PagSeguro Digital Ltd. Class A Common Shares

Hello everyone and thank you for waiting. Welcome to PagSeguro PagBank's first quarter 2021 results conference call. This event is being recorded and all participants will be in listen-only mode during the company's presentation. After PagSeguro PagBank's remarks, there will be a question and answer session. At that time, further instructions will be given. Should any participant need assistance during this call, please press star zero to reach the operator. This event is also being broadcast live via webcast and may be accessed through PagSeguro PagBank'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 post their questions on PagSeguro PagBank'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 in PACSeguro PACBank's current assumptions, expectations, and projections about future events. While PACSeguro PACBank 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 PagBank's presentation or discussed on this conference call, for a variety of reasons, including those described in the forward-looking statements and risk factors sections of PagSeguro PagBank's registration statement on Form 20-F and other filings with the Security and Exchange Commission, which are available on PagSeguro PagBank's Investor Relations website. Finally, I would like to remind you that during this conference call the company may discuss some non-GAAP measures. For more details, the foregoing non-GAAP measures and the reconciliation of those 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.

Good evening from São Paulo, everyone, and thanks for joining our first quarter results conference call. Tonight, I have here with me Artur Schunk, our Chief Financial Officer, and Eric Oliveira, our Head of Investor Relations. First of all, we hope you and your families are well and safe. Before we move on, just a quick update about the outbreak of COVID-19 in Brazil. It seems the worst is over, however, The economic recovery may take a while due to the speed of vaccination rollout in Brazil. Although we are enthusiastic about the availability of effective vaccines, the rate at which vaccinations are taking place in Brazil is still low when compared to other countries like the US. Consequently, merchants and consumers have changed their behaviors to keep working in this scenario with more digitalization, less cash, and the adoption of alternative payment methods. Meanwhile, our dedicated employees have been doing an extraordinary job to keep serving our clients with excellence. Thank you very much PagSeguro PagBank team. Despite the pandemic, the resilience of our business model and our focused execution allowed us to achieve great results and records in several KPIs in this quarter. I'm pleased to report that PagSeguro achieved a record consolidated TPV growing 102% year-over-year and kept adding 300,000 merchants and more than 1 million pack bank users per quarter, while total revenues were above R$ 2 billion in the quarter. In fact, we are the company with the highest growth in terms of volumes, net ads, and have been increasing our acquiring market share in the past quarters, reaching approximately 9% in Q1 2021 versus 5.9% in Q1 2019. Our last quarter's performance have reinforced our belief that both businesses, acquiring and banking, will deliver robust growth in years to come. Talking about banking, we continue to see unprecedented changes in the highly concentrated banking industry in Brazil. Although we have experimented the entry of new players in the last few years, PagBank being a precursor of this movement, in December 2020, More than 70% of the Brazilian credit portfolio was concentrated among the top five banks. We see that as a huge business opportunity and a reason to bring more competition to an economic segment that has been basically the same for decades. The opportunity to change people's lives thrives the stamina that runs impacts professional things. We consider ourselves exceptionally well positioned to continue to disrupt banking in Brazil because of three main reasons. First, Our Tech DNA Approximately 6.5 thousand engineers in UOL Group with the best in class professionals working for PEGS Second, our unique expertise and knowledge on the Brazilian Internet Since the early beginning back in 1996 which today the most visible aspect is the UOL audience with a reach around 90% among Brazilian Internet eyeballs Right after Facebook with 93% and Google with 96% reach. And third, the fact that we are the first woovers. Creating a new market unserved by the competition before us. And finally, but not least, a strong culture and excellent execution. I would resume as Peg's way of doing it. We operate in an evolving industry whose answers to some questions are not 100% clear. For that reason, we permanently promote self-criticism. But having said that, we can affirm our investment thesis relies on the following six pillars. First, payments is the best entering door for digital banking. PEGS has the largest Brazilian merchant base that generates recurring revenues through a digital account that naturally provide cross-selling opportunities for additional banking products. Payments industry has consistently grown two digits in the last two decades, driven by merchants accepting new electronic payments. New payments methods, such as NFC, P2P, among others, continue to replace cash transactions. For example, in the first quarter, NFC volumes increased in almost eight times in comparison to the same period of last year. We consolidate our leadership in long-tail markets, and we see limited competition as incumbents have given up serving these clients. Now, we will prove our thesis that is much easier to go up in the pyramid than to go down in it with our hub strategy. Our hubs are extremely successful and we are gaining market share with profitable SMBs clients very rapidly. Second, online score. Online payments go on a score for us and our focus has delivered a growth of 140% in Q1 2021. PAX is enhancing omnichannel solutions for merchants and increasing cross-border transactions. In first quarter, cross-border volumes increased three times compared to the same period of last year. Third, cards and lending are core. Because banking industry is highly concentrated, Brazilian unbanked populations is still huge and the spreads are very high. This is an opportunity for us 17 times larger than payments in terms of revenue pool. PEGS has been working with cards and lawyers in the last three years, mainly focused on the micro merchants, creating a unique database and credit models to manage returns and risks. Clearly, a strong entry barrier for new players. Fourth, new financial products are core. PEGS' movement to go up in the pyramid to conquer market share in SMB's market can and will be replicated with other financial services. Fifth, technology. Customer Experience and Product Development are core. Technology, innovative and client-centered culture combined with a lean structure promotes disruption, awareness and engagement. In the first quarter, PEGS reached 480 million apps downloads and processed 81 billion reais. We believe that value relies on active and recruitment clients. and we are happy to announce that we surpassed the market of 10 million active clients in PagBank's second anniversary. And sixth, regulatory environment helps. Regulatory changes such as peaks, marketplace of receivables and open bank create a positive environment for new players like us. With these initiatives and achievements, we are truly committed to keep promoting the financial inclusion in Brazil, making investments that are creative and will bring higher returns in the future. Finally, the pandemic is not over in Brazil. This year will be another challenging one, but if you're prepared to face it and ready to explore the economic rebound in the coming years. That said, Artur and I will present some slides and we'll have a Q&A session at the end. On slide three, we highlight the achievements of the first quarter. We break down in three sections. First, operating and financial results. Second, PEG-Seguro or acquiring business. And third, PagBank or a banking business. Start with the operation and financial highlights. Consolidated TPV of 81 billion Reais, up 102% year over year. Total revenue and income of 2.1 billion Reais, up 30% year over year, with consolidated net take rate of 2.41%. Adjusted BIDA of 573 million Reais, up 12% year-over-year, despite PagBank and HUB's investments. Non-GAAP net income of R$ 327 