Q3 2023 PagSeguro Digital Ltd Earnings Call
Participants
Alexandre Magnani; CEO & COO; PagSeguro Digital Ltd.
Artur Gaulke Schunck; Chief Financial & IR Officer, CAO and Director; PagSeguro Digital Ltd.
Éric Krahembuhl de Oliveira; Head of IR; PagSeguro Digital Ltd.
Ricardo Dutra da Silva; Principal Executive Officer; PagSeguro Digital Ltd.
Alexander Wexler Markgraff; Associate ; KeyBanc Capital Markets Inc., Research Division
Daer Labarta; VP; Goldman Sachs Group, Inc., Research Division
Gabriel Gusan; Research Analyst; Citigroup Inc., Research Division
James Eric Friedman; Senior Analyst; Susquehanna Financial Group, LLLP, Research Division
John James Coffey; Research Analyst; Barclays Bank PLC, Research Division
Jorge Kuri; MD; Morgan Stanley, Research Division
Joshua Michael Siegler; Research Analyst; Cantor Fitzgerald & Co., Research Division
Kaio Penso Da Prato; Analyst; UBS Investment Bank, Research Division
Mario Lucio S Pierry; MD in Equity Research; BofA Securities, Research Division
Neha Agarwala; Analyst, LatAm Financials; HSBC, Research Division
Pedro Leduc; Research Analyst; Itaú Corretora de Valores S.A., Research Division
Sheriq Sumar; Research Analyst; Evercore ISI Institutional Equities, Research Division
Soomit Kumar Datta; Founding Partner & Analyst of Latin America; New Street Research LLP
Yuri Rocha Fernandes; Analyst; JPMorgan Chase & Co, Research Division
Presentation
Operator
Good evening. My name is Carolyn, and I will be your conference operator for today. Welcome to PagSeguro Digital Earnings Call for the Third Quarter 2023. (Operator Instructions) This event is also being broadcast live via webcast and may be accessed through PagSeguro Digital website at investors.pagbank.com. Participants may view the slides in any order they wish. Today's conference is being recorded and will be available after the event is concluded. I would now like to turn the call over to your host, Éric Oliveira, Head of IR. Please go ahead.
Éric Krahembuhl de Oliveira
Hello, everyone. Thanks for joining our third quarter 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.
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 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 website 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 a substitute for our financial information prepared and presented in accordance with IFRS as issued by the IASB. 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.
Ricardo Dutra da Silva
Hello, everyone, and thanks for joining our third quarter 2023 earnings call. Once again, I have the company of Alex, our CEO; and Artur, our CFO.
Going to Slide 3. I'm happy to announce in Q3 2023, we have reached the largest net income, both GAAP and non-GAAP in the history of the company.
In the past years, we have successfully managed the impacts related to the high interest rates for a longer period while reshaping our funded structure backed by deposits. More recently, we have been seeing better operating trends in our volumes, combined to Brazilian interest rate decrease, which should positively contribute to our funding strategy to keep delivering growth with the profitability. Our non-GAAP net income reached BRL 440 million, growing 7% year-over-year. Despite our increasing footprint to merchants, largely in the long tail, accretive to gross profit besides lower take rates, our margins continue to improve, resulting in BRL 894 million EBITDA, reaching the highest margin since Q3 2021.
Total revenue was flattish year-over-year and grew 5% quarter-over-quarter, reaching BRL 4 billion. Disciplined CapEx deployment resulted in BRL 10.6 billion in net cash balance in the end of the quarter, 17% higher than previous year, driven by 36% growth in cash earnings versus Q3 2022.
Going to the Financial Services section, we have continued (inaudible), constantly improving our risk management models. We have been exploring new addressable markets by offering collateralized products and despite the interchange cap impact in our revenues from Financial Services division, revenues posted a quarter-over-quarter growth, and EBITDA was positive again, reaching BRL 2 million. PagBank cash-in was BRL 56 billion, driving up deposits to the all-time high level, reaching BRL 21.6 billion, reinforcing the closed loop advantage backed by a comprehensive set of payments beyond cards accepted while lowering the company's cost of funding.
In payments, we keep growing in a profitable way and our TPV reached almost BRL 100 billion, 11% year-over-year growth. Going to Slide 4, our focus on new technologies and product developments continue in 2023. In this slide, we share the main milestones of our company. In October, our company executed its first transaction using DREX, the Brazilian digital currency through the blockchain platform, embracing the digital assets revolution. This month, we just announced the facial authentication feature for our clients aiming to use our payment link option, reinforcing our security features while improving user experience and confidence.
On payments, we announced our Tap On phone solution, fully embedded in PagVendas app, our proprietary ERP software with more than 1 million users. We also launched our collection platform, a comprehensive set of payment solutions, covering cards acceptance, PIX QR Code and boleto issuance, empowering merchants to accept all payment options. On Financial Services, in addition to products launched for consumers, such as investment options, debit cards and so on, we also launched products focused on SMBs and larger merchants. This year, we have launched our payroll solution, allowing entrepreneurs to manage their employees' paychecks in a seamless way, and we also launched our PagBank business account that allows direct deposits from third-party acquirers into PagBank account.
Now I pass the word over to Alex for the commentaries on the third quarter 2023 operational highlights.
Alexandre Magnani
Thank you, Ricardo. Hello, everyone. We show on Slide 5 that our merchant acquiring business remains solid and through the combination of our superior value proposition and the broad reach of our sales channel, we have been able to accelerate TPV growth faster than the industry, driven by our merchant segments. TPV reached almost BRL 100 billion, growing 11% year-over-year. We continue to observe better TPV growth through the first weeks of the fourth quarter. MSMB TPV posted 15% growth versus third quarter 2022, primarily driven by SMBs, followed by micro-merchants. As Ricardo mentioned earlier, we also noted a rebound in TPV growth from large accounts, which is composed by merchants with TPV above BRL 500,000 per month.
