PagSeguro Digital Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2024

There are 23 speakers on the call.

Operator

Good evening. My name is Olivier, and I will be your conference operator for today's call. Welcome to PagSeguro Digital Earnings Call for the Q4 of 2023. The slide presentation for today's webcast is available on PagSeguro Digital's Investor Relations website at investors. Pagibank.com.

Operator

Please be advised that all participants will be in listen only mode. After the presentation, to ask a live question, please use the raise hand button to join the queue. Once you are announced, a request to activate your microphone will appear on located on the lower part of your screen. Today's conference is being recorded and will be available on the company's IR website after the event is concluded. I would now like to turn the call over to your host, Eric Olivera, Head of IR.

Operator

Please go ahead, sir.

Speaker 1

Hello, everyone. Thanks for joining our Q4 2023 earnings call. After the speakers' remarks, there will be a question and answer session. Before proceeding, let me mention that any forward looking statements included in the presentation or mentioned on this conference call are based on currently available information and PagSeguro Digital's current assumptions, expectations and projections about future events. While PagSeguro Digital believes that the assumptions, expectations and projections are reasonable in view of currently available information, you are cautioned not to place undue reliance on these forward looking statements.

Speaker 1

Actual results may differ materially from those included in PagSeguro Digital's earnings presentation or discussed on this conference call for a variety of reasons, including those described in the forward looking statements and risk factors sections of PagSeguro Digital's most recent annual report on Form 20 F and other filings with the Securities and Exchange Commission, which are available on PagSeguro Digital's Investor Relations Web site at investors. Pagbank.com. Finally, I would like to remind you that during this conference call, the company may discuss some non GAAP measures, including those disclosed in the presentation. We present non GAAP measures when we believe that the additional information is useful and meaningful to investors. The presentation of this non GAAP financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered separately from or as is listed for our financial information prepared and presented in accordance with IFRS as issued by the IASP.

Speaker 1

For more details, the foregoing non GAAP measures and the reconciliation of these non GAAP financial measures to the most directly comparable IFRS measures are presented in the last page of this webcast presentation and earnings release. With that, let me turn the call over to Ricardo. Thank you.

Speaker 2

Hello, everyone, and thanks for joining our Q4 2023 earnings call. Once again, I have the company of Alex, our CEO and Arthur, our CFO. Going to Slide 3. I'm happy to announce in 2023, we had the largest net income in the history of the company. We successfully passed through a pandemic and the high interest rate cycle for a longer than expected period.

Speaker 2

Meanwhile, we have diversified our business model beyond long tail, beyond POS and beyond payments, managing the risks related to the credit cycle and at the same time, reshaping our funding structure backed by deposits. Recently, we have been accelerating our growth, already reflected in the quarterly operating trends, which combined to the easing cycle of the Brazilian interest rate, should positively and additionally contribute to the business evolution, delivering growth, revenue diversification and profitability. By the end of 2023, we reached 31,000,000 clients and we processed almost BRL1 1,000,000,000,000 in financial transactions in 2023, a 30% growth year over year. In payments, we keep growing in a profitable way and our TPV reached BRL394 1,000,000,000. Aligned to our strategy to become a comprehensive one stop shopping payments, gathering cards, boletos, PIX among others, our cash in reached BRL217 1,000,000,000, a 59% growth year over year.

Speaker 2

Combined, they drove up deposits to all time high level, reaching BRL28 1,000,000,000 reinforcing the power of our closed loop, which helps lowering companies' cost of funding. And in our credit portfolio, the share of secured products reached 66%, 25 percentage points higher than 1 year ago. In the shareholders' return column, we can see our earnings per share reached BRL5.10, 12 percent higher than 2022. Net income in non GAAP basis reached BRL1.8 billion in 2023. And we also used BRL400 1,000,000 to buy back shares in 2023, 37% more than 2022.

Speaker 2

Finally, our value added to society stand out. We have become a benchmark among digital banks, fintechs in Latin America landscape by including millions of Brazilians into the digital financial system, positively impacting clients, suppliers, investors, employees and the society. That was possible due to our unique, lean and high technological infrastructure in terms of security, AML and data privacy with much lower impact on climate in comparison to the banking industry around the world, allowing us to roll out new products faster and managing new and existing weeks with an affordable price for our clients. Moving to the next slide, our Q4 2023 highlights. EPS reached BRL1.53, 25 percent higher than Q4 2022.

Speaker 2

Total revenue grew 10% year over year, reaching BRL4.3 billion with all time high non GAAP net income of BRL520 1,000,000. The disciplined CapEx deployment resulted in BRL11.2 billion in net cash balance by the end of the quarter, 13% higher than previous year, driven by cash earnings generation. Cash and financial investments reached BRL6.2 billion, 112% growth year over year. On the payment side, TPV growth accelerated in our merchant segments, reaching BRL114 billion, 21 percent higher than Q4 2022. In TPV per merchant, in SMB, TPV grew 32% 31%, respectively.

Speaker 2

In financial services, we see clients engagement constant growth. Our cash in, which is composed by all PIX P2P and write transfers sent from another financial institutions into PagBank account, marked BRL66 billion, with cash in per active client growing 42% when compared to Q4 2022, reaching BRL4,000 per active client. This increase drove up deposits to the all time high level, reaching almost BRL28 1,000,000,000. Now I'll pass the word over to Alex for the commentaries on the operating highlights for the quarter.

Speaker 3

Thank you, Ricardo. Hello, everyone. On this first session, we'll show how our value proposition payments has unlocked new addressable markets by reaching relevant milestones throughout 2023. Going to Slide 6, our strategy to expand our service to a more diversified merchant profile led our payments business to move beyond micro merchants. Our go to market strategy has been focusing on merchants activation, healthy cohorts and cross selling rather than merchants net adds growth since 2022.

