Hello, everyone, and thank you for waiting. Welcome to PagSeguro's Fourth Quarter 2019 and Full Year 2019 Results Conference Call. This event is being recorded and all participants will be in a listen-only mode during the company’s presentation. After PagSeguro’s remarks, there will be a question-and-answer session.

[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 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..

adjusted net revenue reached BRL1.6 billion, up 38% year-over-year and our net take rate ended at 2.97%. Our non-GAAP net income reached BRL412 million, up 27% year-over-year, with a net margin at 26%. Moving to our operating figures, our TPV reached BRL34.3 billion, up 39% year-over-year, adding BRL4.9 billion in new TPV quarter-over-quarter.

In terms of active merchants, we ended the year with 5.3 million active merchants, adding 1.1 million active merchants in 2019.

Now moving to PagBank, we ended December with 2.7 million PagBank active users, adding 868,000 new client’s quarter-over-quarter, a strong acceleration when compared to previous quarters, which shows the fast adoption of PagBank by our clients.

These figures not only reinforce we are in the right path with a broad ecosystem, but also show our execution capability. On the next slide we present our full year highlights. Our TPV reached BRL114.8 billion, growing BRL38.7 billion or 51% when compared with 2018.

Active merchants reached almost 5.3 million merchants, growing 1.13 million or 27%, when compared with previous year. We added BRL4.9 billion in absolute TPV in Q4, when compared with Q3 2019. This figure is 11% higher than the TPV we added in Q4 2018.

We reached our historical record in quarterly absolute TPV growth, and most important, with stable take rates. Our PagBank Users reached 2.7 million in Q4 2019. Our total revenue and income reached BRL5.7 billion. We grew BRL1.5 billion or 36% year-over-year. Our non-GAAP net income of almost BRL1.5 billion grew 38% when compared with 2018.

On the next slide, we revisit our 2019 guidance. We reached non-GAAP net income of BRL1.47 billion, [ph] close to the top of the guidance, despite larger investments on PagBank during 2019. Additionally, on merchants net new additions, we ended the year with 1,133 million delivering, 133,000 more merchants than our 1 million initial expectation.

Now I would like to turn the conference over Eduardo..

Thanks Ricardo, and hello everyone. Before I start, let me make some comments about governance. 2019 was the first year for PAGS to be fully aligned with Sarbanes Oxley requirements. We have already completed the entire process with our external auditors without any material weaknesses, which attests the soundness of PAGS internal control environment.

The Sarbanes Oxley opinion will be filled with our 20F report during the month of April. In addition, this year, our audit committee has been 100% independent, having three independent board members.

Moving to our membership fee model, implemented in September 2019, we are providing you a detailed analysis of this impact at the end of this presentation.

Just to summarize the impact, for the full year of 2019, we had a total bottom line impact of BRL51 million, versus our previous expectation of BRL80 million, shared with you during our Q3, 2019 earnings release. The difference is mainly explained by the deferral of the membership fee revenues.

We have also updated our estimates for the membership fee impact for 2020. We now estimate a positive bottom line impact of approximately BR150 million. Having said that, year-over-year the aggregated impact on bottom line should be around BRL100 million versus our previous expectation of BRL120 million.

Now moving to the presentation to Slide 6, our adjusted net revenues, the sum of net revenues from transactions and financial income reached BRL1.6 billion in this quarter, up 38% year-over-year and 11% quarter-over-quarter. For the full year, we reached BRL5.4 billion, up 47% year-over-year.

Moving to the top right, we are providing the breakdown our revenue growth, and we can see a stable mix between transaction services and financial income. On the chart below, we present our non-GAAP total costs and expenses that decreased 0.3 percentage points year-over-year, ending the fourth quarter at 3% over total TPV.

For the full year, non-GAAP total costs and expenses decreased 0.3 percentage points. Related to non-GAAP admin expenses, over total TPV, it reached 0.2%, flat when compared to one year ago and for the full year reached 0.3 percentage points, also flat when compared to one year ago. On the next slide, we show our non-GAAP net income growth.

In the fourth quarter we reached BRL412 million, an increase of BRL89 million and up 27% year-over-year. The non-GAAP net margin reached 26%, up 0.6 percentage points, despite larger investments on PagBank.

For the full year, we reached BRL1,470 billion, up 38% year-over-year, and the non-GAAP net margin reached 25.8%, up 0.4 percentage points year-over-year. On the next Slide number 8, we present our TPV growth.

Our total payment volume reached BRL34.3 billion in the fourth quarter, an increase of BRL9.6 billion, up 39% year-over-year, and growing almost 17% quarter-over-quarter. For the full year of 2019, we closed with a TPV of BRL114.8 billion growing 51% year-over-year, or almost BRL39 billion of absolute TPV increase.

Our absolute total payment volume grew BRL4.9 billion in the quarter, or 11% when compared to the same amount registered in Q4, 2018. Meaning a record in terms of absolute TPV captured by PAGS, and double-digit absolute TPV growth year-over-year.

