Ricardo Dutra - Chief Executive Officer Eduardo Alcaro - Chief Financial Officer André Cazotto - Head, Investor Relations.

Bryan Keane - Deutsche Bank Carlos Macedo - Goldman Sachs Alexandre Spada - Itaú BBA Josh Beck - KeyBanc Rafael Frade - Bradesco James Friedman - SIG Brent Avon - Bank of America/Merrill Lynch Domingos Falavigna - JPMorgan Felipe Salomao - Citibank.

Hello, everyone and thank you for waiting. Welcome to PagSeguro’s Third Quarter 2018 Results Conference Call. This event is being recorded and all participants will be in listen-only during the company’s presentation. After PagSeguro’s remarks, there will be a question-and-answer session.

[Operator Instructions] This event is also being broadcast live via webcast and maybe 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 this presentation or mentioned in this conference call are based on currently available information and PagSeguro’s current assumptions, expectations and projections about future events.

While PagSeguro believes that their assumptions, expectations and projections are reasonable in view of currently available information, you are cautioned not to place undue reliance on these forward-looking statements.

Actual results may differ materially from those included in PagSeguro’s presentation or discussed on this conference call for a variety of reasons, including those described in the forward-looking statements in the Risk Factors section of PagSeguro’s registration statement on Form F-1 and other filings with the Securities and Exchange Commission, which are available on PagSeguro’s Investor Relations website.

Finally, I would like to remind you that during this conference call, the company may discuss some non-GAAP measures. For more details, the foregoing non-GAAP measures and 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 of PagSeguro. Mr. Dutra, you may begin your presentation..

Hello, everyone and welcome to our third quarter results conference call. Today, I have here with me Eduardo Alcaro, our CFO and André Cazotto, our Head of Investor Relations. Before we go through the operational and financial metrics, we want to reiterate our confidence in our strategy.

Being independent company allows us to think exclusively on our clients’ financial needs, delivering growth and profitability simultaneously by offering a unique ecosystem through our digital accounts. We expect to deliver in 2019 some critical new enhancements to take over to seek into the next level.

Before you ask, we cannot disclose details at this point due to competition that is systematically trying to copy us. However, we will provide you more color in the 2019 quarterly calls. Being the first mover in mobile-first, with a non-replicable online distribution through UOL brings a natural advantage to PagSeguro.

We operate in a new and massive market with the ability to launch and cross-sell additional services through our digital accounts, which is a key piece of our long-term strategy.

PagSeguro proves that operating and winning in long-tail requires an online and mobile approach that is totally different from the traditional acquiring business model in other new competitors that is attracted to the markets.

We operate in a brand new market 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.

On Slide 3, we start with our total payment volume that reached BRL16.9 billion in third quarter, an increase of BRL9.6 billion, up 90% year-over-year and BRL3.4 billion or 20% quarter-over-quarter accelerating when compared to the BRL2.5 billion or 17% growth observed in Q2.

This growth is the result of a greater penetration of our ecosystem in long-tail combined with the trend of cash to classic switch relatively at the beginning of our merchant base and we do also have room to grow in Brazil and also new innovative products and solutions offered to our clients.

The net take rate excluding sales of devices ended the third quarter at 4.9% representing a small contraction quarter-over-quarter mainly related to the higher penetration of better transactions that went up 110 basis points and a slightly lower penetration of credit card transaction installments in the quarter.

It is important to highlight that although gross take rates went down a few basis points quarter-over-quarter, the net take rate, which is the take rate net from transactions costs mainly interchange in cards and fees reached 3.3% in 3Q 2018 is stable throughout the year.

The maintenance of our net take rate enable our net income margin expansion, reaching 26% in the third quarter and Eduardo Alcaro, our CFO will give more details later. On the chart below, we see the number of active merchants.

Just to remember the criteria used internally, active merchants are those who made at least one single transaction in the last 12 months. We ended the third quarter with 3.8 million active merchants, adding almost 1.4 million new merchants in 1 year representing an increase of 56% year-over-year.

Quarter-over-quarter, we added 323,000 new merchants within the range that we provided in the last conference call. Compared to Q2 2018, we had a decrease mainly because Q2 was a very strong quarter, where we had the launch of Minizinha Chip and MDR campaign.

In addition, the third quarter usually has a low seasonality than the second quarter given the winter vacations in July. We are confident our growth will keep the same pace of more than 300,000 net adds in the following quarters. For instance, in terms of sales of devices, November would be the best month of the year.

