Hello, everyone, and thank you for waiting. Welcome to PagSeguro's First 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.
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 post their questions on PagSeguro's website.
Before proceeding, let me mention that any forward statements included in the presentation or mentioned in this conference call are based on currently available information on PagSeguro's current assumptions, expectations and projections about future events. While PagSeguro believes that their assumptions, expectations and projections 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 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 Q1 results conference call.
Today, I have here with me Eduardo Alcaro, our CFO and
Andre Cazotto, our Head of Investor Relations. Before we go through operational and financial metrics, I would like to say a few words about PAGS' vision for the near future in this competitive market. Our primary focus is the payment business, and we will keep investing to maintain our fast growth combined with profitability. We will now enter a new phase that we believe will be a landmark in PAGO's history. Starting tonight, the company will offer digital payments and banking services in a massive way through the app to any Brazilian consumer in an onboarding process that takes less than 3 minutes.
We are now launching a national advertising campaign to promote these services under the brand PagBank. PAGS already has a complete payment ecosystem, which is the core for digital accounts CACIN. We built our digital banking ecosystem with features such as wire transfers, P2P transfers, prepaid card, bill payments, mobile top up, among others, in order to become the client's final money destination and to further increase our closed loop transactions. PAGS has already 4,400,000 active merchant digital accounts in the long tail market. Although they are cashing as a merchant, they operate as a consumer when they cash out.
With the launch of cash card and payroll portability, we are ready to fully serve Brazilian consumers building the path to deploy our super app. In the same way, we disrupted the payments business and promoted inclusions of millions of Brazilians before underserved. We believe now we will lead their inclusion into the banking system. There are lots of customers unsatisfied with their banks, but our focus will be the millions of underbanked Brazilians. It is the same scenario we had in the payments business 6 years ago.
Millions of Brazilians underserved by incumbent banks, most of them with smartphones and 3 gs connections eager to be included into the financial system. We will focus on them. As a reference, in 2017, according to IBGE Governance Source, Class C D and E, which are the low income classes in Brazil, spent BRL 1,700,000,000, being 60% of that in cash. Banking is shifting towards a technology oriented business, and PAGS is a digital born and a tech DNA company. PAGS continues to be uniquely positioned.
Our top notch ecosystem now has scale, know how and processes in place to serve long tail market, including banking services. Stealing market share in the banking business for incumbents will not be our focus. Like PAGS payment business, where 80% of new merchants did not accept cards before joining us, our focus will be on the underserved population. We will go for the blue ocean again. We are now entering a market that is 14x bigger than the company's current market.
It is an immense opportunity, and we are uniquely well positioned to reach this market. Now let's shift to our presentation. We start our presentation highlighting the great achievements of the quarter. Our adjusted net revenue reached BRL 1,140,000,000, up 59% year over year. Our non GAAP net income reached BRL 325,000,000, up 50% year over year and 1% quarter over quarter.
Additional revenues from services like digital account, lending, prepaid cards and reconciliation growing 175% year over year. Engagement is a key metric for the company, given that almost 80% of our merchants never accept
the cards before joining us.
We continue to observe a higher adoption of our ecosystem, being translating more transactions. We ended Q1 with more than 25% of our active merchants using services of our digital accounts, such as bill payment, P2P transfers, cars, mobile top up, among others. We launched 4 additional products, including instant payments, payroll portability, cash and credit cards that will have PAGS to expand its addressable market and start targeting the consumer vertical. Our average spending per merchant in Q1 2019 reached BRL5.7000, up 70% year over year. We believe the adoption of additional functionalities through the digital account will be translated in higher stickiness and more transactions.
Our goal is to be the merchant's final money destination. Our TPV reached BRL 24,400,000,000, growing BRL 11,000,000,000 or 70 percent year over year. And we also ended Q1 2019 with 4,400,000 active merchants, adding 1,300,000 new clients year over year. These figures reinforce we are in the right path with a broad ecosystem and also our execution capability. Our 2015 2016 annual cohorts exceeded in average 115 percent TPV retention rate year over year after achieving a normalizing run rate, showing that our merchant base is growing at a very solid pace and with potential to improve given the continued adoption curve and future cross selling opportunities.
