Good evening, everyone. Thank you for standing by. Welcome to StoneCo's third quarter of 2026 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. Before we begin the call, I advise you to review the disclaimer included in the press release and presentation, which outlines important information about forward-looking statements and non-IFRS financial measures. 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.
Beforehand, I would like to highlight that the company is restricting the number of questions to one per analyst. Joining the call today is Stone CEO Mateus Scherer, the CFO and IRO Diego Salgado, and the Head of IR, Roberta Noronha.
I would now like to turn the conference over to Mateus Scherer. Please proceed.
Thank you, operator, and good evening, everyone. Thank you for joining us. Before we go through the presentation, I want to take a step back and share where our focus has been and how we are progressing. As we will remember, late last year, we began to see higher churn in our client base.
The main cause was complexity. As we expanded our range of products and services, our offers and our operation became harder for clients to navigate. Since then, we have been working to remove the complexity. We are making our offer simpler and our pricing more transparent. We are improving the client experience, and we have changed how our sales force is rewarded to put more weight on retention. We are moving in the right direction. There is still ground to cover, especially in our Stone product, but the changes are starting to show in the numbers.
TPV growth accelerated again this quarter. To put that in context, earlier this week, Abecs, the Brazilian Card Industry Association, reported that card TPV grew 6.6% year-over-year in the quarter. Card present transactions grew 3.5%, and cards not present grew 13.5%. Against that backdrop, our overall market share stabilized this quarter, and we gained modest share within our segment. In banking, deposits continue to grow as clients use more of our ecosystem. This is also why we are investing in our positioning as the bank for entrepreneurs.
We started that work last quarter. Brand takes time, and we expect the benefits to build gradually. In credit, we kept growing, and we have been deliberate about where. We tightened our stance on the dedicated desk, where larger tickets call for more caution, and we directed more of our growth to government-backed programs.
These lines carry a guarantee, and that lets us keep serving our clients in a tougher environment at healthy risk-adjusted returns. We are seeing the results.
Our newer cohorts are performing better, even excluding the effect of the government-backed lines, and the more selective mix helped us with the cost of risk in the quarter. At the same time, the environment for small business remains challenging, and we are not expecting for it to ease in the near term. That keeps us cautious on cost of risk and selective on where we grow. While we see these gradual improvements across operation, profitability in the quarter was under pressure. Two things drove that: higher provisions as the credit portfolio grows and higher costs to run the business. Cost control is one of our main priorities, and it will remain a central focus in 2027 and beyond.
Now, let's turn to slide four, where these dynamics come together in our nine-month results. In the first nine months of the year, we delivered BRL 4.5 billion in adjusted gross profit and BRL 6.9 in adjusted basic EPS, with a year-to-date effective tax rate of 15.2%. These results are below what we envisioned at the start of the year.
Part of that is the macro environment, which stayed tougher for longer. Interest rates remain high, the credit environment remained difficult, and smaller merchants felt that pressure the most. Part of it is a choice we made. Our retention initiatives prioritize offers that maximize the lifetime value of each client. We make these decisions client by client, where the unit economics justify it, but that puts short-term pressure on our top line in exchange for more sustainable growth over time. In summary, this was a quarter of gradual progress.
The early signs are there in TPV growth, in market share, and in our newer credit cohorts. Near-term results carry the cost of building for the long term. Three things guide how we think about what comes next: our focus on the clients, the long-term value of the business, and our commitment to returning capital to shareholders. Turning to slide five, we are updating our 2026 outlook.
This reflects the same two factors: a macro environment with high interest rates and higher credit losses than we assumed, and the short-term impact of our retention initiatives. We now expect adjusted gross profit to be between BRL 6.1 billion and BRL 6.2 billion, compared to a range of BRL 6.6 billion-BRL 7 billion previously. For adjusted basic EPS, the range is now between BRL 9.1 and BRL 9.5 per share, compared to BRL 10.8-BRL 11.4 previously.
