StoneCo Ltd. (NASDAQ:STNE) Q4 2021 Results Conference Call March 17, 2022 5:00 PM ET
Company Participants
Rafael Martins – VP of Finance and Investor Relations Officer
Thiago Piau – Chief Executive Officer
Lia Matos – Chief Strategy Officer
Marcelo Baldin – Chief Financial Officer
Conference Call Participants
Jorge Kuri – Morgan Stanley
Tito Labarta – Goldman Sachs
Sheriq Sumar – Evercore ISI
Jason Mollin – Scotiabank
Antonio Ruette – Bank of America
Neha Agarwala – HSBC
Geoffrey Elliott – Autonomous
Kaio Prato – UBS
Operator
Good evening, ladies and gentlemen. Thank you for standing by. Welcome to the StoneCo Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. By now, everyone should have access to our earnings release. The Company also posted a presentation to go along with its call. All material can be found at www.stone.co on the Investor Relations section. As a reminder, this conference is being recorded.
Throughout this conference call, the Company will be presenting non-IFRS financial information, including adjusted net income and adjusted free cash flow. These are important financial measures for the Company but are not financial measures as defined by IFRS. Reconciliations of the Company’s non-IFRS financial information to the IFRS financial information appear in today’s press release.
Finally, before we begin our formal remarks, I would like to remind everyone that today’s discussion might include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the Company’s expectations. Please refer to the forward-looking statements disclosure in the Company’s earnings press release.
In addition, many of the risks regarding the business are disclosed in the Company’s Form 20-F filed with the Securities and Exchange Commission, which is available at www.sec.gov.
I would now like to turn the conference over to your host, Rafael Martins, VP of Finance and Investor Relations Officer at StoneCo. Please proceed.
Rafael Martins
Thank you, operator, and good evening, everyone. Joining us here today, we have Thiago Piau, our CEO; Lia Matos, Chief Strategy Officer; and Marcelo Baldin, our CFO. Today, we will present our fourth quarter 2021 results, discuss some recent trends and provide an updated outlook for the business.
I will now pass it over to Thiago so he can share some key messages and highlights of our performance. Thiago?
Thiago Piau
Thank you, Rafa, and good evening, everyone. I want to start today’s call by taking a moment to reflect on our performance in 2021, the challenge we encountered and what we learned from them. Then I want to discuss the core strengths in our business that have enabled us to continue to grow fast and take market share despite all the problems we faced last year. And finally, I will review some recent trends we are seeing in the business, why I have such confidence in our outlook and why I think Stone is poised to benefit in 2022 and beyond.
So let’s start by reflecting on 2021. This past year was unsatisfying for Stone. We executed well in some areas, but we certainly made some mistakes. We took an aggressive approach. This is how we built the Company and how we help lead the fintech revolution in Brazil. But I think at the end of the day, we tried to do a lot last year, and we simply did not execute it as well as we would have liked.
We ramped our credit offering quickly, but we did not manage this expansion well. Our execution challenges were magnified by the problems of the National Registry System, which we were also not well prepared to deal with. So in mid-2021, we decided to pull our credit operation, regroup, learn from our mistakes and go back to the drawing board.
In prepayment, we delayed repricing our solutions when interest rates in Brazil began to rise. We didn’t want to hurt our customers with higher costs, which we felt we could absorb for a while. But in the end, the impact was too much on our bottom line, and so we began repricing in November.
Despite these issues, we did not want to slow down our expansion plan. So we continue making significant investments in the business, which increased our operating costs. In the fourth quarter, we almost doubled our selling expenses, excluding Linx, and continue to invest in building our Stone products, banking ecosystem, software solutions and enhancing our technology and customer service, which remain a key competitive advantage for Stone.
In hindsight, we should have spread out some of these investments to ease the near-term pressure on our bottom line. But I think overall, it was the right strategy for Stone to lay the groundwork for strong growth and market share gains over the next few years, and I’m already encouraged by the early results.
Ultimately, I think we lost some of our focus and execution precision as we manage all of these issues, while at the same time, also integrating Linx, an entirely new part of our business. As a result, our performance suffered, and our profitability declined. So 2021 was not our best year. However, to be fair, we also did some pretty good things last year.
We learned a lot from our mistakes, corrected our course, and despite all of our problems, we still produced very strong top line growth. In the fourth quarter, we generated 87% revenue growth year-over-year, 60% excluding Linx, which was our best performance since the third quarter of 2019.
During the quarter, we also produced a record number of new client wins, accelerated our TPV growth, executed well in the MSMB segment with a big win in the Micromerchant space, which is new for us.
We continue to expand our banking ecosystem and generated double-digit organic growth in our software solutions. So the core growth engine of our business remains quite strong. We are winning clients, taking market share and expanding our footprint to lay the foundation for future top line and bottom line growth.
We learned a lot from last year’s challenges, and we have also made some important changes in our structure and management team to strengthen our execution capabilities. We are reorganizing the Company into two operating segments: financial services and software, which we’ll begin to report in 2022.
The financial services segment is the Stone payments digital banking and credit business. The software segment will bring together Linx and all our other portfolio companies. We think this will provide greater transparency. As Lia will explain later, software is a strategic priority for us, and we will continue to drive growth and expansion in this area as well.
Now let me shift to our outlook for this year, which is quite positive, with strong growth and improving margins. I think we are well positioned for 2022. The investments we made in our projects and operations will continue to help us drive growth on top of our strong core business, which keeps taking market share.
In addition, the lessons we learned and the changes we made last year have positioned us to improve profitability this year. Looking at both top line and bottom line performance, I feel that 2022 will be a good year for Stone. I will discuss more of our outlook toward the end of our call.
I will now pass it over to Lia, who will provide more detail about our fourth quarter performance and strategic direction. Lia?
Lia Matos
Thank you, Thiago. Good evening, everyone. I’m going to start on Slide 5 with key performance highlights. In the fourth quarter, we had very strong top line growth with weaker profitability driven by the increase in funding costs resulting from the challenging macro scenario.
On the top line, growth performance for Linx accelerated to 51% year-over-year in the quarter compared with 26% growth in the third quarter of ’21. This performance was largely driven by an 87% year-over-year TPV growth in MSMB and by growth in our payments client base, which more than doubled to 1.8 million active clients compared with our previous guidance of between 1.4 million and 1.5 million clients.
Pro forma for Linx. Software revenue grew 15.7% driven by 26% growth in our core software business of POS and ERP solutions, offset by lower Linx of acquired revenues, a result of client migration to the Stone platform.
Regarding profitability, adjusted net income was $34 million in the quarter, which, as Thiago mentioned, was negatively affected by higher financial expenses resulting from a spike in CDI rates and our delay in repricing of clients, which we started in November and scaled in December and January. As we will highlight in the end of the presentation, we expect profitability to begin to recover in the first quarter.
