Hello, everyone and thank you for waiting. Welcome to PagSeguro’s Third Quarter 2019 Results Conference Call. This event is being recorded and all participants will be in a 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 the 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. Mr. Dutra, you may begin your presentation..

Hello, everyone and welcome to our third quarter results conference call. Tonight, I have here with me Eduardo Alcaro, our Chief Financial Officer and André Cazotto, our Head of Investor Relations.

Before we get started, we would like to reiterate that we continue to focus on the long-term market, take advantage of being the first mover, having a complete digital banking ecosystem, the most recognized brand and UOL online distribution, which in our view are unique and unreplicable strengths to operate in long-term markets.

Therefore, we have delivered this quarter in the same position performance we have been delivering since our IPO, healthy net adds growth and a 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 highlights the achievements of the quarter.

Starting with our results, non-GAAP 390 million reais, up 34% year-over-year with a net margin at 27%. Our adjusted net revenue reached $1.4 billion reais, up 42% year-over-year and our net take rate ended at 3.17%. Moving to our operating figures.

Our TPV reached 29.4 billion reais, up 45% year-over-year, closing the quarter with 5 million active merchants adding 1.2 million when compared to the third quarter 2018 and adding 305,000 quarter-over-quarter. These figures reinforce not only that we are in the right path with a broad ecosystem, but also our execution capabilities.

Now, moving to PagBank, we ended September with 1.9 million PagBank active users, which means the use of at least one additional product or feature beyond our products and services in the last twelve months.

In addition, we are seeing a strong adoption of PagBank 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 52% increase in TPV from prepaid cards year-over-year showing higher adoption of our clients in our issuances strategy.

Finally, PagSeguro has proven that operating and winning long tail requires an online and mobile approach that is totally different from the traditional operating 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 to 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 thing is 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 first mover.

They must have the first mover scale advantage. That is most well position a player once PAGS is local, PAGS is tech and PAGS is the first mover. On Slide 5, PAGS is leading the digital transformation and democratizing financial services.

Brazil already had a solid infrastructure with 3G networking, covering 98% of the Brazilian population and 97% already covered with 4G coverage. As smartphone penetration the company reached 71% of the Brazilian population.

When it comes to global internet figures, Brazil is one of the most relevant countries, being the fifth largest country in number of internet users, fourth in time spent in internet, and second time spent in social media.

And it comes to our relevant and unique position to capture this digital transformation, it is worth to remind that UOL had 88% internet audience coverage in the country with a 108 million unique monthly users as of August 2019.

Additionally, PAGS continues to have the largest brand reputation in the market having six times more Google searches than the second largest player. .

Considering the new initiatives already available for merchants and consumers, we estimate revenue to almost 14 times larger than payments market. According to IBG, and Brazilian Central Bank, there are 68 million unbanked people in Brazil.

Additionally, 28 million of the low income population do not have a bank account and 57% of the population are interested in adopting digital banks. Still 40% of the pay checks are paid in cash. 65% of the bill payments are also made in cash. And finally, 51% of the new bank accounts are opened just with the payroll checks.

On Slide 7, we show the leadership of PagBank as a digital bank in Brazil according to Google reports.

We ended the quarter with 62% of the total shares over digital bank, more than doubling our shares when we started our campaigns back in May 2019, showing the importance of our marketing efforts and the strong brand reputation already concluding the market.

Additionally, our APP was rated 4.80 stars in iOS and 4.6 stars in Android being the most reviewed and best rated APP among digital banks and payment bills. 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 the account research. Since the beginning of the operations in May 2018, we reached 60,000 lending contracts.

In Q3 2019, we had six times more contracts than what we had in Q1 2019 ending with a total credit portfolio, net of losses of a 196 million reais lowering our average tickets from 5.1000 reais in Q2 2019, to 3.3000 reais in Q3 2019 which shows our focus on the long-term market. So far, we have been careful with credits.

However, the initial results are encouraging as we had low levels of delinquency. Credit is also an important tool to create higher engagement with our merchant base and may generate additional revenues for the company in the future. Now, I would like to turn the conference to over to Eduardo..

Thanks, Ricardo and hello everyone. On the next slide, before I start, as I anticipated in the Q2 2019 earnings call, I would like to mention that in the third quarter of 2019, we had a total of 47.6 million reais of non-GAAP items related to our stock-based long-term incentive plan.

