Earnings Call Transcript - XP Q4 2022

Andre Martins, Head of Investor Relations

Good evening, everyone. I am Andre Martins, Head of Investor Relations of XP Inc. On behalf of the company, I’d like to thank you all for your interest in our quarterly earnings call. So welcome to the Fourth Quarter and Full Year of '22 Earnings Call. Today, we have with us our CFO, Bruno Constantino. We will both be available for the Q&A session right after the presentation. And whoever wants to ask a question can raise your hand on the Zoom tool, and we will attend to you on a first-come first-serve basis. We have the option of simultaneous translation to Portuguese. So we have a button as well on the Zoom if you want to turn on the translation. And before we begin our presentation, please refer to our legal disclaimers on Page 2 on which we clarify forward-looking statements, their definition and we have on the SEC Filings section of the IR website, the definitions, as well regarding those legal disclaimers. So now, I'll pass the word to Bruno. Good evening, Bruno.

Bruno Constantino, CFO

Good evening. Thank you, Andre. Good evening to all of you. And thank you for attending our 13th earnings call presentation. As a full year presentation I will take longer than usual in the introduction part, given more context about how XP's business model works in different macroeconomic cycles. I will also mention the important achievements and lessons learned in 2022. On Slide 5, we highlight how XP benefits from a positive market environment. The recent bull market that went on until 2021 attracted many Brazilians to the capital market, as you know. From 2018 to 2021, we had an increase of more than 4 million individuals come into the market. Still nothing compared to the size of the Brazilian population, as you know, but a lot compared to less than 1 million we had in 2018. As the main investment platform in Brazil, and having the biggest specialized distribution network, XP benefited a lot from this scenario with our disruptive and scalable business model. From 2018 to 2021, we grew our client assets by a CAGR of 59%, our revenue by a CAGR of 58% and our net income by a CAGR of 98%, basically doubling our net income for three consecutive years, way above market and our own expectation at IPO. Then comes 2022, a very challenging year, especially for the investment advisory business. With the Selic rate rising from 2% to 13.75%, there was a meaningful change in investors' willingness and sense of urgency to diversify investments from low risk fixed income options. This movement, which also was seen in other asset classes, is clearly shown by the almost 30% reduction in individual equities average daily trading volume in full year '22 compared to '21. Other external factors contributed to the standby mode and lower client activity we saw in 2022, I will name five of them: number 1, the global inflation and respective monetary policy all over the world; number 2, rebound of COVID in early '22; number 3, war in Eastern Europe; number 4, uncertainty pre and post elections in Brazil; number 5, the World Cup fever in November and December, which led to a reduction of actual business days. I know everything I'm saying here is well known by each of you. But it is important to contextualize so everyone can better understand the impact of those events not only in the full year '22, but on a quarterly basis as well. I will talk more about it in our results section. Going back to the risk, except for global inflation and restrictive monetary policy, which happened throughout the whole year, COVID rebound and war happened in the first quarter '22, and the elections in Brazil and World Cup happened in the fourth quarter '22. Not by coincidence, the two weakest quarters of XP last year. This is important to understand. Last year was unusual when looked on a quarterly basis. So in our view, it's better to look at the full year instead. We had a lot of volatility between segments on a quarterly basis. It will become clearer when we get to the results part. We have some slides to share with you. Going back to the advisory business, so the financial advisory business is based on human interactions, circumstances which make these interactions less frequent, as we had in the fourth quarter, for example, has a negative effect on the investment business. Going back in time on the bar graph in the right of the slide will allow us to verify the evolution of our business. I know that in 2014, XP was a different business, much smaller. But the point to make here is to show how resilient our ecosystem became over time. The last monetary tightening cycle in Brazil began in 2013 and took the Selic rate close to the current level of 13.75%. It took the Brazilian Central Bank two years and four months to complete the tightening cycle. In 2014, XP’s net income fell 40% as 80% of our revenues at that time came from equity. With the market worsening, our main metrics, net inflow, new clients and IFAs were strongly affected as well. Fast forward to 2022, the recent monetary tightening cycle has been faster and more severe than the last one. It took the central bank only one year and five months to complete the tightening cycle. The total magnitude of it was 1,175 basis points. It went from 2% to 13.75% really fast. But in 2022, different than what happened in the last cycle in 2014, our revenue grew 10% year-over-year, and our net income remained flat year-over-year. The recent investments we have made in new verticals help to mitigate these challenges, improving the resilience of our business model. Let's talk a little bit more about those investments and also about some lessons learned in 2022 in the next slide. Since the IPO, we have been investing in new verticals to go beyond investments, to become dominant in investment. We are confident that our strategy is on the right track. By going beyond investments, we achieved three main things: one, we increased the LTV of our existing clients; number two, we enhanced the moat of our ecosystem; and number three, we increased our total addressable market. In three years since the IPO, we have built our own insurance company, XP Vida e Previdência S.A., starting with retirement plans and moving into life insurance. We have created a bank from scratch, starting with collateralized credit, moving into credit cards, debit cards, and digital accounts. We have developed an international investment business from scratch, instead of doing it inorganically. We have created XTAGE, our digital assets platform, allowing our clients to buy crypto assets in the same app they use to invest. We have invested in the corporate business, which was basically nonexistent in 2019, that made a revenue of R$600 million last year. Finally, we have expanded the internal advisory team, our B2C, improving our total specialized sales force, from which we expect to reap the full benefits when the macro cycle reverts. These projects demanded an initial allocation of financial and human resource that is decreasing as they mature. Honestly, I don't