Earnings Call Transcript - XP Q1 2023

Andre Martins, Head of Investor Relations

Good afternoon, and welcome to XP Inc.'s First Quarter 2023 Earnings Call. I'm Andre Martins, Head of Investor Relations. And with me are our CEO, Thiago Maffra; and our CFO, Bruno Constantino, who will be available for the Q&A section. I kindly ask you to refer to the legal disclaimer section at the beginning of our presentation about forward-looking statements. Additional information on forward-looking statements can be found on the SEC filings section of our website. It's important to remind that this call has a translation option to Portuguese. And the participants who want to ask questions may raise their hands using the Zoom tool. Now I'll pass it over to Thiago Maffra, who will deliver the opening remarks.

Thiago Maffra, CEO

Good afternoon, and thank you all for joining us today. I want to begin today's call with a few comments about the first quarter, our outlook for 2023, and our longer-term positioning. Then I will turn it over to our CFO Bruno, who will present Q1 results in more detail. So let's start with our quarterly performance. As you all know, the macroeconomic outlook remains challenging. In Brazil, we continue to face a high interest rate environment, similar to other economies around the world. In addition, a large Brazilian corporate filed for bankruptcy in the quarter, causing significant losses for its investors, creditors, and bondholders. As a result, capital markets and corporate credit remain under pressure, which has impacted the financial advisor exchange since many investors are keeping their savings in liquid, low-risk products while they wait for this scenario to improve. While these headwinds have also impacted our core business in the first quarter, we continue to advance in our long-term journey of getting closer to the 1 trillion client assets milestone, having ended Q1 with BRL 954 billion. Additionally, our ecosystem continues to grow with the net addition of 89,000 clients and 688 financial advisors. On the financials, excluding the one-time loss, our gross revenue expanded 7% year-over-year, while EBT and net income grew 14% and 8% year-over-year. While these adjusted numbers look better, they are still not the growth rates that we are used to and which we believe we will see again when the macro environment improves. However, when we look at our first quarter performance, I see positive signs of strength and resilience in our business model, as well as efficiencies from our cost structure improvement. For example, in Q1, our new verticals revenues, which are less cyclical, were strong. Revenue from retirement plans, cards, credit, and insurance together grew 64% year-over-year, reaching BRL 405 million. Because of our focus on execution, our EBT margin increased nearly 300 basis points quarter-over-quarter to 26%. This was in line with the near-term expectations included in our guidance range of 26% to 32% through 2025. I was pleased with our execution on the bottom line. XP remained the top of mind brand investment and was ranked as the 12th most valuable overall brand in Brazil in the annual Interbrand survey. We also remain committed to returning excess cash to our shareholders. Over 2022, we returned roughly BRL 1.8 billion through share buybacks, which was about 50% of our net income. I believe we will have a similar payout ratio in 2023 and reinforce that we have repurchased BRL 916 million worth of shares year-to-date. As a result, we should be able to maintain a conservative balance sheet with a strong liquidity position and carry excess capital of around BRL 5 billion, positioning XP to navigate through any cycle. As I look ahead through the rest of 2023, our guidance outlook remains unchanged. Despite the macroenvironment, XP remains a leading investing platform in Brazil, and we are getting stronger relative to competitors. We are working closely with our advisory channels to improve core revenues and net inflow opportunities, gaining share of wallet in more investment products and reinforcing our high-quality value proposition to clients. As I look beyond 2023, I see our competitive position getting stronger. First, we will continue to leverage the advantages of our platform and ecosystem to expand our leadership investments. This is our core focus and where we excel the most. We have gained almost 400 basis points of market share since the beginning of 2020, including 80 basis points in 2022 despite a very challenging market environment. We currently have 11% market share of individual investments and 8% when we include companies. With our top-of-mind brand, best-in-class product platform, and technology advantage, I believe 20% to 25% is achievable. On the product side, we have the most complete and advanced platform in the market, and we continue to build upon this competitive advantage. We are not only the leaders in the traditional products with 42% market share in the distribution of bonds and 50% in equities, but we keep constantly innovating – being the first player to offer private equity funds for retail investors and having quickly built an offshore platform where clients can easily invest in the U.S. On the distribution side, we have the largest and most well-prepared Financial Adviser Network in Brazil. We were elected the Best Adviser platform in Brazil for 2022 according to Folha newspaper; this is the 50th consecutive year we have been voted number one. I think our place as the leading player in the market is well established, and this helps us attract the very best partners and clients. Another relevant dealer offer strategy is to cross-sell additional products into our current base. We have a massive potential opportunity here to unlock value, and it's already starting to work. As I already mentioned, our new verticals are advancing at a fast pace. While this is during the early stages of our plan, we can already see that cross-selling new products such as our cards, digital accounts, and insurance have helped us gain more share of wallet from our clients in investments and also improve our NPS. We will continue to focus on serving an increasing portion of our clients' financial lives and meeting all of their financial needs. And finally, our third pillar is to continue to differentiate ourselves in the market with premium quality and service levels in everything we do. We are the main platform in the market, and we want to make sure that we are always providing our clients the best experience when they engage with XP. I believe this is the group that we used to bring everything together to deliver the best value proposition in the market. This doesn't just mean delivering a good app or web experience. It means that we are always focusing on improving every aspect of our service levels. As an example, we are continuously improving the training we provide our advisors and innovating the tools we give them so they can perform and serve clients better. Our unique customer service level ensures that our advisors and clients always get fast and efficient support that makes them feel great about XP. As most of you know, XP is already ahead of the traditional banks in terms of the investment experience we offer. This is well known in the market, and we can see it in our NPS, including a recent third-party study that reinforced XP's edge. We remain focused on maintaining this competitive advantage and distancing ourselves from the banks. So as I look at the near term and the long term, I observed progress in Q1 on our execution performance and cost management, which has enabled us to improve our profitability despite the difficult macroenvironment. We remain on plan for 2023. I see us getting better and stronger as a company, enabling us to fortify our position and continue returning cash to our shareholders, and our long-term strategy is working. We are making progress in all of our areas of focus, and I think we are going to come out of the cycle even better positioned to keep winning market share. So now, I will hand it over to Bruno, who will discuss the numbers for the quarter, and we will be available for Q&A. Thank you. Bruno, over to you.