The net take rate, which is the blended take rate net from transaction costs such as interchange, processing and cards scheme fees, reached 2.97%, stable when compared to the same period last year.

This is exactly what we communicated to you in Q3, 2019, slightly down sequentially given a higher seasonality of debit cards during the holiday season, fueled by the thirteen-salary paid in December. However, when compared to Q4 2018, our net take rate remained quite stable, and this is what we expect for 2020, stable net take rates.

In the next chart, we have our number of active merchants. We ended the fourth quarter reaching 5.3 million active merchants, adding 1.1 million new merchants in one year, representing an increase of more than 27% year-over-year and 13% higher than our previous expectation of 1 million net adds in 2019.

Quarter-over-quarter, we added 250,000 new merchants. Now, I would like to turn the conference to Ricardo who will talk about engagement metrics and new products..

PAGS is the most recognized brand among payment companies in Brazil. And Omni channel presence, operating both online and offline payments, combined with our scalable ecosystem and efficient go-to-market strategy leveraged by UOL audience.

We think that a potential cannibalization of debit cards transactions would take significant time, especially because there is a cultural barrier to break as cards are already part of Brazilians’ life. Indeed, the card penetration in Brazil is no longer in an early stage.

We expect total card volumes as a percentage of personal consumption to be close to 40% in 2019. Far ahead other Latin American countries, and therefore is relevant in the payment process of Brazilians, likely making the switching process, debit to instant payment will be slower.

On the other hand, Pix, which is the fast payments brand created by Brazilian Central Bank, is complementary to cards and could accelerate the bancarization process in Brazil, given the need to open a banking account, which PagBank is the most well positioned Digital Bank to capture this opportunity.

Finally, companies with agile culture, tech DNA and capabilities to launch and scale new products will benefit from Pix. PAGS has all these characteristics and is ready to capture new opportunities. Finally, before we start our Q&A session, to summarize our presentation, let me give you more color about our initial view on 2020 trends.

We expect to have absolute net new TPV growth similar to what we had in the past two years, with stable take rates and flattish net income margins, as we will continue to pursue growth combined with profitability.

Important to reinforce that, in the current stage of our journey and the market opportunities ahead of us, we see new users’ addition and their engagement as relevant KPIs to help our revenue growth and diversification.

The combination of payments, software, wallet and banking services is very powerful, and we will keep investing in new products, platform, marketing campaigns and people to build this more complete and robust ecosystem that will help us increase users, their engagement, and consequently more revenues.

Additionally, we reinforce our plan is to have 30% of our total revenues coming from Pagbank, meaning services beyond acquiring in up to five years, with acquiring is still growing at a healthy pace. Having said that, we finish our presentation and we will start the Q&A session..

Thank you. We will now begin the question and answer session. [Operator instructions] Our first question comes from Bryan Keane of Deutsche Bank..

Hi, guys.

When we look at PagBank today, I know you said up to five or in five years, you know 30% the revenues, but when we look at it today, do you still have a sense of how much of revenue it represents today and how fast that revenue piece is growing?.

Hi. Bryan, thank you for the question. This is Ricardo. Nowadays, I mean, 2019 was a low single digit. The plan for this year is to double to grow 100%, and then we're going to be able to get this 30% in up to five years. But, going back to your question, 2019 was a low single digit..

Got it. And then I got most of the metrics on 2020. And I might have missed this.

But did you guide for net new merchant adds this year or is that not part of the strategy?.

For sure, it's part of the strategy. We need to keep growing or ecosystem. That’s what I say about new users. But we are not giving here a guidance about net new adds, because at the end of the day, we're looking more for the topline, the revenues, and also the bottom line.

So, that's why, we are giving you this soft guidance regarding TPV and the net take rate in flattish margins..

Bryan, just one comment here, at least for early 2020, January and in February, we haven't observed any kind of deceleration in the number of sales of terminals to our clients. So, we're still seeing pretty much the same demand that we observed in the past quarters..

Got it. Thanks so much, guys..

Next question comes from Craig Meurer, Autonomous..

Yes. Hi, thanks for taking the question. Can you talk about expectations for the growth in the 20 billion in TPV that you had through additional services the PagBank services? Because, your contemporaries include that in TPV companies like PayPal, that would have added 10 points to your TPV growth this year.

So, in all fairness, how should we expect that number to grow so we can take a more holistic view of your TPV?.

Hi, thank you for the question, Craig. You're right. This is not part of our TPV. As you mentioned, some other companies add this in their TPV. We are not adding because we only report TPV as part of the acquiring only or the acquiring business. Just to give a sense, last year, we grew three times this volume.

We don't have a specific guidance here to give to you, but I would say that is very fast. If it is something that really becomes, let's say, important in terms of revenues, we will give you some disclosure.

But at this point, we are more concerned about making people to use the ecosystem to use all the products for us, the 20 bidders are a decent number, but we still with a lot of room to grow, because there are the top ups from wallet to the people putting in the accounts, wire transfers to third parties that they use it to send to a bank and then from the bank send to someone else.

