds in the second quarter of 2019. It's important to highlight that the net adds improved each month within the quarter, with 19,000 net adds in June alone.
This gives us confidence that in the coming quarters, we should see net addition of clients grow even more than the 50,000 presented in this quarter. As you see on slide 11, in the second quarter of 2019, we also achieved 61% year-over-year growth in TPV, representing an increase from the previous quarter growth. Total revenue and income for the second quarter increased by 69% year-over-year to more than BRL 586 million, compared with nearly BRL 348 million in the second quarter of 2018. This growth was driven by a year-over-year increase of 56% in net revenue from transaction activities and other services, a 60% increase in net revenue from subscription services and equipment rental, and a 62% increase year-over-year in financial income.
As you see on slide 12, cost of services was nearly BRL 101 million for the second quarter, an increase of 44% compared with the second quarter of 2018. Cost of services as a percentage of total revenue and income was 17.2%, an efficiency gain of three percentage points over the prior year period, and a 1.3 percentage point deleverage compared with the first quarter of 2019. The quarter-over-quarter dip was mainly due to higher logistics and customer service costs as we further invested in our operations, as well as higher provisions and losses. Moving on to administrative expenses in the second quarter of 2019. They increased by approximately 32% year-over-year to BRL 77 million.
Administrative expenses as a percentage of total revenue and income was 13.2% in the second quarter of 2019, compared to 16.8% in the second quarter of 2018, an efficiency gain of 3.6 percentage points in the period as the company dilutes its fixed costs. Compared with the first quarter, administrative expenses as a percentage of total revenue and income increased by 1.1 percentage point, explained mainly by higher third-party services. Selling expenses grew by 99% year-over-year, reaching over BRL 87 million in the second quarter of 2019. This increase was primarily due to additional headcount in our sales team, in line with our commitment to accelerate investment in hubs. Financial expenses were nearly BRL 79 million, 6% higher than the second quarter of 2018. Financial expenses as a percentage of financial income fell from 40.3% in the second quarter of 2018 to 26.5% in the second quarter of 2019.
This decrease resulted from lower cost of funds due to lower base rates, cheaper funding lines, and the use of more own cash to fund prepayment operations, combined with higher financial income. Compared with the first quarter, financial expenses increased 18% in line with financial income. As you see on slide 13, our second quarter adjusted net income was BRL 194 million with a margin of 33.1%, compared with BRL 71 million adjusted net income and a margin of 20.5% in the second quarter of 2018. The main factors that contributed to the growth in adjusted net income year-over-year were an increase in total revenue and income, operating leverage in cost of services and administrative expenses, and reduced cost of funds as we gain access to cheaper funding and increase the use of own cash to fund the prepayment operation.
Compared with the first quarter of 2019, our adjusted net margin was negatively impacted by higher investments in our operations, partially offset by lower tax rates, mainly due to interest on capital and R&D tax benefits. During the second quarter, we invested more than BRL 30 million in expanding our operations and in training to our employees, which led our cost and expenses to increase as a percentage of total revenue and income from 39.7% in the first quarter to 45.3% in the second quarter, in line with our strategy of increasing the investment in our operations to expand growth. Overall, in a time when the market keeps competing solely on prices, we were able to maintain our take rate flat at 1.85%, balancing growth and profitability. Achieving the right balance between investments and profitability is key to generating a higher return to our long-term investors.
Let's look at cash flow. As shown on slide 14, we generated almost BRL 80 million of adjusted free cash flow in the second quarter of 2019, compared with nearly BRL 13 million of negative free cash flow in the second quarter of 2018. The main reason for the increase was an improvement in our adjusted net income year-over-year, which was partially offset by higher outflows from income tax paid, labor and social security liabilities, and other accounts receivable. Operator, please open the call up to questions.
Thank you. We'll now begin the question and answer session. If you have a question, please press star one. Our first question comes from Mr. Eduardo Rosman, BTG Pactual. You may proceed.