remember a period in our history where we have done so much and so fast. And maybe this is a lesson learned in 2022. We, as a company and as entrepreneurs, are disruptors. We always want more. And it's always good to remember that Brazil is one of the most concentrated financial industries in the world. You take that in a very benign scenario of recent years, where we doubled our net income for three consecutive years, and we recognize this environment has influenced the pace of our expansion. We executed our plan too fast, and as you can see, we heavily expanded the headcount base almost three times in three years, and people represent 70% of our SG&A. We added 1,200 employees in 2020 and 2,500 in 2021, and we did it right before a market downturn. Again, we have no doubt that each of these initiatives will add value in the long-term and are 100% connected with our strategy. But we must be humble and recognize that we entered 2022 with the wrong cost structure, it’s a fact. Now, it is time to operate on a much leaner cost structure going forward. The ongoing transformation process that XP is undergoing will be key to help us execute this expense reduction without jeopardizing our service quality or ability to advance with our strategy. Just to connect the movements, it's important to remind that this transformation process started with our tech team at the time led by Maffra, when he was our CTO, and expanded to the whole company when he became our CEO at the end of the second semester of '21. With a leaner cost structure, a greater addressable market and advancing in our core business, we believe XP is well positioned for tough times ahead. The scenario, as we all know, is 1,175 basis points in just one year and a half. Still, our main KPIs for the investment business kept expanding at a slower pace, of course, but expanding. Last year, more than 2,000 independent advisors on a net basis joined XP's platform, which reinforces not only the potential of this profession, but also XP's leadership in attracting new IFAs into our ecosystem. If we were a new broker dealer starting up in 2022, it would have been a very tough time to start a business, but we would be by far the third largest IFA network in Brazil, only behind XP, the dominant player and BTG. Net inflow totaled R$155 billion. We believe this shows the resilience of our distribution model and the premium quality of our client base. We added 406,000 net new clients in our ecosystem. Just as a reference, it took us 16 years of existence to achieve that number of clients. Our client assets kept growing as well, reaching R$946 billion at the end of the year. In summary, despite the strong headwind that continues in 2023, XP was able to keep growing and advancing in its core business KPIs: net inflow, IFAs, and net new clients. When we encounter the next tailwind scenario, and it will happen, our ecosystem is going to be much bigger and more complete than during the last bull market. We are expanding our ability to grow exponentially when a reversal of the tightening monetary cycle occurs. Cross-sell is one of the biggest opportunities we have beyond investments. The clients are in the house and have already trusted us with the most precious thing they have, their savings, which we are honored for. The combination of our client base growth and the maturation of new products on our platform presents the best compelling opportunity for revenue growth in 2023, considering we will have very high interest rates for a long time. If that is the scenario, then cross-selling is the most compelling opportunity for revenue growth that we have. Credit cards, insurance, retirement plans, digital accounts, and international investments accounted altogether for R$1.3 billion of revenue in 2022. In the previous year, 2021, it was less than R$600 million. So more than double in one year, we believe a growth of 50% to 60% this year 2023 is pretty reasonable, considering the low penetration of these products in our existing client base. As you can see in this slide, international investments, for example, which should benefit from the current scenario for diversification purpose and risk management as well, has less than 1% penetration in our client base. The credit card is the most mature product we have and still has less than 20% penetration. Therefore, we will continue to have businesses inside our ecosystem with high double or even triple digits of growth, even in a challenging macro environment. Expenses, the lessons learned in 2022. SG&A grew alongside headcount in new verticals as already said, reaching R$5.6 billion excluding incentives in 2022. We went from R$1.9 billion in 2019 to R$5.6 billion in '22. That's almost R$4 billion in three years. We have done more with more. Our SG&A expense ratio went from 37% in 2019 to 42% in 2022. So our main priority for this year 2023 is to regain the inherent operating leverage of our business. How? Through a companywide adjustment of expenses that already began in the fourth quarter '22, then in simple execution; and as I've said already, helped by the ongoing transformation in the company. This is an important point because what we're saying here is our business, which has always had a strong operating leverage, with the ongoing transformation, will increase that operating leverage through a much leaner cost structure, sustainable and not impacting our deliverables or clients, which will show its maximum benefits in the next market upturn. Different from 2022 when costs were controlled but not reduced, the current initiatives should allow for margin expansion, even in tough scenarios for revenue growth and is 100% under our control. To better align market expectations around expenses, we estimate that SG&A excluding incentives for this year will range between R$5 billion to R$5.5 billion, which at the bottom of this range implies a nominal reduction of 11% year-over-year. That is connected to our EBITDA margin guidance as well of 26% to 32% in 2023 to 2025, moving from the bottom to the top in the period. Now, moving to the financials. On Slide 12, we provide some context on the headwinds faced especially by our advisory channel in the fourth quarter '22, which relies on human touch and availability I mentioned earlier. The post-election period, coupled with World Cup and the approach of holidays, added a layer of difficulty on the advisor-client interaction in the quarter. This is important when you analyze our business; you cannot only look at average daily trading volume because the advisory business demands a relationship between advisors and clients. This explains why January is a weak month, as people are on vacation, both clients and advisors. The fourth quarter was exactly what we lived. Because of that, and also because of lower official business days relative to the third quarter with their revenues, they didn't grow as expected. You can also see that on the left part of the slide. The fourth quarter seasonality usually is the strongest quarter of the year, due to strong capital markets activity and performance