Hello everyone, and thank you for waiting. Welcome to PagSeguro third quarter 2019 results conference call. This event is being recorded and all participants will be in a listen only mode during the company's presentation. After PagSeguro's remarks, there will be a question and answer session. At that time, further instructions will be given. Should any participant need assistance during the call, please press star zero to reach the operator. This event is also being broadcast live via webcast and may be accessed through PagSeguro's website at investors.pagseguro.com, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via webcast may pose their questions on PagSeguro's website.
Before proceeding, let me mention that any forward-looking statements included in the presentation or mentioned in this conference call are based on the currently available information and PagSeguro's current assumptions, expectations, and projections about future events. While PagSeguro believes that their assumptions, expectations, and projections are reasonable in view of currently available information, you are cautioned not to place undue reliance on these forward-looking statements. Actual results may differ materially from those included in PagSeguro's presentation or discussed on this conference call for a variety of reasons, including those described in the forward-looking statements and risk factor section of PagSeguro's registration statements on Form F-1 and other filings with the Securities and Exchange Commission, which are available on PagSeguro's Investor Relations website. Finally, I would like to remind you that during this conference call, the company may discuss some non-GAAP measures.
For more details, the foregoing non-GAAP measures and their reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures are presented in the last page of this webcast presentation. Now, I will turn the conference over to Mr. Ricardo Dutra, CEO. Mr. Dutra, you may begin your presentation.
Hello everyone, welcome to our third quarter results conference call. Tonight, I have here with me Eduardo Alcaro, our Chief Financial Officer, and Andre Cazotto, our Head of Investor Relations. Before we get started, we would like to reiterate that we continue to focus on the long tail market, taking advantage of being the first mover, having a complete digital banking ecosystem, the most recognized brand, and UOL online distribution, which in our view are unique and unreplicable strengths to operate in long tail market. We have delivered in this quarter the same consistent performance we have been delivering since our IPO, healthy net adds growth and stable take rates with EPS accretion. We are now seeing higher adoption of new banking products and services, generating more engagement as we continue to invest in new initiatives through market campaigns, product development, and people.
Now we start our presentation highlighting the achievements of the quarter. Starting with our results, non-GAAP net income to reach BRL 390 million, up 34% year-over-year, with a net margin at 27%. Our adjusted net revenue reached BRL 1.4 billion, up 42% year-over-year, and our net take rate ended at 3.17%. Moving to our operating figures, our TPV reached BRL 29.4 billion, up 45% year-over-year, closing the quarter with 5 million active merchants, adding 1.2 million when compared to the third quarter 2018 and adding 305,000 quarter-over-quarter. These figures reinforce not only that we are on the right path with a broad ecosystem, but also our execution capability. Now moving to PagBank. We ended September with 1.9 million PagBank active users, which means the use of at least one additional product or feature beyond acquiring services in the last 12 months.
In addition, we are seeing strong adoption of PagBank features such as mobile top-ups, an increase of 89% quarter-over-quarter and 72% growth quarter-over-quarter in bill payments. PagBank also posted in the quarter a 53% increase in TPV from prepaid cards year-over-year, showing higher adoption of our clients in our issuances strategy. PagSeguro has proven that operating and winning in the long tail requires an online and mobile approach that is totally different from the traditional acquiring business model and new competitors that were attracted to the market after our IPO. We operate in a brand new market that we created, we still have a long way to go. Constantly putting into practice our vision to disrupt and democratize financial services through technology and innovation. Moving to the next slide, we show our mission.
Today, almost all economic activity has been impacted by the internet. One of the last industries to resist was banking. Now banking is changing. The internet's finally transforming banking. To be competitive in this new banking era, companies must have a tech DNA, understand local needs, and deal with local governments and local regulators. Most important, probably the unbeatable advantage, they must be the first mover. They must have the first mover scale advantage. Pag is the most well-positioned player, once Pag is local, Pag is tech, and Pag is the first mover. On slide five, Pag is leading the digital transformation and democratizing financial services. Brazil already has a solid infrastructure, with 3G networking covering 98% of the Brazilian population, and 97% already covered with 4G coverage. Smartphone penetration in the country reached 71% of the Brazilian population.
When it comes to global internet figures, Brazil is one of the most relevant countries, being the fifth-largest country in number of internet users, fourth in time spent on internet, and second in time spent in social media. When it comes to our relevant and unique position to capture this digital transformation, it is worth to remind that UOL has 88% internet audience coverage in the country, with 108 million unique monthly users as of August 2019. Additionally, Pag continues to have the largest brand reputation in the market, having six times more Google searches than the second-largest player. Moving to next slide. We believe Pag is well-positioned and with a robust ecosystem that combines payments, lending, banking, and software products to serve our active unique users and new customers we will acquire in the future.