In the next chart, we have the evolution of our average spending promotions that reached BRL5,500 in Q3, a growth of 70% year-over-year and 8% quarter-over-quarter, also accelerating when compared to the growth that we had in Q2.

This is explained by the higher adoption growth of payments in our merchant base, which is an expected trend with higher engagement in our ecosystem being converted in more transactions and total payment volume. Remember, the majority of our merchants have never expected cards before joining PagSeguro.

Now I would like to pass it over to our CFO, Eduardo Alcaro..

Thanks, Ricardo and hello everyone. Before I start, I would like to mention that in the third quarter of 2018, we had a total of BRL58.9 million of non-GAAP items mainly related to our stock-based long-term incentive plan. Let me remind you these items.

First, stock-based compensation expense and related employer payroll taxes in the amount of BRL115.5 million. From the BRL115.5 million, BRL33.7 million is the recurrent quarterly provision and BRL81.8 million is non-recurring.

BRL59.4 million of the non-recurring amount of BRL81.8 million is related to the vesting of a relevant shared rent in August 2018 and the recognition of the shares at market price versus the original rent price at the IPO in accordance with IFRS 2. At the IPO dates, the share price was $21.5 at the exchange rate of the U.S.

dollar against the Brazilian real ended at 3.14. On the other hand, when the shares were delivered in August 2018 to PagSeguro employees, the share price was close to $30 and the exchange rate of the U.S. dollar against the Brazilian real was above 4.1. The same adjustment can be expected for August 2019 with a similar exchange rate in stock price.

The remaining non-recurring amount of BRL22.4 million is related to new hires in addition to the share-based program. No material non-recurring adjustments related to the stock-based compensation are expected for Q4 2018.

We exclude stock-based compensation expenses from our non-GAAP measures, because they are non-cash expenses and they depend on our stock price and exchange rate from the U.S. dollars into Brazilian reais at the time of the vesting of the equity awards. The related employer payroll taxes depend on our stock price and the exchange rate from U.S.

dollar into Brazilian reais at the time of the exercise and the vesting date of the equity awards over which, management has no control and does not believe these expenses correlate to the operation of our business. Second, financial income in the amount of BRL14.3 million related to the impact of exchange rate variation on the conversion from U.S.

dollars into Brazilian reais of proceeds from our sale of new shares in our June 2018 follow-on offering. We exclude these foreign exchange variations from our non-GAAP measures primarily because it is a non-recurring income. Third, tax related to the remittance of follow-on primary proceeds, IOF tax to Brazil in the amount of BRL4.1 million.

We exclude this IOF tax from our non-GAAP measures, because it is a one-time and non-recurring expense. And the last one, income tax on the non-GAAP adjustments in the amount of BRL46.5 million.

For more details, this 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 the webcast presentation. Now, moving to the Slide #4, our non-GAAP total net revenue reached BRL1.12 billion in the third quarter, up 64% year-over-year.

Moving to the top right, we have our main revenue streams composed by transaction services or mainly NDR collected from merchants, financial income from the prepayments and hardware sales.

In the third quarter of 2018, transaction and services represented 65%; financial income, 36%; and hardware sales, only 9% over total net revenue that continued to trend down and in relative terms going forward should reach low single-digits.

On the other hand, you can note that our revenues from transaction activities and other services grew 5 percentage points compared to Q3 2017. These demonstrate the strength of our 3.8 million active merchant base delivering high double-digit net revenue growth rates.

On the two charts below, we present our total expense figures and the beauty of our lean cost structure allowing us to have a broad and scalable business model. Our non-GAAP total costs and expenses decreased 1 percentage point ending the third quarter at 3.4% over the total TPV.

Related to non-GAAP admin expenses over total TPV which excludes stock-based compensation expenses reached 0.3%, a decrease of 0.1 percentage points year-over-year.

Regarding our cash flow, you will note that in the line changes in receivables subject through early payments that we repaid with our IPO primary share proceeds in the first 9 months of 2018 approximately BRL1.7 billion in receivables which we obtained early payments with the issuing banks as of December 31, 2017.

We have only BRL4 million left to repay in Q4 ‘18 and beginning in 2019, this line item will no longer impact our cash flow.

Adding back, the impact of the repayment of the notes receivables for which we received early payment from issuing banks as of December 31, 2017 PAGS had BRL472 million in negative operating cash flow driven by the working capital growth partially offset by the PAGS cash generation.