So for us, part of this 20 billion of course generates revenues, part of that is on engagement. But going back to your question last year, we grew three times and it is not in our TPV. You're right. You've got it..

And just additional commentary here, Craig, we're still building the ecosystem. If you take a look at what we launched, pretty much in this quarter PagBank health, Cabify partnership, Shell, that is one of the largest gas stations in Brazil.

So, it's even early to us to make any kind of let's say, future guidance about these specific no acquiring transactions, because we're in a process of continuing to build up the ecosystem to our consumers and merchants..

And if we talk about the acquiring business for a second and try to characterize the merchant growth, you're seeing. It seems that you have obviously been growing through smaller merchants on the acquiring side, but that some of your new partnerships like Colibri can take PAGS acquiring toward larger merchants.

Is that a good way to think about it that as these partnerships accelerate that will actually bring along with its merchants that are larger?.

Yes. Just going back to the presentation, software users grew 51% all in this quarter, so our merchants are using our software, more and more. It is important for us to increase the stickiness to have more data to understand their behavior, the way they work, the way they use the money and things like that.

When you close a partnership, just like you mentioned with Colibri, we do get some, a little bit higher merchants, bigger merchants that use this type of software solutions. But if you consider the total BRL5.3 million is still too small to change any trends in terms of spend or things like that.

But it is accretion to our business plan, I mean, we can get some TPV from there, revenues and margins, decent margins. So that's why we keep investing in software. But I don't think is enough to change some behavior in terms of spending, promotional things like that, because this small number when compared with the BRL5.3 million..

Just to not monopolize the call, but the 13th month salary phenomenon and the debit usage that that drives.

Do you have an estimate on how much that impacted the take rate when looking at it versus third quarter?.

Actually, you can see the same seasonality if you look at Q3, '18, to Q4, '18 compared to Q3, '19 to Q4, '19. You will see basically the same seasonality that we have in the last year, I mean, it's pretty normal to have this kind of seasonality. If you look at our net take rate in Q3, it was roughly 3.17, it came down to 2.97.

So we're talking about a 20 basis point impact given the seasonality and the share of higher debit cards in our mix..

And first quarter should have a similar relationship to fourth?.

Yes..

Yes, correct..

Thank you..

Next question from Mariana Taddeo, UBS..

Thanks for taking my question. Just wanted to understand a little bit better the dynamics behind your guidance of stable take rate for this year. As we expect credit to become a little bit more relevant in 2020.

Should we expect the mix effect to continue to affect your net take rates as you move down market and that the transactions continue to be more representative? Thank you..

Well, thank you for the question Mariana. We expect the take rate for 2020 to be stable, just like we've seen what's going on with the past years. You're right, credit may help a little bit, but with this type of credit portfolio is very small.

We're saying that, we are very careful about credit, because you need to know how to not only to give the money, that's the easy part, but to collect and all the processes in place and all the time, we're testing our models and back tests and many things going on in this front of lending.

Because, you know, there is a lot of money, but there is also the risk. So that's why we are cautious about credit. With the size of portfolio is pretty small, it is not big enough to change the trends of net take rate. Of course, it helps a little bit, but at the end of the day, what we see is a stable take rate in the acquiring business.

If you go to our website, you'll see that we didn't change the price in the past years. So, we keep selling the devices and with the same MDRs that used to have two or three years ago..

Thank you..

Next question comes from Tito Labarta, Goldman Sachs..

Hi, good evening. Thanks for the call. A couple questions.

I guess, just first following up on the loan growth, like how quickly do you think you can grow the loan portfolio from here? Just to get a sense of how much we can expect that to contribute to the PagBank? And then a second question in terms of sort of like the investments that you're making in PagBank and the impact on margins? Do you think that, once you invested in 2020, that you can ease up a bit in 2021, so that you begin to see some benefits, both from PagBank and our margins in 2021? Just to get a sense of like, how long you think you need to continue to invest there to grow that business? Thanks..

Thank you, Tito, for a question. Talking about loan. You see, they've been growing close to 50 million, 60 million. This quarter, we grew 90 million quarter-over-quarter.

We could grow much faster than that, there is a lot of demand in our merchant’s base, but we need to have the confidence that the models are working well that we can give the credit right away and collect and so on.

Because there is all this process that the loan, start with the modeling and then the way we offer the loan for lower merchants the way we collect the experience and so on. So, it could be much bigger than that. But we are not in a rush to accelerate it. You just need to do the things right; you want to do things right.

So, it could be much bigger than that. I don't even have the size of that, because there is a lot of demand and it could grow faster but there is no number that I could say is 2 billion, 4 billion. I know there is a lot of demand. Regarding the investment of PagBank, we're seeing that the core business the acquiring business is doing pretty well.

We could have beat the expectations for net income in 2019, if you wanted to. You can see that we invested BRL470 million in marketing versus BRL270 million from the past year. But we are investing in PagBank since May 2019.

