PagSeguro Digital Ltd. Class A Common Shares

Good evening! My name is Caio and I will be your conference operator today. Welcome to PagSeguro Digital Earnings Conference call for the second quarter of 2023. At this time, all lines have been placed on mute to prevent any background noise. 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 PagBank website at investors.pagseguro.com. Participants may view the slides in any order they wish. Today's conference is being recorded and will be available after the event is concluded. I would now like to turn the call over to your host, Eric Oliveira, Head of IR. Please go ahead.

Hello, everyone. Thanks for joining our second quarter 2023 earnings results call. After the speaker's remarks, there will be a question and answer session. Before proceeding, let me mention that any forward-looking statements included in the presentation or mentioned on this conference call are based on currently available information and PagSeguro Digital's current assumptions, expectations, and projections about future events. While PagSeguro Digital believes that the assumptions, expectations, and projections are reasonable in view of currently available information, you are cautioned not to place into reliance on these forward-looking statements. Actual results may differ materially from those included in PagSeguro Digital's earnings presentation or discussed on this conference call, for a variety of reasons, including those described in the forward-looking statements and risk factor sections of PagSeguro Digital's most recent annual report on Form 20F and other filings with the Securities and Exchange Commission, which are available on PagSeguro Digital's Investor Relations website at investors.pagbank.com. Finally, I would like to remind you that during this conference call, the company may discuss some non-GAAP measures, including those disclosed in the presentation. We present non-GAAP measures when we believe that the additional information is useful and meaningful to investors. The presentation of this non-GAAP financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered separately from or as a substitute for our financial information prepared and presented in accordance with IFRS as issued by the IASB. For more details, the foregoing non-GAAP measures and the reconciliation of these non-GAAP financial measures to the most directly comparable IFRS measures are presented in the last page of this webcast presentation and earnings release. With that, let me turn the call over to Ricardo. Thank you.

Hello, everyone, and thanks for joining our second quarter 2023 earnings call. Tonight, I have the company of Alexandre Maiani, our CEO, Artur Schunk, our CFO, and Eric Oliveira, head of IR. Before Alexandre and Artur share the main highlights for the quarter, I would like to share the most recent milestones in the first half of 2023. Going to slide three. We ended June with 29.5 million clients, which along the past years found in our comprehensive set of payments and financial services solutions the opportunity to experience a simple, safe, seamless, and digital way to manage their financial lives. By using our POS devices, our online and cross-border payment platforms, our proprietary set of softwares, and our digital bank, we were able to surpass more than 2 trillion reais in volumes processed. Interesting to point out that it took 16 years for the company to surpass the first 1 trillion in volumes, and only in one year to surpass the second trillion. At the same time, we have maintained our consistency and discipline throughout several scenarios such as pandemic, interest rate cycles and changes in the competitive and regulatory landscape. Still, Our strategy to combine growth with profitability since day one led to our solid financial position of R$7.6 billion in accumulated net income and more than R$10 billion in net cash balance. We kicked off August with S&P Global attributing the highest rating in the local scale, BRAAA, to Banco Seguro, our subsidiary responsible for the issuance of PagBank Certificate of Deposits. one of our competitive strengths in our funding strategy. I would like to take advantage to reinforce our commitment to our mission to make easier the financial lives of Brazilians by offering a one-stop-shop solution through one app, one internet banking, and one customer care center. Now, I pass the word over to Alex for the commentaries on the second quarter 2023 highlights. Thank you.