Hi, everyone. Congrats on the results. Congrats on the partnership with Grupo Globo. I have two questions. The first one, I'm trying to understand here the dynamics of net adds. We can see here that you had a great achievement during the quarter, but we saw big evolution throughout the months, right? It seems that in April, I think you got 15,000, and then at the end of June, 19,000. Just wanted to understand if something changed during the quarter, if you suffered from any special event. We had Hedge announcing the T+2, right? Not sure if you suffered anything from that, or if you had to change somehow the strategy during the quarter to accelerate the growth. Just wanted to understand how these dynamics worked during the quarter. That's question number one. Question number two is on your OpEx, right?
We saw on a year-on-year basis, you continue to improve your margins, right? When compared to the previous quarter, expenses picked up, right? We can clearly see that you are investing to grow. Just wanted to understand if you are still kind of opening one new hub per week. Also want to understand if this kind of a pickup in growth, how much is related to the current business, right, of acquiring and growing the hubs, and how much it's related to new initiatives such as the software, digital banking, et cetera. Thanks a lot.
Hi, Rosman. Rafael here. Thank you very much for the question. Regarding your first question of net adds, nothing specific in the quarter. We have continued investing in the business. That increase in net adds within the quarter is something that we were already playing and as a result of our investment, our expansion in the hubs and our continued productivity within each hub. This is nothing very specific or regarding competition and nothing related to that. To your second question in OpEx, you're right. As we said in the last quarter, we invested this quarter in our growth. That's why you see the OpEx increasing quarter-over-quarter.
When you look at each line item, you see that the investments that we have made to grow, if you exclude that, you would see pretty much the same percentage of revenue in those costs and expenses. As an example, if you see our COGS, our cost of services, it has increased a little bit as a percentage of revenue, but for example, transaction costs, they have decreased as a percentage of revenue. The same way with administrative expenses. If you look, we are having operational leverage with our personal in that line as well. The big part there is investment in the hubs, customer service, logistics, and technology. That was the bulk of it.
So-
Yeah, still your first question in net adds, I think nothing very new in competitive environment. I think that Thiago can address that point.
Thank you, Rafa. Thank you, Rosman, for the question. It's a great question. One comment about net adds is that we expect net adds to continue to grow quarter-over-quarter. As you can see, we are growing June, our net adds more than we were in April, and we expect this trend to continue with bigger net adds quarter-over-quarter. Regarding competition, I will take this opportunity to talk about two specific comments regarding short-term dynamics and long-term dynamics. First is that I understand that capital markets are worried about competition impacting our take rates in the short term, announcements of our competitors. To help our investor understand our perspective on these worries, what I can say is that I don't expect significant changes in take rates in the next quarter.
Take rates can go up or down 2 or 3 basis points because of client mix. As you know, we have digital channel integrated partners with some large account clients, and we have our hubs. We are not concerned with competition for incumbents impacting our hub strategy or our ability to grow. That's the first comment. Second comment is that in our calls, we have talked a lot about competition with incumbent payment players. In reality, we see our market in a different way. Our clients today, they pay around 2% take rates for us in our payment product. If you consider a BRL 20,000 on average TPV, this represents BRL 400 a month that our clients pay to us.
While the market's worried about where these BRL 400 can get to, we see that our clients pay BRL 200 fees monthly for POS and ERP solution that really don't have high quality. More than that, accounting many times is a nightmare for our clients, and they pay BRL 800 a month or BRL 1,000 a month for accounting services. Beyond that, every time someone brings a new sale for them, such as marketplaces or food delivery platform, they pay 16%-20% in fees in this new sale. In our vision, we seek to provide all the service our clients need to run their operation, integrate them with digital channels and marketplaces, and help them with last mile logistics using our 100% integrated platform.
With a customer experience where we can solve all their problems in one simple phone call in four seconds, and our team is more than happy to be there for them whenever they need. I'm proud to say that we have an incredible team that quarter-over-quarter protects our core business. We are expanding our vision. We are evolving our strategy 100% oriented to our clients' needs. This obsession over customers and the fact that we see many opportunities in the business of our clients is something really unique, which you don't see other players trying to build. That's my takeaway regarding the competitive dynamics during the quarter. Thank you very much for your question, Rosman.
No, thank you very much.
Thank you very much.
Our next question comes from Tito Labarta, Goldman Sachs.
