XP Inc. Q1 FY2022 Earnings Call

Okay, good evening, everyone. Welcome to XP’s Earnings Call for the First Quarter of 2022. I am Andre Martins, the Head of Investor Relations. On behalf of the company, I would like to thank you all for your interest in this call. Today, we have with us Thiago Maffra, our CEO; Bruno Constantino, our CFO; and the Investor Relations Team, myself, Antonio Maren, and Marina Montemur. We will be all available for the Q&A session, which is going to happen right after the presentation. You can raise your hands on the Zoom tool to ask your questions. We already have seven raised hands. We have the option of simultaneous translation to Portuguese. You just have to click on the go button on Zoom. Before we begin our presentation, please refer to our legal disclaimer on Page 2 of our earnings presentation on which we clarify the forward-looking statements and their definition. The documents explaining why forward-looking statements might differ from actual results can be found in the SEC filing section of our website. Now I’ll pass the word to our CFO, Bruno Constantino, who will deliver our initial remarks. Thank you all.

Thank you very much, Andre. Good evening, everyone. Are we going to have the presentation on? So I can start. I will be brief. We have already seven hands raised, so I will be brief so we can go to the Q&A. We have basically two sessions here: the highlights, and then the financials and KPIs of the first quarter. Regarding the highlights, we have segregated those five topics that we would like to share with all of you. I will not spend our time talking about the macro environment; everyone is pretty much familiar with it, so jumping directly into the results. I believe the first quarter shows the resilience of our business model. Gross revenue grew 17% year-over-year and we kept our adjusted net margin above 30%. It’s worth mentioning that the gross revenue of March was more than 45% greater than the average of January and February, resulting in the 17% growth year-over-year in the quarter. The second point that we reinforce is the portfolio effects. Two segments did not perform well in the first quarter due to overall macro conditions related to capital markets and equities. However, we set records in institutional revenue, which beat the previous record by 46%, driven by the war and demand for protection and derivatives by our clients in our trading desks. Also, our retail fixed income platform achieved record volumes, surpassing our previous records. We maintain a unique distribution network, especially with our IFA network, and we have grown by more than 5% quarter-over-quarter. We have almost 11,000 IFAs working diligently to succeed in their profession. We decided last year to share with investors our new verticals, which we consider integral to reinforcing our core investments. These verticals experienced threefold year-over-year growth, contributing 7.6% of total gross revenue this quarter. Additionally, we received the award for Best Advisory for the fourth consecutive year, highlighting our core competency in investments. And with respect to the first reward given in 2019, we had five points advantage over our closest competitor, which increased to eight points in 2022. While we cherish this growth, we acknowledge there is still considerable work ahead in investments. Now, moving on to financial specifics, we had significant developments in our investment offerings that I will detail further. We launched an automated equity portfolio service, catering to our IFA network's demand. Additionally, we introduced a secondary trading platform for alternative funds, aiming to enhance liquidity in Brazil's alternative asset class. XP Future, our educational initiative, was launched to train new advisors in the profession. Finally, we unveiled our first flagship store in Manaus, Amazonas, which blends digital and traditional experiences. The initial feedback has been positive, and we intend to open more such concept stores across Brazil. Now, moving to new vertical updates before I jump into the financials, the credit business revealed a revenue growth of more than 200% year-over-year and we have developed an end-to-end digital collateralized credit system. Our credit card initiative has more than 300 active cards with considerable growth potential within our client base, as we reach less than 10% penetration among our 3.5 million active clients. The new verticals have collectively grown revenue by 205% year-over-year. Total gross revenue has reached R$3.3 billion, a 17% year-over-year growth. Gross profit increased by 25% to R$2.2 billion, reflecting a better product mix and an increase in gross margin. The adjusted EBITDA grew to R$1.2 billion, representing a 14% increase year-over-year, although impacted by SG&A growth. The investment AUC reached R$873 billion, achieving an all-time high and contributing positively to our financial metrics. Our NPS stands near an all-time high of 76. Total revenues reveal a 17% increase year-over-year. While we did observe a decline in capital market activities, retail revenue remains strong and stable. Our efforts to control costs will not compromise our future growth, ensuring that we remain committed to delivering on our projects and initiatives. With this, I think I have covered the essential points and I look forward to the Q&A. Thank you.

Great, Bruno. So let me just organize. We have a lot of hands raised. We are going to answer them on a first-come, first-served basis. Starting with Thiago Batista from UBS. We ask you kindly to restrict to one question so we can address the more than 10 questions that we have here. So the first one is Thiago from UBS, as I said, hi Thiago, can you hear us?

Yes. Hi guys, can you hear me?

Yes.