Thank you, Ricardo. Hello, everyone. I would like to present how the growth, profits and cash generation drivers behaved during the second quarter of 2023. Our earnings per share marked 1.18 reais, 7% higher year over year. Our strategy to grow in selected verticals resulted in higher margins with adjusted EBITDA reaching 849 million reais. 90 basis points higher than the second quarter of 2022, resulting in net income of R$415 million in non-GAAP basis. Our cash earnings grew 24% year over year, and our capital expenditures was 8% lower than the second quarter of 2022. Our one-stop-shop solution has been consistently attracting more and more clients' engagement. Total payment volume from our payments division reached R$ 92.7 billion and PagBank cash-in of R$ 50 billion driving up deposits on platform. In financial service division, the highlight was the sustained breakeven point despite the expected impact related to the regulatory change on prepaid and debit cards in Brazil. Adjusted B to that. improved 66 million reais versus the second quarter of 2022. In payments division, our strategy for the last 12 months was to focus on key segments that kept us on track. MS and BTPV grew 10%, almost twice as much as the industry growth this quarter. Our merchant acquiring business remains solid and through the combination of our superior value proposition and the broad reach of our sales channels, we have been able to grow above the market in the MSMB segment as presented in slide five. During the first 45 days of 3Q23, we noticed an uptrend in TPV growth to 8.5% year-over-year from 4% on the second Q23. In MSMB, we have improved our sales on the online channel, which we expect to contribute to the TPV growth moving forward. Hubs presented further improvements in sales productivity and increased cross-selling of financial service through PagBank business account. This not only allows merchants to have access to our instant prepayment product, but also settle direct deposits from different acquirers into PagBank in the case where merchants adopt more than one acquirer. This has been driving up accounts balance deposits and improving our understanding about merchants' needs, resulting higher share of wallet. As a result, our consolidated TPV per merchant went up 15% year over year. In large accounts, our developments in online and cross-border have been evolving, increasing our footprint in Latin American countries, expanding our set of features and fostering the omnichannel offerings. Through our strategy of diversifying our merchant base, focusing on key segments, we expect to drive incremental volumes and gross profit contribution in the future. Moving to slide six, we present our client base and cash in evolution. Our number of PagBank clients reached almost 30 million, placing us among the most relevant Brazilian financial institutions. From now on, we'll pivot our focus on activation and principality rather than number of clients, stimulate higher usage and revenue growth per client. Our 93 billion reais in TPV and 50 billion reais in PagBank cashing led deposits on platform up 25% compared to the second quarter of 2022. This represents 86% of our total deposits and kept our annual percentage yields at 94% of the CDI. We expect further growth in our deposits in the next months, which may be boosted by our AAA rating attribute by S&P Global, which will enhance RCD's distribution among institutional and retail investors on and off platforms. Slide seven shows that our outstanding credit portfolio reached 2.8 billion reais, with 52% being composed by secured products, such as payroll loans and credit cards. The ongoing downtrend in NPLs over 90 days to 14.4% combined to our tax planning allowed us to write off 219 million reais. This amount is already fully provisioned in previous quarters with no impact in P&L. At the same time, we continue to grow our payroll book loan which is focused on the public sector employees and retirees. This opportunity remains extremely attractive to us as our developments to provide end-to-end digital underwriting allow us to give very competitive price with incremental gross profit contribution, which will continue to open new growth avenues. Now, I turn over to Arthur for the financial highlights of the second quarter 2023. Arthur, please.