Bruno Constantino, CFO

Thank you, Maffra, and good evening, everyone. I will walk through our financials in more detail and provide some additional commentary and perspective on our revenue, expenses, and earnings. But before I continue, I want to remind everyone that we are showing some adjusted metrics this quarter, which exclude the one-time impact of a non-recurring loss related to the bonds of a large corporate issuer that filed for bankruptcy in January. We held some of these bonds in our inventory for our clients to be able to trade, and some of these bonds in our own investment portfolio. The value of these bonds dropped significantly when the corporate issuer filed for bankruptcy. As a result, we incurred a one-time loss of BRL 164 million impacting our total gross revenue, with BRL 95 million allocated to retail fixed income and BRL 69 million in other revenue. This event also had a negative impact on overall capital market activity in Brazil. This is not excluded from our numbers, obviously, but it is important to note that the event hurt overall DCM volumes and revenues in retail fixed income and insurance services. Now let's move to Slide 12. As you can see, we have created a column highlighting the one-time loss I just mentioned. Our total gross revenue in the quarter was BRL 3.3 billion, flat quarter-over-quarter and up 2% year-over-year. If we exclude the one-time loss, our total gross revenue was closer to BRL 3.5 billion, representing 5% growth quarter-over-quarter and 7% year-over-year. As Maffra mentioned, our total revenue growth is not where we would like it to be. But considering the weak macro and capital markets environment, we believe our top line numbers show the resilience of our business model and the benefits of the diversification that we have been building over the last few years. In terms of revenue mix, there was no major change at the beginning of this year compared to last quarter. Retail revenue represented 76% of total revenue, the same as in the fourth quarter of '22. Institutional revenue accounted for 10%; corporate and issuer services for 8%; and our other revenue line was 6% of total revenue. Now let's delve into our retail revenue for a little more detail on Slide 13. Our core retail investments, meaning equities, fixed income, and funds platform, total revenue grew 6% quarter-over-quarter and 1% year-over-year, despite the weaker trading environment and capital markets activities. In equities, revenues grew 7% quarter-over-quarter but declined 3% year-over-year, as overall trading in the market decreased more than 10% versus the fourth quarter. One bright spot to mention in equities was our financial structure products, which linked derivatives with stocks. Sales of these products are driven by human interaction, which suffered in the fourth quarter due to the elections and the World Cup, but began to rebound in the first quarter of this year. In fixed income, adjusted revenue grew 9% quarter-over-quarter and was flat year-over-year. As I mentioned earlier, we believe this revenue line was also impacted by an overall decline in capital markets activity in Q1 and would have been stronger in a more normalized environment. In our funds platform, revenues grew 1% quarter-over-quarter and 17% year-over-year. But, comparing apples-to-apples, excluding performance fees, our quarter-over-quarter growth was 12%. Moving down to our new verticals, our revenues continue to grow at a strong pace with an overall increase of 60% year-over-year. As Maffra noted, our performance here remains strong, and I believe we remain on track to deliver annual growth of 50% to 60% in 2023, as stated in our last earnings call. When we look at this on a quarter-over-quarter basis, I would note that the comparison is a little more difficult because of seasonal and one-time benefits in the fourth quarter of 2022. For example, in addition to Black Friday and the holidays, we had a change in the revenue recognition method of our cards business, which created a one-time benefit of BRL 53 million in fourth quarter revenue. Despite this, our cards business remained strong with a BRL 400 million increase in TPV quarter-over-quarter to reach BRL 8.6 billion in the first quarter of '23. And finally, our other retail revenues grew 10% quarter-over-quarter and 70% year-over-year. These revenues were driven by several positive trends such as the float in our broker-dealer business, which benefits from high interest rates and good growth in our international investment platform and FX. Moving to Slide 14. On Slide 14, we show our retail revenues in 2020, 2021, and for the last 12 months as of the first quarter of 2023. I think this helps illustrate the negative impact of the macro environment on our revenues but also the benefits we are receiving from our diversification into new verticals. As you can see, our core retail investments revenue grew significantly in 2021, with an increase of nearly BRL 3 billion, but had decreased by nearly BRL 1 billion