By upselling new products like credit, banking, and software, and expanding our approach to consumers, we will multiply our market. Considering the new initiatives already available for merchants and consumers, we estimate the revenue pool is almost 14 times larger than payments market. According to IBGE and Brazilian Central Bank, there are 68 million unbanked people in Brazil. Additionally, 28 million of the low-income population do not have a bank account, and 57% of the population are interested in adopting digital banks. Still, 40% of the paychecks are paid in cash. 65% of the bill payments are also made in cash. 51% of the new bank accounts are opened just to receive payroll checks. On slide seven, we show the leadership of PagBank as a digital bank in Brazil according to Google report.
We ended the quarter with 62% of the total shares over digital banks, more than doubling our share when we started our campaigns back in May 2019, showing the importance of our marketing efforts and the strong brand reputation already conquered in the market. Additionally, our app was rated at 4.8 stars in iOS and 4.6 stars in Android, being the most reviewed and best-rated app among digital banks and payment peers. Also, a consequence of our best-in-class product development and user experience-oriented strategy. Moving to slide eight. We provide some additional information about our lending product, Pag Capital. We continue to scale the product to our best merchants, eligible according to their account history. Since the beginning of the operations in May 2018, we reached 60,000 lending contracts.
In Q3 2019, we had six times more contracts than what we had in Q1 2019, ending with a total credit portfolio net of losses of BRL 196 million. Lowering our average ticket from BRL 5.1 thousand in Q2 2019 to BRL 3.3 thousand in Q3 2019, which shows our focus on the long-tail market. So far, we have been careful with credit. However, the initial results are encouraging, as we had low levels of delinquency. Credit is also an important tool to create higher engagement with our merchant base and may generate additional revenues for the company in the future. Now, I'd like to turn the conference over to Eduardo.
Thanks, Ricardo, and hello, everyone. On the next slide, before I start, as I anticipated in the Q2 2019 earnings call, I would like to mention that in the third quarter of 2019, we had a total of BRL 47.6 million of non-GAAP items related to our stock-based long-term incentive plan, given the vesting of the fourth grant of the initial stock-based plan, and consequently, the market-to-market adjustment of this fourth grant. For more details, the reconciliation of these non-GAAP financial measures is presented on the last page of this webcast presentation. On the top left of slide number nine, our adjusted net revenue, the sum of net revenues from transactions and financial income from installments, excluding BRL 16.9 million related to membership fees previously booked as sales revenues and now accounted as transaction activities revenues, reached BRL 1.4 billion in this quarter.
Up 42% year-over-year and 8% quarter-over-quarter. Moving to the top right, we break down our revenue growth. With transaction activities and other services reaching BRL 862 million and growing 44% year-over-year. Our financial income revenue reaching BRL 538 million and up 39% year-over-year. On the chart below, we present our non-GAAP total costs and expenses that decreased 0.3 percentage points year-over-year, ending the second quarter at 3.1% over total TPV. Related to non-GAAP administrative expenses over total TPV reached 0.3% flat when compared to one year ago. On the next slide, we show our non-GAAP net income growth. In the third quarter, we reached BRL 390 million, an increase of BRL 100 million and up 34% year-over-year. The non-GAAP net margin reached 27%, up 0.8 percentage points despite higher investments on PagBank.
On slide number 11, we have mapped the current functionalities of our unique ecosystem, broken down by payments, software, and banking features. You can see that there are four new features we launched after our first quarter earnings call, and I'll give you more details about them in the next slides. On the superior block, there are features oriented to merchants. Instant payment and sales app in the software column are the new ones. Below, you can see our robust banking ecosystem. Credit and cash cards. Payroll portability and savings account are the new launched features. We believe these banking features will enable us to attract, engage and monetize both merchants and consumers, helping us to improve our clients' loyalty and stickiness. On slide 12, we have the evolution of our average spending per merchant that reached BRL 6,000 in Q3, a growth of 9% year-over-year.
Here, it's important to recall that the nominal average spending per merchant continues to grow, and even accelerated sequentially, reaching BRL 179 per client versus BRL 151 per client in the second quarter. As time goes by, we start to face harder comps. Since we already reached more than 5 million active merchants and more than BRL 100 billion in TPV in the last 12 months, which makes us comfortable to keep growing TPV with EPS accretion. In the next chart, we have our number of active merchants. We ended the third quarter reaching 5 million active merchants, adding 1.2 million new merchants in one year, representing an increase of more than 30% year-over-year. Quarter-over-quarter, we added 305,000 new merchants.
In Q4, we continue to see a similar pace of net adds growth, which makes us believe that we should be ahead of our 1 million net adds expectation that we provided in the beginning of the year. On the charts below, we see our TPV. Our total payment volume reached BRL 29.4 billion in the third quarter, an increase of BRL 9 billion, up 45% year-over-year and growing 10% quarter-over-quarter. This growth is the result of a higher penetration of our ecosystem in the long tail, combined with the trend of cash-to-plastic conversion, with lots of room to grow in Brazil, and having the upside of cross-selling additional products and services to our clients with our PagBank initiative.