fees that happen in the fourth quarter. It didn't work last year. It was unusual in that sense. From 2018 to 2021, the fourth quarter represented on average 30% of total revenue for that specific year. Last year, it represented less than 24%. Also, after a record third quarter, third quarter last year was our best quarter when our gross revenue reached R$3.8 billion helped by anticipated deals and traded volumes in Institutional and Corporate & Issuer Services, that in the fourth quarter faced a lesser favorable quarter, as previously signaled in our last earnings call. Together, to give you a sense, Institutional and Corporate & Issuer Services represented 80% of the sequential revenue decline quarter-over-quarter. Looking at the full year 2022, which we believe is the best way to look at the results of XP last year because of the disparity among quarters throughout the year, our gross revenue grew 10% relative to a strong 2021, the high of the bull market cycle, which reinforces what I said earlier, the resilience of our business even in tough scenarios. The Retail segment, the most relevant one, and together with Issuer Services were the most impacted by this challenging macro environment in 2022, but still, Retail grew 4% year-over-year, despite the drawdown seen in the equity segment, which is the most relevant for Retail revenue at 21% year-over-year. Equity in '21 represented 55% of the Retail revenue. In '22, it decreased to 42% of Retail revenue. So, what helped Retail revenue in investments? Number one, fixed income at plus 17% year-over-year; number two, float that is in other Retail, 70% growth year-over-year, both benefiting from higher interest rates. Still, Retail also saw strong contributions from the new verticals initiatives. Retirement plans, for example, grew 47% year-over-year. Credit, fixed floor, insurance, and cards showcased 229% year-over-year growth. Institutional and Corporate both had growth in 2022, with strong growth in Institutional at 50%, and Corporate at 250%. Institutional, being a more mature revenue line, benefited last year from mostly FICC revenues, fixed income currencies and commodities. Corporate benefited from the natural growth of a new business that had a very positive year in 2022. On the other hand, Issuer Services decreased 33% versus a very strong 2021, basically due to weaker capital market activity, especially in ECM, comparing year-over-year. When we look at our gross margin, despite being virtually flat in 2022 compared to 2021 on an annual basis, gross margin fell 7.1% in the fourth quarter versus the third quarter of '22. This margin compression was mainly related to: number one, revenue mix, with a change among quarters. Remember that Institutional and Issuer Services have almost 100% gross margins because commission, which is the most relevant line in COGS, is mostly related to Retail investment revenues. Prepaid expenses write-offs occurred in the fourth quarter regarding ended contracts with IFAs. Remember, we have prepaid expenses relating to long-term contracts with the IFAs. If an IFA leaves, we write off everything that is prepaid. Conversely, we receive the fine of whatever we have paid in double and that goes into other income in SG&A. Third, we have a change in interchange fee recognition criteria aligned with other players in the industry. As of the fourth quarter '22, the interchange fee is recognized upon transaction, which impacts the TPV that we release. Looking at this year 2023, we expect gross margin to remain stable relative to '22 and 2021 on an annual basis, despite volatility between quarters. It's always good to remind that between quarters, we can have volatility as we had last year. Moving to expenses. When analyzing SG&A expenses, we prefer to exclude revenue from incentives from Tesouro Direto, B3, and others within Other Operating Income, you can find that in our financial statements. Despite being a recurring line, its magnitude is volatile by nature. As a reference, this line was a positive number of 285 million in 2022, a positive 366 million in 2021, and 353 million in 2020. So when you look at the last three years, we always had a positive reduction in SG&A coming from revenues that are not recognized at the top-line level, but inside operating income in SG&A. So we anticipate something in 2023; I have no doubt about it. The magnitude of it is hard to forecast. So that's why when we look at expenses, we exclude these revenues, and then the SG&A appears higher. Thus, SG&A expenses, excluding the incentives, grew 18% in 2022, reaching R$5.6 billion. People expenses, as I said, represent 70% of total, while Non-People account for 30%. As previously mentioned, for 2023, we are estimating a range of R$5 billion to R$5.5 billion. What's going to drive this range? It's mostly the revenue growth and performance of the business. For instance, if we think that 2023 will mirror 2022, with revenue growing at 10%, we would land in the bottom of the SG&A range at R$5 billion. To hit the top, our revenues should grow at a high double-digit rate. This is why we have this range because there is a performance-based component of our SG&A linked to the bonus that can vary depending on results. In the fourth quarter, looking at the right, SG&A was flat relative to the fourth quarter of '21. Annually, it was R$5.5 billion, already within the guidance range. Over the next quarters, we expect further reductions in SG&A. Net income is essentially a result of everything I have just stated. For 2022, net income remained flat year-over-year at R$3.6 billion, with slightly higher earnings per share growth due to the buyback program that we've been implementing. During 2022, we bought back R$1.8 billion, of which R$1.3 billion occurred only in the fourth quarter. On the quarter, our net income was R$783 million, which fell 21% year-over-year and 24% quarter-over-quarter due to the impacts that I already explained regarding revenue outlook and the gross margin compressions. This drop accounts for the guidance in SG&A. Factoring in our expectations for business performance and the SG&A guidance, we estimate 2023 net income to be between R$3.8 billion and R$4.4 billion. Usually, we do not provide annual estimates like this, but we understand that in this macro environment, it is important for many investors to grasp the impacts on our company and business, hence providing this guidance for the coming year. Finally, before we move to Q&A, just wrapping up the main messages here: focus on expenses, already talked a lot about it, a leaner cost structure is the main priority, and that transformation will allow us to expand margins sustainably; cross-sell, we have businesses with exponential growth; we keep evolving our strategic roadmap; our business keeps improving, especially in comparison to previous cycles; and about the expectations for 2023, our guidance for net income is between R$3.8 billion and R$4.4 billion, with SG&A excluding incentives ranging between R$5 billion to R$5.5 billion. With that, I think we should move to Q&A now, Andre.