since then due to the macro environment, not our competitive positioning. Despite this, our total retail revenue has increased 64% over the same time period, given our more diversified revenue stream and the feasibility to scale new products very quickly in our ecosystem. As you can see, revenue from our new verticals increased over 2 times in 15 months, up BRL 750 million since 2021. This has helped our business to become more resilient and absorb some of the negative macro impacts from the more cyclical parts of our business. And when the macro cycle turns, which will at some point, this diversification could provide an incremental tailwind for us. Now let's shift to the expense side of our P&L where we had some strong performance in the first quarter. On Slide 15, you can begin to see some of the benefits of our cost structure adjustments starting to materialize. In the first quarter of '23, SG&A, excluding incentives, decreased 24% quarter-over-quarter and 17% year-over-year to just over BRL 1 billion. Our headcount management plan resulted in a net reduction of 782 employees in the quarter to 6,143. This impacted share-based compensation to reach BRL 53 million in this quarter, but we expect to return to normalized levels in the following quarters, similar to what we had in the fourth quarter of '22. Our efficiency ratios improved in this quarter, breaking the pattern of past years and bringing the company structure where we want it to be. For example, on the left side of the page, under the bar charts, you can see that our last 12-month efficiency ratio, which is SG&A, excluding incentives, divided by net revenues, decreased 161 basis points quarter-over-quarter to reach 40.4%, our lowest level since the first quarter of '22. On the right side of the slide, you can see that our last 12-month compensation ratio, which is people, SG&A, salaries, bonuses, and share-based compensation expenses divided by net revenues, decreased 107 basis points quarter-over-quarter to reach 28.5%, our lowest level since the fourth quarter of '21. We expect to keep improving our efficiency ratios going forward. I believe we remain on plan to meet our annual 2023 guidance for SG&A, excluding incentives, of BRL 5 billion to BRL 5.5 billion, and we will remain very focused here. Now moving to Slide 16, EBT and net income. As a result of our strong cost management, our earnings before tax and net income margins were positively impacted, as you can see in this slide. During the quarter, we generated BRL 870 million of EBT with a 26% margin or BRL 977 million, excluding the one-time loss with a 29.6% EBITDA margin. I think the quality of EBITDA in the first quarter of '23 compared to the fourth quarter of '22 has also improved significantly and is sustainable. Recall that in the fourth quarter of 2022, seasonal incentives benefited our SG&A by BRL 242 million. Excluding these, our fourth quarter EBT would have been closer to BRL 500 million. In the first quarter, we had only BRL 3 million of this benefit. I believe the operating leverage that we are realizing in the business is an important achievement and gives us a stronger position to face any macro headwinds in the future. As a result, we remain on plan to meet our EBT margin guidance range of 26% in the near term to 32% by 2025. And finally, on the right side of the page, you can see that our net income in the first quarter of '23 was BRL 796 million or BRL 927 million, excluding the one-time nonrecurring loss of BRL 131 million net of taxes. As Maffra already mentioned, our annual guidance for net income between BRL 3.8 billion and BRL 4.4 billion remains unchanged. Now, we will move to the Q&A session in which both Maffra and I will be available to answer your questions. Thank you very much.

Andre Martins, Head of Investor Relations

Thank you, Bruno. So now we will move to the Q&A session. We have a lot of questions – I ask you to be patient. We have a lot of hands raised, and we will, as usual, do this on a first-come, first-served basis. The first question is from Tito Labarta from Goldman Sachs. Hi, Tito.

Tito Labarta, Analyst

Hi, Andre. Hi, Bruno. Hi Maffra. Thank you for the call and for addressing my questions. Congratulations on the solid results. I have a couple of questions. First, regarding the inflows, we were aware of them before today’s announcement. Can you help us understand how the rest of the year might look? Do you believe those inflows are likely to recover? Also, your revenues appeared stable despite the impact of relatively weak inflows. What factors could potentially drive revenue growth from this point, and how reliant would that be on increased inflows? Secondly, I noticed you maintained your guidance despite some challenges. Do you see this as a seasonally weak quarter, and is there potential for earnings improvement moving forward? You have done well on managing expenses, but how do you view the revenue growth outlook in light of the current inflows and any potential for upside? Thank you.