million, down 11% year-over-year. Excluded one-time events during the quarter adjusted a bid of R$ 617 million, up 20% year-over-year, and non-GAAP net income of R$ 371 million, up 1% year-over-year. Moving to PagSeguro, Acquiring TPV of R$ 50 billion in Q1, up 58% year-over-year, despite new lockdowns in the end of March 2021. Online TPV grew 140% year-over-year, while Hubs TPV grew 410% year-over-year, diversifying our exposure to new segments. Active merchants of 7.3 million, with net addition of 201,000 new merchants, or 1.8 million more merchants in comparison to the same period of 2020. Total acquiring revenues of 1.9 billion Reais, with adjusted EBITDA of 725 million Reais, margin of 38%. During this quarter, we launched Pegifone, the first worldwide one-stop-shop POS which combines acquiring, banking, and software. We also launched Moderninha Profit, the smallest POS with integrated printer, and Auditech App, our reconciliation software. Moving to PagBank, PagBank TPV of R$31 billion, up 261% year-over-year, boosted by wire transfers and bill payments. PagBank app downloads of 48 million, with almost 7 million downloads recorded. PagBank active clients of 9.1 million, up 144% with net addition of 1.3 million in the quarter. PagBank consumer clients of 3.5 million, five times larger than first quarter 2020. In first quarter 2021, consumers represented 38% of PagBank active clients. Credit portfolio of 773 million reais, deposits of 5 billion reais, and PagBank CDs surpassing R$1.4 billion in March 2021. During this quarter, we also announced the cashback offering for payroll portability and launched new third-party investment funds and personal accident insurance. Moving to slide four, two years ago, we launched PagBank, aiming to explore and capture the existing opportunities in Brazil. At that time, we had a few products in our portfolio, provided the base digital account features only to our merchants. In slide five, we can see all the achievements throughout the last two years becoming a complete ecosystem now serving both merchants and consumers as we were able to combine acquiring, banking, partnerships, software, marketplace, insurance, investment, loans, and cards. Moving to slide six, we show how powerful is our ecosystem and how it is boosting our growth trends. First, I'll talk about client acquisition and awareness. We reached 7.3 million active merchants up 33% year-over-year and 9.1 million PagBank clients in the first quarter of 2021. It represents a growth of 146% year-over-year. Moving down, we can see we reached 48 million downloads in PagBank as of March 2021. Talking about engagement, We observed the acceleration of volumes growth. Consolidated TPV increased 102% year-over-year, while net consolidated TPV grew 215% when compared with Q1 2020. Our market share in the Brazilian payments industry reached 9%, more than 3 percentage points in comparison to the first quarter of 2019. Our products per user ratio increased from 2.5 to 2.7. which also indicates higher engagement of our clients. Last, but not less important, in third quarter, tax monetization. Revenue and EBITDA growth shows we were able to monetize our businesses and to balance growth with profitability. Total revenues increased 30% year over year, and our adjusted EBITDA increased 12%. Moving to slide seven, we'll start presenting our operating figures for the acquiring business. Our TPV growth remains strong, with a 58% increase over a year, boosted by TPV per merchant growth, which grew 18% when compared with first quarter in 2020, and net merchant ads that reached 300,000 between January and March this year, ended the quarter with 7.3 million active merchants. The strong growth, despite new lockdowns in Brazil, was driven mainly by a fast cash conversion into electronic payments and success in our new verticals and client segments, such as online and hubs. Volume's growth for April and May were very strong, respectively 108% and 91% increase year over year, despite the new lockdowns we had in Brazil in 2021. Moving to slide eight, total acquiring revenues were 1.9 billion reais, Class A Common Shares acquired intake rate increased 17 basis points in comparison to the previous quarter, reaching 2.23%. Moving to slide nine, here we present some new acquired initiatives we have been exploring. First, our online TPV, which has been growing much faster than previous year. In first quarter 2021, our online volumes grew 140% versus 13% in 2020. The acquisition of MoIP, the digitalization process boosted by pandemic, and our several initiatives to incentivize online payments and omnichannel solutions were the main drivers. Also, we are happy to announce card not present transactions during this quarter increased 116% year-over-year. Moving to our SMB Hub strategy, our 2021 volume trends indicate we will be in the top of the range of our current guidance, which was 11% of acquiring TPV. Our forecast is to have 250 to 300 hubs uprun in several cities and regions until the end of 2021, reaching 83% of Brazilian GDP coverage. Finally, software subscribers reached 621,000, 8.5% of PAGs active merchants. We plan to provide additional disclosure of our hubs strategy in the coming quarters. Now, moving to slide 10, we'll share some PagBank figures. Starting with the strong growth of PagBank TPV, once again, a triple-digit growth totaling R$ 31 billion, accelerating the growth in comparison to 2020. On the top right, we have our PagBank Active Client figures. which was 9.1 million being 38% composed by consumers. Net ads were 1.3 million with consumers representing 58% of first quarter net additions. These figures show our strength to serve both merchants and consumers with our two-sided ecosystem. Bottom left, we share our product per user ratio. In first quarter 2021, our products per user reached 2.7. 0.2 higher than the same period of 2020, reinforcing clients' stickiness to our ecosystem. TAG Bank revenues reached R149 million, up 48% year-over-year, and accelerated in April 2021 to above 80% when compared to April 2020, Although April 2020 was the worst pandemic month in Brazil, impacted by lockdowns, which drove down withdrawals and card spending. Additionally, for those clients with higher engagement, such as merchants active in PagBank and consumers with payroll portability, we offer some free ATM withdrawals per month, exchanging short-term revenues for higher engagement and future monetization. In the first quarter of 2021, PEG Bank adjusted EBITDA was a loss of R$ 78 million, driven by headcount increase, marketing expenses, and transaction costs. Also, in the first quarter, we had a one-time event related to digital account losses, not related to loan provisions or credit risk management, amounting to R$ 73 million. The massive data leak in Brazil, which happened in January 2021, did not affect any of our systems, data, or infrastructure. However, it provided information to fraudster activities in online transactions and bill payments. As we identified these transactions, we immediately blocked them. Again, this is a one-time event. Moving to slide 11, we present some additional data about PagBank and PagInvest. The number of active cards increased three times in comparison to the first quarter of 2019. In May, we launched a new home marketing campaign in partnership with Visa to foster card payments. In this campaign, PagBank clients will receive cash prizes, and one of them, we get a house. Day-to-day banking, the number of PagBank app logins was 549 million in the first quarter of the year, while bill payments transactions has been gaining a lot of traction. This is a very good sign, since usually, clients select their main banks to centralize bill payments. Finally, PEG Invest assets under custody reached R$ 4.2 billion, up 127% year-over-year, with PEG Bank CDs almost doubling in size quarter-over-quarter. Worth to say, all this AUC is based on PEG Bank CDs and a few investment funds. We plan to have equities and treasury bonds in the following weeks, which we expect to help increase assets under our custody. Recently, we allowed our investment platforms to receive orders 20 hours a day, 7 days a week, and we also launched new third-party investment funds managed by well-known investment firms in Brazil, such as Western Asset, Alaska, Hashdex, BNP Paribas, Journey, and AZQuest. Now, I'd like to turn the conference over to Arthur, our CFO, who will talk about our credit portfolio and our financial results for the quarter. Arthur, please, go ahead.