We also ended the quarter with the best rated app, 4.8 stars on Google and Apple Stores according to more than 300,000 reviews, reinforcing our commitment in delivering top class user experience. Talking about our brand recognition, PAGS has a stronger brand in Brazilian payment industry with 7.7 times more searches than the 2nd player according to Google Trends Financials category. Being the 1st mover and mobile first with a non replicable line distribution through UOL that holds 84% of the Brazilian internal orders brings a natural advantage to PagSeguro. We also acquired a minority stake with path to control at NetPOS, an ERP software provider that will enhance our value proposition to merchants by combining payments and software integration in our smart POS. NetPOS already has 30,000 active clients.
Finally, PagSeguro has proven that operating and winning 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 still have a long way to go, constantly putting into practice our vision to disrupt and democratize financial and banking services through technology and innovation. Now I would like to pass the word to our CFO, Eduardo Alcaro.
Thanks, Ricardo, and hello, everyone. Now before I discuss the net income slide, I would like to mention that in the Q1 of 2019, we had a total of BRL 15,700,000 of non GAAP items related to our stock based long term incentive plan.
For more
details, the foregoing non GAAP measures and the reconciliation of these non GAAP measures are presented in the last page of this webcast presentation. On the top left of Slide 4, our adjusted net revenue, the sum of net revenues from transactions and financial income from installments, reached BRL 1,000,000,000 100,000,000,043,000,000 in the Q1, up 59% year over year and 1% up quarter on quarter, even considering a worse seasonality in Q1 than Q4 given the holiday season and Black Friday in Q4. We believe that these two operational revenue and income lines best represent our core business, which grows at healthy and high double digit rates. Important to highlight that we continue to promote discounts on hardware, promoting the increase of our base of active merchants. On the other hand, despite any mix effect, our MDR prices are public, remain stable and have the benefit from additional services of our digital accounts, such as lending, prepaid cards, bill payments and reconciliation that, like Ricardo said earlier, grew 125% year over year.
Moving to the top right, we have our main revenue streams composed by transaction services or mainly now MDR collected from merchants, financial income from the installment prepayment and hardware sales. In the Q1 of 2019, transaction and services represented 59%, financial income 36% and hardware sales, only 6% over total net revenues that continue to trend down as we expected. On the chart below, we present our non GAAP total costs and expenses that decreased 0.6 percentage points year over year ending the 4th quarter at 3.2% over total TPV. Related to non GAAP administrative expenses, our 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 Q1, we reached BRL 325,000,000, an increase of BRL 112,000,000 and up 53% all year over year. The non GAAP net margin reached 26%, an increase of 0.6 percentage points year over year. The non GAAP net income also increased 2% quarter on quarter and margin increased 0.5 percentage point. Now moving to Slide 6, we have our number of active merchants. Just to explain the criteria we use internally, active merchants are those who made at least one single transaction in the last 12 months.
We ended the Q1 with 4,400,000 active merchants, adding more 1,300,000 new merchants in 1 year, representing an increase of 43% year over year. Quarter over quarter, we added 283,000 new merchants. In the next chart, we have the evolution of our average spending per merchant that reached BRL 5,700 in Q1, a growth of 17% year over year. This strong and continued growth is explained by the higher adoption curve of our solution in our merchant base, which is an expected trend, higher engagement in our ecosystem being converted in more transactions than TPV. Just reminding what we said in the initial remarks, most of our merchants did not accept cards before joining PagSeguro.