Let’s now take a deeper dive into each of our two businesses. I will talk first about the financial services businesses on Page 6 to 11 and then move to software on Slide 12. In our financial services business, we serve both MSMBs, micro, small and medium businesses as well as key accounts, which we separate into sub-acquirers and platform businesses.
On Slide 6, we show the evolution of our payments client base in the MSMB segment. Last year, we changed our approach to serving this segment. Previously, our sales strategy was to offer Stone products to micromerchants only and to offer Stone and Pagar.me solutions to our larger SMB clients.
However, we discovered that some clients prefer a different mix of solutions or even a combination of solutions regardless of their size. So we changed our approach to better meet their needs. We now focus on the offerings sold into the client base rather than focusing on just the size of the clients’ volume.
During the quarter, we reached 1.7 million MSMB clients by achieving record net addition of 367,000 clients compared to 290,000 in Q3. Of these new additions, 312,000 are using Stone solution and 56,700 are using Stone and Pagar.me products.
As a result, it grew the average TPV of Stone in the quarter almost threefold versus last year, and we increased average Stone and Pagar.me TPV by 22% over the same period. We believe that this new balance between TON and Stone products yields a better value proposition for our clients and better returns for our company.
On Slide 7, we show that the TPV for MSMBs has grown 87% year-on-year, reaching R$66.7 billion, accelerating over the third quarter when it grew 81%. Stone continued to accelerate growth, roughly in line with last quarter at a 21-fold year-over-year increase, while growth accelerated in Stone and Pagar.me, with TPV growing normal 72% year-over-year compared to roughly 70% in the third quarter. Although our competitors don’t disclose their main growth metrics broken down by segments, we believe we had strong market share gains within the MSMB segment in the fourth quarter.
On the right side of the page, we show that we have been increasing take rates in MSMBs, from 1.66% in the third quarter to 1.71% in the fourth quarter and 2.02% in January of ’22. January take rate figures reflect the positive results from scaling the waves of client repricing that started in November. Combined with the repricing, MSMB TPV growth both in January and February remained very strong, above 80%.
On Slide 8, we show in more detail the initial recovery from higher interest rates after we started making pricing adjustments. As you can see, the average monthly interest rate increased faster in 2021, raising our funding costs, especially in our prepayment business. As Thiago mentioned, we decided not to pass along those higher costs to clients right away and started to do so in November.
With that, in the first quarter of 2022, we already see positive results and expect higher take rates combined with better margins. Given the still expected CDI increase along 2022, we will have a more dynamic pricing strategy throughout the year to achieve a healthy balance between growth and profitability.
Moving to Slide 9. We have continued to drive the expansion of our banking ecosystem, which is an important part of our strategy. Banking services for small businesses in Brazil are still largely dominated by incumbent banks, and we see a huge opportunity to offer those merchants a one-stop shop solution for all their financial needs in an affordable way.
The number of clients that actively use our banking solutions has increased almost threefold year-over-year to 492,000 clients, the usage of our card as well as the total outstanding deposit that clients have with us have also increased significantly, both year-over-year and sequentially from last quarter.
Most importantly, we have been growing our banking client base while also increasing ARPU, which reached R$25 in the fourth quarter, growing 39% sequentially, driven by increasing outstanding volume of deposits card TPV growth and the initial scaling of our insurance solutions.
Shifting to Slide 10. I want to update you on our credit business and where we are in terms of resuming disbursements to our clients. We’re implementing five major fixes and improvements.
First, we have completely revamped the product [UX] for a more simplified experience based on monthly installments, pay through automatic retention using the Stone accounts cash-in. We believe this revamped [UX] preserves the strength of our original product to auto retention but improves clients’ understanding of their payment schedules, more in line with the traditional credit products.
Second, to decrease the reliance on the registry system. We have added personal guarantees to enhance protection against bad borrowers with focus on maintaining a simple and frictionless onboarding process.
Third, we will implement a new sales process and scoring system based on enhanced data ingestion from multiple sources, including a more rigorous assessment and detailed data input from our hub sales personnel.
Fourth, so that we can improve client life cycle management and enhanced recovery, we’re rebuilding systems to improve client communication, have more flexible renegotiation analysis and agreements, improve the execution of warranties and better integrate with collection partners.
Lastly, as effective risk monitoring is one of the cornerstones of the successful credit business, we’re implementing an improved risk monitoring system to effectively resume disbursement with a more robust risk management. We will begin testing these improvements with clients in the second quarter of 2022. We will take a conservative approach to scale in order to observe client behavior in more detail.
In addition, we also expect to launch a business credit card for SMBs in the second half of 2022. Despite the initial challenges we faced with the legacy credit portfolio in operation, we’re committed to resuming credit offering to our best SMB clients as this is such an important solution for them. The opportunity is huge, and we’re confident we will be better prepared to have a compelling offer that is great for our clients, and at the same time, profitable for us.
Updating you on our legacy credit portfolio, it is performing in line with our expectations. This quarter, we had a cash inflow of R$430 million from clients paying us back. And we’re close to receiving all the amounts we have disbursed since inception, derisking principal capital. Given this performance and collections, the portfolio decreased to R$1.2 billion by December from roughly R$1.6 billion at the end of the third quarter and is recognized at a fair value of R$511 million in our balance sheet.
Our coverage ratio decreased slightly to 98% in December, which is a natural evolution of a portfolio being phased out. In January, we sold a distressed portion of the portfolio to a third party for R$12 million above its fair value. We continue to collect payments on the remaining portfolio and have reduced its size to R$850 million at the end of January 2022.
Finally, moving to Slide 11. We show some KPIs for our key accounts business within financial services. TPV, excluding Coronavoucher, was roughly stable in the quarter compared to last year at R$22 billion. There are two different dynamics in our key accounts business. We continue to deprioritize sub-acquirers in which we had a volume decline of 28% year-over-year, while our platform services business continues to grow fast, up 93% year-over-year.
Our sub-acquirer volumes should continue to decline significantly in 2022 with a very limited impact in our bottom line. As we penetrate the pool TPV within the Linx client base, we expect this to drive overall TPV growth in key accounts. Take rate for key accounts was 0.82% in the quarter, higher than third quarter levels, mainly as a result of higher prepayment rates and a mix shift towards platform services, which have higher take rates as compared to sub-acquirers.
On Slide 12, I would like to recap important advancements we made on the software front. Since the closing of the Linx acquisition, we have taken an important step to integrate Linx and the portfolio of Stone software investments into a unified software division. We will focus execution of our enhanced software strategy along three main fronts.
