U.S. markets closed

Edited Transcript of PAGS.N earnings conference call or presentation 27-Feb-20 10:30pm GMT

Q4 2019 PagSeguro Digital Ltd Earnings Call

Mar 19, 2020 (Thomson StreetEvents) -- Edited Transcript of PagSeguro Digital Ltd earnings conference call or presentation Thursday, February 27, 2020 at 10:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Eduardo Alcaro

PagSeguro Digital Ltd. - Chief Financial & IR Officer, CAO and Director

* Ricardo Dutra da Silva

PagSeguro Digital Ltd. - Executive Officer & Director

================================================================================

Conference Call Participants

================================================================================

* Bryan Connell Keane

Deutsche Bank AG, Research Division - Research Analyst

* Craig Jared Maurer

Autonomous Research LLP - Partner, Payments and Financial Technology

* Daer Labarta

Deutsche Bank AG, Research Division - Former Senior Analyst

* Domingos Falavina

JP Morgan Chase & Co, Research Division - Head of Latin America Financials

* Felipe Gaspar Salomao

Citigroup Inc, Research Division - Analyst

* James Eric Friedman

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Joseph Dean Foresi

Cantor Fitzgerald & Co., Research Division - Analyst

* Mariana Taddeo

UBS Investment Bank, Research Division - Director and Analyst

* Neha Agarwala

HSBC, Research Division - Analyst, LatAm Financials

* Josh Bish

ABCM - Analyst

* Victor Schabbel

Banco Bradesco BBI S.A., Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Hello, everyone, and thank you for waiting. Welcome to PagSeguro's Fourth Quarter 2019 and Full Year 2019 Results Conference Call. This event is being recorded. (Operator Instructions)

This event is also being broadcast live via webcast. It may be accessed through PagSeguro's website at investors.pagseguro.com, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after event is concluded. Those following the presentation via webcast may post their questions on PagSeguro's website.

Before proceeding, let me mention that any forward statements included in the presentation or mentioned in this conference call are based on currently available information in PagSeguro's current assumptions, expectations and projections about future events. While PagSeguro believes that their 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. Actual results may differ materially from those included in PagSeguro's 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's registration statement of Form F-1 and other filings with the Securities and Exchange Commission, which are available at PagSeguro's Investor Relations website.

Finally, I would like to remind you that during this conference call, the company may discuss non-GAAP measures. For more details, the foregoing non-GAAP measures and the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures are presented in the last page of this webcast presentation.

Now I will turn the conference over to Mr. Ricardo Dutra, CEO. Mr. Dutra, you may begin the presentation.

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [2]

--------------------------------------------------------------------------------

Hello, everyone, and welcome to our fourth quarter results conference call. Tonight, I have here with me Eduardo Alcaro, our Chief Financial Officer; and André Cazotto, our Head of Investor Relations.

Before we get started, we would like to reiterate that we continue to focus on the long-tail market, taking advantage of being the first mover with the best and most complete digital payments and banking ecosystem, and by having unreplicable strengths. We continue to see strong growth in long-tail merchant acquiring business despite a more competitive environment.

Q4 2019 was a landmark for PagSeguro that became the largest acquiring business in Brazil in terms of absolute net income and active merchants. We believe we will continue to lead payments and financial services in long tail due to our unique strengths, such as brand, first-mover advantage, the best and most complete digital payments in banking ecosystem, combined with exclusive UOL online distribution.

PAGS has the best value proposition for macro and small merchants and foreign bank or underserved consumers. Our [completely consistent] goes beyond payments with complete softer wallet investments and banking features, a market with a revenue pool 14x larger than merchant acquired, combined with the network effect of having both merchants and consumers. Like with disruptive payments in Brazil, PAGS will continue to lead the bank in digital transformation in Brazil with already 2.7 million PagBank active users. Our goal is to continue to lead digital banking in Brazil.

Having said that, we are proud to announce that we delivered in 2019 the same consistent performance we have been delivering since our IPO, strong top line and TPV growth, healthy net adds, stable take rates and profitability despite investments in new initiatives, such as PagBank.

In addition, we are now seeing higher adoption of new banking products and wallet services, which generates more engagement, increase the stickiness and loyalty and also generates additional revenues. We will keep investing marketing, product development platform and people for these new initiatives in 2020. These investments are necessary to take advantage of the opportunities ahead of us and to keep growing our presence in payments, wallet and banking. Consequently, we expect to add more merchants and consumers to our ecosystem, increases our total addressable market and diversify our future revenues. There is a huge opportunity to serve the merchant long tail under bank and underserved consumers. We are just [to] start our journey.

Now we start our presentation highlighting the great achievements of the quarter. Starting with our solid results. Adjusted net revenue reached BRL 1.6 billion, up 38% year-over-year, and our net take rate ended at 2.97%. Our non-GAAP net income reached BRL 412 million, up 27% year-over-year with a net margin at 26%.

Moving to our operating figures. Our TPV reached BRL 34.3 billion, up 39% year-over-year, adding BRL 4.9 billion in new TPV quarter-over-quarter. In terms of active merchants, we ended the year with 5.3 million active merchants, adding 1.1 million active merchants in 2019.

Now moving to PagBank. We ended December with 2.7 million PagBank active users, adding 868,000 new clients quarter-over-quarter, a strong acceleration when compared to previous quarters, which shows the fast adoption of PagBank by our clients. These figures not only reinforce we are in the right path with a broad ecosystem, but also show our execution capability.

On the next slide, we present our full year highlights. Our TPV reached BRL 114.8 billion, growing BRL 38.7 billion or 51% when compared with 2018. Active merchants reached almost 5.3 million merchants, growing 1.13 million or 27% when compared with previous year. We added BRL 4.9 billion in absolute TPV in Q4 when compared with Q3 2019. This figure is 11% higher than the TPV we added in Q4 2018. We reached our historical record in quarterly absolute TPV growth and, most important, with stable take rates. Our PagBank users reached 2.7 million in Q4 2019. Our total revenue and income reached BRL 5.7 billion. We grew BRL 1.5 billion or 36% year-over-year. Our non-GAAP net income of almost BRL 1.5 billion grew 38% when compared with 2018.

On next slide, we revisit our 2019 guidance. We reached non-GAAP net income of BRL 1.47 billion, close to the top of the guidance, despite larger investments of PagBank during 2019. Additionally, on merchants net new additions, we ended the year with 1.133 million, delivering 133,000 more merchants than our 1 million initial expectation.

Now I'd like to turn the conference over to Eduardo.

--------------------------------------------------------------------------------

Eduardo Alcaro, PagSeguro Digital Ltd. - Chief Financial & IR Officer, CAO and Director [3]

--------------------------------------------------------------------------------

Thanks, Ricardo, and hello, everyone. Before I start, let me make some comments about governance. 2019 was the first year for PAGS to be fully aligned with Sarbanes-Oxley requirements. We have already completed the entire process with our external auditors without any material weaknesses, which attests the soundness of PAGS' internal control environment. The Sarbanes-Oxley opinion will be filed with our 20-F report during the month of April. In addition, this year, our Audit Committee has been 100% independent, having 3 independent board members.