I have one question on the take rate of XP. The take rate was super resilient up to last quarter, but this quarter we saw a significant decline. Do you see this decline as a temporary event or should we expect this lower level to continue for a while?

I see it, Thiago, as a temporary situation. Just to clarify, January was quite an unusual start to the year due to Omicron. The capital market activity was very low. The numbers indicate that in March, for example, the revenue exceeded the average of January and February by 267%. The take rates for this quarter were affected by that, along with the retail revenue growth of 16%. The custody impact will also influence the take rate metrics. So I wouldn't generalize this decline as indicative of ongoing trends for the rest of the year.

Very clear, Bruno. Thanks for the answer.

Thank you. Thank you, Thiago again. Next in line is Mr. Jorge Kuri from Morgan Stanley. Good evening, Kuri.

Hi everyone, thanks for taking the questions. Good to see everyone. I wanted to talk more about those metrics you provided for March, which I believe show that the quarter was pretty odd. You said March's net revenue was above the average for January and February. Was that 45% for the total revenue?

Yes, that's total revenue.

And can you provide specifics for the retail revenue?

The retail revenue was higher than that 45% compared to the average.

All right. And how about April? Have you seen a continuation of this upward trend?

Yes, the trend for April remains much stronger than January levels, and we expect this momentum to continue.

Thank you so much, Kuri. Next we have Jeff from Autonomous. Hey Jeff.

Hi, I need to improve my reaction times. We’ve discussed revenues and the environment was tougher than expected this past quarter. Can you elaborate more on the actions you’ve taken to manage expenses and how you balance these short-term measures against long-term growth?

Yes, thank you. You are right; we’ve aimed to keep costs under control without impacting our future growth. Last year, our headcount grew by more than 60%. In this quarter, we've seen a decrease in personnel costs despite this continued growth in headcount. We maintain our commitment to our long-term strategy, ensuring this focus doesn’t hinder our project rollouts.

We believe we have the right resources to deliver on new verticals while optimizing our existing operations, and our growth will not be compromised in the future.

Thank you.

Next question is from Otavio Tanganelli, Bradesco.

Hi, Andre, Bruno, and Maffra. Thanks for taking my question. People have asked about revenues. I wanted to hear more on the gross margin trends and can we expect to see improvement towards prior levels with better mixes from products benefiting from higher interest rates?

It’s a fair assumption, Otavio. The gross margin will rely on product mix, and I agree there's potential for improvement.

Thank you, Otavio.

Hi, good evening everyone. Can you hear me okay?

Yes.

Regarding retail revenue, can you elaborate on the conditions in January that resulted in poor performance? It seemed like overall market conditions worsened later on.

January’s downturn was countered by capital market activities, adversely affecting retail revenue due to low engagement and channel fees. It was certainly an atypical month, but recovery was evident in February and March.

Indeed, the stock exchanges faced declines due to widespread concerns, and we also experienced spikes in COVID cases that disrupted typical trading patterns.

Thanks, that's helpful.

Hi guys, how are you? I have two quick questions. The first concerns your cash flow statement, which shows a significant negative value in the quarter. Could you explain the change in working capital? This seems like a first for the preceding quarters.

Marcelo, it's important to assess that operating cash flow doesn't directly reflect our operational viability. We usually encounter seasonal effects impacting our cash flows, especially concerning bonus payments.

That would be great for follow-up then. And regarding your institutional revenue, you noticed a substantial increase this quarter that might not repeat in the same way going forward. There appears to be an impact from derivatives being used.

The increase was a direct result of heightened trading activity amid geopolitical events. However, I do not expect to see the same levels of institutional trading activity consistently going forward.

That said, retail revenue is positioned to grow in response to these changes.

Hi guys, can you hear me?

Yes.

Can you explain how the new revenue lines are progressing? What is the cost-to-income ratio you expect as these avenues grow?

It's difficult to specify clear figures for these costs at this time since our expenses are shared across various operations. We believe the margins should gradually stabilize and improve as our product offerings grow.

We also see great potential for cross-selling our additional services, which will further enhance our profitability.

Hi, Andre, thank you for taking the last question. In terms of adjustments to strategy as you’ve ventured outside your core business, what have you learned?

XP is always on the edge of innovation. We began as an education provider and proceeded to build Brazil's first open investment platform. We will continue to explore opportunities in sectors such as credit and insurance for the long-term success of our brand.

Regarding the stake acquired by Itaú, we will engage in dialogue with them to explore potential collaborative opportunities. We would be interested in participating in any share placements they might consider.

Thank you, everyone, for joining us. The call is now concluded. We appreciate your engagement and ask you to reach out if you have additional questions. Have a good night.