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 conference presentation. After Pag Seguro's remarks, there will be a question and answer session. At that time, further instructions will be given.
This event is also being broadcast live via webcast and may be accessed through PagSeguro's website at investors. Pagziguro.com, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via webcast may post their questions on PagSeguro'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 in 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 factors section of PagSeguro's registration statements on Form F-one 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 the 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, and welcome to our Q3 results conference call. Tonight, I have here with me Eduardo Ocaro, 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 1st mover, having a complete digital banking ecosystem, the most recognized brand and the UOL online distribution, which in our view are unique and unreplicable strength to operate in long tail market. Therefore, 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. In addition, 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 to highlight the achievements of the quarter. Starting with our results, non GAAP net income to reach BRL390 1,000,000 up 34% year over year with a net margin at 27%. Our adjusted net revenue reached BRL1.4 billion, up 42% year over year and our net take rate ended at 3.17%. Moving to our operating figures, our TPV reached BRL29.4 billion, up 45% year over year, closing the quarter with 5,000,000 active merchants adding 1,200,000 when compared to the Q3 2018 and adding 305,000 quarter over quarter. These figures reinforce not only that we are in the right path with a broad ecosystem, but also our execution capability.
Now moving to PagBank, we ended September with 1,900,000 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 a strong adoption of TagBank features such as mobile top ups, an increase of 89% quarter over quarter and 70% 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 issuance strategy. Finally, PagSeguro has proven that operating and winning the long tail, he acquires 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 and 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. But now banking is changing. The Internet is 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. But most important, probably the unbeatable advantage, they must be the 1st mover. They must have the 1st mover scale advantage. PAG is the most well positioned player once PAGS is local, PAGS is stack and PAGS is the 1st mover. On Slide 5, PAGS is leading the digital transformation and democratizing financial services.
Brazil already has a solid infrastructure with 3 gs networking covering 98% of the Brazilian population and 97% already count with 4 gs 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 5th largest country in number of Internet users, 4th in time spent on Internet, and second, in time spent in social media. And 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 108,000,000 unique monthly users as of August 2019. Additionally, PAGS continues to have the largest brand reputation in the market having 6 times more Google searches than the 2nd largest player.
Moving to next slide, we believe PAGS 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 68,000,000 unbanked people in Brazil. Additionally, 28,000,000 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. And finally, 51% of the new bank accounts are open just to receive payroll checks. On slide 7, 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 concluded in the market.
Additionally, our app was rated at 4.80 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 8, we provide some additional information about our lending product PAGS 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 6 times more contracts than what we had in Q1 2019, ending with a total credit portfolio net of losses of BRL196 1,000,000, lowering our average ticket from BRL5,1000 in Q2 2019 to BRL3,3000 in Q3 2019, which shows our focus on the long tail market. So far we are careful with credit. However, 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 would like to turn the conference over Eduardo.
Thanks, Ricardo, and hello, everyone. On the next slide, before I start, as I anticipated in the Q2 2019 earnings call, I'd like to mention that in the Q3 of 2019, we had a total of BRL47.6 million of non GAAP items related to our stock based long term incentive plan, given the vesting of the 4th grant of the initial stock based plan and consequently the market to market adjustment of this 4th grant. For more details, the reconciliation of these non GAAP financial measures is presented in the last page of this webcast presentation. On the top left of Slide number 9, our adjusted net revenue, the sum of net revenues from transactions and financial income from installments excluding BRL16.9 million related to membership fees previously booked as sales revenues and now accounted as transaction activities revenues reached BRL1.400 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 862,000,000 and growing 44% year over year and our financial income revenue reaching BRL538 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 and in the 2nd quarter at 3.1% over total TPV. Related to non GAAP administrative expenses over total TPV reached 0.3%, flat when compared to 1 year ago. On the next slide, we show our non GAAP net income growth. In the Q3, we reached BRL390 $1,000,000 an increase of BRL100 $1,000,000 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 4 new features we launched after our first quarter earnings call, and I will give you more details about them in the next slides. On the Secure 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 BRL6000 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 BRL179 per client versus BRL151 per client in the 2nd quarter. And as times goes by, we start to face harder comps. Since we already reached more than 5,000,000 active merchants and more than BRL100 1,000,000,000 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 3rd quarter reaching 5,000,000 active merchants, adding 1,200,000 new merchants in 1 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 1,000,000 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 BRL29.4 billion in the 3rd quarter, an increase of BRL9 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 PAG Bank 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 that we started in September and it is already becoming a standard model among Brazilian payment companies. There is no change for our merchants on pricing, But 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 and 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 2 months, we should have an impact in the revenue from sales line due to ICMS and PIS and cofin's taxes on the transfer of the inventory from Netfone, which is a PagSeguro fully subsidiary that buys and sells POS devices to PagSeguro. The impact of ICMS, PIS and co fees 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 impact of BRL20 1,000,000 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 and D, personnel and sales and marketing to scale new initiatives, spending an additional BRL110 1,000,000 pretax in the last 6 months year over year, aligned with our long term strategy to offer a unique financial ecosystem for both merchants and consumers in Brazil. Now 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 Q2, 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 you are in the way to build our network effect as time passes by. Currently, on average, 39% of our clients use at least 3 products from our ecosystem. Our PagBank app is open 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 you have the company to increase the switching costs and we will enable future monetization and have a new diversification. On the top of the chart, we have the number of cards issued, especially prepaid and cash cards that increased 92% year over year. Our prepaid cards TPV that increased 53% year over year when compared to the same period in 2018.