Our effective tax rate assumption is unchanged in the mid-teens. On 2027, we are withdrawing the targets we communicated earlier this year. Interest rates remain a headwind, and the economic uncertainty we see today makes the macro outlook for next year volatile. In that context, we are not comfortable providing guidance at this point. We will decide whether to provide updated 2027 guidance when we report full-year results. Our strategy and execution priorities will not change. We are focused on improving our operational roadmap, enhancing retention, and building a bank for entrepreneurs. With that said, I will pass it over to Diego, who will go over our financial and operating results for the quarter. Diego?
Thank you, Mateus, and good evening, everyone. Starting on slide six, we present our main financial metrics for the quarter. On one hand, our revenue growth continues to be led by our credit product, as our portfolio continues to scale. On the other, adjusted gross profit decreased year-over-year and sequentially, as the growth in revenues was more than offset by provisions for loan losses and other costs associated with the growth of our operations. This lower gross profit, combined with investments in selling, led to a decrease in adjusted net income. However, adjusted basic EPS declined much less, as the continued share buybacks over the last year meaningfully reduced our share count.
On slide seven, our active client base reached 5.1 million merchants, led by the performance of Ton, our micro-merchant brand, and by a growing number of banking-only clients, as we evolve in our positioning as the bank for entrepreneurs. This growth mix slightly impacts the ARPA, but we expect to further monetize clients as they engage with our solutions over time.
Turning to slide eight, TPV is slowly accelerating, although the churn challenges we detected last year still pressure our growth. The sequential acceleration is a sign that our initiatives are gaining traction and will compound in time with churn reduction. Growth continues to be led by Pix QR code, which grows well ahead of card volumes. Card TPV remains under pressure and still declines year-over-year, driven mainly by debit volumes, with credit cards getting flattish. But the trend is improving.
Its sequential growth this quarter was stronger than a year ago, and the annual decline has been easing, an early sign that our retention efforts are gradually reaching card volumes as well. In banking, we keep evolving and sustaining the gap between TPV and deposits growth as we further engage clients with our account offerings. On slide nine, we present the growth metrics of our credit business. Our portfolio reached BRL 4.1 billion, 78% larger than one year ago and 9% quarter-over-quarter, driven mainly by working capital solutions. As Mateus mentioned, we've been focusing our growth backed by government-secured programs.
These loans have nearly doubled quarter-over-quarter and are quickly gaining relevance in the book. We are currently disbursing under three different programs and studying new ones to support our client needs. Finally, our credit card portfolio also kept advancing, reaching over BRL 500 million.
Credit revenues grew 14% sequentially, with the average yield roughly steady throughout the year, even as government-backed programs gained weight in the portfolio. This is the result of our blended approach to the portfolio on a risk-adjusted basis. That takes me to slide 10, where our consolidated credit indicators reflect the portfolio mix, with cost of risk declining sequentially. On NPLs, we're benefiting from the normalization of first payment default ratios, which have returned to historical levels. Additionally, we've been investing in new collection and renegotiation tools, which benefit both cash flows and delinquency ratios. Loan loss provisions were BRL 197 million in the quarter, mainly given by the scaling of the portfolio. That led to a cost of risk reduction to 20.1% from 21.5% in the second quarter, in line with our previous expectations.
Finally, our coverage ratio reached 196%, compared with over 200% in the previous quarter, which reflects the same shift in the mix, as government-backed loans carry a guarantee and therefore require lower provisioning. Although we continue to see gradual improvements in our credit portfolio, we are mindful with the impact of higher rates for a longer period of time, affecting the health of our clients' businesses. As such, we are currently reviewing our credit models for a tougher macro backdrop, and that may weigh on the cost of risk for longer than we initially expected.
We still believe cost of risk will go down to the mid-to-high teens range in the medium term, but that will remain pressured in the coming quarters. Slide 11 explains the moves in our NPL ratios. Our NPL over 90 days increase is consistent with the seasoning of the book.
