StoneCo Ltd. (STNE) Earnings

Management highlights

**Capital Allocation and Shareholder Returns** - Year-to-date 2026, BRL 3.6 billion has been distributed to shareholders, representing a 27% distribution yield, including the extraordinary dividend from the Linx divestiture and BRL 0.6 billion in ordinary share buybacks. - At least another BRL 1.4 billion is scheduled for share repurchases by the end of 2026. Excess capital is returned to shareholders when value-accretive internal opportunities are not immediately available. - The pro forma capital ratio (excluding returned Linx divestiture proceeds) is ~29%, comfortably above the 17% internal hurdle, with an adjusted return on equity of 19% in Q1 2026. **Payments Strategy and Client Retention** - Elevated churn is concentrated among 2025-onboarded clients, not the legacy core customer base, driven by overly complex product bundles and pricing after expanding into new offerings (instant settlements, investments, credit cards). - Key priorities are simplifying product bundles and pricing, improving retention, and reaccelerating profitable TPV growth, rather than chasing unprofitable volume. Initial April data shows improving TPV growth from these changes. - The sales force incentive structure has been adjusted to align origination with long-term client retention and value creation, shifting focus from purely new client acquisition to engagement of the existing active base. **Credit Strategy and Risk Management** - Underwriting models underperformed in recent quarters, leading to higher-than-expected first payment defaults and NPLs in newer cohorts. Management responded quickly by tightening risk selection, adjusting pricing, and rolling out updated models. - Early results show first payment default rates have converged back to historical levels by the March 2026 cohort. The priority is growing credit with strong risk-adjusted returns, not just volume growth. - New secured working capital products have been launched, which will expand access to credit, deepen client relationships, and reduce overall portfolio risk. Product diversification now includes credit cards, overdrafts, and secured offerings. **Operational Efficiency and Product Expansion** - Q1 results were impacted by seasonal softness, higher credit provisions, and one-off severance costs; operating leverage is expected to resume as these factors normalize. - The company is continuing to invest in AI-driven efficiencies and a unified merchant app that supports end-to-end financial workflows, to increase the share of clients using the full suite of StoneCo solutions. - The deposit franchise has grown, reducing StoneCo's total cost of funding from 100% of CDI in early 2025 to approximately 87% recently, lowering financial expenses.

Guidance

- Full year 2026 guidance remains unchanged, with performance expected to be weighted toward the second half of the year as credit revenues compound and retention initiatives deliver results. - While the Q1 2026 uptick in credit provisions was an unanticipated surprise, management expects provisions to normalize over the course of the year and can accommodate the impact within the existing guidance range. - TPV growth was in line with expectations in Q1, and is projected to accelerate in the second half of the year as churn reduction initiatives take full effect, driven by execution rather than reliance on an improving macro environment. - Cost of risk is expected to gradually decline to the mid-to-high teens range over time, though there will be a lag as existing Q1 delinquencies flow through the income statement in subsequent quarters. - Higher-than-projected interest rates (expected year-end Selic rate is now ~14% vs. the prior 12.5% forecast) create the largest headwind to full year results, and management currently expects to come in at the bottom of the guidance range. Multiple operational levers remain available to hit this target.

Segment performance

StoneCo reported total revenue of BRL 3.6 billion in Q1 2026, up 6% year-over-year. Adjusted gross profit was broadly stable year-over-year at BRL 1.5 billion, with a gross margin of 41.6% (down from 44.4% in Q1 2025). Adjusted net income grew 3% year-over-year to BRL 549 million, and adjusted basic EPS increased 15% year-over-year to BRL 2.19. Total processed transaction volume (TPV) was BRL 137 billion, growing 3% year-over-year, with PIX QR code volumes outperforming card TPV. Retail deposits reached BRL 10.1 billion at quarter end, up 22% year-over-year; average daily retail deposits grew 7% sequentially and 26% year-over-year. The total credit portfolio grew 14% sequentially to BRL 3.2 billion: Merchant Solutions (mostly working capital offerings) reached BRL 2.9 billion (13% sequential growth, 90.6% revenue contribution), and the credit card portfolio reached BRL 400 million (23% sequential growth, 9.4% revenue contribution). Credit revenues grew 25% sequentially to BRL 297 million, with a portfolio yield of 3.3% (up from 3.1% in Q4 2025 and 2.6% in Q1 2025). Provision for credit losses was BRL 166 million, pushing the cost of risk to 21.9% with a coverage ratio of 229%. NPLs over 90 days reached 7%, up from 5.2% in the prior quarter. Total active clients under the new unified definition was 4.7 million, up 13% year-over-year and down 5% sequentially. Average Revenue Per Active Client (ARPAC) was BRL 247 per month per client, down 3% sequentially and 11% year-over-year.