Speaker 3

On top of it, we have been strengthening our sales force since September 2023. As a result, our TPV from SMBs and large accounts grew respectively 31% 11% year over year in Q4 2023. We have also unlocked new market beyond point of sales, ramping up online payments with the conclusion of MoIP integration and the revamp of our cross border payment business unit called PagSegood International. Furthermore, additional features such as tap on phone and facial authentication for payments via link has enabled our merchants to sell more through a seamless and integrated omni channel solution. As service levels become more and more relevant in clients' decision about their acquire option, We also would like to share the great improvements done in our service levels.

Speaker 3

During the past 3 years, our teams have been working hard to increase client satisfaction while promoting additional cost savings through processes, automation and optimization. We show on Slide 7 that our merchant acquiring business remains solid and through the combination of our superior value proposition and the broad reach of our sales channels, we have been able to accelerate TPV growth faster than the industry driven by all merchant segments. TPV reached BRL114 1,000,000,000 in Q4 2023, growing 21% year over year with similar trends observed in the 1st weeks of 2024. MSMB TPV posted 27% growth versus Q4 2022, primarily driven by SMBs followed by micro merchants. As Ricardo mentioned earlier, we also continue to see growth in TPV from large accounts, which is a result of our evolution on the development of an integrated omnichannel payments platform for large customers.

Speaker 3

During the Q4 'twenty three, we also observed a relevant growth of 14% among the long tail segment in which we are already the market share leaders. Moving on to Slide 8, the instant prepayment product, which combines payment service and financial service through the PagBank account, has promoted an increased footprint in SMB merchants and larger share of wallet, resulting in 32% year over year growth in TPV per merchant. Our current strategy remain focused on disciplined CapEx deployment and merchants activation rather than net adds. We observed once again the growth of our active merchants 3% year over year when excluding nano merchants. On the top of it, POS activation has continued to move up, which represents a positive sign of our strategy playing out.

Speaker 3

On this next session, we'll share some highlights about the financial service business. Our strategy is to provide a seamless experience combining payments, value added service and banking through multiple interface for merchants and consumers. Micro merchants can grow faster their business with 1 stop shop solution, but also small and medium business can rely on our app and Internet Banking to manage multiple sales proceeds, multiple payment methods, multiple sales channels in a simple, digital, safe and seamless way. For consumers, we are in the very early stages to capture the opportunities we have ahead of us. Still, we were also able to create a complete retail digital banking experience, simplifying the financial lives of our clients.

Speaker 3

Our credit cards backed by investments help to educate our customers and their monthly income usage. Our payroll loans through our digital channel provides affordable APRs and no need to reach out a banking branch. For the savers, our investment platform is robust and our high yield savings account enabled to manage cash liquid while providing the best returns. Due to all of that, in Slide 11, we present that PagBank clients grew 12% year over year surpassing 31,000,000 clients, placing us among the most relevant Brazilian financial institutions with more than 3,000,000 new clients added in the past 12 months. Our active client base reached 16,700,000 clients, leading to BRL66 billion in PagBank Cashing composed by Alpiq's P2P and wire transfers inflows into PagBank accounts from other financial institutions.

Speaker 3

Finally, cash in per active client, an important indicator of the increasing engagement with our client base, grew 43% year over year reaching BRL4,000 per client. Moving on to the next slide, Combined, GPV and PAG Bank Cashing led deposits up 33% compared to the Q4 of 2022, reaching a record of BRL 27,600,000,000. This deposit level was boosted by our AAA rating attributed by S&P Global, which enhanced our CD distribution among institutional and retail investors on and off platform. Checking accounts balance, the cheapest funding source and a key performance indicator to measure client engagement, grew 31% year over year, driving down our annual percentage yields to 94% of the CDI. Slide 13 shows that our credit portfolio reached BRL2.5 billion due to our ongoing runoff of the working capital loan portfolio combined with the tax planning to write off non performing loans starting in 2Q2023.

Speaker 3

We expect this runoff effect to stabilize over the next quarters. Payroll loan and advancing withdrawal already accounts for more than 50% of the portfolio, expanding our offerings to consumers primarily through a seamless experience and cheaper cost structure. Our go to market strategy for secured loans is based on competitive APRs and digital end to end onboarding, risk assessment, underwriting and collection. This also includes our offering of credit cards backed by investments and savings. The total credit portfolio share composed by secured products reached 66%, resulting in the ongoing trend in NPL90 to 7.5%, the lowest since 2Q 2022.

Speaker 3

Now I turn over to Arthur for the financial highlights of the Q4 and full year 2023. Arthur, please?

Speaker 4

Thanks, Alexandre. Hello, everyone, and thank you for joining us in the call. This quarter, I'm proud to announce all time high net income GAAP and non GAAP. Net income on a non GAAP basis reached R520 1,000,000, growing 27% versus Q4 'twenty two. On a yearly basis, non GAAP net income reached BRL1.8 billion, 11% higher than 2022.

Speaker 4

GAAP net income reached BRL488 1,000,000 in the last quarter of 2023, growing 20% year over year. On a yearly basis, GAAP net income reached BRL1.7 billion, 10% higher versus 2022. Earnings per share reached R1.53 dollars 0.26 dollars better than in the last quarter. For the year, EPS reached BRL5.10, 12% better than 2022. Moving on to Slide 16, this quarter we had a record of BRL 1,700,000,000 in gross profit, a 19% growth in comparison to Q4 2022.

Speaker 4

On a yearly basis, gross profit reached BRL6 billion, a 9% increase versus 2022. We consider the gross profit as the best KPI to capture our margins evolution since it considers the impacts of financial expenses and total losses in the spreads. We highlight 2 factors that has been positively contributing to gross profit. First one is peak scarecoat growth due to the better unit economics with instant settlement and lower cost in comparison to cards. 2nd is the growth of total deposits since the access to a cheaper funding source enables pricing power with healthy margins.

