XP Inc. (NASDAQ:XP) Q2 2022 Earnings Conference Call August 9, 2022 5:00 PM ET
Company Participants
Andre Martins – Head-Investor Relations
Thiago Maffra – Chief Executive Officer
Bruno Constantino – Chief Financial Officer
Conference Call Participants
Jorge Kuri – Morgan Stanley
Otavio Tanganelli – Bradesco
Tito Labarta – Goldman Sachs
Thiago Batista – UBS
Marcelo Telles – Credit Suisse
Domingos Falavina – JP Morgan
Andre Martins
Okay. Hello. Good evening. Good afternoon, everyone. Thank you for participating in another earnings call of XP Inc. now for the Second Quarter of 2022. I’m Andre Martins. I am the Head of Investor Relations. And I’m joined here today by our CEO, Thiago Maffra; and our CFO, Bruno Constantino; as well as the Investor Relations Team, Marina and Antonio. I hope everyone is safe. And well the materials from this result are already on the Investor Relations website. There you can find the SEC filings of XP Inc. and the definitions of forward-looking statements and how forward-looking statements of this call can differ from actual results.
It’s important to highlight as well that this call is being translated to Portuguese. So you can use your – you can use the tool in Zoom to change to Portuguese. [Foreign Language] And also important to highlight that for any questions at the end of the session, you can raise your hand and we will call you on a first-in, first-served basis. I can see that we have already seven raised hands here. So thank you for participating already.
Now I’ll move to Bruno to kick off our earning call. Hi, Bruno.
Bruno Constantino
Hi. Thanks, Andre. Hi, Maffra. And hi, everyone. Good evening. It’s a pleasure to be here with you for, I believe, the 11th time in terms of quarterly results. As usual I’m going to be brief in the presentation, so we can go to the Q&A as we have already many raised hands, right. Before I start the presentation, we would like to share a video with you. We are steering a little bit hangover here from the experts that we had last week. So let’s go for the video and then I come back.
[Video Presentation]
Yes, I hope you like the video. We are – as I said, you’re still recovery from expert. It’s a pretty, very intense days. And I’d like to take the opportunity in saying thanks for all the personnel that really made it happen. It seems easy, but it’s not. People are already working on the 2022 expert event. So it takes a long time to plan everything. And it was really amazing after three years without in presence event we did in 2020 virtual, only virtual and also in 2020 year because of the COVID. And finally, this year we came back. So it was really, really great. And a transformation during the expert, this one was special because as you already know in our numbers and everything that we have disclosed in terms of the growth in our headcounts and a lot of new initiatives that we have been investing. We asked at expert how many people to raise their hands that was their first contact with the expert only internal employees and more than 60%, their first time in an event like that. So the energy was really good. Just sharing that before we to the presentation. So Andre?
Andre Martins
Fair enough. Let’s move quickly here. So the first – the main highlights and if I have a lagging effect, okay, we have selected five main points here. The first one is the business model resilience, not new here. We have been repeating that every quarter. We know we are in a tough macro environment with the bare markets, and that has an impact in the investment business, especially, but despite these tough macro environment, we were able to deliver our all-time-high record quarterly revenues, R$3.6 billion in the second quarter of this year with also an all time high retail revenues, a growth of 15% quarter-over-quarter. I’m going to talk more about that in a while.
Number two, we’ve been diversifying our revenues stream. Last year, December, we highlighted the new verticals to give more disclosure about those new verticals that are in very early stage, and they do not get the same impact of the macro environment as investments and by the new verticals, I mean, the credit card credit, credit, the retirement funds and insurance and those new verticals added together they grew 113% year-over-year, very strong growth quarter-over-quarter also a strong growth, 7%. The cost discipline, as entrepreneurs we are paranoid about keeping our costs under control. We’ve been investing a lot as a nation. We highlighted here the first semester of this year, first quarter plus second quarter, we have approximately R$500 million invested in what we call early stage initiatives. And by early stage initiatives, we mean banking from scratch the direct international investment platform and also we built from scratch XTAGE, our digital asset platform that I’m going to talk more about it, also builds from scratch and internal advisors investments as we believe there is a huge opportunity together with the IFAs plus internal advisors to keep growing and disrupting the concentration in the investment and financial landscape in Brazil. We’ve been doing all these investments and we get hit upfront, and the revenue is not there yet. But even considering that everything expands upfront, we kept our margins in a very healthy numbers, adjusted EBITDA margin above 35% and adjusted net margin, even above the top range of 24% to 30%. So above 30%. And we expect to keep like that going forward.
Number four, the second quarter we have delivered a lot of new products. We are very proud of it. And of course, those products we need to keep evolving and getting better, getting the feedback from our clients, but we delivered the depth card, the digital bank account, as I mentioned, the direct international investment platform and the crypto, the exchange the digital asset platform.
And finally, we got rewarded as the most innovative financial service company by Valor Inovação. We are very proud of that. We know we have not conquered anything yet. We still have a lot to accomplish, but it’s always good to get this type of recommendation.
Moving to the next slide, I’m going to just recent development, I’m going to talk about the direct international investment platform and XTAGE. Only those two. Here, we believe this can be the beginning of our internationalization of our business. We are going to start as always from the low [indiscernible] group, so taking our Brazilian clients that want to invest outside Brazil, and the experience is something that we really care about and here for those that are XT clients, you’re going to see that is frictionless. And why is that? Because everything is already embedded in the app that you are using.
To use and with two clicks, you can open your account, you can move your money, do your FX transaction, and then you are ready to buy more than 10,000 equities in the U.S. ETFs, ADRs, REITs, et cetera. We are still, in early stage, so we are going to move forward with mutual funds, bonds, banking, service, and much more, but the product is ready. So it’s something that we are really optimistic about when we look forward the following years to come.