The first one is core software, which is the driving force of our software strategy. Our core software business comprises POS and ERP solutions for multiple retail and service verticals. Our TEF and QR Code gateways that enable payments and fixed integration to the POS and ERP, our reconciliation solution, which enables reconciliation of all payment methods within the POS and ERP, and our CRM solutions.
Our focus in the core will be on driving organic growth through new locations and cross-sell as well as inorganic growth through selected strategic acquisitions. In 2022, this fund should represent approximately 85% of software revenues and should grow approximately 20%. We expect this part of the business to have a 20% plus EBITDA margin level.
The second front is digital solutions where we will focus on enabling our core clients to digitize. Digital comprises the OMS, our omnichannel solution for physical stores, our e-commerce platform, engagement tools that help retailers to better reach consumers online, our marketplace hub that helps merchants sell in multiple marketplaces through a single integration and/or ad solution. This part of the business should represent 15% of software revenues in 2022 and grow approximately 20%. We still expect negative margins in digital in 2022 as the business continues to mature.
The third front is the integration and cross-sell of financial services. This used to be the lengths of acquiring business, which is nearly shut down because we have migrated the majority of clients to the Stone platform. We will focus the strategy on cross-selling Stone financial services to our software client base. In 2022, we expect to have positive contribution margins from this part of the business as we execute our cross-selling strategy.
Now let’s talk a little bit about software performance in the fourth quarter of ’21. Our revenue from software solutions reached R$328 million in the quarter, up eightfold compared to last year or 15.7% pro forma for Linx. When we look more closely at the growth trends across the different software fronts, we see very different growth dynamics.
Core software had a strong growth of 26% year-over-year. As we show in more detail in our earnings release, the number of locations using Linx POS and ERP solutions increased 11.7% year-over-year, reaching 109,000 locations. Linx digital solutions grew revenue by 20% year-over-year, and Linx of acquiring business had a revenue decline of 53% as we discontinue this operation and transition it to the Stone payments platform, as I just described.
Overall, given the early stage of many of the software solutions and the work we still have to do in cost management, integration of companies and synergies with our financial services business, software is still dilutive to margins. However, in 2022, we expect margins to improve as our business scales and we advance in these fronts.
Finally, on Slide 14, we show some encouraging initial results of penetration of Stone financial services into the Linx client base. TPV from Linx’ clients processed by Stone has increased 116% year-over-year in the fourth quarter of 2021 to R$5.9 billion. This was largely driven by the migration of Linx Pay volumes, but also by the cross-sell of Stone solutions and Linx client base as well as a natural overlap as Stone continues to grow organically.
Compared to the second quarter, which was the latest quarter before the closing of the deal with Linx, volumes grew 47%. In the fourth quarter, we estimate that our TPV represents approximately 13% of overall TPV of the Linx client base, up from 8% in the fourth quarter of 2020 with a still huge opportunity ahead.
Now I will pass it over to Rafael so he can discuss in more detail some of our key financial metrics. Rafa?
Rafael Martins
Thanks, Lia. Starting on Slide 16, I will highlight some aspects of our 2021 performance. While our adjusted net income decreased to R$203 million, our adjusted cash flow from operations increased by 40% compared with 2020, reaching R$1.1 billion. That increase is mainly because some of the factors that affected our P&L in 2021 are noncash items such as the fair value adjustments related to our credit business.
Cash net income, which grew 20% year-over-year, was the main growth driver in our cash flow from operations. Our adjusted free cash flow for the year was negative R$214 million, impacted by two decisions we made that, although very accretive to the business, generated additional cash outflows in the year.
First, we decided to significantly increase our CapEx in the fourth quarter to R$548 million compared with R$50 million last year to make advanced purchases of POS terminals, derisking 2022 growth amidst supply chain uncertainty and microchip shortages. This proactive investment resulted in significant reductions in our POS lead time.
Second, we prepaid R$230 million of marketing expenses in the first quarter 2021, which was fully funded by cash received from Grupo Globo and is still mostly available for us to use. We believe that those two measures were appropriate and necessary decisions for our business, strengthening our value proposition and our ability to grow at a strong pace. And of course, when we look at CapEx for the coming quarters, it should decrease substantially compared to the fourth quarter.
Excluding the cash outflow from those two preemptive investments, full year adjusted free cash flow would have been positive and at a similar level as full year 2020 despite the negative headwinds and challenges we have highlighted throughout 2021, excluding these investments, we are continuing to generate solid adjusted free cash flow while driving strong growth and investing in existing and new solutions.
In the following slides, I will provide more detail about costs and expenses that drove our bottom line results.
On Slide 17 and 18, we show our P&L for the quarter as reported on Page 17 and pro forma for Linx on Page 18. In order to provide more transparency and help investors better understand our results, we have included this quarter our adjusted P&L where we allocate the same adjustments we do for our adjusted net income metric into each line item in our P&L.
As we provide a detailed analysis of each line item in our earnings release, including a discussion of the item, excluding Linx, and have already talked extensively about top line, I will move directly to Slide 19 to focus on our cost and expenses pro forma for Linx. Although we continue to increase investments in our business, we are implementing and will continue to implement in 2022 more measures to better rationalize costs and expenses. We believe this is healthy for the business and for our culture of ownership.
Compared with last quarter, we realized operating leverage in cost of services, administrative and selling expenses, which were all lower as a percentage of revenue compared to the third quarter. Financial expenses as a percentage of revenue continued to increase this quarter as a direct result of the substantial increase in CDI, while we only started our waves of repricing in November.
Starting with cost of services. We saw a 96% year-over-year increase in the fourth quarter, growing from R$329 million to R$646 million. As a percentage of revenue, cost of services increased from 26.4% in the fourth quarter 2020 to 34.5% in the fourth quarter of 2021, an 8.1 percentage point increase.
Within that increase, 3.7 percentage points was a result of the lack of credit revenue and 2.7 percentage points increase was driven by costs related to our registry business, which is a very early stage business. It started operating in June 2021, and therefore, to negatively impact our margins.
We also increased investments in technology, customer service and logistics. Most of our costs tend to increase with the growth in our client base. We expect that as our registry business matures in the coming quarters, it should break even and start contributing positively to our pretax earnings. Also, we believe we can improve efficiency in costs related to data center, cloud costs and other overall costs.
Looking at administrative expenses, we have gained operational leverage both year-on-year and on a quarter-over-quarter basis. Administrative expenses grew 41.7% year-over-year to R$230.5 million, decreasing from 13.1% of revenue in the fourth quarter 2020 to 12.3% of revenue this quarter. Main drivers of growth in this line are personnel expenses and third-party services.
Although we are already seeing operational leverage here, we will seek additional efficiency as the business scales and we rationalize back-office expenses both in financial services and software.