Thanks, Ricardo, and good evening, everyone. In the slide 12, we show our credit portfolio where the performance is improving every day, based on credit model's result. We ended the month of March with a total credit portfolio of R$ 773 million, being 53% of working capital loans, 43% credit cards and 3% of other credit products. As we have been tracking very close the NPLs by cohorts for working capital loans and for credit cards, trends are getting better since August 2020, showing very healthy numbers. Our confidence has been increasing and encouraging us to reach the highest level of credit disbursements in May. We expect to increase credit originations going forward, mainly in the second half of this year. Our cash position remains very strong, with a positive balance of R$ 8.1 billion, enforced by the issuance of PACBank CDs to fund the credit disbursements. Loans-to-deposit ratio was 53%, guaranteeing stamina to grow our credit portfolio in a healthy and sustainable way. Moving to slide 13, we present our quarterly financial results. In the top left of our consolidated net pick rate reached 2.41%, representing an increase of 11 basis points in comparison to Q4-20 and 6 basis points versus Q3-20, driven by better TPV mix with more credit and lower debit transactions and a longer duration for credit cards receivables in installments. In the top right graphic, we share our non-GAAP total costs and expenses, which totaled R$ 1.6 billion in the first quarter of 2021, up 51% year-over-year. Cost of sales and services represented 70% of total costs and expenses reminded at the same level of Q1 2020 and increased 49% year-over-year. The main drivers were higher interchange and card scheme fees following the TPV growth, higher depreciation and amortization related to our solid active merchants additions during the past quarters and expenses to new products and services developed to PagBank. Selling expenses represented 23% of total costs and expenses and increased 94% year-over-year due to headcount expansion for our hubs and the one-time digital account losses of R$ 73 million previously explained by Dutra. If we exclude the digital account losses, this line increased 56% versus the same period of last year. In the bottom left chart, our adjusted EBITDA was 573 million reais, excluding the negative effect of 73 million reais related to one-time digital account losses not related to loan provisions or credit risk management and the positive effect of 29 million reais related to tax provision reversal. The recurrent adjusted EBITDA was R$ 618 million, with a margin of 30%. Finally, in the bottom right, we share our capital allocation strategy. During the first quarter of the year, we invested almost R$ 393 million, being 62% in POS acquisitions and 38% in other initiatives, mainly related to product and software developments. as a percentage of revenues, CAPEX, decreased 4 percentage points, reaching 19% versus 23% in the first quarter of 2020. Thank you all for joining us tonight. Now, I pass the word back to Dutra to conclude the presentation.

Thank you, Arthur. Moving to slide 14, we present PagFone. During the last quarters, we were working very hard to launch the first device in the world which combines acquiring, banking, and smartphone. Everything in one single device created a real one-stop shopping solution for our merchants, reinforcing our leadership in long-tail market and continue to be a company driven by innovation. Finally, in slide 15, our last slide, we present Modernia Profit. This is the smallest POS with integrated printing in the market. Initiatives like this help us to offer a better customer experience and to allocate capital more efficiently. Consequently, improving our LTV per-carb ratios. With that, we end our presentation and we can start the Q&A session. Thank you. Operator, please.