Andre Martins, Head of Investor Relations

Okay, Bruno. Thank you. So, again, we have a lot of analysts on the line here. So I'll ask you to be patient. We will go one by one, answering the questions. First one, Eduardo Rosman from BTG.

Eduardo Rosman, Analyst

Hi, Andre. Hi, Bruno. I have two questions. The first one is more related to the short-term. And the second one more related to the long-term. Do you prefer me to do both at the same time or do you prefer for me to ask them one at a time? Let me just do both of them. So the first, the short-term, you gave the guidance, which was great, thanks. I think it helps. And that guidance implies earnings growth, right, year-on-year. I think it has to do a lot with your cost control, right? But how do you think that will evolve throughout the year, right? Because my sense here is that the first quarter is likely to be pretty weak. We know it's very bad after the Americanas situation. January is bad. You don't have the incentives. As I know, usually, you have some upfront costs and then you benefit throughout the year. So it's fair to assume that the first quarter is likely going to be the weakest of the year, and then we're going to be recovering over time? That's the first one. And the second one, I think, is related to the long-term, right? We know that the short-term stuff, so let's try to think about the long-term here. Which I think is an important theme, which is the partnership model, right? If you can, maybe talk a little bit more about the model, how it's working today? We know that you had a model in the past, which was at the controlling group, and all the partners were there. And that worked pretty well during many years. But you had to change, right? You had to change that because you've now bought big stakes at different times, changed that a few times, or a couple, I don't know. I assume there's a chance to change again. So how crucial do you think this partnership model is? If you have anything to add toward that? Because we think here is something very important.

Bruno Constantino, CFO

Perfect, Rosman. I mean, the first question about how we're going to evolve over 2023 with the guidance. You're 100% correct; the first quarter should be the weakest quarter in 2023. The Americanas event, that you mentioned, has a secondary effect on capital market activity. We know that DCM activity has been frozen, especially in the distribution part where XP acts as the key role. So yes, the first quarter continues to be a tough quarter. We do have the expense reduction that is 100% under our control, as I mentioned. So we do expect when we look at SG&A to show already a reduction, considering the guidance that we gave. You are also correct when you say that in the first quarter, we had the benefit of the SG&A because of the incentives, and we are not going to have that in the first quarter. That's correct. But as our guidance goes to SG&A excluding incentives, it doesn't matter that much. But yes, we are going to see an evolution of the SG&A in the first quarter, okay? Then we expect to keep evolving that throughout the whole year. Going to the partnership and the more long-term question. You already gave some of the answers when you mentioned what happened with Itaú. We liked the model that we had in the past with XP Controle. We had to change that model after the IPO exactly because of Itaú, they went to super voting rights; super voting rights should be for the controlling shareholders, but that was their agreement. We had to accommodate that. And we didn't have, I would say, space to keep the same model that we had as a non-listed company. Then we started with restricted stock here, and it's with a different vesting period. In the middle of the way, we improved the model that we had, learning from feedback and from experience as a newly listed company. We are always thinking about improvements in our partnership model. That I can assure you, because that's the heart of our business, and we take that as a main priority. The model that we had in the past is not directly related to share price fluctuations. For example, take the model of return on equity model, where you buy and sell based on return on equity; we think it's a very good model because it aligns you in terms of the return of the company in terms of cost reductions, for example. You are not directly exposed to market fluctuations, but more about the fundamentals of the business. We like that very much. We don't have anything to announce right now, but what I can tell you is that we are always open and thinking about ways to improve our partnership model. The restricted stock units are working just fine. Can it be improved? We think yes.