And XTAGE, it’s another venture that we started from scratch. We did a lot of survey with our clients. 59% of our clients already invest in crypto assets. 58% they invest directly. And when we ask those clients that have crypto assets, almost 90% of them told us that they would have the intention to invest through XP. So that’s the reason we decided to move forward with this venture. But it’s important to mention that this is just the beginning. We start with Bitcoin and Ethereum. But when we think about XTAGE, it’s much more than that. It’s a digital asset platform that starts with a very powerful technology behind. We have NASDAQ as a service provider. We did a lot of research. We used our previous experience through XTAGE to choose what we believe to be the best solution in terms of scalability for XTAGE.
And as we scale the business, we are ready in terms of latency, and terms of velocity and everything that needs to provide a very good UX to help our clients navigate through this digital asset platform.
Now we can move directly to the KPIs. The KPIs you have seen already. So I’m going to focus on the financials. I mentioned already $3.6 billion gross revenue, gross profit, $2.5 billion. We kept our gross margin at a very high level in the second quarter, as we had already in the first quarter. First quarter was 71.5% second, quarter 72.0% gross margin, basically the main reason mix of products, more fixed income, less equities, it has an impact in terms of commissions and helps the gross margin.
When we look at our adjusted EBITDA $1.2 billion 2% decrease year-over-year, and 1% increase in the adjusted net income more than $1 billion. And I’m going to talk about the adjusted EBITDA and the adjusted net income, but the main impact there is because of the new, the early stage initiative that we have been investing a lot. That as I said, we expense the whole thing and the revenue is not there yet. So there is an impact. We are always investing to have the growth in the future with sustainability in our perpetuity. And we expect those business to scale as we move forward. But the highlight here is the margins. They are at very healthy space, despite all those investments, which shows the resilience of the business.
Now we can move to the next slide. Total revenues 13% growth year-over-year 17%, in the first quarter. When we look at the first half of this year, 15% growth in the first semester of 2022, compared to 2021.
Let me pause here just to mention a few highlights that, I think, it’s worth sharing. When we think about the product mix and the difference between a bear market to the bull market and of course there is a difference. We have said that too many investors that you should not expect the growth of XP to be the same in the bear market, compared to the bull market.
What happens in terms of product mix? In a bull market we have equities and features going up. We have capital market activities going up. We have listed funds, secondary trading and follow-ons of listed funds REITs going up. They are all connected and related.
When we have a bear market, all those three together, they get hit. On the other hand, fixed income, floating and the interest on our adjusted gross cash, they benefit from the bear market because of higher interest rates.
When I look at the mix, the product mix, just to give you some numbers here equities capital market and listed funds altogether, as a percentage of our total revenue in the first semester, last year was close to 35% of total revenue. So very important revenue stream.
When we move to 2022 in our bear market, all those components of our revenue, they represented less than 22% of our total revenue. So a big hit. When we add all of them together the decrease year-over-year is close to 30%. So [indiscernible], the main revenue lines in terms of products, got hit by 30% year-over-year because of the macro environment. And still, we delivered our all-time high, gross revenue in this quarter. That’s why we have that first highlight as the business model resilience, because that’s what we believe XP is considering the ecosystem we have built. On the other hand, when we look at fixed income floating and the remuneration over our adjusted gross cash and we add all of that together in the first semester last year in a bull market, they represented less than 20% of the total revenue.
In the first semester this year, they represented together more than 30%. So this is just to give you the magnitude of the shift that we have in terms of the product mix. The top line, the total is what you see in our numbers. On the right side of the slide, we have the breakdown and of course, retail keeps being the most relevant segment in our business, but I’m going to talk about institution as well in a while, is still growing at a very health based as well.
So going to the retail revenue, all-time high, we had – in the first quarter this year, we had a lot of questions from investors about the take rate of the first quarter. When you annualize the take rate, it was 1.15 in the first quarter. And we mentioned that we had a very week start of the year that March was already better a month in terms of take rate for retail business. And we didn’t know what the second quarter would be, but we expected to be better than the first quarter in terms of the take rate and the take rate in the second quarter, 1.3% so, much better than the 1.15%.
The way I like to look at the take rate is the last 12 months. And why is that? Because the take rate is not only a function of the revenue, the retail revenue, it’s always also a function of the denominator, the AUC, the average AUC. And when you look at the last 12 months, you have five data points in the denominator that makes softer in terms of change quarter-over-quarter. So here, we have the take rates in the last 12 months, you can see that there is volatility but it’s really small volatility over quarters, despite the macro environment. So we had 1.30, 1.32 and 1.27 in this quarter, a little bit better than the first quarter, which was 1.26.
Moving to the adjusted EBITDA, before we go to the adjusted EBITDA, let me just mention the institutional, I think it’s on the annex of the presentation, but institutional revenue, there we go. Thank you. Institutional revenue R$436 was really strong, 16% year-over-year growth. And in 2021, the second quarter was the best quarter for institutional revenue was R$375 million that’s the highest quarter we had last year for institutional revenue.
So a very strong pace of growth but lower than the first quarter as we have already anticipated because we had a very astonishing volume in terms of derivative demand because of the war in February in our institutional desks. And also Issuer Services, that is related, that’s not 100% of the investment banking revenue, there is part of it that goes into retail institutional by distribution channels fees, but it’s a proxy. And as you can see, there is a strong recovery compared to the first quarter as expected.