This is a blue ocean and a new market created by PagSeguro as we are not stealing clients from competition. On the charts below, we see our TPV. Our total payment volume reached BRL 24,400,000,000 in the first quarter, an increase of almost BRL 11,000,000,000 and up 70% year over year and almost flat quarter on quarter due to seasonality when compared to Q4, which is the strongest quarter from the payment business in Brazil given the holiday season and the Black Friday. This growth is the result of a greater penetration of our ecosystem in the long tail, combined with the trend of cash to plastic conversion that is still at the beginning in our merchant base with lots of room to grow in Brazil and with the upside of cross selling additional products and services to these clients. The net take rate, which is the blended take rate net from transaction costs such as interchange, processing and card scheme fees, reached 3.12% in Q1 2019 or 12 basis points up when compared to previous quarter.
This is exactly what we expected and shared with you during the 2018 Q4 call, a higher net take rate compared to Q4 2018, but slightly down compared to Q3 2018. This is explained by two reasons. 1st, a higher share of debit in our payment mix in Q4 due to seasonality, as in the Q4, debit is stronger in Brazil with the 13 salary payments and second, compared to Q3 2018, a trend of higher penetration in debit transactions. Important to highlight that this take rate is the result of all payment methods and may change according to payment mix. As we discussed in previous quarters, we are not facing any type of MDR pricing pressure in the long tail market, where our merchants are little sensitive to MDR prices.
With our prices being public and transparent, you can easily check online and verify that we are not taking MDR prices down. The reason behind this is slightly decrease in the net take rate compared to 2018 is due to a higher mix of debit versus credit, which is not a concern for us. Now I'd like to hand over to Ricardo that will talk about engagement metrics and new products. Thanks, Eduardo. On Slide 7, we show some of
the most relevant engagement trends in our ecosystem. We believe engagement is a relevant metric to follow, also to help the company to increase the switching cost, add more transactions and TPV and will enable future monetization revenue diversification. On the top of the chart, we have the number of active prepaid cards that increased 2 80% in Q1 2019 when compared with Q1 2017. According to Card Monitor, PAGS is the largest prepaid card issuer in Brazil. Additionally, we also have the volume of prepaid cards reload that increased 3 60% when compared with the Q1 2017.
In the chart below, we see the number of bill payment transactions that increased 3 35 percent since its launch back in Q2 of 2018. Our mobile top out feature is also ramping up, growing more than 1,200% when compared to Q3 2018 when we were launched, and 162% growth quarter over quarter, becoming one of the most used features in the digital account. The next slide, we have the evolution of our P2P transfer that started to get traction and already grew 3 15% quarter over quarter and also the customer average balance that increased 52% year over year, showing that through new products and features, more and more our merchants are perceiving our digital account as their final monetization. On the chart below, we can see the evolution of our new transaction methods like NFC and QR code. Our TPV through near field communication or contactless increased more than 1,000 percent year over year and more than 50% quarter over quarter.
Additionally, our TPV from QR code transactions increased almost 3,000% year over year and 75% quarter over quarter. We believe that offering NFC and QR code acceptance in our terminals and in our wallet increase the value proposition to our customers. On Slide 9, we present our cohort metrics. Our TPV retention rate from our 2015 2016 winters on average exceeded 115% year over year. TPV retention rate is provided 1 year after the cohort has achieved a normalized run rate.
This consistent cohort lead us to strong revenue visibility and shows that our merchant base is growing at a very solid pace and its potential to improve given the continued adoption curve in future cross selling opportunities. On next slide, we can see the strength of our brand. PAGS is the 1st mover in this market and the fact it can access your awareness, the 3rd largest online audience in Brazil, only behind Google and Facebook, with more than 85% Internet reach as of October 2019, to promote our products and solutions long term market, helping PAGS to reach a unique brand recognition. In the past 12 months, according to Google Trends, featuring by financials category, we have on average approximately 7.7 times more search than the 2nd player. PAGS reached a level of brand awareness where the business has a word-of-mouth effect.
And consequently, we have lower acquisition costs than our competitors. On Slide 11, we highlight our road map of products already delivering this year. Being an independent company allow us to think exclusively in our clients' financial needs by delivering growth and profitability simultaneously and offering a unique ecosystem through our digital accounts. 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 we know it is important to understand credit behavior so that it can manage delinquency accordingly.
