PagSeguro Digital Ltd. Class A Common Shares

Good evening, my name is Ogir and I will be your conference operator for today's call. Welcome to PEG Seguro Digital Earnings Call for the second quarter of 2024. This live presentation for today's webcast is available on PEG Seguro Digital's Investor Relations website at investors.pegbank.com. Please be advised that all participants will be in listen-only mode. After the presentation, to ask a live question, please use the raise hand button to join the queue. Once you are announced, a request to activate your microphone will appear on your screen. Please ask all your questions at once. Alternatively, you can also write your question directly into the Q&A icon located on the lower part of your screen. Today's conference is being recorded and will be available on the company's IR website 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, sir.

Hello, everyone. Thanks for joining our second quarter 2024 earnings 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 packed Seguro Digital's current assumptions, expectations, and projections. While Paxigroo Digital believes that those are reasonable in view of currently available information, you are cautioned not to place undue reliance on these forward-looking statements, as actual results may differ materially from those included in Paxigroo 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 section of Paxigroo Digital's most recent annual report on Form 20F, and other findings with the Security and Exchange Commission, which are available on Paxigroup Digital's Investor Relations website at investors.pacbank.com. Finally, I'd like to remind you that during this conference call, the company may discuss non-GAAP measures. 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 EASB. 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 appendix 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 2024 earnings call. Tonight, I have the company of Alex, our CEO, and Arthur, our CFO. and I'm proud to announce the company had a very strong quarter with all-time high in key financial metrics, such as revenues and net income. Hence, you'll see many all-time highs at the beginning of the slide titles throughout the presentation. On this first section, I'll share the main operational and financial highlights for the quarter. Starting with slide four, total revenue grew 19% year-over-year, reaching 4.6 billion reais, an all-time high quarter result with a strong CPV and revenue growth in all client segments. Our gross profit margin ended the quarter close to 40%, in line with the current guidance and 86 basis points increase in comparison to Q2 2023. On a year-to-date basis, we ended the semester with a gross profit margin of 40.3%. We also reached the all-time high net income in GAAP and non-GAAP basis, which reached 542 million reais, a 31% year-over-year growth. In the last bullet, we can see our EPS reached 1.68 reais, 32% higher than Q2 2023, also an all-time high. Moving on to slide five. We reached 31.6 million clients by the end of June, adding more than 2 million clients in the last 12 months, with 17.7 million active clients. We also had an all-time deposit level reaching R$34.2 billion, an impressive 87% increase year-over-year. This increase shows the power of our value proposition, which has been contributing to improve client engagement and to lower our cost of funding, supporting our profitability metrics. Down in the slide, in the first bullet, we can see we also had a AAA rating from Moody's. Now, PagBank has AAA rating from both agencies, Moody's and S&P. Also worth to highlight, in the bottom right of the slide, our PagBank app evaluation of 4.9 stars in App Store and 4.8 in Google Play. Moving on to slide six, we share some highlights of the payments and banking units. In payments, We have been able to maintain a strong growth, and our TPV reached 124 billion reais, 34% year-over-year growth, three times more than the Cardo's industry growth, which was 11%. We had strong growth in MSNBs and LMEc merchants as a result of our strategy of attracting merchants with monetization potential on financial services. On the banking side, in the mid column, we can see our cash in reached 76.4 billion reais, a 52% growth year-over-year aligned to our strategy to successfully stimulate principality for our clients. Our credit portfolio grew 11% year-over-year to 2.9 billion reais, the third consecutive quarter of expansion driven mainly by our credit underwriting on security products. In the last two bullets, We can see our early prepayment of receivables from other acquirers restart now in Q3. And also, our NPL 90 reached 3.2% in Q2 2024. Now, I pass the word over to Alex for the commentaries on the business units highlights for the quarter. Thank you.

Thank you, Ricardo. Hello, everyone. On this section, we'll break down our business unit's performance through the second quarter of 2024. Starting with payments on slide 8, we show that our merchant and acquiring business keeps growing faster than the industry, with strong growth register in all segments. TPV reached R$124 billion in Q2-24, growing 34% year-over-year, with TPV per merchant growing 42% on a yearly basis, and active merchants on a 30-days criteria, excluding non-merchants. grew 4% year-over-year. These results are a consequence of our strategy to expand our payments business focused on merchants' profile with better engagement and profitability. Moving on to Slide 9, let's look further into the MS&B segment, which gathers merchants with monthly TPV up to R$1 million. MSMB's TPV grew 28% year-over-year, reaching R$83.6 billion in the second quarter of 2024. The strong merchant's cross-adds positively contributed to this performance, combined with higher productivity and expansion in our hubs, resulting in our year-over-year TPV addition of R$18.2 billion, which is five times larger than in the previous year. We have been recording strong QoS sales across multiple channels and geographies, which is an important sign of how consistent and robust our current growth and performance are. This is only possible due to the unique value proposition that our company has for MS&B clients in Brazil. Through unrevealed instant settlement solution, we offer the cheapest working capital source, empowering businesses to thrive without financial strain. In addition, we provide a fully integrated platform combining a complete set of payment products, a broad suite of financial services, and a comprehensive portfolio of embedded software solutions from more than 350 partners. On the next slide, Here on slide 10, we show how our TPV from LMEC segment has performed, comprised by large merchants, e-commerce, and cross-border clients. In the second quarter of 2024, this segment posted 50% TPV growth in comparison to Q2-23, reaching R$40.8 billion in volume, accounting for approximately one-third of our total TPV. We are increasing our share of wallet on larger merchant segment that gathers business with monthly TPV above 1 million reais, with the strong growth on cards not present transactions expanding our market beyond POS. We have also seen a strong TPV growth on new growth verticals, in special our online segment with e-commerce and cross-border. Our online payment platform ensures trust and reliability for online clients and an integrated solution under the brand PagSegur International for the cross-border segment. Moving on to the banking business on slide 11, our strategy to provide a seamless experience combining payments, value-added services, and banking through multiple interfaces for merchants and consumers continues to drive engagement up. This engagement increase resulted in over R$76 billion in PagBank cash-in, composed by Alpix P2P wire transfers and deposits through boletos and invoicing to PagBank accounts from other financial institutions. Our active banking client base reached 17.3 million customers, growing 5% year-over-year. As a result, cashing per active client, an important indicator of our client engagement, grew 44% year-over-year, reaching R$4,400 per client. The constant evolution of engagement is shown in the bottom right graph, which demonstrates the increasing penetration of our investment and credit products, expanding at a much faster pace than our active client base. On slide 12, we shared that deposits were up 87% compared to the second quarter of 2024, reaching a record of R$34.2 billion, boosted by our AAA rating attributed by S&P Global, which enhanced RCD's distribution among retail and institutional investors on and off-platform. Just last month, we received a AAA rating by Moody's as an additional sign of the financial strength of our banking platform. Checking accounts balance, the cheapest funding source, and a key performance indicator to measure client engagement, grew 39% year-over-year, reaching R$11.5 billion. Annual percentage yield for checking accounts and total deposits remain compelling, create a unique engine connecting price and power without harming profitability by lowering the average cost of funding for the company. In this sense, as we grow the deposits franchise, we are also exploring alternatives to further reduce the current cost of funding. Moving on to the next slide. Slide 13 shows that our credit portfolio grows at a steady pace since presuming growth on Q3-23. This quarter, it reached R$ 2.9 billion, with increasing share of secured products, which currently represent 80% of our book loan, promoting financial inclusion, education, and important financing lines to our clients through these products. Our NPL 90, on the bottom right of the slide, demonstrates the improvement on our asset quality in the last 12 months, moving from 14.4% to 3.2%. Now, I turn over to Arthur for the financial highlights of the second quarter of 2024. Arthur, please.