First quarter was really weak in terms of capital market activity, second quarter, much better. But when we look at 2021, still a drag in terms of capital market activity. Going back to the adjusted EBITDA and adjusted net income, here the main, I mean, impact, as I mentioned is the early stage initiative. We could have done inorganically, for example, the international – direct international investments for retail clients or additional asset platform.
We could have done M&A, we decided to do organically, we think it’s much better, in terms of costs is much less money. But we need to recognize all the expenses up front. We expect those business to scale over time and we know this is an issue because of the reduction in the margins. And that’s why we decided to highlight here.
So you can have a sense of how much we have been investing for our growth in perpetuity and the impact that those investments they have in our margins. In the first semester, approximately R$500 million invested in the revenue is at very, very early stage. And we expect, as I said to see the revenue growing from, in the following years.
And I think with that, I stop here and let’s go directly to the Q&A, so we can answer all doubts and questions you might have. Thank you very much. And before we go to the Q&A, I didn’t mention that, but we would love to have our investors and all of you in our expo next year because it’s an event that I believe it’s worth, it’s the largest investment event in the world.
We are very proud of that when I remember what used to be when I joined XP more than 10 years ago, it’s really a huge event and would be an honor to have all of you visiting us in Brazil next year for the event. We’re going to send invitations when the time comes.
So Andre, you’re going to be the one responsible for the Q&A, right.
Andre Martins
Yes, I will and for sending the invitations as well next year.
Bruno Constantino
Yes.
Question-and-Answer Session
A – Andre Martins
So thank you, Bruno. So as I said, we’ll be answering the questions on our first whoever raise the hands first. I know that [indiscernible], but he was, I guess, number five here. So we’ll start with Andrew from Morgan Stanley. And I kindly ask you to limit to one question so we can be productive and everyone can ask their questions. So again, thank you very much for the interest and now Andrew, can you hear?
Jorge Kuri
Hi, it’s Jorge Kuri from Morgan Stanley. Hi everyone.
Thiago Maffra
Hi, Jorge.
Andre Martins
I’m sorry. There’s a different tag here.
Jorge Kuri
No, that’s fine. Thanks for taking my question and congrats on the numbers. I guess I wanted to see if you could share with us how the business is tracking in July and so far, the first day of August. How much of that normalization in inflows and AUC and take rate that we saw for the full quarter, especially versus what was the beginning of the year continues so far in August. And if you also can quantify how much back to normal you are or if there’s still sort of like at the beginning of this quarter, the second quarter a little bit weaker than expected trends. And if we should see sort of like even further normalization to the upside for the full third quarter. Thank you.
Bruno Constantino
Okay. Look, if we – if I had to answer, for example, the first quarter, this year, based on January it would be a disaster. And then we had – because January it was really weak and we had a better March, much better March. And it was the $10 billion per month net new money.
Second quarter we saw very positive trend. We had the $14.3 billion net money per month. Third quarter I mean I’d rather wait for the end of the quarter. What I can tell you, we have these soft guidance of $10 billion to $15 billion. I wouldn’t change that high. And the reason is think this business investment is not on a quarterly basis, right? You need to keep convincing the clients to come and test our platform. And when they do, we hook them and then they become our clients for the long-term, and they keep bringing more money. That’s what our cohorts show.
Those that are our clients already, we have this strategy to go beyond investments to get the other 50% of the share wallet that we still don’t have, right? And we just launched the digital bank account and all those investments that we’ve been doing. So this thing it will pick up in the future as we believe, but it takes time.
So until, we get there the $10 billion to $15 billion per month of net new money seems a reasonable soft guidance considering that we do not have the tailwind that we have in the blue market or equities and people wanting to trade new individuals, opening accounts at the stock exchange that’s not happening anymore.
And despite the all of that, you saw the numbers of the second quarter. So I will not give you the guidance of the third quarter because we do not do that. So I would say between $10 billion to $15 billion, I know it’s a huge spread like 50%, but it’s because we do not know we can have a very strong month, less strong month, so it’s hard to tell.
Jorge Kuri
Right. Thanks, Bruno. And on take rate – any commentary on take rate on?
Bruno Constantino
Yes, I do. Sorry. I forgot the take rate question. The take rate, the only thing that I would mention is, we did have a very good take rate, at least the way I see it in the second quarter, the 1.3%. And I’m talking about now the way the analysts look at the results, not the way I look it, but I respect that it’s the annualize quarterly take rate, right? So the 1.3% a very strong one.
I would expect a little bit lower in the third quarter. And why is that? Because we have performance fees in the second quarter. So performance fees for the funds distributed for retail clients, it goes into retail revenue and has a positive impact on that end. If we take that out roughly, I can be wrong in the numbers, roughly speaking here, we are talking about a take rate of 1.24% – around 1.25%. So we are talking about 5 to 7 base points of take rate in terms of performance fees.
Jorge Kuri
That was very clear. Thanks a lot and congrats again.
Bruno Constantino
Thank you.
Andre Martins
Thank you, Jorge. Nice to hear from you. Okay. Jeff from Autonomous is the next in line. Hi, Jeff.
Unidentified Analyst
Hi. Can you hear me okay?
Thiago Maffra
Yes. Hi, Jeff.
Bruno Constantino
Yes, we can.
Unidentified Analyst
Great. Thank you. You’ve spoken in the past about your desire to speak to identify new investors who potentially could mop up some of this overhang, maybe somebody strategic come in and take a stake. Can you give us any updates on that? How much progress you’ve been able to make that?
Bruno Constantino
Well, let me answer this way. I wasn’t – I know Itaú, they had their results today as well. I couldn’t hear, so I don’t know what they specifically said about that because usually investors ask them what you’re going to do with their XP shares.