We need to create this brand, we need to bring people into the system, make them to download the app, create their accounts, and then make the use the products and monetization is going to come later. So, we are between this first and second stage, which is bring people to the ecosystem and make them use the product.

So, once we have volume here, the monetization is going to be a consequence. It's hard to give you even a soft guidance for 2021, I guess, the best way to think about PagBank is to think about the 30% of revenues in five years.

Throughout this year, if there is anything that we can give more disclosure to you, it will be a pleasure, but at this time, we can just say you there's going to be flattish margins and PagBank of course, is going to receive largest part of resources.

Also want to say that PagBank not only helps in the consumer side, but also in the merchant side, because our merchant is so small that when they sell, they are merchant. But, when they get the money in the digital account, they behave like a consumer.

So, when investing the PagBank platform, we can also get benefits from both, from merchants and also from the consumers. You saw that we launched many products in the past months. In this call, we just gave some disclosure about the trend, Shell, Cabify, PagBank [ph] health.

So, we're building this ecosystem to have a more complete offer for the Brazilian consumers and also merchants. Not to say the CD, they were also large that was part of the request for our base. They already have the savings account, but part of them were asking for this type of let's say, investment.

So that's why we're launching the CD in March, in the next couple weeks..

Alright, thanks. That's helpful. If I could maybe just one follow-up, I guess, like how that relates to them to the acquiring business. Given that you're guiding for like a stable take rate but you mentioned earlier, competition is increasing in the long tail market.

Just to understand, how are you able to keep your take rate stable given increasing competition? Is it because of the additional products that you're offering? Or is it you just not seeing pricing competition? Just understand, I guess, the competitive dynamics there a little bit..

Yes. So Tito, the price is part of the equation. As I just said to Mariana, we didn't change the price in the past two years. We know that we had some other players that try to come to our market the long tail market in 2018 and 2019, just decreasing prices, making broadcast media, offering devices in a very low price.

And they went nowhere, because price is only part of the equation. We keep saying that we need to have the ecosystem, we need to create the stickiness. This company was created to serve long tail. We think about long tail day and night, everything we do is to serve long tail.

So, it's a simple app, single app, people can easily understand what's going on, they can easily understand when they sell the money goes there, they can activate the cards in a very frictionless way and so on. So, what I'm trying to say you here is that, we didn't change the price. We keep adding more than 1 million net adds in 2019.

So that's why we think that we are confident that we can keep the take rate stable. Not only to say, that the average ticket for our emergence is very small. So they sell BRL1700 per month in cards. So, it's not because 10 basis points 15 basis points that is going to move them to change everything and just to use another acquiring.

So, we're confident that we can keep with good levels of price and stable take rates to keep going and grow in 2020..

And Tito, this is Eduardo speaking. Let me just compliment other things on what Ricardo is saying. I think first of all, the long tail markets is still large and under penetrated. If you look at public studies, like IBG and Sabra there's around 20 million to 30 million micro merchants and SMBs in Brazil.

And we were able to deliver the solid performance in the last two years, given some strength that the company has that nobody has. So first mover advantage, the UOL online distribution, the best banking digital ecosystem for the long tail and the brand.

And think about two years ago, I mean, we are always reinventing ourselves, from an acquiring company to be a complete banking ecosystem for both merchants, and consumers, and only a tech DNA company can do that. So talking about pricing, if you really look to our competitors, all prices are public.

And you can see that pricing is pretty much the same around me, with a few basis points differences, but all the core of the pricing, you see basically the same, the same pricing..

All right, thank you very much..

Next question comes from Felipe Salomao, Citibank..

Thanks for taking my question. I have a question regarding the launch of new products and services. It's interesting to see the growth towards Super Apps, especially with the launch of a food delivery business that was completely not expected, at least for me.

So it seems that PagSeguro is moving from a pure provider of financial services, including banking merchant acquiring to something else, something bigger, right? But PagBank has UOL as a controlling company, and arguably, some of these investments could be done by the holding, UOL, and not let PagBank, but this does not seem to be the case.

So my question is, five years from now would it be fair to say that PagBank will concentrate all the investments that the controlling group might decide to do on everything related to payments software and possibly marketplaces. Because I mean, food delivery is a softer.

Food delivery software is a marketplace of restaurants, right? So, would it make for PagSeguro perhaps to enter on the online retail marketplace business? This is my question..

Hi, Philippe, thank you for the question. Let me try to be concise here and summarize. Pretty fast or just to put everyone on the same page is our pilot testing that we're doing. As we say, all the time, we are always making researches in our merchant’s base.

People that have stores, people that have bars or have restaurants, people that sell things on the street. So we are all the time trying to understand how we can help all these merchants.

And part of the complaining that we've heard from restaurants and bars that some other apps charge them very high take rate and they were not happy just to have one or two players offering this type of food delivery service. So that's why we decided to do this type of pilot mode.

We don't want to invest millions of reais in media to make this that's not in our core business. But we see there is a space to serve part of our merchants that want to have this online menu and deliver things by themselves, without the intermediary, so to say. So that's why we are launching this pilot mode, it's doing well so far.