Thanks, Alexandre. Hello, everyone, and thank you for joining us in the call. In this last session of our presentation, I will share our consolidated financial results for the second quarter of 2024. Here on slide 15, I am proud to announce once again an all-time high quarterly net income, which reached R$ 542 million on a non-GAAP basis, growing 31% versus Q2 23, with non-GAAP earnings per share reaching R$ 1.68. Net income on GAAP basis reached R$ 504 million in the second quarter, growing above 30% year-over-year, with earnings per share on a diluted basis marking R$ 1.56, a 32% increase on yearly comparison. This result was especially driven by a strong operational and financial performance, as shown in the coming slides. Moving on to slide 16, Q2 24 total revenue and income growth accelerated to 19% on a yearly basis, positively impacted by higher volumes from acquiring and the acceleration of our banking platform. Consolidated gross profit margin keeps in line with current guidance, reaching 40.2% over the total revenue on a year-to-date basis, as we have been successful in balancing growth on all segments and profitability, driven by the execution of our strategy focused on clients with better unit economics and higher engagement. Looking at our business segments, in the graph on the right side, payments revenue reached 4.1 billion reais, a 17% year-over-year growth, with a gross profit margin marking 38%. Banking revenue grew 41% year-over-year, mostly driven by interest income from credit, float from cash position, combined to service fees linked to client engagement with a higher profitability. Gross profit from our banking segment remains at 60% or higher for the third consecutive quarter. It is important to mention that the gross profit margin in banking is higher than payments even based on our strategy of underwriting mostly secured credit products that naturally presents low yields combined to high yields paid on deposits to attract and engage new clients in the short term. In the next slide, we share how our discipline in capital allocation has been an important tool to balance growth and profitability. leading to higher value creation with an earnings before tax growth of almost 20% this quarter versus the same quarter of last year. Here, let me focus on our cost breakdown and operating expenses and what to expect moving forward. I would like to start by highlighting the increasing efficiency coming from our main costs, including transaction and financial costs. Transaction costs decreased more than 11 basis points as a percentage of TPV, benefiting from the TPV mix driven by a higher share of PICs. On a similar trend, financial costs also show a positive performance of 16 basis points as a percentage of TPV. mainly due to our powerful deposit franchise. We expect to keep this trend in the next quarters. Operating expenses remained at 26% of our total revenue and income, same level of last quarter. The year-over-year increase was mainly driven by marketing expenses to acquire new payment clients and distribute financial services, and personal expenses, reflecting the strengthening of our sales force concluded at the end of Q1 24. The expansion was aimed at supporting the company's current growth cycle with a positive impact on our TPV. The increase eases on the quarterly basis as most of those initiatives are already concluded or should register a more stable trajectory, thus creating opportunity for operating leverage in the next coming quarters. The year-over-year increase in DNA and POS write-off in nominal terms is aligned to the current capital expenditure cycle and is steady in comparison to the previous quarter. It is important to highlight that tax efficiency initiatives are part of our strategic plan and are running well above expectations, reducing income tax charges. This quarter, we have successfully advanced in optimizing our tax structure abroad and the use of lead-obeying benefits. Considering the volume growth level also above expectations and efficiencies identified as mentioned before, during the second quarter we decided to further improve our client experience and actively address clients' needs by strengthening our initiatives in customer care, product development and service levels agreements, which increased operating expenses. However, we are confident that these investments will return in higher client engagement, strong cross-selling, lower churn, and a larger profit to be captured in the coming years, as the cohorts mature, without impacting 2024 net income guidance. Moving on to slide 18, we show how solid is the capture structure for this PAGS momentum. Equity position expanded to R$14.3 billion, with the return on earnings representing 62% of the total, which demonstrates the success of our strategy of best balance in growth and profitability. Cash and financial investments ended the second quarter of 2024 with R$6.2 billion, within the 40% to 50% range of our equity balance, which is what we consider a good reference for a recurring level. Here, we highlight, as mentioned in the previous call, that in the last week of March, we anticipated fundraising from April that increased cash position in Q1-24, which led to the higher cash position on the previous quarter. On the final slide, we are increasing our guidance for the year, reinforcing our sentiment that we have started the year at a very good pace. The current performance is a positive surprise in terms of growth rate, especially in larger segments and its new growth avenues such as cross-border. We are also happy with the results coming from our banking platform. The success of our strategy to reach those larger merchants to foster our deposits franchise is key to balancing a higher country interest rate than expected. As a result, we take the opportunity to increase our guidance as shown. We now expect the total payment volume to achieve between R$ 480 billion to R$ 505 billion, with a healthy profitability. The guidance on gross profit margin remains unchanged, above 40% over total revenue and income, as we are currently delivering 40.3% in the first half. Net income on a non-GAAP basis should be between 2.1 to 2.2 billion reais, considering a more efficient level of effective tax rate than 2023 as we have been currently achieved. CapEx remains unchanged. Higher investments deployed this quarter are in line with business expansion, while we raise the recovery ratio to support future growth. Nonetheless, the current guidance remains between R$ 2 billion to R$ 2.2 billion. DNA plus POS write-offs amount should end the year between R$ 1.7 to R$ 1.8 billion, benefited by an ongoing improvement in POS management. Now, let me give the word back to the operator and we will start the Q&A session.

Thank you for the presentation. We will now begin the Q&A session for investors and analysts. If you wish to ask a question, please press the raise hand button. If your question has already been answered, you can leave the queue by clicking on put your hand down. There's also the possibility to ask your question throughout the Q&A icon located at the bottom of your screen. You may select the icon and then type your question with your name and company on it. Written questions that are not addressed during the earnings call will be returned by the investor relations team. Wait while we pull four questions. Our first question comes from Kyle Prato from UBS. Mr. Sebrato, you've got a microphone to open.

