PagSeguro Digital Ltd. Class A Common Shares

This event is being recorded and all participants will be in a listen-only mode during the conference presentation. After Part Ceguro's remarks, there will be a question and answer session. At that time, further instructions will be given. Should any participant need assistance during the call, please press star zero to reach the operator. This event is also being broadcast live via webcast and 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 the event is concluded. Those following the presentation via webcast may pose their questions on PagSeguro's website. Before proceeding, let me mention that any forward statements included in the presentation or mentioned on this conference call are based on currently available information and PagSeguro's correct assumptions, expectations and projections about future events. While PAG Seguros believes that their assumptions, expectations, and projections are reasonable in view of currently available information, you are cautioned not to place a new reliance on these forward-looking statements. Actual results may differ materially from those included in PAG Seguros' presentation or discussed on this conference call. For a variety of reasons, including those described on the forward-looking statements and risk factor sections of PagSeguro's registration statements on Form 20-F and other fillings with the Securities and Exchange Commission, which are available on PagSeguro's Investor Relations website. Finally, I would like to remind you that during the conference call, the company may discuss non-GAAP measures For more details, the four going 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 your presentation.

Hello, everyone, and thanks for joining our first quarter results conference call. Tonight, I have here with me Eduardo Alcaro, our Chief Financial Officer, and André Cazoro, our Head of Investor Relations. First of all, I hope you and our families are well and safe. I also would like to say thank you to all PagSeguro PagBank team who have attained their focus in supporting our businesses, our customers and partners, as well each other during the past weeks, while almost 100% of us have been working from home. Thank you very much PagSeguro and PagBank team. I will start with an overview of our results. Then I will pass the word to Eduardo Caro, our CFO. And in the end, we will give you our perspective about COVID-19 and some preliminary data about Q2. Going to slide 3, we compare PEGS performance with our listed peers. PEGS is in a strong momentum. and is the most resilient payments company in Brazil. Despite the health crisis and higher subsidies offered to our clients through this period, PEGS was able to combine growth with profitability. Comparing Q120 with Q419, our revenues grew 1%, despite the strong seasonality in Q4, while our previous revenues decreased 8% and 5%. In year-over-year, Our net income grew 13%, while our peers net income decreased 13% and 65%. These results reinforce the strength of our broad ecosystem, the resilience of our business model, and the caliber of our professionals and their execution capability. On slide four, we highlight the great achievements of the quarter, even with COVID-19 impact in Brazil and in our businesses. As we have seen in the past years, we are proud to announce one more quarter with solid results. We delivered organic growth in top line, both revenues and TPV, with less than 3% of our TPV coming from subacquirers. We also delivered users growth, both merchants and consumers, and net income growth. On the left side of the slide, our total revenues and income reached close to 1.6 billion reais. growing 27% year-over-year and 1% quarter-over-quarter, despite a stronger seasonality in Q4. Our TPV reached R$31.7 billion, up 30% year-over-year. We reached 5.5 million active mergers, up 24% year-over-year. Moving to Peggy Bank, Our non-acquiring TPVs through digital account and wallet reached 8.7 billion reais, growing 190% year-over-year. Our active users, by the end of the quarter, were 3.7 million, meaning we added 1 million new users only in this quarter. Now, moving to our financials on the right side, our take rate ended the quarter at 3.31%. Up 19 basis points year-over-year, which is a result of adding healthy TPV in our ecosystem. Our adjusted revenue and income reached R$1.5 billion, growing 33% year-over-year, and our non-GAAP net income ended at R$367 million, up 13% year-over-year. Now, I will pass the words to Eduardo Alcarro, our CFO, who, by the way, with his previous Walmart experience, has been doing an amazing job in cost controlling and cash preservation as we navigate through this unique time together. Thank you. Thank you for your work, Eduardo.

Thanks, Ricardo, and hello, everyone. On the next slide, we show our total revenue and income that reached almost R$1.6 billion, up 27% year over year, This means an acceleration of our total revenue and income growth of 260 basis points, which grew 24% from the fourth quarter of 2018 to fourth quarter 2019, proving that we are on the right track as far as investments in PAC Bank. On the top right, we show the total net revenue and income growth compared to Q4, up almost 1%. Let me just pause here for a second. This is a remarkable achievement. Despite the COVID-19 pandemic and the strong seasonality in Q4, Pangs was able to grow total revenue and income quarter over quarter. Moving to the chart below, our operational revenue and income that reached 1.5 billion reais grew 33% year over year. Talking about net income, PAGS delivered growth year-over-year. Our non-GAAP net income in the first quarter reached R$367 million, an increase of R$42 million and up 13% year-over-year, despite the COVID-19 pandemic and investments in PAGBank. Moving to the slide six, We present here our operating figures. Our TPV reached 31.7 billion Reais, growing 7.2 billion Reais or 30% when compared to the first quarter of last year. As we show in the next graph, our TPV grew high 30s in January and February and low 40s in the first half of March. Better than Our Expectations for the Year shared with you during our fourth quarter 2019 earnings call, but decelerated sharply in the second half of March. This occurred given social distancing measures implemented in several Brazilian cities resulting in partial shutdowns as a consequence of the pandemic. We estimate an approximate miss of 2 billion Reais in TPV for the quarter due to the COVID-19 outbreak, which means a miss of approximately 40 million Reais in the bottom line for the full quarter. On the chart below, our net take rate, which is the blended take rate net from transaction costs such as interchange, processing and card scheme fees reached 3.31%, 19 basis points year-on-year, and 34 basis points quarter-over-quarter increase. This increase is explained by a better mix of credit versus debit, higher contribution of bank-bank revenues, and the resilience of MDRs in the long tail. About transaction costs, We had a positive impact in scheme fee rebates of 9 BIPs in Q1. Active merchants reached almost 5.5 million, growing 1.1 million year over year and 227,000 sequentially. Also important to say that the pandemic impacted from 25 to 30,000 net ads in the second half of March. Moving to slide number seven, We highlight our strong balance sheet in cash generation despite the pandemic. On the top left chart, we present our solid balance sheet ending the quarter with 8.1 billion reais in cash plus our net position between accounts receivable from card issuers, less payables to merchants. Moving to the top right, We ended the quarter with R$3.5 billion in cash, growing more than R$1 billion when compared to one year ago. This is explained by higher cash generation, higher PagSeguro clients' deposits, as well as higher receivables discounting in volume and duration, resulting in R$22 million of additional interest expenses Class A Common Shares Class A Common Shares Related to non-GAAP admin expenses over total TPV reached 0.2%, down 0.1 percentage points when compared to one year ago, and stable quarter over quarter. Important to highlight that approximately 70% of our costs and expenses are variable. Meaning that the company has the flexibility to do the necessary expense adjustments to deliver healthy margins and solid bottom line growth. Since April, we are revisiting our expenses structure, which should allow the company to maintain the same level of net income margins in Q2 2020, observed in Q1 2020. Now, I'd like to turn the conference over to Ricardo, who will talk about engagement metrics and new products. Stay all healthy and safe. Thank you.