The net take rate, which is the blended take rate from transaction costs such as interchange, processing, and card scheme fees, reached 3.17%, which has been stable when compared to previous quarters. On slide 13, we present more color about our new POS membership fee model in Brazil, so-called Comodato. It is already becoming a standard model among Brazilian payment companies. There is no change for our merchants on pricing. Moving to the new membership model, we improve our customer service by reducing some bureaucracies in the process, such as issuing invoices and registration processes, helping us to deliver a better and faster experience, like reducing up to 20% the customer service time and allowing the company to deliver a faster POS activation for our new clients. We are constantly looking for change to improve our customer service and experience.
Additionally, this model brings a different accounting treatment in our P&L. From now on, POS sales will be booked as membership fee and will be recognized as transaction service revenue instead of revenue from sales. In this quarter and for the next two ones, we should have an impact in the revenue from sales line due to ICMS and PIS and COFINS taxes on the transfer of the inventory from Net+FONE, which is a PagSeguro fully subsidiary that buys and sells POS devices to PagSeguro. The impact of ICMS, PIS and COFINS taxes in September 2019 was BRL 26.7 million. Our cost of goods sold should also be reduced as we are now capitalizing our devices, impacting depreciation over the next few years. The result of this change was a net income positive effect of BRL 20 million in our Q3 2019.
Despite this operational change that brought a recurring positive impact in our Q3 results, it is also very important to remember that we intensified short-term investments in R&D, personnel, and sales and marketing to scale new initiatives. Spending an additional BRL 110 million pre-tax in the last six months, year-over-year, aligned with our long-term strategy to offer a unique financial ecosystem for both merchants and consumers in Brazil. I'd like to turn over to Ricardo, who will talk about engagement metrics and new products.
Thanks, Eduardo. On slide 14, we present our next step of evolution and value generation. Since the official launch of PagBank in the second quarter, we intensified our investments in product development, people, and marketing campaigns to promote this new initiative to our merchant base and consumers. We observed a huge engagement since the very beginning, and we are on the way to build our network effect as time passes by. Currently, on average, 39% of our clients use at least three products from our ecosystem. Our PagBank app is opened 10 times a week by our active clients, which means higher engagement of our clients. On slide 15, we show some of the most relevant engagement trends in our ecosystem. We believe engagement is one of the most relevant metrics to follow.
Once it will help the company to increase the switching costs, it will enable future monetization and revenue diversification. On the top of the chart, we have the number of cards issued, especially prepaid and cash cards that increased at 92% year-over-year. Our prepaid cards TPV that increased at 53% year-over-year when compared to the same period in 2018. According to Card Monitor, PagSeguro is the largest prepaid card issuer in Brazil. In chart below, we see the number of bill payment transactions rose 72% quarter-over-quarter. Our mobile top-up feature is also ramping up, growing almost 9% sequentially. Moving to new payment methods, our NFC transactions grew more than 100% quarter-over-quarter, and our P2P transactions increased at 45% quarter-over-quarter. On slide 16, we highlight our roadmap of products are delivering this year.
Being an independent company allows us to think exclusively on our clients' financial needs by delivering growth and profitability simultaneously and offering a unique ecosystem through our digital account. With cash and credit cards and payroll portability, we expect to diversify our addressable market and start gaining penetration with the consumer vertical, besides our higher engagement on the merchant segment. It is worth to say, we will be very cautious in the credit offer. As you know, it is important to understand credit behavior so that we can manage delinquency accordingly. In the past two months, we added our savings account and Super App application, and for payments, we launched our low-cost smart terminal version called Moderninha X. On slide 17, we present our new banking products, such as savings accounts that use more than Poupança, the most popular savings account product in Brazil, and our initial Super App strategy.
Adding new services like Uber, Spotify, and Google Play directly in the app. We are just starting our Super App initiatives, and we should continue to expand our products and services. On slide 18, we show our new devices. Starting with Moderninha X, a low-cost Android-based smart terminal with apps and software installed to help merchants to manage and grow their businesses. It also comes with PagBank digital account and an international cash card for free. Additionally, we also have Minizinha Chip 2, an upgraded version of our entry-level device with a promotional price of 12 installments of BRL 8.9 or BRL 106.80. This device is NFC enabled and comes with the usual SIM card, a larger screen combined with a thinner hardware, and it will offer a better experience for self-employment segment. Moving to the next slide, we present our software solutions.
Through M&A transactions, we now offer a wide range of software solutions to our clients. We ended Q3 2019 with 123,000 clients using our software products, up 45% quarter-over-quarter. PagSeguro will continue to monitor possible M&A activities that can speed up the building of a more complete ecosystem. I'd like to turn the conference over to Eduardo again.
On slide 20, finally, this is the last slide where we have our 2019 guidance. Even accelerating investments in new initiatives, we continue to reiterate our commitment to reach close or at the top of our non-GAAP net income guidance. We finish our presentation, and we will start the Q&A session.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star one. If at any time you would like to remove yourself from the question queue, press star two. Our first question comes from Craig Meurer, Autonomous Research. You may proceed.