Eduardo Rosman, Analyst

Great, crystal clear. But do you think that when you have changes, or anything on that front, I think it will be great.

Bruno Constantino, CFO

No, we will announce. That's for sure. Because as I said, Rosman, we think it's a priority in terms of it's a very important topic for the company. No question about it.

Andre Martins, Head of Investor Relations

Okay. Our next question is from Mario Pierry. Just a couple of seconds.

Bruno Constantino, CFO

We have some delay. We are trying. You should announce that, Andre. We are trying a new model where we can see the analysts, whoever is asking the questions. So we might have a delay.

Mario Pierry, Analyst

Hi, guys. Thanks for taking my question. Two questions. In the last quarter, I think you had changed your guidance to be on earnings before tax because of the volatility in the tax rate. So I was wondering what kind of effective tax rate are you assuming in your guidance for the net income that you gave? And then the second question is related to your expense reductions, right? You’re talking about how you reduced your headcount by 5.5% from December to January. I was wondering if you have any other plans to get to the bottom of your guidance, right? So an 11% reduction in SG&A. Does it mean further headcount reductions or does it mean cost savings in other areas? And what kind of impact this could have on the growth of some of your other businesses?

Bruno Constantino, CFO

Perfect, Mario, good to see you. Regarding the income tax rate, you're right. We gave the earnings before tax margin guidance. We know that the accounting income tax rate is tricky depending on the mix of revenue. That's exactly why we provided a wider range in terms of net income from R$3.8 billion to R$4.4 billion. We have many different assumptions here. So I cannot give you a specific rate that we used to give this guidance because it depends on the range. What I can tell you is we're confident that we can deliver the bottom of the range. One simple math here to help you is the following: Imagine we are in 2022, the whole year, R$14 billion revenue, and R$3.6 billion of net income. We would have instead of R$5.6 billion, R$5 billion of SG&A, a R$600 million reduction in expenses would mean more than R$300 million additional to net income. With that, we would be able to reach the bottom of the guidance. Of course, as I answered the previous question, the year started in a very tough way because of what happened with Americanas and its impact on capital markets and so on. But we do not expect the market to stay, I would say, dysfunctional throughout the whole year. Capital market activity should resume at some point; companies need to roll over their debt. We have several investments in fixed income that mature around this year. All of that factored in is what gave us the confidence to move forward. I don't have a specific income tax rate to give you, but I believe that answers your question.

Mario Pierry, Analyst

Okay. And the impact that these headcount reductions could have on revenue growth?

Bruno Constantino, CFO

Sorry, I didn't answer that. None. And that's what I tried to explain throughout the presentation. The benefits of the transformation, whenever you have transformation, it's natural to have a J curve because you're going to be working with more than you need. But it's important, so you do not let anything fall off the table. And we accelerated that. That process intensified when Maffra assumed as our CEO, and last year, primarily in the second semester, mostly in the fourth quarter, we accelerated a lot. The way XP now is organized through business units gives us more agility and efficiency in terms of the teams working together, and that's the big benefit. We're not postponing any deliverables in terms of products; we are not jeopardizing the experience for our clients as I mentioned, nothing like that. We are not dropping anything.

Mario Pierry, Analyst

This is all related, like, on the SG&A guidance that you gave, are you including any severance charges associated with these layoffs?

Bruno Constantino, CFO

Yes, we are.

Mario Pierry, Analyst

So, there won't be any additional?

Bruno Constantino, CFO

No, it's not additional. We are including that because, you're correct, we have several layoffs. So everything is in the first quarter pretty much.

Andre Martins, Head of Investor Relations

Okay, I'm bringing Geoff in from Autonomous Research.

Geoff Elliott, Analyst

First, just a very quick clarification, the net income guide, is that on an adjusted basis or a GAAP basis?

Bruno Constantino, CFO

No, Geoff, it's on an accounting basis, not adjusted. It's the GAAP net income. We still release the adjusted net income, but we have withdrawn the adjusted net margin guidance, as we look at it, including the share-based compensation, which is a noncash expense; we consider it an expense.

Geoff Elliott, Analyst

And then in terms of the pressure that you saw in the retail business, specifically in equities, how much of that is simply less activity and how much of that is product mix, kind of people trading cash equities versus derivative products and other things?