Moving on to Slide 6, the instant prepayment product which combines payment service and financial service through PagBank account, has promoted an increasing footprint in larger merchants, resulting in 22% year-over-year growth in TPV per merchant. Our strategy to focus on disciplined CapEx deployment did not interfere in our POS sales uptrend.
In August, we presented the record POS sales level since January 2022, with the highest POS activation ratio since mid-2021. Consequently, we reached 6.7 million active merchants. At first glance, the net merchant's loss has been raising concerns about our ability to grow our business and revenues. However, when we consider active merchants with at least one transaction in the past 30 days, excluding nano-merchants, the positive trend is revealed, supported by our TPV growth rebound in all segments and the improving cash earnings generation.
PagBank clients grew 16% year-over-year, surpassing 30 million clients, placing us among the most relevant Brazilian financial institutions, adding more than 4 million new clients in the past 12 months, as shown on Slide 7.
Our active clients base reached 16.7 million clients, leading to BRL 56 billion in PagBank cash-in, composed by PIX and P2P wire transfers inflows into PagBank accounts from other financial institutions. Combined, TPV and PagBank cash-in led deposits up 11% compared to the third quarter of 2022 and 18% quarter-over-quarter, reaching a record of BRL 21.6 billion. This deposit level was boosted by our AAA rating attributed by S&P Global, which enhanced our CD distribution among the 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 43% year-over-year, driving down our annual percentage yields to 93% of the CDI.
Slide 9 shows that our credit portfolio reached BRL 2.5 billion due to our ongoing run-off of the working capital loan portfolio, combined to the tax planning write-off of nonperforming loans we started in the last quarter. Payroll loan and FGTS already accounts for half of the portfolio, expanding our offerings to consumers primarily through a seamless experience and a cheaper cost structure. Our go-to-marketing strategy for secured loans is based on competitive APRs and a digital end-to-end onboarding risk assessment, underwriting and collections. This also includes our offering of credit cards backed by investments and savings. The total credit portfolio share composed by secured products reached 60%, resulting in the ongoing downtrend in NPL 90+ to 10.7%. Now I turn over to Artur for the financial highlights of the third quarter '23. Artur, please.
Artur Gaulke Schunck
Thanks, Alexandre. Hello, everyone, and thank you for joining us in the call. This quarter, I am proud to announce all-time high net income, GAAP and non-GAAP. Total revenue and income grew 5% due to TPV growth and gross profit grew 3% on a quarterly basis, also positively impacted by lower losses and higher level of deposits that reduced financial expenses. Our commitment to efficiency led another decrease in operating expenses, driving 5% EBITDA growth quarter-over-quarter with similar improvement in EBITDA from payments vertical while EBITDA from Financial Services got back to the positive territory despite the effects related to the cap on interchange of prepaid cards, lowering our revenues since second quarter.
Net income on a non-GAAP basis reached BRL 440 million, growing 6% quarter-over-quarter and 7% year-over-year. Earnings per share reached BRL 1.27, BRL 0.09 better than last quarter and 10% higher than third quarter 2022. Cash earnings amounted to BRL 365 million, 40% higher than the second quarter of 2023 and 36% versus the same quarter of last year.
On Slide 11, revenues from Payments unit grew 5% quarter-over-quarter, while gross profit grew 4% in the same period. TPV growth and transaction cost savings due to interchange cap impacted positively the current performance versus third quarter 2022. Comparing quarter-over-quarter, the increase was due to lower take rate partially led by client mix change towards large merchants with lower take rates but incremental gross profit contribution.
Adjusted EBITDA on the Payments division reached BRL 892 million, an increase of 5% quarter-over-quarter and 7% year-over-year. On the next slide. Financial Services vertical's total revenues reached BRL 260 million in third quarter of 2023, 8% higher than the second quarter. On the other hand, gross profit decreased to BRL 101 million, down 9% on a quarterly basis, mainly led by an increase in provisions for losses due to a credit model update based on IFRS 9. Besides the higher provision levels, adjusted EBITDA grew BRL 64 million from third quarter of 2022, back into the positive territory.
Moving to Slide 13. Financial expenses closed at BRL 820 million versus BRL 921 million in the third quarter of 2022. This decrease is mainly explained by our lower average cost of funding, driven by higher level of deposits. On a quarterly basis, financial expenses increased due to more 2 working days in third quarter 2023 versus last quarter. Total losses decreased 39% year-over-year, accounting BRL 165 million, driven by lower provisions for expected credit losses, healthier coverage ratio and credit underwriting mostly on secured projects. On the other hand, the increase quarter-over-quarter is mainly due to higher provisions led by modeling review for working capital and payroll loans.
Operating expenses reached BRL 583 million, down 5% year-over-year and 1% quarter-over-quarter. This amount represents 14.5% of total revenue and income lower than the level of third quarter 2022. Despite of lower revenue levels derived from the regulatory change and even with 5% of inflation in the last 12 months, our headcount resizing and marketing and infrastructure optimization led to the leverage. In the Slide 14, our cash earnings continued to gain momentum, driven by discipline in total costs and expenses, revenue growth, stable CapEx and higher margins, reaching a positive amount of BRL 365 million, up 36% versus same period of 2022. CapEx marked BRL 529 million, up 5% year-over-year due to inflation and the upbeat trends in merchants' gross adds that requires additional POS inventory levels, but lower quarter-over-quarter, driven by better merchants' cohorts and POS activation, our discipline in capital allocation and efficiencies in IT investments remain, which we expect to result in a similar or lower capital expenditure disbursement versus last year.
Depreciation and amortization, including POS write-off, totaled BRL 393 million, representing close to 10% of total revenue and income, keeping the pace to coverage to CapEx levels in the coming quarters to unlock additional profitability in the future. We expect this stabilization to happen in the second half of 2024, in line with CapEx. On the final slide, our net cash balance ended the third quarter at BRL 10.6 billion. In the past 12 months, our cash generation amounted to BRL 3.7 billion, which we invested BRL 1.8 billion in POS purchase and technology developments and BRL 330 million in buyback shares.