Thanks, Eduardo. On slide 8, we present our highlights in terms of online distribution, Google searches, and our app rating. Starting with Google searches for digital banks, PagBank continues to lead and gain in share over its peers, with 72% of the total shares over digital banks, a consequence of our marketing strategy and product rollout. On average, 53% of our clients use at least three products of our ecosystem, and PagBank app is open 11 times a week. Our PagBank app was rated at 4.8 stars in iOS and 4.5 stars in Android. Being the most reviewed and best-rated app among digital banks and payment peers. Also, a consequence of our best-in-class product development and user experience-oriented strategy. Finally, with UOL, that in the quarter broke new audience records in Brazil, reaching 1.8 billion accesses, ending with 113 million unique monthly users and reaching 94% of the Brazilian Internet audience. just behind Google and Facebook. On slide 9, we show some of the most relevant engagement trends in our ecosystem. We believe engagement is a relevant metric to follow at this stage, once it will help the company to increase the switching cost of our clients, their stickiness and loyalty, which will enable future monetization and revenue diversification. On the top of the chart, we reached 8.7 billion reais in non-acquired GPV through our digital account, including prepaid card top-ups, cash card spending, credit cards, mobile top-ups, wire transfers to third parties, cash in through bank slip, bill payments, tax collection, P2P, QR code, and other super app transactions, growing 190% year-over-year. In the chart below, we see the number of bill payments transactions that increased 25% quarter-over-quarter. Our payroll portability feature is also ramping up, growing almost 37% sequentially. Moving to alternative payment methods, our QR code transactions grew more than 30%, quarter over quarter, and link of payments increased 53% year over year, both boosted by COVID-19. Finally, on PEGS Capital, we continue to offer the product only to our best merchants, Eligible according to their account history, TPV behavior, and payment frequency. Since the beginning of the operations in October 2018, we have done 150,000 lending contracts. We ended the quarter with a total credit portfolio of R$338 million. Additionally, we ended the quarter with R$156 million in our credit card portfolio. Our credit card strategy is also targeted to our best merchants. So far, We continue to be careful with credit disbursements. However, the preliminary results are encouraging, as we still face controlled levels of NPLs. To keep our operations under control, helping our merchants, particularly during the COVID-19 crisis, and following the central bank's instructions, we are offering a 90-day grace period on a case-by-case basis. Finally, it is important to highlight that during the first and second quarter of 2020, The full rates are not showing significant deteriorations. On top of that, to manage our credit risk exposure in the middle of a global pandemic, we have significantly reduced credit disbursing for now. Crediting is an important tool to create higher engagement with our merchant base and will continue to generate additional revenues for the company in the future. On slide 10, we highlight our roadmap of products already delivered in the past two 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 almost 40 new products, including hardware, software, banking, and services in our super app. In May, we launched our services, offers, and discounts map feature, where our clients can find in-app studio locations, closest ATMs, and also merchants in different categories such as restaurants, pharmacies, gas stations, and general services to have discounts or cash back when they purchase through QR code or by using our cards. Additionally, we also launched two new CDs paid 115% and 120% over CDI. Peg Bank CDs with remunerations 30% above the traditional savings accounts is part of our strategy to expand our investment products offer as well to acquire new PagBank clients. Despite the current health crisis, we decided to keep investing in product development and keep committed with our roadmap agenda. We should continue to deploy new products and services on payments, banking, and software fronts. Our ecosystem and its development are key to our core strategy. On the next slide, We present some of the new products or initiatives launched in the quarter. First, we officially started our partnership with Shell, one of the largest gas station companies in Brazil. Additionally, we announced a partnership with the most relevant drug and retail pharmacies, offering incentives, discounts, and cashbacks with purchase done with PagBank Cash Card. This partnership will also reinforce PagBank Card usage. Given the health crisis, we also decided to accelerate some new initiatives, such as PagPerto, our new virtual shopping, to support merchants and individual entrepreneurs to sell online. On the social side, we announced a partnership with the State of Minas Gerais, and PagBank became the exclusive digital bank to distribute the social aid paid by the government for more than 280,000 public school students. Additionally, PagBank is also supporting the most vulnerable families by offering R$20 cashback for the users that are transferring the aid paid by the government to PagBank account. Citizens could withdraw the money or select a bank to have their vouchers deposited, and PagBank was the 8th in the ranking in terms of deposits received. On slide 12, we present PagBank Health, officially launched in late April. Peg Bank Health works in a monthly subscription model with prices between R$ 9.9 and R$ 14.9 per month and offers a diversified number of medical and dental appointments, including remote appointments during the COVID crisis, exams and pharmacy discounts in the whole country at low cost, everything in-app. We work in a 30-part partnership model with different healthcare companies. On next slide, we introduce Pagio Pro Piceno, in English, Pag to Small Companies. Our website was launched during COVID-19 pandemic with PagSeguro solutions to help our clients to keep selling remotely, even with their doors closed. Some of the solutions are link of payments, a non-card present transaction that can be shared via social media, email, or SMS, PagFacil, Delivery App. Pedifacio is a complete omni-channel that combines payment with software and online menu and online ordering. We also offer EnvioFacio, a partnership that is set with the Post Office with promotional price to our clients, less bureaucracy and faster shipments. And QR Code. We are offering 0% MDR fees to our merchants and 10% cashback for our buyers. Additionally, we are offering from now on unlimited wire transfers at no cost to all our PagBank clients, both merchants and consumers. Now, I'd like to share the management perspectives due to outbreak of COVID-19, including our initiatives with our clients, employees, community, and investors. I would like to reinforce Pag's has a highly variable cost structure, mainly interchange and card scheme fees, combined with a scalable platform, so that we are able to manage costs and expenses accordingly to sustain at income margin levels observed in Q1-20 during Q2-20. Enter describes the leading in financial inclusion and electronic payment adoption, with 5.5 million active merchants and 3.7 million bank bank users. Our employees Our first and main priority. In a few days, we were able to set home office for almost 100% of our team and we continue to hire people for positions in our project development and software engineer departments. Important to mention, there were no impacts in our systems or operations as we transitioned our team to a work-from-home status. To our investors community, we recognize it would appreciate as much information on our performance as possible. And to that end, we will disclose some second quarter preliminary numbers in the next slide. However, due to obvious reasons, such as poor visibility and high uncertainty levels around the duration of lockdown measures and the near-term economic effects of COVID-19, we have decided to withdraw our full year 2020 soft guidance for absolute TPV growth, take rate, and net margin, shared in the previous conference call. For our clients, as we saw in previous slides, we launched many services such as PAGI for Pequeno and also helped the government in distributing financial aid to the population. Community matters for us. PAGI Seguro donated thousands of masks to public hospitals, donated more than 200,000 food baskets, and promoted online concerts with donations of cash, food, and health items to UNICEF Brazil. All the initiatives to our clients and community will reach 30 million reais. Finally, on slide 15, we can see some Q2 preliminary data. We saw a stronger impact in the second half of March, with a sharp decline in sales for two consecutive weeks, due to initial shutdowns in Brazilian retail. However, since April, we started to see recovery in sales, posted a small decline of only 3% year-over-year, when compared to almost 37% decline in retail sales in Brazil in the same period. Also, important to say, we are observing growth in our year-over-year basis since the second half of April. Adjusting by calendar effect, meaning few working days due to national volume 2020, our TPV in April would have been up 2% year-over-year. In May, We are seeing, until last week, a growth of 11% year-over-year, or 18% up, adjusted by calendar effect. Once in May, we also observed one less working day, due to national holiday in the beginning of the month. This trend shows the resilience of our diversified merchant base, constituted by micro, small and medium merchants, and also by individual entrepreneurs, that were less impacted by the crisis. In the chart below, we can see healthy TPV trends. TPV has been improved week after week, and in the first half of May, we reached 86% of the TPV of the first half of March, which is pre-COVID-19. Right now, some states in Brazil are reducing the social isolation, and retail volumes are gradually improving. Important to mention that our lack of concentration in segments or geography 100% coverage of the Brazilian cities and a little over one-third of our TPV coming from large capitals. In our efforts to rapidly adapt and deploy omnichannel products are key to our TPV recovery. On the right side of the slide, as May 23, active merchants reached 5.7 million, backed by a healthy trend of 167,000 net ads in April and May. Meanwhile, AgBank reached 4.6 million active users, maintaining the accelerated pace of net additions of 826,000 in the same period. In summary, we are prepared to increase our leadership in the long-tail market, which is still huge, due to the large number of micromartians and informal employees. And it will grow due to the acceleration of shifts from cash to plastic. Important to mention, some of our peers decided to reduce their investment in the long-tail segment. Having said that, we reinforce our plan to have 30% of our revenues coming from PagBank, meaning services beyond Aquarium in up to 5 years, with Aquarium still growing at a half pace. Although we are pragmatic in understanding and managing short-term impacts of COVID-19, we are confident about the strong fundamentals of our businesses, the strength of our brand and the ecosystem we have built so far. And we will keep investing in our long-term strategy, in people, We believe PEGS will leave this crisis uniquely positioned to lead the digital transformation of financial services in Brazil. Having said that, we finish our presentation and we start the Q&A session. Operator, please.