Speaker 4

Q4 2023 total revenue and income grew 10% on a yearly basis, positively impacted by higher volumes from acquiring. Net take rates decreased in the quarter, and this downtrend is natural to continue in coming quarters due to the growing share of larger merchants in our TPV, which has lower churn and lower taking rates. On Slide 17, revenues from payments Unity grew 8% quarter over quarter, while gross profit grew 13% in the same period. TPV growth and transaction cost savings due to interchange cap impacted positively the current performance versus Q4 'twenty two. Comparing quarter over quarter, the increase was mainly due to client mix change towards larger clients with lower take rates but incremental gross profit contribution.

Speaker 4

In the next slide, Financial Services Verticals total revenues reached BRL253 million in Q4 of 2023, while a strong increase in gross profit reaching BRL125 million, up 24% on a quarterly basis, mainly driven by higher margins. We ended 2023 with BRL550 1,000,000 in gross profit, a 30% increase versus last year. Moving to Slide 19, we continue observing leverage on costs and expenses. Financial expenses closed at BRL841 million versus BRL855 million in the Q4 of 2022. This decrease is mainly explained by our lower average cost of funding driven by a higher level of deposits and lower basic interest rate partially offset by strong TPV growth.

Speaker 4

And credit underwriting mostly on secured products. This performance is very important as it shows the evolution of our risk assessment tools and the quality of our collection process. The 2.8% is the lowest level of losses as a percentage of revenue since Q1 of 2019. Operating expenses reached BRL700 1,000,000 and 13% increase year over year. The increase is mainly due to the strengthening of our sales force and marketing expenses to support and accelerate the positive momentum of the company's growth, which will continue to contribute to the revenue expansion and product cross selling going forward.

Speaker 4

In the Slide 20, our cash earnings continue to gain momentum driven by disciplined control in total costs and expenses as mentioned in the previous slide, but also revenue growth with higher margins reaching a positive amount of BRL454 million, up 11% versus same period of 2022. On an annual basis, we have ended 2023 with over BRL1.5 billion in cash earnings, a 65% increase versus the previous year. CapEx marked BRL 521,000,000, mainly due to the upbeat trends in merchants' gross adds and product development on tech, but lower quarter over quarter. Looking forward, our discipline in capital allocation and efficiencies in tech investments will remain without harming the new ventures we are entering into it. Depreciation and amortization including POS write off totaled BRL405 1,000,000, representing 9.3% of total revenue and income, a slightly reduction versus previous quarter.

Speaker 4

Keeping the pace to coverage to CapEx levels in the coming quarters to unlock additional profitability in the future. Moving on to Slide 21, the solid results from this quarter contributes to the increase in our equity position with 60% being composed by returning net income, reinforcing our commitment to shareholders on capital allocation and returns. Our net cash balance ended the 3rd quarter at R11.2 billion dollars In the past 12 months, our cash generation amounted to BRL3.7 billion, from which BRL2 1,000,000,000 were invested in POS purchases and technology developments and approximately BRL400 million were used in buyback shares. As of December, treasury held more than 4% of total shares issued and the company bought back BRL1 1,000,000,000 in shares since 2021 that represents more than 80% of the total program proved in 2018. Cash and financial investments ended 2023 with over BRL 6,200,000,000, a 112% increase year over year, which demonstrates the success of our strategy of best balancing growth and profitability with a solid balance sheet to support our business evolution.

Speaker 4

On the final slide, we would like to share our guidance for 2024 based on the current scenario. We expect total payment volume to achieve between R441 1,000,000,000 to R457 1,000,000,000 with healthier gross profit margin above Q4 2023 level of 38.5 percent over total revenue and income. Net income in non GAAP basis should be between R2.50 billion dollars to R2.150 billion dollars considering the similar level of 2023's effective tax rate. Following up, CapEx should be between R2 1,000,000,000 to BRL 2,200,000,000 and D and A plus POS write offs amount between BRL 1,900,000,000 to BRL 2,000,000,000. Now we have ended the presentation, and we will start the Q and A session.

Operator

Thank you for the presentation. We will now begin the Q and A session for investors and analysts. Icon at the bottom of your screen. You may select the icon and type your questions with your name and company. Written questions that are not answered during the earnings call will be returned by the Investor Relations team.

Operator

Wait while we pull for questions.

Speaker 5

Our first question comes from Antonio Pucci from Bank of America. Please, Mr. Antonio, you may proceed.

Speaker 6

Hello, Tim. Thank you for your time and congrats on the results. Very strong guidance. Let me focus on this. So please, if you could share a little bit on operating expenses assumptions and also take rate assumption for the quarter for the guidance.

Speaker 6

Thank you.

Speaker 7

Hi, Antonio. Thank you for the question. This is Ricardo. I will start with the take rate. If we look at the take rates moving forward, take rates should go down a little bit, not because we are decreasing prices, but because of changing the client mix with more SMBs, SMBs getting share in the total payment volumes.

Speaker 7

And to be honest, as the financial income and financial expenses are very important to our business, it's better to look at the gross profit yield, so to say, which captures the financial expenses. So if you look at the gross profit yield, you're going to see that it's very stable regardless of the growth, regardless of the change in the client mix. You're going to see that the percentage of the gross profit compared to TPV is very stable throughout the quarters. But if you look at specifically in net acreage, it should go down a little bit again because of the change in the client mix with more SMBs. Regarding OpEx, Arturo will clarify to you.

Speaker 7

Thank you.

Speaker 8

Hey, Antonio. It's Arturo speaking. Regarding to OpEx, it's important to mention that the growing is according to our growth strategy. So the company is growing. OpEx should grow too.

Speaker 8

That means OpEx will grow more than inflation for 2024, but enable to pressure the margins increase going forward, okay? We are seeing and considering this guidance, marketing a little bit higher than used it to be in the 9 months of 2023, so something similar to Q4. Personal expenses higher because we strengthened our sales force in the end of Q3. And also other expenses more related to infrastructure that we are considering to support the volumes that we will have.