Moving to our membership fee model implemented in September 2019, we are providing you a detailed analysis of this impact at the end of this presentation. Just to summarize the impact for the full year of 2019, we had a total bottom line impact of BRL 51 million versus our previous expectation of BRL 80 million shared with you during our Q3 2019 earnings release. The difference is mainly explained by the deferral of the membership fee revenues. We have also updated our estimates for the membership fee impact for 2020. We now estimate a positive bottom line impact of approximately BRL 150 million. Having said that, year-over-year, the aggregated impact on the bottom line should be around BRL 100 million versus our previous expectation of BRL 120 million.

Now moving to the presentation to Slide 6. Our adjusted net revenues, the sum of net revenues from transactions and financial income reached BRL 1.6 billion in this quarter, up 38% year-over-year and 11% quarter-over-quarter. For the full year, we reached BRL 5.4 billion, up 47% year-over-year.

Moving to the top right, we are providing the breakdown of our revenue growth, and we can see a stable mix between transaction services and financial income. On the chart below, we present our non-GAAP total costs and expenses that decreased 0.3 percentage points year-over-year and in the fourth quarter at 3% over total TPV. For the full year, non-GAAP total costs and expenses decreased 0.3 percentage points. Related to non-GAAP admin expenses over total TPV, it reached 0.2%, flat when compared to 1 year ago and for the full year reached 0.3 percentage points, also flat when compared to 1 year ago.

On the next slide, we show our non-GAAP net income growth. In the fourth quarter, we reached BRL 412 million, an increase of BRL 89 million and up 27% year-over-year. The non-GAAP net margin reached 26%, up 0.6 percentage points despite larger investments on PagBank. For the full year, we reached BRL 1.470 billion, up 38% year-over-year. And the non-GAAP net income margin reached 25.8%, up 0.4 percentage points year-over-year.

On the next slide, #8, we present our TPV growth. Our total payment volume reached BRL 34.3 billion in the fourth quarter, an increase of BRL 9.6 billion, up 39% year-over-year and growing almost 17% quarter-over-quarter. For the full year of 2019, we closed with a TPV of BRL 114.8 billion, growing 51% year-over-year or almost BRL 39 billion of absolute TPV increase. Our absolute total payment volume grew BRL 4.9 billion in the quarter or 11% when compared to the same amount registered in Q4 2018, meaning a record in terms of absolute TPV captured by PAGS and double-digit absolute TPV growth year-over-year.

The net take rate, which is the blended take rate net from transaction costs such as interchange, processing and card scheme fees, reached 2.97%, stable when compared to the same period last year. This is exactly what we communicated to you in Q3 2019, slightly down sequentially given a higher seasonality of debit cards during the holiday season, fueled by the 13th salary paid in December. However, when compared to Q4 2018, our net take rates remain quite stable. And this is what we expect for 2020, stable net take rates.

In the next chart, we have our number of active merchants. We ended the fourth quarter, reaching 5.3 million active merchants, adding 1.1 million new merchants in 1 year, representing an increase of more than 27% year-over-year and 13% higher than our previous expectation of 1 million net adds in 2019. Quarter-over-quarter, we added 250,000 new merchants.

Now I'd like to turn the conference to Ricardo, who will talk about engagement metrics and new products.

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [4]

--------------------------------------------------------------------------------

Thanks, Eduardo. On Slide 9, we have met the current functionality of our unique ecosystem broken by payments, software and banking features. We believe these banking features will enable us to attract, engage and monetize both merchants and consumers, helping us to improve our merchants' loyalty and stickiness and to create more and more engagement as time passes by. In terms of revenues, the total market of banking and credit is 14x larger than the merchant acquiring business. In fact, it is well positioned to reach this market.

On Slide 10, we showed the leadership of PagBank as additional bank in Brazil, according to Google report filtered by financial services and then by checking accounts. We ended the quarter with 62% of total shares of digital banks, showing the importance of our marketing efforts and the strong brand repetition already concluded in the market. Additionally, our app was rated at 4.8 stars in iOS and 4.6 stars in Android, being the most reviewed in the best-rated app among digital banks and payment peers, also a consequence of our best-in-class product development and user experience-oriented strategy.

On Slide 11, we present our next step of evolution and value creation. Since the official launch of PagBank in the second quarter 2019, we intensified our investments in product development, people and marketing campaigns to promote this new initiative to our merchant base and also to consumers. We observed a huge engagement since the very beginning, and we are on the way to build our network effect as time passes by.

In the last 12 months, 50% of our clients use at least 3 products from our ecosystem. Our PagBank app is opened 11x a week by our active clients. This high engagement shows we are in the right path to monetize these clients in the future.

On Slide 12, we show some of the most relevant engagement trends in our ecosystem. We believe engagement is one of the most relevant metrics to forward this stage once we do have the competent increase switching costs for our clients, increase stickiness and loyalty, which will enable future monetization revenue diversification. We are pleased to share that we're reaching close to BRL 20 billion in non-acquiring transactions for the full year, including prepaid card top-ups, cash cards spending, mobile top-ups, wire transfers to third parties, cash-in through bank slip, bill payments, tax collections, P2P, QR Code, credit and other Super App transactions. This BRL 20 billion volume we already reached last year and the continued engagement we observe day after day gives us the confidence that has allowed them to grow in these new products beyond acquiring.

On the right side, we show the growth expanded through our prepaid and cash cards in 2018. TPV grew 51% while spending on our cards grew 67%, which reinforced the usage of our digital ecosystem. Right below, we see the number of bill payments transactions that increased 56% quarter-over-quarter. Our mobile top-up feature is also ramping up, growing almost 45% sequentially.

Moving to new payment methods. Our NFC transactions grew 89% quarter-over-quarter and P2P transactions increased by 6x quarter-over-quarter.

Moving to Slide 13, we provide some additional color about our lending product, PAGS Capital. We continue to offer the product only to our best merchants and is more according to their account history, TPV behavior and payment frequency. Since the beginning of the operations in May 2018, we have done 116,000 lending contracts. In Q4 2019, we almost doubled the number of contracts compared to Q3 2019 and ended with a total credit portfolio of BRL 286 million. So far, we continue to be careful with credit. However, these results are encouraging as we still face low levels of NPLs. Credit is an important tool to create higher engagement with our merchant base and will generate additional revenues for the company in the future.

On Slide 14, we highlight our road map of products already delivered in the past 2 years. Being tech and independent allow us to think exclusively on our clients' financial needs and consequently combine growth with profitability. Since May 2018, we have delivered more than 30 new products, including hardware, software, banking and services in our Super App.

On Slide 15, we provide more details about some of the new initiatives. First on banking. Since January 2020, we allow PagBank users from the state of São Paulo to pay cars and motorcycle's taxes and traffic tickets. Just to give you an idea, the state of São Paulo has more than 30 million vehicles and motorcycles registered.

Additionally, in March 2020, PagBank will launch its first CD, certificate of deposits. The CD will be available for our PagBank users in addition to our current savings account offer. On the Super App side, we introduced PagBank Health in partnership with third-party health care assistance company. PagBank Health will allow our users through the app to get discounts on medical exams, doctor appointments and new pharmacies. PAGS will collect a monthly subscription fee from clients that sign up this product.

Additionally, we closed the partnership with Shell, one of the largest gas station networks in Brazil. This partnership with all our PagBank users to pay gas stations in our [featured] process directly to a rep in a P2P transaction without the need to use a plastic card.