Hi, everyone. Good evening. Thanks for the question. I would like to explore a little bit more the guidance change that you made for this quarter. So we saw a big adjustment in the TPV expectations upwards. It was an increase of around 10% versus your previous guidance. Then we had a reduction of around 10%. 200 million reais in DNA and write-offs. However, your net income increase only by 2% versus the midpoint that we had previously. So it seems a little bit conservative, especially after the net income of the first half of the year and even lower than I expect effective tax rate. So just wondering if you can provide more details around that. What lines of your P&L are you expect to be worse than previously expected in order to offset this better TPV, DNA, and also tax rate? Please. Thank you.

Hi, Caio. Thank you for the question. This is Ricardo.

You're right. You already did the guidance, the increase in TPV and also the decrease in DNA. But remember, there are many moving parts in our P&L, and it is very dynamic. Just to give an example of one of the assumptions that we had at the beginning of the year, that by the end of the year, interest rates would be around 9% base interest rate of the economy in Brazil. And today it's 10.5, and there is no visibility that it's going to go down. So that's one of the variables that impacts our P&L, and that we need to manage in such a way that it can decrease financial expenses by having more deposits, by having different sorts of funding and so on. So that's one of the examples that could be worse than what we expected. But at the end of the day, the company has the ability and the discipline to control costs. We've shown that in 2022, 2023. So that's why we, even with this moving part, some tailwinds, some headwinds, the best information that I have today is that our net income could be higher than the previous or the original guidance that I had at the beginning of the year. And remember, we're always looking here for sustainable growth, to build a company for the future, to grow this new avenue, which is banking, grow our credit operations and so on. So the idea here, as we always said, is to balance growth and profitability. We could prioritize short-term profit. However, we think that the best way is to increase profit and at the same time keep growing the company. So, I mean, that's mainly... the overview of the guidance that you have today.

Okay. Thank you very much. Thank you.

Our next question comes from Pedro Duque from . Thank you, guys.

Congrats on the quarter. A little bit on the SG&A side, in the prepared remarks you mentioned, a rollout of higher commercial investments, part of this is driving revenues now, part to come. I would just like to understand a little bit how you're looking at this reinvestment phase, and is it perhaps one of the reasons also that an income revision was a bit more modest in the revenue or gross margins uh just just for and and also in the call you mentioned uh efficiencies in the second half just again trying to get a little more color around this this line thank you hi pedro this is ricardo um well in terms of sgna we we invested

In this second quarter, and not to say in the first semester, as you could see in our P&L, we invested more in marketing, we invested more in personnel. We don't think there is going to be an increase in the level of investments or expenses that you had in these two lines of our P&L in the second half. So we expect that to be kind of stable. So the size of the sales personnel that they have today, It seems to be stable at the same size for the second half. That's one of the, let's say, the expectations that we have. We invested also in our customer experience or call center and everything that relates to customer relationship. And we also invested in product development. We've been launching new products, just to name a few here. We invested in – we launched the multiple card now in Q3. We are also doing multi-acquiring and other features for the SMB. So, That's why when you look at the expenses, the operating expenses, you see this increase, but specifically in the SG&A market, it seems to be, we expect to be stable. And that's looking forward. That's why we reviewed the guidance. 50 million more in the midpoint for the net income, even with this all moving parts, with the interest rates, that it seems to be higher than what we expected. DNA lowered what we expected. So, There are many moving parts, but I would say the big one is DNA should be lower, as we see in the guidance, and financial expenses should be higher because of the basic interest rate of the economy, and we should offset that with more deposits and cost control in other lines that, at the end of the day, we have conditions to control.

Okay, that's clear on us, Janay. Thank you. And if I may, for the second question, and that's unrelated, but also important on the credit portfolio, especially on the SME sides, merchant clients, the working capital loans were more modest. Of course, you're banking more for this guy. How are you feeling on the comfort of originating more and working capital? Thank you.

Well, Pedro, we do expect that to grow. We are still, to be honest, in big steps. We launched now, by the end of Q2, to be honest, we launched the working capital and also the overdraft. These two products are still small in terms of credit portfolio, but it is growing. We do have expectation that we will be able to We grow these two products a little bit faster in the following quarters in such a way that we can see the results in the financial services P&L. These small tests that we have so far have been very successful, very, very successful, the way that the SMBs ask for the working capital, the way they are paying. So today I don't have a guidance to give to you because it's still very small and baby steps, as I mentioned before. But we do have expectation these two products will grow faster in the following quarters.

Very useful. Thank you.

Thank you. Our next question comes from Mario Pierre from Bank of America.

Mr. Pierre, your microphone is open.

Hey, guys. Congratulations on the results. I wanted to ask a little bit about your volume growth on the LME-C segment, growing 50%. I wanted to understand a little bit better the take rates and the profitability of this product versus volume growth at the MSMB segment. Because what I'm trying to get to is given the increase, right, in the guidance that you're giving for volumes, how come that's not translating to a higher net income? And you already explained that you are facing higher financial expenses. But I was wondering if the growth is, you know, the higher guidance is because of stronger growth at the LMEC and that's a lower profitability product. Thank you.

Mario, thank you for the question. You're right. We grew 50% TPV in LMAIC and 28% in MSNB. And they do have a lower margin in large merchants, e-commerce, and cross-border. At the end of the day, in absolute terms, in absolute figures, it makes sense because it is a creative, not as a creative as it is in the MSNBs. But in terms of volumes, they bring more volumes, and it is a craze in the bottom line. But if you look at what we have in terms of results in both segments, LNBC, we grew 50%, and SMBs, we grew 28%. All of these figures, they are much, much higher than what is in the market. Remember, the market grew 11%. The cards industry in Brazil grew 11%, and we grew 28% in MSNB and 50%. So, yes, it is growing faster. But if you look at the core or the beginning of the company, the origin of the company, MSNBs and long-term or so on, it's still growing 28%, which is very healthy. But as we have the opportunity to grow more in the LMC, we keep growing there and getting these clients. But going back to the question, yes, they do have lower margins. It's growing faster, but they are creative by the end of the day, and both segments are growing faster. much, much faster than the whole industry in Brazil.

Right. That's clear. And what explains the acceleration in growth in the LMEC? Because you were growing close to 30% and now you jumped to 50%. Does it have to do with gaming or the increase? We keep hearing about sports betting and things like that in Brazil. Is that one of the drivers and why did the growth accelerate so much?

There are many reasons here. One of the reasons I would say, we finally integrated all the platforms. Remember, we acquired Moip by 2020, and then we had all this work to bring Moip inside the company and then integrate the platform. Now we have the unique platform, the only one platform to serve the online clients. That's one of the reasons. The other one, we tried to bring large merchants online and also integrate our banking solutions to them. So some of the bankers are using our CDs and so on, which is a kind of way to be different in the market, not to go there and compete with price. And also, in fact, we are having new clients in Brazil, in fact, when you think about cross-border and also online. So it's a mix of everything. But I would say that it's very balanced. There is no growth in one specific area that we are concentrating on. It's a mix of online clients, cross-border, larger merchants coming because of the bank. So it's a combination of these reasons I would say to you.