Hi. Good afternoon. Thanks for the call. A couple questions as well. One, just following up in terms of your growth in your clients and also with TPV, right? Because we're seeing clients grew like 80%, but TPV is growing around 61%. I understand you're probably going into maybe more smaller merchants and more into your core business. Should this trend continue where clients grow faster than TPV, or how should we think about that evolution? The second question in terms of the, I guess, the new products with credit and software, how should we think about that? I guess on the credit side, what percentage of your financial income will come from credit versus prepayments? Any color you can give on that?
I know it's still kind of early, but just want to get a sense of how we should kind of try to forecast that into our numbers. Then also with the software, how much can you reach in terms of potential penetration? If you have 70,000 clients now, how fast does that grow? Thank you.
Hi, Tito. Rafael here. Thank you very much for the question. Regarding your question for TPV, you still see a slight decline in TPV per client. That's mainly because of mix of clients still. Whenever we go to the countryside in Brazil, you have the same type of clients selling a little bit less. That's still the effect you see here. Despite that, we were able to grow 60% TPV. When you look at the market share in that quarter, this is the quarter where we gained most share, if you look at the last year, all of the four quarters. I think we have been able to grow TPV at a healthy pace. Over the long term, of course, these trends, when you look at the SMBs in the country, you should have more aligned growth, right?
This is what we are seeing from a TPV perspective. Regarding your next question, Lia is going to answer.
Yeah. Thanks for the question, Tito. Talking a little bit about new products and specifically about the financial services part of those products. Like we said, we were incredibly encouraged with the growth of our credit offering. We started piloting it, and it's been growing way ahead of our plans. Like we mentioned, we launched credit and banking this year, right? When we did that, our core payments platform was already pretty evolved. We launched those three solutions separately. What we're seeing, and because of the very good feedback that we're getting from our clients, is that a natural evolution is to really integrate these three offerings into a single financial platform that we're calling ABC, like you saw in the presentation. We will naturally evolve to really offering one single financial platform where our clients can use multiple set of financial services.
Like we also said, regarding prepayment and credit, we see this as part of the same revenue pool. We see that there's a humongous opportunity. We've tapped so far 1% of this addressable market, so we see a lot of leeway for growth in the future.
Just to add, in terms of credit and prepayment dynamics. As Lia said, and we've shown on slide seven, the total market in terms of financing merchants in Brazil with credit and prepayment is very big. Every time merchants need money to match accounts receivables and payables, we can do this by prepayment. Every time they need money to grow, to buy more inventory, or to open a new store, we can do this using our credit solution. We don't seek to bear risks in our balance sheet in terms of this credit operation. We see opportunity to have partners in terms of this credit opportunity, in which we can originate the credit.
We can have all relationship with the merchant to help them understand exactly how much they are paying, the ability of the merchant to pay as a part of their volume, but not bearing the risk of this credit and having a strategic partner to bear this risk. That's the only comment, because now we have the license of the SCD, which is an entity in Brazil that give us the ability to give credit directly to our merchants. Our strategy is not to bear the risk of this credit in our balance sheet.
Okay, great. That's very helpful. Maybe if I could just follow up, I guess. Maybe just in terms of helping us think about the growth or how quickly it grows, right? If you're growing financial income today roughly around 50%, right, can that growth accelerate from here given these additional products? Is that how we should think about that?
It's very difficult for us to say forward-looking statements about this. We don't like to give guidance in terms of the future, but the credit opportunity is very, very big, as we already said. We are mainly focused at this point in three fronts, which is integrating all the offering of payments, banking, and credit, as you can see on slide five, to have one single platform for all of our clients. That's the first focus. The second one is rolling out the software for our entire base, and the third one is growing credit. We see that software is the strategy to reduce churn and create more stickiness, and definitely credit is the way that we can have more yields in the future. It's really a big opportunity. We will invest heavily on that, but we don't want to take the risks of the client.
We will evolve this, looking for these topics that I just told you.
Okay, great. Thank you.
Next question comes from Mario Pierry, Bank of America.