We also signed an agreement with Cabify, one of the largest ride-hailing company. Through this agreement, our clients will be able to ask for a Cabify driver in PagBank App, and we will also promote incentives for Cabify drivers to adopt PagBank as a primary digital bank. For instance, currently, Cabify drivers receive their money once a week. If they choose PagBank, they will receive 3 times a week. Our plan in the near future is to pay the drivers every day.

Finally, we are announcing a brand-new initiative called PedeFácil. PedeFácil is our proprietary food delivery app. We are now starting a pilot testing phase with our own food clients. We will start with a small number of our merchants that operate bars and restaurants and expect rollout throughout the year. Our revenues will be a monthly subscription fee plus a take rate over the value of each order.

These new products and initiatives, including our new food delivery app, show PAGS has increased its ecosystem features and services that we have to diversify these businesses and deliver best-in-class user experience to our clients.

Moving to the next slide, we present our software solutions. We ended the quarter with 186,000 clients using our software products, up 51% quarter-over-quarter. Recent partnerships with NCR/Colibri and the integration of PagVendas in our smart terminals, Moderninha Smart and Moderninha X, are helping to boost our software capabilities and helping merchants to manage their businesses. PAGS will continue to monitor possible M&A opportunities that can speed up the building of a more complete ecosystem.

On the last slide, we'd like to take advantage of this call to share our view about fast payments. When we look what happened in the markets that already had fast payments regulation and implementation, such as the U.K., India and Australia, we came into 2 main conclusions. First, cannibalization was observed mainly in cash, checks and wire transfers transactions. According to Brazilian Central Bank survey, 1/3 of the labor force in Brazil is still paid in cash.

Second, fast payments helped the financial inclusion of bank and underserved population and foster the adoption of electronic payments. In these countries, after fast payment implementation, debt transactions continue to grow 10% yearly despite the adoption of instant payments and P2P transactions. In the U.K. where card payments culture and network infrastructure are already established, like the scenario we had in Brazil, the adoption of fast payments were even more gradual. We believe fast payments could be an opportunity rather than a threat due to the foreign reasons. PAGS is not only an acquiring company, we have a complete digital payments and banking ecosystem that serves merchants and consumers.

PAGS has a tight DNA. We have an open and flexible platform that allow us to launch products and feature faster. Strong brand, PAGS is the most recognized brand among payments companies in Brazil. And omni-channel presence, operating both online and off-line payments, combined with our scale ecosystem and efficient go-to-market strategy leveraged by UOL audience. We think that a potential cannibalization of debit card transactions would take significant time, especially because there is a culture barrier to break as cards are already part of the Brazilian's life. Indeed, the current penetration in Brazil is no longer in early stage. We expect total card volumes as a percentage of personal consumption to be close to 40% in 2019, far ahead other Latin American countries and, therefore, is relevant in payment process of Brazilians like we make in the switching process. Debt system payments will be lower.

On the other hand, PIX, which is a fast payments brand created by Brazilian Central Bank, is complementary to cards and could accelerate the bancarization process in Brazil, given the need to open banking account, which PagBank is the mostly well-positioned digital bank to capture this opportunity.

Finally, companies with agile culture, tech DNA and capabilities to launch and to scale new products will benefit from PIX. PAGS has all these characteristics and is ready to capture new opportunities.

Finally, before we start our Q&A session, to summarize our presentation, let me give you more color about our initial view on 2020 trends. We expect to have absolute net new TPV growth, similar to what we had in the past 2 years, with stable take rates and flattish net income margins as we will continue to pursue growth combining this profitability. Important to reinforce that, in the current stage of our journey and the market opportunities ahead of us, we see new users addition and their engagement as relevant KPIs to help our revenue growth and diversification. The combination of payments, softer wallet and banking service is very powerful. And we will keep investing in new products, platform, managing campaigns and people to build this more complete and robust ecosystem that will help us increase users, their engagement and consequently, more revenues.

Additionally, we enforce our plan is to have 30% of our total revenues coming from PagBank, meaning services beyond acquired in up to 5 years with acquiring is still growing at a healthy base.

Having said that, we finished our presentation. We will start Q&A session.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Bryan Keane, Deutsche Bank.

--------------------------------------------------------------------------------

Bryan Connell Keane, Deutsche Bank AG, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

When we look at PagBank today, I know you said up to 5 or in 5 years, 30% of the revenues. But when we look at it today, do you still have a sense of how much of revenue it represents today and how fast that revenue piece is growing?

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [3]

--------------------------------------------------------------------------------

Brian, thank you for the question. This is Ricardo. Nowadays or -- I mean 2019 was a low single digit. The plan for this year is to double to grow 100%, and then we're going to build to get this 30% in up to 5 years. So going back to your question, 2019 was a low single digit.

--------------------------------------------------------------------------------

Bryan Connell Keane, Deutsche Bank AG, Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

Got it. Got it. And then I got most of the metrics on 2020. Are you guys -- and I might have missed this, but did you guide for net new merchant adds this year? Or is that not part of the strategy?

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [5]

--------------------------------------------------------------------------------

For sure, it's part of the strategy. We need to keep growing our ecosystem. That's what I say about new users, but we are not giving here a guidance about net new adds because, at the end of the day, we're looking more for the top line, the revenues and also the bottom line. So that's why we are giving with this soft guidance regarding TPV and the net [creating] credit margins.

--------------------------------------------------------------------------------

Eduardo Alcaro, PagSeguro Digital Ltd. - Chief Financial & IR Officer, CAO and Director [6]

--------------------------------------------------------------------------------

Bryan, just one comment here. At least for early 2020, January and in February, we haven't observed any kind of deceleration in the number of sales of terminals to our clients. So we're still seeing pretty much the same demand that we observed in the past quarters.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Next question comes from Craig Maurer, Autonomous.

--------------------------------------------------------------------------------

Craig Jared Maurer, Autonomous Research LLP - Partner, Payments and Financial Technology [8]

--------------------------------------------------------------------------------

Can you talk about expectations for the growth in the BRL 20 billion in TPV that you had through additional services to PagBank services, because your contemporaries include that in TPV companies like PayPal. That would have added 10 points to your TPV growth this year. So in all fairness, how should we expect that number to grow, so we can take a more holistic view of your TPV?

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [9]

--------------------------------------------------------------------------------

Thank you for the question, Craig. You're right, this is not part of our TPV. As you mentioned, some other companies add this in their TPV. We are not adding because we only -- we report TPV as part of the acquiring, only the -- for the acquiring business. Just to give a sense, last year, we grew 3x this volume. We don't have a, let's say, specific guidance here to give to you, but I would say that is very fast. If this is something that really becomes, let's say, important in terms of revenues, we will give you some disclosure. But at this point, we are more concerned about making people to use the ecosystem to use all the products for us. The 20 bidders are a decent number, but still with a lot of room to grow because there are the top-ups from (inaudible) that people putting in the accounts, wire transfer to third parties that they used to send to a bank and then from the banks send to someone else. So for us, part of this BRL 20 billion, of course, generates revenues. Part of that is on engagement. But going back to your question, last year, we grew 3x, and it is not in our TPV. You're right. Your -- you got it.