Thank you. We will now begin the question and answer session. If you have a question, please press star 1. Our first question comes from Greg Miller, Autonomous Research. You may proceed.

Hi, and thanks for all the good detail tonight. Two questions for you. First, our own, we're trying to pay attention to the competition from what we can see. It looks like competition has pulled back significantly through the early part of the pandemic, and Is that creating an opportunity for you? Second, should we expect financial expenses to normalize in second quarter following the need or perceived need for short-term liquidity in late March? Thanks.

Hi Craig. Thank you very much for the question. Regarding competition, We have seen some competitors reducing terminal subsidies, reducing market investments, and at some point even reducing headcount. Some of them are increasing the price of the terminals, decreasing the advertisement, taking out some promotions. So we see that some of the players that try to come to Lonteo, they are kind of creating this segment of the market and trying to focus on the large accounts and SMEs. So, you're right, we have seen less competition from some of the players. We always said that to operate in Lone Tail, it requires a larger front investment, the platform, the branding, user experience, and payback will come later. So, we started doing that in 2006. We have a very broad ecosystem, very complete. So, that's why we are able to scale our platform and bring, as you could see, 80 plus thousand new merchants per month and be profitable at the same time. So, going back to your question, right, some of the competitors decided not to invest in Monteil as they used to do in the past. Regarding the financial expenses, Eduardo will take that.

Hi Craig. Obviously, we expect financial expenses in Q2 to be lower than Q1. Obviously, because In Q1, we had to build this liquidity reserve. But going straight to your question, we should expect lower interest expenses, financial expenses, in Q2 compared to Q1.

If I could just ask one follow-up. Could you discuss your e-commerce business? Because I know you do have a significant or meaningful e-commerce business, and you can discuss where that's focused and how it's been performing.

So we are observing faster adoption of e-commerce for some of our clients, mainly post-COVID. Online transactions have been growing 50% year-over-year in May. That's the number of transactions, not in TPV because the average ticket sometimes is lower. But we are taking advantage, so to say, because of the COVID and all the interest from the clients for the merchants to sell online. to leverage our online or e-commerce platforms. So, it's been growing at a healthy pace, faster than the POS, of course, and we see opportunities in the future to even take market share from the POS to the e-commerce. Just one follow-up here, Craig, since you're speaking.

We are, just like we said in the presentation, we decided to accelerate some new initiatives like a buggy bag to get our people shopping, that is like an open channel for food delivery application. So, some new initiatives that should help the company to, let's say, capture more electronic transactions through online channels going forward.

