Cielo (ticker: CIEL3.SA) has announced a net profit of BRL 503 million for Q1 2024, the highest since Q1 2019, marking a significant milestone with 11 consecutive quarters of year-over-year growth. The company's return on equity reached 18.7%, positioning it among the industry's top performers.
These results reflect Cielo's strategic initiatives, including investments in technology, distribution capabilities through banking partners, and the success of various programs such as Installa Doreto. Despite a decrease in Total Payment Volume (TPV), Cielo remains committed to its transformation program and strategic objectives for 2024.
Key Takeaways
- Cielo achieved a net profit of BRL 503 million, the highest since Q1 2019.
- The company has seen 11 consecutive quarters of year-over-year growth.
- Return on equity reached 18.7%, demonstrating strong industry performance.
- Cielo continues to invest in technology and distribution capabilities.
- Success in payment transactions at events like Lollapalooza and Installa Doreto program.
- A focus on optimizing funding costs and reducing FDIC structure.
- Positive movements in revenue yield despite a decrease in TPV.
Company Outlook
- Cielo is committed to its transformation program with strategic objectives set for 2024.
- The company plans to continue optimizing its debt structure.
- Investments in technology, products, and services are ongoing to expand the customer base.
Bearish Highlights
- Acknowledged decrease in TPV.
- The growth of Heciba habta product did not meet expectations, leading to inefficient funding costs.
- The market's maturity and competition limit the potential for a competitive advantage based on price.
Bullish Highlights
- Cielo has successfully optimized funding costs, improving net financial results.
- The company sees positive elasticity in the market and a rational pricing environment.
- There is a focus on improving UI, UX, and distribution capabilities to regain market share.
Misses
- The company faced a debt squeeze in 2020, which led to the creation of a longer-term funding structure.
- The strategy to match the duration of ARV operations with funding structure was initially inefficient.
Q&A Highlights
- Provisions were described as a one-off incident with no expected substantial impact on future results.
- Cielo is focusing on commercial expansion through the banking channel.
- The company is working on matching the duration of funding with ARV operations to reduce funding costs.
Throughout the article, the focus remains on Cielo's financial performance, strategic initiatives, and market position without providing any recommendations or opinions. The information is presented to offer a comprehensive view of the company's earnings call and future outlook.
InvestingPro Insights
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Full transcript - Cielo SA (OTC:CIOXY) Q1 2024:
Operator: Thank you and good morning. Welcome to Cielo's Q1 2024 Earnings Conference. Joining us today are Mr. Estanislau Bassols, Mr. Filipe Oliveira and Mr. Daniel Diniz. This event is being recorded and streamed online via Zoom (NASDAQ:ZM) and will be available for replay at the company's IR website at ri.cielo.com.br. Questions will be received via the Zoom platform and will be answered via audio soon. [Operator Instructions] Before we proceed, we'd like to clarify that any statement made during this conference relative to Cielo's business prospects projections, operational and financial targets are based on the company's management's beliefs and assumptions, as well as information currently available to the Company. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions, seeing as they relate to future events, and therefore rely on circumstances that may or may not materialize. Investors and analysts must understand that general economic conditions, the state of the industry and other operational factors may affect Cielo's future earnings and lead to results which are materially different than those expressed in set forward-looking statements. Leaning on the material published at the Company's website, this conference will be devoted to the question and answer session, which will be preceded by a message from Mr. Bassols, CEO of the Company, featuring the highlights of the quarter. If you have any question, please press the raise hand button again. If at any point your question is answered, you may leave the queue by clicking on lower hand. Questions will be answered in the order that they are received. I will now turn over to Mr. Bassols for his opening remarks.