Yeah, hi. Thanks for taking the questions. First, if you could give any type of look into the trends you're seeing through mid-November in terms of fourth quarter, in terms of both TPV and if net new merchant adds are running on pace with where they've been. Secondly, more broadly, as we look forward, can you help us understand the monetization of the growth in usage of PagBank offerings? How we should think about that? I know you've given us the 30% of revenue in 3-5 years, but there's a lot of time before 3 years, how we should think about that revenue ramp and try to translate it back to the engagement stats you're providing. Thanks.
Hi, Craig. Thank you very much for the question. Regarding net adds, as Eduardo mentioned, we are following the same path, adding 100,000 net adds per month. That's what we had in October. We don't see deceleration in November, we are looking for close to the same 300,000 per quarter that we've seen in the past quarters. Regarding TPV, we are also seeing a strong growth in terms of absolute numbers and also as a percentage. It's also worth to say that we are comparing this quarter with also a strong quarter in 2018. We are operating a much larger scale. Sometimes the percentage is not as high as it used to be, but the volumes are still pretty high. In terms of PagBank, you're right, we said about this 30% between 3-5 years. We are at the very beginning.
The revenues from PagBank are marginal, are very small at this point. We see some revenues coming from cards, but we will still have a lot of opportunities to monetize in terms of wire transfers that people are getting to use. Bill payments, people are using more, also mobile top-up. Everything's gained some traction. People are used to the account, how to use them, how to make it work. At this point, it's still very small. The revenues are very small. Once it becomes something more important, we will give more color, more information about this vertical. I don't know if Eduardo or Cazotto want to add something. Okay.
Thank you.
Thank you.
Next question comes from Bryan Keane, Deutsche Bank.
Yeah, hi guys. I want to ask on the TPV. Last quarter it grew about 59% year-over-year, and this quarter it grew 45%. The additional net merchant adds seems to be still growing at a solid pace. Is there anything to read into the types of merchants that are staying in the portfolio that maybe they're yielding lower volumes or lower growth? Is there something in the economy that happened that created a little bigger drop than I think most anticipated when you guys gave out your preliminary results?
Hi, Bryan. Thank you for the question. We don't see any change in terms of macroeconomics or trends that may affect our businesses. The environment in Brazil keeps the same. We don't see any big bangs coming that is changing the dynamics of the business at this point. You're right, the percentage of the growth of TPV is going down. We are working a much larger scale at this point. The percentage is going to be smaller. We've been adding some slightly smaller merchants in our ecosystem, which is not bad for us. It is aligned with our focus in the long-tail market. We are comfortable adding these type of merchants because we offer the most complete ecosystem. We can cross-sell additional services to these type of merchants. They are the type of merchants that are not sensitive to prices. They don't have access to financial services.
Also important to say, I know it was a question that we had a few weeks ago about the TPV per merchant. The average TPV per merchant did not grow double digits. Just to put everyone on the same page, the people that are on the call, we are not talking about decreasing TPV or decreasing the spending per merchant. It grew 9%. By the way, we don't think this is a relevant metric because at the end of the day, it could be easy for us to increase the average of TPV per merchant if we add a large merchant that we can lose money or have a smaller margin. We don't want to work artificially increase the TPV per merchant. We are working with the merchants that we know how to work, that are profitable, and we know how to serve them.
Wrapping up here, we are seeing strong growth in the Q4, but the percentage is not going to be the same that used to be in the past 70%, 59% or things like that, because we are working a larger base. Remember that Q2, we grew 10% compared with Q1. Q3, we grew the same 10%. For us, we don't see deceleration there because we're working in a larger base and growing the same percentage quarter-over-quarter.
Got it. That's helpful. My second question. Given the amount of investment for PagBank and new services, I think that makes sense. What can we expect going forward as we look out into next year? Should we expect additional amount of investments as well to keep net income margin slightly growing or flat? Just trying to think about it so we can get ready for 2020. Thanks.
Hi, Bryan. We don't expect to decelerate investment. We see a great opportunity ahead of us in terms of banking in Brazil. As we gave more information during the call, 68 million people in Brazil without a bank account, people that only open a bank account just to receive the payroll and all this stuff. We see a lot of opportunity, a big opportunity ahead of us. We will not decelerate in 2020. What we have in our business plan is not to hurt the margins too much in 2020. We think that we could have an operational leverage if we didn't have PagBank 2020, but we will use the operational leverage to invest in PagBank and invest more in marketing, products and people, and to keep the growth of the company for the future.
Think about that being more flat potentially given the amount of investments for PagBank and other services in 2020.
Yeah, I guess that's a good assumption.
Okay, great. Thanks, guys.
Thank you.
Next question comes from Mario Pierry, Bank of America.