Thank you.

Our next question comes from Brian King, Deutsche Bank. You may proceed.

Hi, guys. Two questions. I guess first on the PagBank user growth, it continues to be solid and impressive. Can you just talk a little bit about these new users, any change in underbanked or are they coming from other competitors? Both, I guess, in the physical branches or even the digital competitors and kind of what engagement you're seeing out of these new users to start. And then secondly, the take rate was also impressive in the quarter. Can you quantify the impact that PagBank might have had there and what take rate might look like as we go into the second quarter? Thanks.

Hi Brian, Guto here. Thank you for your question. Regarding PagBank, as we could see in the presentation, we grew 1 million new users only this quarter. The majority of this growth is still coming from merchants, but the part that is coming from the consumer, it's accelerating month after month. So we already have hundreds of thousands of consumers using PagBank, and it's going fast. Q1 Digital Accounts Digital Accounts Some governments, such as the Minas Gerais, to distribute benefits for the population. So, we are talking about 200,000 that started in April. They are not in the number of March yet, but they started in April. And also, let's say the brand of PagBank that is being more known for the people in Brazil. Also, we have been launching some new products. Class A Common Shares Class A Common Shares

Hi, Brian. Take rate is a combination of things. First, we have lower transaction costs. We also expected a higher net take rate because of the seasonality. Remember that in Q4, usually we have a higher mix of debits because of the holiday season and the 13th salary compared to Q1. And obviously, we do have a higher engagement of our users in our banking strategy, which is already showing some monetization in our statements.

Got it, got it. Thanks so much and stay safe.

Thank you, Brian. Next question comes from George Curry, Morgan Stanley.

Hi, everyone, and congrats on the numbers. Two questions, if I may. Can you maybe talk through what's driving that resilience in your micro merchants? I think it's pretty impressive that you're at 86% of pre-COVID levels in terms of TPV. Can you just help us understand that? Is it geographical presence? Is it industry vertical? Is it the ability of micro merchants to pivot to do different things? Is it that they simply didn't lock down? Any corner that you can provide with that will be helpful. And then the second question is, could you continue to talk about 30% of your revenue is not coming from acquiring, so I'm assuming it's the bank, really. Where are we in that path? Clearly with PacBank now at almost 5 million clients, I'm assuming it's already bringing in some percentage to the top line, at least. Could you tell us Where are we in that pathway to getting there? Our revenues already have a meaningful portion of packback, say 5%, 10%. Any quantification around that would be very useful. Thank you.

Hi Jorge, this is Ricardo. Good to hear you. So, I'll take the question about the resilience of our total payment volume. I agree with you, it's really impressive that we already have 86% of our TPV in the first half of May, compared to the first half of March. Part of that, I would say that, first of all, we don't have exposure to industries that were very, very affected by COVID-19, such as airlines, rental cars, and things like that. So, as we don't have this exposure, we didn't suffer that much, just like other players in the market. We have clients in every city in Brazil. It's more than 5,500 cities in Brazil. We have clients in every city in Brazil. It is very spread out geographically. Our TPV becomes a little bit more than one-third coming from capitals and the other two-thirds is from the small cities and countryside. We don't have dependency in the specific industry. The largest industry that we have is bars and restaurants, close to 15%. So it's very spread out. We don't have any concentration in terms of users. Also worth to say that all this TPV is organic. Only 3% of our TPV is coming from subacquires. So we are not, let's say, surfing on the TPV from other companies that are, let's say, serving long-tail clients or things like that. So it's all organic, all directly connected to us. What happened due to the COVID is that we saw some changes as weeks passed by. So in the first weeks, we saw a lot of TPV coming from supermarkets and also from pharmacies. Gas stations went down a lot. Then we saw some changes that gas stations coming back, restaurants also coming back, hair salons and beauty salons are still suffering a little bit, but as we don't have too much concentration, we could see that it could I'd say has the TPV coming back in 86%. The other advantage is that as we have many, many millions of micro-entrepreneurs and self-employed people, these people need to work. So, if they cannot sell coconuts at the beach, they will work as a plumber, they will paint houses, they will do something because they do need to work. So, at some point, they are a transaction and they need to survive. So that's part of the answer why our TPV has been resilient in this period.

It's important to say that we also saw, let's say, a faster adjustment or a faster adoption of those, let's say, micro-entrepreneurs on Paget Pro PGM, that is this program that we launched. pretty much offering alternative payment methods for those clients, like link of payments, like QR codes, like delivery services, so we observed that usually these guys, they adjust faster to this new reality, they adopt faster some of those initiatives. You could observe that link of payments in our presentation grew more than 50% year over year, QR codes more than 30%, so also reinforcing, let's say, the good work that we did internally to Also offer new channels for our clients even working remotely under this environment. Hi, this is Eduardo speaking. Nice to hear your voice. So, in terms of the additional revenues in this quarter, what we can say is that we grew almost three times when we compare year over year. So, when we compare Q1 2019 to Q1 2020, those additional revenues, they grew three times year over year. And we expect this trend to continue in 2020. I think despite the potential impacts of COVID-19, which really has been an upside to the larger adoption of electronic payments by Brazilians. CariBank is really helping our clients during these tough times, Jorge. We are offering, for example, free instant wire transfers, 10% cashback through QR codes, cashbacks for people who choose PagBank as their bank to receive, for example, the corona vouchers or even the incentives in the state of manager ISO. We are really confident that we can reach 30% of our total revenues and income in five years.

Thank you and congrats again.

Next question comes from Mario Pieri, Bank of America.

Hi, everybody, and congratulations on the results. Let me ask you also two questions. First one is related to Pagibank, right? When we see here that you added one million clients, and you brought your base up to 3.7. So this is a significant growth in your client base at Pagie Bank in one quarter. If you can be a little bit more specific then about your acquisition costs, your client acquisition costs at Pagie Bank. Do you think also that this growth at Pagie Bank has benefited from this disruption that we have had and people then are moving more into the digital banks? Also, when you mentioned in the prior question that your revenues are up from non-acquiring business, that your revenues are up three times year over year, can you be a little bit more specific about what product is driving this growth? Is it related to your credit book? What is really driving this big increase in revenues year over year? Thank you.