Risks & headwinds

- The macroeconomic environment continues to pressure smaller Brazilian merchants, which represent StoneCo's core client concentration, leading to broader industry-wide increases in delinquency that have a disproportionate impact on StoneCo's portfolio. - Automated underwriting models for small and medium-sized merchants lost efficiency in recent quarters, leading to higher-than-expected NPLs and credit provision expenses that pressured Q1 2026 profitability. - Isolated large-ticket delinquency cases in the dedicated larger-merchant credit desk continue to contribute to an elevated delinquency baseline, with single large cases able to meaningfully move aggregate portfolio metrics due to the large ticket size. - Higher interest rates remaining elevated for longer than initially projected creates a material headwind to pretax earnings, with every 100 basis point increase in Selic reducing pretax earnings by approximately BRL 200-250 million. - Product and pricing complexity from recent ecosystem expansion led to unanticipated elevated churn among newer client cohorts, pressuring near-term TPV growth.

Analyst Q&A

• Q: ARPAC is down 11% year-over-year, and the client base has shrunk sequentially. What is the ARPAC trajectory, when will it turn positive, and is there an optimal target for the active client base that will lead to continued sequential client declines? /

  A: ARPAC declines are driven entirely by client mix effects, not worsening monetization of the core base. Expansion into lower ARPAC new products (such as banking-only offerings for newly onboarded clients) creates near-term downward pressure, but multi-product clients have significantly higher ARPAC than the company average, creating long-term upside. There is no fixed ceiling for the optimal active client base, as new products expand the total addressable market long-term. The new unified ARPAC metric was introduced to reflect the company's evolution to a broader financial platform, and vintage analysis will be provided in future disclosures to show the evolution of client monetization over time.

• Q: Higher cost of risk this quarter affected both the automated and dedicated credit desks? After tightening underwriting and seeing improved first payment defaults, will credit portfolio growth slow, and will cost of risk remain at this elevated level? /

  A: Higher NPLs were driven by three factors: broader industry-wide macro deterioration, underperformance of older automated underwriting models, and isolated large delinquency cases in the dedicated desk. The firm has adjusted pricing, rolled out new models and policies, reduced maximum ticket sizes on the dedicated desk, and begun launching secured credit products. Cost of risk is expected to gradually decline to the mid-to-high teens over time, though existing Q1 delinquencies will flow through results over coming months, creating a lag. There will be short-term fluctuations in growth, but long-term credit portfolio growth trajectory is unchanged.

• Q: Why did the credit quality deterioration happen, and are there any material changes that affect full year 2026 guidance? /

  A: The broader macro deterioration in Brazil increased delinquency across the entire banking industry, and the impact is more pronounced for StoneCo due to its concentrated exposure to the small and medium merchant segment. The Q1 provision uptick was a surprise, but it can be accommodated within the existing guidance range, and TPV was in line with expectations. The largest unanticipated change is higher-for-longer interest rates, which are now expected to end the year at 14% vs. the prior 12.5% forecast, making it likely the firm will hit the bottom of the guidance range.

• Q: Secured working capital has lower yields than unsecured lending. Will this hurt credit profitability over the medium term, and what drives the expected TPV acceleration in the second half? /

  A: Even though government-backed secured programs have lower stated rates, net interest margin is not necessarily lower due to embedded guarantees and lower risk. Secured lending also allows the firm to serve higher-rated clients that were previously inaccessible, gaining share from incumbent banks and expanding other revenue streams (deposits, payments) from these clients. TPV acceleration in the second half is driven by the firm's churn reduction initiatives (product simplification, aligned sales incentives, client experience improvements), not an expected improvement in the macro environment.