Thiago Maffra, CEO

Hello, Tito. How are you? Thank you very much for being here and for your question. I will take the first part, and Bruno can take the second one. About the inflows, to be very honest and direct with you, it's hard to imagine that in an environment like we have today, our investors, they are afraid; they have a high level of uncertainty, and with the high-interest rates at 13.75%, they prefer to keep their money in very liquid and low-risk investments. So it's hard to imagine that we will have the same levels of net inflows that we had in the past, especially with the level of uncertainty, okay. Not much with the interest rates, of course, it helps if it goes down. But when you get the two things together, that's the difficult part. To give you some numbers, we track all the inflows and outflows throughout the financial institutions and all of them went down at the same level. So we don't see any player getting more efficient against us than others. In our opinion, this reflects that it's more important to have liquid products like LCAs and CDBs with tax-free benefits at 13.75% than anything else. Regarding inflows, not the net-new money, we are closer to all-time highs. We see more outflows, and when we examine outflows, they are more concentrated on companies. So it's not on the individuals; it’s more on companies that because they need cash. They have lower credit at the banks right now. They are experiencing a tough environment. So we see a lot of outflows from companies right now. This is cyclical; it’s part of the investment business. We have cycles, and we are in a challenging cycle for investments, but on the other hand, we have all the new verticals, all the new business lines that are growing and more than compensating for the decreasing investments.

Bruno Constantino, CFO

To respond to your question about the lower revenue from net inflows, it's not as crucial now as it was during the bull market. Additionally, as Maffra pointed out, net inflow consists of gross inflow and outflow. If the net inflow is low due to higher outflow, such as in wholesale for corporate clients, it does not necessarily mean our revenue will be significantly affected. In fact, if we maintain higher levels of both inflows and outflows, we could actually increase our revenue in the short term. Regarding your second question about guidance and seasonality, I do believe seasonality exists. The first quarter was particularly weak in capital market activity, especially following January’s events. The corporate credit market was not functioning well in the first quarter, and although it is starting to improve, it remains weak thus far this year. Analyzing longer-term trends, specifically in DCM over the past five years, we've observed that the second half generally outperforms the first half, with about 40% of revenue generated in the first half and 60% in the latter half. While we cannot predict if this pattern will hold true this year, the start of the year has been quite weak in terms of capital market activities.

Tito Labarta, Analyst

Thank you, Bruno and Maffra. That's very helpful. I have a follow-up, Maffra, regarding the gross inflows. Can you provide any insights on how those gross inflows from individuals have changed over the past year? Have they slowed down or accelerated? It would be helpful to understand this in the context of the market.

Thiago Maffra, CEO

I'll pass it over to Bruno.

Bruno Constantino, CFO

Thanks, Maffra. Tito, just to give you a few numbers. We do not disclose the gross inflow, but just for you to have the big picture, when we look at the first quarter this year compared to the average quarters of last year, inflow was down around 5%. That's the number. So considering the macro-environment, it's not much in our view. But when we look at outflows, it was up 20%. So that's what has been hurting the most the net inflow. When we break down between our core engine of retail investors and segregate the wholesale part, mostly companies, the core engine of our business, all the outflow-related to total client assets has been stable. It has not increased. So we don't see a problem there. Of course, the level is not where we'd like to be, but as Maffra mentioned, considering that investors are not investing, they are keeping their savings in very liquid low-risk products. We understand it's a headwind for the investment business. But even with this environment, the core engine, in terms of a percentage of outflow compared to total client assets, is not increasing.

Tito Labarta, Analyst

Okay. That's very helpful, Bruno. And I do see the retail AUC went up and Corporate AUC going down, so it’s good context. Thanks very much.

Andre Martins, Head of Investor Relations

Thank you, Tito. Have a good one. Next question is from Mario Pierry from Bank of America. Hi, Mario.

Mario Pierry, Analyst

Hi guys. Thanks for taking my question. Let me ask two questions as well. First one, on your cost reductions. If you're expecting to make any more changes to your employee base, also if you could be a little bit more specific in which areas these reductions were concentrated in? And you mentioned that you expect the stock-based compensation to go up in the second quarter, back to the fourth quarter levels. I was just trying to understand why? So that's on expenses. And then my second question is related to your NPS score. And again, it's still a high NPS, but I think it's down to 70 and used to be a peak of 77. Can you provide some color on why NPS is going down, and what are you doing to improve that? Thank you.