Given the vesting of the fourth grant of the initial stock-based plan and consequently the market-to-market adjustment of this fourth grant. For more details, the reconciliation of these non-GAAP financial measures is presented in the last page of this webcast presentation.

On the top left of slide 9, our Adjusted Net Revenue, the sum of net revenues from transactions and financial income from installments, excluding 16.9 million reais related to membership fees, previously booked as sales revenues and now accounted as transaction activities revenues reached 1,400 million reais in this quarter, up 42% year-over-year and 8% quarter-over-quarter.

Moving to the top right, we breakdown our revenue growth, with Transaction Activities and Other Services reaching 862 million reais and growing 44% year-over-year and our Financial Income revenue reaching 538 million reais and up 39% year-over-year.

On the chart below, we present our non-GAAP total costs and expenses that decreased 0.3 percentage points year-over-year, ending the second quarter at 3.1% over total TPV. Related to non-GAAP Administrative Expenses, over total TPV, reached 0.3%, flat when compared to one year ago. On the next slide, we show our non-GAAP Net Income growth.

In the third quarter, we reached 390 million reais, an increase of 100 million reais 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 by Payments, Software and Banking features.

You can see that there are four new features we launched after our first quarter earnings call and I will give more details about them in the next slides. On the superior block, there are features oriented to merchants. Instant payments 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 client’s loyalty and stickiness.

On Slide 12, we have the evolution of our average spending per merchant that reached 6,000 reais in Q3, a growth of 9% year-over-year.

Here it is important to recall that the nominal average spending per merchant continues to grow, and even accelerated sequentially reaching 179 reais per client versus 151 reais per client in the second quarter, and as time goes by, we start to face harder comps, since we already reached more than 5 million active merchants and more than R$ 100 billion in TPV in the last twelve months, which makes us comfortable to keep growing TPV with EPS accretion.

In the next chart, we have our number of Active merchants. We ended the third quarter reaching 5 million active merchants, adding 1.2 million new merchants in one year, representing an increase of more than 30% year-over-year. Quarter-over-quarter, we added 305,000 new merchants.

In Q4, we continue to see a similar pace of net adds growth, which makes us believe that we should be ahead of our 1 million net adds expectation that we provided in the beginning of the year. On the charts below, we see our TPV.

Our total payment volume reached 29.4 billion reais in the third quarter, an increase of 9 billion reais, up 45% year-over-year, and growing 10% quarter-over-quarter.

This growth is the result of a higher penetration of our ecosystem in the long tail combined with the trend of “cash to plastic” conversion with lots of room to grow in Brazil and having the upside of cross-selling additional products and services to our clients with our PagBank initiative.

The Net take rate, which is the blended take rate net from transaction costs such as interchange, processing and cards 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 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 experience 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 changes to improve our customer service and experience. Additionally, this model brings a different accounting treatment in our P&L. From now on, POS sales will be booked as membership fee and which will be recognized as a transaction service revenue instead of revenue from sales.

In this quarter and for the next two ones, we should have an impact in the revenue from sales line due to ICMS and PIS/COFINS taxes on the transfer of the inventory from Net + Phone which is a Pagseguro fully subsidiary that buys and sells POS devices to PagSeguro. The impact of ICMS, PIS and COFINS taxes in September 2019 was R$26.7 million.

Our cost of goods sold should also be reduced as we are now capitalizing our devices impacting depreciation over the next few years. The result of this change was a net income positive effect of 20 million reais in our Q3 2019.

Despite this operational change that brought a recurring positive impact in our Q3 results, it is also very important to remember that we intensified short-term investments in R&D, personnel and sales and marketing to scale new initiatives, spending an additional 110 million reais pre-tax in the last six months year-over-year, aligned with our long-term strategy to offer a unique financial ecosystem for both merchants and consumers in Brazil.

Now I would like to turn over to Ricardo who will talk about our engagement metrics and new products..

Thanks Eduardo. On slide 14, we present our next step of evolution and value generation. Since the official launch of PagBank in the second quarter, we intensified our investments in product development, people and marketing campaigns to promote this new initiative through our merchant base and consumers.

We observed a huge engagement since the very beginning, and we are in the way to build our network effect as time passes by. Currently on average, 39% of our clients use at least three products from our ecosystem. Our PagBank APP is opened 10 times a week by our active clients, which means higher engagement of our clients.

On slide 15, we show some of the most relevant engagement trends in our ecosystem. We believe engagement is one of the most relevant metrics to follow, once it will help the company to increase its switching cost and will enable future monetization and revenue diversification.