Bruno Constantino, CFO

I would say activity, especially — in the full year, the equity part, clients are migrating out of equities into more fixed income products because of interest rates. On a quarterly basis in the fourth quarter activity, not for the brokerage business, the trading part. But for example, you mentioned structured notes. I believe the industry fell like 20% to 25% quarter-over-quarter. So there was less activity. So, that's basically what I would say in terms of the equity drop in the fourth quarter. The base is low now because we've been in that trend for a while.

Andre Martins, Head of Investor Relations

Okay. Next in line is Domingos from JP Morgan.

Domingos Falavina, Analyst

I have a couple of straightforward questions. First, you mentioned that you're now recognizing interchange at the moment of total payment volume. How did you recognize it before? That's the only method I can think of for recognition, and it didn't seem to have much of an impact. The second question is about the one-off impacts many companies experienced, particularly with the Americanas situation being a major concern. I'm curious if you noticed any one-off impacts in your income statement.

Bruno Constantino, CFO

Okay. Now, regarding the interchange, Dom, it was basically — the installments we recognize, it was basically on a cash basis. The installment not paid, we didn't recognize and we adjusted that in the fourth quarter. So that's why we say it's related to the TPV. Our recognition was below what actually was the TPV. That's what we changed. Regarding one-off, I mean, we decided not to adjust anything for one-off events, right? Because we always operate in business; you have one-offs every single quarter or every single day. So, if we would adjust anything for what we believe to be one-off, it would be a mess. The Americanas event, I believe, can be considered one-off because it was a very singular event. We didn't have any impact on the banks in the credit book because our credit book of R$17 billion at the end of last year had zero exposure to Americanas; 90% of that credit book is collateralized. We are in a different situation here. We do have a market-making book in fixed income, where of course, the branches and bonds of Americanas were traded. We had exposure there, but we could not recognize it in the fourth quarter because it was not a credit that you can have NPL there and recognize. It was recognized in January this year with the market-to-market proceeds of the tradable parts of the book. To give you the impact, because that's going to — it's fair to consider a one-off impact; it's going to hit the first quarter, and the amount is close to R$125 million in the bottom line.

Domingos Falavina, Analyst

Are you clear of this risk? Is it fully done?

Bruno Constantino, CFO

Yes, basically. Yes. We don't have our market-making activity. We don't have big exposures to one single name. It's basically a function of what the clients buy and sell. We do have many different names. Unfortunately, Americanas was one of them. It was 100% recognized in January; you're going to see that in the first quarter, but that's it.

Andre Martins, Head of Investor Relations

Okay. Next, we have Neha from HSBC.

Bruno Constantino, CFO

Hi, Neha, I think you are on mute if you can hear us.

Andre Martins, Head of Investor Relations

So let's try. We can come back to Neha. I'm bringing Tito from Goldman Sachs.

Tito Labarta, Analyst

Thanks for the call. Thanks for the guidance and color. That’s helpful. Maybe just on the revenues. You mentioned a challenging quarter. The first quarter is going to be a bit challenging. Help us think about sort of the long-term growth potential on the revenue side. What do you think needs to happen? Is it just a better macro environment, interest rates coming down? I know there are a lot of moving parts, but just to try to think about that. Yes, I'll go back a little bit. At the end of 2021 during your Investor Day, you mentioned aiming for R$10 billion in revenues from new verticals. That would be 25% of revenues, like $40 billion in 2025, which is only two years away. So I imagine we can reset those expectations. Just help us think about revenue growth from here, downside risks, and upside risks as much as you can.

Bruno Constantino, CFO

Yes, sure. I will separate my answer into two parts, Tito. Let's look at these tough environments for investments with high-interest rates and assume we will be in this environment for longer, right? If that's the case, the equity part of the business is going to continue to suffer from the macro environment. What do we have as an ecosystem, two positive things that will benefit regardless of that. Number one, I already talked about the new verticals. So, if you look at R$1.3 billion, a 50% to 60% growth this year, we are confident that we can deliver that. It's not correlated with investments. We're talking about R$700 million to R$800 million of additional revenue this year. Number two, when I think about the funds platform, and we have the largest open funds platform in the market, and when we think about the fixed income business, both should grow at the Selic rate, which is 13.75%. So, we're talking about mid double digits here. It's important to have that in mind. The client assets shifted in the fourth quarter when fixed income client assets surpassed equities in our breakdown, indicating that the impact can continue. Yes, but a lot has been done already. In the fixed income part and the funds platform should grow at Selic rate. So that component also will help with revenue growth. For a longer-term perspective, for revenue to really reflect this operational leverage and exponential growth, we would need a market upturn again, a reversal of the tightening cycle. We don't need anything close to what we had in the last financial deepening process in Brazil, where interest rates went down to 2%. Not at all; that's not even good for XP when we're at 2%. It's not sustainable. I think that low high single-digits, lower than double-digits interest rates is more than enough. It’s a psychological effect; if you have 9% it’s one thing; if you have 10% it’s another. This is important. We believe we will get there; we just don’t know when. It depends on macro policy, but we believe we are going to be cyclical. So, when that happens, as I tried to convey during the presentation, we have a strong operational leverage, still growing and expanding not only the sales force, but we are complementing the services and products that we can offer to our clients through our ecosystem. Our ecosystem is not only becoming more resilient but bigger. When we experience the reversal of the cycle and with these transformation adjustments to a leaner cost structure, the operational leverage we still possess will play an important role. I don’t know when it will happen, but it will at some point in time. So, that is how I would assess the growth of revenue: focusing on Selic rate for funds platform and fixed income; float, same thing; and new verticals growing exponentially. The equity part is at a very low base and should stay like that if the conservative scenario of higher interest rates persists.