Hello, everybody. Congratulations on the results. Two questions. The first one is related to your churn rate. Can you just give us some color of your churn rates? I'm not looking for actual figures, but just the trends. Second question is related also to PagBank. You talk about how your volumes are growing six times, I think, than what you were doing. Can you give us a little bit more color on the average ticket size, interest rates, and the NPLs that you're seeing so far?
Hi, Mario. Thank you for the question. We don't see changes in our churn. There may be some months that we have a slightly higher churn, some other months a slight lower churn when compared last year. We don't see big changes. I would say that it's stable at this time. Regarding Pag Capital, that is your question about the number of contracts. The average ticket that we had in Q2 was BRL 5.1 thousand. Now the average ticket is BRL 3.3 thousand, so it's a very small ticket. We are looking for the long tail. We are focused on this type of merchants, these guys that do not have access to financial services. That's the type of merchants that we like to work and to know how to work with them, and that's what we've been doing in the past years.
The interest rate, it varies, depends on the account history they have with us. We don't do anything lower than our prepayment interest rate, which is 2.99%. Some of the merchants, we have different rates depending on the risk that we think the merchant could pose to us.
On the NPLs, I know it's a recent portfolio, but what kind of NPLs are you seeing on the portfolio?
We are working here to have the best NPLs in the market. The reason why is because we also want to have the lowest interest rate in the market. Our idea is to help our customers to increase their business with us, and we don't believe in high interest rates. This is a complementary product to help our customers to grow their business with us. We are still not disclosing specific metrics on NPLs because it is still something that is under construction. Our portfolio is still really small if you compare to our total receivables. We ended with BRL 190 million. If you compare that to our total receivables, it's roughly around 2% of our total receivables. It's a product that is encouraging. It's getting a great acceptance. We are lowering our average ticket by continuing to focus on the long tail market.
All that we can tell you right now is that we are very pleased with the results that we are having so far. I think that is all that we can say at this stage.
Okay. Thank you.
Next question comes from Josh Beck, KeyBanc.
Thank you for taking the question. I wanted to ask about PagBank, and you had mentioned in one of the charts that it basically was 63% of Google searches in September. That was the biggest of all of the challenger banks, if you will. I'm just wondering, do you think that it has really moved into a position where it's being viewed as a true consumer product, and consumers are really what are going to drive the growth versus your historical focus on merchants?
Hi, Josh. Thank you for the question. At this point, we're serving both merchants and consumers. It is clear for us that the merchants that we already have in the base, they are the, let's say, the low-hanging fruit. Those are the type of merchants and type of PagBank clients that we are having, adopting PagBank as a financial service option more rapidly and more quickly than the consumers. We already have thousands of consumers using our products. We've been collecting feedback since May. We've made improvements in the products. Yeah, you're right. We are going to the consumers pretty fast, so that's why we are building this brand. We are having adoption of the consumers at this point.
To be sincere with you, right now, we have much more merchants than consumers in the base because the merchants are already working with us, and the consumers are, at this point, knowing our services, trying, seeing what we offer, how it works, and so on. We believe in the future we're going to have millions of consumers using PagBank as well.
Okay. I also wanted to ask about the software subscribers that seems to have moved up nicely sequentially. Is this a big investment area for you in 2020? I'm imagining that is going to take you upmarket to slightly larger merchants. Just trying to understand strategically how important that opportunity is for you.
The investment in this area is not that big. We acquired these four companies. What we do is to maintain the softwares and make some upgrades and some improvements in software because it needs to evolve as time passes by. It's not a huge investment in this vertical. It's just to keep it working and make it better as time passes by, collecting feedbacks from merchants and so on. Regarding your question, if we're moving up in the pyramid, if you look at these four softwares, only one of them is for larger merchants, which is the conciliation r2tech . The other three software solutions, two of them are for small merchants, and Celcoin, the bill payments, is focused much more in consumers. By investing in these software initiatives, it doesn't mean that we are going up in the pyramid. That's not the case.
Okay. Thank you.
Thank you.
Next question comes from Tito Labarta, Goldman Sachs.
Hi, thank you for the call. A couple questions. Following up just on the growth. I understand you expect it to decelerate from the growth rates you were posting in the past. In terms of going forward, is like the 45% growth, does it decelerate further from there, or should we think about 10% growth per quarter that you mentioned? Is that sort of reasonable? Could maybe fourth quarter even be a bit higher just because it's seasonally stronger than the 10%? Just want to understand in terms of how much it could decelerate potentially. A second question in terms of the competitive environment. The take rate, it fell a little bit, still relatively stable, but just anything you're seeing in terms of competition increasing or coming in that could potentially add some more pressures to the take rates going forward? Thanks.