Estanislau Bassols: Hello. Good morning. Thank you all for joining our Q1 2024 earnings conference. Before we open the call for questions, I'd like to highlight some advances we've made across various areas of our company and the results we've attained during this period. We ended the quarter with a net profit of BRL503 million. This is the highest recurring net profit since the first quarter of 2019. It marks our 11th consecutive quarter of year-over-year growth. Moreover, our return on equity reached an impressive 18.7%, making it one of the best in the industry. In this context, I'd like to emphasize the ongoing evolution of Cielo's financial results. Our efforts to optimize ARV profitability and enhance funding [ph] structures have made us even more competitive in the market, resulting in year-on-year growth of BRL115 million. Furthermore, our focus on tax efficiency and cost management continues to have a positive effect on these results. More specifically, our initiatives to optimize the network of POSs, coupled with our increasing use of data and predictive models, have successfully reduced costs. These efforts underscore our unwavering commitment to a relentless pursuit of efficiency opportunities. Our commitment to efficiency is an integral part of our transformation program for seamless Cielo. We continue to invest across various fronts to enhance our technological portfolio and streamline our processes, bearing in mind that, among other things, Próxima [ph] aims to explore new frontiers inefficiency, two innovate the payment industry and three, pave the way for new avenues of business. Every quarter, we've shared with you the achievements brought forth by this program as we reflect on this latest period, one notable achievement in the products and technology domain is the 33% reduction in time to market for implementing enhancements and launching new solutions. While we've made significant progress, we continue to work on the necessary developments to achieve best in class status in our digital and UX UI journeys, as well as our processes and risk management. Our efforts and investments will keep us up to date and put us ahead of the competition. Additionally, we are strategically investing in distribution capabilities, particularly through our banking partners. This journey allows us to identify process improvement opportunities that will lead us to the pinnacle of expected productivity. These investments span processes, back end systems integration and technology. Although this channel requires further effort to reach the productivity levels of more experienced sales representatives, ultimately it has the potential for superior productivity when compared to traditional door to door approaches. These examples demonstrate Cielo's engagement and the adoption of important initiatives. Another milestone is the first quarter of the Installa Doreto program, which was more widely adopted across banking channels. This solution enables on the spot delivery of POS devices during sales transactions. It had already yielded highly positive results within our own channels. Notably, in the first quarter, over 50% of our POS devices delivered to bank customers were used on the same day of delivery, a substantial increase over the 10% same day usage recorded in the previous quarter. On that note, I'd also like to highlight the following achievements from the first quarter, in terms of cashless solutions, Cielo played a pivotal role in handling payment transactions during the Lollapalooza festival, one of the country's greatest pop music events. We've also made headway in the Cielo app and our Cielo tap solution, including the innovative tap on phone feature. This environment of continuous evolution and investments in people and processes is essential to keep Cielo at the forefront of innovation in the payments universe. All of this becomes possible when tied to a digitalization agenda with an increasingly intense use of data and AI integrated technologies to enhance our customers experience. Lastly, we remain committed and eager to advance in our transformation program and in the strategic objectives set for 2024. We believe that the investments made so far have already yielded significant structural results and that we are on the right path. However, there are still opportunities to be seized and they will remain a constant focus for the company as we strive for efficiency and value delivery to our customers. Once again, thank you for your time. And now let's proceed to the question-and-answer session.
Operator: Thank you Mr. Bassols, we will now begin our question and answer session. Our first question comes from Mr. William Barojaris [ph] with Itaú BBA. Sir, you may proceed.
Unidentified Analyst: Good morning. Thank you for the opportunity. We have a question about the larger provision that you demonstrated this quarter. We wanted to understand whether this was really one off, or whether there was any operational issue involved. I'd also like to know if we should be thinking about any recurrence in this impact for the following quarters, or whether we should see it as really one off? Thank you.
Estanislau Bassols: Thank you for your question. This was actually a systemic incident which was simple and has already been addressed. There is really no threat to the future of the company. We do not expect this to affect any future quarterly result. Thank you.
Operator: Our next question comes from Mr. Kaio Prato with UBS. Mr. Prato, you may proceed.
Kaio Prato: Good morning, everyone. Thank you for the opportunity to ask some questions. Well, first of all I'd like to ask about your TPV performance this quarter. We saw a decrease by 10% quarter-over-quarter and 1% over one year earlier. So if we consider the industry's record, the industry should be, or your TPV should be growing 10% year-over-year right now. So that shows a loss of share for you. I'd like to hear from you how you're seeing these figures and should we expect some change in the commercial area and whether this stems from a movement from the competition? Also, the commercial change that led to the one off provision for this quarter, did that lead to any sort of churn for you that was different from what you expected for this first quarter and how that's been going forward in early Q2?