In October, treasury holds more than 4% of total shares issued. The company bought back BRL 1 billion since 2021. That represents 81% of the total program approved in 2018. Our equity position continued to increase with 58% being composed by returning earnings, reinforcing our commitment to shareholders on capital allocation and returns.
Now we have ended the presentation, and we will start the Q&A section. Operator, please.
Question and Answer Session
Operator
(Operator Instructions) The first question comes from Mario Pierry with Bank of America.
Mario Lucio S Pierry
Congratulations on the quarter. Let me ask you 2 questions, please. First one is on the take rate. We saw that it declined quarter-over-quarter from 4.06% to 3.97%. You talked about a change in client mix to the large accounts, it seems like it. But I was wondering if that's all of the impact was just from changing mix, how are you seeing the pricing environment, how are you seeing the competitive environment and how do you think your take rate behaves going forward?
And then the second question is related to -- like you talked about having BRL 10.6 billion in cash, how you have this buyback program opened since 2021, you executed 80% of the program so far. But I was wondering like how do you see future distribution of excess capital, either in buyback or dividends?
Éric Krahembuhl de Oliveira
This is Eric. Thanks for the question. When we think about the take rate trajectory, we always have to remind that the breakdown take rates are based on the merchants' mix, like you said, duration mix and also promotional prices that we also make for a certain period of time. If you remember, we started doing the promotional prices for our online sales channel in the beginning of the year and necessarily as we continue to see uptrend beat, and uptrend in gross adds, naturally, most of these gross adds comes from micro-merchants, which have access to the promotional prices for the first month's transaction with us, so promotional prices for a certain period of time, merchant mix and also duration mix.
We understand that the take rate trajectory in the short term should be slightly down, especially in Q4 for seasonality reasons as debit cards tend to increase the penetration in comparison to overall TPV. But moving forward, as our footprint in larger merchants stabilize, take rates combined to the financial services revenues should also stabilize over 2024. So I think it's reasonable to expect take rates in a consolidated view to stabilize in 2024 but naturally always considering merchants mix, duration mix and promotional prices that we do. Now let me pass the word to Artur.
Artur Gaulke Schunck
Mario, it's Artur speaking. Thank you for your question. Good to talk to you. Regarding to buyback program and the BRL 10.6 billion of net cash balance that we have, BRL 10.6 billion, it's important to mention that it's a comparison of assets and liabilities, operational assets and operational liabilities. At this point, we do not have the intention to distribute dividends. We have been buying back shares every quarter. We are expecting to continue doing that due to the current attractive valuation of the company.
The buyback program launched in 2018. We executed 81%. There is BRL 200 million available at this point. And there is a new buyback program under discussion in the company and as soon as possible and as soon as we decide to launch this new one, we will inform the market. And so this is the thing that we are thinking about the share buyback.
Mario Lucio S Pierry
Great. Let me follow up then on what Eric talked about the promotions that you started promotions for online at the beginning of the year, so is it fair to assume that these promotions have been going on since the beginning of the year or have you stopped the promotions?
Éric Krahembuhl de Oliveira
Yes, since the beginning of the year. But when we look at the cohorts evolution in the time line, we see the decisions that we took 3, 6 months ago, posting benefits, especially in the gross adds 6 months later. So the decision that we took in the beginning of the year are reflecting in better gross adds trend and necessarily the share of promotional prices for a certain period of time, much more now than the first half '23.
Mario Lucio S Pierry
Okay. And how are you seeing the competitors behaving, Eric?
Ricardo Dutra da Silva
Mario, this is Ricardo. We don't see competitors being irrational. Of course, there are some competitors that are trying to get some market share for a while. But once they realize that it's hard to make money, they give up, they step back. So we don't see anyone being irrational. If you look at what happened in Q3, looking at the trends more recently, we were the company that grew more quarter-over-quarter than all the market. We grew like 8% quarter-over-quarter and the market grew 4%.
So I mean, we've been executing well. As Eric said, we also have this promotion that we are getting some results at this point. But going back to your question, we don't see anyone being irrational. And we think we have a good pricing point as of now to keep growing. And as you can see in our results, we had the highest net income in both GAAP and non-GAAP. So I mean -- we think we are in the right lever in terms of price and growing.
Operator
The next question comes from Jorge Kuri with Morgan Stanley.
Jorge Kuri
Everyone, congrats on the numbers. I wanted to ask you about your credit portfolio. I'm looking at Slide 8 of your presentation. We continue to see the total loan book coming down quarter-on-quarter. I'm wondering where is your risk appetite? At what point do you think this can start inflecting -- some of the smaller, more fintech-driven lenders like Banco Pan, Banco Inter, Nubank are showing significantly more growth. What do you need, either internally or externally to start to see the portfolio of credit really taking off and making best use of your capital and your deposits?
Artur Gaulke Schunck
Artur speaking. Our credit portfolio is growing when you consider where we have focused on payroll loan, FGTS and credit card backed by CDs. So the portfolio is growing. But at this quarter, we also had some write-offs for the working capital loans. It's our running off operation. Regarding to when we can back to offer credit, at this point, we consider focus on secure rate. We still see difficulties in the market when we compare to other players and the banks reducing the limits for credit cards. We are waiting for the conditions in the market to improve to back to offer maybe in a different way, credit.
But at this point and in the coming quarters, we will focus 100% in the secured portfolio in the secured originations and focus on payroll loan, FGTS and credit card backed by any investment that we receive from the clients. We continue working in the models and all the, I would say, infrastructure to offer credit at the right moment, we will be able in the future to talk in a different way about credits.
Operator
The next question comes from Gabriel Gusan with Citi.
Gabriel Gusan
Maybe to follow up on Jorge's question about the credit portfolio. Can you talk about your appetite specifically to the SMB segment? I understand, of course, in your first attempt, there was a mix of micros and SMBs and how you continue to see the growth in SMBs outpacing micros. Is that something that should continue seeing that we will see PAGS more active in this SMB space? And my second question is about CapEx. We see it's stubbornly high despite you reducing your exposure to micro-merchants, focusing more on SMBs. So I'd like to hear your thoughts on that. Thank you.