Speaker 5

Our next question comes from Eduardo Bosman from BTG Pactual. Please, Mr. Eduardo, your microphone.

Speaker 9

Hi, everyone. So congrats on the numbers. I have two questions here. First, on your potential credit growth or prepayment growth, we can see that you have lower losses, a very strong cash in, right, which suggests improvement in the Principality, right? So your clients using more PagBank as their main bank and a lot of deposits, right?

Speaker 9

So what are you waiting for in order to expand a little bit more your asset base because clearly, if that happens, your results can improve faster? That would be the question number 1. And question number 2 would be about dividends, right? We can see naturally that you are buying back shares. So I think your EPS has been even better, right?

Speaker 9

So but you're still generating a lot of cash, right? You have a CapEx plan that is not going to go up anymore. You have you're generating more cash than you need. Why not paying dividends as well? So that's it.

Speaker 7

Hi, Jose, thank you for the question. I will start and then Arthur can talk about the dividend and so on. Regarding the cash in, you're right. We had a very strong cash in in Q4, dollars 66,000,000,000 in cash in deposit growing to $28,000,000,000 the all time high. And as you know, deposits are important for a bank because you can have this cost of funding to be competitive and then you can offer better products on the other hand for regarding to credit and so on.

Speaker 7

We know that we've got to have a diverse top priority portfolio. That's part of our plan. In the past 2 years, we have noticed an unfavorable scenario in Brazil that you know very well what we saw in delinquency and even in the big banks and incumbent banks. And then we decided to create this portfolio with secured products. We've been building this portfolio in the past years.

Speaker 7

We will keep building this portfolio in 2024. We are running some tests in unsecured products. We have the team here. We have the processes in place. And we will start offering this credit unsecured when you think it is appropriate.

Speaker 7

But we're going to do in a cautious way, but we are fine with that because at this point we are building these deposits and building the secured portfolio which is important for the future because depending on the economic cycle we should be more aggressive in unsecured or if the economic cycle is easy, we can go to I'm sorry, if the economic cycle is more hard, we can go secured and if it's more easy, we go to unsecured. But you got to view this credit portfolio as time passes by. But we're going to do it cautiously in the following quarters, probably we're going to have some good news.

Speaker 8

Hey, Hosman, it's Arthur speaking. Nice to talk to you. Talking about capital allocation and more specific to dividends and share buyback. You are right, we use it to buy back shares in the past. The last buyback was executed in October 23, and we will continue executing in an opportunistic way.

Speaker 8

In 2023, we bought back BRL400 1,000,000, an amount 37% higher than 2022. Now we have in our treasury 4% of outstanding shares. And there is $45,000,000 remaining to execute in the program approved. But we are discussing internally a new buyback program as soon and we will disclose as soon as we conclude the buyback program that we have approved in 2018. But there is no discussions on dividends after this moment.

Speaker 8

We see many growth opportunities and investment in new ventures that will provide higher returns in the future. So this is the reason that right now we are not discussing dividend at this point.

Speaker 9

Great. Thanks a lot.

Speaker 7

Thank you, Roza.

Speaker 5

Our next question comes from Caio Prato from UBS.

Speaker 10

Hi, guys. Good evening. Thank you for the opportunity for asking questions. I have 2 on my side, if I may, please. The first one, it is also related to credit, but more specifically to the credit card portfolio.

Speaker 10

I understand that the product is secured. And at the same point, we are seeing the level of deposits and investments in the PAGS Bank continuing to increase, which is really good. So my question is why are we not seeing, I would say, a sequential increase in the credit card portfolio since it is secured and we are seeing an increase in terms of investment? So just would like to understand the rationale behind that, if you are being more cautious on the credit card even if this is backed by the investments or not. And also, if you think at some point, I would say, to gain some traction in the fixed credit products that we are seeing from some other peers, as probably you are one of the main players in terms of PEIX market share nowadays.

Speaker 10

And then I will follow-up with the second question. Thank you.

Speaker 7

Hi, Caio. Thank you for the question. Regarding the credit card portfolio, you're right. We are been growing our deposits, as I said before, close to $28,000,000,000 the all time high. The explanation for when you look at our data and you will see the credit card growing faster is because we have the payroll and the FGTS products growing faster than the rest of the portfolio.

Speaker 7

That's the first one. So they're getting share. And the other part is because we are replacing part of our unsecured credit card portfolio to secured credit card. So probably you don't see the growth because we are changing this mix from unsecured credit card to secured credit card. Because when you look at Slide 13, this 30%, 12% is secured and 18% is still unsecured.

Speaker 7

And then we are making this shift. So that's why you're not seeing the growth because of these two moving parts. Regarding the peak market share, well, we keep working with our acquiring solution, and we see that fixed credit are not going getting, let's say, share from the credit card product because of many reasons. So we are following that very close. But at this point, it's very small.

Speaker 7

We see that it's still consumer prefer to use a credit card because they have all the system regarding chargebacks, all the security and so on, not to say the installments. And so we are following that, but we don't see that changing dynamic because of this new product that some players are trying to develop.

Speaker 10

Okay. And my second question is around the effective tax rate. We saw that it actually reduced this quarter. Again, I think it's around 18%, down from 21% last quarter. So just would like to understand the drivers here and what is considered, I would say, implied in our guidance in terms of effective tax rate for 2024, please?

Speaker 7

Caio, you're right when you see the Q4 compared to Q3. But if you look at the whole year, you're going to see that in 2023 when compared to 20 22, we have a higher tax rate, which means our earning before tax is growing. And regarding the guidance, I'll let Arthur just explain to you, but pretty straightforward here.

Speaker 8

Yes, Caio, thanks for the question. And considering for 2024, we are considering effective tax rate in the same level of 2023. So that's the point.

Speaker 5

Our next question comes from Yuri Fernandes from JPMorgan.