Thiago Maffra, CEO

Hello, Mario. Thank you for your question. It's Thiago here. So, about your first question regarding employees and areas, what happened is, since I became the CEO of the company, we have been implementing what we call a digital transformation of the company. Last year, I would say we finished the reorganization of the business units and the entire structure of the multi-disciplinary teams in the company. As you know, when you undergo a transformation, you achieve some efficiency gains. Imagine you have 10 pieces of Lego, and when you put them together, you only need eight. Part of the reduction is due to this transformation, which we have begun implementing for the past three years. In part, it’s also because we over-hired during the pandemic; we hired people not necessarily aligned with our culture. So, part of this is efficiency-driven, and part is correcting the excess. All the reductions are done. As Bruno mentioned, when you have a company with owners and partners, we are very quick to correct any mistakes we made. You can see that in the numbers, and we don't have any specific areas to point to. Of course, we have intelligence to identify where to cut more or less, but we did make cuts across the board, of course preserving the business lines that are in early stages and also keeping critical risk areas like credit and compliance intact. Regarding your second question about NPS, as we mentioned in the presentation, we have our own NPS. That's the number that you see in the presentation, the 70 that you mentioned. But we have third-party consultant companies that conduct independent NPS surveys. Recently, when we look at NPS for affluent clients in investments for the five big banks, all of them went up in the last eight months, around 35 points. And the clients’ feedback in this survey indicates that the level of returns at 13.75% with no risk has been beneficial to them. So that’s the current scenario we find ourselves in. We don't consider buying CDBs as investing because you are not purchasing a portfolio; you are not diversifying. It’s challenging to outperform the SELIC rate in this scenario. So, we believe that this is a crucial factor benefiting the five big banks while we are facing some challenges in that regard. Nonetheless, we expect the investment cycle to change at some point, and we believe we can return to more normalized levels for NPS and net inflows.

Bruno Constantino, CFO

And I can take the question about the share-based compensation. We had cancellations of restricted stock units and performance stock units in this quarter, which resulted in a lower level than we expect to see in the next quarters. That's why I mentioned that we should come back to a normal level as of the fourth quarter, something between BRL 160 million to BRL 170 million, and not the BRL 53 million that we saw in the first quarter. Additionally, we also had recent new partners that we more than welcome in our partnership, and the matching that is going to happen in the second quarter will contribute to this increase in expense.

Mario Pierry, Analyst

Okay, just to clarify, there were no one-time charges related to the headcount reduction. Were there no severance charges taken this quarter?

Thiago Maffra, CEO

It's in there.

Mario Pierry, Analyst

Sorry.

Thiago Maffra, CEO

Everything is included in there. I don't know if you heard me, sorry.

Tito Labarta, Analyst

Can you quantify how much the severance charges were?

Bruno Constantino, CFO

Look, I would stick to the annual guidance that we have, which is BRL 5 billion to BRL 5.5 billion for SG&A excluding incentives. That's the annual guidance. As Maffra mentioned, considering what happened in the first quarter, we are leaning towards the low end of the guidance.

Mario Pierry, Analyst

Okay. Thank you very much.

Thiago Maffra, CEO

Thank you, Mario.

Andre Martins, Head of Investor Relations

Next question, Geoffrey Elliott from Autonomous Research. Good evening, Jeff.

Geoff Elliott, Analyst

Hi. Can you hear me, okay?

Andre Martins, Head of Investor Relations

Yes. We can hear you.

Geoff Elliott, Analyst

Hello? Great. Thanks very much for taking the question. On capital, first of all, the buyback program has been completed; can you talk about that 50% payout ratio in the slides? Why not announce another buyback now, and what are you thinking in terms of options for deploying capital? And then second, related to that Modal, it's been a while since we heard much there, but we did see that Form F-4 cancellation. Can you explain why it was not issued and when should we expect Modal to close? Thank you.

Bruno Constantino, CFO

Hi, Geoff. So I will start with the second one first. We expect to close soon. Now the only pending part is central bank approval. As you mentioned, we withdrew the F-4 because we went a different route to conclude that transaction. Everything has happened as planned; the General Meeting of Modal was approved. So everything is on track, and now it's only central bank approval. Hopefully, we're going to get it during the first semester, but we cannot guarantee it. In terms of capital allocation and share buyback, yeah, we have completed the program of BRL 2 billion. If you look at all the blocks that we have bought, including Itau, that’s blocked last year in less than 12 months, we bought back around BRL 2.7 billion: BRL 1.8 billion in 2022, and BRL 916 million already this year. As Maffra mentioned, we're probably going to keep a similar payout ratio, which is around 50%. We don't know what the net income for 2023 will be. We are still in the first semester; we have our guidance of BRL 3.8 billion to BRL 4.4 billion for net income. We're going to conclude this in the second semester, either through dividends or share buyback; we haven't decided yet.

Geoff Elliott, Analyst

Understood. Thank you.

Bruno Constantino, CFO

Thanks, Jeff.

Andre Martins, Head of Investor Relations

Next in line is Olavo Arthuzo from UBS.

Olavo Arthuzo, Analyst

Hi guys. Can you hear me well?