Thank you. We'll now begin the question and answer session. If you'd like to ask a question, please press star 1 on your phone. If your question was answered and you want to leave the poll, you can press star 2. Our first question comes from Jorge Cury with Morgan Stanley. Please, Mr. Cury, go ahead.

Hi. Good evening, everyone, and congrats on the numbers. I have two questions, please. The first one is on your TPP guidance of 40%. I think that chart on page 7 is quite telling. I think you're running at significantly above that and hopefully we've passed the worst of this year. Is it possible that the number is just significantly above that? It wouldn't be surprising given the current trends that you end up at 55% to 60% growth and What stops you from updating that guidance or where do things could potentially go wrong? And we do end up in 40%, which would be a big deceleration from the first five months of this year. And my second question is on NPLs. And I'm not sure if this is related to the digital losses. I'm not sure that I understood properly what that is. But anyway, my question is on On MPLs, going to your slide number 12, where you have the pre-pandemic cohorts and the post-August 2020 cohorts, can you maybe explain how loan losses are trending over the last few months, particularly given the difficulties of the first quarter? And just if you can explain what those digital losses are and if indeed those are part of the MPLs. Thank you.

Hi, Jorge Cury. Good to hear you. Thank you for the question and thank you for the compliments as well. This is Ricardo. I will start with TPV and then begin to answer your question number two and then Artur can compliment. But talking about TPV, You're right, we are running above the 40% guidance. We are confident with this guidance. And the reason that we do not update is because we are still in the middle of the pandemic in Brazil. I mean, we have some uncertainty looking forward. We have tougher comps in the second half 2020 because the government had 300 billion reais in corona vouchers last year in second half. So we have tougher comps. And we need to wait and see how it's going to be the economy recovery in Brazil. So that's why we don't update at this point. As time passes by, we will be more than happy to update that. So that's why we are confident with this 40% at this time. Talking about the digital losses, just to be clear here, there is no relation with credit, no relation with loans. That happened because we were, I would say, more aggressive than what it should in terms of authorizing some bill payments transactions. And then what you had is people coming here, paying bills, some of them with credit cards, and then we had chargebacks afterwards. So we had this, we are saying here Q1, but actually it was in February and March. We already adjusted that. We didn't have any impact in April and May. So it is really a one-off. It is really a thing that happening in February and March and that's it. There is nothing that is gonna happen Q2 regarding to that. And again, there is no relationship with NPLs or things like that. Just to be clear here, I want to reinforce that we didn't have any problems with our infrastructure, with our data or data leak. What it had was a massive data leak in Brazil in January 2021. It was in the news and probably were aggressive in authorizing some bill payments, transactions to credit cards. So that's it. We already adjusted that and it's not happening in Q2. And talking about the NPLs in slide 12, I'll ask Arthur to help us here. And again, Jorge, thank you very much for the question.

Jorge, it's Arthur speaking, and thank you so much for your question. It's a pleasure to talk to you. I think the idea of these graphs is to show you that when we start to offer credits again in August 20, our NPLs are much better than we have before because we learned a lot during the pandemic period. And so you know that in March 20, we stopped our originations. And we learned a lot, adjusted our models, hired new people, more experience into that. And so now we are having better results than we had before. And the idea is just give you more color about it because we don't give the number. So it's important to you to understand that we have a better performance right now than before. And that's it. So we are very happy with the numbers and encouraging us to accelerate the originations going forward.

All right. Thanks, Ricardo and Arthur, for that. Thanks again.

Thank you. Our next question comes from Mariana Tadeu with UBS. Please, Ms. Tadeu, go ahead.

Hi, hello everyone. Thanks for the opportunity of asking a question. It's regarding the FME segment. You mentioned that it should represent 7% to 11% of your total TPV this year, but could you share how much it represents today? Also, if you could give us some color, where are the merchants in the segment coming from? Are they from the incumbents, from Estone or any other player? I don't know if you could share that. and also in the presentation mentioned the penetration of the software within the SME clients. I want to understand if you are offering the banking credit products to them and how is this penetration? Thank you.

Hi Mariana, this is Ricardo. Thank you for the question. So we are not disclosing the exact number of hubs TPV in the total TPV at this point, Mariana. As we said at the presentation, we plan to give more color as time passes by. Just we don't want to give this information at this point for strategic and competitive reasons. Regarding the players that we are getting in this segment, it varies, but usually it follows the market share in the SMBs. So the majority of them we are getting from incumbents. And then we have some others coming from new players. But it follows a little bit the market share of the segment. We are the, let's say, the newcomer here. We are the company that is, let's say, competing with the other ones, being the aggressive here. So that's why we are getting all these new merchants and TPV grew 410% year over year. Regarding the software, the 8.5%, we actually use the information we had from software to put in our models, in our credit models, because we have more information from the ones who used software versus the other that don't use it. I don't have here in the top of my mind how is the penetration of credit for these clients, to be sincere. But it is one variable of the models, not the main one. but it helps us to improve our models. I don't know if I answered your question.

Yeah, on this second part of the question in terms of banking and credit, I just want to understand if you are offering, if they have a credit product or, I don't know, credit card or something like this.

Oh yes, we are offering credit for SMBs as well. We are growing our credit portfolio Our next question comes from Brian Kane with Deutsche Bank.

Hi, guys.

Congratulations on the results, especially given the tough economic environment. Two questions. I guess I'd be interested in some more color on the increase in the TPV per merchant. I think it was up 18% year-over-year versus 3%. Class A Common Shares and how much to expect for the investments in the hubs and Peggy Bank, etc. Thanks.