Estanislau Bassols: All right, let's start on the simpler note. We do not see any consequence from the one off operational issue on our churn. We do not expect any substantial impact of that in the near future. As for TPV, over the course of last year we saw a decrease in year-over-year and also in quarter-over-quarter terms. This was slightly different, as you said. But regardless of that, our main lesson, well, we are going into large commercial expansion via the banking channel, and the waves of that are showing that we have significant room to improve both our processes when it comes to sales and with regards coming to the state of the art and the back end, improving the balance between time to market and other aspects. And just to give you an example of how we onboard our clients, or identify the clients that are at the branch and need a different approach than those that call to buy, we are trying to move forward in all of these processes which require significant investment in technology, on the one hand, for products and services, and on the other hand, one thing we did not imagine we would be learning was that the time it takes for a DDN, as we call it, the sales support for banks to reach maturity is a lot longer than what we have when it comes to door to door sales. On the other hand, it may reach the door to door approach profitability much faster. But what we see for in terms of profitability for those that reach maturity is much higher. So the result of what we're seeing in terms of sales expansion should mature in about six months or six months longer than what we see for the door to door approach. And peak maturity should involve a slower upward curve than what we were used to seeing. Okay, that was perfect. Thank you
Operator: Our next question comes from Mr. Andrew Gherardi [ph] with Morgan Stanley. Mr. Gherardi, please you may proceed.
Unidentified Analyst: Thank you for the opportunity to ask a question. I am going to ask in English, but fee, but feel free to reply in Portuguese. Two quick questions, one on funding and one on the prepayment business. The first question on funding, I see that one of the fatigues was, I suppose, closed during the quarter. I'm curious why that was the case and whether that'll be the status quo moving forward. Given that now your total FIDC balance has been reduced materially, maybe you plan to open a new FIDC later. Kind of curious what your view is there. And then, just when I look at total borrowings for the business, short term debt also reduced a lot. So curious how you're thinking about funding and how that might evolve throughout the rest of the year. And then the second question, I realize you guys are optimizing the ARV line. So the ARV volumes declined pretty materially in the first quarter. I'm wondering if Q1 is a good benchmark for the remainder of the year, or whether you expect that to increase gradually as the year continues? Thank you.
Filipe Oliveira: Thank you. Hi, Andrew, this is Felipe. Thank you for your question. First, about the FIDC. Cielo has adopted a strategy of optimizing the funding costs to match the average duration of the ARV operations with the funding structure. Just to give a little bit of context there, we had, back in 2020, a little bit of a debt squeeze in Brazil. So we decided to create a longer term, more stable funding structure for the Heciba habta [PH] product, which is a product that is, in our opinion, a stable and heavy commitment to the customer in the long term. So we matched that with long term funding. What happened since 2020 is that hasn't grown as much as Cielo expected it to grow. So was using some longer term funding with FDICs to fund shorter term obligations, which was inefficient in terms of cost of funding. So since the end of last year, we have been optimizing our debt structure in order to match the duration of the ARV operations to the term of our liabilities as well. So with that, we have reduced the FDIC structure, as you mentioned, and that's something that we, we want to keep doing. Right. So this optimization, we understand that this is heavily positive for the company, and as a big consequence of that, our net financial results have improved in this quarter, even though we had less ARV results overall. So we believe that this strategy of matching the cost of funding, or the duration of funding to the duration of the ARV operations has been highly successful, and that's something that we want to, want to keep doing in the future. Regarding the ERV optimization, you have a good point there. Cielo [ph] has decreased its total exposure to the ERV operation quite significantly from year to year and quarter to quarter. So if you look at the total capital allocation or funding allocation from last quarter, we had a decrease of 24.2%. But on the other hand, when you look at the ARV revenues, we had a drop of only 3.3%. So that means we have been able to increase our effectiveness in selling at higher rates to better customers, while reducing the total overall cost of funding. So this has been highly accretive and this has been highly positive for the net financial results, and that's something that we're keen to do in the next quarters as well.
Unidentified Analyst: Got it. Thank you. Just, if I could follow up real quickly on the first question, also, on the balance sheet, I saw, like, the short term borrowings fell materially, does that also have an impact to your financial, your interest expense for the remainder of the year. And trying to gauge like to what extent the interest expense could actually continue to fall from here.