Andre Martins, Head of Investor Relations

Hi.

Bruno Constantino, CFO

Yes.

Olavo Arthuzo, Analyst

Okay, sorry for that. Thank you. Thank you, everybody, for taking my question. Actually, I have two questions basically related to the credit card business. The overall trend of credit cards continues to expand well, and I believe this is evolving according to the expectations of the company. So my first question in this regard is that we noted the increased penetration of cards on active clients, which stood at more than 20% this quarter. So my question is how much more could this figure increase? Is there a target that you guys can share with us for this penetration, like 40%, maybe 50% or even above that? And my other question on credit cards is related to monthly average spending. As you can see here, it's dropped to BRL 4,200 this quarter, which is below the average of last year or even well below when compared to the first quarter of 2021. Could you clarify if this is solely related to stricter credit policies with lower limits or other factors?

Thiago Maffra, CEO

Hello, Olavo. Thank you very much for your question. About penetration in credit cards, remember that we started with XP clients above BRL 50K. This was the segment that we started with, and we remained there for almost a year. Then we went to XP clients below BRL 50K. I would say in December or November last year, we began to increase the card offering under the Rico brand. When we look at the penetration we can achieve, if you look at the five big banks and if you look at the affluent brands for these banks, they have 90% penetration. So out of 10 clients at those affluent brands in these banks, nine out of ten have credit cards. That's our target; of course, it is going to take a while, but we believe we can increase penetration significantly. We don’t have a specific target, of course, 90% is very high, but we are improving. We have been delivering a lot of new features and benefits for the cards in the coming months and quarters. Regarding your second question about the expansion mentioned, as we start to move down the pyramid or segmentation for clients below BRL 50K at XP and Rico clients, we have lower spending per client in these two segments. For example, top clients have around BRL 10K spending, while clients at the lower end may be around BRL 2,000 to BRL 2,500. The decrease in spending you see is because we are increasing the number of clients at the lower segmentation.

Bruno Constantino, CFO

And Maffra, can I just add one comment? I think it’s pertinent to the question. You have to think about our strategy here. Our strategy is pretty clear; it’s a long-term journey. So on a quarterly basis, it’s hard to analyze, but if you extend the view to the long term, you see cards – we started with cards; we didn't have a digital bank account, which is essential for cards, but we didn’t have it. We’re moving brick-by-brick, looking after our profitability as we go down this road in this long-term journey. Now we have the digital bank accounts, so those aspects will reflect the speed at which we can scale the penetration and cross-sell in our ecosystem. The slide in my part of the presentation makes clear how fast XP and our ecosystem can scale anything we put out there. The BRL 750 million we added to revenues in only 15 months from new verticals unrelated to investment directly, illustrates the potential for cross-sell and scaling those new businesses. However, it takes time; I wouldn't just focus on a quarter, but would look in the long term. That’s what we’re going after: convincing our clients to do everything in their financial lives with XP. If we accomplish that, they will also open accounts with the banks; it takes time, but we are committed.

Olavo Arthuzo, Analyst

Okay. Thank you very much. Just a quick follow-up on this. Can you share how much of the BRL 4,200 monthly average spending represents in terms of the average credit limits that you give to your clients, just for us to understand the potential here?

Bruno Constantino, CFO

No, it's hard to make the math. For many of our clients, we have a dynamic limit for example, so because it's related to the investments. We would have to segregate the portion that is purely credit, and we do not disclose that type of information. So I'm sorry, I cannot help you do that math. I know what you're trying to accomplish, trying to see the potential, but we expect all those new verticals as I mentioned. When you combine them, we expect the revenue to grow between 50% and 60% this year.

Thiago Maffra, CEO

Yeah. But just to complement Bruno here, you can assume that we have some opportunities to better manage the credit limits of the lower segment of our customers, but I would say the largest opportunity for growth in TPV, the growth for the business is not there. The limit constraint is not a big issue for our customers. Of course, we have an opportunity; we can better manage some clients, but it's not a huge opportunity.

Olavo Arthuzo, Analyst

Yes. Thank you very much, guys.

Thiago Maffra, CEO

Thank you, Olavo.

Andre Martins, Head of Investor Relations

Thank you. Next question is from Neha from HSBC. Good evening, Neha.

Neha Agarwala, Analyst

Good evening. Congratulations on the results and thank you for taking my question. Two quick questions: first on the IFA business. Could you shed some light on what is the sentiment with the IFA right now? Inflows or net inflows are a bit weak. There is more investment in fixed-income securities, which are plain vanilla. So, are you seeing some mortality in terms of the number of new IFAs opening up? Your gross sentiment is strong, but any color would be very helpful if there has been a change in the economics for the IFA network and also any change in the competitive dynamics regarding IFAs? My second question is regarding your market share. You mentioned that you believe that if I'm not mistaken, you mentioned about 20% to 25% market share could be achievable in the long term. Is there a time horizon that you have in mind, and what are the main drivers for you almost doubling your market share? Thank you so much.