Hi, Brian. Thank you for the question and thank you for the compliment. Talking about the average TPV per immersion, there are some drivers here. If you look in Brazil, we are seeing the penetration of cards in PC is increasing. It used to be, I guess, 40%, and now it's close to 44%. So we see more adoption of electronic payments. And we are also increasing our participation of online and hubs in our total TPV. So as we go up a little bit in the pyramid, the average TPV per merchant will grow as well. So I guess those are the two main drivers here, people using more cards, less cash, and also we are having more TPV coming from online and for hubs.

Thanks. Brian Zertor speaking. Thank you so much for your question. It's a pleasure to talk to you again. And so regarding to margins, as you said, we invested a lot during the last months and also in this choir we invested a lot in PAC Bank to hire more headcounts and product development, to develop products like PAC Invest, insurance, credit. And also we are investing in hubs with Salesforce, facilities, rentals, and also marketing to promoting our new products and services. And also right now, we are, in terms of nominal, we are slightly better in the bottom line in 2021. Even though our focus is to reach the best balance between growth and profitability, looking for a bigger company in the future, gaining scale to leverage expenses. And so we are much more focused right now in the growth of the company to leverage expenses in the future and improve margin as well in 2022, 2023, in the more mid-long term.

Got it. And any guidance on where we should set our models in terms of the net income margin going forward for this year, just given those investments you talked about?

Yeah, Brian, we gave the guidance for TPV, for CAPEX. What we can say here that in absolute terms, our net income this year will be better than last year. We don't have the exact number here. But as Arthur said, we are looking for, let's say, more growth this year than profitability. But in absolute terms, we're going to see a better net income this year versus 2020, even with this challenge that we are seeing in the first quarter with lockdowns and so on and more debit transactions and so on. So that's, let's say, a better guidance I can give you at this point.

Got it. Great. Thanks so much.

Thank you.

Our next question comes from Craig Maurer. He's an autonomous research. Please, Mr. Maurer, go ahead.

Yeah, hi. Thanks again for taking the time. Appreciate it. I was wondering just some housekeeping items. You provided TPV growth for the acquiring channel through April and May. Could you provide what the total consolidated TPV growth was for April and May? Second, I wanted to return to the non-credit digital account losses. Just some additional clarification. I mean, it sounds like you're authorizing bill pay on credit cards, but that something went awry and you wound up with a lot of chargebacks. Were these fraudulent bill payments? I'm trying to understand what went wrong in that. I know it's one time, but what went wrong in that authorization process? That might be a learning experience for you. And lastly, in the SMB hub business, are you seeing a strong degree of software uptake? And to what degree are you seeing perhaps an omnichannel opportunity in the SMB software, in the SMB business? And can you bring MoIP to address some of that? Thanks.

Hi, Craig. This is Ricardo. Thank you for the question. We must discuss here internally how it's going to be if you can give the TPV for PagBank. We didn't give in this call. We just need to see what is the best way to give this disclosure. Of course, it's growing a lot. We just closed in May. But, I mean, we can discuss. We can make it public before next call. I don't have the answer to you at this point. Talking about the digital account losses that you asked, we were aggressive in authorizing some transactions. The models for bill payments, let's say, authorizing more transactions than it should. So it's not credit related, it's not NPLs related to lowers or things like that. It's just that people came here to pay bills to credit cards. That's the majority of the chargebacks. And we authorized some of the transactions that after we reviewed, we should not have authorized. I mean, we were aggressive in doing that. So that's what happened. There is no data leak. There is nothing like that. Just people came here, decided to pay a bill, and then we had this chargeback. That's as simple as that. Regarding SMB and hubs, Yeah, they are using our software, although we know that our software, at some point, they are very complete, but some type of merchants, they require something more sophisticated. But at the end of the day, what we are looking here, we are bringing the merchants that are four to five times larger than Longtail. So they are still small. They are not very sophisticated. Part of them could be omnichannel. But we know that part of them will not be omnichannel because of their business. Just, let's say, the guy from the restaurant, sometimes he's going to find a new platform to make delivery and Peggy Bank will not provide that for him, although we have a small platform, just to give an example here. The guy that has auto parts probably will not sell, will not, let's say, fix cars and reach these customers through online. So we see some opportunity for omnichannel. For those who we think that is feasible, we can offer solutions, link of payments and things like that. But I would say the majority of them still today, they are not omnichannel. They are more physical stores because we are going, let's say, in the bottom of the pyramid of SMBs. So they are not well-sophisticated for softwares and part of them are not ready for omnichannel. And that's fine. At the end of the day, what we want is to bring them for acquiring and make them to use PagBank Get the data at some point, increase the relationship, strengthen the relationship with them. We could offer credit and credit cards and so on. So our idea is much more to have the financial services embedded with our solution than other solutions at this point.

Thanks. And are you seeing any change in behavior around PIX, any P2M transactions, or is it still mainly a P2P channel?

Well, Craig, we don't see PICs hurting our acquiring business or people using PICs to make payments. What we see is PICs replacing wire transfers. So let's say if you had a bill that you used to pay to wire transfer, So people did not use cards, now they are using PIX because PIX is free and is instantaneous and so on. But we don't see PIX, let's say, cannibalizing our card business. As you could see in our growth, 58% year over year. That's the thesis that we have, the hypothesis that we have from the beginning since when we started talking about PIX in the beginning of last year. PIX is much more to replace our transfers, at some point to replace cash and help digitalization of some people in Brazil. And then we can take advantage by offering PagBank and you can see that we are growing more than 1 million PagBank clients per quarter.

Thank you.

Thank you.

Our next question comes from Mario Pierre with Bank of America. Please, Mr. Pierre, go ahead.