Okay. Great. Thank you very much.

Thank you, Mario. Our next question comes from Chito Labarta from Goldman Sachs. Please, Mr. Labarta, keep my phones open.

Hi, good evening. Thank you for the call and taking my question. Actually, a little bit of a follow-up to Mario's question on the TPV. I guess one first to clarify, is the pressure on the take rate simply a function of mix, just to make sure? I mean, I think you kind of mentioned that you're not really competing on price, but Just to think about the competitive dynamics a little bit in the two different segments, right? I think with the large merchants, there's one competitor in the middle of being privatized. I don't know if that's maybe... contributing as well to your ability to grow with large merchants. And, you know, again, the first part of the question is all the take rate pressure just mix. And should we expect this trend to continue where you can continue to grow faster with large merchants and lease in the shorter term that could maybe put further pressure on the take rate going forward? Thank you.

Aikido. Yes, the growth of large emersions is going to be larger than the MSNBs. And remember, I just answered Mario, that even MSNBs, if you look at the growth in MSNBs, 28% is much more than the Cardinals industry in Brazil. It's a very healthy growth in MSNBs. But in large emersions, e-commerce and cross-border, we are growing almost double of that, reaching 50%. And... Part of that will keep growing this dynamic. So today, 67% of our TPV in Q2 was MSMB TPV and 32% in LMAQ. So if you look forward, probably the share of MSMB should go down because LMAQ is growing faster. But again, it's a creative studio bottom line. There is no relation with one company being privatized or some pricing policies in other companies. It's much more related to what are we doing out there in the streets. And one thing that is very important also to mention is that large merchants for us, as you don't have a definition in the market, what is large merchant? Remember, for us, large merchants is a merchant with a TPV of cards larger than one million reais per month. If you look in the competitors or in the incumbent, the acquirers from the incumbent banks, probably this is going to be a medium price to them. So the definition for us is around after one million reais, we consider a large immersion. So it's not that large if you look at the market, but still we are growing and very healthy in both segments, I would say.

Okay. No, great. That's helpful. Thanks for clarifying. And And following up a little bit, like, you know, continued strong growth in deposits. Are you seeing any color you can provide in some of these deposits because you're growing with larger merchants and that's helping to drive that growth in deposits? And any color on the mix of the deposits between large merchants and MSNB?

I would say to you that large merchants, of course, help, but it's not the main driver for this growth. This growth is much more related to MSNBs and also consumers than to the larger merchants because, as you can – as you expect, some larger merchants, they do have corporate accounts in larger banks at this point, and some of them just use it as an aquarium and in CDs, but not exactly in deposits. So that's why we – I would say, too, the main driver for the deposits are MSNBs and consumers at this point.

Okay. Very clear. Thank you very much.

Thank you. Our next question comes from Neha Argawala from HSBC. Argawala, your microphone is open.

Hi, thank you for taking my question. My first question is on your guidance, what is the implied average SELIC? that you have incorporated in your guidance, both the old and the new one. Has that changed? Second question is, again, on the LMAIC segment that you have here, which is growing extremely strongly. Is this comparable to the AVEX TPV that we look at for the system? Because I believe the e-commerce and the cross-border volumes, which you're including, is probably not included in the AVEX system. So that kind of distorts comparison on apples to apples. And would it be possible for you to break it down for us to see what is comparable to that of the system to get a better sense of the market share? And we'll go with that, and then I'll ask the third question.

Hi, Neha. Thank you for the question. I'll start backwards. The TPV that we report here is not 100% compared to ABAC, so that's why when I say the Cards Industry in Brazil is growing 11%, and our TPV includes peaks as well. But let's say the participation of PICs in RTPV is a high single digit today. So even if you discount the PICs participation in RTPV, we are growing much, much more than the ABEX and much more than the competitors. Regarding the interest rate of the password to transfer.

So... speaking. In terms of guidance, what we are considering in the interest rate for our account is something above our business plan, the original business plan that we had at the beginning of the year. And today is 10.5%. And we do not consider any reduction going forward. Okay.

Okay, so you're... Niha, just to complement here, we do have some scenarios because, of course, we don't know what's going to be the interest rate by the end of the year. So we have some scenarios. If you have some increase in interest rate, as some banks have been saying the past weeks, we also have some other scenarios too. control other lines of P&L in order to deliver the guidance that we're showing to you in this presentation. So, of course, we have some conservative interest rates, some aggressive, and then depending on the scenario, we're going to manage the company to deliver the guidance that we have here in this presentation.

Great. Perfect. That's very helpful. And lastly, on the MSMB segment, so we see the overall take rate has been going down, which is mostly because of the strong growth in the LMX segment. But just talking about the core MSMB segment, what is the take rate for that particular segment and how has that take rate evolved over the last year?

Yeah, we don't disclose this exactly take rate. But I'll say to you, it decreased a little bit from one year to the other. Not a big decrease, but it decreased a little bit, a few basis points. But I'll say to you, it's very healthy still today. Competition has been rational. We keep growing in a very healthy way in this segment, as you could see, this 28% growth. But I'd say the take rate went down just a little bit. But it's still very healthy margins, very accurate to the bottom line, very good business, to be honest.

Super. Thank you so much. So much.

Our next question comes from Jorge Cury from Margaret Stanley. Mr. Cury, your microphone is open.

Hi, everyone. Thanks for the opportunity to ask questions. I wanted to go back to the marketing and selling expenses. For the first half of the year, according to your press release, your selling expenses are up 42% year-on-year. That's one-and-a-half times the revenue growth. two times the MSNB, TPV growth. If I look at just the marketing expenses, they're up like 70%, I believe. And I guess the question is, what gives you comfort that This is going to allow you to accelerate revenue or keep the same pace of revenue without necessarily having to continue investing in marketing and selling at this pace. And I ask that because we're seeing exactly the same thing from your peers. You know, the same thing happened at Stone, at Cielo, at Reddick, at Ned. I mean, everyone is adding salespeople. Everyone is adding customers. sales capacity, marketing capacity. So if everyone is adding, you're all at the same place, right? I mean, you're not better than the guy next door. So what gives you confidence that this is indeed an effort that surpasses your peers and will allow you to grow above average going forward? And then I'll ask my second question. Thank you.