Hi, everybody. Congratulations on the quarter. Let me ask you also a couple of questions, please. First one, of the global partnership here, if you can be more specific how you're planning on addressing the micro-merchant segment, how are you going to price your products, right? Because you already have one competitor that is very present there, very transparent pricing structure. I was wondering if you're going to try to replicate the model or if you have a completely different strategy, if you're going to be using the same brand, the Stone brand, or are you going to differentiate? Also, when I look at your client base today, what percentage of your clients do you think are already this micro-merchant segment?
The second question that I have is when we look at this growth in software clients, right, this big growth, is this because your clients are more aware of your product, or is it because you're launching new products and clients are seeing the value? I'm just trying to understand here, right, because you made a few acquisitions during the quarter of software providers. I was wondering what is attracting the clients here. Is it new products that you're introducing, or is it just that they are aware of your products now? What are you doing then to get people more interested in signing up and using your software products? Thank you.
Great, Mario. Thank you very much for the questions, they're great questions. I will start answering the question regarding the JV with Globo, and then Lia will talk a little bit about the software part. To your question, we will have a separate brand for this operation. We are looking to launch this on fourth quarter. We are creating this brand. It will be linked to Stone, but it will be a separate brand, and we are creating here with four hands with Grupo Globo. We are happy to see that we will be a heavyweight contender, a top player in this market. We think that the market's very big. It has space to everyone, but we seek to be a top player in the market, and our differentiation will be in three main areas.
First, we will redefine customer service for micro merchants, as we already do for SMBs. Second part, the level of marketing data and consumer intelligence of Grupo Globo will allow us to be very efficient in customer acquisition, and the distribution of this product will be mainly through digital channels. As we already have an efficient operation and a best-in-class technology, as you know, for our core business, we think that this will create the ability to us to pass part of the efficiency to our clients using price. Pricing is something that we can use. Those are the three main areas that we are looking in terms of this joint venture with Grupo Globo. We will have more details about our solution, including the price, brand, and feature to disclose to the market when we officially launch the JV.
We are planning to report this joint venture separately once we launch the operation. That's something that we are talking with our auditors, but we seek to report the joint venture separately. The client base, in terms of micro merchant at this point, is very small. It's almost irrelevant. Very low single digits, so it's very small, as we said in our earnings calls before. Those are the takeaways regarding the JV with Globo.
Yeah.
Lia, do you want to talk about the software part?
Sure. Just, Mario, to highlight a couple points in software, and especially the recent organic growth that we saw in software, okay? I think first thing is this organic growth, I think speaks to the power of our distribution, right? The fact that we can own distribution on all fronts and that we interact directly with our merchants really gives us a very good position in terms of being able to offer anything beyond payments, really. Anything that our merchants need. I think that's the first important point. The second is our ability that through technology, integrate the software offerings to our core payments offerings. This really allows us to offer software in a very simple way.
I think the other very important point is that all of our merchants, as we see it, they use software today, and they interact with thousands of local providers that are spread out throughout Brazil. This is a very fragmented market. These solutions tend to be relatively low quality on-premise solutions. There is a huge untapped opportunity, as Thiago has already mentioned. I think those are the elements that really explain our ability to have been able to grow organically in software.
Let me just go back to the joint venture of Grupo Globo again, because I know that there's some questions about the client base, and I just want to make sure that I address this right. We are not entering the micro merchant space because we see competitive pressure in the SMBs. It's actually the opposite. We continue to be extremely excited with the SMB opportunity as we communicate in our vision. We also see a lot of opportunities in the micro merchant space. That's why we want to have both operations separately, and we will report separately for the market to see net adds, take rates, and all the KPIs of both operations separately. Our focus continues to be on 100% in the SMBs, and we are very excited with everything that we can do for our merchants from our own.
We expect to continue to grow net adds quarter-over-quarter, as we have done so far.
Perfect. Now, very clear. Thank you very much.
Next question comes from Felipe Salomo, Citibank.
Hi. Good night, Piao, Rafael, Lia. Thanks for answering the question. I have two questions. One is a follow-up from Mario's question, and then I will make a different one. The first one is about the new software offering. Stone had a very strong organic growth of 35,000 new clients. My question is, are these clients or most of these clients paying an additional fee for these software services? The offering of these software services is actually embedded within the subscription fee that Stone was already charging from all the SMB clients since day one. Are the new software offerings generating additional revenues or just helping to keep the rate stable? That would be my first question. The second question is about the TPV per average client.