Thanks, Alexandre. Hello, everyone, and thank you for joining us tonight. Once again, PAGS presented another set of records for a second quarter in the company's history. TPV, gross profit, net income, and cash earnings marked all-time high figures. Total revenue and income grew 2% quarter over quarter, positively impacted by TPV growth and financial income. partially offsetting the impact in top line related to the regulatory change in interchange cap on prepaid and debit cards that came in force in April 1st. Our winning funding strategy has let down for the third consecutive quarter the financial expenses, despite no change in Brazilian interest rate in the second quarter 2023. Our additional leverage coming from lower losses and operating expenses led to EBITDA growth of 8% quarter over quarter, with significant improvement in our EBITDA from payment units, which grew 18% versus first quarter, led by lower transactional costs yield, and also related to the regulatory change on prepaid and debit cards, neutralizing potential effects in bottom line from lower revenues. Earning before tax also presented a strong growth of 13% quarter over quarter and 7% year over year, due to the sustained adjusted EBITDA break-even in financial services division. Better than expected financial services results led to a higher tax income rate, which did not imply headwinds for profitability. Net margin on a non-GAAP basis grew 60 basis points versus second quarter 2022, resulting in R$ 415 million in net income. Earnings per share increased again and achieved R$ 1.18 in the quarter, 5% better than Q1 2023. Going to the next slide, we would like to deep dive in our revenue performance. This quarter, we had several moving parts. In financial services, we lost R$ 74 million versus Q2 2022 due to interchange cap on prepaid and debit cards, with negligible impact in bottom line, giving the natural offset in transaction costs and financial expenses. Mixed change towards secure credit products, which have lower yields and longer durations. However, this short-term negative effect is expected to disappear as the portfolio grows and mature. In payments, TPV growth led to revenue incremental of R$ 141 million offset by lower gross take rate, mainly driven by shorter duration on TPV of credit card installments and faster growth in SMB over the other segments. In other financial income, we had a positive contribution related to the higher average interest rate in comparison to the same period of last year. On slide 10, revenues from payment to unity grew 4% quarter over quarter due to carry effect from the massive merchants repricing done last year, partially offset by client-mean exchange towards larger merchants with lower take rates but incremental gross profit contribution. As a result, gross profit reached 1.3 billion reais, an increase of 11% when compared to the same period of last year, with transaction costs and financial expenses performances being the main operating leverage drivers. In the next slide, financial services verticals total revenues reached 242 million reais in second quarter 2023, 27% lower than first quarter. impacted by the regulatory change on prepaid and debit cards interchange fee and settlement term and higher share of secured credit products with lower APURs but longer duration as payroll loans. On the other hand, gross profit reached R$111 million, up 57% year-over-year, led by better asset quality in the credit portfolio, requiring lower provisions for expected credit losses. Moving to slide 12, financial expenses closed at R$ 796 million versus R$ 756 million in Q2 2022. This year-over-year increase is mainly explained by the higher average Brazilian interest rate in the period and TPV growth. On the other hand, financial expenses fell in comparison to Q1 2023. driven by our unique funding mix strategy, backed by deposits and return on earnings, rising more than 70% of our working capital needs at a lower cost than market average. Total losses decreased 55% year over year, accounting R$ 122 million, driven by lower provision for expected credit losses of credit portfolio, healthier coverage ratio and credit underwriting mostly on secured products. Operating expenses reached R$589 million, down 5% year-over-year and flat-ish quarter-over-quarter. This amount represents 15.4% of total revenue and income, similar to the level of second quarter 2022 despite of lower revenue levels derived from the regulatory change. Our headcount resizing and market optimization led to the leverage. Our cash earnings continued to gain momentum, reaching a positive amount of R$ 319 million, up 24% versus Q2 2022. CAPEX market 530 million reais, down 8% year over year, but higher quarter over quarter due to the upbeat trends in merchants' gross ads that required additional POS inventory levels. Still, our discipline in capital allocation and efficiencies in IT investment stands still, which we expect to result in a similar or lower capital expense to disbursement versus last year. Depreciation and amortization, including POS write-off, total R$ 374 million, representing close to 10% of total revenue and income, keeping the pace to conversion to CAPEX levels in the coming quarters, to unlock additional profitability in the future. On the final slide, our net cash balance ended the second quarter surpassing R$ 10 billion, from R$ 8.6 billion in comparison to second quarter 2022. In the past 12 months, our cash generation amounted R$ 3.5 billion, which we disbursed at R$ 1.8 billion in investments and R$ 200 million in our share-buy-back program. Our equity position continued to increase, with 56% being composed of return on earnings, reinforcing our commitment to shareholders on capital allocation and returns. Now, we have ended the presentation and we will open the Q&A section. Operator, please.

Thank you. Ladies and gentlemen, we'll now begin our question and answer session. To ask a question, please press star 1 on your touchtone phone. If you would like to remove yourself from the question queue, please press star 2. For people using speaker equipment, it may be necessary to pick up your handset before pressing the keys. Our first question comes from Mario Pierre with Bank of America. Please go ahead.

Hey guys, good afternoon. Congratulations on the results. Let me ask you a question focused on your headcount reduction, right? You talked about operating expenses declining year over year due to some changes in headcount that you made. However, We're hearing some of your competitors talking about expanding headcounts going forward, especially Salesforce. So can you give us an idea of where your headcount reductions, which areas they impacted, and how do you think about headcount going forward? Thank you.

Mario, it's Arthur speaking. Thank you for your question. Related to headcount reduction that we did, there is only one department that we didn't change anything that is related to commercial team. As you know, we have a little bit more than 300 hubs, 3,000 people in the streets. And There is no intention to increase any people in the Salesforce at this point. What we did is relocate some hubs from one side to another side when we identified that there are many opportunities in other places that we don't have the hubs at this point. And the reduction was related to other departments, including IT, back office, other departments. And looking ahead, we do not understand that there is a need to hire more people, neither for commercial team. So the two downsides that we did this year is enough to our intention to continue to grow in the company for the future. Okay, that's clear.