I just wanted to remind you that this is not a cash burn, but an investment in working capital. PAGS ended the quarter with receivables from credit card insurers that are very liquid and no credit risk in the amount of BRL7.5 billion and payables to merchants of BRL3.7 billion, a net working capital of BRL3.8 billion plus BRL2.5 billion in cash.

On the next slide, we show our non-GAAP net income growth. In the third quarter, we reached BRL290 million, an increase of BRL143 million and up 97% year-over-year. The non-GAAP net margin reached 26%, an increase of 4.4 percentage points year-over-year. This shows the unique profile of PAGS delivering growth and profitability.

In the quarter-over-quarter comparison, our non-GAAP net income grew 20%, accelerating when we compare it to the 14% growth in Q2, while the non-GAAP net margin expanded 1 percentage points. Now, I would like to hand over back to Ricardo who will comment on new products recently launched..

Thank you, Eduardo. On the next slide, we introduced our Moderninha Smart our smart POS. Moderninha Smart offers a full integration of hardware, PagSeguro apps in its fast and secure payment network.

Now combining the Android operational system with all the high-end functionality such as WiFi, Bluetooth and 4G connections, as well NFC and QR code Acceptance, Moderninha Smart offers a robust managed payment experience to any kind of business. This product was built for simplicity and ease of use.

It requires no setup and it comes with features like product catalog, inventory management, installment calculator, bank slips issuance and payment links. The integration of software and hardware helps merchants to be more productive, serve clients better and manage their businesses.

PagSeguro point-of-sale software also gives merchants the ability to run their business efficiently by managing their PagSeguro accounts, including bill payment, mobile top-up, balance transfer, among other functionalities available in our ecosystem. It costs 12 installments of BRL69.90 around $19 per installment or BRL839 and it has 5-year warranty.

On Slide 7, we have netted our portfolio functionality already available to our merchants. PagSeguro has been building a unique and world class payment ecosystem focusing to deliver a frictionless online and physical payments experience. Recently, we launched our lending products, PAGS Capital.

We just started and issued personal model with a very small pool of clients, manageable according to some categories such as account history, CPG, payment frequency and so on. On average, PAGS’ charge rates almost 3x lower than banks.

We are seeing against that and for now, this brought up this margin through our financial results and we expect it to increase stickiness in the loyalty of our merchants. In November, we also complemented our cash-in and cash-out process through the digital accounts allowing instant transfers from and for any bank.

On Slide 8, we show you the evolution of our bill payment transactions, which grew 288% quarter-over-quarter. We believe engagement is key to the success of our ecosystem. As we promote higher stickiness through the adoption of additional products and features, more transactions and growth are expected.

On the next slide, we can see the strength of our brand.

PagSeguro is the first mover in this market and in fact, it can access UOL audience, the third-largest online audience in Brazil, only behind Google and Facebook with more than 75% internet reach to promote our products and solutions in the long-tail market to help PagSeguro to reach unique brand recognition.

In 2018, according to Google Trends, we have 4x more searches than the second player. PagSeguro reached a level of brand awareness where the business has a word-of-mouth effect and consequently, we have lower acquisition cost than our competitors.

Finally, on the last slide, it is important to highlight the size of our total addressable markets and the huge opportunity that PagSeguro has ahead. Considering our last 12 month total payment volume, which is BRL65 billion, we have only 4% of our addressable market and we still have a long way to go.

We have been facing sustainable TPV growth in our platform. For instance, we had our historical total payment volume peak last August, one day before Father’s Day in Brazil. On September, we surpassed this record, then had a new TPV record in October and again, the historical new record in November.

Also, we will just say that from Q1 to Q3 2017, our total payment volume was BRL24.8 billion and in Q3 2018, our TPV was BRL51.5 billion. We more than doubled our TPV year-over-year, which means we added BRL26.6 billion this year.

Being the first mover, having a fully vertical and a low cost ecosystem with 3.8 million active merchants, mobile-first, strong brand, focus on user experience, the best rated financial services app on Google and Apple stores and replicable online distribution through UOL brings the natural advantage and leadership in the long-tail market.

In Q4, we continue to see a higher adoption of our ecosystem translating in healthy TPV growth. Net additions are growing at the same pace as observed in the average of the past quarters while take rates despite possible mixed effects remained at the same previous levels as well.

We are confident our business will continue to deliver long-term shareholder value. Now, we finished our presentation. We may start the Q&A session. Operator, please..