--------------------------------------------------------------------------------

Eduardo Alcaro, PagSeguro Digital Ltd. - Chief Financial & IR Officer, CAO and Director [10]

--------------------------------------------------------------------------------

And just additional commentary here, Craig. We are still building the ecosystem. If you take a look what we launched pretty much in this quarter: PagBank Health; Cabify partnership; Shell, that is one of the largest gas stations in Brazil. So it's even early to us to make any kind of, let's say, future guidance about these specific non-acquiring transactions because we're in the process of continuing to build up the ecosystem to our consumers and merchants.

--------------------------------------------------------------------------------

Craig Jared Maurer, Autonomous Research LLP - Partner, Payments and Financial Technology [11]

--------------------------------------------------------------------------------

And if we want -- if we talk about the acquiring business for a second and try to characterize the merchant growth you're seeing, it seems that you have obviously been growing through smaller merchants on the acquiring side, but that some of your new partnerships, like Colibri, can take PagSeguro acquiring toward larger merchants. Is that a good way to think about it that, as these partnerships accelerate, that will actually bring along with it merchants that are larger?

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [12]

--------------------------------------------------------------------------------

Yes, you -- just going back to the presentation, software users grew 51% only in this quarter. So our merchants are using our software more and more. It is important for us to increase the stickiness to have more data to understand their behavior, the way they work, the way they use the money and things like that. When you close a partnership, just like I mentioned with Colibri, we do get some -- a little bit higher merchants, bigger merchants that use this type of software solutions. But if you consider the total of 5.3 million, it's still too small to change any trends in terms of spend or things like that. But it is accretional to our business plan. I mean we can get some TPV from there, revenues and margins, decent margins. So that's why we keep investing softer. But I don't think it's enough to change some behavior in terms of spending promotion and things like that because it's a small number when compared with the 5.3 million.

--------------------------------------------------------------------------------

Craig Jared Maurer, Autonomous Research LLP - Partner, Payments and Financial Technology [13]

--------------------------------------------------------------------------------

Just to not monopolize the call, but the 13th month salary phenomenon and the debit usage that that drives, do you have an estimate on how much that impacted the take rate when looking at it versus third quarter?

--------------------------------------------------------------------------------

Eduardo Alcaro, PagSeguro Digital Ltd. - Chief Financial & IR Officer, CAO and Director [14]

--------------------------------------------------------------------------------

Actually, you can see the same seasonality. If you look at Q3 '18 to Q4 '18 compared to Q3 '19 to Q4 '19, you will see the same -- basically, the same seasonality that we have in the last year. I mean it's pretty normal to have this kind of seasonality. If you look at our net take rate in Q3, it was roughly 3.17%. It came down to 2.97%. So we are talking about a 20 basis point impact, given the seasonality and the share of higher debit cards in our mix.

--------------------------------------------------------------------------------

Craig Jared Maurer, Autonomous Research LLP - Partner, Payments and Financial Technology [15]

--------------------------------------------------------------------------------

And first quarter should have a similar relationship to fourth?

--------------------------------------------------------------------------------

Eduardo Alcaro, PagSeguro Digital Ltd. - Chief Financial & IR Officer, CAO and Director [16]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [17]

--------------------------------------------------------------------------------

Yes, correct.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Next question from Mariana Taddeo, UBS.

--------------------------------------------------------------------------------

Mariana Taddeo, UBS Investment Bank, Research Division - Director and Analyst [19]

--------------------------------------------------------------------------------

I just want to understand a little bit better the dynamics behind your guidance of stable take rate for this year. As we expect credit to become a little bit more relevant in 2020, should we expect the mix effect to continue to affect your net take rates as you move down market and that the transactions continue to be more representative?

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [20]

--------------------------------------------------------------------------------

Well, the -- thank you for the question, Mariana. We expect the take rate for 2020 to be stable, just like we have seen what's going on in the past years. You're right, credit may help a little bit. But with this type of credit portfolio, it's very small. We are saying that we are very careful about credit because you need to know how to not only to give the money, that's the easy part, but to collect and all the processes in place and all the time we are testing our models and back tests and many things going on in this front of lending because you know there is a lot of money, but there is also the risk. So that's why we are cautious about credit. With this size of portfolio, it's pretty small, it is not big enough to change the trends of net take rate. Of course, it helps a little bit. But at the end of the day, what we see is a stable take rate in the acquiring business. If you go to our website, you see that we didn't change the price in the past years. So we keep selling the devices and with the same MDRs that used to have 2, 3 years ago.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Next question comes from Tito Labarta, Goldman Sachs.

--------------------------------------------------------------------------------

Daer Labarta, Deutsche Bank AG, Research Division - Former Senior Analyst [22]

--------------------------------------------------------------------------------

A couple questions. I guess, just first following up on the loan growth. Like how quickly do you think you can grow the loan portfolio from here? Just to get a sense of how much we can expect that to contribute to PagBank?

And then second question in terms of sort of like the investments that you're making in PagBank and the impact on margins? I mean do you think that once you've invested in 2020 that you can ease up a bit in 2021 so that you begin to see some benefits, both from PagBank and our margins in 2021. Just to get a sense of like how long you think you need to continue to invest there to grow that business?

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [23]

--------------------------------------------------------------------------------

Thank you, Tito, for your question. Talking about loan. You see that we've been growing close to 50, 60. This quarter, we grew 90 million quarter-over-quarter. We could grow much faster than that. There is a lot of demand in our merchant's base, but we need to be -- we need to have the confidence that the models are doing -- are working well that we can give you [credit] right away and collect and so on, because there is all this process that the loan -- start with the modeling and then the way we offer the loan for our merchants, the way we collect the experience and so on. So it could be much bigger than that, but we are not in a rush to accelerate it. We just need to do the things right. We want to be -- we want to do the things right. So it could be much bigger than that. I don't even have the size of that because there is a lot of demand, and it could grow faster, but there is no number that I could say is BRL 2 billion, BRL 4 billion. I know there is a lot of demand.

Regarding the investing of -- or the investment of PagBank, we are seeing that the core business, the acquiring business is doing pretty well. We could have beat the expectations for net income in 2019, if you wanted to. You can see that we invested BRL 470 million in marketing versus BRL 270 million from the past year. But we are investing in PagBank since May 2019. We need to create this brand. We need to bring people into the system, make them to double dip, create their accounts and then make them use the products and monetization is going to come later. So we are between this first and second stage, which is bring people to the ecosystem and make them use the product. So once we have volume here, the monetization is going to be a consequence. It's hard to give you even a soft guidance for 2021. I guess the best way to think about PagBank is to think about the 30% of revenues in 5 years.

Throughout this year, if there is anything that we can give more exposure to you, it will be our pleasure. But at this time, we can just say you that it's going to be flattish margins and PagBank, of course, is going to receive a largest part of resources.

Also worth to say that PagBank not only helps in the consumer side, but also in the merchant side because our merchant is so small that when they sell, they are merchant. But when they get the money in the digital account, they behave like a consumer. So when investing the PagBank platform, we can also get benefits from both, from merchants and also from the consumers. You saw that we launched many products in the past months. In this call, we just gave some disclosure about the trend, Shell, Cabify, PedeFácil, PagBank Health. So we are building this ecosystem to have a more complete offer for the Brazilian consumers and also merchants. Not to say the CD, they were also large that was part of the request for our base. They already have the savings account, but part of them were asking for this type of, let's say, investments. So that's why we're launching the CD in March in the next couple weeks.