And then if I may ask a second question related to volume growth, TPV growth of, you know, 4% year on year. We do see that the industry is decelerating, but can you give us a little bit more of a color on why we're seeing this slowdown in growth overall? Is it because card penetration in Brazil is already reaching like a mature level? Is it because we're seeing disruption from picks? And how should we think about volume growth going forward?

Hi, Mario. Thank you. This is Ricardo. We saw that Q2, we saw some decrease in card volumes in the overall economy. I think it's more related to macroeconomic variables than to the penetration of cards and things like that. Of course, if you look at PIX and if you look at the ABEX report, you see that debit is not growing year over year. If you sum debit and prepay, you're going to see there's going to be some increase there, but probably PIX is cannibalizing the growth of debit. We don't see cannibalization of credit. But if you look at our numbers, and we had some numbers in the slide here, in the first 45 days in Q3, we grew 8.5% TPV. So we are seeing some acceleration in our TPV. In the first half of the quarter was 8.5%. And it seems that the worst was in Q2 2023 for the industry as a whole. So again, going back to your question, it seems to be more related to market economic scenarios, people without credit card limits and things like that than to saturation or other variables.

And going forward, how should we work? Do you think we could see double-digit growth going forward in volumes?

Well, we're seeing 8.5 in the first 45 days. I think in Q3 it's going to be close to that. Let's see what we're going to have in Q4. As far as you know from the industry, people are more optimistic about the second half. So probably in Q4, we're going to see acceleration again. I mean, maybe it's too early to say, but the signs that are happening in Q3 are encouraging with 8.5% growth year over year in the first 45 days of Q3.

Okay, guys. Thank you very much.

Thank you. Our next question comes from Pedro Leduc with Itaú BBA. Please go ahead.

Thank you guys so much. Good evening. Questions on the expenses or losses front, your expected credit losses list on the release are close to zero. I understand you shrunk your loan book, but I don't know if it has anything to do with the lower expected losses, lower red nation. Just really looking to review what the underlying driver for this new credit losses. And then also on the same line, chargebacks, again, rose this quarter as a thought maybe 1Q levels had more sustained. So just two questions on this side.

Thank you. It's Arthur speaking. Thank you, Pedro, for your question. Regarding to provisions for credit losses, as you may know, last year we decided to shift our originations and the portfolio to secure products. Also in last year, we increased a lot the provisions to cover the NPL's performance that we identify with the legacy. And all the legacy is 100% provisional. So the new underwriting is related to secure products that requires less provisions than unsecure products. And so this is the reason that we have this almost... no impact in the provisions because it's not necessary to increase provisions for credit.

Regarding to chargebacks, Pedro, you're right that we see a small increase from Q2 compared to Q1, but something, let's say, it's not a one-time event, but it's something that is not going to be in this level for the future. It's going to be around... 10 bips, 11 bips, that's what you expect for the future. So there's gonna be some small increase here and there, but overall it's gonna be between 10 and 11 bips for the whole year. So that's what you expect. And there might be some quarter that you have two bips more, two bips less, because you know, chargebacks, you can receive chargebacks up to six months after the transaction. Sometimes you have this time mismatch between the date of the transaction, the date of the chargeback, but it's not something that is crucial here and it's not a problem that we have regarding chargebacks. It's just a small variation, to be honest.

Thank you, Arthur.

Our next question comes from Jorge Cury with Morgan Stanley. Please, go ahead.

Hi, good evening, everyone. Thanks for taking my question. I wanted to ask about the take rate contraction during the quarter. If you can walk us through what exactly drove the contraction and how is third quarter moving along relative to that second quarter print that we saw today? And then the second part of my question is, What are you seeing in terms of price changes for prepayment rates now that the central bank started the easing cycle? You were a bit guarded in the first quarter conference call saying that you would benefit from falling rates, but that the elasticity would probably be tested by aggressive price competition. Curious to see if you are seeing anything positive or negative so far. Thank you.