Hi, Tito. This is Alcaro speaking. About the TPV, just to reinforce what Ricardo just said. When we talk about absolute TPV figures, we operate today in a much larger scale. Our TPV has overpassed BRL 105 billion in the last 12 months. The additional absolute TPV figure in Q3 2019 compared to Q2 2019 has increased BRL 222 million. Our growth quarter-over-quarter remaining stable in 10%. There is no absolute TPV deceleration. About Q4, of course, we should expect a number that is higher than 10% because we have the holiday season in Q4. I think that's the first point. Regarding competition and the competitive environment, we didn't see any change in these past quarters. As you can see in our numbers, we've been adding the same 100,000 per month. October, we had the same figure.
Same competition that we used to have in the past, is that what we are seeing at this point. No big changes, no news. By the way, if you look some of the incumbents, when they talk about long tail, they just copy our prices, which is good. They are more rational about pricing, and they know that we are the best player in terms of serving long tail, and they just copy what we are doing in terms of devices and also in terms of MDR. We see a few players doing some irrational prices, but when they discover that by lowering the price of the devices too much, the activation goes down, the long tail is not sensitive to prices. They start having the irrational prices again. Summarizing, we don't see big changes in the competitive environment so far.
All right. Thank you.
Thank you.
Next question comes from Daniel Federle, Credit Suisse.
Hi, good evening, everyone. My first question is to understand how should we see the credit initiative if it is still in a pilot stage. If that's the case, what is the company waiting to scale up this more fast? The second question regarding the remuneration of the accounts. If 100% of the accounts were already remunerated in the third quarter, and if you have any estimates about the impact of that in net income? Thank you.
Hi, Daniel. In terms of Pag Capital, the lending business is still at the very beginning. We are growing gradually. We know that it's a different business than the acquiring. The risk is different. The way we should work is also different. People don't think too much when they decide to take credit, the collection is sometimes may be a challenge. That's why we are very careful about this credit and how we are going to make it bigger. We are going gradually, step by step, taking care of the risk, once it becomes a very important business line, we will give more information about it. Regarding the savings account, just remember that we remunerate the accounts only for the balance that it stays with us for 30 days.
We know that long tail people, they have the cash in, cash out very often in the account because they need to work. They need to use the balance to buy products to resell, and then they receive the money and cash out again to work and so on. We have this remuneration only for the balance that it stayed with us for 30 days, and so far the amount is small as well. It's not a big amount that could hurt our P&L or net income or things like that.
Okay. Thank you very much.
Thank you.
Next question from Domingos Falavina, JP Morgan.
Hi, all. Thank you also. I confess I'm a little lost. Actually, I have two questions. The first one is basically on accounting moving parts. Reading your press release and your transcript remarks, it seems you had two effects. One, you moved all your POS from the subsidiary, which impacted, according to your press release, BRL 27 million in revenues, put 30% in taxes would be about BRL 20 million positive impact on earnings. The second, the whole change between sale to lease, which you claim added negatively BRL 20 million to earnings. My question is, how should I read this, basically? Is this like net everything else? If you hadn't changed POS parking base, if you had not changed the sale to lease or anything like that, how much would the earnings impact? It would be close to zero impact?
Should I read that the BRL 20 million is net negative considering everything already? Then I move to the second question.
Okay. Domingos, this is Alcaro. Let me reconcile this for you. First, you have approximately BRL 17 million of subscription revenues, because remember we started with the Comodato beginning on September 1st. We have just one month of membership fee. We have BRL 17 million of membership fees. If you deduct the 34% income tax, you get roughly to BRL 11 million of a positive effect. That's effect number 1. The second effect that makes up to the BRL 20 million positive is the Q3 negative margin. If you look at previous quarters, we had on average BRL 88 million of negative margin on POS subsidies. We had BRL 74 this quarter. What is the headwind and the tailwind here?
The headwind is really the taxes on the transfer on the inventories that we had, the tailwind are the market-to-market provisions that we had to make in our inventories to adjust the market values. If you compare the 88 negative to the 74 negative that we posted this quarter, is roughly BRL 14 million of negative margin. After tax is BRL 9. If you add the tailwind that we had in the negative margin, plus the tailwind that we had in the membership line, those two things combined it's a total of BRL 20 million that we should have the same amount in Q4 as well. That impact of BRL 20 million was just in September. If you consider, for example, Q4, it's around between BRL 50 million and BRL 60 million of positive impact in Q4.
Just one thing. When you say negative margin, that depends on your commercial decision, right?
Right.
I guess my question is more tilted to the accounting, not that like, well, we decided to lower the prices. If you had not changed the accounting or the lease to rent, what would have been the impact on the net income this quarter?
20 million.
Positive?
Yeah.
I mean, without BRL 20 million.
The membership is helping the P&L in BRL 20 million this quarter.
If you had not done anything, neither relocated the lease nor relocated the POS from the subsidiary nor-.
Right.
Okay.
Right.
Okay. Perfect. The second question is, what is your legal understanding as far as two options? If you have a terminal sold to a merchant, can he or can he not hypothetically connect to another acquired provider, hypothetically Getnet or anybody? If you lease this equipment to the merchant, can he or can he not? Is there a change in understanding as far as the ability of these merchants to use this terminal for other providers?