Filipe Oliveira: Yeah, that's a factor of how much we sell in terms of prepayment, both in ARV and Heseba habtu [ph] So I can't really give you a guidance on what the final number is going to look like, but what we have been seeing as a trend, the average cost of funding and percentage points dropping over the last couple of months. So we have been able to be a lot more efficient in getting new funding at cheaper rates, especially because we have been focused a lot more on the short term funding as well.
Unidentified Analyst: Got it. Thank you very much.
Operator: Our next question comes from Mr. Yuri Fernandes with JPMorgan. Mr. Fernandes, your mic is open, you may proceed.
Yuri Fernandes: Good morning, everyone. I have a question about Cateno. We saw there was more pressure in the cost of services, and our impression is that that may have something to do with oral card [ph] So I'd like to ask you, where has that pressure on Cateno's cost come from and how long do you expect that to last and when should it return to normal thinking more about the margin for Cateno on your side? That's my first question. And if you allow me a second question. This week we saw the tax reform bill, and it's one of its earliest drafts, and it's still early, but one thing that caught our attention is that payment firms were expected to go into the special banking regime. I'd like to hear from you, if you have any understanding of that, and if you think this should lead to a decrease in your tax rate. Because right now you're paying [indiscernible] by 9%, something in IFRS, and if you reach a rate that could be changed, if you expect to see any decrease. So whatever your take is on tax reform, there are obviously a number of other topics involved. But whatever you can tell us about the tax reform, it would be very helpful at this point.
Filipe Oliveira: Good morning. I'll start with Cateno and then Stannis may address the tax reform issue. Well, Cateno is at a higher point in its investment cycle. You saw that in our statement, especially this quarter, we saw an increase in embossing rates, something we expect to be positive for the business in the long run. We cannot provide any guidance relative to the future of Cateno within Cielo, but we can tell you that Cateno is at an important point in its investment cycle.
Estanislau Bassols: Thank you, Felipe. As to the tax reform, we have several fresh analyses here and to your point, yes, we do expect to fall under the special regime. As for rates, so it's still early to say, but so far we're looking at it with a positive set of eyes. But that being said, the process is involving every stakeholder and it's being built on a very technical basis. And all things being constant, that should establish a good governance for those decisions to be made. Bearing in mind that no final decision has been made yet, lots of changes may still occur, and we are paying close attention to that alongside the entire industry. So again, so far it seems really positive.
Yuri Fernandes: Perfect, guys, if I could just follow up on the Cateno side, how long do you expect the investment cycle to last? Is it a one quarter thing, a one year thing? Just so that we have an idea?
Estanislau Bassols: Well, we do not expect the time horizon to be that long, but we really can't provide any specific guidance.
Yuri Fernandes: Okay, thank you, everyone.
Operator: Our next question comes from Mr. Wagner Biondo with GO Investimentos. Mr. Biondo, Please you may proceed.
Wagner Biondo: Good morning, everyone. We have been seeing Cielo developing programs such as Persema Cielo [ph] and hiring a new help. But we are still seeing a decrease in the number of customers and the decrease in the TPV. So I'd like to hear a little bit more from you about how do you expect to turn that around and start increasing the number of customers and increasing your sales in retail and your TPV, and also understand a little bit better what have been your challenges to at least keep your customer base steady and begin to grow your market share?
Estanislau Bassols: Thank you so much for your question, Wagner. When we look at what's necessary for us to grow in a robust way, not only in terms of client numbers, but also to grow our market share, I think we may have two different elements to two different sectors, and I'll go into the elements first. First of all, we need products, services, user experience and user interface, all on par with what the industry has. And we are making efforts to precisely tackle that. A lot of persimmon Cielo [ph] approaches just that. And we are looking not only into services, but also products. And also there's something that has to do with distribution. And on the distribution side, what we've seen for nearly a year is that one of the companies most important callings is to use its banking distribution arm in an excellent way. And there's a challenge that this entails, which is for our sales agents to help us. They need to understand about the institution they're working with, whether that's Bradesco or Itau or Bancado [ph] Brazil. They need to understand Cielo's products, they need to understand Cielo's processes, and they need to deal with stakeholders on both sides. And what we came to understand is that it takes a lot longer for them to reach that than it takes to train someone to work on door to door sales. So what we're working on is how to reduce that time lag. What we understand today is it would take us another six months to be able to match the sales capabilities from both sides. But again, those capabilities, without what I mentioned before, sales, services, Ux, UI and other features, it wouldn't move forward. So this is a trail that we're blazing in parallel, and this has an impact on both sides. On retail. I think that's precisely the answer. For resellers, there are two aspects. First, we need capabilities to dematerialize our POS, and we're already working on that. Those are the arguments we worked on over the last four months. And again, these are newly launched products, so they involve all of the improvements that we've made on the products we're launching. But there's another aspect, which is it takes an end to end journey that's fully digital. This is something that we're still working on. And it takes longer to grow the number of clients in an industry that's thriving, but especially amongst smaller customers, that's critical to grow our TPV. What I said is critical on the retail side. But what we're also doing on TPV is to grow, first of all, our number of clients and then our market share. That's the journey we have outlined for the next six months.