Tito Labarta, Analyst

One follow-up, if I may. I guess just on why you're confident that the cost-cutting won't impact the revenues, and particularly some headcount reductions? I mean, do you think you over-hired? When the cycle comes back, will you need to hire again? And is there no impact on that?

Bruno Constantino, CFO

We hired too many people. That's part of the issue. In the past three years, we doubled our net income, but we were growing too quickly. It was difficult to manage during the pandemic. In 2020, we added 1,200 employees, and in 2021, we brought on 2,500 while working from home, which made it challenging. I'm certain we over-hired. However, the most crucial factor is the transformation we've undergone, which provides us with a significant competitive advantage in terms of organization and agility. We are well-equipped and haven’t given up on anything. We've made substantial investments; our digital accounts are operational, our insurance company is functioning, our international accounts are up and running, and our corporate business is active with internal advisors already in place. Now, we need to consolidate our efforts. Through transformation, we achieved a leaner cost structure. It's not about cutting anything; it's about consolidating and maximizing the benefits of our cross-sell initiatives.

Andre Martins, Head of Investor Relations

I'm bringing Marcelo from Credit Suisse.

Marcelo Telles, Analyst

I have two questions. The first one is more of a strategic question. We've seen XP having a very successful business model. In previous years, there was certainly strong growth in a scenario where interest rates were abnormally low. XP had indeed a winning value proposition for customers, especially vis-à-vis banks at the time, so there's a lot of growth. Now, the relationship with the IFAs was easier. The relationship with internal stakeholders was probably easier. When there's more money, it's always easier in that respect. But now, we are in an environment where interest rates are double digits. We can argue whether they'll be 14%, 15%, or 10%, but they're definitely not going back to 2%. You have an environment where IFAs may be struggling in this environment, and you may not have that same winning value proposition because banks are fighting back. They have products you don't have. Some investors look for low risk-type instruments, which puts banks at an advantage. Large banks are willing to replicate your model of having offices throughout countries, trying to bring that entrepreneurial spirit to them, something you guys excelled in over the years. My concern is that I didn't hear much about the need for a change in strategy from XP in terms of this new environment. So, how will you approach your relationships with IFAs? There seems to be more tradition today with IFAs and that before we see a consolidation. I see a potential attrition in relationship or maybe it forces XP to spend more to retain them either through key money or buying direct stakes. So, what is XP's strategy? Is there a broader strategy to address those issues? Thank you.

Bruno Constantino, CFO

You made a lot of questions and assumptions there. I will try to address the concept, and please let me know if I am addressing it well. I don’t agree with the narrative that you presented. I think it's simpler than that. XP is evolving in the investment business. It's not that — of course, there is competition and so on, but that's not the point. The point is a very tough macro environment that makes the investment business suffer because, as I said, people have higher inertia in moving money when interest rates are very high; investing in fixed income is satisfactory. If you look at the KPIs, we advanced last year despite all that competition and interest rates climbing from less than 10% to 13.75%. We added 2,000 new IFAs, net inflows of R$155 billion, and 406,000 new clients. If you look at our market share in 2019, it was 7.3%; in 2020, 8.6%; in 2021, 10.1%; and November, the last data we have, last year was 11%. We are gaining market share; the pace is slowing due to high interest rates, but it’s not because of competition. I'm confident that whenever the cycle changes, XP will be the primary destination for clients because we have a trained sales force prepared to serve clients in investments; we’ve been elected the top-of-mind investment platform in Brazil for four consecutive years. I think this has much more to do with the macro environment than with structural changes. We keep evolving. The attrition you mentioned among the IFAs, I don't know what that is. We have more than 12,000 IFAs in our network. In the past, we had less than 1,000. We communicate with every single day, and if I showed you all the complaints, we would be here for a whole month. But we like that because that makes us better to listen and serve. That's how we will improve. That's what XP has been doing for over 20 years. Regarding the conflict of interest you mentioned, we always tell the IFAs and internal advisors, we need to do what's best for the client. Period. You have to make money, and the client must understand that, but it must be a win-win situation. If you don't operate this way, you won't be a successful entrepreneur. Our IFAs have a very high score in terms of NPS. Our strategy, as far as I can see, is pretty clear: go beyond investments to become dominant in investments. We are not there yet. We have a significant asset, our client base. Our client base of 4 million clients is a base that has money to invest. We need to take care of it, serve well, and convince them to try other products, which expands our addressable market, increases the moat of our ecosystem, and boosts the LTV of our clients. That's exactly what will create a win-win situation with that client over time. So, I don't see any need for a strategy shift here, honestly.