Well, Domingos, first of all, it's also worth to say that what some people say portability, in our view is more like piracy or things like that. It doesn't work for 100% of the transactions. If some merchants decide to use one device from a company they bought using another app from another company, it will not work for 100% of the transactions. That's the first thing to say. That's why people don't stick with this type of, let's say, pseudo solutions. If we sell or if we lease in the contract, we had the right or we ask the merchants that they cannot use the device with other companies. It doesn't matter if you are leasing or selling the device, the contract says that they cannot use with other companies. Some of them, they may try.
They see that doesn't work, and they will come back to us. Going back to our question, it doesn't change.
Okay. Super clear. Just out of curiosity, the recognition of the sale of the terminal under lease is upfront, but the cost that you bought that terminal is deferred over time. Is that the reason why you have this positive impact or something different?
That's the reason. You got it.
All right. Perfect. You deferred the acquisition cost over 12 months, I'm assuming?
Over 3 years-5 years. It will depend on the average life of each device.
Understood. All right. Thank you very much.
Domingos, just reinforce here that, regardless of the accounting impacts that could be positive, negative, or whatever, the main driver for us to change the model is to have a better experience for our merchants because of the bureaucracy in Brazil and all the paperwork that you need to do when they buy the device versus when they lease. That's what drove us to make this change. We're going to have a much better experience, faster activation. We will improve our SLA. It's going to be, at the end of the day, a better services for the merchants. That what matters for us.
No, super clear. Just wondering if you had an additional benefit, a higher entry barrier. Super clear. Thank you.
Next question comes from Jeff Cantwell, Guggenheim.
Hi. Thanks very much. Most of my questions have already been asked, but I did have a question which relates to your earlier commentary on your software strategy. I guess what I heard was you framed software as a smaller piece of the overall company strategy, but I do want to ask if you can drill down for us a little bit and just explain why pursue that strategy. For example, are you seeing higher revenue per merchant from those software customers? If so, can you quantify that for us? Maybe it's a specific vertical strategy where you're trying to defend market share or gain market share. We see the increase you have in your subscribers with software. I just wonder how you're putting that type of growth up. I'd like to know more about it and where it's going in the future. Thanks.
Hi, Jeff. Thank you for the question. Just to be clear for everyone in the call that when I talk that we do not invest in software, or that is a small piece of our investment, we are talking about these four softwares that we presented in the deck of the slides, in slide number 19. Of course, we do invest a lot in software and in platform and in our app and a lot of initiatives that we have in PagSeguro. Just to be clear for everyone that we were talking about only these four softwares that we described in slide 19. Our merchants, as we are focused on long tail, sometimes they don't have I would not say the capability, but they don't have It's missing the word here. Yeah, sophistication here to have a software solution to use.
They just want to make the transaction, that's all. Some of the merchants, they do use additional software when we offer, like small CRM that you can have the name of our client, the mobile phone, the date of birth, and things like that. The idea here is not to make a lot of money from software, as at this point, most of the software that we offer are for free for our merchants clients. The idea is to increase the stickiness, give them a better services, make them more loyal to our solutions, and increase the switching cost. Some of the merchants, yes, they do pay, but some of the merchants, they just
Use as part of our offering in the acquiring services and in the payment solutions that we have.
Great. If I could just ask one on the take rate. We heard your earlier commentary on the margin outlook for next year, but what would you say currently would be the two or three factors that would swing the take rate up from where it currently is or down, and how should we think about the trajectory of the take rate going forward from there? Thanks.
Talk about net take rate. If you look at our take rate compared to last year, there is a slight decline in the take rate as a result of mix, because we are not taking prices down. Our prices are public, and they remain untouched in the last 12, 18, or 24 months. Going to Q4, obviously, as we had last year, you may remember, Q4, we have a higher percentage of debit because people receive their 13th salary and they go out and spend that through debit. We should expect in Q4 a decline in the net take rate as a result of our mix, not because we are taking prices down. Overall, if you look this year is a slight decline compared to last year as a result of mix, and in Q4, it should follow basically the same trend.
Great. Thanks very much.
Next question comes from Karina Martins, Citi.
Hi, everyone. Thanks for taking my question. First thing that I wanted to ask is, as you shift to this membership model, how should we look at the COGS? As you're actually going to lease the terminal but not sell them, they're going to stay in your balance sheet. COGS should actually be lower, and we should expect that to go through CapEx, which could actually increase operational leverage. First, am I correct to assume that?
That's correct. We recognize the membership model as revenues in the transaction line. The cost of goods sold, instead of flowing through the P&L-- I mean, will flow through the P&L, but through depreciation of the assets. If you look at our fixed assets, you could see a material increase in Q3 because now we are booking the hardware, the devices as fixed assets instead of cost of goods sold.