Ricardo Dutra da Silva
Gabriel, This is Ricardo. Regarding the SMBs, as Artur said to Jorge, we are looking at this point and we are focused on secured products, secured credit products which means FGTS, payroll loan and credit card backed by CDs. It doesn't matter to our consumers if you're an SMB business. That's the -- those are the products that we're going to focus on and we're going to keep accelerating in the following quarters. At some point, of course, if you want to be a bank, you've got to have unsecured products, but we just don't think that's the right time to do so.
When you look at the market, we see even the incumbent banks struggling with some NPLs and delinquency rates. It seems that it's getting better, the scenario. But at this point, we don't think it's worth to take the risk. We are going in a healthy way in this secured products, and we'll keep investing on that. So if your question was related to unsecured products to SMBs, we do not expect to do that in the short term. If something changes, we'd let you know, but we don't expect to have this type of products in the short term. We'll keep working on secured products (inaudible) CapEx.
Artur Gaulke Schunck
It's Artur speaking. Thanks for the question, and good to talk to you, too. Regarding to CapEx, we remain disciplined on this investment that we are doing. It's important to mention that the CapEx is not only related to POS, but also related to technology developments, and we see many opportunities to develop new features and also improve the features that we have today to getting better the offer to our clients as most as possible. We are expecting to have a CapEx this year slightly lower than 2022.
That means the level of CapEx today is reasonable for us and is a good lever to maintain the company running and attract new clients, increasing the gross merchants for the company. In 2024, we probably will have the similar CapEx of 2023. And it's important to mention that in the second half of 2024 onwards, our CapEx levels tend to be similar to our D&A plus POS write-off. So in the past years, the expenses related to DNA and write-off increased a lot and put pressure on our bottom line. And we are seeing that in the second half, we have a better way to see the bottom line for the company.
Operator
The next question comes from John Coffey with Barclays.
John James Coffey
Alex, I had one question for you on some of your prepared remarks. I think you said that you continue to see better TPV growth through the first weeks of the fourth quarter. Should I interpret that as meaning that you're seeing growth around 11%, more than 11%. So I'd just be interested in your thoughts on that. And then for my second question. It was really on the financing expenses that you have. And I'm just, I think, going over to Slide 13 in your deck, where I think one of the drivers for having the lower financing expenses year-over-year have been your deposits. Should we take this just to mean that you're becoming more and more insulated from the impacts of the Selic rate that perhaps as the Selic declines, it makes less of a difference in your financing expenses because you're almost funding most of the book or a lot of the book from your deposits. So those are my 2.
Alexandre Magnani
Okay. John, this is Alex and I will answer the first part of your question. Actually, we are growing higher than 11% in the first weeks of the fourth quarter and we see a very good trend in terms of growth moving forward. This is the result of this new growth cycle. We're just starting the beginning of the second semester of this year. First semester, we did a lot of optimization and adjustments in our operation, and we suffered in terms of TPV growth. And now we are regaining this growth momentum, and we are doing better in the fourth quarter than we did in the third quarter.
Ricardo Dutra da Silva
And John, this is Ricardo and I will start the answer to the second question regarding the dependence or the linked with Selic. You're right. When you look at the Slide 13, we are more and more using deposits for funding and for all the operations that we have, meaning prepayment and also the credit that we offer for our clients. We -- at the end of the day, if Selic goes down, it's good news because we're going to have lower costs. And even if you have deposits, they are linked with Selic. So look at Slide 8. We see that our deposits, we are paying the blend and 93% of Selic. So if Selic goes down, we're going to take advantage. So as deposits grow more and more, we don't need to rely on third parties for the funding, and we have a lower cost as a percentage of Selic considering the deposit.
So answering that in a different way. If Selic goes down, we're going to take advantage because at the end of the day, the cost that we have for partnership expenses are linked to Selic, and deposits have a lower cost than third parties operations that we might have in the market.
Artur Gaulke Schunck
Complementing the answer. When we talk about deposits, especially when we see deposits on our platform, it's most cheaper than the deposits received from out of our platform and third-party platforms. So we have (inaudible) that considers deposits, on capital. That is based on return net earnings. There is no impact in the P&L, in the cost of the P&L. And we mix with other funding institutions that also help us to run the business.
Going forward, we are expecting to have or to continue to have this good performance in financial expenses because we are most efficient every time. And so this was the first time when we compared year-over-year that we are reducing (inaudible) so it's good for the company. Obviously, part of that is related to Selic down I would say downtrend because we are expecting to have more cut in December, but also because we are more efficient in the funding that we developed for the company.
Operator
The next question comes from Yuri Fernandes with JPMorgan.
Yuri Rocha Fernandes
I have a question here on PIX P2M. I would like to know if you can share anything with us how relevant is it becoming -- some competitors are starting to disclose that information. So just checking if you can help us to understand a little bit this PIX? And then I will ask a second question?
Ricardo Dutra da Silva
This is Ricardo. Thank you for the question. Well, first of all, it's important to say that our take rates, we consider (inaudible) revenues, and we also consider PIX volumes in the denominator. We know some other players in the market that may differ, but we use the PIX revenues to our code, and we also use the PIX TPV denominator. We don't disclose exactly number or the volumes of PIX that we have, but they are similar to what you see in the market with other players. Yes, so as a percentage of TPV, it is very similar to what you see in other players in the market.
Yuri Rocha Fernandes
That clearly helps a lot. And on deposits, you already discussed in the previous question, but it was not very good, right? 20% quarter-over-quarter. This is not a seasonal quarter, right? It seems we're doing something differently. What are the drivers for this growth? Why was deposit stable for, I don't know, 3 quarters and now we are seeing deposits accelerating? What are you doing to bring these deposits (inaudible)?
