PagSeguro Digital Ltd. Class A Common Shares

Hello everyone and thank you for waiting. Welcome to PargSeguro's 34th 2020 Results Conference Call. This event is being recorded and all participants will be in a listen-only mode during the conference presentation. After PargSeguro'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 all 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 post 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 the currently available information and PagSeguro's current assumptions, expectations and projections about future events. While PagSeguros believes that their assumptions, expectations, and projections are reasonable in view of currently available information, You are cautioned not to place undue reliance on these forward-looking statements. Actual results may differ materially from those included in PagSeguro's presentation or discussed on this conference call for a variety of reasons, including those described in the forward-looking statements and risk factor sections of PagSeguro's registration statement of 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 this conference call, the company may discuss no-gap measures. For more details, the foregoing no-gap measures and the reconciliation of these no-gap financial measures to the most directly comparable gap 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.

Good evening, everyone, and thanks for joining our third quarter results conference call. Tonight, I have here with me Eduardo Alcaro, our Chief Financial Officer, Arthur Schunk, our Finance Director, and Andre Cazoto, our Head of Investor Relations. We hope you and your families are well and safe. Everybody knows the past few months has been challenging, and we remain focused on supporting our clients, our business partners, the society, and our employees. By the way, I would like to pay a tribute to all extraordinary people who work at PagBank PagSeguro and who have been supporting our business from their homes in the last eight months. Thank you very much PagBank PagSeguro team. As you see in the next slides, even without continued impacts generated by COVID-19, we see positive trends in terms of engagement, new clients addition, and electronic payments volumes we are helping enable. Our results show our business is exceptionally resilient and improving day after day. I'm glad to announce that in this quarter, we reached our all-time high absolute TPV and historical records in net new additions for both merchants and PagBank users, results of our confidence and continued investments in our business despite the challenging scenario. Finally, important to mention that during these months, we have been developing features and products for both Acquiring and banking businesses pursuing to build the most complete and unique two-sided ecosystem to explore this huge addressable market. And we are just starting. Regardless of the current moment, we are confident in our strategy and the opportunities ahead of us. We will continue to manage the business for the medium and long term while recognizing near-term realities, which means adapt our company for the opportunities accelerated by COVID-19 Why we invest to grow the company. That said, Eduardo, Carla and I will present some slides and we will have Q&A session at the end. On slide three, we highlight the achievements of the third quarter. All time high TPV reached close to 45 billion reais, growing 53% year over year or 44% year over year, excluding the corona vouchers impact. Our online TPV grew 121% year-over-year, showing another quarter of acceleration, a sustainable and expected trend going forward, as we expect online payments to be a growth driver for our company. Active merchants reached 6.3 million, adding 1.3 million new clients in the last 12 months and a historical record of almost half a million new merchants in one single quarter. Total revenue and income reached close to 1.8 billion reais, growing 22% year-over-year. A very strong rebound when compared to the previous quarter growth, also our revenues record. Net take rate ended the quarter at 2.35%, down 37 basis points quarter-over-quarter, or 2.58% excluding Corona Vouchers products, down 14 basis points quarter-over-quarter, slowing down the decrease compared to previous quarter, but still temporarily impacted by the TPV mix, meaning more debit card transactions and less credit installments, directly impacting our prepayment revenues. Non-GAAP net income was R$330 million, reaching a net margin of 18.5%, or 28% excluding interchange, as ROPs report. is still impacted by the pandemic and investments in PagBank. Our adjusted net margin, excluding pandemic and PagBank investments effect, ended at 29.3% in the first nine months of 2020, growing 2.6 percentage points when compared to the same period last year, posting continued operating leverage in the core business. Additionally, we are glad to announce that in November, PagSeguro completed the acquisition of Moip Wirecard that will accelerate our online strategy. Moving to PagBank. Our PagBank TPV, previously known as No Acquiring TPV, through banking, digital account, and wallet services, reached R$23 billion, growing 312% year-over-year, another triple-digit growth, or 286% excluding corona vouchers. The Q320 non-acquired NPV volume is 12% higher than the full-year 2019 volumes. PEG Bank clients were 6.7 million, representing all-time high net additions of 1.8 million in one single quarter. We reached 2.2 million consumers, growing 8 times year-over-year, and already representing one-third of our total PagBank clients. PagBank revenues reached R$133 million in the quarter, up 109% year-over-year, re-accelerated when compared to previous quarter, and represented 7.5% of total revenues and income. Finally, we kept increasing our cashing process through different products, with PagCD's clients close to 50,000 Payroll Portability Transfer reaching 150,000 and finally, more than 400,000 transactions through TikTok only two months after we officially launched this service. On slide four, we