Our selling expenses increased 73.4% to R$318.4 million going from 14.8% of revenue in the fourth quarter of 2020 to 17% this quarter. This increase was mainly due to higher marketing expenses and investments in salespeople. We have been expanding our sales team in the hubs with a focus on increasing coverage density in existing regions.
Compared with last quarter, selling expenses as a percentage of revenue decreased 4 percentage points, mainly due to operational leverage and slightly lower marketing expenses, we are constantly measuring the unit economics and payback of our CAC, and selling expenses is an important part of the calculation.
Following the November and December repricing waves, our CAC payback of 8 to 13 months remain highly accretive and the reason why we continue to increase our selling investments compared to last year. Financial expenses were R$610.6 million in the quarter, roughly 8x last year levels. This increase was mainly led by higher funding costs combined with strong growth of our prepayment operations.
Higher cost of funds is the result of a combination of several factors: first, a higher base CDI rate in the country, which increased from 1.9% at the start of the year to over 9% by year-end; also, there was some change in our capital structure with a higher percentage of third-party capital being used to fund our prepayment business; and finally, we had approximately R$90 million of financial expenses in the quarter arising from the sale of receivables to our new FDIC.
As we have signed longer duration receivables to this fund, the result was a higher-than-usual impact in the quarter. As we started to reprice our clients in mid-November, we are already seeing a recovery in profitability. And in the first quarter of 2022, that will be translated into higher overall margins for the business when compared with the fourth quarter.
Now I would like to pass it back to Thiago so he can close the presentation with our 2022 priorities and outlook. Thiago, back to you.
Thiago Piau
Thank you, Rafa. As I mentioned earlier, and we announced today in a separate press release, we have taken important steps to reorganize the business and bringing in new seasoned and talented people to strengthen our team. We believe this change will help us simplify the management of our operations, enable our team to focus and manage our bigger and evolving mission more effectively and create greater strength and depth of expertise across our management structure.
To highlight a few of these new appointments, Caio Fiuza, who is the Head of our Micro-Merchant business, TON, who was appointed COO of our Financial Platform division. Gilsinei Hansen, previously the Head of Linx Core, was appointed COO of our software division, which encompasses our Linx business and the Stone’s portfolio of software solutions.
João Bernartt, former Board member of several retail companies in Brazil and Founder of Chaordic, has joined the Company as Chief Information Officer, leading our efforts in product, technology and data with greater focus in the financial platform division.
Sandro Bassili, former VP of People of Anheuser-Busch Inbev, is our Chief People and Management Officer, leading a big part of our organizational and management system changes as well as maintaining a focus on talent attraction, development and retention, a hallmark of the Stone culture.
Diego Salgado, former Executive Director in LATAM debt capital markets team at JPMorgan, has joined our team in 2021 as Head of Treasury.
In terms of the business reorganization, from the first quarter 2022 onwards, we will report our financial results in three reportable segments: financial services, software and other segments. We believe this will also provide more transparency to the market, helping investors to better understand the drivers behind our performance.
Our 2022 priorities for each business are presented on Slide 20. In financial services, given the expected ongoing increases in the CDI in 2022, a key priority will be balancing profitability and growth through a more dynamic repricing strategy.
We will continue to execute on our product road map to become the one-stop shop financial services solution for our MSMB clients. And in this rising interest rate environment, the banking strategy becomes even more compelling, as shown in our recent ARPU evolution. For this business, evolving our banking offering will also be a key focus this year.
On top of this, we are obviously focused on relaunching our credit offering in 2022. We are certain that credit is one of the most pressing needs of our clients and a huge opportunity for us. We also believe that we are well positioned to win in this segment given the proximity with clients built into our business model and the expertise we have through our over 100,000 clients to whom we have previously extended credit.
In addition to relaunching our working capital solution in the second half of 2022, we’re also building a business credit card and overdraft product for SMB. In software, most efforts will be concentrated on driving organic growth and margin improvement in the par and continue to pursue selected strategic inorganic opportunities, an important part of our software growth playbook.
We’ll also focus on digitizing the core client base. And as Lia discussed, we see an attractive opportunity to increase penetration of financial services across our software client base, with our initial focus being on payments and banking. We’ll also begin to explore different models by which to leverage our distribution to scale our software solutions to SMBs.
Finally, three elements will be key to a successful execution of these priorities; first, the evolution of our management structure and a strong team, which is underway, as I have mentioned; second, our continued investments in technology to advance our multiproduct strategy; and lastly, the discipline to maintain a strong balance sheet and liquidity levels.
I would like to close with some specifics on our first quarter 2022 outlook for the business. We expect revenue growth to accelerate in the first quarter of 2022 with total revenue and income between R$1.85 billion and R$1.9 billion, representing year-over-year growth of between 113% and 119% or 67% and 72% pro forma for Linx.
We expect revenue growth to be driven substantially by the growth of our MSMB business, projected to reach TPV between R$58.5 billion and R$60 billion, representing year-over-year growth between 79% and 83%. A net effect of the repricing waves initiated in the fourth quarter is expected to be a lower pace of net client additions in the first quarter.
We expect to see an improvement in profitability with adjusted pretax earnings above R$140 million in the first quarter, coupled with ongoing heavy investments in our business. In summary, for 2022, we will continue to invest in our growth avenues and strategic priorities while improving our margins.
With that said, operator, can you please open the call up to questions?
Question-and-Answer Session
Operator
Thank you. At this time, we’re going to open it up for questions and answers. [Operator Instructions] Our first question comes from Jorge Kuri with Morgan Stanley. Please go ahead.
Jorge Kuri
Congrats on the quarterly results. Nice improvement across the board. I have two questions, if I may. The first one is on the lending business. I recall back in August, September of last year, Andre Street and some of the management team talked about moving the lending business to a distribution model where you were going to use partners to provide the balance sheet, the risk assessment, and you would do the distribution exclusively. It seems to me in listening to the call today that, that’s not the case that you actually want to do this on your own, on your risk and your own balance sheet. And so, I just want to make sure if that assessment is correct. And if not, please let me know how that’s going to work out.
And my second question is on your guidance for the first quarter, particularly on the pretax income, above R$140 million. Just using the regular seasonality for the year, that number is — ends up being roughly around $600 million or so, which is nicely above consensus. What do you — as you think about consensus for 2022, where do you think the market is underestimating what you could do for the year? What do you think are the number one or number two areas of your business that you think the market is underestimating?
Thiago Piau
Hello, Jorge, Thiago here speaking. Thank you very much for your questions. So regarding the credit operation, actually, we want to implement both models, Jorge, but we have to start in a model, which we have the origination in-house, we assess the credit risk, we sell to partners. So that’s the first model because we want to make sure that in terms of the credit risk assessment, the way that we handle clients, the full life cycle of the clients we are executing within our plans and then we have the ability to sell the client that portfolio to partners that can bear the risks afterwards.