Artur Gaulke Schunck
It's Artur speaking. Relating to deposits, it's not a silver bullet that we are doing. It's many things differently. The management is 100% focused on that because we know that it's important to us, increase the number of deposits. We are working to provide better service to the clients. The AAA rating that we received from S&P Global is also helping us to bring this money to the company in the cheapest way. TPV volume growing helped us because part of this deposit come from merchants. So it's several things that we are doing. And also, I can tell you that we increased the level of the features that we are offering to the clients and it is much better than in the past. And so many things that we are doing, it's not only one thing that brings this result to us.
Operator
The next question comes from Kaio Prato with UBS.
Kaio Penso Da Prato
Hello, everyone, and good evening. Thank you for questions. I have 2 on my side, please. First, on your reported losses this quarter. So we saw that the expected credit losses increased during the quarter, and you mentioned that it was related to some change regarding the IFRS 9. So I just would like to have more details here. What was the change? If this was a one-off effect or not? And also, still on losses, if you could better explain the drivers behind the sequential increase on chargebacks which surpassed the level of TPV growth. So just like to understand the drivers behind that.
And if this is related to the prepayment product with instant settlement or not, if you are offering these nowadays or not? And the second question is related to the expectations for 2024. If you can provide us some details and if you expect to provide any type of guidance for the year, I don't know, in the coming quarters? That's it on my side.
Artur Gaulke Schunck
Artur speaking. Good to talk to you. Regarding to expected credit losses, this quarter, we had the impact of payroll loan and working capital loan IFRS 9 review. That increased the provisions. This is the explanation why we increased the provisions at this point. On a yearly basis, we use it to review the models to ensure we have the right level of provisions to cover expected losses or future expected losses.
But the most important point is the new credit originations are secured, which relies on a lower level of provisions going forward because we are increasing this origination related to secured products that will represent a lower provisions going forward. Regarding to chargebacks, we include their operational losses, we include other things related to issuing cards and chargebacks from online and POS chargebacks. If we compare the amount, okay, it's higher. But when we compare in terms of basis points, it is lower than the last year. That is most important to us because we are seeing that our fraud prevention is increasing.
Regarding 2024, Kaio, we still think it is a little bit early to give some color about 2024. But I would say to you that as Alex said in his speech, we are seeing very good growth in terms of volumes, TPV growth in Q4. We also expect the interest rate of the country is still to have another cut, maybe 25 or 50 bps at the beginning of December. So we are optimistic with Q4 to be a very good one.
Usually in Q4, we have more volumes because of the holiday season with Black Friday and Christmas and so on. So we are very optimistic with Q4. And from there, we can give more color about 2024. But I mean we are confident it's going to be a good quarter as far as we have the previous numbers. We are in half of the quarter at this point. So we are optimistic about it.
Operator
Next question comes from James Friedman with Susquehanna.
James Eric Friedman
So Artur, just in response to the prior answer, because the IFRS issue came up with one of your competitors as well though it may have been for a different reason. But do you mind just elaborating on what you just said in the prior response about the impact of the working capital. And as you answer that, are there any other changes in IFRS that you're anticipating that we should also be aware of before they happen?
Artur Gaulke Schunck
Thank you for the question. So the most relevant impact is related to the runoff operation of working capital. So we increased a little bit the provisions at this point. It's -- I would say that it's like a one-time impact in this quarter. We are not expecting any other change in the coming quarters.
James Eric Friedman
Okay. Clear. And then just a kind of a higher-level question, but I realized for a while now, you have just on extent emphasized SMB to deemphasize the less structured long tail. But I'm just wondering if you're anticipating any additional consequences of that, whether it's -- how you see like the take rates evolving longer term or the additional opportunities that will create just as you transition the company that way for -- and I know it's a very open-ended and big-picture question, but as you move the company in that direction, how do you anticipate the financial results are going to evolve?
Ricardo Dutra da Silva
James, this is Ricardo. Just to be clear, we are not emphasizing the long tail. We're just saying that we're seeing a big opportunity in SMBs. As you can see, (inaudible) we are growing like SMBs 18% and long tail growing 9%, important in Slide #5. So we are growing -- even if we consider long-tail, we are growing 9%, which is the same growth of the industry. And remember, some of our long-tail clients, they become SMBs as time passes by.
They keep working with us, at some point their businesses grow and then they become an SMB. So if you look at the composite of these 2 parts, both SMB and long tail are growing 15% which is like 60% more than what the industry grew in Q3. So it doesn't mean that we are deemphasized, but we are seeing a very good opportunity in SMBs as well, not only in acquiring but also in the banking side. We have a very strong, very powerful value proposition for this type of clients. That includes instant settlement, banking, (inaudible) software.
So that's why we see opportunities coming there. In terms of -- coming from there. In terms of financial results, as we tried to explain before, our take rates might go down as a percentage, but in absolute terms, it makes total sense because SMBs have much more volume when compared to long tails, sometimes 10x bigger. So as a percentage, the net rate is lower, but as absolute term, absolute dollars makes total sense. So that's why we keep growing. That's why in Q3, we had the highest net income of the company ever.
And we don't think that's going to change. I mean take rates might go down as we said before or maybe stabilize or slightly go down. But in absolute terms, we expect to keep growing. So that's the overall picture. We still see opportunities in long tail, and we also see opportunities in consumers as well. We keep growing in Q3 this year. If you look at net adds, PagBank was the best quarter of the year. So I mean, we still see some avenues of opportunities to explore going forward.
Artur Gaulke Schunck
Also, I would just like to complement that in this quarter, we had a record of POS sales since January 2022, with the highest POS activation since mid-2021.
Operator
Next question comes from Neha Agarwala with HSBC.
Neha Agarwala
A few observations from your comments so far. It seems like on credit, you are not even testing or piloting the unsecured loan product at the moment because you are fully concentrated on the secured lending side. But first, is that right? Or it's something different? And I do not understand correctly. Because when we talk to most of the other players in the market, while they had been restricting originations so far, even the larger banks are now talking about the potential acceleration in growth.