--------------------------------------------------------------------------------

Daer Labarta, Deutsche Bank AG, Research Division - Former Senior Analyst [24]

--------------------------------------------------------------------------------

All right. That's helpful. If I could maybe just one follow-up, I guess, like how that relates then to the acquiring business given that you're guiding for like a stable take rate. But you mentioned earlier, competition is increasing in the long-tail market. Is -- just to understand, how are you able to keep your take rate stable given increasing competition? Is it because of the additional products that you're offering? Or is it you're just not seeing pricing competition? Just to understand, I guess, the competitive dynamics there a little bit.

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [25]

--------------------------------------------------------------------------------

Yes. So Tito, the price is part of the equation, as I just said to Mariana. We didn't change the price in the past 2 years. We know that we had some other players that tried to come to our market, the long tail market in 2018 and 2019, just decreasing prices, making broadcast media, offering devices in a very low price, and they went nowhere because price is only part of the question. We keep saying that we need to have the ecosystem. We need to create the stickiness. This company was created to serve long tail, we think about long tail day and night. Everything we do is to serve long tail. So it's a simple app, single app, people can easily understand what's going on. They can easily understand. When they sell, the money goes there. They can activate the cards in a very frictionless way and so on.

So what I'm trying to say here is that we didn't change the price. We keep adding more than 1 million net adds in 2019. So that's why we think that we are confident that we can keep the take rate stable, not only to say that the average ticket for our merchants is very small. So they sell BRL 1,700 per month in cards. So it's not because 10, 15 basis points that is going to move them to change everything and just to use another acquiring. So we are confident that we can keep with good levels of price and stable take rates to keep going and grow in 2020.

--------------------------------------------------------------------------------

Eduardo Alcaro, PagSeguro Digital Ltd. - Chief Financial & IR Officer, CAO and Director [26]

--------------------------------------------------------------------------------

And Tito, let me -- this is Eduardo speaking, let me just complement other things on what Ricardo is saying. I think, first of all, the long-tail market is still large and underpenetrated. If you look at public studies like IBGE and [Sabra], there's around 20 million to 30 million micro merchants and SMBs in Brazil. And we were able to deliver this solid performance in the last 2 years, given some strength that the company has that nobody has. So first, the first-mover advantage, the UOL online distribution, the best banking digital ecosystem for the long tail and the brand. And think about 2 years ago, I mean, we are always reinventing ourselves. From an acquiring company to be a complete banking ecosystem for both merchants and consumers, and only a tech DNA company can do that. So talking about pricing, if you really look to our competitors, all prices are public. And you can see that pricing is pretty much the same around me with a few basis points difference. But on the core of the pricing, you see basically the same pricing.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

Next question comes from Felipe Salomao, Citibank.

--------------------------------------------------------------------------------

Felipe Gaspar Salomao, Citigroup Inc, Research Division - Analyst [28]

--------------------------------------------------------------------------------

I have a question regarding the launch of new products and services. It's interesting to see the growth towards Super Apps, especially with the launch of a food delivery business. That was completely not expected, at least for me. So it seems that PagSeguro is moving from a pure provider of financial services, including banking merchant acquiring to something else, something bigger, right? So -- but PagBank has UOL as a controlling company, and arguably, some of these investments could be done by the holding, UOL, and not let PagBank, but this does not seem to be the case. So my question is, 5 years from now, would it be fair to say that PagBank will concentrate all the investments that the controlling group might decide to do on everything related to payment software and possibly marketplaces because, I mean, food delivery is a software -- food delivery software is a marketplace of restaurants, right? So would it make sense for PagSeguro perhaps to enter on the online retail marketplace business? This is my question.

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [29]

--------------------------------------------------------------------------------

Felipe, thank you for the question. Let me try to be concise here and summarize. PedeFácil, just to put everyone on the same page, is a pilot testing that we are doing. What -- as we say all the time, we are always making research in our merchant's base, people that have stores, people that have bars, that have restaurants, people that sell things on the street. So we are all the time trying to understand how we can help all these merchants. And part of the complaining that we've heard from restaurants and bars that some other apps charge them a very high take rate, and they were not happy just to have 1 or 2 players offering this type of food delivery service. So that's why we decided to do this type of pilot mode. We don't want to invest millions of reals in media to make this. That's not in our core business, but we see there is a space to serve part of our merchants that want to have this online menu and deliver things by themselves without the intermediary, so to say. So that's why we are launching this pilot mode. It's doing well so far. It's another software initiative that we are doing, just like we did with the other softwares that we mentioned in the presentation, like R2TECH is a consolidation company. Yummy is a split payment company. So it's another software initiative. So it's going to help -- our merchants are going to increase the stickiness and make them more loyal to our solutions. So that's PedeFácil.

Regarding your question about 5 years, as we said, we plan to have 30% of the revenues coming from PagBank. We are a tech company. It's hard to say how it's going to be. If we're going to have more softer revenues in 5 years from now or things like that. But the plan so far is to keep the acquiring business software to increase the stickiness and to help these merchants to grow and also the banking platform. All the payments and digital banking and software related to payments is going to be done from PagSeguro. PedeFácil is 100% PagSeguro. So there is no relationship between another controlling shareholders or things like that. It's 100% PagSeguro. And payments, digital banking and software related to payments or to these small merchants are going to be done to PagSeguro. I guess Eduardo just also want to add something.

--------------------------------------------------------------------------------

Eduardo Alcaro, PagSeguro Digital Ltd. - Chief Financial & IR Officer, CAO and Director [30]

--------------------------------------------------------------------------------

No, I just think, Felipe, that we are building a relevant platform for both merchants and consumers, so the Shell gas station initiative or even the Cabify initiative. I mean, as Ricardo said, if you are a small merchant during the day, your behavior -- you behave like a merchant. And of ours, you behave like a consumer. So if you're a small merchant, you have the cash-in in your digital accounts and you can go out and spend in Shell gas stations or even spend on Cabify. So that's what we're aiming, to be relevant for both merchants and consumers. And this just increases the stickiness and improves the user experience of our app.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Next question comes from [Josh Bish, ABCM].

--------------------------------------------------------------------------------

Josh Bish, ABCM - Analyst [32]

--------------------------------------------------------------------------------

I was interested in the PagBank users. You obviously have 2.7 million today. What channels are you acquiring these users from? Is it mostly paid internet marketing? Is it referrals from other users on the platform? Any color you could provide us on just how you've acquired these 2.7 million PagBank users.

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [33]

--------------------------------------------------------------------------------

Josh, thank you for the question. The majority of these merchants -- of these PagBank users are merchants. We already have hundreds of thousands of consumers as well. But the majority of them are merchants. We -- sometimes, it's hard to give you the exact answer how many are coming from different marketing channels, so to say, because we do many things. We do UOL. We do newspapers. We do out of home, sometimes broadcast TV, YouTube. So it's -- also sometimes also curious. We try to send information to our merchants through the app, SMS, e-mail, saying then about PagBank, and sometimes they don't stick with the product. And then we do a mass media. We do UOL and things like that, and they decide to use the product. When you do the research and ask them, why you didn't use before, he just said, I didn't see, I didn't pay attention. So it's marketing mix we are bringing people from everywhere. But just trying to summarize the answer to the majority of these PagBank users are merchants.