So in both models, we have to make sure that the risk assessment is in the right track, but we will move to a model in which we distribute credit from third party, too. So we intend to execute both. But to make sure that the operation is working well, it’s important to start originating in our own balance sheet and then selling the outstanding balance to third-party partners. I think that, that’s the best way to begin. Regarding the guidance, I will pass it over to Rafa. I think that Rafa can be helpful here.
Rafael Martins
Hi, Jorge. Rafael here. Thank you for the question. I think that the feedback we had received from investors, Jorge, over the last few months, I think there was two main elements, the concern about CDI increase and our ability to reprice. And I think that what our guidance shows is that we have been able to reprice clients successfully. I think this is one relevant factor
And the other one was maybe last quarter, investors didn’t have a view on our cost and expenses and a lot of details. And one of the reasons why we brought in this call here, a little more details about that, mainly because some of those expenses and costs are related to investments we are making. And that of course, when those investments mature and we have the results, we have more profitability. So I think those were the two main elements that we see.
And if you look at the guidance and top line that we gave, despite the weak seasonality in first quarter, you don’t see a big change compared to fourth quarter revenue, right? So — and we have also provided details about take rate. So I think maybe we have derisked part of those concerns in the guidance that we gave, and that’s the — our impressions.
Operator
Our next question comes from Tito Labarta with Goldman Sachs. Please go ahead.
Tito Labarta
I have one follow-up on the margin guidance. And any color on how do you think that evolves from here as you continue to reprice merchants? And can you talk a little bit about the competitive environment to reprice those merchants? I mean you mentioned a little bit net adds should be a bit weaker next quarter perhaps because of that. And are you seeing a big difference between repricing SMBs and micromerchants? And then I have a second question on Linx, but maybe you can start with that one.
Thiago Piau
Thiago here speaking. Thank you very much for your questions. So regarding the guidance, we are focused now on providing guidance for the quarter, but what I can say is that we expect the margins to continue to increase along the year. So we expect to improve our bottom line results along the year.
We are implementing much more discipline in the way we manage costs and expenses. We will be — we will continue to invest heavily on our growth. We’ll continue to provide lots of resource to the team dedicated to our banking platform, to the credit platform, to the software unit that we are building, but more disciplined here in the way that we allocate capital and the way we think about costs and expenses. So I expect that this trend will continue along 2022.
What is important to comment here is that we are trying to balance profitability with growth. So more than the guidance we are giving in the bottom line of the Company, I think that we decided to show results we have in the MSMB in January and February. So if you see in the presentation in Slide 7, in January and February, you already have growth of TPV in the MSMB above 80%.
So I’m pretty confident with the guidance we gave and pretty confident in the ability of the team to deliver the results we expect.
Tito Labarta
That’s helpful. Maybe one follow-up on that. On the take rate, which you mentioned in January, is already above 2%. And as you reprice, any color — how high do you think that can get? Yes, I mean, I guess that’s the main question. How much more can that increase as you continue to reprice?
Thiago Piau
Tito, we are seeing two things here. One is that we see competitors talking more about repricing in their own strategy. So I think that this is a trend in the market, and it’s a positive trend. The second thing is that we are focused to use not only the repricing, but the offering itself. So we have created an offering.
In TON, we adjust automatically with the SELIC improvements here in Brazil once we scale banking and we have more expanding balance for our clients, that money receive interest rates because we put that capital in investments in the Central Bank, and we receive interest rates on that outstanding balance.
So, I think that more than only repricing the existing offerings, we are thinking more offerings to our clients better align what we are doing and with what it’s best for them. So we expect that we will continue to drive more profitability for the business, but with the mindset of aligning the strategy of the Company with what is best for our clients.
And regarding competition, as you said, I think that everybody is being more rational in this challenging environment regarding interest rates. So I think that, that’s what we are seeing.
Tito Labarta
Okay. Great. And then my question on Linx. You gave some good color there. I think you have about $5.9 billion in TPV from their clients. You continue to highlight around $200 billion addressable market. How much of that Linx TPV of the client base do you think you could potentially penetrate? Any color on the take rate you get on Linx’ clients? And any update on when you think it becomes accretive since you had believed that last time?
Thiago Piau
Yes, Tito. So regarding Linx, I think that we are in the early beginning of our ability to penetrate financial services in that client base. We decided to show here some numbers of our initial work. The take rate is more in line with the key accounts take rates that you show here separately. Those are larger clients who are more in line with that segment, much more close to the platform service than the sub-acquiring ones, but more in line with the key accounts take rate.
I think that more than only penetrating payments — and the first steps really providing the payment solution we have from the clients that already used the test gateway within Linx. We are focused in additional services using the banking platform. PIX, I think that it’s a great opportunity for Linx. So the combination of PIX, our bank accounts with the front end of Linx, the checkout of Linx in the stores, I think that, that can be a big opportunity for us.
So we’re focused on creating the projects and integration between the checkouts and the point of sale of Linx with our banking and our financial platform in the right way. So there are good, encouraging results in the beginning, and we expect this to increase. So we will provide more information to you and to investors as we evolve. We expect this business to be accretive, as we said. We still have investments to do. And the digital part, we are finishing to — the shutdown process of the sub-acquiring platform that they had there, but I think that we are evolving well.
Tito Labarta
That’s great. And sorry for a follow-up question. Just one quick follow-up on the margin. Just to understand that, that would be the pretax margin that you guided for in 1Q, you think that continues to increase throughout the year?
Thiago Piau
Yes. That’s what we are aiming here.
Operator
Our next question comes from Sheriq Sumar with Evercore ISI. Please go ahead.
Sheriq Sumar
I have a question on the financial expenses. We just wanted to get a sense as to how to think about for 2022, like would of 4Q ’21 be like a good jumping off point, like assuming the rates kind of continue to grind higher, like, to say, around like 12-plus percent or something? And I do have a follow-up after that.
Rafael Martins
Rafael here. Thank you for your question. When you look at financial expenses, I think that there are two main drivers that drive that line there. One is CDI evolution and the other one is the growth in our prepayment business.
So when you look at our TPV for 2022 that we expect to continue to grow and the CDI evolution that you see, I think if you look at fourth quarter, this is a good base point with one exception that we mentioned in our earnings release and also we mentioned in our call here, which is in the fourth quarter, we had around R$90 million of financial expenses related to the sale of receivables to our FDIC, right?
And from that amount, around R$60 million, they are related to longer duration receivables. That — so I think that is sort of an element that you should not like project going forward for the full year calculation. But apart from that, you can go from the fourth quarter levels and look at CDI increase and our TPV growth as well.