Good afternoon, everybody. Congratulations on the results. Let me ask you two questions as well, primarily related to revenue generation. How should we think about the direction of your take rate on the acquiring business, taking into consideration the expansion, the hub expansion? and also taking consideration that the economy is opening up, so we should see a better mix of credit versus debit. And also when we think about the take rate at Pagibank, I think it's fair to say that Pagibank is growing much faster than we anticipated. So I was wondering if you think that you can achieve Hi Mario, this is Ricardo. Thank you for the question. Regarding acquired intake rates, as you could see, we grew 17 basis points in Q1 versus Q4.

Even with more TPV coming from SMBs, which has a lower net take rate because, I mean, they are a little bit larger merchants. So looking forward, what we expect from the acquired intake rates to be stable. There's going to be some variation here and there, but to be stable because we're going to have more clients coming from hubs. would put some pressure in the net rate coming down. On the other hand, we have the tailwind that is the mix of payments, more credit. So what you can look forward here this year, we expect to be stable or improve a little bit. But let's see how it's going to be. In Brazil, we have a lot of ups and downs and lockdowns suddenly. Unfortunately, the rate of vaccination is not Going pretty fast as we see in other countries. Some people talking about third wave. Some cities making lockdowns, some others opening. So it's still a lot of uncertainty. But to give, let's say, soft guidance here, let's consider it stable even with the pressure coming from the hubs, which in our opinion is a very good performance. The other question about the 30%, PagBank. It's hard to say if we're going to be able to make it earlier than that, Mario. We prefer to keep the 2024. Let's follow the following quarters, and then we can update. What we saw in April is good level of revenues in April, much better than Q1. Let's wait a little bit, and then we can, let's say, update it. But it's feasible to have before that. I just don't want to affirm that at this point.

Yeah. Hi, Mario. This is Eric. I'd just like to reinforce here that We will reach 30% in one of the quarters in 2024. This is not an easy task, right? Because we have been seeing payments grow very fast and solidly, right? And even our new verticals, such as hubs and the online. So it's a hard task here, but we continue to be committed to this 30% in one of the quarters in 2024. Thank you.

Okay, let me follow up then here on Pagin Bank. Even if we add back these losses that you booked of 73 million reais, we're calculating revenues per client of about 24 reais. Is that about right? When we look in the fourth quarter, we have around 27 and one year ago at around 27. Any reason why revenues per client are coming down at PagBank?

Well, Mario, we should make the math here just to be if you have the same numbers that you have, but usually the dynamics for a PagBank monetization are the following. We bring the client, they stay here for a while, they start using, engage with the solution, and then we see monetization afterwards. So there is some lag between bringing the client and having the revenue. So that's why at some point we see the number of clients coming to 9.1, but the revenue is not coming at the same pace because it takes a while. And that's even more true if we think about consumers, because the consumers don't have the automatic cash out that you have from the acquiring clients. Even if the client loves our app and it's easy to use, very good UX and so on, if he doesn't have any money there, he cannot do anything. So that's why we see some lag between bringing the clients and then the revenue. So that's the main explanation of that. We also said in the presentation for some of the clients, we decide to give free ATM withdrawals, which should... bring revenues a little bit down. It's not material, but of course it doesn't help. So those are, let's say, the main reasons here. But the main reason, the main driver is the lag between bringing the client and having the revenue from these clients. Perfect. Very clear.

And just a final follow-up then on Pagibank here. I think in the past you had talked about maybe breaking even at Pagibank in the second half of next year. Is that still your view?

Yeah, that's our view. That's our view. Thank you. Thank you.

Our next question comes from Jeff Cantwell with Guggenheim. Please, Mr. Cantwell, go ahead.

Hi, thanks for taking my question. Can you hear me?

Yes.

Great, great. I want to ask you one quick question on PodBank. You've grown your PagBank clients to 9.1 million over the course of two years, which is impressive. And underneath that, the active card base has increased by over three times while you're also laying in new products. And clearly, they're seeing uptake and more and more adoption. And I think that all suggests that your average revenue per user should continue to increase. Perhaps more materials, things continue to normalize. Do you agree with that idea? And the reason I ask is because we see, you know, other banks, some in Brazil, you know, with fairly high average revenue per user numbers. And so I think it's still early days for you guys. So I'm just curious if you agree with that view and if you can give us some updated thoughts on what your ARPU impact bank might go to over time. Any color of thoughts there would be appreciated. Thanks very much.

Hi, Jeff. Thank you for the question. I was trying to, let's say, to explain that as well for Mario, but yes, in the medium to long term, we expect the revenues from PagBank users to go up. That's one of the drivers for us to reach the 30% of the revenues of the company coming from PagBank by 2024. What we have here is that there is, let's say, a longer time between opening the account and starting generating revenues. And this is even more true when you have the consumers, because the consumers don't have the cash-in. So you need to open the account and then wait to receive the card, and then they're going to receive some money here, some wire transfer from other banks or PICs or the payroll or so on. But yes, you're right. We are bringing these clients. That's the first. Let's say we have this framework to bring the client, engage, and then monetize. I would say we are between the first and second step today. We are still having lots of accounts, millions of accounts every quarter, so bringing new clients. The engagement is increasing. Monetization is happening, but it doesn't happen at the same pace. There is this lag between bringing the client and then start monetizing. But looking in the middle term, that's the idea. I said before, we are running some pilots with consumers, making some additional products to them, testing with them. We're going to have, in a few weeks, we're going to have equities here so people could buy stocks here. We're going to have treasury bonds. We just launched two options of insurance, personal insurance and home insurance. So the idea is to make this cross-sell and increase every revenue per user in PagBank. That's the idea. That's the dynamics that we expect to happen.

Great, I appreciate that. And then a quick follow up on Pogphone. I was hoping you could give us some, you know, thoughts on why now and, you know, just how that piece fits into the strategy and maybe just kind of consolidate our thinking on the acquiring side and, you know, while you're building a one-stop shop for micro merchants and how that might, you know, sort of be a driver for you guys, maybe in terms of net ads, you know, volumes, et cetera.