hi jorge thank you for the question we started there to can complement more with the numbers but i've seen a more uh qualitative way so to stay here uh when you look what happened with the company in this quarter we've been investing and uh as i said the beginning of the presentation is an an all-time high presentation all the slides that they have started all time high so TPV grew 34%, revenue grew 19%, deposits 87%, cash in 52%, banking at edge accelerated versus Q1. Banking revenues grew 41%. We had a TPV record in June 8th, and now a new record in July 6th. So the company is doing very well, and it's growing. And part of the investment, of course, is to bring this growth. We could have looked at the short-term profits and not invest in the growth, but you do have the confidence that these investments will be paid back because I've seen in terms of cohorts, the way that clients come to us, the way they engage with the app, the way they do the caching, and the way they start using our products gives us the confidence that we are bringing very good cohorts for the company. And of course, there is a lag between the investments, getting the client, and then start generating the revenues. But when you look at the qualitative way that the clients are using our products and all the ecosystem, that's why we keep investing on that. And I know that sometimes we do compare peers and so on. But I'd like to reinforce that probably we are the only one with this very, very powerful combination of acquiring and banking at the same app. Not only the players, they have the D plus zero. They don't have the same logistics that you have. They don't have the same complete accounts that you do have today that you invest in also for MSNB. So, I would say that it's not the same animals. So that's why we are confident that our value proposition is stronger than competition. Maybe one competitor is better in a specific feature, the other one is better in another one. But a competitor that has all the combinations and features that they have in our ecosystem, I don't see one to compete with us in a very powerful way for long-tail MSNBs and the consumer as well, I would say. So we're launching new products. Portfolio is growing, NPL is trending down. So when you look at the numbers and the qualitative cohorts, that gives us the confidence to keep investing. And regarding the numbers, the specific percentage, I guess Arthur can give us more quality. Thank you.

Well, to complement what Dutta mentioned, I would like to reinforce that the higher expenses and investments that we are seeing right now or in 2024, And by the way, we achieved the level that we expected for this year in the second quarter. It's a little bit higher than the first quarter, but it's in the same level when you compare quarter over quarter. But those investments are part of our strategy for 2024. As we reduced costs and expenses in 2022, part of our strategy for that moment. In 2023, we also had a very good discipline on the costs and expenses. part of our strategy again in 2023. And based on the big strategy that we have, that is balanced growth and profitability, not reaction on competition and so on, but the balance of growth and profitability now is a moment of growth. And we achieved the level of investments that we see important to the growth the growth that we are expecting going forward. And as Dutra mentioned, we had a lot of all-time high numbers in this quarter, and we are expecting to have very good numbers going forward in terms of growth, engagement, and activation of clients.

Thanks for that. Let me ask a second question, if you don't mind. Different topic. On payroll loans, which you mentioned, basically doubled over the last year in terms of REI portfolio. Can you help us, can you give us some color on what is your payroll loan business? Are these payroll loans for retirees, for government workers, FGTS loans, private workers? What is the ticket size? You know, how many clients, what percentage of your clients have a payroll loan and If you can also help us dimension just how big this business could be, you know, either, you know, you have X number of retirees in your base and only X percent have a payroll loan or government workers. Any way you want to help us try to get our arms around how big this could be, given that, indeed, it's growing very rapidly. Thank you.

Jorge, at this point, we are not doing for private employees, but we do have some products in our ecosystem, which are FGTS products for retirees. The size of the average ticket for this product is similar to what we have in the industry. We keep growing and trying to digitalize all these products in such a way that we can get out the friction Some products have today that you've got to talk to someone and then send documentation and so on. The total addressable market for these products is around 600 billion reais. So if you look at our portfolio, it's a percentage of the 3%. So it's like 2 billion reais out of a 10 of 600 billion. But going back to our question, we are not doing private at this point. It doesn't mean that we're not doing the future. But at this point, we are focusing more in retirees and FGTS and trying to digitalize this process as much as we can. And the size is similar to what we have in the industry. It's not different than what we have in the market.

And are these fully originated digital loans or are you using pastillas or you're buying... uh portfolios for some from some of the intermediaries is a hundred percent of the origination done at your point of uh at your client's mobile for some products 100 online for other products it's uh part is fasting as part is online

At this point, we haven't bought any credit portfolio from someone. So we bought in the past, but at the very beginning. But if you look at the last, you know, one year and a half, we didn't buy any credit portfolio from other companies. So today, everything is originated through us. Some products are 100% digital. Some products, we still use Passinhos. But as time passes by, the participation of Passinhos is going down. So more and more, we are having more digitalized, more through the app. without friction or without intermediaries.

Got it. Thank you very much.

Thank you, Jorge. Our next question comes from John Coffey from Barclays. Mr. Coffey, your microphone is open.

Great. Thank you very much for taking my questions. The two questions I had just refer to a couple of things that you had in your slide deck. So the first was on slide number six, I think your third bullet, where you're talking about relief payments and receivables from other acquirers. Could you help me size this? I just wanted to get to see if it better – I guess trying to understand if there's a different kind of economics here than maybe some of your other prepayments and just really how big this opportunity is. And I can just ask my second question here, and that was on – Slide nine, you talk about geographic expansion. Were you not fully expanded in Brazil, or were there pockets in which you really didn't have a lot of penetration? So I'd just be very interested in knowing more about where that geographic expansion was, if there's still a little bit more runway to expand more in that particular area or other areas in Brazil. Thanks.

Hi, John. Thank you for the question. Starting backwards again. So in terms of geographic extension, of course, digital, we serve everyone in Brazil, but we do, we've seen some opportunity to have hyper-local sales force to serve some clients in specific regions of Brazil. So that's why we reached some – we hired some new personnel, and part of the operating expenses increased because of that for specific regions and specific niches where we see some potential TPV. And in our analysis, the coverage was not good enough to get the clients and give the right treatment for this type of merchant. So that's why that's geographic expansion. It is within Brazil in specific regions of Brazil. Regarding the slide six that I mentioned about the early prepayments, today we have in Brazil this chamber of receivables that is finally working properly. And we have some clients that use PagSegur and other acquirers and have the opportunity to early prepay for these clients through our app. If you look at the total addressable market, two-thirds of TPV in Brazil is done through credit. So with installments or without installments, but two-thirds is done to credit. So you can, at the end of the day, you can anticipate everything of these two-thirds. Part of them already anticipate because they received D plus zero or they have some specific contracts with some acquirers, but part of them are not included in this, I would say, lockout. So we know that for larger clients, It's a pricing war, like you have in acquiring with the big, big clients. The acquiring is based on price, and the acquiring from incumbents are working there. The incumbent banks are working with these clients. So we are more the SMBs, and it's too early to say the economics of these products, but at the end of the day, we're going to anticipate with a spread, based on the cost of funding that you have that is very competitive when compared to competitors because we do have deposits. But, I mean, it's too early stage. I guess we can give you more call or, I don't know, next or two quarters from now we could have more information about this product. But we will launch now in Q3.

All right. Thank you.

Thank you.