Thiago Maffra
They said they are not in a rush to sell the shares. They don’t have a price target, so.
Bruno Constantino
So yes, that’s – yes. I mean, it’s their decision. What I can tell you, Jeff, based on the talks that we have with investors, generally speaking is, there is demand. It’s not a problem of demand, okay. And I know some investors have already talked directly to Itaú. Our position here is to tell Intel when we have done that look it’s, so if you want to sell, we are here to help to do it in a very organized way.
And by the way, we also want to buy okay, we have done that. As you know, we have a shared buyback program in progress for Class A shares, the listed shares, but Itaú, they also have Class B shares, not listed shares that we can buy on top of the share buyback plan. And that’s exactly what we did in June this year.
We bought a little bit more than 1 million Class B shares from Itaú. When they decided to sell a small part of their stake to go below the 10% total capital in XP. So they didn’t get the impact in their basil ratio. And we are ready to buy more shares if they want to sell. We only can buy Class B shares outside the share buyback program. From other investors, I am pretty confident that it’s not a demand problem, but we have to rely on Itaú life. So it’s their shares, not ours unfortunately.
Unidentified Analyst
Thank you.
Andre Martins
Thank you, Jeff. Okay. Next is Mr. Otavio Tanganelli from Bradesco.
Otavio Tanganelli
Hi, Andre, Maffra, and Bruno.
Thiago Maffra
Otavio.
Bruno Constantino
Hello, Otavio.
Otavio Tanganelli
Thanks for taking my question. I have a real quick one. It was a little buzzing to me to see a EBITDA margins compressing in the quarter given that everything that you mentioned about operating leverage and cost discipline. So I understand that you’re ramping up some of the products that are expected to mature in the coming quarters, but because it just gives us a little background what’s requiring such a high level of investments or where are your plans for this and in the coming quarters, when we expect this to actually reach the benefits of this operating leverage. Thanks.
Bruno Constantino
Yes, sure. I will start here and Maffra feel free to join me if you feel like. Otavio, I’ll – I mentioned about the organic or in-organic decision, for example, Itaú, they acquired avenue, right? It’s our direct international investment. We built from scratch. Everything that we did to put in the app, the transaction for our clients from scratch, everything went through our cost and expense, another example, XTAGE, same thing. I don’t know. We could have tried to buy [indiscernible] Bitcoin, for example. We built from scratch. It costs and it goes in our P&L and despite all of that, we kept our margins at a very health pace and we believe those new businesses, early initiatives, they will payoff more than payoff and they also give us optionalities for our perpetuity growth.
We are always thinking about innovation and perpetuity always. And we need to plant the seeds at some point in time. And that’s exactly what we’ve been doing. In terms of the R$500 million, in the first semester that I mention. We have two main impact in the short-term. Okay. Cards, banking cards, specifically cards in the COGS because we have to invest bags. So as – and you have a analyzed new bank and other players in the market, as you keep growing your number of cards and the growth of revenue on cards, you have a lot of expenses from uploaded at front, right, front uploaded that are set. And that’s exactly what’s happening. You saw TPZ in this quarter, R$5.5 billion growing a lot quarter-over-quarter because we have a small market share we have a lot to cross sell internally, so this will keep growing.
And the costs goes together. When we look at the cohorts more than pays off, but we expect to keep growing. We do not have, for example, the credit card at the Rico grant, we intend to have. It’s going to be an investment, and it’s going to be in our P&L. Internal advisor, same thing. We are growing IFAs as you saw the number and internal advisors. And why is that? Because there is more than 50,000 bank managers in Brazil, we believe there is a window of opportunity for us to grow in this business. And we believe it’s a human business, advisory business. In the next three years, three to four years, and we want to accelerate that when our IFAs hire new IFAs, it does not go into our P&L straightforward only when the revenue comes through commission.
But when we hire our internal advisors, it goes up front. And then as this advisor has the custody, the portfolio of the clients, we start to build that it more than payoff, it break even in less than 15 months. So it’s an investment that goes through the P&L and brings the margin down. And we have been investing a lot in all of that, and we are going to keep investing, because we believe it’s what we need to do. And there is a huge opportunity and it pays off, but in the short term, it has this impact. And as I mentioned, the way we look internally, despite all of that, the costs are under control.
Let me give you one data point. So you can follow my rationale here. Year-over-year, we have grown our headcount base by more than 40%, second quarter last year to second quarter this year. When we look at our personnel expenses, people plus bonus altogether they represented in the second semester last year 20.4% of our net practice, close to 25% of our net practice.
In the first semester this year, you have this statistical effect, because we had for less than 4,500 people in June 2021. And we ended this quarter with more than 6, 300 people in our company. And our personnel plus bonus expense is below 25% of our net revenues. So our cost we are paranoid about that, but of course, it’s going to grow we are hiring a lot of people, we are building new businesses and the revenue is not there yet.
But despite all of that, we believe the profitability of the business is healthy, which give us the comfort because we are very conservative for certain decisions. We are aggressive in some and conservative in others. We do not have the crystal ball here. We do not know what’s going to happen, inflation all over the world, global recession. So the micro environment that we do not control, we need to be prepared for the worst. But we are not going to have a short term view. If there is a clear strategy that we believe it makes sense for XP in the long run. And the time is now because we see this window of opportunity, we are going to invest. And that’s exactly what we’ve been doing.
Thiago Maffra
This point is very important, Bruno. We will not like a favor, a short-term result instead of like a long-term investment that we believe we will return to our shareholders. So credit card, it’s a J Curve, internal IFAs and other many investments that we have been doing during this year. And we’ll keep investing because as Bruno mentioned, the payback is very short in some business there like 12 months in some other 24 months. So we’ll be investing for the whole year here.