So I just want to understand that if you're not testing, if you're not open to lending in the unsecured market, then your competitors will be ahead of you when the market conditions improve. So what are your thoughts on that? And did I understand correctly that lending to the (inaudible) is not your priority because I would assume that the SMBs are probably less risky than the long tail when it comes to unsecured lending product, so clarification there. And this goes to my next question, which is on the take rate. The take rate has been coming down given the change in mix. And next year, you see more stability in terms of mix, so take rates should stabilize. But what about '25, '26, do you see take rates continue to come down due to competition? Or do you think new products like banking or credit would be able to offset any pressure on take rates from competition or lower rates? So some clarification on the trends there?
Ricardo Dutra da Silva
This is Ricardo. I'll try to address your question. If not clear, let me know. But we are testing unsecured credit for small volumes for some clients. And for -- we have some credit pilots, we are doing a small test for different clusters of clients. So we do have processes in place as we have the models, we have the billing process in place and so on. So we are testing that. But the point is even when you look at the credit cycle, as I said before, it seems getting better. It doesn't mean it is already the time to jump in. But it seems to be getting better.
Many, many big banks or the incumbent banks in Brazil, they had -- they struggled with NPLs in the previous quarters. Now in Q3, a little bit better for some of them, but it doesn't mean that it's time to jump in. We are ready to do that when you think it's the right time, when you think the risk return makes sense. But to be honest, we find a way with secured products that we are happy with that and we'll accelerate that as much as we can. It doesn't mean that we cannot make unsecured products in the near future.
I'm just saying that's not the focus, but we do -- we are testing, just to answer your first question. In terms of SMBs, we see that we have a strong value proposition that doesn't require us to offer credit for these clients that we are getting our base. Of course, there could be some SMBs out there that they just want to have an acquiring company, there is any loan or lending offer and so on. But we don't see that as a block for us to keep growing. As I said before, in Slide 5, we are going like 18%, double of the industry in SMBs year-over-year.
Still a lot of room to grow in SMBs. We see there is bad service out there, and we can get these clients with the value proposition, instant settlement, digital free banking and so on. But we don't think that -- we don't have the plan to keep offering loans for the SMBs at this point. Regarding take rates, as we said, 2024 is likely downward stable. In 2025, 2026, it's hard to give you some visibility. But remember that as we grow our Financial Services business unit, we also are going to have a tailwind in our take rate because they're going to have more revenues with the same clients.
So it's hard to say to you how it's going to be in 2025, 2026. But structurally saying, what we see at this point is TPV that we are seeing in Q4 is growing. Interest rate seems to go down, not only in Brazil but all over the world. So all the headwinds that we had like 2 years ago, we are seeing that they are disappearing or getting better as we look into the future.
So I mean, I cannot give you what's gonna be in 2025, 2026, but it seems like Q4 is going to be a good quarter and we expect to have a good 2024 as well.
Operator
The next question comes from Joshua Siegler with Cantor Fitzgerald.
Joshua Michael Siegler
Nice print today. First of all, I was wondering if you could comment on how you're thinking about the longer-term capital allocation of the business given the cash generation you have going?
Artur Gaulke Schunck
Well, Josh, it's Artur speaking. Thank you for the question. Regarding to long-term capital allocation, what I can tell you is we are 100% focused and continue to delivering the results that we are delivering, growing quarter-over-quarter and using part of these results to reinvest in the company to reduce the dependency on other financial institutions to fund part of the operation. We have very good margins on advancing receivables to merchants, and we will continue doing that.
On top of that, we have this buyback program that we expect to approve a new program in the coming months, and then we will inform to the market that we have a new program and the rules of this program. And at this point, we are not discussing dividends. So -- just our focus on continuing delivering results, investing part of this money to buy back shares, investing part of this money in the operations.
Joshua Michael Siegler
Great. That's helpful. And I just wanted to dive a little bit deeper into 2024, potential stabilization of take rate. Can you give us some more KPIs that would be integral to seeing that take rate really start to stabilize?
Éric Krahembuhl de Oliveira
Well, when we see, again, take rates, we have not stopped moving up market only to post higher take rates because by the end of the day, I think we have been showing quarter after quarter that as the company keeps moving your strategy to extend the services beyond long tail, this business looks accretive to EPS. What are the drivers for that? Primarily better spreads, given the deposit base by lowering our cost of funding structurally. And also the financial services uptrend in terms of revenues that can contribute positively to the take rate evolution moving forward.
Naturally, we expect in some point a much more stabilized TPV mix breaking down by merchant size than we have nowadays that necessarily should bring more stable take rates moving forward. But again, we are not looking take rates. We are looking merchants growth and how they contribute to the bottom line. If we look only take rates, we are losing the focus, which is necessarily grow with profitability by delivering EPS growth quarter-over-quarter and year-over -year.
Joshua Michael Siegler
Okay. That's very helpful, Eric. And congrats again on the quarter.
Operator
The next question comes from Soomit Datta with New Street Research.
Soomit Kumar Datta
And great, great numbers. Just on that point, it seems like the momentum in the business in Q3 and in early Q4 is really strong. You talked about some initiatives in the first half of the year really coming through. I mean just to dig into that in a bit more detail, you talked about some promotional pricing being part of that. Maybe just help us understand what else you've done and what else is happening to continue that TPV momentum would be helpful. And then I have a quick follow-up, please.
Ricardo Dutra da Silva
Thank you for the question. Good to hear. It's Ricardo. The promotions that we have, we always have promotions all the time depending on the seasonality, if it's a holiday, if it's a Black Friday, we always have promotional prices. But -- at the end of the day, the idea is to have a driver to get new clients that are looking for specific promotions, specific features, specific, I don't know, pricing structure. But to be honest, this promotion doesn't move the needle because they are very small in terms of the TPV that they have today.
So we have BRL 100 billion in TPV in Q3. So imagine that we are getting new clients, but they are a small portion of the total. So I don't think that, to be honest, these promotions will move the needle in terms of, I don't know, take rates going down (inaudible) so on because it's like very small when compared to the whole volumes. What we do have is like when you go to mix of clients shifting towards SMBs because, again, they have much more volume than long tail, although they have a lower take rate, it does makes sense for us to go for these clients because they use not only the acquiring, but we are getting more penetration of digital banking in these clients.