[Operator Instructions] Our first question comes from Bryan Keane, Deutsche Bank..

Hi, guys. Two questions. I guess on the net new merchant adds, it was towards a little bit the lower end of your guidance that you gave. Anything material you are seeing out of competition? It did seem like you had record sales in the month of November. So I am just trying to reconcile that.

And then my second question is on the government’s push for instant payments and QR Codes, what would be an impact to your model if you saw more adoption towards instant payments in Brazil? Thanks..

Hi, Bryan. This is Ricardo. Thank you very much for the question. As we said during the call, the Q3 has more seasonality when compared with Q2. Q2 was a very strong quarter. We are not seeing huge deal of acceleration in our business. It’s the opposite. We are seeing this is growing. So, it is within the range that we gave before the 323.

Regarding the government and pushback and the push regarding QR Code instant payments, it is too early to forecast any potential impact. The discussion is still in the early stages as the market participants. From our side, regardless of regulation, we are developing our own QR Code solutions.

We are in favor of new payment methods believing that it will complement our portfolio. So, at the end of the day, it’s still the very beginning of the discussion and there is nothing definite, but we are developing our own QR Code solution meanwhile..

Bryan, since we are speaking if you just allow me one specific comment here, it’s very important to mention that we are in favor about new payment methods.

We do believe that it could help in terms of migrating more cash transactions to the 20 payments in the Brazilian system and that’s exactly what PagSeguro has intended to do, to be more disruptive and help to bring more cash transactions and instant payment and QR Code is a good way to do it..

Okay, thank you..

The next question comes from Carlos Macedo, Goldman Sachs..

Hey, Dutra, Alcado, good evening. Couple of questions here. First, I want to talk a little about the equipment sales that you guys have. I have been monitoring the prices and obviously there has been a lot of competition and the Minizinha now is going for BRL5 per month as competition has pushed it down. Cielo with Stelo now is at BRL2 per month.

I am not sure if you are going to match or not, but looking at the numbers that you reported on a gross margin basis, it’s already minus BRL53 million in the third quarter for equipment sales and I know equipment sales aren’t the core business, it’s just a way you get there, but that number is up from 37 in the second quarter.

I am just wondering if you believe that with competition going strongly still on that level that number can increase as you sell more terminals at a bigger loss going forward. Second question, on the marketing side, marketing expenses came down.

What’s the thinking here? I mean, obviously, competition is not – is very strong as we mentioned before and you count on the word-of-mouth and advertising to get your brand out there. Is this just a one quarter thing or should we be factoring probably weaker or lower advertising going forward? Thanks..

Hi, Carlos, this is Ricardo. Thank you for the question. Well, let’s go to the first part regarding the sales of the equipment. We are the leader in the long-tail market. We are not leading the prices down. We are evaluating competition pretty close.

As we have the largest base, we have today the lowest acquisition cost, so it is important for us to win the merchants, because when we win merchants, we are going to bring the base to offer additional services and so on. So, we are looking for lifetime value. If we need to, let’s say, subsidize part of the equipment, we will do it.

We know that the competition is doing as you said of almost BRL2. I don’t know if they are going to keep it, but we will try to keep making our calculations not to make anything very, let’s say, aggressive to hurt our P&L. In the Q4, I would say that you will not see higher number in terms of subsidies, although we are selling a lot.

And at the end of the day, what I am trying to say is we will keep evaluating the competition pretty close. For us, the acquisition cost is much cheaper than to them, but we are not leading the prices down in terms of equipment. We are just looking at the competition. If they go down we can evaluate if we are going to match or not..

And Carlos, this is Alcaro speaking. I think one point that I need to factor in is the fact that our net income margin had an expansion in Q3 compared to Q2. So even with this higher investment in the subsidies to the devices, we are able to expand our margins and grow our net income margin by a little bit more than 1% quarter-over-quarter.

So, our lean structure model in terms of expenses allows us to take those price subsidies and did not hit our margins as you can see in our numbers in Q3..

Just one additional comment here, Carlos, Dutra speaking, it’s very important to mention that in the long-tail market, our merchants were sensitive to fixed cost, so the price of the hardware matters more.

As you can see, the company has been able to keep the take rate stable despite any kind of mix effect like we had in the quarter with more debit card transactions.

And we know that, combined with all the strengths that we have in the business like the strong brand and UOL distribution, the POS is a good way to capture its clients and bring to our ecosystem thinking about the long value of forward merchant going forward..