On the next slide, we have mapped the current functionality of our unique and world class ecosystem, broken by payments, software and banking features. We can see there are 4 new features we launched after our Q1 call, and I'll give you more details about them in the next slides. On the superior block, there are all features oriented to merchant available to our 4,400,000 merchants. Instant payments and sales app in software column are the new ones. The block below, we can see our robust banking ecosystem.
Credit and cash cards as well as payroll portability are the new features launched. As I said at the beginning of this call, we believe these banking features will enable us to attract and monetize consumers, help us to improve our merchants' loyalty and stickiness, creating more and more engagement. It will be crucial for closed loop transactions, where we can have a better profitability and, at the same time, offer benefits for both parties, consumer and merchants. We believe the addressable market of banking and credit is 14x larger than the merchant acquiring business, and PAGS is well positioned to reach this market. On Slide 13, we show our instant payment feature for debit and credit card transactions, regular and installments for all merchants.
PagSeguro announced in April the launch of its new settlement period feature. This feature is available for transactions beginning on May 1 and allow all PagSeguro's merchants and individuals to receive payments from their regular credit card, credit installments and debit card transaction at about the same time of the sale, even during weekends and holidays at the same cost of the one day settlement. Although the change for D1 to instant payment seems to be minor, for a small entrepreneur that do not have access to working capital can make a big difference. On the next slide, Slide 14, we introduced NetPOS. PagSeguro acquired a minority stake with Pesto Control at this company that provides ERP software to retail and foodservice segment.
Built for front and back office with sales and management tools like inventory control, detailed reports, cash manage and invoicement. It will be fully integrated with PAGS MPOS, POS and SmartPOS devices as well in our PAGS sales app. NetPOS has more than 30,000 clients. On Slide 15, we show our software solutions. Through M and A transactions, we now have Telix, an automated application that innovates the customer experience in paying bills.
From utilities to tax bills, TILIX offers a simple and user friendly interface to manage bill payments and will be fully integrated in our digital account app in the following months. We also have r2tech, a company acquired in 2017 that offers a streamlined process of credit card transactions reconciliation. And finally, net POS that I've just described in the previous slide. PAGS will continue to monitor possible M and A activities that can speed up the building of a more complete ecosystem. Now I'll give more details about our banking features.
On the next slide, we give more details about digital account app onboarding. Now anyone, merchants and consumers, can sign up for a digital account directly to the app for free and in less than 3 minutes and manage all the products and services. Additionally, tonight, we will start our massive national advertising campaign to promote PagBank, the digital account and banking services targeting consumers. The campaign will be running on UOL, broadcast TV, pay TV, online, radio, newspapers, magazines and out of home. On the next slide, we show our payroll portability feature, which allows anyone to receive their salary on PAGS digital account without any cost.
With this new and efficient cash in method, our customers can pay bills, make purchases, mobile top up transfers, P2P, withdraw cash and reload prepaid cards. This new product will help our access to consumers willing to have Bags as their banking services provider. On Slide 18, we present our cash card. Launched in March, PagSeguro and Visa are promoting financial inclusion and offering the account card to all our merchants and our consumers. The cash card is linked directly with the balance of the digital account, bringing more convenience and better experience to our merchants and consumers.
The cash card is also NFC enabled. On the next slide, we introduce our new credit card product. Launched in early May, it's still in pilot mode. Initially, we will be targeted to our merchant base with no annual or membership fees. Our Visa credit card is accepted in all merchants all over Brazil and abroad and can be stored in PAGS digital accounts to enable contactless and QR code transactions.
Finally, on Slide 20, we believe PAGS is well positioned and with a robust ecosystem that combines payment, lending, banking and software products to serve our more than 4,400,000 active merchants and to reach consumers market. By upselling new products like credit, banking and software and expanding our approach to consumers, we will multiply our addressable market. Considering the new initiatives already available for merchants and consumer, we estimate the revenue pool almost 14x bigger than merchant acquiring services. Being the 1st mover, having a robust and low cost ecosystem with 4,400,000 active digital accounts, mobile first, strong brand, focus on user experience, the best rated financial services app on Google and Apple Stores and unapplicable online distribution through UOL brings a natural advantage and leadership in the long tail market. Now we finish our presentation.