Jorge, thank you for the question. Good to hear you. I will start with the second question and then Arthur can answer the first one. Regarding prepayments, we didn't see any pressure in terms of prepayment rates at this point. Of course, we have a small, very small part of our TPV where prepayments are related to the base interest rate of the economy. It's related to CDI. So once CDI goes down for these clients, rates goes down automatically, but that's very, very small part of our TPV. For the other part, we didn't change our price. We don't see movements from the competition decreasing price at this point. And remember that we had this decrease from 13.75 to 13.25. Although it's 50 bps, it's not something that you think is, let's say, a structure for people to start changing the prices at this point. So we don't see if the rates keep falling down, if some competitors will start decreasing prices. As we said before, we don't plan to be the first one to keep decreasing prices. We try to keep the prices the level that we have. as long as we can. But of course, we're going to evaluate and look what the competitors are doing. But at this point, we didn't see pressure. Looking to the end of the year, the basic interest rates expect to come to around 11.75% or 12%. And for next year, around 9%, 9.5%. we'll keep following the movements of competitors. But going back to your question, at this point, we don't see pressures for prepayment rates decrease yet. So let's see. And Arthur, would you like to take the first one?

Yeah. Jorge, good to talk to you. Thank you for your question. And related to this take rates, there are many moving parts. And we... I decided to include a slide, slide nine in the presentation that shows everyone what the most clear way to show to everyone that there are moving parts and those moving parts related to financial services division and also payments. In financial divisions, as you know, in April 1st, we started the interchange cap on prepaid cards and debt cards that affected our revenues in financial services division. On top of that, we decided to change the underwriting and also the portfolio from unsecured products to secure products that present lower yields but longer durations, better for engagement to the clients when we move our originations to payroll loans. That also reduces the level of revenue that we have in financial services, but with lower expected credit losses. In terms of payments, we have a positive effect of our TPV growing 4% year over year. That resulted in 141 million reais of revenues. However, we saw that in the second quarter, we had shorter duration on TPV credit card installments, reducing the number of installments that affected our take rates, because as we have less installments, we have less take rates. And also, we continue to change the client mix in payments to SMB clients that has lower take rates, but good contribution in terms of gross profit and EBITDA. On top of that, we have this 22 million reais in other financial income that also contributed a little bit because of interest rate in the country that was higher than before.

Thank you. That was very clear. Thank you both. And just the last part of my question was, how is that take rate trending so far in the third quarter relative to the second quarter?

We are expecting a take rate reducing a little bit, not too much, but reducing because of this client shift mix.

Got it. Perfect. Thank you, Arturo, and thank you, Ricardo.

Thank you. Our next question comes from John Coffey with Barclays. Please, go ahead.

Great. Thank you very much for taking my call. I just had two short questions, which somewhat overlap with the last caller. My first question was on page nine, which I thought was a great slide, and I find it to be very clear. As far as at 74, which is a result of the prepaid interchange caps i understand that and i see that that will i would presume continue to some level for the next three quarters before it laps but regarding the 171 which you're getting from the shorter duration on uh tpv for credit card installments could you give me some thoughts about when that lapse is that something that we should also expect for three quarters or have we seen this already in the past couple quarters and we should see that that impact diminish My second question is, if we do see three 50 basis points declines in the SELIC over the course of 2023, how should we think about the different puts and takes on your P&L? Because you already seem able to mitigate the effects of SELIC increases just due to your strong balance sheet. How can you take advantage of this if you start to see these interest rate declines? Thank you.

Hi, John. Thank you for the question. I'll start backwards here. Just to give a sensitivity analysis here, for every 100 BIPs decrease in SELIC, if we did not change the price and keep the same capital structure and client mix, I mean, all variables equal, we're going to have something like close to 1,200 million reais EBT benefit for every 100 BIPs for one year. if everything else keeps the same. So of course we cannot predict how it's gonna be the other variables because you cannot control it. And let's say if the client mix changes a little bit, or if competitors start decreasing price, then you may respond a little bit. We don't know how it's gonna be the, the size of our response and things like that. But everything else equal, it's going to be 200 million reais, around 200 million reais EBT for every 100 BIP. So that's the sensitivity to give a sense how is the P&L related to the SELIC. Regarding the order 171, that's something that may happen in some quarter. Maybe the next quarter is going to be better. What we saw here is that the duration went down a little bit. But let's say in Q4, when you have Some people using more debit, but we also have some people buy like holiday gifts and things like that. The duration could go up. So it's hard for us to predict, to say to you that 171 will keep going down in Q3 and in Q4. We are just putting here what happened in this quarter. It doesn't mean it's going to happen in the following quarters. And also important to say that for the whole analysis for the P&L, so to say, we should look at the financial expenses and also the financial income. Because by the end of the day, what matters is the net of these two lines, the financial income minus financial expenses. And here we are just talking about the financial income in this slide nine. We're explaining only the revenue part of the P&L. So I don't know if it's clear for you or if you need any clarification.