Speaker 11

Hey, guys. Thank you. I have two questions also. One is on the credit regarding the NPL. You mentioned and it improved again, now running around 7.5%.

Speaker 11

So my question is, if you have any kind of outlook for this NPL, like should we continue to see NPL improvements for you? So that's the first one. And I have a follow-up on COGS. When I check your administrative expenses here, it was pretty good down year over year. You mentioned some seasonal effects here.

Speaker 11

I would like to understand a little bit what is driving your improvement on administrative expenses because you're growing revenues, you're growing everything, you're investing more and it caught my attention that administrative expenses, if you look non GAAP or GAAP, is improving. So that's my second one. Thank you.

Speaker 5

Payur, regarding the NPLs,

Speaker 7

we see that NPLs 1 year ago was around 20% and now is down to 7%. It's a very good achievement, A lot of work here to do so. And looking forward, we see these trends with the same path. The NPL is going down, mainly because we are getting more control with the credit concession, with the collection and all the processes that we have in place and also because of the change in the mix with more secured products. So looking forward, with the credit portfolio that we have at this point and that we plan for 2024, we expect the NPLs to keep going down.

Speaker 7

Regarding second question, Arthur will explain to you.

Speaker 8

So Yuri, thank you for the question. In terms of administrative expenses, we had a decrease in comparison to Q4 'twenty two mainly due to seasonal efficiencies captured in this quarter. We also have there part of the long term incentive plan booked. And so there are some reversal on that line.

Speaker 11

Thank you, Arturo. What are the seasonal efficiencies that you captured this quarter?

Speaker 12

Hi, Yuri. This is Eric. In Q4 'twenty two, we have a reversal in our long term incentive plan. So this creates like an easier comp in order to not fully capture the effect. So I would recommend you to observe the non GAAP basis in order to offer model the administrative expenses moving forward.

Speaker 11

But Eric, even on the non GAAP, it was down and it's adjusted by the SBC. We can check this later. It's not that material, but it's common notation that it's down. Thank you very much, guys.

Speaker 8

Yes. Well, Caio, I think it's important sorry, Yuri. It's important to mention that, okay, administrative expense, Eric can follow-up with you after the call and another meeting. No problem. But it's important to say to you that OpEx is most important than only take a look in specific clients, okay?

Speaker 12

Yuri, It's all about long term incentive plans, okay? We can follow-up, but it's a difference between the long term incentive plans in Q4 2022 and in Q4 2023, okay? So this is the main difference here, but definitely we can follow-up with you, okay?

Speaker 11

That's perfect. Thank you very much guys. Congrats on the questions.

Speaker 7

Thank you.

Speaker 5

Our next question comes from John Coffey from Barclays. Mr. John, your microphone is open.

Speaker 13

Great. Thank you very much. Based on my follow-up, I had 2 questions, I'll just ask them both at once. So when it comes to your guidance for the TPV in 2024, it looks like the range is about 12% to 16%, midpoint 14%. Given that you had 21% growth in Q1, can you help us think about the cadence of the growth in the other three quarters?

Speaker 13

Is it roughly going to be 12 perhaps? Or is it going to be moving up and down as those quarters go on? And the second question is, given that you did give 2024 guidance, does this contemplate that we're going to have about 7 more 50 basis point sleeve cuts in the I think it's the remaining seven meetings of the Brazilian Central Bank over the course of the year? Thanks.

Speaker 7

Hi, John. Thank you for the question. You're right. Our guidance between 12% and 16% midpoint is 14%. The industry is expected to grow in the high single digit to low double digit.

Speaker 7

So we expect to grow a little bit more than their industry. What we saw in Q1 is not the same number, but a similar trend than what we had in Q4 2023. So it's a good momentum in TPV. So that's why we are confident to give this guidance at this point with the best information that we have, which is the performance from Q4, January and almost the full month of February. So that's regarding TPV.

Speaker 7

Regarding the interest rate that is going down, the last report we saw from Central Bank is to have CDI or CELIC by the end of the year as 9%. And you know that when we have this decrease, we have a lower cost of funding. So we are considering that in our business plan and in our guidance for 2024. So that's the assumption that we have at this point. We're getting the end of the year with 9%.

Speaker 13

All right. Thank you very much.

Speaker 7

Thank you.

Speaker 5

Our next question comes from Neha Agarwalo from HSBC.

Speaker 14

Congratulations on the results on a strong quarter. Two quick clarifications. First on the tax rate. So you clearly mentioned that you're expecting in your guidance effective tax rate to be stable year on year in 2024. But given that we've seen an increase between 2022 to 2023 and with growing relevance of Parq Bank, shouldn't the effective tax rate be gradually moving upwards?

Speaker 14

So if you could explain the dynamic there? And my second question is on the TPV. All of last year, you've been focused more on the MSMB, but it seems like now the volume growth is improving both in the SMB as well as in the micro merchants. How do you see the TPV mix evolving during 2024? Any noticeable changes that we should be mindful of?

Speaker 14

Thank you so much.

Speaker 7

Hi, Neha. Thank you for the question. I'll start with the TPV and then Arthur can clarify the tax rate. Regarding TPV, you're right, we're growing more in MSMBs, but when we break down MSMBs and SMBs, you're going to see we're growing more in SMBs. And we expect to keep growing more in SMBs because we have all the sales force focused on this type of clients.

Speaker 7

And of course, they have a TPV per merchant higher than in the small merchant. So that's why we expect the SMBs to keep gaining share in the total mix and that's part of the explanation or the main reason that's why net take rate should go down. But the gross profit as a percentage of TPV being stable because you're going to have other adjustments in other lines such as lower financial expenses and other adjustments that we're going to do in the company for to achieve this guidance. But going back to your question, SMB will gain share in the total mix. That's what we expect.