According to Card Monitor, PAGS is the largest prepaid card issuer in Brazil. In chart below, we see the number of bill payments 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 45% quarter over quarter. On Slide 16, we highlight our roadmap of products already delivering this year.
Being an independent company allow us to think exclusively on our clients' financial needs by delivering growth and profitability simultaneously and offering 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. 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 2 months, we added our saving account and super app application.
And for payments, we launched our low cost smart terminal version called Moderna X. On Slide 17, we present our new banking products such as savings accounts that is more than Popansa, the most popular saving account product in Brazil and our initial super app strategy, adding new services like Uber, Spotify and Google Play directly in 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 Modern EA 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 Mini Zinnia Ship 2, an upgraded version of our entry level device with a promotional price of 12 installments of BRL8.9 or BRL106.8. This device is NFC enabled and comes with the usual SIM card, a larger screen combined with a thinner hardware and will offer a better experience for self employment segment. Moving to the next slide, we present our software solutions. Through M and 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.
PAGS will continue to monitor possible M and A activities that can speed up the building of a more complete ecosystem. Now, I would 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. Now we finish our presentation and we will start the Q and A session.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from Greg Merer, Autonomous. You may proceed.
Yes, hi. Thanks for taking the questions. So first, if you could give any type of look into the trends you're seeing through mid November in terms of Q4, in terms of both TPV and
if net new
merchant ads are running on pace with where they've been? Secondly, more broadly, as we look forward, 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 to 5 years, but there's a lot of time before 3 years. So 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.
So we are looking for close to the same $300,000 per quarter that we've seen in the past quarters. Regarding GPV, we are also seeing a strong growth in terms of absolute numbers and also as a percentage, but it's also worth to say that we are comparing this quarter with also a strong quarter in 2018. So we are operating a much larger scale. So 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 to 5 years.
We are at the very beginning. It is also the revenues from PagBank are marginal, are very small at this point. We see some revenues coming from cards, but we 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 ups. So everything's gained some traction. People are using to the account, how to use them, how to make it work.
So but at this point, it's still very small. The revenues are very small. Once it becomes something more important, we will give more color and more information about this vertical. I don't know if Eduardo or Casoto want to add something.
Thank you.
Thank you.
Next question comes from Brian Kien, Deutsche Bank.
Yes. Hi, guys. I want to ask on the TPV. Last quarter, it grew about 59% year over year and this quarter grew 45%. The additional net merchant add seems to be still growing at a solid pace.
So 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 or 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, Brian. 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. So we don't see any big banks 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, but we are working on 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 this type of merchants because we offer the most complete ecosystem and we can cross sell additional services to this type of merchants.
They are the type of merchants that are not sensitive to prices. They don't have access to financial services. And 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 digit. So just to put everyone on the same page that people that are in the call, we are not talking about decreasing TPV or decreasing the spending per merchant.
It grew 9%. And 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. So 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. So wrapping up here, we are seeing strong growth in the Q4, but the percentage is not going to be the same that it used to be in the past, 70%, 59% or things like that because we are working a larger base.
Remember that Q3 we grew 10% compared with Q1. Q3 we grew the same 10%. So for us, it's 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. And then my second question, given the amount of investment for next year? I mean, 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, Brian. 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, 68,000,000 people in Brazil without a bank account, people that only open a bank account just to receive the payroll and all this stuff. So we see a lot of opportunity, a big opportunity ahead of us. So we will not decelerate in 2020.