Bruno Constantino, CFO

Okay. Hi, Neha. Thank you. This is Bruno, I'll take the first one and Maffra can take the second one. So regarding the IFA, first – first thing to keep in mind: the IFA business model is a very asset-light business model with very little capital investment; you can break even when you compare it to the bank manager's salary, for example. One of the reasons is not only because it is asset-light, but it because it has tax benefits compared to the bank manager as well. Of course, this tough environment for the investment business makes it harder to grow at an accelerated pace. So, everybody is facing headwinds in terms of investments, but it doesn't mean people are below water; that’s not the case. For the biggest IFA offices that have heavily invested during the bull market and hired a lot of IFAs paying a lot upfront, they need to adjust, just like XP did, and we are working with them to help them. But those biggest IFA offices are also the most capitalized ones. So we do not see any problems in terms of financial health in our IFA network. Regarding your question about attracting IFAs, the numbers speak for themselves. In the first quarter, we added more than 600 new IFAs on a net basis. XP continues to be the main destination for new IFAs. This market keeps growing even in a tough macroenvironment, and I believe, especially with the new regulation of CVM, that it will be really good for the IFA business. This will continue going forward, and XP is going to be there for all the new IFAs that want to join our platform.

Thiago Maffra, CEO

Hello, Neha. I can take the second question. The way I like to see when we say that we have 11% market share, we are only talking about individuals. If you look and if you include companies, we have only 8% market share. When you break down the segmentation, we have, I would say, 2% at the bottom, clients with zero to BRL 300,000 in AUC, we have around 20% in the middle, BRL 300,000 to BRL 10 million, and we have 5% at the top of the pyramid. We have been investing a lot to go down, leveraging technology. A few years ago, it was very hard for us to go below BRL 300,000; today, we have Internal Advisors or IFAs focused on customers above BRL 25,000. Why is this possible? Because we have much more technology, we have CRM systems, we have all the information we need to have higher account loads, and to serve these clients effectively. In the middle, it's more of the same; how we keep increasing, and at the top, it's how we create even better services for high-net-worth and ultra-high-net-worth customers. We have been investing significantly at both extremes while investing in the middle to continue to grow. One way you mentioned how many years in what time horizon might it take us to reach 20% or 25%. If you go back to the beginning of 2020, we increased our market share by 400 basis points. In good years, we typically increase by around 160 bps, and last year, which had a very tough environment for investments, we increased by 80 bps. Our plan is how to continue increasing by 150 bps to 200 bps per year. Of course, in tough years, we will grow less; in better years, we will grow more. This is how we see it; we like to say that we are the only house in Brazil that is 100% focused on investments. We don’t sell products; we sell services. We sell allocation. We have a higher level of sales when you compare us today to the other players and that's how we differentiate ourselves. In a very tough environment like now, when people are worried about the political environment, the macro environment, and you have a 13.75% interest rate, it’s harder to convince them to invest in diversified portfolios and shift away from banks' offerings, but we understand the macro environment is temporary. It's going to change at some point, and we believe we can go back to a faster pace of growth.

Neha Agarwala, Analyst

Understood. If I can just follow-up quickly on the market share question. So you mentioned that you are investing a lot in technology to be able to expand your share in the bottom of the pyramid. What strategies do you have for the top of the pyramid? We have 5% share at the top of the pyramid; where do you see you can go in the top of the pyramid? Thank you so much.

Thiago Maffra, CEO

When you go to the top of the pyramid, it’s much more personalized service because each client is different when you talk about high-net-worth and ultra-high-net-worth clients. One point that has been very important for us to be competitive is the administration of funds. We have been investing a lot in this area, as we have to do the custody of the funds. It’s something we have been building for the past two years, but it takes time. I would say we are close to having the same level of service as other houses at the top. We believe we can start to gain a lot of market share.

Neha Agarwala, Analyst

Perfect. What is your current market share in terms of the number of IFAs and the AUC coming from the IFAs? Thank you so much.

Bruno Constantino, CFO

Yes. We have 70% market share in the IFA business. The AUC, we do not disclose; we just keep saying it's less than half of the total, but we do not give a number. To your question, when we think about distribution channels, of course, the IFA is an important one and one that we expect to keep growing. As I mentioned, XP will be there with all the tools that we have to help them succeed, but we also have many more channels. We are agnostic about channels; we want to be an entrepreneurship hub where an entrepreneur in the investment business can connect to our platform. For example, wealth service business that we announced back in the pandemic in 2020 is growing a lot, as well as consultants and other channels in our ecosystem, so it's not only IFA. IFA is important, and we're going to keep growing, but we have many more channels.