It's another software initiative that we're doing, just like we did with the other softwares that we mentioned in the presentation, like R2Tech is a constellation company, Yummy split payment company. So it's another software initiative.

So it's going to have - our merchants are going to increase the stickiness and make them more loyal to our solution. So that's beneficial. Regarding your question about five years, as we said we plan to have 30% of the revenues coming from PagBank.

We are a tech company, it's hard to say how it's going to be if we're going to have more softer revenues in five years from now or things like that. But the plan so far is to keep the acquiring business softer to increase the stickiness and to help these merchants to grow and also the banking platform.

All the payments and digital banking and software related to payments is going to be done from PagSeguro. Pagfast is a 100% PagSeguro.

So there is no relationship between another controlling shareholders or things like that, it's 100% PagSeguro and payments digital banking and software related to payments or to these small merchants are going to be done through PagSeguro. I guess, Alcaro just also want to add something..

No, I just think Philippe, that we are building a relevant platform for both merchants and consumers. So, the Shell gas station initiative or even the Cabify initiative, I mean, as Ricardo said, if you are a small merchant during the day, you behave like a merchant and off hours you'll behave like a consumer.

So if you're a small merchant, you have the cash in your digital accounts and you can go out and spend in Shell gas stations or even spend on Cabify. So that's what we're aiming to be relevant for both, merchants and consumers. And this just increases the stickiness and improves the user experience of our app..

Next question comes from Josh Besh, ABCM [ph]..

Thank you for taking the question. I was interested in the PagBank users, I would say, 2.7 million today.

What channels are you acquiring these users from? Is it mostly paid internet marketing? Is it referrals from other users on the platform? Any color you could provide us on just how you've acquired these 2.7 million PagBank users?.

Hi, Josh, thank you for the question. The majority of these merchants of this PagBank users are merchants. We already have hundreds of thousands of consumers as well, but the majority of them are merchants.

Sometimes, it's hard to give you the exactly answer, how many are coming from different marketing channels or so to say, because we do many things, we do UOL, we do newspapers, we do out of home, sometimes broadcast TV, YouTube. So, it's also sometimes also curious.

We try to send information to our merchants through the app, SMS, e-mail, saying then PagBank and sometimes they don't stick with the product. And then we do a mass media, we do UOL and things like that. And they decide to use the product.

When you do the research and ask them, why you didn't use before, he just said, you didn't see, I didn't pay attention. So it's marketing mix. We're bringing people from everywhere. But just trying to summarize the answer to the majority of this, PagBank users are merchants.

Part of that is also because they have the cash in, daily basis when they use the POS. So it's more let's say, directly for them to use the app and to use all the features in the digital account bank. And also want to say that, when you invest in PagBank, we not only bring consumers but we are also creating this brand.

So it is important when it grows a partnership with the gas station, for instance, that people go there they see PagBank, they're going to know what it is, they know the brand, they know that is related to PagSeguro and things like that.

So it's hard to give exactly answer what percentage is coming from each channel, but we are doing many things building the brand. I guess, at this point, most important thing is just to see this growth that is accelerating quarter-over-quarter..

Okay, that's very helpful.

And when you think about maybe the next year for PagBank, I mean, do you feel like it's really about expanding the product? You've obviously done a lot with the products but do you feel like there's a lot more to do or do you really think that it's at a time, where you'll be putting a lot of money into the brand and really just trying to bring in those consumers that are completely new to the ecosystem?.

I guess, it is a combination of both. It's going to be marketing all the products that we are launching. Of course, we have a product roadmap to launch this year. So, when we say that we will invest in PagBank, it's not only marketing, but also people, engineering, product, people and also in the platform.

So, in this call, we are giving you more information about PagBank health, PagBank CD, Shell partnership. So there's going to be more products that we will launch. I guess, this year we will still build this digital cost to be more and more complete. When we launched this account in May 2018, we didn’t pay interest in the balances.

So we launched this last September. Now, we have launched CD. So, as you can imagine, to be a retail digital bank, we still have a few products to launch to be more competitive.

But I guess we're in good shape right now to expand PagBank to make more margin and bringing new users, but there's going to be investment in both this year, in the brand and also in the product itself..

Okay, very helpful. Thanks, everyone..

Next question comes from Joseph Foresi, Cantor Ftizgerald..

Hi, and I wanted to just say that I like the PagBank song that I was listening to, as I was waiting to get on the call. A couple questions for you. Just on the end market penetration rate in your core business, can you talk a little bit about where that is this year versus sort of prior years.

And the competition, I guess the question there is, why moving to PagBank now and how strong is the core business? I got a couple others..

Well, Joseph. First of all, thank you for saying the song is good. Thanks..

Yes. It’s very catchy. I figured it was worth mentioning..

That's a song that used to launch one of the PagBank products, so it's very sticky, people just remember that and think..

Well, maybe I won't be able to forget it. But anyway..

Open your account, please put some money here..

Exactly..