The main driver was the roll forward of early-stage delinquencies in our dedicated desk, which carried the elevated 15 to 90 days NPL last quarter. On the short end, the NPLs 15 to 90 days actually improved, driven by lower rates of first payment defaults on the automated desk, as I previously mentioned, and in line with what we've been observing during the last months. Additionally, the new tools for collections and renegotiations that we've recently launched are showing early signs of success. On slide 12, we present our capital position and return on equity. Our capital ratio stood at approximately 27%, comfortably above our 17% internal hurdle. We continue to return capital to shareholders, repurchasing over BRL 200 million in shares this quarter.
The lower repurchase pace in the third quarter compared to the previous quarters reflects the restructuring of certain legal entities we executed during the third quarter, which temporarily required short-term liquidity. However, our commitment to distribute the BRL 2 billion in excess capital over the course of 2026 remains unchanged, and we will keep on executing our buybacks until December. Finally, our adjusted return on equity expanded almost 200 basis points on an annual basis to 23.5%.
On slide 13, we present the evolution of our costs and expenses. Cost of services, excluding provisions, was higher mainly due to investments in software, with AI as a key and fast-growing component, alongside higher transactional, operational, and risk management costs. On that front, we are currently facing higher risk costs with new products, which although pressure short-term results, present an efficiency opportunity as these products mature and we evolve in managing fraud risks.
Net financial expenses were broadly flat, as higher funding needs associated with the restructuring of the legal entities I've mentioned before were partially offset by a lower average CDI, improved efficiency from the deployment of clients' deposits, and a lower number of business days.
Funding costs in the quarter was 86% of CDI. Admin expenses were lower annually on reduced personnel expenses and our more disciplined approach to G&A. Selling expenses were up on higher investments in our distribution channels, software licenses, and higher marketing expenses, including our repositioning campaign as the bank for entrepreneurs. Other expenses were down in the quarter, mainly due to lower share-based compensation, as we update our estimates of share-based compensation to be forfeited by departing employees, which offset higher contingencies and higher provision for POS losses. Finally, our effective tax rate was 14.7% in the quarter, within the mid-teens level implied in our guidance.
As final remarks, on slide 14, our operation continues to improve, but slowly, under a very challenging backdrop for the Brazilian economy. When I look at the nine months of 2026, TPV is accelerating, new cohorts of the credit portfolio are coming at healthy economics, and the engagement of clients with our account keeps increasing. However, our expectation that interest rates will remain high and volatile keep adding pressure to short-term results. Our goal is to be the bank that entrepreneurs rely on to run and grow their businesses, and deepening our banking and credit relationships is how we get there. We are confident we are building that, one quarter at a time. With that, let's open it up for questions.
Thank you. Now we'll begin the Q&A session with Mateus Scherer, CEO, Diego Salgado, CFO, and Roberta Noronha, Head of Investor Relations. If you would like to ask a question, please press the Q&A button at the bottom of the screen, or to ask a question on audio, click on Raise Hand. You will then receive a request to activate your microphone. One moment, please, for the first question. Our first question comes from Antonio Ruette with Bank of America. You can open your microphone, sir.
Hey, guys. Thank you for your time. Two questions on my side. The first one, you mentioned that you had some restructuring of certain legal entities, if you could please provide a little bit of more detail here. The second one would be on your credit initiative. You mentioned that the macro environment has been more challenging than expected, and you can, of course, see this in the deterioration of the NPL. If you could please provide a little bit of color here. When you look at the merchant portfolio, where is this deterioration coming from, and how are your model revisions doing? Thank you very much for this.
Hey, Antonio. This is Diego. Thank you very much for the question. During the third quarter, we moved a relevant amount of the capital that we had from our holding company from Cayman to other entities located in both Luxembourg and Switzerland. That caused us to withdraw capital from Brazil for a certain period of time, capitalize those entities, and then moving back the capital into Brazil. We are now centralizing people, activities, and capital in this main entity in Switzerland. That caused a lot of moves in cash balances among the entities. Is that clear?
Yes, it is, but what is the need for this? What is behind this reorganization to these institutions in Europe?