Part of that is also because they have the cash-in on a daily basis when they use the POS. So it's more, let's say, directly for them to use the app and to use all the features in the digital account bank. And also worth to say that when you invest in PagBank, we not only bring consumers, but we are also creating this brand. So it is important when it close a partnership with the gas station, for instance, that people go there, they see PagBank. They're going to know what it is. They know the brand. They know that is related to PagSeguro and things like that. So it's hard to give an exact answer what percentage is coming from each channel, but we are doing many things, building the brand. I guess, at this point, the most important thing is just to see this growth that is accelerating quarter-over-quarter.

--------------------------------------------------------------------------------

Josh Bish, ABCM - Analyst [34]

--------------------------------------------------------------------------------

Okay. That's very helpful. And when you think about maybe the next year for PagBank, I mean do you feel like it's really about expanding the product? You've obviously done a lot with the product. But do you feel like there's a lot more to do? Or do you really think that it's at a time where you'll be putting a lot of money into the brand and really just trying to bring in those consumers that are completely new to the ecosystem?

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [35]

--------------------------------------------------------------------------------

I guess it is a combination of both. It's going to be marketing all the products that we are launching. Of course, we have a product road map to launch this year. So when you say that we will invest in PagBank, it's not only marketing, but also people, engineerings, product people now using the platform. So in this call, we are giving you more information about PagBank Health, PagBank CD, Shell partnership. So there's going to be more products that we will launch. I guess this year, we will still build this digital cost to be more and more complete. When we launched this account in May 2018, we didn't pay interest in the balances. So we launched this last September. Now we have launched the CD. So as you can imagine, to be a retail digital bank, we still have a few products to launch to be more competitive. But I guess, we are in good shape right now to expand PagBank to make more margin, bringing new users. But there's going to be investment in both this year in the brand and also in the product itself.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

Next question comes from Joseph Foresi, Cantor Fitzgerald.

--------------------------------------------------------------------------------

Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [37]

--------------------------------------------------------------------------------

I wanted to just say that I like the PagBank song that I was listening to as I was waiting to get on the call. On the -- a couple questions for you. Just on the end-market penetration rate in your core business, can you talk a little bit about where that is this year versus sort of prior years and the competition? I guess the question there is why moving to PagBank now, and how strong is the core business? I got a couple others.

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [38]

--------------------------------------------------------------------------------

Well, Joseph, first of all, thank you for saying the song is good.

--------------------------------------------------------------------------------

Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [39]

--------------------------------------------------------------------------------

It's very catchy. I figured it was worth mentioning. So...

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [40]

--------------------------------------------------------------------------------

That's a song that we used to launch one of the PagBank products. So it's very sticky, people just remember and think.

--------------------------------------------------------------------------------

Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [41]

--------------------------------------------------------------------------------

Well, maybe I won't be able to forget it, but anyways.

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [42]

--------------------------------------------------------------------------------

Open your account, please, and put some money here.

--------------------------------------------------------------------------------

Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [43]

--------------------------------------------------------------------------------

Yes, right. Exactly.

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [44]

--------------------------------------------------------------------------------

Thank you. Regarding the core business, what you see here, Joseph, is that the churn rate is very stable. We don't see spikes in churn rate, it's just stable. Sometimes even lower than the previous year. But our challenge here, that's something that we discuss all the time that we need to control the churn rate, not only as a percentage, but also in absolute numbers because as the base keep growing, the percentage should go down. To rise at some point, we're going to have absolute numbers very high. So we don't see anything hurting our core business. Of course, we lose a few merchants to the competition, but we also bring some merchants from the competition.

At the end of the day, it's -- there is still a lot of room to grow. The long-tail market is untapped with many new merchants that are coming to the system at this point still in Brazil. So there is no big changes in the core business in terms of churn and retention rates that we've seen in the past quarters and in 2019.

--------------------------------------------------------------------------------

Eduardo Alcaro, PagSeguro Digital Ltd. - Chief Financial & IR Officer, CAO and Director [45]

--------------------------------------------------------------------------------

Yes. And just adding here. I think that PagBank also is very important. Just like we reiterated here earlier, PagBank, for sure, will be a very important tool to create more revenues to diversify the business to extend the addressable market once we're also capturing, let's say, purely consumers in Brazil, the under bank and the underserved one. But also, PagBank helps to create the stickiness, the loyalty of our clients. We perceive that these guys, they are, let's say, creating higher engagement with the new products, the new solutions. We show it in our investor deck that we already have 50% of our, let's say, users and the majority are through merchants, using at least 3 products from the ecosystem. That's the main focus of the company right now to keeping investing the platform, to keep adding more engagement in future monetization by having less churn and for sure, new avenues of revenue going forward.

--------------------------------------------------------------------------------

Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [46]

--------------------------------------------------------------------------------

Got it. And then just on the competition side, have you thought about moving upstream at all? And any thoughts around added or new competition from the WhatsApp or Mercado Pago?

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [47]

--------------------------------------------------------------------------------

Yes, we are reactive to go up in the permit. We are not, let's say, proactive. There are some -- we are seeing larger merchants. For us, you can say larger merchants. For this competition, they are still very small. But we have some merchants that come to us to work with us. So we obtain this type of merchants. When we launched these software solutions, of course, we get a little bit higher merchants, not only the long tail, but we are reacting in this sense.

Regarding, as you mentioned, Mercado Pago, I guess, Mercado Pago is very much focused on (technical difficulty) our natural competitor. We respect them, great company. But I guess we are ahead of them in terms of products in the acquiring business and also in digital banking. Just remember, we have a banking license. We have many products that we can do by ourselves without depending from third parties. So I mean, as I said before, as we still have a lot of room to grow, we are selling thousands of devices every month. I guess competition is also selling thousands of devices. It's not a zero-sum game at all at this point here in Brazil.

--------------------------------------------------------------------------------

Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [48]

--------------------------------------------------------------------------------

Got it. And then just the last one from me, and I'll take a shot at it. I think the Street is looking at something like 30% volume growth and 20% or mid-20%s on the revenue side. I know you -- that wasn't part of your guidance, but any color or direction that you could provide there, I think, would help because it will help keep consensus kind of along the right path. So I wanted to get your thoughts on those numbers if you would give them or at least ask if there's any other color that you'd like to provide on 2020?

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [49]

--------------------------------------------------------------------------------

Yes, yes. Well, we had close to BRL 115 billion in total payment volume in 2019. We added close to BRL 38 billion -- BRL 39 billion in 2019. We added BRL 38 billion in 2018. What we have in our plan is to keep same levels of net new TPV this year, so we can make the math a little bit, how's going to be the growth as a percentage of TPV. The net take rate, we expect to be flat. So it's -- to be stable and flat. So it's also -- let's say, you can calculate how it's going to be the growth of the revenues. But that's the soft guidance that we gave in the call net new TPV, similar to what we had in the past 2 years with stable TPVs.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

Next question comes from Neha Agarwala, HSBC.

--------------------------------------------------------------------------------

Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [51]

--------------------------------------------------------------------------------

First, if you could talk a little bit about the evolution of credit card. Has the card, given the micro merchant segment, evolved over the last 2, 3 years?

Second would be on net debt for clients. The net debt has been declining in 2019 versus 2018, should we expect it to go down further? You mentioned that the churn is quite stable. How do you see these net adds in terms of client evolving in the coming 2 years?