show the main Q4 trends. Our main top line KPIs such as TPV for acquiring and total revenues and income continues on accelerator mode. TPV is growing above 60% in October, and in the chart below, we can see healthy TPV trends when compared to the first half of March, which is pre-COVID-19 in Brazil. TPV has been improving, and in the first half of October, reached 144% of the TPV of the first half of March, with both credit and debit presenting growth, although debit is still growing faster. PagBank TPV growing close to 300% year-over-year and total revenue and income accelerating and growing high 20s year-over-year. Although we are in the middle of Q4 and still have some impacts related to the pandemic, with a continued higher mix of debit, which is also historically stronger than Q4, and continued investments on PagBank, we expect to improve our results and profitability. In Q4, We expect our non-GAAP net margins to recover and to be between 20% and 21%. On slide 5, we present our operating highlights. Total payment volume reached close to R$45 billion, growing close to R$16 billion, or 53%, when compared to the same period of last year. Our diversified merchant base with no geographic concentration, resilience of the micro-merchant segment, and adoption of online Cross Border and Card Not Present transactions supported this strong rebound that continues in Q4. Additionally, excluding the Corona Voucher's impact, meaning transactions that we captured through QR code that represented 2.7 billion reais in the quarter, we grew 44% year-over-year, still a strong growth. In the next graph, we show the largest portion of volume growth is coming from debit card transactions. Although both debit and credit have been growing, debit grew faster. The mix of debit cards has increased more than 20% when compared to Q3 2019, while overall credit cards mix decreased 15% as a consequence of the pandemic. On active merchants, we reached 6.3 million in the quarter, adding 1.3 million new sellers, or 25% year-over-year. and half a million new ones only in this quarter, reaching a historical record and adding 56% more merchants when compared to Q3 2019. Our new clients are still majority long-tail with similar size and behavior when compared to older cohorts. We still see that 70% to 80% of our new sellers never accepted cars before and we are still confident that long-tail market is approximately one-third penetrated. with a huge potential to keep a strong pace in the coming quarters. Also important to highlight that in Q3, we launched a new device, our Mini-Zine NFC, now enabled for contactless transactions, helping nano and micro entrepreneurs to improve their sales as contactless payments are becoming quite relevant since the start of the pandemic. Additionally, we entered a quarter with 414,000 software subscribers, growing three times over the year as we keep diversifying additional self-service ERP, loyalty, and reconciliation features to our clients. On next slide, I'd like to spend some time talking about our online strategy. Online has always been a very important vertical for PEGS as we started our journey back in 2006 as an online wallet and payment provider. Although in recent years our offline growth was much stronger and the main focus of our strategy, we kept investing in new products and solutions to offer the most complete omnichannel product offered to our clients. But with the beginning of the pandemic and the social isolation, millions of sellers and consumers became digital for the first time, bringing an urgency for companies like us to improve our solutions and pursue the best experience for our clients in a hugely addressable, sustainable, and growing markets going forward. Brazil still has a long road to run, as online represents less than 5% of the total retail sales, bringing a relevant opportunity to pegs to explore a potential addressable market of almost R$130 billion in TPV, assuming that Brazil can reach similar online penetration levels compared to US. According to EBIT News & Survey, in the first six months of 2020, Online sales grew 4% year-over-year, meaning a growth three times larger than expected before COVID-19, the highest growth in the last 20 years. Brazil reached 41 million online users, having almost 7.5 million new ones only in the first half of this year. Additionally, 58% of the total users made online purchases at least four times in the period, and 20% of the users did more than 10 purchases in the period, showing a very healthy combination of new users, both sellers and consumers, and recurrency. PEGS is well prepared to explore this growth, as we have one of the most complete platforms that combines web checkouts for micro, small, and medium businesses, many of those going online for the first time, a complete end-to-end acquiring platform for marketplace and e-commerce with the recent acquisition of MOIP, wallet services for consumers in cross-border trade with our BOA Compra company. So, the result is that our online TPV grew 121% in Q3 when compared with Q3 2019, accelerating our growth compared to past quarters and showing signs of a stronger growth with October growing 163% year-over-year. Additionally, our cross-border business is doing very well, growing almost four times year-over-year capturing the majority of the TPV outside Brazil, mainly in other Latin American countries and Europe. Boa Compra has a very strong presence in the gaming vertical and gradually expanding its exposure to others such as travel and entertainment, software and physical goods. Finally, in November, we completed Moip's Wirecard Acquisition, starting the integration process since the beginning of the month and prepared to accelerate our growth going forward with the best-in-class online platform of the Brazilian market. We expect online will be a relevant growth driver in the coming years, and PEGS is ready to lead this process for both sellers and consumers. Now, I'll pass the word to Eduardo Alcaro, our CFO, to talk about the financial performance. Thank you. Eduardo, please go ahead.