The TPV per average client was down 13% year-over-year and 3% quarter-over-quarter. Would it be possible to get a better sense on what are the key reasons behind this marginal decrease? Should we not expect, I don't know, TPV per merchant to actually grow, given that merchants are becoming more familiar with Stone service and are willing to increase the usage of Stone POS devices while no longer using, let's say, incumbent payers. Just want to get a better sense of this specific trend. Thank you very much, and congratulations for the very strong results.
Thank you, Felipe. I'm going to take the first part of the question, and then Rafa is going to answer the second. Regarding software, again, in the context of subscription revenue, like we mentioned, we're offering this software as an integral part of our offering. We do not, at this point, charge beyond the subscription revenue. We are focusing on sustaining stable take rates and, most importantly, on growing the base of merchants that use software integrated with payments. What we are seeing is very encouraging early results in churn reduction for the clients that actually use our software offerings. I hope that answers your question, and I'll pass on to Rafael to answer the second part.
Hi, Felipe. Thanks for the question. Regarding the TPV per client, as you mentioned, it declined 3% quarter-over-quarter. We still see the dilution of large clients we have in our base because when you look how fast we're growing the SMB space, and if you see in a hub, the average TPV is a little over 20,000, so it's lower than our average TPV today. You still have that effect, right? It's not migration or the clients leaving us. That's the main reason we still see the dilution of large clients there.
Okay. Thank you, Lia. Thank you, Rafael, for the answers.
Thank you.
Thanks, Felipe.
Next question comes from Daniel Vaz, Credit Suisse.
Hi, everyone. Thank you very much for taking my questions. The first one is to try to understand a little bit better the dynamics in the prepayment revenues. We continue to see prepayment revenues growing pretty healthy in spite of some competitors offering the prepayment of single installment transactions for free. My question is if Stone is not suffering or feeling any pressure in reducing the interest rates for single installment transactions, or if Stone is offsetting these with higher fees in multi-installment transactions or with higher volume. My second question is a follow-up on the strategy, the micro-merchant segment. Just understanding if I understood correctly, and Stone is seeing opportunity to practice lower prices in this segment. Thank you very much.
Hi, Daniel. Thiago here. Thank you for your question. Very good question. First, regarding the prepayment. We are not using higher rates in the client base to offset these announcements of competition, as you have asked it. Actually, we said many times that our business model is very protected from competition because of the value proposition that we offer. Having our agent close to our clients, having our customer service with so high quality service that we offer to our merchants. I think that the results of this quarter proves the ability of these teams to protect its core business and how strong our business model is. Actually, we continue with the same level of prepayments and the same strategy. We are really not suffering from this effect that you just mentioned. The second part of the question is regarding?
Micro merchant.
The micro-
Micro merchant.
Yeah. Is your question micro merchants regarding price, is that right? Regarding the price right now.
Yeah.
Oh, yes. We do have the option to use price. It's something that we will take into account as we launch this operation. We believe that we already have a technology platform that's very high quality and makes a difference for our clients, and that service is something that our clients do see value. Those are the first ones that we will use. If needed, we have price to use because our operation is very efficient. That's something that we will have in mind.
Perfect. Thank you very much.
Thank you.
Thanks.
Our next question comes from Joseph Foresi, Cantor Fitzgerald.
Hi. A couple of questions from me. Could you provide us with an update on your Stone hubs build-out and what your targets are for this year? Maybe you could also give us a little more color on some of the financial options and how you expect that to change, financial options for the merchants and how you expect that to change as you move more to the micro merchant level. Finally, I just wanted to get some general comments around the Central Bank and some of the moves towards real-time payments and technology and the pricing environment. Thanks.
Thank you, Joseph, for the question. Regarding hubs, what we can say is that we continue to accelerate our hub openings. Over the second quarter, we opened over two hubs every week. Although we don't give any guidance in terms of the number of hubs that we expect to reach in the long run, what we can say is that we continue to see a lot of opportunity, both in opening new hubs as well as to further penetrate the hubs that we are already in, as you could see on page nine of our presentation. That's regarding hubs. I'm going to skip to the third question, I'm going to ask you to please repeat the second question because I think we didn't get it very clearly. I believe your third question was regarding fast payments, right?