And as time passes by, we can cross-sell more products to them. So going back to your question, we do have promotions all the time depending on the type of clients, depending on some period that we have, related sometimes limit to volumes, sometimes the promotion is only debit, other times in credit. So we always have promotions. And we -- sometimes we may have more than one promotion at the same time. It's very common. So it's not an issue and it's not something new. What it seems that you are getting more clients, more SMBs, they are getting mature.
Some of them may be using other (inaudible) now they're using us more and more because they have this (inaudible) and so on. So -- but as you said in your question, we are having a good momentum in our view and growing more in the market quarter-over-quarter and a strong TPV growth in Q4 as well.
Soomit Kumar Datta
Okay. That's clear. And quick follow-up, if possible, please. Again, just referring back to Slide 5, when there's a bit of granularity on the different segments. Can you just maybe help us understand how much of the volume is SMB today? And can you remind us of what the cutoff is, what the definition is of SMB versus long tail is. And then just finally, the chart on the right-hand side showing the relative growth rates, not sort of precisely, but is that broadly how you'd expect to see the kind of relative segments going forward, that relative difference between the 3?
Ricardo Dutra da Silva
We do expect SMBs to grow more in TPV because, again, they have more absolute TPV than other clients that you have the long tail. We are seeing good momentum in the SMBs. And as I said before, some of their clients, they became SMB. So that's why once they reach some level of TPV, they go to the SMB niche or cluster, so to say here. So that's why SMBs may take advantage of clients that are growing within our base. But yes, we do expect SMBs to grow more than long tail (inaudible) the same difference that you have in this Slide #5.
But if you expect SMB TPV to grow more than long-tail (inaudible). Anything else? I don't know if I answered fully your question.
Soomit Kumar Datta
I just wondered, did you have to cut off the TPV definitions between SMB and long tail and enterprise, that would be helpful?
Ricardo Dutra da Silva
We don't disclose exactly the level of each one. But you may expect that long tail with more clients and SMBs, you have a small business with a few employees and so on. So we don't have to exactly give a number, we don't disclose that, but it's similar to what some other players in the market, they disclose. And usually, the TPV from SMBs are 5 to 10x larger than long tail.
Operator
The next question comes from Pedro Leduc with Itau BBA.
Pedro Leduc
So congrats on the quarter and good disclosure. Question quickly on the selling expenses that have been quite controlled year-to-date, but they seem to have moved up in 3Q and looking at almost 20% Q-on-Q jump. I'm wondering if it's related to that heavy activation of POS that you mentioned more recently or if it has to do with the greater SMB profile, again, essentially trying to (inaudible) of your total cost and expenses, but this line, in particular, everything else was quite controlled. This one caught our attention. Just wondering if there's any specifics here you want to share with us?
Artur Gaulke Schunck
Well, Pedro, thank you for your question. It's Artur speaking. It's a mix of things in this line moving up, moving down. We have a little bit of sales force increase in the last months of the quarter. That is pushing a little bit this line up. But also we increased the level of chargebacks and provisions for credit. And so the most relevant impact is coming from total losses.
Éric Krahembuhl de Oliveira
Exactly, Pedro, because by the end of the day, even though chargebacks as a percentage of total payments has decreased 1 basis point in comparison to Q3 '22, naturally, it grows with TPV, but also the higher level of expected credit losses given the credit model update accordingly to the IFRS 9 that made us to additionally increase our provisions in the short term. We had also an increase in sales force, reinforcing in some geographies or operations, a slightly increase. So necessarily when we combine all of these deployments necessarily, we had this kind of trend in Q3.
Pedro Leduc
Super clear because indeed, personnel expenses doesn't look like to have gone up that line specifically but (inaudible). Much appreciated, Eric and Artur. Thank you.
Operator
The next question comes from Alexander Markgraff with KeyBanc.
Alexander Wexler Markgraff
Just one for me. I was wondering if you all could comment on a metric that you disclosed in the past, the clients using PagBank as a primary bank. I don't think you've shared it for a couple of quarters. Just wanted to get your observations around that metric, both for consumers and merchants?
Ricardo Dutra da Silva
Alex, this is Ricardo. We -- you're right, we don't have the information here, but we used to have like 60% using that in the consumers and 50% in the merchants. That didn't change too much. It might grow a little bit amount and so on, but it's -- you can -- I don't have the numbers on top of my mind here, but you can consider that as the same level, 60% for consumers and 50% for merchants using PagBank as the primary bank.
Alexander Wexler Markgraff
Okay. And is that true as well for the newer cohorts that have onboarded?
Ricardo Dutra da Silva
Yes, that is true for the newer cohorts. To be honest, for some of them is even higher, but you can consider very similar to what we had.
Operator
The next question comes from Sheriq Sumar with Evercore ISI.
Sheriq Sumar
It's nice to see the trajectory on the margins. I just wanted to get a sense as to how should we think about for next year in terms of the margin trajectory as to how focused is PAGS on driving margin expansion? And also on the operating expense side, also, like we saw a nice decline as a percentage of top line to like 14.5%. I mean I know you kind of also answered to that. But is there like a target on that as to what's the baseline for that, which we could see for 2024 and even for the fourth quarter as well?
Ricardo Dutra da Silva
Thank you for the question. I'll let Artur in a few minutes for him to complement. But in terms of margins, it's also worth to say and to remember everyone that we are the most profitable company in this market if you consider TPV for every real or every dollar that you have in volumes, transaction in our POS devices or online solutions, we are the one that translate that in profits in the bottom line more than any other player.
So relevant to our competitors, we have the -- we are the most profitable company in this market. So margin is a consequence of what you're doing and what you're growing in terms of clients. And as we said, as we have this mix shifting from less to long tail and more to SMBs, we see that the net take rate is lower, but in absolute terms, it's higher. So in dollars, in absolute dollars it is higher. So we don't look to margins as the main driver for the company because at the end of the day, what we want to do is to have EPS accretion.