What we have in our business plan is not to hurt the margins too much in 2020. We are working the numbers, but 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.
And so think about that being more flat potentially given the amount of investments for PagBank and other services in 2020?
Yes. I guess that's a good assumption.
Okay, great. Thanks guys.
Thank you.
Next question comes from Mario Pierry, Bank of America.
Hello everybody. Two questions. 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 like just the trends.
And second question is related also to PagBank. If you can, right, you talk about like how your volumes are growing 6 times, I think, than what you were doing. Can you give us a little bit more like color on the average ticket size, interest rates and the NPLs that you're seeing so far?
Amar, thank you for the question. We don't see changes in our churn. There may be some months that you have a slightly higher churn, some other months is slightly lower churn when compared last year. So we don't see big changes. It's I would say that is stable at this time.
Regarding PAGS Capital, that is your question about the number of contracts. The average ticket that we have that we had in Q2 was BRL5.1 1,000. Now the average ticket is BRL3,3000. So it's a very small ticket. Again, we are looking for long tail.
We are focused on this type of merchants, these guys that do not have access to financial services. And that's the type of merchant that we like work and we 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%.
But some of the merchants we have different rates depending on the risk that we think the merchant could pose to us.
And then on the NPLs, I know it's a recent portfolio, but have you seen what kind of NPLs are you seeing on the portfolio?
We are working here to have the best NPLs in the market. And 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. So I mean, this is a complementary product to help our customers to grow their business with us.
We're still not disclosing specific metrics on NPLs because it is still something that is under construction. It's a our portfolio is still really small if you compare it to our total receivables. And we ended with like BRL 190 million, if you compare that to our total receivables, I mean, is roughly, I mean, around 2% of our total total receivables. So I mean, it's a product that is encouraging, is getting a great acceptance. We are lowering our average ticket by continuing to focus on the long tail market.
And 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's 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. So that was the biggest of all of the challenger banks, if you will. So 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. We at this point, we are 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.
But we already have thousands of consumers using our products. We've been collecting feedback since May. We've made improvements in the products. And yes, 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. But 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. But we believe in the future we're going to have millions of consumers using PagliBank as well.
Okay. And I also wanted to ask about the software subscribers that seems to have moved up nice sequentially. Is this a big investment area for you in 2020? I'm imagining that is going to take you up market to slightly larger merchants. Just trying to understand strategically how important that opportunity is for you?
Well, the investment in this area is not that big. We acquired these 4 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. But 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 you are moving up in the pyramid, if you look at this 4 softwares, only one of them is for larger merchants, which is the conciliation R2Tek. The other 3 software solutions, 2 of them are for small merchants. And Chilix, the bill payments is focused much more in consumer. So by investing in these software initiatives, it doesn't mean that we are going up in the pyramid. That's not the case.
Next question comes from Ciro Labartre, Goldman Sachs.
Hi, thank you for the call. I saw a couple of questions. I guess following up just on the growth, I understand you expect it to decelerate from growth rates you were posting in the past. But in terms of going forward, I mean, is it like the 45% growth, does it decelerate further from there? Should we think about like 10% growth per quarter that you mentioned?
Is that sort of a reasonable? Could maybe Q4 even be a bit higher just because it's seasonally stronger the 10%. So just want to understand in terms of how much it could decelerate potentially. And then second question in terms of the competitive environment, the take rate, I mean, you 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 BRL105 billion in the last 12 months. The additional absolute TPV figure in Q3 2019 compared to Q2 2019 has increased BRL222 1,000,000.
So our growth quarter over quarter remaining stable in 10%. So there is no absolute TPV deceleration. About Q4, of course, we should expect a higher a number that is higher than 10% because we have the holiday season in Q4. So 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. So same competition that you used to have in the past is that's 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. So 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. So 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 rational prices again. So summarizing, we don't see big changes in the competitive environment so far.
All right. Thank you. Thank you.
Next question comes from Daniel Fedeli, Credit Suisse.
Hi, good evening, everyone. My first question is to understand how should we see the credit initiative if it's still up in a pilot stage? And if that's the case, what is the company waiting to scale up this more fast? And the second question regarding the remuneration of the accounts. If 100% of the accounts were already remunerated in the Q3?
And if you have any estimates about the impact of that in net income? Thank you.