We see fast payments as a certain evolution in Brazil. We see the regulator creating a framework to talk about fast payments and that opportunity. Like we said before in previous calls, we have a platform, our open banking platform, that is very adapted, we think, to the reality of where regulators are pointing in terms of that evolution in Brazil, which is very similar to the kind of evolution that happened in Europe. We see that fast payments is just one more payment method, right? It's likely to disrupt debit and cash. We see this disruption happening much more on the consumer side than on the merchant side. The merchant side of the business in Brazil has already been significantly disrupted, and we believe that our role here is to really help merchants accept any type of payment method.
Brazil has a large complexity of payment methods already in existence. Debit and credit cards, vouchers, boletos, and now fast payments is yet another form of payment. We will enable our merchants to accept that as well as another form of payment, and most importantly, through software and our tools to reconcile all those payments to make their life and their cash management pretty easy. If I may just ask you to repeat the second question again.
Yeah, may I just add one comment on the fast payment part?
Sure.
We don't believe that in Brazil we will have very big closed schemes, closed loop schemes, as you have in other countries. Mainly because in terms of regulation, we have a rule that if a scheme go over BRL 20 billion in volume in 12 months, it's obligated to be an open scheme, which represents that every payment company that onboard merchants will have the ability to onboard their merchants into this payment scheme, and every issuer will have the ability to issue this payment method. That's a rule that the Central Bank put it in the market. We don't think that we will have in Brazil an environment with big closed loops schemes as exist in other countries.
For us, it will be this new payment methods, fast payment methods will be one more payment method for us to help our merchants to accept and manage all their cash flow in a single platform.
Got it. Okay. Just my second question was around slide number seven. You had talked about working capital and for us in the U.S. market, installment payments and some of the commentary around that and the financing aspect of what you do is fairly new. I wanted to get your feedback on sort of the trajectory of that and how it might change as you move more to the merchant or the micro-merchant level.
Great. We don't expect big changes in terms of how this operation works, mainly because prepayments in Brazil is a way that our merchants use these products to fund their clients for them to purchase more. Interest rates for consumers in Brazil are very big. Our merchants, they prefer to offer installments, and they embed the cost of this prepayment in the price of their product. That's the best way to finance this purchase, because they are combining many transactions and they are negotiating funding with acquirers and banks as an asset-backed security, based on the receivables that they have. That's why the interest rates for the merchants to do this are much, much lower than the interest rates charged to consumers. We don't expect changes in terms of this prepayment operation. In the micro-merchant space, the dynamics is quite the same.
Clients, they like to offer credit for their clients to buy more, and they fund this with prepayment and taking credit from the banks.
Thank you.
Thanks.
Thank you.
Next question comes from Greg Moore, Autonomous.
Yeah. Hi, thanks for taking the questions. First, I was hoping you can comment on actually something you said earlier. You said that SMB volumes are diluting the volumes from large merchants, which is expected from StoneCo. However, that doesn't necessarily line up with the take rate being flat or the transaction take rate as best we can see falling. You would expect the opposite. You would expect a rising take rate if SMB was becoming a larger portion of the TPV. I was hoping you could talk through why the take rate isn't rising if SMB is growing as a component. Secondly, on the entrance into micro, I believe it was a BRL 461 million investment from Grupo Globo into what theoretically should be marketing and advertising spend.
The reason why I'm asking about that is that's effectively a little more than one year of the budget at PagSeguro. How should we expect the move into micro to impact the rate of growth in expenses around selling and advertising? Thanks.
Hi. Thanks for the question, Greg. Rafael here. We're going to your question of take rates and SMBs. What we see, we see a very competitive dynamics in the large accounts in Brazil. What we are seeing is incumbents putting pricing pressure in the big accounts. If you look at that, you should see that our take rates should go down. We do have still a positive effect from the mix in SMBs. Always, as a whole, in the company, we balance the take rates with the LTV to CAC, as we have always mentioned, which is basically, whenever I have a client that has a certain volume, we might decrease a little bit the take rate on that client for that client to bring more volume and generate more LTV.