To the second part of our question regarding marketing, we are evaluating marketing every month. What happened in Q3, this is small decrease, it doesn’t mean that we are going to increase forever, but we are just evaluating to have the best mix in terms of marketing, online, offline and equipment subsidies.

At the end of the day, we are looking for the acquisition cost. If we see there is opportunity to increase the market, we always think we should keep it at the same level as we do the same, so it’s part of – it’s very dynamic, but there is no plan for the future to go down with the marketing investment..

Okay. So just to follow up then, I am not asking for guidance, just the rule of thumb or some kind of direction. It’s likely that marketing expenses will move together with TPV to some degree.

Is that a good way to look at it?.

I don’t think so, Carlos. I guess the marketing – if you compare to TPV, marketing is going down. I guess it’s already top of my head right, 0.46%. So TPV is going faster than the marketing investment. I guess that’s the answer for your question..

Okay, thank you..

Thank you..

The next question comes from Alexandre Spada, Itaú BBA..

Hi, gentlemen. Good evening. Thanks for the opportunity to make questions. I have one actually.

Can you comment on the implications that the reduction in debit interchange, will you have on PagSeguro from Q4 onwards? Are you passing through the benefit to the merchants or will their prices be kept unchanged starting October 1 were kept unchanged starting October?.

Alexandre, this is Ricardo. Thank you for your question. As you know the cap for interchange in debit transactions is starting October 1. We started a promotion in September only for new merchants for the MDR for debit. For these merchants, we are passing through, but for all the bases that we have we are keeping the same level.

So, we are going to have positive impact in our P&L in Q4, because the largest part of our base is still paying the same rate, same MDR that we charged them before. For the new merchants, we made this promotion. So part of that – answer your question, a small part of that, we are passing through, but the largest part is we kept in the same level.

So we are going to have a positive impact in P&L..

Okay.

And a quick follow-up, is that promotion temporary or is that actually not a promotion, it’s just a new pricing scheme?.

We have this promotion. It is temporary because it’s for the first year..

Okay..

Right, so 1 year from now they are going to start paying the full MDR..

Okay.

So if that’s the case, there will be no pass-through at the end of the day?.

That’s what we expect, but let’s see. What happens overseas is that in the medium term, this gap between the MDRs before and MDRs after the cap were passing through the merchants. We don’t know how fast its going to happen in Brazil, but in the medium-term, it’s going to happen at some point..

Understood. Thank you very much..

Thank you..

Our next question comes from Josh Beck, KeyBanc..

Hi, there. Thank you.

I wanted to ask about the other side of acquisition costs and is there any color you could provide on how long it takes you to recover those customer acquisition products, because I do think the economics that you have are quite favorable? So is there any color you could provide in that area?.

Hi, Josh. Thank you for the question. It’s hard to make this calculation, because it depends on the device he acquires, depends on the device that has a better payback, depending on the device who has a worse payback, depending on the subsidies that we do, it depends on many factors, but the payback, if you do the average is not that long.

I guess you can make the math using our P&L numbers. You can have a better proxy of what is our payback, because it has our TPV promotion, the take rate and the net MDR, so you can make this math, but overall, the average you can do it through the P&L, but it depends on the device that you are selling for the merchant.

I can assure you that we are doing these calculations very often and then we are looking for lifetime value. As I said before we have in mind to win the merchants, because once you have the base, there are many other services that we can offer to them and then we can monetize in the future..

Okay, very helpful. And I also wanted to ask, have you seen any changes in the churn of your install dates? So that’s one part.

And then, secondarily, the margin expansion when you look at the pre-tax margins, has been quite positive, is that something that you expect to continue?.

In fact, our churn is going down. I know the base is – once the base – the number of merchants to go up, you have a largest base to, let’s say, to dilute the churn, but when you compare the churn that we have, let’s say, this year with previous year, it is coming down. So we are having a very healthy base of merchants, very healthy TPV.

There are some merchants that decided not to use our service and then they came back, but at the end of the day, if you look at the churn this year, it’s smaller than last year, for instance.

And in terms of margins, I mean, it’s hard to predict this every quarter we are going to have this kind of margin expansion, but what you need to factor in is we operate in a volume-driven business. As we bring more TPV obviously, we dilute admin costs, fixed costs things like that.

But you can see, for example, in this quarter, we have to invest more for example in the price of the devices and even investing more, we have a margin expansion. So it’s something that is very hard to predict going forward, but we don’t see margin contractions, for example..

Okay, thank you. Very helpful..