Our next question comes from Yuri Fernandes from JP Morgan. Who is Mr. Fernandes? You're my consultant.

Thank you very much, guys, and congrats on the volumes and creating this closed loop here. I have a question on financial costs. When I go to page eight of your press release, we see securitization costs down a lot, like 40% quarter over quarter. And I understand this is likely because of your deposit's growth. So maybe it makes less sense for you to continue doing securitization. So just want to check if this makes sense, if the costs are similar, if you are paying somewhat the same for your time deposit. Because I know the average cost is 96. That maybe is lower than the securitization. But not all your deposits are paying like 96, right? This is a blended. So probably on time deposits, you are paying higher than that. So just checking if you continue to do more deposits and less securitization. And then my second question, this is related to this one, is regarding your net cash. If you continue to do more deposits, you have 12 billion reais of net cash that will report on your presentation. You continue to generate cash. You are relying less on proprietary cash as deposits grow, I would assume. So what should we do here? Like M&As, dividends, buybacks, like what should you do with this excess cash you have been accumulating, given your funding has somewhat migrated towards deposits? And finally, just a very quick follow-up on the first question from Caio. I understood your message and the guidance. People already explored this, but given your DNA is moving down, right? Your write-off of POS is moving down. Is it fair to say that your cash earnings is going down, like with all those moving parts, because you have a lower non-cash expenses, but, you know, like a very marginal guidance revision.

Thank you.

Well, Yuri, it's Arthur speaking. Let's start to talk about each one individually. And so financial costs, when you talk about financial costs, it's really that we are building here a great deposit franchisee. Our time deposit presents today a very low cost to us, 68% in average. The total deposits that we have to fund the operation, 96%. That is awesome to see that we are funding the operation below the country cost in Brazil. Specifically to the second quarter, and it's part of the decisions that we take, we reduced a little bit AR securitization to bank issuers, but it was only for the Q2. If you remember in the first call, we commented that we had a large AR securitization in the end of March. And then we use this cash during April in the second quarter. But going forward, we expect to have our deposits growing more and more. All the management is focused on increasing the volumes on deposits. And also we are balancing AR securitization and third-party distribution of products or financial ladder or CDs that we distribute in third-party platforms. It's important to mention that the financial cost in Q3 is also affected by four working days more than Q2, so everybody needs to prepare its model. uh to understand that we have four days more in in the q3 and we are working to balance all the funding sources that we have to mitigate any impact that we can have in this in this more number of days in terms of cash balance it's true we achieved 12 billion reais we are growing quarter over quarter every time we see the company growing in the volumes growing repayments for merchants and also we measure this net cash balance as a very healthy for the company because we are increasing uh this excessive cash as you mentioned uh we are always assessing the capital structure based on this cash flow generation. At this moment, we are seeing our business growing faster than expected, and we decided to use OnCash to support that growth. uh obviously we can do using on cash or third party but at this moment we prefer to support the growth based on our own cash that is cheaper and it's better when you are negotiating with the banks and other financial institutions in a more positive scenario furthermore we we see several initiatives to better invest our cash increased volumes that we are seeing right now, engage clients, improve customer care, and launch new products, as we mentioned in the call and in the presentation. On top of that, financial industry is huge and beyond payments. And we are on the very early stage of exploring credit banking investments, insurance opportunities, as we have been doing with our complete banking offer. And we are always balancing growth and deployed capital. It's part of our strategy to maximize shareholders' return, and we are always doing that management in the capital circle. And the third question related to write-off of POSs, that is part of our P&L. So we have some policies to read the usage of our POSs, And when the POS is not used anymore, we have this practice of write-off POSs. It's only impacting our economics, but not impacting our cash flow because we have this capex in years before of this write-off.

Super clear, Arthur. Thank you. If I may, just a follow-up on second point on the use of cash, like just a more opinionative take on, yourself on if you believe this industry should be consolidated at some point. What do you think is going to happen in this industry? Because there are so many economies of scale. You have this ecosystem, you have the deposits, you have the banks. I would like to hear your thoughts on how you see this industry. I don't know what's going to happen with the payment industry in Brazil in five, ten years from now. Thank you.

Hi, Yuri. Well, it's hard to give a prediction what's going to happen with the industry five, ten years from now because, I mean, the industry is very dynamic. Remember, this has been changing a lot in the past years. We are, to be honest, we are very active looking for opportunities in the market in different business units of the company, so payments, credit, and other products. When you think that we have a good target that we could approach with the right price and similar culture to us and so on, of course, we'll move forward. But, I mean, it's hard to predict if there's going to be consolidation or not. We keep very active in the market looking for accretive M&As that could create shareholder return. But at this point, there is, I mean, nothing to be announced and nothing happening to it. That should give you some information in this call. So, yeah, that's pretty much it.

Thank you. Thank you very much, guys. Thank you. Our next question comes from Brian Keane from Deutsche Bank. Mr. Keane, your microphone is open.

Hi, guys. Congrats on the quarterly results. Just wanted to follow up on the acquiring TPV. It continues to kind of beat and gain share versus the market. And I know the comps start to get a little more difficult, especially as we get into the fourth quarter. So thinking about SMMB and the LMEc separately, you know, how sustainable do you think some of the changes you guys are making that you will be able to continue to outpace and take share from the market in those two segments?

Hi, Brian. This is Ricardo. Well, we've seen what happened this year. We've been growing faster than the market. We've seen what happened in Q1 and Q2. Q3 is not that different. We keep growing in a very healthy way. And what we always say is try not to compete this price. Try to have a different value proposition with cross-selling opportunities and try to use banking as a differentiator for our clients. That's why we have been investing in PagBank since 2019. But going back to our question, we do think it is sustainable to grow more than the market in the following quarters. But again, the industry is very dynamic, but you have a strong value proposition, the process is in place, and there's some inertia that we've been seeing in our sales force, productivity per employee is growing because they get more and more trained and understand better the ecosystem. We've been launching new projects such as CDs that serves not only MSNBs, but also LMEc. So, I mean, looking forward, I don't see many changes in these dynamics. It's hard to say what's going to be the level, but I don't see changes in these dynamics that we can share.

Got it, got it. And then as a follow-up, just thinking about the pipeline for acquisitions or what you guys are thinking about that you might want to add to the portfolio. Are there things out there that you guys are looking at that could make sense for acquiring or building internally to build on the portfolio for cross-selling opportunities?

Hi, Brian. We look for – sometimes we can bring some clients and try to bring the P&L of the company out there. And sometimes we are only looking for kind of the acqui-hire to bring some new talents and to bring the product that could complement our ecosystem. So those are the two rationals that we have here. One is more related to the economics of the company we are looking to acquire. The other one is more related to the knowledge and to the talents that this company could bring to us. If you look at the history of the company, you have some acquisitions in the past years, most of them related to the second vertical, say, more related to the products. We keep looking to that. What is the type of startup or company that could bring new features and speed up our time to market but um there's nothing nothing that you can give more information this call at this point i mean we keep working on uh we have our own proprietary mna team but there's nothing to to nothing new at this point to be honest okay thanks so much

Our next question comes from Gustavo Schroden from Bradesco PBI.