Speaker 8

So, Nih, in terms of tax rate, naturally, you are right. When we have more revenues in the banking, legal entity, the effective tax rate should go up. But we have an efficient tax planning here to work with all the legal entities that we have in the group. And we are not considering any increase in comparison to 2023. So this is the reason that we set in the guidance that we have the same level of 2023, even considering that financial services should increase the revenue for the company.

Speaker 14

If I could just clarify one thing. Last year has been a bit weak in terms of merchant net adds in the long tail. You've been losing nano merchants and that's been more of a conscious decision to improve profitability. How is that evolving during 2024? Should we see stability there?

Speaker 14

Are you done with all the cleaning up that you had to? Any color on the long tail would be very helpful. Thank you.

Speaker 7

Hi, Nihar. If we look at the total merchants, it should stabilize at some point in 2024. We don't have any specific quarter that's going to happen. But if you go one of the slides in the presentation, remember, Slide 8, you're going to see that if we exclude the NANDOMERSHINCE that it's a big number of merchants, but that they have a very small percent of TPV is only 1.3% of TPV. If we exclude these merchants, you see that our base grew 3%.

Speaker 7

So but going back to your question, it should stabilize at some point, but we are looking more as the total TPV that we are giving this guidance to grow between 12% 16% in the whole company.

Speaker 5

Our next question comes from Gabriel Cusan from Citi. Mr. Cusan, you may proceed.

Speaker 15

Good evening, everyone. My question is about the TPV acceleration in SMBs. I'd like you to double click on the strategy, what's been implemented. Is it more regions? Is it more salespeople?

Speaker 15

Are you doing more ads? Or overall spending more in marketing, is it helping? And can please comment on competitive landscape in that segment that has allowed you to outperform so much in the quarter? Thank you.

Speaker 7

Gabriel, thank you for the question. As you can imagine, there is no silver bullet here. It's a mix of many things. So we did have more a little bit more people in the sales force. But we also have been focused on the SMBs with a very strong value proposition for the banking products.

Speaker 7

So we are offering them our banking product and then they can decide to work with us not only because of the acquiring, but because of the whole package or the whole value proposition that we bring to them. We keep gaining share from other players because of the service, because everything that we offer, the instant settlement, the logistics that we have that are one of the best in the market, if not the best. So all these things, the service levels and the service that we offer help us to get this SMB client. So there is no one specific reason, but it's a mix of many things. At the end of the day, it's to serve the client the best way that we can.

Speaker 15

And about the competitive landscape in the pricing environment?

Speaker 8

Yes. In competitive landscape, to be honest,

Speaker 7

Gabriel, everyone is being more rational. We don't see any company trying to buy market share, even the company that was gaining share in Q3, for instance, some of the companies lost share in Q4. So we see everyone being more rational, which is good in the market. So pretty much the same that have been seen the last year. No irrational movements, everyone looking for profitability and the industry is growing.

Speaker 7

As you can see in the total year, the industry grew 10%. So I mean, industry is growing. Everyone is trying to get the clients and not making irrational movements.

Speaker 5

Our next question comes from William Tang from Susquehanna. Please, Mr. Tang.

Speaker 16

It's Jamie Freeman at Susquehanna. So two questions. One, with regard to guidance, over the years you've given guidance, sometimes not given guidance. I'm just curious philosophically

Speaker 8

That's one thing.

Speaker 16

And then in terms of the SMB mix, That's one thing. And then, in terms of the SMB mix shift, which I know is an evolution, how are we thinking about the hubs support strategy related to the evolution of the merchant base? So, the first is on the guidance, the second is on the hubs. Thank you so

Speaker 7

much. Hi, James. Thank you for the question. Regarding the guidance, yes, if you look back during the pandemic and even a little bit after the pandemic, we used to give a quarterly guidance because there was a lot of uncertainty in the market. So people were concerned about TPV consumption and so on.

Speaker 7

So we took this decision back there to give a quarterly guidance to give the comfort for the market and for the investors what we are seeing because there was some, let's say, people think there could be more volatility in the market, consumption going down and so on. So that's why we decided to give the quarterly guidance. And when we decided to stop to give the quarterly guidance, the main reason was that everyone was looking only for the specific numbers for the quarter and we're not looking for the whole picture for the trajectory of the company and for everything that the company was developing and all the clients and so on. And we decided to give the guidance for 2024 because the thing, it's a good decision to give discomfort to the investors so that you can understand what you're thinking. It's not a short term guidance, a quarterly guidance.

Speaker 7

We have this, let's say, plan for the 2024 that you can execute against this guidance. And we think it's going to be a good north for everyone to understand what you're thinking and what you are seeing and the results of the company that you expect. So yes, that's regarding the guidance. And regarding the SMB evolution, the hub strategy, the hubs of course helps us to get the clients and of course the hubs also help us to serve the clients. So not only to acquire the clients, but also to make some farming, to cross sell some products and even to deliver some support and some service for the client, the SMB client.

Speaker 7

So we are using the hubs in very different ways, not only to acquire the clients, but also to support them and to make some farming. And we keep working with the hubs. We grew a little bit in Q3 2023. Yes, so that's what we've seen the hubs so far.

Speaker 5

Our next question comes from Josh Segal from Cantor Fitzgerald.

Speaker 17

Hey, Tim. This is Will Carlson on for Josh. Two questions. The first one is, what services are you seeing new clients onboard with? And how is this shaping the way you think about platform investments looking forward?

Speaker 17

And then second question, can you dive into the improvements you're implementing for onboarding and risk assessment to reduce chargebacks and losses? Thank you.

Speaker 7

I will. We of course, the clients that we have in the acquiring business, usually they get the device and many clients decide to use our cards because it's a way for them to cash out. So they can have a card, they can withdraw the money, they can make purchases, so usually these two products go very well with the clients. And we try to offer them another additional services such as investments, insurance and so on. So part of the clients are buying or acquiring these services, but usually they acquire the POS, the device and the cards.