Thanks, Ricardo, and hello, everyone. It's great to be here today. and I hope you all are safe and healthy. In the next slide, we present our revenue figures. Total revenue and income grew 22% year over year, reaching almost 1.8 billion reais in the quarter, showing a strong rebound sequentially. In the next graph in the right side, breaking down our operating revenues, Transaction Activities and Other Services grew 38% year-over-year, also showing a very strong recovery compared to 4% in the second quarter. Our financial income revenue also improved when compared to the 8% decrease observed in the past quarter and flat on a year-over-year basis as a consequence of the consumer behavior during the pandemic. leading to less credit card transactions in installments in our transaction mix. Important to remember that our prepayment model is automatic, meaning that every credit card installment transaction is automatically prepaid instantly in Dplus 14 or Dplus 30 to our clients. In the charts below, we present the recent TPV market data provided by ABEX, the Brazilian Card Association, as of Q3 2020. Important to show that the market is growing at 17% year-over-year or 10% excluding Corona Vouchers, with debit cards growing 41% year-over-year or 22% ex-Corona Vouchers. on a year-over-year basis, while credit cards are only growing 1%, showing how the mix has changed across the board as a consequence of the consumer behavior during the pandemic. Based on those numbers, PAX is gaining market share in both products, and our total volumes grew four point times faster than the market, excluding coronavirus. In the next chart, we present our net take rate, which is the blended take rate net from transaction costs such as interchange, processing, and card scheme fees that reached 2.35%, down 37 basis points quarter over quarter. Excluding the Corona Vouchers impact, our take rate reached 2.58%, or 14 bps down, already easing the pace of decline sequentially as a consequence of the temporary mix effect already discussed earlier. In the next slide, we are presenting our cost and expenses structure and net income performance. Starting with our non-GAAP total cost and expenses, we ended the quarter totaling 1.3 billion reais growing 44% year-over-year. Breaking by categories, our sales and services costs grew 58%, driven by higher interchange costs, up 37% year-over-year as we grew our TPV by more than 50%. Our personal expenses grew 63% year-over-year As a consequence of the expansion of our PagBank teams, hiring more tech developers, cards, credit, investments, sales, and insurance professionals. Our DNA has also increased 200% year over year as a consequence of an unprecedented merchant edition expansion during the quarter. Boosting POS acquisition depreciation and higher amortization of product development and tag teams. Marketing allocated in sales and services also increased by 42% year over year with higher investments to promote digital wallet, back bank products and engagement. Moving to selling expenses, We highlight costs related to chargebacks, declining as a percentage of the TPV from 0.21% to 0.18% year-over-year, even with higher exposure to online sales and a credit portfolio twice larger than in Q3 2019, driving to a healthy CAC. Upright Non-Gap Net Income reached R$ 330 million, a decrease of 15% year-over-year, but 8% higher when compared to Q2 2020. It's important to remember that in every Q3, we have the stock-based long-term incentive plan grant, leading to a larger non-gap market-to-market adjustment. In this quarter, we had a total of 67 million reais impacted by the stock performance and a more pressured FX rate from dollars to reais in the period. For more details, the reconciliation of these non-GAAP financial measures is presented in the last page of this webcast presentation. Bottom right, non-GAAP net income margin reached 18.5% in the quarter. is stable when compared to Q2 2020. This is exactly what I mentioned during the last call. It's stable margins comparing Q2 2020 to Q3 2020. As we shared in our Q4 2020 trends slide, we expect to expand net income margins in Q4 comparing to Q3. Moving to the next slide, we highlight the main operating and financial KPIs for PagBank. In the first chart, PagBank TPV, previously known as non-acquiring TPV, reached R$23 billion, growing 312% year-over-year, or 286%, excluding the R$1.5 billion volumes related to Corona Voucher stop-ups. Moving to PacBank clients, we ended the quarter reaching 6.7 million users, growing 257% year over year, and adding 1.8 million new users in one single quarter. In the chart below, we present the evolution of our consumer base. Consumers reached 2.2 million users in Q3, Growing eight times year-over-year and already representing one-third of the total PagBank base, showing our ability to expand our addressable market as we become a full complete financial digital ecosystem. Moving to the next chart, our PagBank revenues ended the quarter at R$133 million, accelerating 109% year-over-year. In the first nine months of 2020, our total back bank revenues reached 330 million reais and growing 103% year over year, a triple digit growth, despite our decision to be more cautious on new credit originations since Q1 2020 that we are resuming in Q4 2020, as well as the launch of new products in the coming months as we'll discuss further. These figures show that we are in the right track to reach 30% of our total revenues coming from PagBank in four years. Thank you all, and now I'm passing the word to Ricardo, who will comment on the latest business developments.