Thank you. Regarding the core business, what you see, you just Joseph, is that the churn rate is very stable. We don't see spikes in churn rates, it's just stable, sometimes even lower than the previous year.

But our challenge here, that's something that we discuss all the time, that we need to control the churn rate not only as a percentage, but also in absolute numbers, because as the base keep growing, the percentage should go down or rise at some point, we're going to have absolute numbers very high. So we don't see anything hurting our core business.

Of course, we lose a few merchants to the competition, but we also bring some merchants from the competition. At the end of the day, there is still a lot of room to grow. The long tail market is untapped with many new merchants that are coming to this system at this point, they are still in Brazil.

So, there is no big changes in the core business in terms of churn and retention rates that we've seen in the past quarters and in 2019..

Yes. Just adding here, I think that PagBank also is very important. Just like we reiterated here earlier, a PagBank for sure will be very important tool to create more revenues to diversify the business to extend the addressable market once we're capturing, let's say, purely consumers in Brazil, the banking and the underserved one.

But also, PagBank helps to create the stickiness, the loyalty for our clients. We perceive that these guys, they are, let's say, creating higher engagement with the new products and new solutions.

We show it in our investor deck that we already have 50% of all the, let's say users and the majority are through merchants, using at least three products from the ecosystem.

That's the main focus of the company right now to keep investing the platform, to keep adding more engagement and future monetization by having less churn and for sure, new avenues of revenue going forward..

Got it.

And then just on the competition side, have you thought about moving upstream at all? And any thoughts around added or new competition from the WhatsApp or Mercado Pago?.

Yes. We are reactive to go up in the permit. We are not, let's say, proactive. There are some we are seeing larger merchants. For us, you can see larger merchants for this competition. They are still very small. But we have some merchants that come to us to work with this. So we obtain this type of merchants.

When we launch this software solutions of course, we get a little bit higher merchants, not only the long tail, but we are reacting in this sense. Regarding, as you mentioned, Mercado Pago, I guess, Mercado Pago is very much focused on [indiscernible], our natural competitor. We respect them, great company.

But, I guess, we are ahead of them in terms of products, in the acquiring business and also in digital banking. Just to remember, we have a banking license. We have many products that we can do by ourselves without depending from third parties.

So I mean, as I said before, as we still have a lot of room to grow, we are selling thousands of devices every month, I guess, competition is also selling thousands of devices. It's not a zero-sum game at all at this point here in Brazil..

Got it. And then, just last one for me, and I'll take a shot at it. I think the street is looking at something like 30% volume growth and 20% from mid-20s on the revenue side.

I know that wasn't part of your guidance, but any color or direction that you could provide there, I think would help, because it'll help keep consensus kind of along the right path. So, I wanted to get your thoughts on those numbers, if you would give them or at least ask if there's any other color that you'd like to provide on 2020.? Thanks..

Yes. Well, we had close to BRL115 billion in total payment volume 2019. We added close to BRL38 billion, BRL39 billion in 2019. We added BRL38 billion in 2018. What we have in our plan is to keep same levels of net new TPV this year, so we can make the math a little bit how's going to be the growth as a percentage of TPV.

The net take rate we expect to be flat, so it's to be stable and flat. So, it's also, let's say, you can calculate how it's going to be the growth of the revenues. But that's the soft guidance that we gave in the call, net new TPV similar to what he had in the past two years with stable TPVs..

Thank you..

Next question comes from Neha Agarwala, HSBC..

Hi, thank you for taking my question. First, if you could talk a little bit about the evolution of your credit card. Has the card given the micro merchant segment involved over the last two, three years? Second, would be net adds for clients. The net adds has been declining in 2019 versus 2018.

Should we expect it to go down further? You've mentioned that the churn is quite stable. How do you see these net adds in terms of client evolving in the coming two years? And lastly could you please update us on the marketplace initiative that the Central Bank and the regulator wants to create for the receivables business.

And if that is created, which is likely scheduled for October, November, what impact do you see on your business from that marketplace? Thank you so much..

Well, thank you Neha for the questions. Let's talk about first of the acquisition costs, that was your original question. We invested a little bit to bring new merchants in 2019, of course, is a little bit higher than what we had in 2018. There's more players in the market so we are not changing the prices of MGRs.

At some point, we increased the subsidies of the POs and sometimes we give zero MDR for a short period of time. So that increases the acquisition cost. It is still healthy. In our view, we are all the time calculating this cap versus the lifetime value. So that's why we are managing these accordingly. Regarding the receivables that you asked in the end.

We have a very close relationship and conversation with Central Bank. We are part of the discussions for the receivables. But, as our merchant is very small, they don't have the sophistication not even to think about this type of receivables to be the receivers or things like that.

When they sign up with us, they need to choose one specific period of time to receive the money, we have three options, they receive the money right after the transaction, after 14 days or after 30 days. So we don't give the options for our merchants to receive in installments.