The next question comes from Rafael Frade, Bradesco..

Hi, good afternoon everyone. So I have two questions. The first one is this related to the POS price, the follow-up from a fellow question.

A few weeks ago, you are making some promotions related to the Black Friday, but you are keeping those promotions, so I would like to understand if it’s something that we should come see the previous price in coming weeks or it’s something that probably it will be more permanent, those new levels of pricing to us? The second question is related to your financial expense and getting in some hard times to ripple through it here.

You had a strong growth in TPV and consequently on the receivables, but I would expect your financial expenses to increase to funding those prepayment of receivables, but it all seems to be the case, so if you could help me to understand how should we expect this line to evolve? Thank you..

Just to understand, you are talking about financial income or financial expense?.

Financial expense..

Well, financial expense should trend to zero, because we are using the IPO proceeds to fund the prepayment business. So if you look at the financial expenses line, it’s trending to zero compared to last year and I will let Ricardo answer the first question..

Yes. Regarding POS prices, as I said, we are looking at the market pretty closely. We started this promotion in November. We are looking for the demand. We are evaluating investing in marketing and all of these variables to see what is the acquisition costs for a merchant. So we keep thinking that it’s reasonable to keep these prices, we will do it.

Our plan was to come back for the regional price and that’s what we are evaluating, but it’s hard to give you a final answer like we will increase the price or keep the same because we are evaluating and as you know, it’s very dynamic this price for POS in Brazil at this point..

Right, perfect. Just a follow-up on the financial expense, just to understand maybe I am doing something wrong here, so there is a gap between the receivables and payables of more or less BRL4 billion.

You have around BRL2.5 billion in cash, so I understand that you fund part of this with this, but still you would won a little more than BRL1 billion in mismatch between the receivables and payables.

I understand that this would be prepaid with banks, but maybe you have another working capital here that I am not seeing, just to understand?.

We are doing now all the prepayment with our cash. So, if you look at the growth in our receivables being in Q2 compared to Q3, we had little bit over – in the first 9 months of the year, we had like BRL2.4 billion in receivables and we repaid about BRL1.7 billion from receivables that we had discounted last year.

So, at the end of the day, it’s the combination of both. We are not discounting receivables with issuing banks anymore, so that’s why you don’t see the financial expenses lines hitting our P&L anymore..

Okay, that’s perfect. Thank you..

Thank you..

The next question comes from James Friedman, SIG..

Hi, good evening. It’s Jamie at Susquehanna. A couple of questions. I want to ask about your Q4 expectation. I realize you don’t give the explicit guidance, but you had the 13th month phenomenon in the Q4. My understanding is that, that came after Black Friday and Cyber Monday.

Is there any reason to think that the sequential growth in the Q4 relative to the Q3 would be different in 2018 say than it was in 2017?.

Hi, James. Thank you for the questions. We are going to talk about guidance later on in this call. Regarding Q4 and Q3, I don’t have here in the top of my mind why would be this change. I know in 2017 we had a very strong Q4 when compared with the Q2, but as I said before in the call, we are having this total payment volume records month after month.

We grew 20% in Q3 compared to Q2. We have seen a very strong Q4 quarter, but I don’t have here in the top of my mind to say if it’s going to be stronger or the same level of 2017. I would say it was a very healthy TPV. We are not seeing changes in the variables that could hurt our P&L..

Okay. Thank you, Ricardo. I also want to ask you about this Slide 7. It’s the one about the digital ecosystem.

Over time, do you have any objective or any commentary about how many products per merchant you anticipate or even if you have something now like how many products like if you look at this Slide 7, this digital ecosystem, this is the one with the prepaid and the P2P and the e-commerce and the wallet, how many typically of these are your merchants purchasing?.

James, we do not disclose the exact number, but I would say there are some products that are having more good relation as we showed you in the presentation like bill payments. That’s something that we knew that our merchants were waiting for, because we have a lot of people in Brazil that are under-serviced in terms of financial services.

So thousands of our merchants didn’t have bank accounts and they need to pay bills, they need to top-up mobile phones. So those are the services that have more engagement, but we are trying and we are testing all these products.

I would say lending as I have said before, we are in baby steps, but there is also lot of demand, because people are underserved in Brazil and the banks charge very high rates, but we unfortunately do not disclose the exact number because of competition and all the dynamics that you have in this market right now..