Bruno Constantino
We are not accelerating more because we need to find, for example, the advisory business, either IFA or internal, we need to find the right advisor train, et cetera. If we had the certainty that we have found the right one and it would double, we would do it. We would, but it takes time, but we are going to keep investing.
Otavio Tanganelli
Right. Super clear.
Operator
Thank you, Otavio. Moving to Tito Labarta from Goldman Sachs. Hi, Tito.
Tito Labarta
Hi, good evening. Thanks, Andre. Hey, Bruno, Maffra, good to see you.
Thiago Maffra
Hey, Tito.
Tito Labarta
My question, following up a little bit kind of obvious question on margins, but digging a little bit more into the expenses, which spiked a lot. I know you talked about personnel expenses. You have a lot more people than you did last year. Can you give some color in terms of hiring needs going forward? I think you had mentioned, you would expect that to slow down a bit, just where you have 8,000 people by the end of the year. Any color you can provide on that. The other expense that increased a lot was also data processing up like 60% compared to last year. Is that related just to the investments and the apps, or just some color on that to help us think about how to, I guess, forecast a model some of these expenses from here just given there was a big spike in SG&A in the quarter?
Bruno Constantino
Yes, sure. Just going backwards, Tito, the data processing there is also related to the growth of headcounts, the license, et cetera. But there is also one component that in terms of accounting measures there is some part of it that was depreciation and became SG&A instead of depreciation in the line, so when you look at the EBITDA that was capitalized and amortized, and now it’s expense through the time of the contracts that we have. But we can discuss that offline in details with you later.
Look, the number of headcounts in the second quarter, it was a little bit more than 6,300 personnel. And in the first quarter was a little bit – December was a little bit less than 6,200 personnel. So the growth of personnel headcounts in 2022 has not been that significant, right? The growth happened mostly in the second semester last year. We started all those new initiatives, the digital, the direct investment platform in U.S. The XTAGE, October, September, last year, we hired this personnel along.
To look forward for the base of what we have, I would not expect the headcount growing a lot. It can grow, but it’s going to be single digit, right? What can change that is internal advisors. As I mentioned we are – we think there is a window of opportunity in the next three to four years, and we believe investment is a business of advisory service. So I think in internal advisors, we want to keep growing and it’s much more a matter of finding the right personal to join us in this journey than anything else.
So if we do not find, we are going to – and we are very data driven, right? So for example, we were hiring and then we follow-up the data, and then we said, look, the strategy of hiring this type of personnel. It’s not the best one. Let’s go back there and accelerate other front. We have the XP Future, as you know, the education is in our DNA. So we have built a lot of tools to help the advisor, even those that are not from the financial world to be successful in the financial world.
And those that have a commercial skill. So we’ve been doing a lot there, the growth of personnel there, it’s going to depend on finding the right people. But if you think that there are more than 60,000 bank managers, I mean we could grow a lot there. I know I didn’t answer your question, specifically, because I can’t, it’s a data driven. It’s like Central Bank answering questions about inflation that is data dependent. It’s like that, right?
Tito Labarta
Understood. But that’s some helpful color. Thanks, Bruno. Just one quick follow up, just on the bonus, because you mentioned, I guess, it get paid in 2Q and 4Q. If I look – looks like there was a jump last year in 2Q, but I don’t see as big of a jump in 4Q. But is that what we should expect kind of similar level in 4Q in terms of bonus?
Bruno Constantino
Yes. Look, the bonus as a percentage of net revenue look at a semester base, that’s my advice it’s better than on a quarterly basis. And when you look at the first semester this year it was 13.4% of net revenue. Second semester last year was 15% even higher of net revenue. And first semester last year was 13.7%, a little bit higher compared to – on a percentage basis compared to the first semester this year.
There are parts of the bonus that they depend, they are more objective. They depend on performance fees, they depend on institutional desks. And then only in December we will know, right, because it’s the whole year when it ends. But I would expect to keep close to those percentage of net revenue on a semester base.
Tito Labarta
Okay. That’s clear. Thanks, Bruno.
Andre Martins
Thank you, Tito. Have a good one. Next is Thiago Batista from UBS. Go ahead, Thiago.
Thiago Batista
Yes. Hi guys. Thanks for the opportunity. Can you hear me?
Thiago Maffra
Yes.
Bruno Constantino
Yes.
Thiago Batista
Okay. My question is about excess capital or excess cash of XP. I’m trying to figure out how asset light is XP nowadays. The company is presenting, let’s say an EBITDA or earning of $1 billion per quarter. But is that tough for us to really see this as cash or capital? So in your view, the company has this excess capital or in a different way is XP still enough asset light company or all this cash consumption that we are seeing in XP is more temporary event, because all the investments that you mentioned Bruno. And in the future, we will see the company again, being kind of asset light company? Or no, the new business are changed the company and XP should become more – require more capital? So how you guys are seeing the capital of XP?
Bruno Constantino
No, I start – let start answering Thiago that we believe that we are an asset light business and we want to keep like that. We do have some capital requirements, especially because of the credit card business and the credit business, we can mitigate a lot of capital because most of this is collateralized. But mainly we use our cash flow and we do generate a lot of cash every month. We do use our cash flow for our market making activity. That’s where most of the cash goes.
So the market making activity, it’s something that in the future, as the Brazilian capital markets keep developing, it should require less capital from our warehouse. It works like a warehouse buying and selling in the secondary markets. There are some products that these works much more like a brokerage fee, but the nature of the product requires, a spread, you buy and you sell like fixed income, for example. But that’s where most of the capital goes, okay.