Hi Mario, thank you for a question, good to hear. Regarding PagBank, we of course we follow the CAT evolution almost daily, not to say intraday sometimes. But what we see here, we have very, let's say, healthy CAC for Buggy Bank, but we're still also building this brand. At least we used to do that until March more often. So it's hard for us to say what is the level of CAC that we use in the future because right now we need to build this brand. Same thing that we need for BuggySeguro. The cap for PagBank is very low, because we leverage the brand using PagSeguro ecosystem, using UOL, and of course we have the challenge to monetize as much as possible this type of clients. The majority of the merchants of the PagBank clients, as I said, are merchants, but consumers are going fast. That is also because of the COVID-19, that people are being more digitalized, they need to. We made some changes in the past months that also helped at PagBank. One of them that people asked us is free unlimited wire transfers. So for everyone that uses PagBank, they have free unlimited wire transfers. We added two new CDs, pay 115% and 120% of Brazilian CDI. We have seen a lot of traction in the rollout of products that is happening. We launched virtual cards for people. They can use virtual cards while the plastics are going through the post office. So, once you open your account, you can have a virtual card right after that and use it. So, there are many things happening in terms of products as well that helps us in paid bank acquisition. The majority of revenues at this point are related to interchange. As we said before, interchange is a good business in Brazil. So, the majority of the revenues are coming from interchange. At this point, the transactional is low and the credit portion also is low at this point.

Okay, thank you for that. Let me ask then a follow-up. It's related then to the mortality of your clients. Can you give us some color on the mortality that you see in both PagBank and PagSeguro?

Yes. PagBank is very low. It's growing fast because as we don't charge, let's say, anything, they keep using the account even to receive our transfer or things like that. So PagBank, let's say, mortality is very low. In terms of PagSeguro, what we saw is we saw It's early to talk about churn rates after these two months of health crisis, but we saw a slight increase in absolute numbers in people that stopped making transactions. Of course, we surveyed this type of merchants and the answer is they just stopped it because their business are closed or they decided not to do business anymore and will come back after the health crisis. So, it's a temporary, let's say, We don't see mortality in our merchant base accelerating or many businesses going down because the majority of them are self-entrepreneurs, as I said before, and they need to work, they need to make money, even to survive. For the merchants that we surveyed, they said they are not transactional because businesses are closed, but it will be back as soon as possible. We saw the worst number in April, but in May we have seen some recovery, as you could see in TPV. So, one process of the merchants that we have in the base, you just can take a look at TPV. TPV is already 86% what it had in the first half of March, so users are coming back as well. So I don't see that sharing is going to be an issue. It's just a temporary, let's say, we stopped it for a while. Mario, just one add-on here.

We do believe that probably the addressable market could increase, especially after the crisis. We are seeing, let's say, the same example that we had in the past crisis back in 2015. Many new individual professionals, let's say that an increase in the unemployment rate probably will cause a larger number of informal jobs, informal entrepreneurs, and probably we're going to be able to capture this additional addressable market that is expected to, let's say, be created in the coming months. That's very clear. Thank you very much.

Next question comes from Eduardo Rosnan, BTG Pactual.

Hi, everyone. So two questions here. First on the TPV. I just want to understand if you have seen in the last two months, you know, clients who were only using the machines, you know, as a part-time job are increasing their usage right now, right? So my question here is trying to understand here if maybe, you know, People lost their job and their income right now, and so they need to use a lot more as a full-time job when compared to before. So this is the first question. If you're seeing something like that, a lot more usage on machines. And the second question is on Pagibank. We can see here that the bank has been a very clear beneficiary of the Corona voucher. And as far as I understand, and please correct me if I'm wrong, One of the challenges, right, that you have is to educate, you know, clients on how to use, you know, the functionalities of a bank, right, which probably is much tougher than to understand a POS machine, you know, for merchant acquiring, right? So do you think that this crisis will force, in a way, you know, the low income part of the population, you know, the long tail to learn how to use that app and to learn how to use a digital bank and this could be Very good news for you. So, these are the two questions. Thanks.

Hi, Rosa. Good to hear. Thank you for the question. So, regarding TPP, We didn't see, let's say, this trend coming up that people that lost their jobs are using the device as their first income. I guess it is expected to happen in the future if unemployment goes up as we expect it to happen in Brazil, but at this point, we didn't see this coming up. Of course, there must be people doing that in our base, but probably it's not something that BankBank We will have the beneficiary of coronavirus, as you said. For those who are not aware of what is going on in Brazil, the government is giving R$600 for close to 50 million, 60 million people in Brazil. They're going to receive R$600 for three months. And people can receive through the government bank or people can select a bank to have the money deposited in another bank. And PagSeguro was the number 8 in terms of deposits. We just launched PagBank one year ago, last May, so in one year we are the number 8 in terms of Corona Vouchers that were deposited. We are very proud to that, not only because of the business, of course, but also to help the community and help the society to spread out this People that use our app, it's very simple. You can just sign up in three minutes and then after that it's very intuitive. People use it to have these mobile phones and use other apps. So, I don't think this is an issue, but you're right. There are some people today that may have some difficulties using technology or using mobile phones, and they're being forced to do so. So, it will generate a new, let's say, addressable market for us, people that were more resistant to adopt a digital bank, and now they We have been forced to adopt this digital bankruptcy that is useful, that works, that is simple. So we try to do our lab in a very intuitive way, large fonts for people to see very clearly what's going on, what's happening in the screen. So I agree with you. It's going to be an opportunity for us.

Okay. Thank you very much.

Our next question comes from Mariana Tadeu, Banco UBS.

Hi, good evening, everyone. I have some questions related to tax capital. During the presentation, you mentioned that you reduced your credit origination. What level is it today compared to the level before COVID-19 outbreak? And what can we expect in terms of credit portfolio at the end of the year? Also, how is MPL training in the current scenario? And have you done incremental provisions to face this more challenging scenario? Thank you.