No, that was very helpful. I appreciate it. Thank you.

Thank you. Our next question comes from Gabriel Guzon with Citi. Please go ahead.

Hey guys, good evening. So a couple of questions. So maybe just a different way to ask this point about competition. So do you see any signs that competition or any other financial aspect, to be more broad here, could make pegs not enjoy the full benefit or the bulk of the benefit of the lower selics in its bottom line. And second question is capex increased quarter over quarter. So kind of expecting that first quarter level to be more of a trend. And so what's the background there? Why we are not seeing a lower level here given the lower additions of clients? Thank you.

Hi, Gabriel. I will start with the first one and then Arthur can talk about the capital expenditures. To be honest, we are not seeing big changes in competition in the segments that we decide to play, which is essentially MSNB. We know there is some competition happening in the key accounts, but we are not part of that game. So we are more focusing, I mean, most of our focus is in MSNBs. And the competitive environment we've seen in the past quarter is similar to what we've been seeing in the last years, in the past year. So we don't see big changes. I know some players say they're going to increase sales force and things like that. But to be honest, we don't see that hurting us in such a way that we need to change our strategy or to change the way they work here. So competition seems to be similar to levels that we had before. In answer to your question about how we can benefit about the selling going down, as I was saying before, we don't plan to be the first one to pull the trigger and decrease prices. So we try to offer better services for our clients in such a way they can use us and they are not that price sensitive. That is much more, we can see that much more in the long-term and micro clients. And we try to do that, the same for the SMBs, by offering PagBank to them. So, I mean, it's hard to predict to you if Selic goes down, if some competitors start to decrease prepayment rates, if you do the same. But we don't plan to be the first one. We'll keep following the competitors. I guess after these two years of pandemic and this Selic with 13.75%, Companies are not looking for growth at any price as they used to do in 2021. So everyone is more rational looking for profitability. So, I mean, I don't think there's going to be irrational movements if we keep seeing Selic going down. But we are going to be close to our clients to understand what's going on. Yeah, that's pretty much the way that we think here.

Guzan, thank you for your question. Nice to talk to you again. Regarding to CAPEX, it's true, it was higher than Q1-23, but it was lower than Q2-22. But the good point is the CAPEX that we are having right now is under control, in line with our budget, our annual budget. And the reason that the CAPEX was higher in this quarter was because we need to increase inventory levels because of higher POS sales. Looking ahead, what we are expecting is to have a similar or slightly lower than 2022 CAPEX.

Perfect. Thanks a lot.

Thank you. Thank you, Gabriel.

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

Hi, thank you for taking my question. Can we just talk about the dynamics of the SMB segment? You posted stronger growth around 10% for the SMB segment versus the entire TPV, but should we expect a stronger acceleration for the SMB segment? Is that your focus and how the dynamics that you're seeing in that particular segment? And then can we talk a bit about the long tail segment? Your active merchants continue to decline as they're probably being more selective and focusing on profitability. But when can we see this stabilize? And do you see an impact from, there's some new players who've got their full acquiring license. Have you seen any change in competition or with Tome going down market? Do you see more aggressive price subsidies for the POS or Any other change in dynamics which is worth highlighting? Thank you so much.