There are two business rationales, two business reasons behind it. The first one is we want to make sure that we've been reducing our exposure to jurisdictions that are not necessarily well-perceived by the Brazilian tax authorities. We are looking means to reduce our exposure to any tax disputes in the future. But most importantly, we see Switzerland specifically as a healthy capital hub to support the growth of the business, not only in Brazil as we evolve, but also to other regions once and if that occurs.
All right, that's clear.
To your question on credit, what we've been seeing is that TPV retention from clients on the credit products are not necessarily performing as we would expect, considering the seasonality of the year. We do not necessarily see that in the NPL formation just yet. But as you know, we follow the daily TPV from our clients and the expected daily amortizations in the contracts, and we've been seeing some pressure on that front.
If I may add, Diego, the other place where we see clearly the impact of the macro environment is in judicial recovery filings, the Brazil's equivalent of Chapter 11, which are at record levels in the country. I think that's all over the news. If you were to look at the previous quarters that hit our dedicated desk, and that led us to make a series of changes in policies by tightening the maximum tickets and directing growth to the government-backed line. Those are the two factors. On dedicated desks, it's mostly about judicial recovery filings, and then we also see our clients suffering on the TPV side, like Diego mentioned.
That is clear. Thank you for your time.
Thank you.
Our next question comes from Thiago Pinheiro with Goldman Sachs. You can open your microphone.
Hi. Good evening, everyone. Thank you for taking my question. It's really just a follow-up on the guidance decision on why to suspend the 2027 expectations for now. Can you help us understand what are you thinking about this resetting of expectations? What kind of market conditions do you need to see over the next three months to decide about launching new guidance ranges? Would you say it's more a matter of asset quality stabilizing, the path on rates, or whatever key metrics do you think are more relevant for now? Thank you.
Thiago, thanks for the question. When we think about the 2027 guidance, I think the main reason why we decided to withdraw the targets rather than update them is the macro environment. The volatility is still very high, and the visibility is still very limited on that front. Probably a good example, or the best example for ourselves, is the interest rate environment. Post-election, I think we've seen a move in the yield curve of about 250 basis points. As you all know, we have a sensitivity to interest rates of about BRL 200 million-BRL 250 million for every 100 basis points in the interest rates. That alone is a big variable that would change materially the way that we think about the guidance.
Today, when we think about 2027, it's still hard to say where rates and credit conditions will be 12 months from now. That's why it's hard to put out a range that we would be comfortable and that would be useful for you as investors as well.
The one thing that we also have been highlighting here is that even though we're taking the decision to withdraw the guidance for 2027, in terms of the direction of the business, nothing is materially changing. We manage Stone for the long term. The priorities for 2027 are pretty much the priorities that we have nowadays, focusing on the retention work, focusing on churn, growing credit with discipline. The other thing that I think will be even more important in 2027, of course, is the focus on efficiency, given the tough macro environment. That's pretty much it.
I think the decision around the 2027 guidance has mostly to do with the macro environment, and we're going to reassess whether we have comfort in updating the guidance or not whenever we disclose the 4Q numbers.
Thank you, Mateus. Appreciate it.
Thank you.
Our next question comes from Kaio Prato with UBS. You can open your microphone.
Hey, guys. Good evening. Thanks for the opportunity. I have a follow-up on credit, please. If you can just, Diego, remember us, what is your new view estimate for cost of risk? I think you briefly mentioned during the conference call, to be honest, for the next couple of quarters. And given this new environment, how would you describe your current appetite for growth going forward? And if you can split by the secured loans and also the unsecured ones, just to understand if there is room to continue growing at this pace or if you could see a major deceleration at some point in 2027. Thank you.
Hi, Kaio. Thank you for the question. Very good one. Let me start with cost of risk. We have mentioned since the beginning of the year that cost of risk would peak and then would trend down to the mid to high teens, and we were hoping that it would happen by the end of the year, probably earlier in 2027. What we have been seeing now or what we have been working on is that this trend towards lower levels will probably take a little bit longer.