We'll start the Q and A session. Operator, please?
Thank you. We will now begin the question and answer session for investors and analysts. Our first question comes from Greg Moore, Autonomous Research.
Yes. Hi. Thanks for taking the questions. Two questions from me. First, on the new credit card launch, are you taking the credit risk on that credit card for consumers?
And secondly, unrelated question, thinking about the market that you guys address in acquiring, when we look at Cielo's performance with Stelo, it was extremely disappointing. They restated their prior numbers. The current quarter numbers were unimpressive. So are you just finding that the competition is just not finding traction in the market regardless of what they do with hardware promotions or so on and so forth? Thanks.
Craig, this is Ricardo. Thank you for the questions. First, regarding credit card, as I said in the speech, we are in pilot mode, and we will offer credit card only for merchants that we already had some relationship. We know the behavior. We have the TPV and so on.
So it's going to be
It's a little hard to hear you.
I'm sorry, Craig. Is it better or is it
It's just a little muffled, but it might be my phone, so.
Can you hear me? Yes. Okay. So, Quagenda, thank you for the question. Regarding credit card, as I said in the speech, we offer credit cards only for merchants at this point, very cautious.
And why you want for merchants? Because we already have some relationship with them. We know their TPD history. We know their behavior. So really, tired of this credit card offer from merchants and very cautious not to take the credit risk.
Regarding Stella, as we said in the previous calls, the growth of our business is not only It's the way we distribute online, leveraging our audience, offering people cards and so on. So some companies think that just decreasing the price is the way to get the same thing in market, but we are here to
Next question from Mario Pierry, Bank of America.
I have two questions and congratulations on your results. First one is the outlook for your take rate. As you showed, right, your take rate right now is depending very much on your mix and you mentioned that your MDRs for the long tail segment has been unchanged. But I was wondering what has been your strategy to get into the SMB market? Are you having also to reduce prices there like we're seeing some of the incumbents doing?
So if you could discuss a little bit then the outlook for the take rate outside of the micro merchant segment? 2nd question is related also to you provided your addressable revenue markets credit BRL282 billion. Here, it's not clear how you plan on approaching this. Are you going to be opening up your platform for 3rd parties? Are you going to be taking the credit risk?
Are you going
to be doing the landing?
How you plan on funding the segment?
Mario, this is Eduardo Ocasio speaking. Let me take the first question. About the take rates, when we see when you see the recovery in Q1 compared to Q4, most of the recovery is related to product mix as we anticipated in the last call. In Q4, due to seasonality with the working salary and consumer behavior, you know that there is an increase in that card transaction volume and less transactions in installments in relative terms. Take rate is not a concern for us, and we expect a slightly decrease in 2019 compared to 2018 as a result of more of more debit transactions.
But when you look, the outlook for take rate from what we are seeing now comparing Q2, comparing to Q1, we see take rate stable.
Regarding the this is Ricardo, Mario. Thank you for your question. Regarding the credit business that we have, first, is there a plan at this point to open the platform for third parties to offer a landing or something like that. The number that we put here is the reference, how big is this market because as we said in the speech, our main focus after payment is going to be to reach the underbanked in Brazil. So this is the reference of how big is this market.
We will pilot with some consumers to see how we're going to perform, but very cautious, very limited. We already had some experience by offering credit for merchants. It's doing well, a labor intensive. So we already
Just one additional commentary here, Mario Andre speaking. In the end of the day, our main focus remains engagement in our ecosystem, okay? I think that by, let's say, cross selling additional financial products for sure, just like Ricardo mentioned, we're going to be able to create more stickiness in our ecosystem and, for sure, capture more TPV, more transactions. That's the main focus, okay? Just as a last comment, Mario, on the lending products.
We are actually cherry picking our clients eligible to these products. So clients have an account history with us. We are fine tuning the product. We are getting the right model to make the difference. And before we accelerate, what we are doing here, we are learning, learning, learning.