We never manage the take rate alone, we manage it together with our growth levels, lifetime value to CAC. That's the way we see things, that's why you don't see the take rates going up as you mentioned.
As Rafael said, yes, you would expect take rates to go up with this new addition of clients in the hubs. What is happening here in terms of take rates is that we have big clients as marketplaces and some super acquirers. In that business, we see that competition is trying to use prices as a weapon, so sometimes we adjust. It's not a concern in terms of take rates in the hubs at this point. Regarding the investment of Grupo Globo and our own investment in this operation, we think that having an initial investment of BRL 500 million in this business, that we already have all the operation working, the products done. We think that we have enough capital to start this and prove that this business model has a cost of acquisition and lifetime value that justify to have more investments.
We don't expect that this operation will change the dynamics of the SMB in terms of investments, and that's why we will report separately. We see that this is a huge opportunity. We are allocating capital with a sided pocket to this opportunity, and we think that this initial BRL 500 million will give us the ability to be in a very good position in terms of proving our ability to create a very strong business model for this operation.
Thank you so much.
Thank you.
Our next question comes from Julie Chariell, Bloomberg.
Good evening, and thanks for taking my question. Just had a few more on the credit side of the business. I'm wondering if the offering has been rolled out publicly or if it's still sort of just in a more mature initial phase. As part of that, are you targeting the merchants who you're going after for credit, or are they coming to you at this point? I'm wondering if, since you're able to kind of get a view into the TPV flow for these merchants, if you're still at the point of going after pursuing the ones who you think are most creditworthy. If you could put some numbers around that, how many clients have you identified so far? How many clients are getting credit right now, and how many do you feel are most eligible out of that very large client base?
Just lastly, on the partnership for the credit risk, if you have a timetable for when you might find or announce a partner? Thanks.
I'm going to start answering that question. If I don't get everything, please repeat the question, okay? Regarding our offer, what we do is we actually pre-select a group of clients from within our base, and we actually pre-approve that credit amount, and we offer it through our Stone portal. This is pretty much a kind of a self-service type of flow, right? Those clients, they can order that credit either through the Stone portal or by calling us. The way we actually analyze whether those clients are creditworthy is looking at their transactional history. That's a huge advantage that we have, right? We can see how they have transacted with us over the last 12 months, and that's how we actually base our credit offering to those clients. Regarding partners, yes, we are exploring new partnerships so that we can continue to grow.
Like we said, we are incredibly encouraged, and we have tapped only a small part of the opportunity, even looking within our own client base.
Can you share anything on the eligible number of the creditworthy clients that you see in your client base? And then maybe the terms of the credit that you're offering, the rates specifically?
Yeah. Not at this moment. We're still in the initial phase, like we said. We're incredibly encouraged, but we're not disclosing anything beyond what we have disclosed at this point.
Okay, understood. Thank you.
Thank you, Julie.
Thank you, Julie.
Next question comes from Neha Agarwala, HSBC.
Hi. Thank you for taking my question. Most of them have been answered, but I have a few more. First, on the tax rate, it was quite low this quarter. How should we think about it in the coming quarters, and how should we think about it for the year as a whole? My second question is on the new POS platform that is being offered by your competitors. They are offering payment solutions through the NFC technology, which would not require a POS terminal. Do you have a similar solution? What are your thoughts regarding the impact of such a move for the system as a whole? On your credit business, I understand you're not giving too many details, but any idea of the term that you're offering for credit? Is it two months, three months?
Also when you look at your customer base, if you analyze, say, 100 customers, how many of those, what percentage, if you can give us a rough estimate, do you think are eligible as per your standards to receive credit? Thank you so much.
Hi, Neha. Rafael here. Thank you very much for your questions. Your first question regarding tax rate, this was mainly a result of our tax planning this quarter. Some effects of this are going to remain, and some were higher than usual in this quarter. Two effects is what we call in Brazil, JCP, is interest on capital and some R&D tax benefits. Regarding the following quarters, I think Marcelo Baldin can talk a little bit about.