Speaker 7

Regarding the charge backs. Regarding the investments platform, your second question, we keep evolving the platform. A few months ago, we didn't have, for instance, stocks. Today, we do have stocks, but we don't have options, for instance. So we'll keep evolving this platform and the prioritization takes into account what our clients are looking for.

Speaker 7

I know we've got many questions in the past about crypto and so on, but that was not the type of crisis that we had

Speaker 12

in our base. So right now, we keep evolving this investment platform because it helps us to get the client to increase engagement. But we are having some prioritizations here. We are in the past to have a complete platform in the following quarters. Regarding charge backs, I'll pass the word to Alex.

Speaker 12

Okay. Well, we have done many improvements on our onboarding and also getting information and validation of our customers. We also implemented some second authentication factor in our cash out. Some of our solutions for online payments, we have implemented facial authentication for the transaction. So we can improve not only chargeback, but also conversion rates.

Speaker 12

And we have been putting in place a lot of intelligence and usage of our data to prevent to better prevent fraud in our ecosystem, in payments and financial service altogether. And we have been scanning our base and being more rigorous on the onboarding process to avoid fraudulent activity in our ecosystem.

Speaker 5

Our next question comes from Bryan Keane from DB.

Speaker 18

It's Bryan Keane at Deutsche Bank. Just thinking back here strategically, going through thinking about the IPO process, when you guys came out, you're growing mostly micro merchants in the payment business and growth rates were well above industry. Then over the past 18 months or I guess the recent 6 months, there's been a massive transition. But I guess going back, we went to in the payments business of basically growing at market. And obviously, the stock was under quite a bit of pressure under that.

Speaker 18

And then now we've completely reversed, and we're back to gaining share versus the market significantly in the payments business in particular. Can you just talk about structurally what's changed in the strategy that's worked and how sustainable you think the share gains are now in the payments business?

Speaker 7

Hi, Brian. Yes, you're right. The company started with micro merchants in the IPO 6 years ago. And of course, it's part of this dynamic market for the company to evolve and to change. I would not say that we are making this transition, but I'd say we are doing this expansion because we are not only focused on or serving the micro merchants, but also addition, we are having the SMBs as well.

Speaker 7

So we are growing the size of the pie that we can work with. And in my opinion, we've been very, very successful in doing this expansion, as you can see in our SMBs. Part of the market in terms of micro merchant doesn't grow at the same pace that used to grow 6 years ago because of course we have more penetration of credit cards acceptance in the micro merchant. So that's why we don't see the growth. It's not saturated, but it's not growing at the same pace that used to grow in the past.

Speaker 7

That's why you don't see this number of merchants growing at the same pace that used to grow in the past. But what we do see is credit cards getting more penetration in PCE. We also see opportunity in micro in SMBs not only because we're getting new clients, but because we're getting TPV from other acquirers they work with. Sometimes they have more than one acquiring who are trying to make this TPV for us. So that also helps to understand why you're growing more than the market.

Speaker 7

But you are not growing significantly more as we have only the micro motions because I mean the size of the company is also much bigger than it used to be in the past. So markets expect to grow in high single digit, low double digit in 2024 and our guidance is between 12% 16%. So I'll not say that this strategy changed that much. We are just trying to get SMBs as much as we can, try to make the shift from other acquirers to work with us. And of course, we also take advantage of the credit card penetration in PCE that is still happening in Brazil.

Speaker 18

Yes. It just looks like the execution on the share gain side of what you're growing versus the market has improved, especially over the last two quarters. So I was just trying to see if there's anything in particular to think about for the mix of business. Obviously, all those callouts you bring up are logical, but the amount of share gain that you guys are now getting is better than the market expected and better than our expectations?

Speaker 12

It's important to mention that we also have done in the past year many investments to explore new and nonprofitable segments where we didn't have too much participation and penetration, such as online payment, cross border payment and also serve larger merchants with integration with automation systems and all these integrated partners that we have been integrating our payment platform into them. So this is also helping us to explore other markets that we wouldn't reach before and also in a profitable way.

Speaker 5

Our next question comes from Chitula Bardo from Goldman Sachs.

Speaker 19

Hi, good evening. Thank you for the call taking my question and congratulations on the strong results. A couple of questions. I guess a little follow-up just on the competitive environment. Just kind of curious how you think if there could be any changes, we're seeing one of your competitors potentially being privatized by its owners.

Speaker 19

We've heard Pfizer in the U. S. Wants to grow clover in Brazil. And just as things get better, I mean, could there be any potential changes in the competitive environment? I mean, you seem pretty comfortable with growing faster than the market going into next year.

Speaker 19

But just any thoughts about how that could potentially change, if anything? And then second question on the loan book. From a different angle a little bit, as you grow more in SMBs, is that something you would consider perhaps doing some working capital loans to those SMBs, some of your competitors are doing that and some of your bank owned competitors kind of compete from the banking perspective. So is that something that you would look into or consider to another way to increase your take rate potentially?

Speaker 12

Okay, Tito. Thank you for the question. Well, I will start with the competitive landscape. Well, regarding to the move you mentioned about some of the competitors getting together their banking and acquiring operation, This is good news for us because it only proves our successful model. We were born in an integrated way between payments and financial service.

Speaker 12

And we believe we have a strong value proposition that makes total difference in the market because it addresses our customers' needs. In our platform, our customers, they get paid instantly 24 hours a day, 7 days a week. They have the automatic savings features. They're getting their money returns in a much higher way than other competitors. And also they use these funds as limit for their cards.

Speaker 12

So we have these all integrated. What we see looking at some of the competitors is that they have 2 big legacies, the acquiring legacy systems and the banking legacy systems. And in order to get these integrated working properly to offer a superior value proposition like we do, we think it will take time. It will be hard for them. So this is actually good news.