And we do not have any rush to do it because we won't take the credit risk. So we really want to play it safe, and Square Campo is one of the benchmarks for us. So for now, we are funding all transactions with our own balance sheet.
Next question please.
Next question comes from Brian Kenny, Deutsche Bank.
Yes. Hi, guys. Two questions. First, just on net new merchant adds. I know they're typically seasonally softest in 1Q and then seasonally strong in 2Q.
The 1Q number was a little bit better, dollars 283,000 was higher than we expected. Just trying to figure out should we still expect 2Q for new merchant adds to be seasonally strong? And then does the $1,000,000 for the full year still hold? And then the second question on net income guidance that we provided on the last call, should we still expect you guys to be in that range? I think you guys feel comfortable more towards the high end of the range towards the $1,500,000,000 Thanks.
Hi, Brian. This is Eduardo speaking. So again, we believe we'll be able to reach 1,000,000 net adds at the end of 2019 with 5,100,000 active clients. And this is exactly the number that we shared with sell side analysts during the IPO for 2019. As far as your second question about the guidance, I think it's too early to make any updates on the guidance.
What I can tell you is that management is committed with the top end of the guidance. Our annual bonus is tied to the top of the guidance. And that's our commitment. The bottom of the guidance is really what we committed when we did the IPO, and we thought that was an important number to draw a line in the sand and say that's the minimum number that we are going to achieve. And with the high the top of the guidance, we are talking about a number that is 40% higher than what we delivered in 2018 and 13% higher than the lower end of the guidance, which is the number that we provided you when we did the IPO.
Okay. Thanks so much.
Thank you.
Next question comes from Thiago Karpuski, BTG Pactual.
Hello, everyone. Thanks for the opportunity to make questions. I also have two questions. The first one related to your PagBank initiative, which looks a pretty interesting one. I mean, we've seen yesterday actually, TAO releasing Ity as well and a number of players kind of moving this way of towards digital banks.
I just want to get a sense of how you guys see this platform. Are you targeting the 4,400,000 clients that you have on the long tail? Can you move into, I would say, into the top of the pyramid with this? I mean, how are your plans related to this initiative? And my second question is related to costs.
I mean, especially cost of sales, I mean, even though you had a better trend in the SG and A, the COGS actually came a little bit above what we were expecting. Just want to get a sense of your sales, if it's improving or not? And how do you see that on the margin?
Thiago, this is Ricardo. Thank you for the question. Talking about private bank, we, as I said, we have been building this ecosystem for a few years. And what we realized is that by doing by launching some new products or some additional products, we could also reach the consumer market review with the main focus on the underbanked, traditional banks. We are hearing more for the generation of bringing people into the system.
So the 4th and 4th of emotions that we have nowadays has been approached in the past month, even though we're using our digital account. If you look up in the period, we don't see that we should go there because this type of merchant require different services from banks that we don't have. And I don't even know if we really have some day. So what we're looking for is to bring new consumers to the system, focusing when they're banking, People that just today, we don't have bank accounts, and that's going to be very focused for the PagBank. Regarding your question about other players launching some initiatives.
I can tell you about always, we have this wallet that we already offer PTP, QR code, NFC, where people can make PTV, can use their codes, can save corticosteroids, they are all great initiatives for us because the more people need credit cards in electronic payments, it's better for us as a whole, as an acquirer or as a company that is operating consumers. So we will focus on the new consumers building people into the system just like we did 6 years ago with the POS devices. Regarding the cost of solar, that will ask and where to help with the weather?
Well, it's more the seasonality that we see in Q1 compared to Q4. Basically, I mean, we expected lower device sales. And in terms of discounts, which have the same pricing that we were practicing in December, in Q4, so there is no material difference there. And as I said before, I mean, you can go online and check our prices. Our prices are public, transparent, and they are very easy to check and very easy for you to verify that we have the same level of pricing and discounting that we were doing in Q4.