On the top of the chart, we have the number of cards issued, especially prepaid and cash cards that increased 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 the chart below, we see the number of bill payment transactions rose 72% quarter-over-quarter. Our mobile top up feature is also ramping up, growing almost 90% sequentially. Moving to new payment methods, our NFC transactions 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 delivered in the year. Being an independent company allows us to think exclusively on our clients’ financial needs, by delivering growth and profitability simultaneously and offering a unique ecosystem through our digital 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 we can manage delinquency accordingly. In the past two months, we added our Saving accounts and Super APP application and for payments, we launched our low-cost smart terminal version, called Moderninha X.

On Slide 17, we present our new banking products such as Savings Accounts, that yields more than Poupança, 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 in our Super App strategy and we should continue to expand our products and services.

On Slide 18, we show our new devices, starting with Moderninha X, the most advanced POS in the world, with apps and software included to help merchants to manage and grow their business, and it also comes with PagBank digital account and an international cash card for free.

Additionally, we also have Minizinha Chip 2, an upgraded version of our entry-level device with a promotional price of 12 installments of 8.90 reais or 106.80 reais. This device is NFC enabled and comes with the usual sim card, a larger screen, combined with a thinner hardware. It will offer a better experience for self-employed segment.

Moving to the next slide, we present our software solutions. Through M&A transactions, we now offer a wide range of software solutions to our clients. We ended Q3 2019 with 123,000 clients using our software products, up 45% quarter-over-quarter.

PAGS will continue to monitor possible M&A activities that can speed up the building of a more complete ecosystem. Now, I would like to turn the conference over Eduardo again..

On Slide 20 finally, which 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&A session. .

[Operator Instructions] Our first question comes from Craig Meurer , 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 are seeing through mid-November in terms of fourth quarter, in terms of both TPV and if net new merchant adds are running on pace with where they’ve been.

Secondly, more broadly, as we look forward, can you help us understand the monetization of the growth in usage of PagBank offerings? How we should think about that? I know you’ve given us the 30% of revenue in three to five years, but there is a lot of time before three years.

So, how we should think about that revenue ramp and try to translate it back to the engagement stats you are 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 seen in past quarters.

Regarding TPV, 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 result also a strong quarter in 2018. So, we are operating in a much larger scale. So, sometimes the percentage is not as high as it used to be, but the volumes are too pretty high.

In terms of PagBank, you are right, we said about this 30% between three to five years. We are at the very beginning. It is also – the revenues from PagBank are marginal or 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 gain some traction. People are used 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 more important we will give more color and more information about this vertical. I don’t know if Eduardo or Cazotto want to add something..

Thank you. .

Thank you. .

Next question comes from Bryan Keane, Deutsche Bank. .

Yes, hi guys. I wanted to ask on the TPV. Last quarter, it grew about 59% year-over-year and this quarter it 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 are yielding lower volumes or lower growth? Or was there something in the economy that happened that created a little bigger drop and I think most anticipated when you guys gave out your preliminary results. .

Hi, Bryan. Thank you for the question. We don’t see any change in terms of macroeconomics or trends that may affect our businesses. The environment in Brazil keeps the same. So we don’t see any big banks coming that is changing the dynamics of the business at this point. You are 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 term market.

We are comfortable adding this type of merchants, because we offered 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 merchant did not grow double-digits. So, just to put everyone in the same page that people that are in the call, we are not talking about decrease in TPV or decrease in 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, we are seeing strong growth in the Q4, but the percentage is not going to be the same that used to be in the past 70% and 59% or things like that, because we are working on a larger base.

Remember that, Q3 – Q2 we grew 10%, compared with Q1. Q3, we grew the same 10%. So, for us, we don’t see deceleration in that, because we are 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 PagBank and new services, I think that makes sense.

But what could we expect going forward as we look out into next year? I mean, should we expect the additional amount of investments, as well, to keep net income margin slightly growing or flat? Just trying to think about it. So we can get ready for 2020. Thanks. .

Hi, Bryan. We don’t expect to decelerate investment. We see great opportunity ahead of us in terms of banking in Brazil as we gave more information during the call, 68 million people in Brazil without a bank account. People that only open a bank account just to receive the payroll and other stuff.

So, we see a lot of opportunity, big opportunities 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, invest more in merchants, 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. Congratulations on the results. I have two questions. The first one is related to your churn rates.