But when we look at our adjusted gross cash, we have close to BRL 10 billion of adjusted gross cash. But this cash is being using mostly for market making activity in our books. In the past, in the recent past, we have used a lot of cash for two main lines, I would say. Number one, IFAs as used followed since 2020 when we had a huge attack in our IFA network. And we invested to have the long term contract with our IFAs. And you can say, can look at that in our prepaid expenses, close to BRL 4 billion and M&A mostly with minor stakes in assets, asset managers and some funds that we have seed, how that to get this close to BRL 2 billion total, we are talking about BRL 6 billion, roughly speaking. We do not foresee anything close to this amount in the future. Right.
And we have done that with our own cash generation. So that’s for me a proof of how asset life we are in that sense. But to answer your question about the capital return, yes, the new initiatives, when they mature, they will return to capital. Capital markets activity when the Brazilian capital markets develops, going to be less capital from us, and we are going to be able to return the capital, and in the credit states. We want to grow in this business, but not using our balance sheets. Of course, we’re going to have to use something of our balance sheet as a warehouse, then recycle, and securitize and have a good product to distribute for independent asset managers using our acquisitive, we want to disrupt the credit business through the asset management business and not through our own balance sheet.
And it’s something now reviews similar to what the hedge fund industry has done in the United States to the banks in the United States. We believe there is a win-win situation here for the Brazilian capital markets for democratizing investments, for individuals and for our ecosystem to grow and penetrate in the credit world. So, yes, you’re going to keep being an asset like business mark.
Thiago Batista
Very clear. Bruno thanks for that.
Andre Martins
Thank you. Have a good one. So, I’ll pass the word here to [indiscernible] because he was first in line and then he fell off the call. Rozman [ph] can you hear us?
Unidentified Analyst
Yes, yes. Can you hear me?
Andre Martins
Yes. Yes.
Unidentified Analyst
Hi, Bruno. Hi, Maffra, and Andre. My question is a follow up on Thiago’s one. I think it’s an important theme, because XP, you have been growing earnings quite fast over the last few years, but when we look to ROE and ROA, they have been trending down. Right? So, I know that recently, if I’m not mistaken, you raised also BRL 1.8 billion bankers to run day to day operations. So, I’m just trying to understand here, if ROE and ROA, if this is a metric that you follow internally or not, because I know you talked about net margin and EBITDA margin, but like just trying to understand here, if you have any sort of a long-term ROEs or if just trying to understand here what could be your returns longer term? Thanks.
Bruno Constantino
Sure, sure. Rozman. Yes, we do follow all the maths compare to one of the metrics that we follow, but basically what he mentioned about the, ROE or ROA decreasing it’s more – in our view, more a consequence of the macro environment than anything else. We do not look our credit portfolio, it’s not big it’s BRL 12.9 billion in the second quarter. It was nothing in the past. We, the best way, at least for me, that I like to think about when we – now we have entered in the banking world with our own bank, but the reason we have a bank is different than our competitors, the incumbent bank, right? We have a bank now, because we realize we need to go beyond investments to serve our clients. And by that digital bank account, other products, other services, and you need a bank license for that.
So, we are an investment platform that acquired a bank. If you look at our organizational chart is the only one in Brazil that has a broker dealer with 100% subsidiaries. That is a bank. As we speak today, all the other players in the market, they are the opposite way around. So the leverage of the bank is something that we do not use at full speed, as we speak right now. Okay. Because of this logical sequence that led us to have a bank. The impact in return on equity and et cetera has much more to do in my view with the macro environment. We lost billions of revenues year-over-year, because of the macro environment. If to look at equities in features for example, used to be our main line. I mentioned, the mix of equities in future plus capital market plus, lease fund used to be more than one third of our total revenue now is close to 20%.
That’s a lot going down, and that’s not market share being lost on the culture. We still have 50% of market sharing equities and features in the secondary market in Brazil. It’s a matter impact, of course, that hits the operating leverage of the business. We more than compensated that with other business, new verticals, et cetera, fixed income floating and so on. But for example, credit card has a lower margin, because of the net-net. So it’s a mix, a portfolio mix that has an impact plus the BRL 500 million that I mentioned. So, when the macro environment’s different, I expect the metrics that you mentioned to scale back the way I see.
Unidentified Analyst
Okay. Thanks a lot Bruno.
Bruno Constantino
Sure.
Andre Martins
Thank you, Rozman. Next is Credit Suisse. Hello?
Marcelo Telles
[Foreign Language]
Bruno Constantino
Okay, Telles. I am responding in English. Got it?
Marcelo Telles
[Foreign Language]
Bruno Constantino
Okay. Thank you. Thank you, Telles. Look in terms of the cash flow, it’s more than the 500 million per quarter. You’ve mentioned, it’s close to the adjusted EBITDA if we do not have M&A and incentives or for the IFA as you mentioned. And we did have a small M&A in the second quarter, probably 100 million roughly speaking. And in the IFA it was less than the 300 that you’ve mentioned, okay. A little bit more than 200 million. It’s hard to forecast that number going forward. We analyze case by case. As we said in the past, we do have the benefit of knowing very well, all the IFAs in our math work and we decide based on the math that makes sense for ourselves.
If it doesn’t make sense, we are not going to spend money in a long-term contract with IFAs. If it does make sense, we are ready to do so. And that’s exactly what we’ve been doing. We have done a lot already, so that’s why we do not expect the same going forward, nothing close to that. But on a quarterly basis, you can have fluctuations. Last quarter, for example, it was close to nothing. This quarter was a little bit higher than the BRL 200 million. Look, the cash flow and I just, I remember now that I didn’t answer the second question of Rozman about the BRL 1.8 billion debenture. So this is just going back Rozman this is something we want to leave an open relationship with the local bond market. And we – in May, we repay the last bond. We have BRL 800 million of bond issued by our holding company in Brazil.