They need to pick one of these dates and then they receive the money in a specific date right after the transaction. They are very small, they sell BRL1700 in cards per month. A percentage of that is going to be through installments. So, they don't have the sophistication [indiscernible] to have this type of conversation.

And I don't think it's not even economic viable for this chamber to have this type of merchants. But we don't see any risk for our business at this point..

And Neha, just to complement, I mean, in the long tail of market, the priority is really to receive the cash as fast as possible. So bear in mind that in merchant that makes for example, BRL50 per day is not even efficient to go to a chamber of receivables to prove the receivable to someone to be those receivables.

And as Ricardo said, at the end of the day, we prepaid 100% of our installment transactions. Our clients are already born prepaid..

Just one complement to your question Neha, we're not seeing a decline in the number of net adds. That's a deceleration compared to previous year. Remember that when we started 2019, we were expecting to add around 1 million new merchants, we did more than that, we did 13% more than 1 million ahead of our expectations.

Like I said earlier, we're not seeing at least in early 2020 any kind of deceleration at the base of sales in terms of terminals. We're still seeing a very strong demand in the micro merchant space. Not forgetting that at the end of the day now we have a much more complete ecosystem.

We're not only focused in bringing new merchants, we're also focusing bringing new users for PagBank both merchants and consumers. If in one hand, the number of net adds of the merchant business, it's somehow decelerating to BRL250,000 per quarter for PagBank is accelerating.

So that's what we are building up, an ecosystem that could be complete for both existing merchants and new merchants and also new consumers. That's our view..

Very helpful. If I can follow-up with another question. You mentioned that most of your PagBank users are your merchants. So the wallet share of your PagBank users is actually very limited.

So, what is your strategy to gain a more affluent set of client base for you PagBank so that you can monetize them in the future and make the banking business more profitable?.

Well this - just remember that first if we didn't have PagBank they only use us as an acquiring company and then the revenues even if it's small, it should be captured for another player. So we're trying to make this closer look here to have their money here, to be the destination of their money. We can make - I'm sorry..

I can hear you..

Yes. So we can make the money with these merchants today through the interchange of the cards when they pay bills, we receive a collection fee from the companies we are collecting the bill. And we are also having consumers at this point. We already have hundreds of thousands of consumers. So we can make money with these guys also with interchange.

The money they leave here with us, that they - if they don't complete 30 days, we can make money through the float and we don't pay any interest for the consumer.

So there are some revenue streams, there's going to be new products that we're launching by health is one example, the kind of the micro insurance, and we will launch new products in the future. But, at this point we are making money with interchange transactional and new products.

As we said before, we are not exploring lending for consumers at this point. There is also a lot of demand, but we are being very careful, we are only working with the best merchants. Once we have the confidence to roll out a little bit we are, at this point, we are just making money with the allowance by working with the merchants..

If you can tell us what is the number of credit cards you have in insurance, a rough range?.

We just started. It's very small. We just started. We will launch for sure in the next weeks..

Thank you so much..

Our next question comes from Domingos Falavina with J.P. Morgan..

Hello, good evening, everyone. Thank you also for taking the question. I just want to run by you guys a couple of numbers and see if they make sense directionally. So, I remember, thank you for the data on the TPV of the PagBank, it helps a lot.

You provided 20 billion, and in there you mentioned some of the transactions that those clients are doing, some of them pay fees like using the prepaid card, mobile top ups and some others and some others don't pay fees.

If we assume here for lack of better data that half of the TPV is paying some kind of fee, and we know that the interchange is around 1.5%, 1.6%. We would get to sensing BRL100 million, BRL150 million, very ballpark numbers of revenues from PagBank, which kind of adds up to 2%, 3%.

It adds up to your statement of low-single-digits in contribution of revenues to this year. If we look at the total number of clients PagBank has, which is around 1.8 million for the year on average. You will basically place the average revenue per client on something on BRL80 to BRL100.

Just want to get your guys input, if the yields we're estimating is too high or if the numbers directionally make sense?.

Hi, Domingos, this is Ricardo speaking. I see your math, but at the end of the day, there are too many assumptions there. And we're not providing any specific guidance on how much of the 20 billion generates revenue or not. Of course, we do have some transactions that do generate revenue. So, for example, the prepaid cards or the cash cards.

And we also have transactions that do not generate any income, for example B2B transfers, or even the QR code transactions we do not make money on them. I'm sorry, that's all that I can say at this point, but I think there's too many assumptions on those numbers. And when those revenues they become relevant will do the appropriate disclosure..

Okay. Understood. Thank you very much. Second one, I'm not sure if you guys actually disclosed that in the 20F, I haven't had a chance.

But, what kind of delinquencies chart jobs or NPLs you're seeing in the loan book as it is now?.

Of course, we are providing a number of our credit portfolio net of NPLs. We can say that for the - where we are operating for the long tail market, we do have the best NPLs in the marketplace, for the market that we operate. Think about people that have never had access to credit before us..

I know like Mercado Libre in 2018 yearend both published 25% charge offs. I think you'll have to report to that in the 20F.

So, I'm just wondering, if you have the number or not?.