Mr. Schroden, your microphone is open.

Hi. Good afternoon, everybody, and thanks for taking my question. Sorry to insist in this LMC economics, but I think it is very, very important. My question here is, would it be correct to assume that this marginal TPV that you are including in the LNC is still or hasn't reached the break-even? I'm asking this because we have all this positive news on the TPV in the quarter. but the pre-tax earnings were stable, and you already explained that there was some pressure on the operating expenses side. You already mentioned that the take rate is below the average, below the other products. My question is, would it be correct to assume that you are still ramping up in this segment and maybe the operating leverage will come in the coming quarters, or it was just one quarter with some specific investments and, I mean, that would be like a non-recurring, let's say, let's put in these words, weaker quarter for the LMC. Thank you.

Hi, Gustavo. The LMC, they are profitable, they are positive. The company doesn't have any policy here to buy a market share or just to get TPV, increase our market share, and not to make margins from this specific TPV. Remember, our large merchants start with R$1 million in cards, so it's not a lot. Sometimes you say large merchants, people think that we are talking about the Walmarts in Brazil. So they're not. One million reais per month in the OMC. They are positive. We're looking for clients that they have positive margins. In the OMC, we also have e-commerce and we also have cross-border. So it's not only larger merchants. Indeed, the margins of these clients, they are smaller than MSNBs as a percentage. But if you look at in absolute terms and absolute figures, as they have a higher volume, it is a creative to the bottom line, and it is a good business at the end of the day. When you grow 50% year over year in a profitable way, it's a very strong growth and healthy growth, I would say. Also, these merchants, they also bring deposits. Because, again, when I said that larger merchants could not bring deposits, I'm talking about the Walmarts in Brazil. They have their own banking solutions out there. But when you think about a merchant that is one million reais in cards, we are very competitive for these clients. We have high-yield CDs and other options that can be used as an account to them. When you think of the mix and the client is in the whole portfolio, not only the acquiring, but also in the bank and the cost of funding and so on, they are positive and they help us our deposits. And yeah, so that's why we do think it's going to grow. It keeps growing and it's a good business at the end of the day. If you could grow more in both segments, of course, we'd grow. But to think we grew 28% in SMBs. It's very strong growth as well. It's not that we are only focused on OMEC. Both segments are growing in a very strong way, I would say, and they are both profitable.

Thank you. And if I may, the second question is related to your deposits and also your credit portfolio. As you mentioned, indeed, your deposits, it is growing very fast. But when we analyze the low into deposit ratio is around 8%, so below 10%. And you mentioned that while we should expect some acceleration in the low portfolio in the coming quarters, what is the reasonable target here in terms of a loan-to-deposit ratio? I'm asking this because it is very important to monetize and to improve the profitability of the whole business, right? So what would be a fair loan-to-deposit ratio that we could forecast? Thank you.

Gustavo, we don't have a specific number to these guys to give the score to you because, remember, we also use deposits for the prepayment. So in a daily basis, we look at the best capital allocation. also to support our prepayments because sometimes we should go to reflect with the banks and sometimes we do use our own deposit. So we don't have a guidance to give to you about the due loan to deposit ratio. But I mean, at the end of the day, it's very good news that deposits are growing this pace. And 87% year over year is a very strong growth. And it helps the company as a whole. We can use these deposits for the credit business or for the prepayments in the acquiring. So I mean, I don't have here a specific loan duration to give to you at this point. And just to complement the first question that you asked about the earnings before taxes, We took the conscious decision to invest in the growth of the company because we knew that we could have higher operating expenses and still grow the bottom line. So that's why we invested more in operating expenses in Q2 in order to keep the growth, keep supporting this growth. And as I said before, In key metrics, we are growing much, much more than the market, 34% TPV, 19% revenues and so on. So that's why we knew they would have this efficiency tax rate, and then we reinvested part of that in the growth of the company.

Okay. Thank you. Very clear. Thank you. Thank you. Our next question comes from Daniel Vaz from software. Please, Mr. Vaz, your microphone is open. Hi, everyone. Congrats on the results.

So, hi, everyone. Congrats on the results again, and thank you for the Q&A. I think most of the questions have been answered. I wanted to touch based on your question. credit, right? I know you're rolling out working capital loans and all of that. But when I look at your current credit portfolio, it's still disconnected to your payment strategy, right? So you're moving up from long tail and individuals to SMBs and large merchants. So trying to pick up your brains for the long term here, how this credit portfolio look like in the future, right? So do you expect Retail loans to be a smaller portion as you grow further in wholesale. So, I mean, any breakdown or any color you would pass to us, it would be very helpful to try to forecast for the next year your wholesale and retail portfolio here. Thank you.

Hi, Daniel. Looking forward, we expect this credit portfolio to be more balanced. because Tuesday is pretty much focused on the payroll and also credit cards. But it just started working capital again and overdraft as well. Overdraft we are offering not only for consumers but also to merchants. So looking forward, we do expect this to be more balanced with more credit portfolio based on consumers and also merchants, merchants from different sizes. Of course, it depends on how it will evolve in the following quarters, the acceptation of our offers, NPLs, and so on. At the end of the day, we're looking for credit margins, not only NPLs, of course. But it's going to depend. It will depend how it's going to evolve in the following quarters. But to give up, let's say... A big guidance here would be to have a more balanced credit portfolio with merchants and consumers and merchants from different sides using different products. We just launched the working capital and overdraft in last month, two big steps. But following quarters, we're going to have more color to give on that. But it's a huge opportunity at the end of the day to look at We're going to have this year, if you look at the guidance, around 500 billion reais in TPV, and the credit portfolio is only 3 billion reais. So it's a huge opportunity. We just need to find the right offer and the way that we work with our merchants in order to increase the credit portfolio for the merchants as well.

Okay, thank you. If I may, a quick follow-up on the LMAIC. When do you expect this to converge to similar growth rates to MSNBs? I mean, are you still seeing opportunities for further penetration way higher than the MSNBs that we're seeing right now?

Daniel, this is Alexandre speaking.

We still see room for growth and fast growth on the Elmax segment, since a big portion of this segment is related to e-commerce and cross-border, which are card-not-present transactions. And our fair share in card-not-present transactions is much lower than our fair share on card-present transactions. So we still have room to grow in this segment, and even though the margins are smaller, they provide good margins for us and a creative profit on this segment. But obviously, MS&B segment is our core, and we keep investing in the growth of this segment, and that's why we are growing MS&B 28%, which is much higher than the market growth.