Can you just give us some color of your churn rates? I am not looking for actual figures, but like just the trends? And second question is related also to PagBank, if you can talk about like how volumes are growing six times I think than what you were doing.

Can you give us a little bit more like a color on the average ticket size, interest rates and the NPLs that you are seeing so far?.

Hi, Mario. 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 month there is light lower churn when compared to last year. So, we don’t see big changes. I would say, that is stable at this time.

We’ve already PAGS Capital that is no question about the number of contracts. The average ticket that we had in Q2 was 5.1000 reais. Now, the average ticket is 3.3000 reais. 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 merchants that we like to work and 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 – 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 a 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 rate.

So, I mean, this is a complementary product to help our customers to grow their business with us. We assume not disclosing specific metrics on NPLs, because this is still something that is under construction. It’s our portfolio is still really small if you compare to our total receivables.

And we ended with like a 190 million reais if you compare that to our total receivables I mean, is roughly, I mean, around 2% of our total receivables. So, I mean, it’s a product that is encouraging. It’s getting a great acceptance.

We are lowering our average ticket by continuing to focus on the long tail market and all that we can tell you right now is that we are very, 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 search is in September. So that was the biggest of all of the challenger banks, if you will.

So, I am 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 fruits.

Those are the type of merchants and 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 have been collecting feedbacks since May.

We’ve made improvements in the products and yes, you are right, we are going to the consumers pretty fast. So that’s why you are viewing 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 and consumers in the base, because, the merchants are already working with those and the consumers are at this point knowing ourselves is trying, seeing what we offer, how we work and so on.

But, we believe in the future we are going to have millions of consumers using PagBank, 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 am imagining that’s 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 four companies. What do we do is to maintain the software and make them 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 we are moving up in the permits, if you look at this four softwares, only one of them is for larger merchants, which is the consolidation R2 Tech.

The other three software solutions, two of them are for small merchants and bill payments is focused much more in consumers. So, by investing in this software initiatives, it doesn’t mean that we are going after in the permit. That’s not the case. .

Okay. Thank you. .

Thank you. .

Next question comes from Tito Labarta, Goldman Sachs. .

Hi, thank you for the call. I also got a couple questions. I guess, following up just on the growth. I understand you expect it to decelerate from the growth rates you are posting in the past.

But in terms of going forward, I mean, is it like the 45% growth, decelerate further from there or should we think about like 10% growth a quarter that you mentioned. Is that sort of reasonable could maybe fourth quarter even be a bit higher, just because it’s seasonally stronger than that 10%.

So, just want to understand in terms of how much it could decelerate potentially? And then, a second question in terms of the competitive environment.

The take rate, I mean, it fell a little bit and still relatively stable, but just anything you are seeing in terms of competition increasing or coming in that could potentially add some 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 over passed 105 billion reais in the last 12 months. The additional absolute TPV figure in Q3 2019, compared to Q2 2019 has increased 222 million reais.

So our growth quarter-over-quarter remains 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 now our numbers, we’ve been adding the same 100,000 per month. October, we had the same figure. So, the same competition that used to have in the past is that what we are seeing at this point. No big changes, no news.

By the way, if you look some of the incumbents, when they talk about a 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 irrational prices again. So, summarizing we don’t see big changes in competitive environment so far. .

All right. Thank you. .

Thank you. .

Next question comes from Daniel Federle, Credit Suisse. .

Hi, good evening everyone.

My first question is to understand how should we see the credit initiatives 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 third quarter and if you have any estimates about the impacts of that in net income? Thank you.

.

Hi, Daniel. In terms of PAGS Capital, the lending business, we are still at the very beginning. We are growing gradually. We know that it’s a different business than acquiring, the risk is different. The way we should work is 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 growing 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 accounts, the – just to remember that we remunerate the accounts only for the balance that it stays with us for 30 days.

And we know the long tail people they have the cash and cash out very often in their 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 it stays with us for 30 days.

And so far, the amount is small, as well. It’s not a big amount that could hurt our P&L or net income or things like that. .

Okay. Thank you very much. .

Thank you. .

Next question from Domingos Falavina, J.P. Morgan.

Hi all. Thank you all. I confess I am a little lost. Actually I have two questions. The first one is basically on account in moving parts. Reading your press release and your transcript remarks, I think you had two effects.