Sheriq Sumar
That’s super helpful. My second question is on the loan origination. I just wanted to get a sense on the timing and the magnitude of how you would want to ramp up in 2022. And how much of that is incorporated in your 1Q 2022 guidance? What would be the revenue contribution if there’s anything that’s going to be in the first quarter?
Thiago Piau
Thiago here speaking. Thank you very much for the question. So, first comment is that there’s no credit origination incorporated in our first quarter guidance. We expect to start test the product between the second quarter and the third quarter. And then, we will evolve this — the evolution as we see the life cycle of our clients, how the risk performs. So, we will take a more conservative approach.
So I think that between second quarter and third quarter, we have much more data to provide you about the tests we will execute in our client base, but we will take a more conservative approach in the way we scale the business. One thing, which is important, is that once we start to disburse credit to our clients, we will count this in the new methodology.
We will not use the fair value anymore. So it — we will have the accrual methodology for the new credit disbursements, as we said before. So that’s what we have in mind. And therefore, we don’t have expectations of disbursement for the first quarter, and we are not contemplating that on our guidance.
Sheriq Sumar
Got it. I’m sorry, I just want to squeeze in one more. Can you give a sense of as to how the attrition has tracked so far in this quarter given all the price increases that you have done? And also like I know you kind of talked about the incentives of your banking products, but is there any kind of incremental cost that you would have to generate because of kind of maintaining those clients on your platform while you increase your prices?
Lia Matos
Thank you, Shariq, for this last question. It’s Lia here. So regarding attrition, we gave some color on net adds — trends for the first quarter. Naturally, as we ran several repricing waves between November and January, we expect — we had a slightly higher level of churn in this period, and this is a natural effect of this repricing — the set of repricing wave. So the biggest chunk of repricing waves were in fact done within this period. So we do expect almost like a onetime higher impact from churn in the first quarter. So I think that’s the overall picture here regarding churn trends.
Sheriq Sumar
Thank you so much. I appreciate.
Thiago Piau
Yes. May I add?
Lia Matos
Follow-up. Yes, yes. Go ahead.
Thiago Piau
Yes. Hi, Shariq, Thiago here. Let me add some comments on that part. So when we think about repricing, that’s actually two components. So we are moving prices for new sales, and we are repricing the outstanding client base. What we are seeing is that although we are pricing lower — higher levels of pricing, our ability to sell our products and the interest we have of our clients, it hasn’t changed.
So I think that we keep the pace of adding clients, and we are seeing that the performance in the way that we invest in our channels, we are really doing well. We expect and we are seeing some additional churn in the client base. But what makes me be here more positive is that when we see that the TPV in the MSMB clients from January and February are above 80%, and that’s why we are confident with the guidance we are giving and the trends we are seeing.
I think that we are keeping the best part of our client base and the very small part of the client base that we can lose because of the decision we made. I think we are okay with that. We are not seeing a big impact in the Company. And I think that the offer we give in terms of service, the products, everything we deliver to our clients, it’s worth it to make this movement.
So I’m happy to see that the Company is balancing this repricing with the relationship we have with our clients. We keep the most important part of the client base, which are the best clients. That’s why we are seeing this TPV increase in the first quarter, and we are confident with the guidance for the quarter. So I’m happy with that with both new sales and the way that we are dealing with the client base.
Operator
Next question comes from Jason Mollin with Scotiabank. Please go ahead.
Jason Mollin
My first questions are on the credit side. I mean I guess I understood the answer to the question that we should be waiting to the second or third quarter to get more of a sense of the timing and magnitude of the disbursements, but maybe you could give us some color on the sale of the distressed portfolio that was sold. I guess the data shows or what you released was that the price was over 2.5x the fair value. If you can give some comments on that, is that reflective of the portfolio payer pricing in general?
And my second question would be a general question on the software business, particularly the core business that you talked about growing 20%. If you can talk about where you think you are in the market share there and where you think you’re going with that 20% expected growth profile for 2022.
Rafael Martins
Thank you, Jason. Rafael here. I will get your first question, and then I’ll pass it over to Lia. Regarding the legacy credit, I think the legacy credit is performing as we expected. As we mentioned, we did that sale of that distressed portion of the portfolio to a collection company here in Brazil. It was above fair value. I don’t think that if we look to the ratio, we should apply the same ratio to the whole portfolio. So the fair value that we have there in our balance sheet is a little over 100 — R$500 million. But what I can tell you is that the legacy portfolio is performing as expected.
As we mentioned in our call, we are almost having a cash flow payback of all the disbursed amounts we had since inception. So, I think that what you’ll see over time is that the legacy portfolio will continue to go down in terms of outstanding balance and as we collect the cash inflows from clients. So in the fourth quarter, it was a little over R$400 million, and we expect this to phase out over this year.
Lia Matos
Great. Jason, taking the question on software. So we tried to provide a little bit more color disaggregating the software business and showing the core digital and the financial services part separately. And regarding your question on market share and how we see growth in the core, I think there’s two big messages here. So our software position right now is very strong in the mid- to large clients.
So we do have relevant market share in many different verticals in retail and services. We do see opportunity to continue to gain market share within the mid- to large client base, both organically and also inorganically either within the verticals that we are or in new verticals that are strategic for us.
But there’s also a second part of this, which is the big opportunity we see to grow software within the SMB, and that’s where we believe a lot in leveraging our business model and our distribution capabilities because we think that the software market overall in the SMB space in Brazil is still very fragmented and underpenetrated, and there’s a big opportunity there.
So those are the two areas where we really see opportunity to grow and gain market share in 2022 and beyond. So we gave color on how we see growth ahead. We will focus a lot on those two movements this year. And we do see a lot of opportunities to continue to gain market share both in mid- to large clients and also SMBs.
Thiago Piau
Can I add comments? Jason, here’s Thiago speaking. Just to put the software. One of the things we see here is that when we think about Linx and the position that Linx has in the middle of the pyramid in terms of client base, Linx has a very good market share.
When you go to a shopping center here in Brazil — in the main cities of Brazil, the market share of Linx is very big. But much more than that, as Lia said, the opportunity in the SMBs is very big in Brazil, Jason. I strongly believe that every merchant should use software to improve productivity, to manage their numbers better, to sell channels. This is a need in Brazil.
We don’t have a big champion here in Brazil. I think that in the retail segment, Linx was the champion here in Brazil. So there is a big untapped market for helping those merchants to use simple solutions to drive productivity, and that’s our goal. That’s our commitment to continue to invest in our distribution, in our project capabilities, implementation capabilities. I think that this opportunity in Brazil is still very big, and we will pursue this for the longer term.
Operator
Our next question comes from Antonio Ruette with Bank of America. Please go ahead.
Antonio Ruette
Can you hear me well?
Thiago Piau
Yes.