Perfect. Thank you again, and congrats again.

Thank you. Our next question comes from Gabriel Guzan from Citi. Mr. Guzan, your microphone is open.

Hi, good evening. My question is about CapEx. It is running above the higher end of your guidance at 2.4 billion annualized. And my question is more on the qualitative side. Should the business continue to require the same over 2 billion reais per year in CapEx going forward now that you have less micromotions or you're investing less in that segment? You're going more into LMEc. So over time, should we expect that line to be nominally reduced. Thank you.

José, it's Arthur speaking. Thank you for your question. Related to the investments that we are doing since or over the past four years, we achieved the same level, in average, R$2 billion. Part of these investments are not related to POS, as we always mentioned. The majority of the investments, or more than 50%, is related to technology, products, services, features that we launch, new products to our clients, and the remaining portion is related to POS. For this year, or the first half of this year, We anticipated purchases of POSs, increasing the coverage ratio. It is totally aligned to our strategic plan for the year. That means in the coming quarters, we will reduce in nominal terms the investments that we are doing to achieve the capex that will remain stable since the beginning of the year from 2 billion to 2.2 billion reais this year.

Gabriel, are you there? Oh, yeah. Perfect. Thank you. Yeah. Perfect. Thank you. Okay. Thank you. Our next question comes from Renato Meloni from Autonomous Research. Mr. Meloni, your microphone is open.

Hi, everyone. Thanks for taking my questions here. So for my first question, I wanted to focus again on profitability. I'm looking here as gross profit as a percentage of TPV, which had been stable in line to your previous comments, but we saw 11-bit decline this quarter. So my question here is, was this also related to LMAIC or if there's other elements here? And then looking to the second half, do you still expect some compression here given the growth in this segment? And if you allow me for a second question, I wanted to focus on your cost of funding for deposits and going back to your remarks during the call when you said you were exploring some alternatives to reduce costs here. So if you could expand on those comments and maybe if there is a target as a percentage of CDI where you're trying to get there. Thank you.

I'll start with the first part and then I'll move on to it. LMAQ may pressure a little bit down the percentage of gross profit over TPV, and there is also the mix of product that we have seen in all segments, not only in LMAQ, but also in MSMB segments, the growth of some of the products such as

uh picks uh big store code uh which one and uh just to complement here we we i mean we cannot overlook the genetic rate slash gross profit as the the only drivers for the company's profitability there are many other uh costs and expenses in the pnl that we we need to manage such as financial costs which is the one of our questions so i mean at the end of the day there are several several drivers that could impact the the kinetic rate, gross profit, and so on. But we are here reinforcing our guidance because we are confident that we can manage the company. We keep growing in a sustainable way, looking for the future, not only for the specific quarter, building a sustainable business, bringing new clients, thousands of clients, hundreds of thousands of clients. And so that's why we keep growing pretty strong in the top line. And it's still reinforcing the guidance. So, first, not to keep focused on only one metric, because at the end of the day, there are many moving parts and many movements and actions that we could take in the company to keep the profitability of the company as a whole.

And, sadly speaking, I will talk about the target of funding costs that we have. There is no specific target that I can provide to you that a certain level that we would like to have in terms of uh cost versus uh cdi but we are always looking for opportunities to reduce as much as possible the cost that we have uh based on the strategy that we also have sometimes we pay higher yields to some clients to attract them to the company and then cross sell other products and we have a rationale behind that And what we are doing as much as possible, too, is diversify the funding sources that we have. We would like not to depend on one bucket to take money from the market, but we identify many lines, many different third-party providers that we can use, and we are doing that as time goes by.

Understood. Thanks, everyone.

Thank you. Our next question comes from William Tang from Susquehanna International Group. Please, Mr. Tang, your microphone is open.

Hey, guys. Good results here. I just had a quick question on slide eight. I was looking at your merchant count, and it looks like your active merchants are falling, but I think that's largely due to the offboarding of nano merchants. Is that right? And then if so, what's a good way to think about your gross or net ads at the MSMB level? Can you help us there? Thank you.

Hi, thank you for the question. You're right in your question, in our conclusion. If you look at slide eight in the graph in the bottom right, you're going to see that the exclusion and the merchants, we grew 4% over a year. And even if you look at the bottom left, that you said that the merchants are going down, but it's slowing down. This decrease is lower and lower. So it used to be like $100,000, $150,000 one year ago, and today it's around $40,000. So it's kind of stabilizing the number of active merchants. The loss is more related to the number of merchants, as you said in your question. And to be honest, of course we look for active merchants, but the main focus here is to bring merchants with decent volumes of TPV in such a way that they could be profitable very soon. I mean, the payback in terms of subsidies of the POS and so on, they can be profitable very soon. So that's why we look at this slide. We see the TPV per merchant grew 42% year over year. because we're bringing merchants that deactivate more, they use more, and so on. But, yeah, going back to your question, if you do not consider the merchants, we grew 4% in our base, and it's kind of stable. If you look at the numbers of merchants, the active merchant is kind of stable.

That's perfect. Thank you. Thank you. That's all the questions we have for today. I will now pass the line back to Arthur for his closing remarks. Please, Mr. Arthur, you may proceed.

Before we end the call, I would like to inform you of a recent change within our company's investor relations team. Eric Oliveira has accepted a new position in the company. In this new role, he will lead a team focused on banking growth initiatives, which is a key element of our strategy. We would like to sincerely thank Eric for his dedication and invaluable contributions during his tenure in our IR team, where, among many milestones, he enhanced our communication and engagement with our investor community. Eric, thank you very much for all the support and results we achieved together, and I wish you the best in the new challenge. In light of this transition, I am pleased to announce that Gustavo Sequin is joining our team on August 26th as the new Head of Investor Relations, ESG, Market Intelligence, and Economy. Gustavo brings his extensive experience in investor relations and finance positions. His last position was as CFO of subsidiaries at Santander Brazil. Before that, he was CFO and CRO at Getnet and has led the proprietary M&A team in Brazil. He has got a long journey in the financial market, including equity research for Banco Votorantim and investor relations of ABN Amro Bank. Gustavo completed an MBA in finance from FGV and graduated in accounting from the University of São Paulo. I am confident that Gustavo will continue to uphold our commitment to transparency, effective communication, and a strong relationship with our valued investors and analysts. Eric and Gustavo will work together for a while to make a smooth transition. Please do not hesitate to reach out to Eric, Gustavo, and I if you have any questions. Gustavo, welcome to PAG's team and thank you for engaging in our proposal of making the financial life of individuals and businesses easier. Thank you all for participating in our second quarter 2024 earnings call and we look forward to meeting you in our next call.

This does conclude PAG Seguro Digital's conference call. We thank you for your participation and wish you a very good evening.