One, you moved all your POS from the subsidiary which impacted according to your press release 27 million in revenues, or 30% impact would be both 20 million positive impact on earnings. And the second whole change between sale to lease which you claim as negatively 20 million to earnings.

My question is, should I read this – how should I read this basically? Is this like net-net everything else, if you haven’t changed POS parking days, if you have not changed lease to – the sale to lease or anything like that? How much would this impact.

They would cost to zero impact or should I read that as 20 million is net negative considering everything already? And then I move to the second question. .

Okay. Domingo, this is Alcaro. Let me reconcile this for you. So, first, you have approximately 17 million reais of subscription revenues, because remember, we started with the Comodato beginning on September the 1st. So we have just one month of membership fees. So we have 17 million reais of membership fees.

If you deduct the 34% income tax, you get roughly to 11 million reais of a positive effect. So that’s effect number one. The second effect that makes up to the 20 million reais positive is a Q3 negative margin. If you look at previous quarters, we had on average 88 million reais of negative margin on POS subsidies. We had 74 million reais this quarter.

And what is the headwind or the day wind here, or the headwind is really the taxes on the transfer on the inventories that we had and the day wind are the market-to-market provisions that we have to make in our inventories but just the market.

So, if you compare the 88 negative, so the 74 negative that we posted this quarter is roughly 14 million reais of negative margin and after tax is 9.

So, if you add the tailwinds that we had in the negative margin, plus the tailwinds that we had in the membership line, those two things combined, it’s a total of 20 million reais, that we should have the same amount in Q4 as well. So, that impact of 20 million reais was just in September.

So, if you consider for example, Q4, it’s around between 50 million reais and $60 million reais of positive impact in Q4. .

Just one thing.

When you say negative margin, I mean, that depends on your commercial decision, right?.

Right. .

My question is more tilted to the accounting, not that like, well, we decided to lower the prices.

If you had not changed the accounting or the lease rent, what would be - have been impacted the net income this quarter?.

20 million reais. .

Positive?.

Yes. The membership is helping the P&L in 20 million reais this quarter. .

If you had not done anything, neither relocated the lease, nor changed the – relocated the POS from the subsidiary, nor….

Right, right. .

Okay. Perfect.

The second question is, what is your legal understanding as far as two options, if you have the terminals sold to a merchant, can he or can he not hypothetically connect to another acquirer provider, hypothetically get net 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 his terminal for other providers?.

Well, Domingo, first of all is 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 a 100% of the transaction. 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 a 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 solution. If we sell or if we lease in the contract, we had the rights or we ask the merchants that they cannot use the device with other companies. So, it doesn’t matter to our leasing or selling the device.

The contract says that they cannot use this to another company. 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, like the recognition of the sale of the terminal under lease is upfront, but the cost that you bought that terminal is deferred over time.

Is that the reason why you have this positive impact or it’s something different?.

That’s the reason. That’s the reason. You got it. .

All right. Perfect. And you defer the acquisition cost over 12 months I am assuming..

Over three to five years. It will depend on the average lives of each device..

Understood. All right. Thank you very much. .

Domingo, just reinforce here that, regardless of the accounting impact that could be positive, negative or whatever, the main driver for us to change the model is to have a better experience for our merchants because of the bureaucracy in Brazil and all the paper work that you need to do, when they buy the device versus when they leave.

So that’s what drives us to – what drove us to make this change. We even have a much better experience, faster activation. We will improve us. So, it’s going to be at the end of the day a better services for the merchants, that’s what matters for us. .

Super clear. Just wondering if you had as an additional benefit to higher entry barrier. So that’s 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 question which relates to your earlier commentary on your software strategy.

So, I guess, what I heard was, if I am - software as a smaller piece of the overall company strategy, but I do want to ask if you can drill down for us a little bit and just explain why purse 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 are trying to look at market share or gain market share.

Just we see the increase you have in your subscribers with software. I just wonder how you are 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. .

Hi, Jeff. Thank you for the question. Just to be clear for everyone in the call t hat, when I talk that we do not invest in software or there is a small piece of our investment, we are talking about these four softwares that we presented in the deck of the slides – in this slide number 19.

Of course, we do invest a lot in software, in platform and are wrapping a lot of initiatives that we have in PagSeguro. So, just to be clear for everyone that we are talking about only these four softwares that we described in Slide 19.

Our merchants, as we are focused on the 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, yes, sophistication here to have a software solution to you. They just want to make the transaction that’s all.