Marcelo Telles, Analyst

If you allow me, I just want to ask one more question. The cash flow, I couldn't find the managerial cash flow statement in your press release. I don't know the reason why it wasn't there. But I saw there was a reduction in the net assets of about R$459 million quarter-over-quarter because you guys didn't publish the cash flow statement. I don't know if that was because of share buybacks or payments to others. If you could explain to us what drove that cash burn, that would be great.

Bruno Constantino, CFO

The share buyback, you brought an important point that I didn't mention. We have bought throughout the year R$1.8 billion in share buybacks approximately. We have now in treasury more than 3.5% I guess from total capital nowadays. Most of it was in the fourth quarter. Remember that in the fourth quarter, on top of the share buyback program, we had the Itaúsa block that was more than R$550 million, something like that. So in the fourth quarter, we have bought about R$1.3 billion. That's probably what you saw there, but we can go into details later because I don't have any data in front of me. But that's most likely the share buyback program. That continues, so we have been — starting January, it ends in May.

Marcelo Telles, Analyst

Did you pay anything to IFAs in this quarter?

Bruno Constantino, CFO

This quarter, it’s going to be minor. Remember Telles, we have — with all the long-term agreements with the IFAs that we have. We have some variable components linked to performance. So if we achieve those targets, we pay; if we don't, we don't. And then it’s on a case-by-case basis.

Andre Martins, Head of Investor Relations

Okay, I'm bringing Thiago Batista from UBS.

Bruno Constantino, CFO

Hi, Thiago. We cannot hear you. I don't know — you don't appear to be on mute now.

Andre Martins, Head of Investor Relations

Yes, now perfect.

Thiago Batista, Analyst

Okay, sorry, guys. Hi Bruno, hi Andre. So I have two questions. One, actually a follow-up. The follow-up about the guidance only to ensure. The implied top line growth of the guidance in my collection is a low single digit. Is that the case that the top line should expand into three single digits? The second one about the impact of the higher interest rates in your working capital. We believe we have not seen yet the full impact of the highest rates in your working capital, if it's possible to see this line expanding into inventory?

Bruno Constantino, CFO

The top line, the next time we should give the P&L because you must do the backward calculation to get to the top line. The guidance we gave is not providing top line guidance. To your point about achieving the net income guidance with high single-digit or low double-digit revenue growth, yes, we believe we can. It's an approach that we factor in, especially considering that the first quarter it’s probably going to be tough considering the Americanas event and the situation in capital markets. We were conservative in the assumptions to bring this guidance, but it's not a top line guidance. Regarding the tax, we do have that in the cash flow working capital variation here. But I don't know exactly what you're missing there, Thiago.

Thiago Batista, Analyst

Now, the other point is the higher interest rates tend to have a positive impact on your working capital over time. If I'm not wrong, you guys are investing part of the working capital in fixed income securities. So probably we’ll see a higher impact of these in '23 onwards?

Bruno Constantino, CFO

From the increase in rates? Yes, that's going to be higher. You're right.

Thiago Batista, Analyst

Do you have the magnitude of this increase?

Bruno Constantino, CFO

Of interest on gross cash?

Thiago Batista, Analyst

Yes. If I'm not wrong, you guys invest part of this working capital in fixed income securities, so.

Bruno Constantino, CFO

In a lot of different securities, but yes, fixed income.

Thiago Batista, Analyst

The deposits — we have not seen yet the full impact of the highest rates in your working capital.

Bruno Constantino, CFO

It's true to say that?

Thiago Batista, Analyst

I don't know if you’re talking about the other revenue — you’re talking about the other revenue. Now I understand.

Bruno Constantino, CFO

Yes, because we have the hedge floating, the network that we have offshore, and the corporate FTP that goes into other revenue as a reduction in some part. We do have that benefit. But we also have, I would say, negative numbers that when you add them together probably explain a lower number than you expected. That’s what I’m guessing here, but we can we can go offline later too, so I can understand exactly what your math or calculation is. We can help you with that for sure.

Andre Martins, Head of Investor Relations

Okay. Thiago was the last one. Thank you, everyone, for your participation. Hope to see you all soon and touch bases. Bruno, any final remarks or goodbyes?

Bruno Constantino, CFO

Just thank you for being here with us on another call. That's all. Thank you.

Andre Martins, Head of Investor Relations

Bye everyone. Thank you.

Bruno Constantino, CFO

Bye, bye.