We are in the process of reassessing our credit models for a materially tougher macro backdrop, and that should impose additional provision expenses than we initially expected, considering the forward-looking component of those models. Hence, what I have mentioned during the presentation, that it would probably take a little bit longer to trend down to those levels.
As to the appetite to grow the business or the credit portfolio, we are being super mindful of the pressure that the elevated rates we have in our clients. We are also preparing for higher inflation, lower consumption, lower GDP generally for the Brazilian economy, and that should, to a certain extent, hit on the models or hit significantly on the models, and then in our ability to convert the portfolio. We are not anticipating any material changes in the growth of the portfolio, but we are certainly going to be extremely careful in the overall underwriting process. Having said that, credit, it is a key component of our strategy in the long term and an important need for our clients, and we will support those clients on that need. Again, we are going to be careful.
We are going to monitor that very carefully, very closely, on a day-by-day basis, on a month-by-month basis. Mateus, you want to add anything?
No, the only thing that I would add is that when we think about growth of the credit portfolio, we also need to keep in mind that our share of wallet within our client base is still very low. We are talking at about mid-single digits penetration. Like Diego mentioned, on one hand, we are very mindful of the environment. On the other hand, the fact that the penetration is still so low and the fact that we have the government-backed lines to lean on gives us comfort to continue to grow the portfolio. I would not expect that the portfolio will stop growing in the near term, but for sure, we are taking the really cautious approach here.
Great. It's clear. Thank you very much.
Thank you.
Our next question comes from Jamie Friedman with SIG. You can open your microphone.
Hi, guys. Thank you for the opportunity. Mateus, you addressed this to some degree with your prior answer, but I'm just curious, if you were to frame how the company has performed relative to the original multi-year guidance that you provided at the analyst day in 2025. I realize there's a lot of macro changes between then and now, but if you could summarize where you are relative to that and what really the differences are that are leading you to suspend the guidance now. Thank you.
Hey, Jamie. Thanks for the question. Excellent one. When you look back at the original guidance that we provided back in 2023 in the investor day, I think if we were to look at the new initiatives, especially credit and banking, the reality is that when we see the numbers, we are pretty much in line with what we had forecasted in the past. If you remember, we guided for a credit portfolio of around BRL 5.5 billion. If you look at the trends of growth in the credit portfolio and where we stand nowadays, it is pretty much in line with what would be needed to achieve that target, if not a little bit better.
On banking, I think we guided for BRL 14 billion, if I am not mistaken, in deposits back then. Again, if you look at the results nowadays, it is pretty much in line.
Where I think we have seen a tougher environment and also where we performed worse than what we expected in the past is in two areas. The first one is on the TPV growth side. I think if you remember the message that we shared in investor day, we were anticipating that we should not expect high market share gains in the future, but we should grow in line with markets. Then two things happened. The first one is that if you look at the previous quarters, we did perform slightly below market, so we lost some market share, but then the market grew a lot less than what we had anticipated back then. I think TPV growth is probably the major factor. The second one is around interest rates and the overall macroeconomic environment.
Back then, if I am not mistaken, we shared that our assumption for interest rates in the original plan was around 11.7% by 2027. If you look at where the rates are nowadays and what is implied on the yield curve, that alone is a huge gap against the plan as well. When we think about how the company is performing, again, I think we are in the right track, like Diego mentioned, especially when we think about the company becoming a bank. I think we keep evolving on banking, we keep evolving on credit and increasing the engagement. What has been a lot tougher than what we had anticipated is around the TPV growth and the macro side. I do not know if you want to add, Diego. That is it, Jamie.
Yeah, that is a great summary. Thank you. Thank you, Mateus. I will drop back in the queue.
Thank you.
Please remember, to ask questions, you may click on the raise hand button. Once again, if you have any more questions, you can click on the raise hand button. Please hold while we poll for questions. There are no more questions at this time. This concludes the question and answer session. I will now turn over to the CEO for final considerations.
Thank you, everyone, for joining us in the earnings call, and we'll see you on the next one.
Thank you very much. You may now disconnect and have a nice evening.