Hi Mariana, I'll talk about the growth of the portfolio and then Alcaro can comment about anything else. Thank you for the question, good to hear you as well. We closed the Q4 with R$ 286 million in total portfolio, and now in Q1 we closed in R$ 338 million. So we grew R$ 52 million. If you look at the pace in the previous quarters, it was close to R$ 90 million. So in the first quarter this year, we went down to R$ 52 million. In Q2, it will be less than that. We are in the middle of this situation with COVID-19, so we are very careful about credit origination. So it's hard to give you an overview of how it's going to be at the end of the year, because it depends when the lockdown will be over and how it's going to be the rebound of the economy. So right now, it's hard for me to give a forecast Q2 will be even smaller than what we had in Q1.

Mariana, the NPR ratios have not shown yet, rather than the federation. We are offering grace periods for repayment on a case by case, depending on the client, and as Ricardo said, We are managing our exposure to merchant loans during this pandemic, and we slowed down the credit originations so far. But as you know, credit is still a new business for us. It's very small, as you can see in the presentation. And before the health crisis, we continue to scale the product to our best versions, cherry-picking the ones according to TPD, account history, payment frequency, so on and so forth. So that's where we are on NPL right now.

Thank you. That's clear. And if I may ask another question related to your net ads, it remained strong in this first quarter, and based on data provided party to date, it suggests a similar or even higher level in Q2. Do you know or could you share a bit on the profile of these new merchants? Are they individuals that did not accept cards before or retailers increasing their POS base for deliveries, for instance? Is this incremental version coming with lower average spending than the ones you have in your base?

Thanks. Yeah, for sure. I can answer that. We realized we had close to 170K in April and part of May. It seems there's going to be a strong quarter, better than Q1. We don't see any difference in terms of profile of new versions that are coming to us. There is this movement, some merchants coming to us and buying additional devices because of delivery, but that's the minority of them. I guess the majority that we have in our net ads today, they are similar to what we had in the previous quarters. People coming to the system, according to our surveys, it's still close to 80%. That come to us, did not accept cards before joining us. So, even in terms of TPV, it's, let's say, similar to what we had in the past, but it's hard to conclude because in the middle of this COVID-19. So, it's a little bit slower today, but we think it's just because of the situation of the economy, not because of the profile of the merchant.

Mariana, just one additional commentary here. We're keeping the same subsidies for the clients, right? Just like Ricardo said in the beginning of the presentation. We are observing some of our peers or competitors reducing the level of marketing campaigns. Some of those players are just starting in this market, so they rely more on marketing campaigns and advertising. Some of the other peers also decided to increase the price of the hardware, and when it comes to price, that's exactly where this kind of merchant is more sensitive. So, a combination. I think that, just like we said, having our peers also reducing the level of, let's say, service abuse or marketing will help PAGs to keep increasing market share and leadership in the long-term market.

That's clear. Thank you.

Next question comes from Jaime Friedman, Susquehanna. You may proceed, please.

Hi. Thank you and congratulations on the numbers. I'll just ask my two up front. Eduardo, I realize with the Q2 margin, you're guiding the net margin to be flat sequentially. I'm just wondering, are you comfortable? Do you think that it will be at those levels for the remainder of the year? And then you also mentioned in your prepared remarks 70% of the costs are variable. So what would it take, you know, since the cost, the structure is so variable, I mean, what would it take to see a significant deterioration in the margin?

Thank you. Hi, thank you for the question. As you can see, our cost structure is 70% variable, meaning transaction costs, interchange, card scheme fees, marketing, advertising, and chargebacks. We are also a company that is low people-intensive. So you just can look at our 20 apps to see how low people-intensive we are. As we can see right now, we have this ability on Q2 and that's why we are guiding everybody in terms of maintaining the net income margin that we have in Q1 to the same levels to Q2. It's important to say that we continue to hire engineers to invest in the platform. So, at the end of the day, we are doing a tough job here of reviewing every single line of expense during Q2. And of course, slowing down investments that do not make sense at this stage. But going forward, looking at Q3, Q4, we prefer to have more visibility of those quarters. But Q2, we can say that it's going to be the same level of Q1.

Great. Thank you very much. Be well.

Next question comes from Tito Labarda, Goldman Sachs. You may proceed.

Hi, good evening. Thank you for the call. A couple of questions also. Following up, going back on your take rates, I understand the seasonality in the quarter compared to last quarter, so that's an increase. But if you look, it was higher than every single quarter last year. And with PagBank and everything else going on, is this sort of a new level for the take rates? And I mean, do you think it can increase higher over time, particularly as you do more with PagBank? I just want to get a sense of more like the long-term outlook for the take rate. And then my second question, on marketing expenses, you mentioned you spend around $67 million, I think, in marketing for PagBank. Did you reduce that a lot, I guess, in the second quarter, you know, just given the lockdown? and, you know, sexual revenues, would that have any impact on the future growth of PacBank? Like how, you know, we did reduce, how sensitive could that be to future growth? If you can give some call on that, it would be very helpful. Thank you.

Hi, Tito. This is Eduardo speaking. The level of takeaway that we have seen in this quarter is really a combination of three things. I think, first, we do have a better mix in Q1 compared to Q4. That's number one. Number two, we had also lower transaction costs. Q1 2019 Q3 2019 Of course, we do believe that going forward, we will have those additional revenues in five years representing 30% of the total business and they should contribute more to the take rate going forward.

Regarding marketing expenses, this is Ricardo. Thank you for your question. We decreased the investment in marketing in Q2, but we try to control the acquisition cost as much as possible to see if it makes sense or not. We also have been closing these partnerships that happen in the number of new users. But the investment in marketing in Q2 will decrease for sure. As Eduardo said, we are working here almost on a daily basis. Class A Common Shares and that's why even with the lower investment of marketing we already had 826,000 new public users in these two months. But going back to your question, we are decreasing the market expenses and looking as a performance only view and try to keep the cap in low levels that makes sense for us.

Okay, thank you. And just to go back on the take rate, so once you get the 30% of additional revenues related to PagBank, so I guess it would be fair to assume that the take rate should eventually over time be higher because of the contribution from PagBank. Is that a fair assumption?

Hi Tito, yes, it's expected to go up, but we are talking 30%, 5 years, or let's say 4 years and a half from now. Many things will happen until then, but of course we expect PagBank to help in our take rate, and you can imagine that if it's 30% of the revenue, it's going to be relevant for take rate as well. There are many assumptions in the business plan for this five-year plan, so to say. Things that we thought in the past, we can see change over time. We are adjusting the plan according to results that we have, the performance that we are having. So, at some point, we thought that cards would be one size and would be sometimes even smaller than that or even higher than that, but it depends on the situation and how the business performs. Next question comes from Victor Schabel, Bradesco BBI.