Hi, Daniel. In terms of PAGS Capital, the lending business, 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, it's also different. It's people don't think too much when they decide to take credit, but the collection is sometimes maybe a challenge. So 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 and 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 stays with us for 30 days.
And we know that long tail people, they have the cash in and 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. So we have this remuneration only for the balance that is 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 and L or net income or things like that.
Next question from Domingos Falavina, JPMorgan.
Hi all. Thank you also. I confirm 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 2 effects. 1, you moved all your POS from the subsidiary, which impacted according to your press release $27,000,000 in revenues, put 30% in taxes would be about $20,000,000 positive impact on earnings. And the second, the whole change between sale to lease, which you claim added negatively $20,000,000 to earnings. My question is, should I read this how should I read this basically? Is this like net net everything else, if you hadn't changed POS parking base, if you have not changed lease to sale to lease or anything like that, how much would the earnings impact?
It would be close to 0 impact? Or should I read that the €20,000,000 is net negative considering everything already? And then I'll move to the second question.
Okay. Domingos, this is Alcaro. Let me reconcile this for you. So first, you have approximately BRL 17,000,000 of subscription revenues, because remember, we started with the Comodato beginning on September 1. So we have just 1 month of membership fee.
So we have BRL 17,000,000 of membership fees. If you deduct the 34% income tax, you get roughly to BRL 11,000,000 of a positive effect. So that's effect number 1. The second effect that makes up to the BRL20 1,000,000 positive is the Q3 negative margin. If you look at previous quarters, we had on average BRL 88,000,000 of negative margin on POS subsidies.
We had BRL 74,000,000 this quarter. And what is the headwind in the tailwind here? The headwind is really the taxes on the trends around the inventories that we had. And the tailwind are the market to market provisions that we had to make in our inventories to adjust the market values. So if you compare the BRL 88,000,000 negative to the BRL 74,000,000 negative that we posted this quarter is roughly BRL14 million of negative margin and after tax is 9.
So 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 BRL20 1,000,000 that we should have the same amount in Q4 as well. So that impact of BRL20 1,000,000 was just in September. So if you consider, for example, Q4, it's around between BRL50 1,000,000 and BRL60 1,000,000 of positive impact in Q4.
Just one thing, when you say negative margin, I mean, that depends on your commercial decision, right? I guess my question is more tilted to the accounting, not that like, well, we decided to lower the prices. If you have not changed the accounting or the lease to rent, what would be have been the impact on the net income this quarter?
BRL20 1,000,000. Positive. Yes.
That's BRL 20,000,000.
The membership is helping the P and L in BRL 20,000,000 this quarter.
If you have not done anything, neither relocated the lease nor changed the relocated the POS from the subsidiary more? Right, right, 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? And 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 this merchant 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. So 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. So 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. So it doesn't matter if you are leasing or selling the device, the contract says that they cannot use it in another conference. Some of them they may try, they see that doesn't work and they will come back to us, but going back to your question, it doesn't change.
Okay, super clear. And just out of curiosity, the recognition of the sale of the terminal under leases 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. That's the reason. You got it.
All right. Perfect. And you deferred the acquisition cost over 12 months, I'm assuming?
Over 3 to 5 years. It will depend on the average life of each device. Understood.
All right.
Thank you very much.
Domingo, just to 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 now the paperwork that you need to do when they buy the device versus when they lease. So that's what drives us to what drove us to make this change. We're going to have a much better experience, faster activation. We will improve our SLA. So it's going to be at the end of the day a better service for the merchants.
That's what matters for us.
No, super clear. Just wondering if you had as an additional benefit the higher entry barrier, but 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. So I guess what I heard was you frame software as a smaller piece of the overall company strategy, but I do want to ask if you could 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? And 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 and with software. I just wonder how you're putting that type of growth up. And so I'd like to know more about it and where it's going in the future. Thanks.
Just to be clear for everyone in the call that when I talk that we do not invest in software or that a small piece of our investment, we are talking about 4 softwares that we presented in the deck of the slide in the 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. So just to be clear for everyone that we were talking about only these 4 softwares that we described in slide 19. Our merchants as we are focused on long tail, sometimes they don't have the I would not say the capability, but they don't have the it's missing the word here, sophistication here to have a software solution to use. They just want to make the transaction, that's all.