But some of the merchants they do use additional software than we offer, like, small CRM that you can have the number – the name of our client, the mobile phone, the date of birth and then and things like that. So, yes, here it’s not too. Make a lot of money from software.

At this point, most of the software that we offer are for free for our merchant clients. So they are used to increase the stickiness, give them our 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 merchant outlook for next year. But, would you say, currently would be the two or three factors that was during the take rate up from where it currently is, or down and sort of how should we think about the trajectory should be going forward from here? Thanks..

So, talk about net - net take rate. If you look at our take rate compared to last year, there is a likely decline in the take rate as a result of mix, because we are not taking prices now. 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 through debit. So, we should expect in Q4 a decline in the net take rate as a result of our mix, not because we are taking prices down.

Overall, if you look this year, it 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 Karina [Indiscernible] Citibank. .

Hi everyone. Thanks for taking my questions. So, first thing that I wanted to ask is, have you shifted to the membership model? How should we look at the cost of goods sold? Because as you are actually going to lease the terminals and not sell them. They are 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, am I correct to assume that?.

That’s correct. We recognize the membership model as revenue in the transaction line. And the cost of goods sold instead of flowing through the P&L, I mean will flow through the P&L but through depreciation of the assets.

If you look at our fixed assets, you could see a material increase in Q3, because now we are booking the hardware, the devices as fixed assets instead of cost of goods sold. .

Okay. Good. And as you guys – you commented earlier in the call that you are going be some flat like spot margins in 2020 because the operational leverage, is that benefit you to further invest in marketing and the expansion of PagBank? That actually increases the 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 would actually have a benefit from having COGS go through CapEx and not the P&L?.

Actually, this is already happening. If you see our margins, the nice thing about our business is the operational leverage. I mean, we have – we closed the last 12 months with more than 105 billion reais and we do have operational leverage. And we are investing 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. We are investing in this company for the long-term.

So, it wouldn’t make any sense, for example to slow down our market 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 are looking to the growth of this company.

By the way, I mean, nobody has at least in the long-term or the ecosystem that we offer plus the online distribution, the brand recognition and all the benefits of being a first mover. And our idea here is to build this company for the future. We are not concerned about short-term results. .

Thank you. Just one last thing. The positive impact to income that you have from the change in accounting, that wasn’t accounted for in the guidance for the year, right? That’s like a plus..

No, it is accounted, actually means, because this brings the - I mean, in Brazil, the process of issuing invoices is very bureaucratic. When you need to replace a terminal, I mean, it’s cumbersome. The process that we need to go through.

So we really wanted to have to implement this change before September, I mean, it’s because, I mean, it requires some – see some 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 six months, 110 million reais 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 bank initiatives. 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. Could you provide your initial thoughts into 2020 net adds and TPV growth? You mentioned 300,000 net adds in fourth quarter.

Would you expect that to continue into 2020?.

Hi, Rayna. We are not giving this type of information at this point. We’ve been discussing a lot about guidance and about 2020 and the plans for the future. But 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 and TPV for 2020 at this point.

Just remember this year we had a guidance of 1 million net adds. We are going to surpass that. We already had 1 million into the end of October. So, we used to have two months ahead, November, which is a strong month with Black Friday and holiday season in Brazil in December.

So – but, going back to your question, we don’t have this type of features at this point. .

Understood.

You talk about adding smaller merchants in 3Q, do you expect that move down market to continue? And if so, would you anticipate the increase in net adds and growth in PagBank to offset any lower volume per merchant that we might see?.

Just to make it clear for everyone. We added slightly smaller merchants. We are not adding smaller, smaller, smaller merchants when comparatively. So we slightly smaller when we see the way they are working with us in the first month when compared with the cohort of the legacy that you have there is smaller than what we had.

We are not changing our strategy in terms of marketing. We are not using different channels. We are just bringing these types 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 certain in the 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 the type of merchants that we like to work and know how to work and may have to make profit from them. So, we didn’t changed that merchant that’s slightly smaller that 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?.

Rayna, 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 am asking about the driver though to that metric, just that deceleration if we can get a better understanding of why there was that sharp deceleration.

I think that would be very helpful?.

Well, let me repeat that again. First of all, talking about TPV figures, I mean, you know, we operate in a much larger scale. We grew TPV from Q2 compared to Q1 in 10% and Q3 compared to Q2 in 10%. So, we really – we don’t see here a deceleration.

And again, as Ricardo said, we did 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 – 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 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 will 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..