Okay. And if I could just ask one more about your previous answer on interchange, I just want to make sure we get the facts right. So I apologize if this is wrong, but my understanding is interchange was reduced by policy by the Central Bank in October, is that right? Debit interchange.

And then the follow-up to that is, how much – remind us, how much of your TPV is debit? I think you disclosed that in the S1, but if you have that, that would be helpful? Thank you..

Well, I will give you – what he had in Brazil that interchange on average before October 1 was around 80 basis points, 80, right. The central bank decided to make this new regulation where the goal is to bring this average down to 50 basis points.

So, there is a 30 basis point gap between that interchange before October 1 when compared to what Central Bank is trying to achieve. Our TPV, although we have only 5% of the market share in Brazil, our TPV reflects the industry as a whole. The industry as a whole has around 40% of the TPV debit and we have the same level, so you can use 40%..

Got it. Thank you very much..

Thank you..

Our next question comes from Jason Kupferberg, Bank of America/Merrill Lynch..

Hi, this is actually Brent Avon on for Jason. Thanks for taking the question.

Yes, it was encouraging to hear you guys say that you think you could add at least 300,000 new merchants sequentially in 4Q, but as we sort of look ahead, the environment is getting more competitive, but you guys have suggested you have that first-movers advantage and still under-penetrated market.

So I mean is there any reason why we couldn’t see that pace of merchant addition continue beyond just fourth quarter and into 2019?.

Jason, our plan and our expectations and according to our business plan is to keep the same pace. Q4 is going to be strong. You are right to say there is more competition, but we have the first-mover advantage. We are focused on the long-tail market.

Although some of the incumbents say they are competing with us, they are serving merchants that have a higher TPV or are larger than our long-tail merchants. So, our merchants are very concerned about fixed costs. We know how to do with them. We know how to deal with them. We know what works, what doesn’t work.

So we don’t see any reason for deceleration in short-term..

Great. No, that’s really helpful.

And then just shifting over to in capital allocation, you guys kind of discussed a lot of these new products you are rolling out, which are really interesting and helpful and you have talked about earlier in the year about wanting to ramp up investment spending, but you have also recently announced a share repurchase authorization.

I am just curious sort of where we are today, where your priorities are from a capital allocation standpoint? Thanks..

Talking about the share repurchase, you may remember that we announced just a few days that we were blacked out. So, we did not have time to do large share repurchases. So we did some, but very few. It’s still very small. In terms of capital allocation, our capital allocation continues to have the trend of growth.

So when you look at the rate that we did in our follow-on was to further develop our digital ecosystem and that’s how we are focused. I mean, we are putting growth as our first priority here..

Great, thank you..

Our next question comes from Domingos Falavigna, JPMorgan..

Thank you. Good night, gentlemen and thanks for taking the question. As we progress, we would expect some slowdown on net addition and I am just thinking that volumes can be very strong and in spite I should even say of slower net additions, which is indicative of good trends in same-store sales.

So I think it might be helpful to us to understand like when we look at your volume growth of 20% Q-on-Q or however you want to put it or 90% year-on-year, could you provide some idea on half of it or more than half is coming from the existing clients, 70% like a ballpark number and how much is coming from acquisition, because as those net additions, they shrink, we just want to be comfortable that the existing base will continue to grow? And then I will ask my second question..

Hi, Domingos. I would say it’s hard to make this calculation, because what is seen with our merchant base is that they usually start small and they keep growing.

So as we are adding new merchants to the base, it’s hard to stop the base and take this forward that we are saying today, the new merchants are having this behavior and the vast base are having different behavior, because what I am trying to say here is that as we are growing pretty fast and the merchants grow as well, because you have this trend of cash to plastic in Brazil, I don’t have this picture to give you right now, but I would say sure, its very under control.

When you look at the cohorts, they are growing. Although there is some churn of course because of the mortality of the merchants or whatever the reason, when we look at the cohorts, when you compare the same TPV or the cohorts TPV 1 year after they started we see a very healthy growth. So, that’s I guess this is the best thing I can give you..

Super clear. On the second question, the long-term incentive plan you explained, share prices were super high at 30 and FX also didn’t help and that sort of put some pressure on that, but then you broke down BRL33 million as what you consider recurring and basically the remaining portion BRL80 something million has been non-recurring.

I am just curious to understand, what criteria was used to consider to break this down as recurring and non-recurring.

So the point I am trying to get is next quarter, should we expect something around 30 something or why exactly did you separate those?.