And lastly, could you please update us on the marketplace initiative that the Central Bank and the regulator wants to create for the receivables business? And if that is created, which is likely scheduled for October, November, what impact do you see on your business from that marketplace?

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [52]

--------------------------------------------------------------------------------

Well, thank you, Neha, for the questions. Let's talk about first of the acquisition costs, that was your original question. We invest a little bit to bring new merchants in 2019. Of course, it's a little bit higher than what we had in 2018. There's more players in the market. So we are not changing the prices of MDRs. At some point, we increased the subsidies of the POS and sometimes we give 0 MDR for a short period of time. So that increases the acquisition cost. It is still healthy. In our view, we are all the time calculating this cap versus the lifetime value. So that's why we are managing this accordingly.

Regarding the receivables that you asked in the end. We have a very close relationship and conversation with Central Bank. We are part of the discussions for the receivables. But as our merchant is very small, they don't have the sophistication, not even to think about this type of receivables to be the receivers and things like that. When they sign up with us, they need to choose one specific period of time to receive the money. We have three options. They receive the money right after the transaction after 14 days or after 30 days. So we don't give the options for our merchants to receive in installments. They need to pick one of these dates, and then they receive the money in a specific date right after the transaction. They are very small. They sell BRL 1,700 in cards per month, a percentage of that is going to be through installments. So they don't have the sophistication to (inaudible) receivables to have this type of conversation, and I don't think it's not even economic viable for this chamber to have this type of merchants. But we don't see any risk for our business at this point.

--------------------------------------------------------------------------------

Eduardo Alcaro, PagSeguro Digital Ltd. - Chief Financial & IR Officer, CAO and Director [53]

--------------------------------------------------------------------------------

And Neha, just to complement, I mean in the long-tail market, the priority is really to receive the cash as fast as possible. So bear in mind that a merchant that makes, for example, BRL 50 per day is not even efficient to go to a chamber of receivables to prove this receivable to someone to be the most receivables. And as Ricardo said, at the end of the day, we prepay 100% of our installment transactions. Our clients are born -- already born prepaid.

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [54]

--------------------------------------------------------------------------------

And just one complement to your question, Neha. We're not seeing a decline in the number of net adds. It's, let's say, deceleration compared to previous year. Remember that when we started 2019, we were expecting to add around 1 million new merchants. We did more than that. We did 13% more than 1 million ahead of our expectations. Like I said earlier, we're not seeing, at least in early 2020, any kind of deceleration at the base of sales in terms of terminals. We are still seeing a very strong demand in the micro merchant space.

Not forgetting that at the end of the day, now we have a much more complete ecosystem. We're not only focused in bringing new merchants, we're also focused on bringing new users for PagBank, both merchants and consumers. If in one hand, the number of net adds of the merchant business, it's somehow decelerating to BRL 250,000 per quarter. For PagBank, it's accelerating. So that's what we are building up, an ecosystem that could be complete for both existing merchants, new merchants and also new consumers. That's our view.

--------------------------------------------------------------------------------

Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [55]

--------------------------------------------------------------------------------

Very helpful. If I can follow up with another question. Your -- you mentioned that most of your PagBank users are your merchants. So the wallet share of your PagBank users is actually very limited. So what is your strategy to gain a more affluent set of client base for your PagBank, so that you can monetize them in the future and make the banking business more profitable?

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [56]

--------------------------------------------------------------------------------

Well, this -- just remember that, first, if we didn't have PagBank, they only use us an acquiring company. And then the revenues, even if it's small, it should be captured for another player. So we are trying to make this closer look here to have their money here, to be the destination of their money. We can make money -- I'm sorry? I'm sorry?

--------------------------------------------------------------------------------

Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [57]

--------------------------------------------------------------------------------

Sir, I can hear you.

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [58]

--------------------------------------------------------------------------------

Yes, yes. So we can make money with these merchants today through the interchange of the cards. When they pay bills, we receive a collection fee from the companies we are collecting the bill. And we are also having consumers at this point. We already have hundreds of thousands of consumers. So we can make money with these guys also with interchange. The money they leave here with us that they -- if they don't complete 30 days, we can have -- we can make money through the float and we don't pay any interest for the consumer. So there are some revenue streams. There's going to be new products that we're launching. PAGS Health is an example, the kind of the micro insurance, and we're launching new products in the future. But at this point, we are making money with interchange, transactional and new products. As we said before, we are not exploring lending for consumers at this point. There is also a lot of demand, but we are being very careful. We are only working with the best merchants. Once we have the confidence to roll out a little bit, we will do it. But at this point, we are just making money with the allowance by working with the merchants.

--------------------------------------------------------------------------------

Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [59]

--------------------------------------------------------------------------------

If you can tell us what is the number of credit cards you have in issuance, a rough range.

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [60]

--------------------------------------------------------------------------------

We're just starting, Neha. It's very small. We just started. We will launch for sure in the next weeks.

--------------------------------------------------------------------------------

Operator [61]

--------------------------------------------------------------------------------

Our next question comes from Domingos Falavina with JPMorgan.

--------------------------------------------------------------------------------

Domingos Falavina, JP Morgan Chase & Co, Research Division - Head of Latin America Financials [62]

--------------------------------------------------------------------------------

I just want to run by you guys, a couple of numbers, and see if they make sense directionally. So I remember, you -- thank you for the data on the TPV of the PagBank, it helps a lot. You provided BRL 20 billion. And in there, you mentioned some of the transactions that those clients are doing. Some of them pay fees like using the prepaid card, mobile top-ups and some others, and some others don't pay fees. If we assume here, for lack of better data, that half of the TPV is paying some kind of fee and we know that the interchange is around 1.5%, 1.6%, we would get to sensing BRL 100 million to BRL 150 million, very ballpark numbers of revenues from PagBank, which kind of adds up to 2%, 3%. It adds up to your statement of low single digits in contribution of revenues to this year. If we look at the total number of clients PagBank has, which is around 1.8 million for the year on average, you'll basically place the average revenue per client on something around the BRL 80 to BRL 100. Just want to get your guys input if the yields we're estimating is too high or if the numbers directionally makes sense?

--------------------------------------------------------------------------------

Eduardo Alcaro, PagSeguro Digital Ltd. - Chief Financial & IR Officer, CAO and Director [63]

--------------------------------------------------------------------------------

Domingos, this is Alcaro speaking. I see your math, but at the end of the day, there are too many assumptions there. And we are not providing any specific guidance on how much of the BRL 20 billion generates revenue or not. I mean, of course, we do have some transactions that do generate revenue. So for example, the prepaid cards or the cash cards. And we also have transactions that do not generate any income, for example, the B2B transfers or even the QR Code transactions, we do not make money on that. I'm sorry, that's all that I can say at this point, but I think there's too many assumptions on those numbers. And when those revenues they become relevant, we'll do the appropriate disclosure.

--------------------------------------------------------------------------------

Domingos Falavina, JP Morgan Chase & Co, Research Division - Head of Latin America Financials [64]

--------------------------------------------------------------------------------

Okay. Understood. Second one, I'm not sure if you guys actually disclosed that in the 20-F, I haven't had a chance. But what kind of delinquencies chart [jobs] or NPLs you're seeing in the loan book as it is now.