Good evening, everyone. Thanks for taking the question. First, congratulations on all the initiatives that the company has been carrying out on the social side. So, I think it's worth highlighting that. And second, I would like to hear from you guys about the strategy going forward regarding instant payments. What do you guys see as an opportunity coming from the new infrastructure that the central bank is developing, the PICS? Is it more of an opportunity for your Pagibank is a sort of track for Pagiseguro acquiring business. So how do you see that evolving or are you guys not that excited or that concerned about that new functionality? Thanks.

Hi Vitor, thank you for your question. Let's just do a quick overview about what happens in Brazil in terms of transactions, let's say similar to what we're going to have in PIX. So currently, Brazilian buyers, they don't pay anything to make a debit transaction, and let's say it's part of our culture to pay through debit cards. It's a simple, it's a safe transaction, and merchants, even if merchants have the advantage to accept cheques, Food size, how it's going to be paid, it's the consumers, so it's the buyers. If they don't adopt pigs, probably it won't be successful. I guess it's going to take a little bit of time for the solution to take to action. If you look at the UK case, for instance, it took a while to get traction, and when we got traction, then part of the transaction was growing 10%. So, the cannibalization, we think, is going to have more in cash, checks, and wire transfers. Just remember, one-third of the Brazilian labor force is paid in cash today. So that's part of the transaction that we expect is going to be shipped from cash to plastic or to electronic transaction. In addition to that, we think that fast payments will help the financial inclusion, mainly the unbanked and the underserved. They will start adopting electronic payments. So that's why we see growth in debit card transactions, even in countries that adopted instant payments. So we see more as an opportunity than a threat. It's going to depend on how the consumers will adopt it or not. It's, I mean, you need, today in Brazil it's very easy to pay an adapter card transaction. People are using it to do that. If you want to pay with PIX, you need to get your mobile phone, unlock, go to an app from your bank, unlock again. So, let's see how it's going to happen. But we see more as an opportunity. Everything that is going to turn cash into electronic and plastic transactions is good news for us.

Perfect. Thank you.

Next question comes from Felipe Salomão, Citibank. You may proceed.

Hi. Thanks. I hope you all are well. I have two questions. The first one is regarding the take rate. So you reported a 3.31% net take rate. but I think this number was positively affected by an adjustment of $88 million in the ISON transaction costs. Could you please explain what was the adjustment and also should we expect similar adjustments to take place in the upcoming quarters or is this a one-off? And my second question is related to the marketing budget for 2020. I remember that to expect 600 to 700 million in marketing for the full year. There's these numbers to make sense, even, that everything has changed. Or should we expect a little bit less, a little bit more? I know that we don't provide that, but any call on that would be great. Thank you.

Hi. Hi, Felipe. This is Alvaro speaking. I'll take the first question. The A immediately, it's an intercompany, it's an intercompany task that we have PIS, Goldfin, and ISMS between NetPOS, the company that acquires the terminals. and sells those terminals to Pikeseguro. It's an intercompany transaction. The reason why we do that is because we do have tax incentives to do that. Unfortunately, you see only the intercompany taxes, but we do that because we do have tax incentives and we have a A Lower Taxes On The Total Cost Of The Terminals That We Acquire. Felipe, this is Ruzlan. Thank you for the question. Good to hear.

I expect you are well and safe. I hope you are well and safe. Talking about marketing, we decreased the market expenses in Q2, as we said before. in such a way that we do not hurt our business growth and also keep the margins in decent levels in terms of net income margins. So we are working, let's say, in a daily basis, adjusting that as far as the performance. So it's a very controlled marketing version here too because we're in the middle of the pandemic situation here, as you know. Regarding Q3 and Q4, we kept in our budget the same market investment that we planned for the year, but of course we will adjust if it's necessary according to what happens in the next months. We have seen some governments easing the lockdown, even getting some problems. The government is making this plan that some of the cities will, the activity will come back, so we need to follow that and see if it makes sense to increase market investments. But again, always looking for the performance. To get new merchants, to get new pack-like users, to increase the PV, and try to be accretive as much as possible in our P&L. So, to answer your question, Q2 is almost final. Q3 and Q4, we are keeping the same budget that we did for this year, and we will adjust if necessary. And we can adjust to go up or to go down, depending on what's going on, depending on the opportunity we're seeing. One thing is clear for us, we will always look for growth with profitability. We will not decelerate growth, but we will try to keep profitability as much as possible As Alcaro said before, in Q2 we had the same margins that we had in Q1. And we are confident that we can do that. Very confident. After these two, almost two months of lockdown, we saw the performance of our business, the performance of our buggy bank users, as you could see in the last slide. And we are confident that business is doing well. For a company that has a tech DNA like us, we are taking advantage of the situation. People That's all we have looking for.

Okay, thank you very much for the answers.

Next question comes from Jeff Cantwell, Good Behind Securities.

Hi, guys. Thanks for taking my question. On PagBank, we saw the May update in the slide deck, and you know how 4.6 million active users for PagBank, which is very impressive. That number of users, it still seems like it's early days if we think about the size of the addressable market that PagBank has. Therefore, what I wanted to ask you is why couldn't PagBank's market share double over the next year or two years, potentially? It just seems like that's the pace that PagBank is on. You're seeing some real good momentum in PagBank users right now. There should also be plenty of stickiness to the platform when we kind of look at slide 10, which shows the pace of product development, which, again, is very good. So I'd just like to hear your thoughts if we try to think a year, two years out. Could you maybe talk to us about your level of confidence for PagBank growing its user base from here? Thanks.