Speaker 12

And as we see right now, there are some of the players that are working in this integrated mode between acquiring and banking for a while. And we don't see that much challenge in the competitive landscape. What we observe is that there are some market share gain cycles. They alternate between market share gain and profitability recovery cycles. So what we see is more rational competition, and it's fine for us.

Speaker 12

Regarding to your other question about our lending strategy, our credit portfolio, What we see is that we have been able to create a very strong customer engagement in our banking business. And we see a very big growth of cash in into our accounts and also deposits. And also we have been able to generate more traction on service that generate revenues for us, such as cards, insurances, bill payment and other features we have in our platform. So it's important. We know that credit is a fundamental pillar of our banking strategy.

Speaker 12

On the last year, on the last years And right now, we are focusing in creating this strong portfolio of secured loans as we are also in parallel improving all of our infrastructure to manage risk properly and that we can be in the future mixing our loans with non secured loans portfolio in order to raise

Speaker 7

our spreads, our margins in this activity. Important to say, Tito, that we don't see that as a differentiation when we try to get the acquiring clients. So we are not seeing any impression from players that work or that offer working capital versus our value proposition. So that is important just to be clear here.

Speaker 19

Okay. No, that's great. That's helpful. Thanks, Dutra and Alexander.

Speaker 5

Our next question comes from Sumitry Datta from New Street Research.

Speaker 20

Yes. Hi, guys. Thanks very much for letting me jump on. I just wanted to go to the reference in the slides on online and cross border. You touched on it briefly.

Speaker 20

I'm just intrigued you're calling that out. Maybe you could talk a little bit about the opportunity in a shade more detail just in terms of what are the different competitive dynamics, what exactly are you doing in that area of the acquiring market? And at the end of the day, how significant could these two opportunities become? Thank you.

Speaker 12

Okay. The origin of our cross border operation started in 20 12 when we acquired a company called Boa Compre. And this business we have been running this business in parallel to the PagSeguro business for a while in a more segregated fashion. And just recently, about a year ago, we decided to really integrate this cross border payment business platform into our core business, into our core payment business in order to get some of our competitive advantages we have in acquiring business

Speaker 7

in that platform. So we could serve

Speaker 12

a lot more customers and bigger customers, more complex customers that we were doing in the past. This has been very successful. We did a real revamp in this business. Now we have been able to gain some new clients and accelerate growth. So we see a very interesting growth avenue by exploring this cross border business, uniting all the assets and capacity, our brand into it.

Speaker 12

Actually, by the way, we have changed the name from Boa Compra to PagSeguro International in order to leverage the business visibility.

Speaker 20

That's interesting. And maybe just a quick follow-up. So are you sort of up against the same competitors? Is it a different set of peers that you're up against? Any different kind of dynamics in the market?

Speaker 12

Our focus on this business today, we offer payment solutions for all countries in Latin America for any foreign company. So the competitors might be different depending on the solution. Let's say, for the cross border, probably there's going

Speaker 7

to be different players than what we have in the online environment in Brazil and different than what we have in the POS business in Brazil. So there are players that are, let's say, focused on this type of services. So the competitors are might be different than what we have in the POS market in Brazil, the acquiring market in Brazil.

Speaker 20

Okay. That's interesting. Thank you.

Speaker 7

Thank you.

Speaker 5

Our next question comes from Andrew Giurgaci from Morgan Stanley.

Speaker 21

Hey, congrats on the results. Thanks for the opportunity to ask a question. I was hoping you could elaborate on the contribution of picks to total TPV growth. And then when we think about the 2024 guidance, how much of that is being driven by picks, if we can maybe disaggregate picks from it, just to kind of create a fair comparison versus the rest of the industry? And maybe if we want to think of it relative to the FX projections and whatnot, if you could kind of just give us a sense of how much of the growth is being driven by PIX, that would be great.

Speaker 7

Well, the participation of PIKs QR code is similar to what you see in the industry. It's low single digit, and we don't think that's going to change dramatically in 2024. So that's what we saw in 2023. That's what we expect for 2024. We don't give disclosure of the exact number, but similar to what we see in other players in the industry.

Speaker 7

And of course, we are talking about peaks to our code, which is the type of transaction that generates some revenues for us.

Speaker 5

Our last question comes from Renato Meloni from Autonomous Research.

Speaker 22

Hey, guys. Thanks for the opportunity to ask a question here. I had a follow-up on take rates. So first, if you could break down the decline in 4Q between seasonality and mix change? And then I know you already said that you expect some compression in 2024, but I would appreciate if you can give some level here that we should expect.

Speaker 22

And also when you're thinking that we will stabilize? Thank you.

Speaker 7

And Arthur, to be honest here, we of course, we follow many KPIs and net take rate is one of the KPIs. But we follow more closely the gross profit as a percent of TPV because gross profit captures the financial expenses that we have. And of course, this is important for us because we have all this instant settlement that you need to fund the transaction. And of course, we have financial expenses to get this funding. So I don't have here in the top of my mind or even in my hand to give you the exact net take rate for 2024.

Speaker 7

What I do have here that we follow very close is the gross profit as a percentage of TPV, which has been stable around 1.5% throughout the past quarters, and we don't think that's going to change dramatically in 2024. So what I'm trying to say here is that net take rate, I don't have the information to give to you at this point, and I don't think that is the most important KPI for us at this point because again of the financial expenses line that we have in our P and L and importance that we have for the cost of funding.

Operator

Thank you. That's all the questions that we have for today. I will pass the line back to PagSeguro Digital's team for their concluding remarks. Please go ahead.

Speaker 7

Thank you everyone for participating in the call. Thank you for the questions. And I would like to take advantage here for to say a big thank you for all the PAGS team for the great results in 2023. Thank you very much. See you in next quarter.

Speaker 7

Thank you.

Operator

This does concludes PagSeguro Digital's conference call. We thank you for your participation and wish you a very good evening.

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Earnings Conference Call
PagSeguro Digital Q4 2023
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