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [65]

--------------------------------------------------------------------------------

Of course, we are providing a number of our credit portfolio net of NPLs. We can say that for the -- where we are operating for the long-tail market, we do have the best NPLs in the marketplace. For the market that we operate. Think about people that have never had access to credit before us.

--------------------------------------------------------------------------------

Domingos Falavina, JP Morgan Chase & Co, Research Division - Head of Latin America Financials [66]

--------------------------------------------------------------------------------

Yes. No, I know, like MercadoLibre in 2018 year-end published 25% charge-offs. I think you have to report that into 20-F. So I'm just wondering if you have the number or no.

--------------------------------------------------------------------------------

Eduardo Alcaro, PagSeguro Digital Ltd. - Chief Financial & IR Officer, CAO and Director [67]

--------------------------------------------------------------------------------

I don't have the specific number here or the number that will be published in the 20-F. Of course, I mean, MercadoLibre is a totally different business compared to us. They are lending to consumers. We are not lending to consumers. We are lending to the very best merchants that we have here. We are working on our credit engine to be the best credit engine in the market and then to have the lowest delinquency in the market for where we operate. Bear in mind that those are small merchants, close to individuals. And if you're going to make specific disclosure about NPL in the 20-F, this is something that we have not decided yet. I mean we are like one month from filing the 20-F.

--------------------------------------------------------------------------------

Domingos Falavina, JP Morgan Chase & Co, Research Division - Head of Latin America Financials [68]

--------------------------------------------------------------------------------

No, we should expect lower number then. Okay. I think you'll have to, but we'll wait for it to come up.

--------------------------------------------------------------------------------

Operator [69]

--------------------------------------------------------------------------------

Next question comes from James Friedman, Susquehanna.

--------------------------------------------------------------------------------

James Eric Friedman, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [70]

--------------------------------------------------------------------------------

I'll ask mine upfront. I'll just ask a couple. So thank you for your commentary about 2020, Eduardo. Any comment that you might make about Q1? At least, will it be typically seasonally like it was last year? That's the first question in Q1.

The second question is, are there any accounting changes contemplated for 2020? So we're not surprised. Any accounting changes?

And then the third one, Ricardo, thank you for all these disclosures about the usage. You said 50% of bank usage -- bank clients are using a 3-plus times -- 3 or more products, you said that the PagBank clients open 11 times per week. I was just wondering if you could help us with which of the products in terms of priority. You talked about prepaid, cash cards. But which of those are they using the most frequently?

So the first on Q1, the second on the accounting and the third on the usage.

--------------------------------------------------------------------------------

Eduardo Alcaro, PagSeguro Digital Ltd. - Chief Financial & IR Officer, CAO and Director [71]

--------------------------------------------------------------------------------

Okay. Let's start with the accounting. I think we have talked to analysts and investors about this. And the major driver here is really to improve the service to our customers. The membership model is something that has been already adopted by other players in the marketplace. And in September, we decided to implement the membership model known as comodato. And as I said -- as I told you, this is becoming a standard state model in Brazil because there is no change for our merchants on pricing. But moving to the membership model, we improve our customer service. We've reduced bureaucracies in the process such as issuing invoices, registration process, so on and so forth. So we deliver a better POS activation to our clients.

So I see the accounting as a consequence of the change in the model. We are not expecting any relevant changes in our business model that reflects in the accounting. So I mean there is no planning, let's say, accounting change as a result of changes in our business.

Regarding Q1, we are seeing basically the same seasonality that we saw in past quarters. So basically, I mean, in Q4, we have a higher share of debit in our mix. Of course, volumes are positively impacted by the holiday season. But in Q1, we are not seeing nothing different from what we have seen in the past 2 years as a public company.

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [72]

--------------------------------------------------------------------------------

Yes. And regarding the usage of the app, James. Usually, people, they go to the app to make more common activities and to move their money, right? So usually, they pay bills. They make mobile top-ups, and they use the prepaid card or the cash card, just the way they can do their more common, let's say, banking activities. That's how they use the app.

--------------------------------------------------------------------------------

Operator [73]

--------------------------------------------------------------------------------

Next question comes from Victor Schabbel, Bradesco BBI.

--------------------------------------------------------------------------------

Victor Schabbel, Banco Bradesco BBI S.A., Research Division - Research Analyst [74]

--------------------------------------------------------------------------------

First, we would like to congratulate you guys for taking a more conservative approach regarding the recognition of membership revenues that you guys are now deferring. So we really appreciate that. And second, we just have a couple of questions. One, is it right to expect the financial expenses that came a bit higher to be related to prepayment with IFRS of about BRL 2 billion this quarter? Should we expect this to be capped at these levels going forward?

And the second question is about the number of hubs or offices, commercial offices that you guys might have to serve is likely bigger merchants. How many do you have already, if you have any. So just these 2 questions.

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [75]

--------------------------------------------------------------------------------

Victor, thank you for the question. This is Ricardo. Just talking about these commercial offices, we are always testing new sales channels. We have a very few commercial offices that we are testing. Again, we had the demand for a little bit larger merchants, some of them require this physical presence. So that's why we are testing. It's very small. We're not going to spend too much time looking to that at this point. It's just a test for additional sales channels. So nothing material, not even to keep discussing at this point.

--------------------------------------------------------------------------------

Eduardo Alcaro, PagSeguro Digital Ltd. - Chief Financial & IR Officer, CAO and Director [76]

--------------------------------------------------------------------------------

And talking about our financial interest expenses, it came a little bit higher. This is because as a result of the mandatory guarantee that we need to put in the Central Bank to guarantee the deposits from our clients. So I mean, at the end of the day, it's really small because if you look at Selic rate of 4.25% and a few basis points over Selic, because in the asset side, we have the revenue income. In the other side, we have the interest expense. So at the end of the day, it's a few basis points over CDI because we need to secure those deposits. And those deposits, they have an income that is very close to the Selic rate. And we pay the -- at the end of the day, the net between the expense and the income that we have.

--------------------------------------------------------------------------------

Victor Schabbel, Banco Bradesco BBI S.A., Research Division - Research Analyst [77]

--------------------------------------------------------------------------------

So we should expect this level to be, let's say, like that going forward, right? So this would be a good ballpark estimate, right?

--------------------------------------------------------------------------------

Eduardo Alcaro, PagSeguro Digital Ltd. - Chief Financial & IR Officer, CAO and Director [78]

--------------------------------------------------------------------------------

Yes. And there are several ways to do that. So for example, as Ricardo mentioned, we are going to issue CDs, starting March. We have the option of securitizing those receivables, and we have also the option to discount those receivables with the issuing banks. So I mean, at the end of the day, it's just a matter of where we will fund. And the levels that we saw in Q4, I mean, that's basically the same levels that it should observe going forward.

--------------------------------------------------------------------------------

Operator [79]

--------------------------------------------------------------------------------

I would like to invite Mr. Ricardo to proceed with his closing statement.

--------------------------------------------------------------------------------

Ricardo Dutra da Silva, PagSeguro Digital Ltd. - Executive Officer & Director [80]

--------------------------------------------------------------------------------

Hi, everyone. Thank you very much for your time, for your attention. Talk to you soon and see you next call. Thank you very much.

--------------------------------------------------------------------------------

Operator [81]

--------------------------------------------------------------------------------

And this concludes PagSeguro's conference call for today. Have a (technical difficulty)