Perfect. Thank you for the answers.
Thank you.
Next question from Felipe Salomao, Citibank.
Hi, good night, Dutra, Alcaro, Casotto. Thanks for the opportunity to ask questions. I have two questions. First one, very straightforward. I would like to know if all the new products and services related to Pac Banco that you announced today were included in the guidance for 2019 net income or if they were not?
And my second question is related to instant payments. So yesterday, Itau launched its instant payment product, Ichi, And the Centrobank expects the instant payment infrastructure to go live in the next 6 months, which should allow payment between the e wallets of different providers. Do you believe that this new payment tool represents a threat for Pagli Seguro business model, especially because of the company's exposure to the unbancarized part of the corporation and given that take rates for instant payments are lower? Or do you believe the instant payment infrastructure should be seen more as an opportunity given that PagSeguro has roughly 4,500,000 customers using this wallet. So these are my questions.
Thank you very much.
Felipe, it's Andres speaking. That's your first question. No. The BRL 1 point $5,000,000,000 that the company is committed to deliver in the year and consider payments, okay? Like we said earlier, we are starting to enter with additional of financial products targeting consumers, but we are still very focused in engagement and increasing our addressable market.
The 1.5%, again, is just considering the payment business that we have. And we're still not trying to, let's say, put in metrics above additional revenue lines that we have for the product. We're much more, let's say, concentrated in creating more engagement in our
Regarding your question about instant payments, What we've seen from Central Banking from the regulator in the past year is that they foster competition, right? They try to do the right environment for companies to approach the market and be competitive. So by saying that, I'm trying to say that by having the infrastructure for instantaneous, we see that there is an opportunity because we already have 4.4000000 merchants. We have also millions of consumers. It's still too early to comment about the economics of that because some of the transactions might have high skilled fees, some of the transactions do not have.
So it's hard to see how it's going to work, how it's going to be the economics so on. But we see as an opportunity, everything that is related to electronic payments, we see as an opportunity. Everything that is different than cash, it's good news for us.
Next question from Josh Beck, KeyBanc.
Thank you for taking the question. The push into consumer banking seems very interesting to me. I'm just wondering how long until this could be a material contributor to revenue, say 5% of revenue? Is this 5 years down the road, a couple of years down the road, any way to help us think through that?
Hi, Josh. As it is right now, we are what we are committed here is not with a revenue number, but with engagement with our client base.
So what do we want with
this new product feature with our digital account?
We need to
first reach the consumer market, but first, we were basically on the merchant side. Some of our merchants were also individual entrepreneurs. But by launching this product, what we really want to accomplish here is to increase the switching cost of our ecosystem and create a higher engagement in our ecosystem and also attract the consumer side that we did not have before. So that's the main focus. We are not doing anything to commit to a specific number right now.
And for us, what we want to do here is to create a new product line that brings EPS accretion. I think that's the most important thing. Even when we are talking about additional merchants, additional TPV, our main focus here is always EPS accretion.
That makes sense. The other thing that I wanted to ask is, as you do have a larger consumer offering, does this mean you need to spend more on sales and marketing to reach more true consumers? Or does it not really change your plans much regarding sales and marketing spend?
Josh, Andre speaking. Let's say that for sure, we are investing more in marketing and sales in the coming quarters due to the campaign that we're promoting tonight, starting tonight, but in line to our expectations, in line with our budget, in line with our commitment to deliver the top of the guidance, okay?
Next question comes from Otavio Tanganelli, Credit Suisse.
Hi. Thanks for taking I have only one question regarding the churn rates. We have seen the increasing subsidies on the sales of the POS terminals. So the gross margin is now lower than it was in the previous quarter. So do you see an impact on churn regarding that?
Do you see merchants, since they have a lower risk by buying the POS, do you see churn rates increasing because of that? Thank you.
Hi, Salvio. We are seeing churn really, really stable. No material difference from what we have seen last year. And just to mention here that we as we don't steal clients from large incumbents in the market as we create a new market in Brazil with our features, with our ecosystem, We also do not lose clients to competition. So our churn is really related to business mortality, and that has been pretty much stable from what we have seen last year.