The non-recurring, there are two different types of non-recurring. In this quarter, we classified the non-recurring the new adds to the program and new hires that we did that was about BRL20 million and the largest portion was this IFRS 2 effect that we had to recognize the market value of the shares.

So, for example, when we did our IPO, our IPO was at 21.5 and the FX rate was roughly at 3.14. When we deliver the share to the employees right now, the stock price is close to 30 and the FX was about 4.1. So we had to recognize this BRL59 million of non-recurring.

For Q4, we should expect pre-tax recurrence of 35 and we are not seeing any items in terms of the non-recurrent items..

Okay.

Just to be clear here, is it accurate if I say basically if share price had not moved, nor FX and you do not hire anyone, we would have been seeing something around BRL30, BRL35 million in this quarter?.

BRL35 million every quarter..

Perfect. Thank you so much..

Your next question comes from Felipe Salomao, Citibank..

Hi, everyone. Goodnight. Thanks for the opportunity to ask questions. I have two questions actually. The first one is about competition.

So we continue to see the correlation between discount rates and net adds or are you noticing that clients have become more sensitive to prices? And the reason I am asking this is because two of your competitors have prices significantly down in credit card, propping some up.

So I am just wondering what you guys think about it? And then I will ask my second question. Thank you..

Hi, Felipe. As I said before, our merchants, the long-tail merchants are more concerned about fixed costs. So that’s why we follow the competition pretty close in terms of devices prices. In terms of take rates, we don’t see that pressure. That’s why I say that the fact that we are born online, we built this ecosystem thinking about long-tail.

We are creating these new features like bill payments, mobile top up, prepaid card, lending now. We just launched the distant payments this week. So, we have a more complete ecosystem for these small merchants. We have a strong brand. As we showed in the presentation, 4x more Google searches than the second player.

So we don’t think that if we keep decreasing the price, we are going to sell that much more, so to say. So we are following the competition to the close. We are trying to find the optimal price in terms of devices in terms of take rates.

The fact that as I said before, we were born online, we distribute online, easy onboard and so that’s what makes us different, that’s why we can monetize. And again, just remember, in terms of acquisition cost that we have a strong brand, we have a lower acquisition cost when compared with our other players in the market.

So summarizing, we are finding this optimal price between device prices and MDRs..

Okay, that was clear. Thank you. So, my second question is actually a follow-up on Domingos’ question about stock option expenses. So I understand the accounting back of the market of the FX and the stock price and I understand that 4Q, I think should not bring any non-recurring, non-expected stock option expense.

And then I am just curious about what should we expect in terms of non-recurring stock option expenses for, let’s say, next year when probably another trench of stock options are going to be exercised and probably you guys will need to do the same mark-to-market on those stock option expenses, right.

So I just want to confirm if you continue to see the guidance of what we felt in the rising stock option expenses, Eduardo, as a good one or if we should also consider that some quarters are going to bring these non-recurring stock option expenses? That’s my second question..

Okay. You should consider BRL35 million pre-tax per quarter without any non-recurring items. If next year, for example, in August next year, the FX, for example, is again at 4.1 and the stock price is close to 30 you should expect an additional BRL59 million, BRL60 million that we posted this quarter..

Okay, 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..

Before closing this call, I will provide net income guidance for 2018 and 2019.

For 2018, we expect GAAP net income in Q4 in the range of BRL280 million to BRL290 million ending the fiscal year in the range of BRL888 million to BRL898 million, estimated non-GAAP net income in Q4 of 2018 in the range of BRL305 million to BRL315 million and in the fiscal year 2018 in the range of BRL1.05 billion to BRL1.06 billion.

For 2019, we expect GAAP net income in the fiscal year in the range of BRL1.182 billion to BRL1.36 billion, estimated non-GAAP net income in the fiscal year 2019 in the range of BRL1.32 billion to BRL1.5 billion.

It’s important to say the bottom of the guidance number BRL1.322 billion for our non-GAAP net income for 2019 is exactly the same number that we shared with research analysts before the IPO. We feel it’s possible, 13% upside in this figure, reaching BRL1.5 billion.

In our review delivering a 2019 full year net income higher than the number presented as the IPO not only shows our confidence in PagSeguro’s business model, but also the company’s ability to operate in a competitive market. We would like to thank you all for the time spent with our management team.

We would like to reinforce our commitment and focus on deliverance of the results. See you all in our next conference call. Thank you very much..

That does conclude the PagSeguro audio conference for today. Thank you very much for your participation. Have a good afternoon and thank you for using Chorus Call..