Cielo (CIEL3): The rate reset is a positive highlight of earnings and analysts are even looking better for the second quarter

Cielos net sales (CIEL3) was the positive highlight of the balance sheet for the first quarter of 2022, which the company published on Thursday evening (28th). A the reassessment of fees by the company, plus all the moves it’s made have more than made up for the low volumes, analysts say — and there’s more to come.

However, reaction to the results was initially muted as shares traded near steady at the start of the session and gained strength towards the end of the morning on improving market sentiment. At 11:25 am (Brasília time), CIEL3 shares are up 1.33% to R$5.33.

“The company saw a sharp rise in take rate (how much revenue it can squeeze out for each real of transaction volume), reflecting the company’s pricing movement and better mix. In addition, anticipation products showed record penetration and significant growth in financial volume, which helped composition,” explains Genial Investimentos in a report.

Cielo has been positioning itself to charge higher fees and focus on healthier customers who, according to the company, “really need their services.”

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On the other hand, for example, the company saw a 12% drop in customer numbers throughout 2022. Between January and March, the user base fell again by 4%, closing at 1.02 million.

Transaction volume and customers were negative points

“Traded volumes and customers were the negative points of the quarter. Cielo Brasil presented weak Financial Volume (TPV) totaling R$201 billion, down 13.1% on a quarterly basis, mainly due to the seasonality of the period,” says Genial. “The most negative surprise in terms of volume was the decline of 9.7% q/q and 1.5% year/year in the retail segment, reversing the company’s strategic growth.”

During its restructuring, the acquirer had previously stated that retail was a priority of its business.

JPMorgan, in its analysis of the result, signed by the team of analysts led by Domingos Falavina, warns that despite the improvement in rates, the slowdown in TPV and the loss of market share could pose obstacles for Cielo going forward.

“However, revenue was strong, suggesting the TPV loss may have been concentrated in larger unprofitable accounts. Specifically, Cielo Brasil net income grew 17% for the year, in line with our consensus yield from 0.78%, well above the 0.72% of the fourth quarter and the 0.67% a year ago,” according to the American bank.

Another highlight of the bank was the cost reduction for the acquirer.

“Consolidated expenses, excluding D&A, were R$1.6 billion, down 23% year-on-year (impacted by the sale of Merchant-e) and 14% for the quarter. Overall, Ebitda (earnings before interest, taxes, depreciation and amortization) reached R$994 million, with a consolidated margin of 38.7%, an increase of 13 percentage points per year,” they say.

Goldman Sachs is following the same path. In a report signed by Tito Labarta’s team, the institution notes that the reduction in spending was the main reason driver of profit improvement.

“Earnings shortfalls were mainly caused by lower than expected costs and higher prepayment income,” they comment. “Expenditure and expenses were brought under control for the quarter, with services costs down 6% quarterly and operating expenses down 1%.”

Bank analysts explain that both divisions were affected by the sale of MerchantE. At Cielo Brasil, expenses decreased 3% for the quarter due to lower POS-related costs, while expenses decreased 2% for the quarter due to lower personnel expenses and sales and marketing expenses.

Cielo advances in anticipation of demands

The last point raised by the analysts was the profits from the prepayment of accounts receivable, which amounted to R$32.2 billion.

“It’s important to note that we attribute the significant revenue decline primarily to receivables acquisition, whose penetration volume hit a record 26%, resulting in segment revenue growing by 130% for the year,” says the Santander team. under the direction of Henrique Navarro.

Cielo has said in past financial statements and conference calls that one of the main focuses of the company’s restructuring is the increased range of services — including the early amortization of accounts receivable.

Finally, both Genial and JPMorgan point out that Cielo should deliver even better results in the coming quarters.

“If the first quarter was good, imagine the second quarter,” emphasizes Genial. “Operating costs are 10% below consensus and the next quarter should have less favorable winds for the replacement,” says JP.

According to experts, the regulatory change in the exchange of prepaid cards should improve the acquirers’ margins (net discount rate). A central bank-mandated change, which went into effect on April 1, put a 0.7% cap on the interchange fee for prepaid cards. In addition, the rules for calculating this limit and setting deadlines for providing funds to commercial entities have been simplified.

Cielo should also benefit from the change in its pricing (discount rate) in March 2023 and better competitive dynamics as it just finished training 400 new retail employees.

Managers comment on important points

In a conference call held this Friday morning, Cielo’s board of directors commented on the most important points of the balance sheet published the previous day.

As for take rate, for example, the company expects to continue doing what it’s already been doing. “We will continue to do what we are good at and focus on productive niches and other volume growth strategies. The goal is to increase sales while maintaining profitability,” said Estanislau Bassols, Managing Director of the acquirer.

Cielo further states that it will not subsidize customers in order to maintain market share.

“I am convinced that we will not subsidize the entrepreneurial segment, that we will work profitably with large customers and a policy of healthy retail prices,” comments Bassols.

“But that doesn’t mean we can’t add strategies in other segments. In the case of entrepreneurs, if we think about the customer base, a lot of the negative swings we’ve had in the year are concentrated, but they’re less representative of the TPV,” he added.

The entrepreneur segment company hopes to move forward with some payment link, QR code for Pix and WhatsApp solutions.

“Last year we even had growth with large customers, but now we are withdrawing because of the competition, which has to work in the red. We will not work through rental market share. We will continue to improve the quality and usability to attract customers,” says the CEO.

In retail, the strategy is to watch the segment intelligently, looking at sub-segmentation. “The quality and proactivity in customer service is one point. Second, we’re adding 400 sales people in the last quarter, and they haven’t reached the peak that should be in the third quarter. In addition, together with partner banks, we have commercial support,” they say. “We do not accept that we are continually losing market share in retail and we understand that with the result we may be able to pursue new expansion.”

Regarding the claims, Cielo argues that the better result is due to the progress of the operation, the rise in interest rates and the credit market scenario.

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