Hi, Neha. For the following quarters, we expect effective tax rates to stabilize between 25% and 30%. In the medium term rate. Yeah. I think you made a question, Neha, regarding NFC.
Yes.
Really early to say anything about it, right? We see a lot of different models out there. We see a lot of wallets that use QR codes to enable the transaction. NFC is just another way to enable the transaction, right? Again, for us, this is a matter of a discussion about technology, and it's not a barrier to implement. What we are worried and what we are concerned is what our clients actually need. We will be closely monitoring what our clients need and prepare ourselves to be able to offer that. There's not anything much that we can say beyond that.
Yeah. Regarding the credit question about the terms, at this moment, we have terms around six and 12 months. Main part of our client base we offer six months duration of credit. It's really a short-term credit.
Thank you. If I can ask one last question, do you have any plans to open a bank? I know you have a digital account, but the way PagSeguro created a PagBank, do you have any such plans for Stone? Thank you so much.
Thank you, Neha. Actually, we don't have plans to have a banking license. As you may know, in Brazil, banking license creates an obligation for you to have capital requirements that at this moment we don't need, mainly because we are offering transactional activities of this banking strategy. We are not actually leveraging the deposits that we have, so we don't need a banking license. We don't want to have, at this moment, the level of capital requirement that a banking license needs. We will continue to be a payment company licensed by the Central Bank. With the license that we have, we can take deposits, we can do all the transactional activities such as issuing boleto, paying bills, doing payroll payments. We just can't leverage the money that we have in our balance sheet of our clients.
This money has to be in cash or in treasury bonds. That's why we are not looking for licenses to be a bank.
Great. That's very clear. Thank you so much.
Thank you, Neha.
Thank you, Neha.
Thank you, Neha.
Next question comes from Domingos Falavina, JPMorgan.
Thank you, Rafael and everybody also for taking the question. Two quick questions. The first one is, I noticed you mentioned allowance for doubtful accounts and looking at your cash flow statement, it seems that number came up to BRL 15 million versus BRL 3 million-BRL 4 million run rate in first Q or even one year ago. Can you explain a little bit what exactly were those losses like if they're associated with loans and et cetera? Supposedly once you approve the transaction, you should be very close to zero NPL. Second question, we're pretty positively surprised by the subscription revenues growing Q on Q, which is a pretty good signal of you indeed differentiating as a higher quality service.
You mentioned a little bit some products that you offer, but if you could touch a little bit more detail as far as if the exemptions are being given on a more widely spread basis, or if this growth came predominantly from new clients, or if it's just being able to pass on price increases in those subscriptions. Just to get a bit more sense on how receptive clients are.
Hi, Domingos. Thanks for the question. Regarding your first question of the bad debt allowance, this is regarding the merchant acquiring operations, nothing related to the credit part. This is increase in our operations and mainly related to digital chargebacks. This is part of our business, nothing related to credit, right? Regarding your second question, I think as Lia has mentioned previously, we are charging the software within our plans. This is the way we are doing it. Sometimes we charge incremental amounts in those plans, and sometimes we charge less, right? I think Lia can complement a little.
Yeah. I think just to complement that, we're really much more focused on making sure that the software strategy is something that we can see gain scale, right? We've been really offering this in the context of the subscription revenue within a bundle to clients. As we evolve, and like we mentioned in the presentation, we're really encouraged to furthering our software offering, right, to a more complete platform. As we do that in the medium term, we do expect positive impact in our subscription revenue. In the short term, our real focus is to making sure that we scale software and that we can see the pieces of churn reduction and LTV increase in the clients that use software.
Super clear. One last one, just to make sure I didn't miss anything. I didn't see any cash outflow from acquisition of shares. Fair to assume that there was no share buyback performed this quarter?
Hi, Domingos. That's correct. We haven't done any share buyback in the quarter.
Super. Thank you.
Thank you, Domingos.
Thank you, Domingos.
There are no questions at this time. This concludes the question and answer session. I will now turn over to Mr. Rafael Martins for his final considerations.
I would like to thank everyone for participating on the call. See you next quarter. Thank you.
Thank you all.