But some of the merchants, they do use additional softwares when we offer like a small CRM that you can have the number, the name of our clients, the mobile phone, the date of birth and things like that. So 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. So the idea is to increase the stickiness, give them a better services, make them more loyal to our solutions and increase the switching costs. 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 2 or 3 factors that would swing the take rate up from where it currently is or down and sort of how should we think about the trajectory going forward from there? Thanks. [SPEAKER CANDIDO
BOTELHO BRACHER:]
So talk about net take rate. We 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 debits because people receive their 13th salary and they go out and spend that through debit. So we should expect in Q4 a decline 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 slightly 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 Carina Martin, Citibank.
Hi, everyone. Thanks for taking my question. So first thing that I wanted to ask is, as you shift to this membership model, how should we look at the cost of goods sold because as you're actually going to lease the terminal, but not sell them, they're going to stay in your balance sheet. So cost of goods sold should actually be lower and we should expect that to go through CapEx, which could actually increase operational leverage. So first, is that am I correct to assume that?
That's correct. We recognize the member ship model as revenues in the transaction line and the cost of goods sold instead of flowing through the P and L, I mean, will flow through the P and 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. And as you guys you commented earlier in the call that you're going to see some flat like flat margins in 2020 because the operational leverage you're actually going to like use that benefit to further invest in marketing and personnel and the expansion of PagBank. So that actually increases this change in accounting actually increases your operational leverage. So should we expect even further increases in marketing? Because if your margins are going to stay flat, you actually have a benefit from having COGS go through CapEx and the P and L?
Actually, this is already happening. If you see our margins, the nice thing about our business is the operational is operational leverage. I mean, we have we closed the last 12 months with more than BRL105 billion, and we do have operational leverage. And we are reinvesting this operational leverage in new initiatives. Basically, that's what's happening, because if you look to our net income margin, it's pretty much flat when compared to last year.
It 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, for we are investing in this company for the long term. So 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. So we are looking here for the long term, you're looking to the growth of this company. By the way, I mean, 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 1st mover. And our idea here is to build this company for the future is not we are not concerned about short term results.
Just one last thing on this. Like a plus. Well, like a plus.
Well, it is accounted actually, I mean, because this brings a you know, I mean in Brazil, the process of issuing the process of issuing invoices is very bureaucratic. When you need to replace a terminal, I mean, it's cumbersome the process that you need to go through. So we really wanted to implement this change before September, I mean, is because, I mean, it requires some system changes. I mean, it requires some time to make that happen. But there is a small benefit in September.
But on the other hand, we invested, I mean, in the last 6 months BRL 110,000,000 more in new initiatives, for example. So it was in the guidance and as well as I mean, we had more investments in the new initiatives, we are accelerating the PagBank initiative. So at the end of the day, I mean 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 4th quarter. Would you expect that to continue into 2020?
Hi, Reyna. 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 we I don't even have the official number even if we decided to give some number for you right now. So we don't have this net adds in TPV for 2020 at this point. Just remember this year we had a guidance of 1,000,000 net adds, we're going to surpass that.
We already had 1,000,000 until the end of October. So we still have 2 months ahead, November, which is a strong month with Black Friday and holiday season in Brazil and December. So but going back to your question, we don't have this type of features at this point.
Understood. You spoke about adding smaller merchants in 3Q. Do you expect that move down market to continue? And if so, would you anticipate the Tag Bank to offset any lower volume per merchant that we might see?
Just to make it clear for everyone, we added slightly smaller merchants and we're not adding smaller, smaller, smaller merchants in the comparative base. So we're slightly smaller when we see the way they are working with us in the 1st month 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 this type of merchants for us, which at the end of the day is good news for us because those are the type of merchants that they are not price sensitive.
They are not in certain financial system in Brazil. They require a lot of financial service they don't have access to. They sometimes they don't even have an access to a bank account. So that's type of merchants that we like to work. We know how to work and we may have to make profits from them.
So we didn't change that much and it's slightly smaller than already had in the base.
Got it. So how much of that average spending per merchant deceleration from 2Q to 3Q was from just going to smaller merchants versus other factors?
Reina, I think the information that we provided is what we will provide. So 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 First
of all, talking about TPV
figures, I mean, First of all, talking about TPV figures, I mean, we operate in much larger scale. We grew TPV from Q2 compared to Q1 at 10% and Q3 compared to Q2 in 10%. So we really we don't see here a deceleration. And 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. So again, we are not seeing any deceleration.
The TPV growth in the last two quarters or quarter over quarter was 10% on each quarter. So and that's I mean, 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 in next conference call. Thank you very much.
That does conclude the PagSeguro audio conference for today. Thank you very much for your participation.