Lia Matos
Yes.
Antonio Ruette
So I have a more specific follow-up, then I have a second broader question. So on the follow-up from a previous question, how is your churn going in respect to the prepayment — the repricing of the premium product, but broken down, if you could explore a little bit by segment? So how have your multiple segments responded to this repricing?
Thiago Piau
Antonio, Thiago here. So as we said, we saw churn a little bit higher, not something that we are too much worry about. The segment that we saw the churn increasing a little bit where the clients with TPV from zero to R$5,000 a month, so that was the segment that we experienced, it’s a little bigger increase in churn, but it’s not something that we are really worried. I think it happens when you do this type of repricing in the client base.
However, we do not expect the change will be on high levels. And actually, what we are seeing now in February, March, the churn already got back to the levels we were used to. So there is a big movement now as pricing is a much more dynamic component in our operations. With pricing and repricing, I think that this will not be something that will impact too much our ability to grow.
Antonio Ruette
All right. Super clear. Now on a broader question. Well, you have a very tough year. So you had impact from your credit product, the pandemic, the rest of receivables. I would ask you, what were your main learnings from this year? What do you believe it is wrong? What it is right? And after all this, what are the main issues do you think should still be addressed in 2022?
Thiago Piau
Great question, Antonio. I tried to talk about this at the beginning of the call, and I wrote about this in the letter, myself, with the team. But I think that we tried to do too much last year. We took an aggressive approach towards the growth of the business and the many initiatives that we had at the same time. And in the end of the day, I think that we lost a little bit of focus in our execution. So we regroup with the team. We brought more experienced people close to us where we can learn from. We are very focused on the core strength of our business. And I really believe in what we are executing here. And I think that the team is focused to a very different year in 2022.
This type of years that companies pass, and we have our in 2021, which is difficult, I think that it changes the way you see the business, and you learn a lot from them. So in one way, I’m happy that we learned. It was a good experience. Now we have to move on, execute what we believe and build this business, which is an amazing business that we are — that we love and we are putting all of our efforts here. So we learned. We changed, and let’s move forward for 2022.
Antonio Ruette
Yes. Just a follow-up on this. Do you think something structural here that should still be changed? Are the ground base for your credit product — your financial — other financial products and our software products that is all in place, and now it’s a matter of execution?
Thiago Piau
The only structural part we are seeing is macro environment. So we know that the environment in Brazil and actually across the globe is not a very easy environment. We are seeing interest rates moving up faster than we were expecting.
We are not expecting this new impact that we are seeing, but we learned to be more dynamic in the way that we see the environment and the way that we act on the environment we have in front of us.
So I think that we are much stronger structure in wise macro environment and interest rates. The other part, I think that we have the execution now on track, good leaders in place. We have the assets and the team we wanted to have. Now it’s a matter to execute and deliver on our results.
Operator
The next question comes from Neha Agarwala with HSBC. Please go ahead.
Neha Agarwala
Congratulations on these results. The first question is on the repricing effort. It’s really good to see the numbers above 2% for January, very encouraging. Have you been able to reprice and pass on all of the higher cost of the customers or maybe only a part of it, which we’re seeing in the higher take rate? And which segment has been easier to reprice, the [indiscernible] market or the core SMB market. And then I’ll ask my second question.
Lia Matos
Neha, so I think — thank you for the question. Regarding repricing, the way that we actually conduct the processes and waves, right, and we don’t do a standard process across the client base, right? So we select different clusters of clients and define the level of the appropriate level of repricing depending on that specific cluster. And there’s a lot of testing before we decide to scale any pricing wave.
So I don’t think that there’s one straight answer as to which clients are easier or more difficult to reprice. I think it’s a matter of really not doing the process all at once, which is why we started in November, and we took all the way up to January to really do the repricing waves that we felt were necessary at this stage. So I think it’s really, like Thiago said, a very dynamic process.
The biggest chunk of repricing waves were done in this period, but we do expect a much more dynamic process moving ahead as we continue to see the interest rate environment pretty much in the same way throughout 2022.
Neha Agarwala
And when you reprice, on average, how much of the higher funding costs have you been able to pass on to the customer? And how much are you observing? I understand maybe from a margin perspective, it doesn’t have a similar impact. But just trying to understand how much of the higher prices you still maybe have to bet on average.
Rafael Martins
Neha, Rafael here. So we are now passing along the CDI increase to clients. And I think one important element is what we focus and what we look when we do repricing is we look at the unit economics of clients, and we try to balance this with a healthy level of growth. So in some cases, when we look at payback returns, sometimes it doesn’t mean necessarily that we passing along 100% is the best outcome. So in many clients, we are doing that. But what I can tell you is we are balancing the unit economics to have a healthy payback level, but also a healthy level of growth. So I think this is the way we think internally and how we are dealing with that dynamic environment, as Lia mentioned.
Thiago Piau
Rafa, Thiago here. Can I complement? Just one additional point about pricing on a very high level, I think the Company should not focus only on pricing, the prepayment on the — or the payment solution. I think that once we have the ability to create more engagement of our clients with our banking platform, and we have a more outstanding balance, they use our cash-out methods. They use our cards to purchase goods.
We are focused now on building our credit cards for SMBs. Once we have the ability to improve our distribution of software to SMBs, then the conversation with clients changes completely. You are not only repricing a current product you have. You are trying to offer a better deal for them in terms of what you can offer. So that’s where we are really focused for the longer term to have a completely different type of relationship with clients, not be only focused on the machine of the prepayment.
So for the longer term, that’s what we are trying to implement here. In the short term, yes, we are repricing — we are passing along the CDI, but in a way that we balance and we do not break the relationship with our clients.
Neha Agarwala
Understood. My next question is on the margin improvement that we should expect during the year. And not 100% clear. Could you give us some numbers or some sort of range to understand how much of a margin expansion are we talking about over here? And if you’re looking at an adjusted pretax margin level or an adjusted net income margin level because if I look at the adjusted net income margin for the year, it was 4%? So what range should we look at for 2022? If you can just clarify that, that would be very helpful. And then lastly, any update on TAG. I understand you might want to do a partnership or share some stake in TAG. So any update on that would be very helpful.
Rafael Martins
Hi, Neha, thank you for the question. So just to be clear, the guidance that we gave for the first quarter was pretax earnings. So this compares with R$17 million of pretax — adjusted pretax earnings in the fourth quarter, which was a 0.9% margin. So if you look at the R$140 million with the guidance of top line that we gave, you’ll see that is roughly 7%.
So this was the guidance for the first quarter. We do believe that given pretax earnings provides a better view on operations, and that’s why we didn’t give like adjusted net income, which has a tax rate also in there. But that’s just to make it clear what the number really means.