Okay. Good. As you commented earlier in the call that you're going to see some flat margins in 2020 because the operational leverage, you're actually going to use that benefit to further invest in marketing and personnel and the expansion of PagBank. That actually increases, this change in accounting actually increases your operational leverage. Should we expect even further increases in marketing? Because if your margins are going to stay flat, you would actually have a benefit from having COGS go through CapEx and not the P&L.
Actually, this is already happening. If you see our margins, the nice thing about our business is the operational leverage. I mean, we closed the last 12 months with more than BRL 105 billion, and we do have operational leverage. We are reinvesting this operational leverage in new initiatives. Basically, that's what's happening. If you look to our net income margin, it's pretty much flat when compared to last year. Would be very easy for us, for example, to cut marketing expenses by half and having a great EPS or a great net income, but we are building this company for the future. We are investing in this company for the long term. It wouldn't make any sense, for example, to slow down marketing investments or slow down investment in people or in sales, in exchange of short-term results.
We are looking here for the long term. We are looking to the growth of this company. By the way, nobody has, at least in the long-tail market, the ecosystem that we offer, plus the online distribution, the brand recognition, and all the benefits of being the first mover. Our idea here is to build this company for the future. We are not concerned about short-term results.
Thank you. Just one last thing on this. The positive impact in net income that you have from this change in accounting, that wasn't accounted for in the guidance for the year, right? That's like a plus.
It is accounted, actually, because this brings in Brazil the process of issuing invoices is very bureaucratic. When you need to replace a terminal, it's cumbersome, the process that you need to go through. We really wanted to implement this change before September is because it requires some system changes. It requires some time to make that happen. There is a small benefit in September. On the other hand, we invested, in the last six months, BRL 110 million more in new initiatives, for example. It was in the guidance and we had more investments in the new initiatives. We are accelerating the PagBank initiative. At the end of the day, pluses and minuses, as I said before, the beauty of this company is the operational leverage, and we are reinvesting this operational leverage in new initiatives here.
Great. That's super clear. Many thanks.
Next question comes from Rayna Kumar, Evercore.
Hi, thanks for taking my question. Can you provide your initial thoughts into 2020 net adds and TPV growth? You mentioned 300,000 net adds in fourth quarter. Would you expect that to continue into 2020?
Hi, Rayna. We are not giving this type of information at this point. We've been discussing a lot about guidance and about 2020 and the plans for the future, but I don't even have the official number, even if we decided to give some number for you right now. We don't have these net adds in TPV for 2020 at this point. Just remember, this year, we had a guidance of 1 million net adds. We're going to surpass that. We already had 1 million until the end of October. We still have two months ahead, November, which is a strong month with Black Friday and holiday season in Brazil, and December. Going back to your question, we don't have these type of figures at this point.
Understood. You spoke about adding smaller merchants in 3Q. Do you expect that move down market to continue? If so, would you anticipate the increase in net adds and growth in PagBank to offset any lower volume per merchant that we might see?
Just to make it clear for everyone, we added slightly smaller merchants. We're not just adding smaller merchants than comparative base. We're slightly smaller when we see the way they are working with us in the first months when compared with the cohort of the legacy that we have. They are slightly smaller than what we had. We are not changing our strategy in terms of marketing. We are not using different channels. We are just bringing these type of merchants for us, which at the end of the day, it's good news for us because those are the type of merchants that they are not price sensitive. They are not inserted in the financial system in Brazil. They require a lot of financial service they don't have access to. Sometimes they don't even have an access to a bank account.
That's type of merchants that we like to work, we know how to work, and we know how to make profits from them. We didn't change that much, and it's slightly smaller than what we had in the base.
Got it. How much of that average spending per merchant deceleration from two Q to three Q was from just going to smaller merchants versus other factors?
Rayna, I think the information that we provided is what we will provide. At the end of the day, those are the metrics that we have just released in our Q3 numbers.
Okay. I guess I'm asking about the driver, though, to that metric, just that deceleration. If we can get a better understanding of why there was that sharp deceleration, I think that would be very helpful.
Well, let me repeat that again. First of all, talking about TPV figures, we operate in much larger scale. We grew TPV from Q2 compared to Q1 in 10%, and Q3 compared to Q2 in 10%. We don't see here a deceleration. Again, as Ricardo said, we do not consider TPV per merchant as a relevant metric because it's very easy to fabricate and to get a bunch of high volume merchants and post a very nice TPV per merchant. Again, we are not seeing any deceleration. The TPV growth in the last two quarters, quarter-over-quarter, was 10% on each quarter. That's how we are seeing TPV here in the company. We continue to deliver healthy take rates. Our take rates have been stable, and we continue to deliver stable net income margins.
Thank you.
This concludes today's question and answer session. I would like to invite Mr. Ricardo Dutra to proceed with his closing statements. Please go ahead, sir.
Hi, everyone. Thank you very much for your time and for the questions. We'll see you next conference call. Thank you very much.
That does conclude the PagSeguro audio conference for today. Thank you very much for your participation.