Yeah. Yeah, so you're right. That's exactly for the micro-emersions or the long tail. We don't think that's a device for someone who has a lot of transactions every day because it's, I mean, you know, POS is It's better for this type of volumes when you have a lot of transactions than when you have a few transactions per day. So it's focused on the micro merchants. You know, everyone has a smartphone. Some of the guys use it to have the smartphone and pair through Bluetooth with our MPOS with Mini Xenia. So the idea here is to have everything is one device. They already receive the device with a PagBank account because they create this account when they buy the device. They create, let's say, the login and password. So they have the app there. They can order a card and so on. So the idea is to have an additional option for the long tail for the micromotion. The average ticket is much higher than other POS. So although we are selling better than what we expected, We don't have the same volumes that you have for smaller POS and Mini Xenia Sheep and things like that because of the price. But I mean, it's doing well. The idea, as you said, is to have for the long tail, one-stop shop, and people can use it as a POS, acquiring digital accounting as a smartphone. It is a very good smartphone, by the way, good cameras and so on. So that's the idea.

Okay, great. Appreciate all the color. Thanks again, and congrats on the results.

Thank you, Jeff. Our next question comes from Reina Kumar with Evercore. Please, Ms. Kumar, go ahead.

Good evening. Thanks for taking my question. Really good to see the strong TPV coming out of Paggie Bank and, of course, your acquiring. I'm just curious to understand if COVID-19 had any material impact on the prepaid card interchange revenue. Hi, Reyna.

Thank you for the question. The reason that our revenues in PagBank were not even higher than what they were is because we did have some impact that people not using prepaid cards because the cash in and even the, let's say, the Corona voucher from the government didn't happen in Q1. and also people using less cash. We also make Some revenues from people taking the money through ATMs. We charged some tariffs there. There was a decrease in that, people at home not using cash. So that's part of the explanation why the revenues from PagBank and Q1 weren't even higher. So, I mean, it's not a big issue. It's good volumes. We are still the number one in prepaid cards in the country by far. And we are sure that once the economy rebounds, we're going to have the rebound as well. And part of our investments, we didn't mention before, but part of the investments that we've been doing since 2020 and 2021 is because we know the COVID, although it's a little bit longer in Brazil when compared to other countries, COVID is something temporary and the economy will rebound. And when the economy rebounds, you just want to be ready to to take advantage. That's what we did in 2020. That's what we did in 2021. That's why we were the company with the highest growth in terms of TPV in our market, taking share from others, creating this new market and bringing these new customers. But going back to your question, yes, there was a little bit impact in the prepaid card because of a little, let's say, lower spending in the prepaid cards in Q1, but it's something temporary. It's not a big issue.

Got it. It's very helpful. And then on your hub strategy, you gave us some clues on your potential volume contribution from hubs in 2021. Could you help us better understand what the potential revenue and earnings contribution could be this year?

Well, Reina, we can give you more color about Hub Strategy when we think it is appropriate. Of course, we are having this operation here, trying to beat other companies that are already there on the street. So we are here the challengers, so we just don't want to give too much information about our performance at this point. We gave the guidance about TPV. Once we think it's feasible to give more color on that, we can give you. It's not because I don't want it. It's just because of, let's say, competitive reasons. We just don't want to give too much information about it and Let's say, let's have this operation up and running, and then we can, when it is more mature, we can give more color, even with more confidence about the numbers and our performance. But so far, we're doing very well. We are beating our estimates. That's why we said that we expect to be in the top of the range of TPV, which was 11%. That's the guidance. So we are doing well.

Understood. Thank you.

Thank you. Our next question comes from Tito Labarta with Goldman Sachs. Please, Mr. Labarta, go ahead.

Hi, good evening. Thanks for the call and for taking my question.

Also, maybe just one quick follow-up on PagBank.

In terms of the client additions, PagBank remains pretty healthy. Do you think, and you kind of alluded to it, but about a million clients per quarter It's sustainable, like for how long that's sustainable, or maybe another way to get to the 30% of revenues. How many clients do you think you would need to have? I mean, at the pace you're going, you can easily be over 20 million clients in a few years. Is that a reasonable assumption? And maybe in terms of the products that they use, I mean, is sort of the main cash just like the prepaid cards, or like which product do you think is generating the most interest amongst the Pac-Man clients? Thank you.

Thank you for the question. Yes, we do think it's feasible to have 1 million new clients per quarter. Hard to say when it's going to be over. I remember, just make a quick parenthesis here, but we've got this question about acquiring and merchants in the past three years, how it could be If it could be sustainable for us to add 1 million merchants per year or 250,000 per quarter, and we are doing this since 2018, since we became public. So every year, at some point, we think it's going to be a challenging one, but we always beat our estimates because we're still playing a huge market. So in terms of merchants, we expect to have 30 million people in Brazil that work by themselves or they may need a POS. So there is still, according to our estimates here, one-third penetration at this point. In terms of peg bank, some estimates say that we have 25% to 30% of people without a bank account. Even after COVID, with all this digitalization, maybe it's a little bit lower than that, but it's still huge. And that's why we are putting more than a million per quarter. We also said in the presentation here, we closed it in March with 9.1, and in May we already surpassed 10 million. So we already added 900,000 in Q2, in previous Q2, and we still have part of May and full June. So we think it's feasible to have this 1 million for a while. To be sincere, I don't have in the top of my mind the number of clients in PagBank to give a number, but you can imagine, we already have more than 10 million. I don't think it's impossible to have this 20 million that you mentioned. And about the why people come to us, I guess there are many reasons here. First, because our brand, the strength of our brand, people know how we work, people know it's a, let's say, a company that you can have the confidence you can put your money here. We have the distribution through UOL that covers more than 90% of eyeballs in Brazil right after Google and Facebook. We invest in marketing. We've been investing in the account. We do a lot of research, how people use it, where they are having some difficulties, try to make it better, easy to use. It's very simple. Just download the app and in up to three minutes you open account. You send your picture and it's done. And it's a full free account. People just come to us because they know it's a free account. They can have interest in their balances. And although we make it free for the consumers or for the user, we are receiving money from the companies. We are, let's say, receiving the bills and so on. So those are the main reasons. People come to us because it's free, strength of the brand, efficient distribution that you have, and investing as well.