And then BRL 800 in the past disclosed to 3 billion to 4 billion nowadays, considering the size of XP. And we did BRL 1.8 billion. That’s not much considering the size in the relationship. We had a very strong demand for that issuance in the market close to BRL 3 billion. We were going to do BRL 1.5 billion and we decided to have more idle cash considering the scenario.
As I said, we are aggressive for some things conservative for others in a bear market. We like to have more cash than we need. Now going back to your question, looking forward I would expect something close to be adjusted EBITDA, so the 1.2 billion per quarter when we have, there is a volatility when we pay bonus, we pay on a semester base.
So there is a drag in the cash. We are going to have that in August, this month, we are going to have in February next year. But despite that, it’s basically the adjusted EBITDA close to that our cash version. The working capital it’s really small. In the second quarter, we have a small, more than 100 million of working capital that is impact by performance fees. So – but it’s really short term. It was paid in July. Okay. But in June when you close the balance sheet, there is a revenue recognized in June from performance fees. What goes to BRL 150 million [ph] that it’s paid in less than 30 days, right. So that’s basically the main fluctuations that we have. M&As, IFAs outside the P&L performance fees, payment of bonus on a semester. The rest is pretty much close to be adjusted EBITDA.
Andre Martins
Thank you. Thanks, Bruno. Thanks, Thiago. And then appreciate it.
Bruno Constantino
Thank you, Telles. Bye-bye.
Andre Martins
Next question comes from Neha from HSBC. Hi, Neha.
Unidentified Analyst
Hello. Hi, Andre, Thiago, Bruno. Congratulations on the results.
Thiago Maffra
Hi, Neha.
Unidentified Analyst
My – I have two questions, quick one. First one on the credit revenues, which looked a bit softer this quarter. We had some light on that. And the second question is on the tax rate. I mean, the tax rate has been pretty volatile over the past few quarters. So how should we think about this in the coming quarters, if you could give us some sense on how to focus? Thank you.
Thiago Maffra
Yes, sure. I didn’t hear well your first question that….
Unidentified Analyst
Credit revenues?
Thiago Maffra
What front?
Unidentified Analyst
Credit revenues a bit softer this quarter.
Thiago Maffra
Yes, yes, yes. Credit revenues on a quarterly basis is tough. We have sometimes some bigger one-time transactions in terms of credit that you have like a feet up front that can create a distortion. In the first quarter, we had something similar to that that made the first quarter like a test comp. The credit part we are going to keep growing but again here our decision process is about the risk then to hit any target, whatever, right. We are owners of the company. We think for the long-term, so if we are risk averse in terms of the credit, and we do not want to grow the credit business, we are not. If we feel comfortable about it, as you can see in our NPL ratios we are going to keep doing if we’re comfortable about it.
Regarding the tax rate is, the way I like to think about the effective tax rate that’s the best way to look at it because remember other market making activity that goes from specific funds, it has a 15% to 20% tax bracket that is not recognized in our financials. So the revenue goes net from that tax, but the tax does exist and we pay that tax. When we add that back we have a tax – effective tax rate normalized of close to 15% in the first semester this year. That’s slow. We expect in the future to have higher effective tax rate, but that talks to the capital market activity as well, right.
When we have, for example, a strong capital market activity, most of the revenue goes into the broker dealer level with a 40% tax bracket. And then the effective tax rate goes up. When we do not have that, we have more costs than revenue at the broker dealer level. We have the tax benefits of the credit of the expenses at 40%, and this lowers the effective tax rate. So going forward, I would expect as the capital market activity specifically keeps rising. The tax rate should increase compared to what we had in the first semester this year.
The point here, Neha, is, if we have a different revenue mix for the future, as capital markets comes back we’ll have a higher tax rate, but we will have higher revenues in absolute numbers. So if you see tax – higher tax rate, you’ll see much higher revenues, okay.
Bruno Constantino
That’s correct. And I said at the beginning of the call that I’m still with a hangover of expert, right. I forgot Telles. On your previous question I forgot to mention the buyback. We have been buying back shares as well. So that’s also part of the cash flow that we have been doing. We’ve done more than – we have done approximately one-fourth, a little bit more of one-fourth of the whole buyback program we have announced back in May, right. Sorry, move forward.
Andre Martins
Thank you, Neha. Next is Mario from Bank of America.
Unidentified Analyst
Hey guys. Good afternoon. Thank you for taking my question. Just two quick questions; first one is a follow-up on the revenue yield that you talked about on the retail revenue yield that you have about 5, 7 basis points benefit from performance fees. Can you just remind me how often are these performance fees recognized and if there were any performance fees one-year ago?
And then the second question is related to the integration of model, right? If you can provide us an update of the timeline what do you – when do you expect this transaction to close? I know model reported earning last night. It seems like the earnings are coming below what the market was expecting at the beginning of the year. So I was wondering also, and I don’t remember if the price that you’re paying for model that was fixed, right. I think you were issuing like 13 million shares. But I was just wondering how are you seeing the performance of model? When do you think this transaction is going to close and any potential synergies from the transaction?
Thiago Maffra
Sir, Mario about the take rate and the impact of – the positive impact of performance fees on the take rate. Last year we did have performance fees on the second quarter, but it was much lower than the 150 rough numbers that we had this year. I believe it was something around $50 million, something like that. I can follow-up with the right number here and I have front of me, but it’s close to that. So usually performance fees, we have strong numbers, second quarter, fourth quarter, those two quarters and it depends on each time we have – a lot of funds in our platform and ecosystem.