I don't have the specific number here or the number that will be published in the 20F. Of course, I mean, Ricardo, labor is a totally different business compared to us. They are lending to consumers; we are not lending to consumers. We are lending to the very best merchants that we have here.

We are working on our credit agent to be the best credit agent in the market and then to have the lowest delinquency in the market for where we operate. Bear in mind, that those are small merchants close to individuals. And if you're going to make specific disclosure about NPL in the 20F, this is something that we have not decided yet.

I mean, we're like one month from filing the 20F..

Okay. Now we should expect a lower number then. Okay. I think you'll have to - but we'll wait for it to come up..

Thank you..

Next question comes from James Friedman, Susquehanna..

Hi, thank you for doing this call and taking all these questions. I'll ask mine upfront. I'll just ask a couple. So thank you for your commentary about 2020. Eduardo, any comment that you might make about Q1, at least will it be typically, seasonally like it was last year? That's the first question Q1.

The second question is, are there any accounting changes contemplated for 2020, so we're not surprised, any accounting changes? And then the third one Ricardo, thank you for all these disclosures about the usage. You said 50% of bank usage bank clients are using it three or more products. You said that the PagBank clients open 11 times per week.

I was just wondering if you could help us with which of the products in terms of priority you talked about prepaid, cash card, but which of those are they using the most frequently? So the first on the Q1, the second on the accounting and the third on the usage. Thank you..

Okay. Let's start with the accounting. I think we have talked to analysts and investors about this and the major driver here is really to improve the service to our customers. The membership model is something that has been already adopted by other players in the marketplace.

And so in September, we decided to implement the membership model, no less commodato [ph]. And as I said, as I told you, this is becoming a standard model in Brazil, because there is no change for our merchants on pricing.

But moving to the membership model, we improved our customer service, we've reduced bureaucracies in the process such as issuing invoices, registration process, so on and so forth. So we deliver a better POS activation to our clients. So, I see the accounting as a consequence of the change in the model.

We are not expecting any relevant changes in our business model that reflects in the accounting. So, I mean there's no planning, let's say, accounting change as a result of changes in our in our business. Regarding Q1, we are seeing basically the same seasonality that we saw in past quarters.

So basically, I mean, in Q4 we have a higher share of debit in our mix. Of course, volumes are positively impacted by the holiday season. But in Q1, we're not seeing nothing different from what we have seen in the past two years as a public company..

Yes. And regarding the usage of the app, James, usually people, they go to the app to make more common activities and to move their money, right. So usually they pay bills, they make mobile top ups and they use the prepaid card or the cash card, just the way they can do their more common let's say banking activities. That's how they use the app..

Great, thank you for all the color. I appreciate it..

Next question comes from Victor Schabbel, Bradesco BBI. You may proceed..

Hi, guys, thanks for taking the question and for the patients. First, we would like to congratulate you guys for taking a more conservative approach, regarding the recognition of membership revenues that you guys are now deferring. So we really appreciate that. And second, we just have a couple of questions.

One, is it right to expect the financial expenses that came a bit higher to be related to prepayments with issuers of about BRL2 billion.

This quarter should we expect this to be kept at these levels going forward? And the second question is about the number of hubs or offices, commercial offices that you guys might have to serve is likely bigger merchants. How many do you have already, if you have any? So just these two questions. Thanks..

Hi, Victor, thank you for the questions. This is Ricardo. Just talking about this commercial offices, we are always testing new sales channels. We have a very few commercial offices that we are testing. Again, we had the demand for a little bit larger merchant some of them require this physical presence. So that's why we are testing. It's very small.

We're not going to spend too much time looking to that at this point. It's just the test for additional sales channels. So nothing material, not even to keep discussing at this point..

And talking about our financial interest expenses, it came a little bit higher. This is because as a result of the mandatory guarantee that we need to put into the Central Bank to guarantee the deposits from our clients.

So, I mean, at the end of the day, it's really small because if you look at SELIC rates of 4.25 and a few basis points over select, because in the asset side we have the revenue income and the other side we have the interest expense. So, at the end of the day, it's a few basis points over CDI, because we need to secure those deposits.

And those deposits, they have an income that is very close to SELIC rate. And we pay at the end of the day the net between the expense and the income that we have..

Thanks.

So, we should expect these levels to be, let's say, like that going forward right? So, this would be a good ballpark estimate, right?.

Yes. And there are several ways to do that. So for example, as Ricardo mentioned, we are going to reissue CDs, starting March. We have the option of securitizing those receivables. And we have also the option to discount those receivables with the issuing bank. So, I mean, at the end of the day it's just a matter of where we will fund.

And the levels that we saw in Q4, I mean, that's basically the same levels that it should observe going forward..

Okay, perfect. Thanks for the answers..

I would like to invite Mr. Ricardo to proceed with his closing statement..

Hi, everyone. Thank you very much for your time, for your attention. Talk to you soon and see you next call. Thank you very much..

That does conclude PagSeguro’s conference call for today..