Neha Agarwala, Analyst

Excellent. Thank you so much.

Andre Martins, Head of Investor Relations

Thank you, Neha. Bye-bye. Next question, Marcelo Telles from Credit Suisse. Hi, Telles. Thank you for joining us.

Marcelo Telles, Analyst

Hi. Can you hear me now?

Andre Martins, Head of Investor Relations

Yes, we can.

Marcelo Telles, Analyst

Hi, Maffra. Hi, Bruno. Hi, Andre. Thanks for your time. I have two questions. Regarding the net inflow you mentioned, which was BRL 16 billion in the quarter, the yield curve suggests a decline in interest rates. How do you think this will affect your business, particularly in terms of your clients' willingness to take on more risks? Do you believe that just having an inverted yield curve would be enough to see a rebound or net inflows, or do we need to see interest rates drop to single-digit levels to really attract clients back? If you could provide some insight on this as we potentially enter a monetary easing cycle, that would be great. For my second question, your revenue performance this quarter was quite resilient despite the challenging microenvironment. According to your accounting disclosure, revenue from services fell significantly by about 14% quarter-over-quarter. Meanwhile, net income from financial instruments increased from BRL 14 million to BRL 500 million. Can you clarify if there were any recurring revenues or extra gains from structured operations that helped in this quarter? Or do you view this as a return to normal after an already weak fourth quarter? I would like to understand how sustainable this level of revenue in the first quarter might be going forward. Thank you.

Thiago Maffra, CEO

Okay, thanks. I will start with the second question.

Bruno Constantino, CFO

I can take the first one.

Thiago Maffra, CEO

Yes, regarding the net income from financial instruments, you indicated that it experienced a growth of around 10% quarter-over-quarter, if I'm correct. Looking at the longer term, net income from financial instruments is becoming increasingly significant in the accounting income statement when compared to net revenue from services provided. This shift is largely due to two main factors: first, the floating revenue, which is a financial instrument that is included in that figure; and second, the decline in brokerage commission revenues in the accounting income statement due to the equity market conditions. For instance, last year, brokerage fees were significantly higher at approximately BRL 560 million in the first quarter of 2022, while this year, they fell to BRL 494 million in the first quarter. This decrease has been substantial due to the macroeconomic environment, and while net income has various components, I emphasize the floating aspect of it.

Bruno Constantino, CFO

Well, about your first question in terms of impact if we have lower interest rate levels, of course, it would be great for our business. We've been through cycles in the past where once we start to see interest rates going down, but the shape of the curve depends on that; it’s the best for business. We see longer durations; we see more investments in riskier products, which translates to people moving back from low-yield fixed-income funds to multi-strategy funds. So we expect once we start to see interest rates decreasing, net-new money should increase, and revenues from higher-yield products will follow. This way, capital market revenues will also naturally improve as well. So this represents a win-win scenario, as it’s beneficial for the business. Another aspect is when we see interest rates going down, we also notice that client confidence tends to improve, and they are more willing to explore options outside banks, such as investing with XP in diversified portfolios.

Marcelo Telles, Analyst

Thank you for your follow-up on the previous point. If interest rates were to stabilize at a low double-digit level, around 10%, do you believe there could still be an impact on your business? Is it necessary for rates to drop to a single-digit level to foster growth?

Thiago Maffra, CEO

I would say that's more than the level, okay? if it's 10 or 9 or 11. The problem is when you have a high level of uncertainty. When you see all prices globally going down, inflation is very high, and asset prices are failing, bonds are going down, too. Investors become afraid; they prefer low-risk investments. In Brazil, you know very well; we have tax-free products with daily liquidity at 13.75%, making it difficult to persuade someone to diversify their investment portfolio. If the macroenvironment, the confidence level increases, for me, it doesn’t matter if it’s 9 or 10; without that confidence, it remains a challenge. The combination of very high-interest rates and high uncertainty is the most significant concern at the moment. Also, when we had 2%, it wasn’t the best scenario for the business. At high-single-digit levels, it becomes a much better business scenario.

Bruno Constantino, CFO

It's important to recognize the many portfolio managers participating in this call; investors manage funds in a similar way. Currently, many portfolio managers are looking for opportunities in the stock market but are facing outflows instead of inflows due to risk aversion. It's significant to note that while interest rates are a factor, risk aversion is the primary consideration. This situation can change rapidly, although we cannot predict when or how it will happen, as it is cyclical. When this shift occurs, we can expect to see inflows back into riskier funds, marking the start of a new cycle. Therefore, while interest rates are relevant, risk aversion is the more critical element to monitor.

Andre Martins, Head of Investor Relations

Thank you for your question. That was the last one. So we would like to thank you all for participating in the call. We will be available at the IR team to discuss the results with you, and have a good night, everyone.

Thiago Maffra, CEO

Thank you, everyone for being on the call. Thank you very much. See you next time.