Neha Agarwala
So, around — pretax margin of around 7% for the year and maybe gradually improving in the remaining quarters?
Rafael Martins
So as Thiago mentioned, we are not providing guidance for the full year at this moment. What Thiago mentioned is that we expect to continue improving our margins over time, right? So this is sort of the message we are convening at this moment.
Neha Agarwala
Okay. And on that…
Thiago Piau
Neha, Thiago here speaking. So just a comment on that. I think that the margins we are guiding for the first quarter, they are far away from the stabilized margins that we expect to have in the business. So this margin should improve by the way that we execute and as the business matures. So we continue to invest heavily on our growth in a strategy that we believe. But now you will see those margins increasing. So we decided to give the guidance for the first quarter. I think that that’s the first step. And then we will help you to frame better.
Once in the first quarter we provide more numbers on the two business segments we have, the two business units, I think that the levers will be much more clear. And we are planning a session to be helpful to the market to frame the levers and forecast the business better on your end.
Regarding TAG, what I believe is that the infrastructure of the registry system is really important for credit for SMBs. We are a little bit frustrated that, that didn’t evolve well nationally in Brazil last year, but we still believe that this can be a big change in the way that SMBs can access credit in Brazil, and they really need that. Those clients, they are not accessing credit in big banks or other players. They really need credit.
But in order to decrease the risk, the system has to be working well. So I think that there’s a good value in what the team builds. I think that the technology that we built is a very good technology. We still see problems in terms of governance between the registries and how the environment is working. So we’re assessing the strategic options here we have.
And regarding the financial impact, we expect the target achieved breakeven this year. So I think that from 2022 onwards, the financial impact in TAG will not be a burden, but we will continue to provide our efforts to make the National Registry System works. And I believe that the team is doing pretty good work in terms of technology. So we will keep improving our work on the registry front.
Operator
The next question comes from Geoffrey Elliott with Autonomous. Please go ahead.
Geoffrey Elliott
In terms of the repricing, can you give a sense, is it easier to reprice smaller clients, say, in the TON business? Is it easier to reprice larger clients? Where’s that repricing happening faster? And where is it happening more slowly?
Thiago Piau
Hi, Geoffrey, Thiago here speaking. It’s difficult to talk too much about the strategy in terms of repricing because at the end of the day, we do have a competitive environment here in Brazil. But what I can tell you is that it’s easier to reprice clients that have more installments in their operations. So I think that, that’s what I can say here.
Geoffrey Elliott
Okay. And who would typically have more installments? What sort of retailer would that be? What sort of merchant would that be?
Thiago Piau
All verticals use installments, but the bigger they provide more installments to those clients. So I think that’s not a matter of the difference between a fashion type of store or a bakery. It’s much more a matter of the size of the merchant. But Geoffrey, I’m sorry, we take not to — we try not to talk too much about the commercial strategy here. I think that this is a very sensitive information of the Company. So what I would say is more focused on bigger merchants, bigger SMBs, more focused on SMBs, they use more installments. So that’s the color I can provide here.
Operator
Our next question comes from Kaio Prato with UBS. Please go ahead.
Kaio Prato
I have two here, if I may start with the first one. If you could detail a little bit what are the impacts that you are seeing in terms of peak in Brazil currently if the volumes come from the system is becoming more meaningful for you or not today. So if you could share with us any KPI related to this would be great.
And on regulation, if those new capital requirements announced by the Brazilian Central Bank last week, just would like to understand better if you already have any estimate about the potential impact in the Company and to the implementation, please. And then I will follow up with the second one, if I may.
Lia Matos
Hi, Kaio, thank you for the question. I’m going to take the first part and then pass the second part to Rafael. So regarding PIX, yes, we did see PIX growth significantly within our base in 2021, but mostly substituting wire transfers, wallet than cash. So, there was cannibalization of debit volumes. When we look at the PIX heavy users within our base, we estimate debit cannibalization to be less than 5%.
So the overall impact to the base is very, very low. These trends, we believe, are very much in line with the market, but we do see PIX growing significantly within our base. And we do see PIX as an important part of our banking strategy because it increases engagement of our banking solution. We actually do see that our clients that use PIX, they have higher average outstanding deposits. So we see PIX very positively. So maybe Rafa, you can take the second part of the question.
Rafael Martins
Sure. Kaio, thank you for the question. So when we look at the new regulation, the initial impression we have is that — so first, the capital requirements were lower than initially indicated by the public consultation 78. And also look into our business, both today and to the future, we do have much more capitalization than what is required by the regulation. So I think that shouldn’t be meaningful for us in terms of impact. The Company is very well capitalized. And even when we look at the growth that we expect going forward, so this is what we have to comment about those capital requirements.
Kaio Prato
Okay. Great. And just a final one, if I may, is related to the investment in Banco Inter, please. When we look to your adjustments to net income, we see that you are taking out the cost of funding related to the investments. So I just would like to better understand your view on this effect, if this expense is expected to continue going forward at these levels and if you could see that as recurring. And finally, what are the improvements related to the partnership with Banco Inter expected for 2022, please?
Rafael Martins
Sure, Kaio. Thank you for the question. I will start, and then maybe Thiago can complement. So yes, when you look at the adjustments we made, the reason why we made it is because when we look at the Inter investment in our assets, it doesn’t flow through our P&L, right, Inter results. So what we thought is we have the asset as an investment. We do mark-to-market that investment in our balance sheet.
So you’ll see that moving up and down. So if we only bear the cost in the managerial view, we would have a cost that wouldn’t have the counterpart of the asset, right? So that’s why we adjusted managerially, and we show the adjustment in our P&L just for us to better understand the underlying performance of our business, excluding that part — that investment.
So this is why we do adjust that in our financial expenses item, as we have shown. And this time, I think it helps investors understand we provided the full P&L adjusted, so allocating each line item where the investment goes, so people can understand better in which line item the adjustments flow through. Do you want to complement, Thiago?
Thiago Piau
Yes. Kaio, Thiago here speaking. Regarding the partnership with Banco Inter, I have no relevant update here. We strongly admired the team and what we are doing with the business. But our focus is toward our core and our goals for 2022. We have to relaunch the credit, expanding our banking offering and continue to execute on the core strength of Stone and our software business unit. So we’re much more focused on the core we have, so no relevant update in the partnership with Inter so far.
Operator
There are no questions at this time. This concludes the question-and-answer session. I will now turn over to your host for final considerations.
Thiago Piau
Hello, everyone. Thiago here. Just final comments here. We are now in a high energy momentum with the changes that we are doing in the business and we’re doing it with the learnings. We had from last year really focused on the front line of the business, our clients, our product road map. We’re really passionate about what we are building our mission.
And thank you very much for your time to follow our call and see you next quarter. Bye-bye.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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