Hi, Niha. I'm going to answer a question in two parts. First about SMBs, and then we can talk a little bit about Longtail. Well, what we're seeing in SMBs, similar to what we've been seeing in the past quarters, we understand that we have a very powerful combination here. We have a very clear value proposition for the SMBs. To be honest, I don't see any other company in the market with the same combination of payments and digital bank that we have here. And also we have this instant settlement that other players don't offer for the SMBs. So if you're an SMB and you use PagBank, you can have D plus zero right after the transaction receiver money. You don't have PagBank with high-yield CDs. For the SMBs, they understand the value proposition. We have this advantage. Of course, some of them don't understand or they prefer to work with the banks they already work. But at the end of the day, we think we have a strong value proposition with a very powerful combination. That's why we try to leverage and to use our sales force to sell for the SMBs. And we are doing very well, to be honest. As you can see, we are growing 10% TPV growth. twice as much as the industry has been growing in SMB. So that's the first part. The second one about long tail, we know we've seen some net head losses in long tail. Part of that is churn that happened one year ago. So we are not seeing this TPV for the past 11 months because they stopped working with us one year ago and then we are seeing churn right now. We try to always balance the subsidies that we have, the acquisition cost with the value that we understand that Longday is going to bring to us. We try not to do, I would say, irrational movements, always looking for this equation CAC divided, CAC versus LTV. And yeah, but to be honest, in Q3 now, we are seeing an increase in our gross ads. We are seeing better response for the market. We are getting more gross ads. And as I said before, in the first 45 days of the Q3, we are seeing 8.5% growth overall for the company. No new player in the market that is, I mean, no new kid in the block try to disrupt the market and things like that. It's similar to what we've seen so far. Yeah, that's pretty much what we are seeing. The other thing that we are always discussing here the way that we are going to measure how it's going to be long tail and the long tail TPV is growing. It's very common here in the base that companies start with us as a long tail and after a while it becomes, it goes to SMB because his or her business is growing. And then it starts with one TPV. And after one year, there's like 50% more, 60% more. And then we consider an SMB. So that's why long tail at the end of the day is, I would say, it's losing clients because or they are churning or they're going up for the SMB. So that's why it's hard to give you the exact number, how is long tail performing. But I would say it keeps in a very healthy way with the new clients activation. It's very decent levels. And if you look at the whole MSNB is growing 10% in the second quarter, which is very impressive. If you look at, if you think that the market is growing like 5%. So yeah. That's pretty much, I mean, many moving parts here. Try to answer requests. If it's not clear, let me know.

No, that's very helpful, Ricardo. Thank you so much.

Our next question is from Caio Prato with UBS. Please go ahead.

Hey, everyone. Good evening. Thanks for the opportunity. I have just one question here related to your mix shift strategy on payments. I understand when you mentioned that you are moving towards larger merchants, and this is positive in terms of EBITDA growth, but what we are seeing is that actually your TPV is going slightly below industry, at least on a year-over-year basis, and more importantly, total revenues excluding transaction costs are declining year-over-year. So your EBITDA indeed increased, but seems to be much more related to expenses control rather than revenues. So Having said that, just would like to understand your view about this dynamic, if we are missing anything here, and what is the strategy going forward in order to re-accelerate revenue tax transaction costs, please. Thank you.

Hi, Caio. This is Alexandre. Thank you for your question. I think we are going through an optimization cycle since second semester last year, where we started an important repricing movement, going up our price. And also we implemented very strict risk management policies in order to control and reduce our chargeback losses. Going over this cycle from at the end of last year to the beginning of this year, this slowed down our growth in the acquiring business in general, affecting long-tail and affecting large accounts especially. Obviously, moving forward, as we have all these risk management programs in place and better balance, as we have went through the repricing cycle, and now we see opportunities to further growth in the future as we have been experiencing this in the beginning of the third quarter. So moving forward, we see an acceleration. We didn't lose focus on keep growing long tail segment, even though we grow SMB faster right now. And we see opportunity to keep growing faster to the end of the year, our TPV and consequently our revenues.

Okay, thank you very much.

Thank you, Caio.

Our next question comes from Josh Siegler with Cantor Fitzgerald. Please go ahead.

Yeah. Hi, guys. Thanks for taking my question today. First of all, I'd like to talk a little bit about the potential long-term expansion on the payroll loan side of things. How are you thinking about that total growth opportunity?

Hi, Josh. I mean, the market is very big. Our market share is very, very small. If you look what's going on in our credit portfolio, we are growing like, in terms of mixed shift, we are shifting like eight percentage points from unsecured to secured credit portfolio every quarter. And of course, part of that is because we are growing in this payroll. It's a huge market. And to be honest, our market share is very, very, very small. So we see lots of room to grow. uh we found a way to bring these clients to us uh also through our app through digital and uh yeah that's definitely is going to be a credit portfolio or credit product that we're going to increase in the in the future but it's it's huge the size the total addressable market is huge understood looking forward to tracking that progress over time

And then secondly, you know, how are you thinking about capital allocation as we progress to the back half of 2023? Do you expect to continue buying back shares at the rate that you've been buying it back or perhaps accelerate it moving forward?