Just one additional commentary here, Thiago, from Andres. Let's say that even promoting discounts, we're still bringing the same type of merchant. We haven't seen any type of change in the profile of the merchant that is working with PAGS, okay? Still, merchants are doing a very decent cohort, the same lifetime value. So we're still very confident about promoting our discounts and continue to bring a very good quality of merchants.
Next question comes from Mea Agrawala, HSBC.
Hi. Thank you for taking my question and congratulations on the good results. I have two questions. First, you have a very detailed slide on the products that you have to offer for both merchants as well as individual customers. How are you promoting your products for individual consumers to allure them to use your app?
Would you be giving some kind of discounts for them to have a PagBank account? Or is this any other offer that you have in mind which you would be advertising? Second is, it appears like you gradually want to move up market. You are building your software profiles as well. Would your strategy be somewhat different versus what you have currently for the micro merchant segment?
How do you view this going slightly upmarket from where you are?
Neha, thanks for your question. Enjoy speaking again. We're still targeting, let's say, the same products. We are offering our free digital account strategy. Remember that the profile of the consumer that we're targeting remains the underbanked.
In Brazil, we have probably 30% of the society without a bank account.
That's our focus, probably more
than 60,000,000 Brazilians in the country, okay? Offering the 3 digital accounts with the basic functionalities like bill payment, mobile top up, prepaid card, the cash card that we just launched. Just like Ricardo said, at least for now, let's say that lending and the credit card that we're still piloting, we're going to target our own merchants where we have the transactions, where we have the track record, where we have the, let's say, the TPV history to be more comfortable to offer it, okay? So the strategy is going to be more targeted now with our campaigns. Let's say that, at the end of the day, many of our merchants are already consumers.
Remember that. We have the dog walker, the personal trainer, the heater teacher. So it's a matter of, let's say, targeting with the new campaigns, with marketing and, for sure, improving the products and the services that we offer. The cash card is a good opportunity. It's a new product that we're launching that could be easily adopted by the important fashion method that is the portability of the salary.
So I believe that with these 2 products, we are ready to start capturing more consumers to our base. But there is no additional cost. There is no different product. Let's say that we have a product ready for merchants and consumers. And remembering that none of the merchants that we operate today, they have this hybrid, let's say, mix where they are both merchants and consumers.
Hello?
Next question.
Next question comes from James Jerrzyman with KeyArena.
Hi, thank you and congratulations on the strong results. It's Jamie at Susquehanna. I want to ask about prepayment and settlement related fees. It's obviously been quite topical.
Are you seeing any change in behavior? And do you see
the need to adjust yours? Or do you think you're just at a different end of the market?
No. We are not seeing anything different from what we have seen before. If you look at the long tail market, even us or the incumbents, they were offering the DZ plus 1 and us now with the advantage of offering the instant payment, that is a great functionality to our customer base without charging anything in addition to what we charged for the D plus 1. It's really it's pretty much in our market, it has been pretty much the same. You can see by our volumes, by our net take rate, by the average spending per merchant.
Okay. And then if I could just follow-up, we're halfway through almost the Q2 or tomorrow will be halfway through the Q2. Other payment companies have commented about the Q2, maybe not there, but here. So Visa had observations, Mastercard had observations as they had seen it, including some about Brazil actually. I was just wondering, do you have any callouts
yet on the
Q2? Anything that we should be aware of or trends to date? That would be helpful in getting oriented as to where we are now?
James, there is nothing different in our on what's happening compared to what we have in our business plan. I mean, it's really we continue to see our plan for the year being achieved. So anything different from what we have seen in Q1.
This concludes today's question and answer session. I would like to invite Mr. Ricardo Dutra to proceed with his closing remarks.
I'd like to say thank you all very much for your time, for investing your time in this call. I'll see you next quarter. Thank you very much. Have a great night. Take care.
That does conclude the PagSeguro's audio conference for today. Thank you very much.