Hi Jack, thank you for your question. Good to hear you. You're right. Bodymaking is in a slow momentum. We have seen a lot of people coming to us. It's easy. It's simple. You can just open your account in the last two minutes and then you can start using already. That's part of our advantage to make something that is simple. Useful even for people that are not, let's say, digital. Don't use digital solutions every day, but it's very simple. We have been increasing a lot the rollout of products for Tiger Bank. We know that we launched this Tiger Bank account in May 2019. It was a very basic account and then we started adding some features just to remember. In September 2019, we started paying interest in the account. In January this year, we started offering more and more cashbacks to QR codes. In the past weeks, we launched the radar of services and offers, so people can get benefits by using PagBank. People are sticking to that solution, so if you are in a place, you can see for PagBank users, if you have some offers or discounts or cashbacks, so people are using that. We made this offer free wire transfers, new CDs. So, we are kind of rolling out new products, of course, to increase the stiffness and increase the readiness of these users. We are happy with the growth. Class A Common Shares Class A Common Shares Class A Common Shares Class A Common Shares Not only in terms for the merchants, for the consumers, but also for the merchants. So it's very common for a merchant to start using QR codes for Padmec users because they have 0% NVR and the consumers have 10% cashback. Of course, at this point, we are not making money in this transaction, but remember this is a disintermediate transaction. There is no card scheme fees and no... Next question comes from Marco Calvi, Itaú BBA.

Hi, good evening. So can you share your view on the profitability of your online clients? How different is that, if so, from the rest of your active client base? And a second question, if you may, can you confirm how much of your first few TPV came from the online clients? Thank you.

Hi Marshall, thank you for the question. We are not disclosing the TPP that comes from online and offline. Just to be sincere with you here, it is possible to do, of course, but nowadays you have so many bundled transactions, so to say, that In theory, what we have in the past, this differentiation between online and offline, it doesn't apply today. If you order food in your house and you pay through a credit card, is this online or is this offline? It depends. If you're buying online, you're going to get the products offline, or you can order online and pay when you receive the hamburger or something. As time passes by, things are getting more and more complex, but of course we could divide just what is pure online, but we are not disclosing that. In terms of profitability, it's pretty much the same, because remember, in long tail, we have rates that are profitable for us, because it's long tail. They don't care about the rates. They are much more... Class A Common Shares So, it's not 10 basis points or 15 basis points that move the needle here and make our merchants to change for another competitor or things like that. So, in the online, the cross-stabbing is pretty much the same because also in online we almost don't have debit transactions. It's almost 100% credit and there's a lot of transactions with installments. So, it's profitable and it's very similar in cross-stabbing between both.

Thank you. Very clear. Thank you.

Next question comes from Neha Agarwala, HSBC.

Hi. Good to hear from all of you, and thank you for the detailed presentation. Congratulations on the results. My question is more on parks and capitals. Should we expect that in the second and third quarter you wouldn't be making more provisions in the loans that you've already given out as the 90-day grace period ends? And could you give us any indication on the profitability of the loans that you are giving out right now in Parks Capital? Thank you so much.

Hi Nina, I think the first question about the NPLs, it's hard to say how the closures and the social distancing measures will last. Of course, if they last longer, we should still expect higher NPLs in Q3 and Q4, for example. But there is so much uncertainty right now in terms of when big cities will be reopened and how the pandemic evolves in Brazil that it's hard to say. We are providing the visibility that we have right now where we are on a case by case understanding the needs of each client and trying to help them as much as we can. And NPL's work did not materially affect our takeaways in Q2.

And regarding the type of credits that we offer to our clients, Right now, we only offer for the merchants, so we are not offering credit for consumers, or if you are offering for consumers, it's just small pylons, small tax that we do, but we can say that 100% what we offer is only for merchants, first. Second, we only offer for the best merchants. We have all the history of these merchants in terms of CPV, chargebacks, and many other variables that we have here in our database. And then we score these merchants and we offer only for the best merchants. And usually the majority of them, they pay just like Square Capital in the US. We increase the MDRs and they pay back in each and every transaction. Although it's credit, we know, it's a low-risk credit, so to say, because it's only possible... based on their transactions with all the resources that they have. Also important to say that the information that we had from these merchants, you cannot find anywhere in the market. You cannot buy the information from another bureau because these guys were out of the way there. They were informal. They didn't have the transactions in terms of electronics. They used to sell through cash. So it's kind of the, let's say, exclusive information that they have so that we can offer Next question comes from Josh Beck, KeyBank.

Thank you so much for the color and all the information. It's very helpful. I just wanted to ask about Pagibank. had mentioned that the engagement can be 11 times a week, so that is quite high, especially when you look at that on a monthly basis. So I'm just wondering, if you look at your existing Pagibank clients, you know, are there some of them that are effectively completely replacing those traditional banking relationships and just using the Pagibank app?

Hi Josh, thank you for the question. Good to hear. You're right. People are using it 11 times a week. It's a lot. Because as we said before, we are not only offering their, let's say, basic bank products or solutions, but we are also increasing that to some services like they can get some offers and cashbacks so they can go to an app. See if they have any offers close to where they are, to have cashback or to pay less. Just to give an example, we have a partnership with the largest pharmacy and drugstore chain in Brazil. If you are a Pikebeck user, you can go there and have 10% cashback. So you can find this type of pharmacy on there. So that's why people use a lot. You can fill up gas in your car and then you also have 10 reais back. So, people use the app not only to make the basic transactions such as live transfers or pay deals or top-up mobile phones, but also we have this type of super app feature that people use more, increase the stickiness in the army, let's say, in the top of their mind. Regarding the question that people are using PagBank and replacing the banks, yes, we see that trend in our days. It is getting higher month after month. People come here, they try, they test, they see if it works, they get comfortable with the app, and then part of them uses it as their main bank. It is growing. Still, of course, not the majority of the clients at this point. But we see month after month that people are using PagBank as their main bank. And we are also, as I said before, we are having new people coming to the system because of the COVID-19. And by being a digital bank with a very frictionless process of sign-up and usage, we are getting people that are interested in digital banks during these tough times for everyone here in Brazil.

Thanks so much. Stay well everybody.

Once again, to ask a question, please press star 1. Please hold. Once again, to ask a question, please press Start Wine. Thank you. That concludes the question and answer session. Now, I'd like to turn the floor over to Mr. Ricardo Dutra for his closing statements.

Hi, everyone. Thank you very much for your time and for your questions and for your support during this time. I hope to meet all of you in person very soon or as soon as possible and talk to you next quarter in the conference call. Thank you very much.

That concludes PagSeguro's conference call. Thank you. Have a nice night. Stay well and safe.