Wagner Biondo: Perfect. Thank you.
Operator: Our next question comes from Mr. Thiago Paura with BTG Pactual. Mr. Paura, you may proceed.
Thiago Paura: Good morning, everyone. Stan, Felipe, Daniel. I just wanted to maybe follow up on what you see when it comes to the revenue yield trend. We continue to see the data show that the market is still operating at a very rational state. We still see a negative pressure on price, especially because of penetration and the effect of your new mix. But over time, there's an expectation that with the decrease in the benchmark interest rate, prices will reflect that. I just wanted to understand where you're at and what you think about this trend. And if you could maybe separate each of the segments, if there's any more specific trend for either one of them and so on, that would be great. Thank you.
Filipe Oliveira: Thank you for your question. Thiago, this is Felipe speaking in general terms, our head is still, at the same place, we're very rational, and for each client segment we make the matching decision. We have not seen any change with regard to what the market has been doing. It's still very rational. We expect a more rational scenario for the market in general and there's no incentive for Cielo to move away from that balance. Now, looking at SMB, the message is also the same. We see the market is very rational too. And Cialo made some very interesting movements that moves the revenue yield up. And initiatives in churn and TPV were even better than what we saw in the last year, which shows the market is still rational and not very aggressive when it comes to pricing, shows that it is still favorable. What I see today, being very honest, is there's little incentive for anyone to move away from this rationality. When we look at our P&L and that of the customers, we see little room for change. And as I mentioned before, the situation is simply not favorable. If we had to spend more money to increase our number of customers while not gaining market share, it's more difficult when we compare, for example, to sales operations, most of them dealing with services. So I do not see a rational incentive that makes sense for us to lower prices in the medium term.
Estanislau Bassols: If I may add to what Filipe just said, and maybe underscore what he just said, again, elasticity is still positive in the market. So we do not see anything different with regard to that. We're working at full capacity in diversity analytics to be able to assess that elasticity client to client. We see that the market is also growing those capabilities exponentially, which is very, very positive too. But on the other hand, I see that the competition has moved to a different arena, which is building skills and complements to their products. And it is precisely on that arena where we need to evolve. So, Persima, Cielo is pricing for major investments in generating and building on existing skills. Now, Felipe mentioned this quickly, but it is also important to stress that when we look at how the industry has organized itself within the four parts unit, there's a significant share. Say you look at 100 riots in MTA, between 78 and 80 of that goes to something that's shared by everyone. So taxes and prepayment, and then there's time to market. So there's little space to imagine that the competitive advantage in price will be constant, regardless of what that advantage is. 0So this vision, which seems maturity, which seems mature across every player, and because it is structural, I think that that allows us to expect the current status to persist and this is a status of more maturity which what we've seen for a few quarters and we do not see any new element that might change that.
Operator: That was perfect. Thank you Felipe and Stan, that was very clear. The question and answer session is now concluded. Let me turn over to Mr. Bassols for his final remarks. Please. Mister Bassols, you may proceed.
Estanislau Bassols: First of all, thank you to everyone who joined us in this conference, earnings conference. And remember that we're still focused on working to improve all the variables that we need to work, being best in class and improving our UI and UX and also improving the distribution capabilities for these products so that we can begin to grow again our market share and our profitability as we've been pointing towards in the last few quarters, as we said earlier. So again, thank you everyone and have a great day.
Operator: Cielo's earnings conference is now closed. Thank you for joining us and have a great day.+
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