And this quarter, we had 7% EPS accretion quarter-over-quarter and 10% EPS accretion year-over-year. So that's the main driver that we look for to generate value to our shareholders, EPS accretion. Margin is kind of the consequence. But to be honest, it's not the main focus. And you can see that the margins are very stable in the past quarters. Even this quarter, we grew like 10 bps. So that's the main view how we see margins. But Artur can give you more color to you.
Artur Gaulke Schunck
Okay. As Dutra was saying, we will keep growing our business in payments, in financial services and all of the segments are contributing to the bottom line. We had all-time high net income GAAP and non-GAAP this quarter that we are proud on announcing that. We are not putting a lot of focus on margins, but in nominal growth, yes, we are focused on that. And it's true that going forward, lower interest rates and better performance in financial services can help us to increase margins. We are not providing any guidance for the future.
But it's true that those 2 things and the focus on reducing expenses and continue to grow in both business can help us to deliver that.
Operator
The next question comes from Tito Labarta with Goldman Sachs.
Daer Labarta
Just a follow-up on the Slide 5. Thanks for the disclosure on the growth side, the different segments. And I know you mentioned that SMB probably still grows faster. But should we expect some type of conversions between SMB and long tail, just in the sense for the take rate to stabilize, they probably have to begin to stabilize. So there could be some deceleration in SMB and maybe some acceleration in long tail. And maybe not a completely fair question, but one of your competitors gave some long-term guidance on 30% CAGR and SMB TPV growth.
Just you're growing 15%. But how do you think about the sustainability of the micro and SMB TPV over time? You think you should be able to gain share, growing up of the market is like a mid-teens type TPV growth sustainable over the coming years?
Ricardo Dutra da Silva
I will start backwards and then Eric or Artur can talk about take rates. We always say that we try to go more than the industry in a profitable way, and we try to keep doing that in following years. So we kind of decelerate a little bit our TPV in Q1 this year or a little bit in Q2. But in Q3, we saw this rebound again. Q4, we have fair numbers in the first 45 days, and we will try to keep growing more than the industry in a profitable way in the niches that we decide to grow, which is SMBs, long tail and SMBs. Of course, if you look at TPV, we have relatively more penetration in long tail than SMBs related to the market.
So that's why SMBs TPV grow more when compared to long tail. We keep working on these 2 different niches, so to say, but we really have lower exposure to SMBs at this point, and that's why we are growing. And we don't see good service out there that we need to grow there and decrease prices and so on. We can go there with our value proposition. We try not to compete with price. And looking forward, the long-term view here is to keep growing more than the industry in the niches that we decide to play.
If there is a huge growth in large accounts and we don't grow in this type of client, that's fine. We will play in SMBs. We cannot comment on some of other company's CAGR and we don't know what is the assumption behind that. But our view is to keep growing more than the industry in this niche in SMBs.
Éric Krahembuhl de Oliveira
And one of the things, Tito, that if the CAGR is a reality, I think this is positive news, especially for new players like us, right? Because by the end of the day, when we look at the small and medium businesses despite we see much more companies talking about this existing opportunity, we have the merchant acquiring and digital bank fully integrated. We have been growing almost 20% year-over-year. So there is still further room to keep growing on that. And necessary, if it's feasible, that's good. It implies to say that the economic outlook and the industry trend should continue to improve as we saw in Q3 in comparison to Q2. This also implies that the card penetration should increase and necessarily our market share gains in all segments and overall market share.
So I think it's a good message when we hear that the outlook for the next years is competitive because the opportunity primarily will be for the new players like us. And secondly, we have the advantage of having the lower average cost of funding similar to bank acquirers, and we have a value proposition similar or better than the new players. So we have this vast combination. So this is why, again, we are not looking for take rates because when we look at the total addressable market, it's huge, right?
We only have 10% to 11% market share. So we are aiming to explore this market share. And when we look at the take rate trajectory, again, it will depend on mix. Right now, we have seen better momentum on all the segments if we grow faster in large accounts, and necessarily, there will be a take rate trajectory differently, right? If it's accretive to bottom line, that's amazing, right? So this is what we are looking for, and this is what we are working for. So thank you so much.
Daer Labarta
Great. That's helpful. Appreciate it. And just one follow-up kind of on the first point. But is it fair to say that for the take rate to stabilize, you do need a little bit of a conversions between the SMB and the long tail on the growth, just given the different dynamics there?
Éric Krahembuhl de Oliveira
It depends on how both segments work. It's early to say anything about conversions right now.
Daer Labarta
Yes. No, my question is more for the take rate to stabilize, you would need to see the growth be closer between the 2 segments, right? Because otherwise, if you keep growing faster in SMB just by nature, the take rate will come down. So take rate stabilization that you pointed to, they would be growing a little bit more at a fuller pace. That's just what I'm trying to understand?
Éric Krahembuhl de Oliveira
Tito, we are not concerned about take rates. We are concerned about profit growth necessarily as the convergence of SMBs, micro-merchants and overall market share breaking down in large accounts, SMBs and long tail. Necessarily, if this stabilizes, take rates stabilize. So it's -- we don't have right now any commentary on the convergence of take rates of SMBs and long tail. But while we can say it's for the long tails to necessarily keep growing their businesses, they can have better offerings if it makes sense, but we always evaluate the cross-selling opportunities and how to create a win-win relationship for merchant acquirement take rates and financial services revenues and what (inaudible) that we have here.
Daer Labarta
Okay. I can follow up with more specific question.
Operator
Thank you all very much. This concludes our Q&A section of the call. I'd like to turn the conference over back to the management for your closing remarks. Please go ahead.
Ricardo Dutra da Silva
Thank you very much for your participation in the call. Thank you for investing the time. Talk to you on the next call. Thank you very much.
Operator
This concludes today's conference. Thank you for attending today's presentation. You may now disconnect.