Great. Thank you very much.

Thank you. Our next question comes from Otavio Tanganelli with Bradesco BBI. Please, Mr. Tanganelli, go ahead.

Hi. Thanks for taking my question. I wanted to ask on PacBank as well that the credit portfolio increased a little over 200 million or almost 200 million reais quarter-on-quarter. I wanted to understand if NPLs are behaving well and the economy is expected to improve in the coming quarters, why not accelerate loan originations or when should we see, I would say, more aggressiveness in terms of the loan book here? Thank you.

Thank you so much for your questions. It's a pleasure to talk to you. So we are showing that we have a better NPLs for credit, but we are a conservative company. We have a lot of cultures about the uncertainty of the market. As Dutra said, some people are saying that we could have a third wave here or other issues related to COVID. We don't know exactly when the economy will rebound, but we have... All the conditions to accelerate. We are starting to doing that in Q2. And so you will see in the coming quarters better volumes. We will increase our portfolio in the right way. So we are understanding the models, understanding the NPLs, understanding the performance and growing the portfolio. We understand that this is the best way to do that. And so we have the conditions to accelerate more, but we are cautious related to the economy, related to the moment that we are living in the country. And so you will see in the future our portfolio growing.

And, Otavio, this is Ricardo. Thank you for the question. Good talking to you. As well, we were ready to accelerate last year. But of course, when you have the model and you have COVID with a lot of up and downs and lockdowns, there is a lot of noise in the data. So that's why we didn't accelerate before. Just want to have the right moment to do. We are not in a hurry to do that. We know it is important. We just want to do it right away. We see some other players in the market doing some aggressive Growing the portfolio and the NPLs will come. We know that and you know that so that the NPLs will come if you don't give the right credit for the right person and you don't have the collection processes and so on. So we just want to be ready and be confident that we can accelerate a little bit. We are already with the 700 Almost R$ 800 million, close to R$ 1 billion, so we are growing, but step by step, not doing, let's say, crazy movements here and doing step by step. But we will accelerate to some point that we think it's feasible and we are confident to do so.

That's great, guys. Thank you.

Thank you.

Our next question comes from Niha Agarwala with HSBC. Please, Miss Agarwala, go ahead.

Hi, thank you for taking my question and congratulations on the good results. Most of my questions are answered but very quickly and I know you can't give more information on the hubs but it seems like the hubs are doing quite well and exceeding the expectations. What do you think are the strengths of ParkSeguro which is helping you to gain clients either from incumbents or the other players? Is it the service quality, is it the brand image, or are you doing something different on the distribution? So what are your strengths in that particular segment? And my second question is on the monetization of the software opportunity. I mean, you already have a good take-up, 8.5% of the client base uses software. So are you already monetizing it? Can you give us some names, what percentage of revenue comes from software, and what is the opportunity that you see here? Thank you so much.

Thank you, Niha, for the question. Let's talk first about the hubs. We always said that, and we mentioned that during the presentation, that our thesis is that it's easier to go up in the pyramid than to go down when you think about the size of the merchants in terms of TPV. So we started with long tail, as you know, We had all this platform that is very scalable, easy to use, self-service. So we have all this, let's say, online DNA here that we can serve the small clients here. When you go up in the pyramid, it's just a matter of distribution. The platform is the same. The solution is the same. The easier the solution, the better for the merchant. It doesn't matter how is the size of the merchant, but if it's easy to use, Every merchant will like it. It doesn't matter if you're a small one or a big one. So it's a matter of distribution here. And as I said before, we have a strong brand. We see a lot of unsatisfied merchants in the SMBs. So at some point, they don't have the right service, and that's why we come there and we can bring these merchants to us. We have good devices here. We have a portfolio of seven devices. The merchants also like our devices. There are some components here that we can use or some instruments that you can use to bring these merchants. It's not a matter of price and try just beating the price. At some point, the merchant even want to pay you more if they have a good service. So that's the dynamics behind going to SMB, but we are proving here the thesis that it's much easier to go up in the pyramid than to go down first. And talking about software, the 8.5%, A very small part of that we monetize. We are not charging the majority of them. We are giving the software for free. We think that today is not a lot of money. Our merchant is not sophisticated to pay for a software. So we are making here for free. At some point, if you see an opportunity that you can charge, we will do it. But from all the softwares that we have, we have some premium features from the loyalty software and also premium features from the conciliation software. The other softwares that you have, the point of sale that you can use, let's say, put some products, coffee, croissant, and all this stuff, and then you just can have a database of clients, database of products. We are giving this for free. So today we are not charging, just to be sincere. A very small part of that is paying. That concludes our Q&A session. I would like to turn the floor over to Mr. Ricardo Dutra for his final remarks.

Please, Mr. Dutra.

Hi, everyone. Thank you very much for your time. As you could see, the company is doing well. All the KPIs are growing. Number of clients, KPV. Class A Common Shares Class A Common Shares Class A Common Shares

The PagSeguro PagBank's first quarter 2021 results conference call is now concluded. Thank you for your participation, have a good night, and thank you for using our call. You may now disconnect.