Hey Josh, it's Arthur speaking. Related to capital allocation, we have three things that we are doing because we are generating a positive cash flow. The first one is reinvesting in the company. So we are not planning at this point to have any dividends or other type of programs to back to shareholders this money in that way. The other point is changing to funding lines cheaper. so we can use part of this money to move from here and there and reduce the financial expenses that we have. And in terms of buyback, yes, we are doing every quarter some buybacks. Now we have 7.5 million shares in the treasury. The plan is to continue doing that because of the low price that we are seeing in comparison to what we expect to have in the company. So we believe a lot that this company is a great company, especially for the future, because it's a solid company, solid balance sheet, and we are growing rapidly. this company for the future, not just for one quarter.

Understood. Thanks very much for taking my question. Thank you.

Our next question comes from Alberto with Goldman Sachs. Please.

All right, good evening. Thank you for the call and taking my question. A couple of questions also, maybe just to think a little bit high level on in 2024, maybe are you thinking about revenue growth? You know, you mentioned, you know, TPV growth, you know, maybe hit bottom and can begin to accelerate, but maybe take rates still coming down a little bit as you're shifting the mix. Just, you know, maybe PagBank starts to contribute more as also as you get past some of the impact from the prepaid interchange. Just high-level thoughts on revenue growth for 2024 would be helpful. And then my second question, just following up on the take rate impact from the shorter duration of the receivables, are you seeing any pressure from the banks there? You know, a lot of talk about ending, you know, revolving cards and banks maybe pushing for doing less interest-free installments. Any callers on how you think that can evolve? Are you seeing any pressure from the banks already offering less installment period than in the past? Thank you.

Hi Tito, this is Ricardo. I'm gonna start backwards again and then someone can answer the first part. Regarding this discussion about the revolving credit card interest rates in Brazil, which is around 15% per month and compound is gonna be like 440% per year. There are many discussions at this point with Congress and politicians and so on. As a matter of fact, the text for the law that is under discussion about this credit card was published today in the afternoon. there is no relationship or no mention in this law about installments or things like that. So we're not seeing any pressure at this point. Remember, we are a credit card issuer as well. And then we are following this discussion. We are part of the discussions with the government and regulators. But at this point, and the text of the law is focused on decreasing the revolving credit cards, which again in Brazil is close to 4%. 440% per year, but no updates at this point. I mean, everything is just being under discussion, how it is possible to decrease this 440% to a lower level.

Hi Tito, this is Eric. I will break down the question related to revenues growth in two parts. Starting with the acquiring businesses, we do see an acceleration of TPV growth towards the second half of 2023, like we shared our guidance for the first 45 days of Q3. And we do expect to keep gaining market share over the next quarters and years. But we understand that as larger market share we have, the bigger markets are the markets where we have SMBs and large accounts, so lower take rates. But the combination with the financial expenses, potential decrease backed by lower interest rates and our funding strategy, the incremental gross profit tends to be very compelling in 24 owners. For the financial services, we will have this interchange cap effect enduring until Q124. So this will create potentially easy comps for second quarter 24 onwards. We also have the compounding effect on the payroll loans as we disburse upfront the cost to underwrite, but we have the compounding effect over the years. And as we keep growing our deposits base, naturally, we also have additional float revenues. And we also expect to grow our credit portfolio in the short term in secured products. And midterm, I think we are working here to further improve our onboarding and to end processing credit underwriting, onboarding, risk assessment, underwriting and collection to restore and accelerate the underwriting of unsecured products. So these would be the main revenue streams for the both verticals.

Great. That's very helpful, Eric and Ricardo. Thank you for the call.

Thank you.

Ladies and gentlemen, that concludes our question and answer session. I would now like to turn the floor over to Mr. Ricardo Dutra for closing remarks. Please, sir, go ahead.

Thank you everyone for taking the time to participate in our call. See you next quarter. Thank you very much. Good evening.

The conference has now concluded. Thanks everyone for participating. You may now disconnect.