We do have; for example, we have a small part of performance is in the first quarter, but really small because of certain funds. So second quarter and fourth quarter that’s what is really relevant and the 5 to 7 base points that’s the impact in this quarter of the take rate, okay. So the take rate would be 1.23 to 1.25 without the performance fee, but they do exist and they could be even hired if the market had a positive equity effect. It’s basically much market funds, macro funds performing well that got the performance piece. You’re going to say something, Bruno?
Bruno Constantino
No.
Thiago Maffra
Okay. About the more down, we expect to have the deal closed by the end of this year. But we do not control the process. We are still waiting on mainly two events, Central Bank approval and SEC approval because there is equity assurance that we are going to do to merge model or have model is 100% subsidiary of XPs conglomerate.
The number of shares maximum is 19.5 million and that’s done, right. Regarding model performance, I mean, again we have a lot of synergy. Their model is – they do not have the diversification that we have in XP. So their business get hit is stronger because of the macro environment. It’s XP like, I don’t know, 10 years ago, if we were like 10 years ago our numbers, we would not have had all time high retail revenue, a record of our quarterly revenue.
We would not have that kind of result, but it doesn’t change anything. We believe it’s a very accretive acquisition. We know exactly what Modal does; we do it internally as well. We are thinking about the synergies, but we need to wait for the offers approved. 5G has approved already. But the Central Bank is too familiar [ph] as, Central Bank, they had a strike this year that delay a lot of process, but they have resumed already. So we’ll see. But…
Thiago Maffra
And we have mentioned in the past as, we have done several acquisitions in the past and started historically, what we have this 30% to 50% synergies on SG&A and another 30% to 50% synergies on revenue. So that’s the way to think and to model the synergies on Modal.
Unidentified Analyst
That’s very helpful. Thank you.
Bruno Constantino
Thank you, Mario.
Andre Martins
Thank you, Mario. So last but not least Domingos from JP Morgan. Good evening, Domingos.
Domingos Falavina
Good evening guys. Thanks. Also for the questions and I’m certainly back a little bit to the cash flow, but started and several other analyst, I guess, or asking similar questions in different way, a web one more way to ask the same question. So I’ll give you some, some sort of a base case, right? Let’s assume your assets under custody, right? You see grows mid teens and market activity doesn’t accelerate a lot. And by that sentence, I am hoping you understand that basically your capital needs, your cash needs. Don’t grow a lot by when do you, can you pay dividends and what kind of payout do you think you could have? Is that a 2023, 2024? I know – add to that like, the beauty of being a technology enabled platform to a lot of investors is being an asset like business model and a lot of people compared to B3 which pays 90 plus percent. So this is sort of, the message we’re trying to get here, when this cash starts flowing back to investors.
The second really quick one is, we came out on new newspapers I guess, villas – the cancers you guys are building would be on hold then you guys would be searching for the floors back in Faria Lima. So my question is that a cost savings? Do you guys give up on that or not? What’s the latest?
Bruno Constantino
Yes. Right. So your first question Domingos to be honest, we are growth driven company, right? So we are always thinking about the next innovation, the next product and as we have a very low market share, investment is a little bit higher, but it’s still, we are not number one yet. Despite being recognized as the best investment platform by clients and prospects getting the awards, but we are not number one in sight yet. So our mindset for the short and midterm is driven to conquer all of that. Right.
And as we have been investing new initiative, I don’t have a number to say to you neither a time horizon that we are going to have our cash returning and pay dividend because we have so much to do for example, think about going international. As I mentioned, the direct investment for retail clients, in U.S. can be small seed to really go international because we are start with equities. We are going to have banking there as well. We’re going to have other products. And then we can think beyond Brazil and even in U.S., just to give you one example, so this mindset, it doesn’t allow us to think about, returning the money because we always want to do more to grow in perpetuity. That’s the mindset.
So I don’t have a numbers to tell you about the dividend payout et cetera, right now. I don’t know Maffra if you have something in your mind to add there?
Thiago Maffra
About the second part of the question, about villa and other floors at Faria Lima. The way we going backwards, it’s not a cost decision. Okay. So it’s not based on cost. At the beginning of the pandemic, we had 3,500 employees, and we used to have 12 floors if I’m not mistaken, 12, 13 floors between Yutaka and Faria Lima. And now we have four floors and we have more than double during the pandemic.
So yes, we are looking for one or two floors will at the same building because we have more than double, okay during the pandemic. And it’s mostly for commercial people, investment banking, asset management, private and corporate, basically commercial people. And because we need these people, they need to be close to where, the customers are and they need to be based in Sao Paulo. So that’s the reason. Okay. And about the villa, we had many problems with the construction company license and so many other problems. But that’s it.
Domingos Falavina
Thank you, guys. Congrats on the quarter and good evening.
Bruno Constantino
Thank you, Domingos.
Andre Martins
Thank you, Domingos. You was – the last one, so once again I would like to thank you so much for your interest in our call. We are available for any follow-ups as usual. Bruno, I think you; you could invite everyone again for next year’s event. Just to finalize and thank you for the…
Bruno Constantino
We are going to think about something that, especially for our investors outside Brazil, that make your trip to Brazil worthwhile and include experts in that agenda. So we would be more than honored and happy to receive all of you in our events next year. But thank you. Thank you a lot for the call and thank you.
Thiago Maffra
Thank you, guys.
Andre Martins
Bye everyone. Thank you.
Bruno Constantino
Bye-bye.
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