Hello everyone and thank you for waiting. Welcome to PagSeguro PagBank's first quarter 2021 results conference call. This event is being recorded and all participants will be in listen-only mode during the company's presentation. After PagSeguro PagBank's remarks, there will be a question-and-answer session.

At that time further instructions will be given. [Operator Instructions]. This event is also being broadcast live via webcast and may be accessed through PagSeguro PagBank'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 by webcast may pose their questions on PagSeguro PagBank's website.

Before proceeding, let me mention that any forward statements included in the presentation or mentioned on this conference call are based on the currently available information and PagSeguro PagBank's correct assumptions, expectations and projections about future events.

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

Actual results may differ materially from those included in PagSeguro PagBank's presentation or discussed on this conference call for a variety of reasons including those described in the Forward-Looking Statements and Risk Factors sections of PagSeguro PagBank's registration statement on Form 20-F and other filings with the Securities and Exchange Commission, which are available on PagSeguro PagBank'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..

First, operating and financial results. Second, PagSeguro, our acquiring business. And third, PagBank, our banking business. Starting with the operating and financial highlights. Consolidated TPV of BRL81 billion, up 102% year-over-year. Total revenue and income of BRL2.1 billion, up 30% year-over-year, with consolidated net take rate of 2.41%.

Adjusted EBITDA of BRL573 million, up 12% year-over-year, despite PagBank and hubs investments. Non-GAAP net income of BRL327 million, down 11% year-over-year. Excluding one-time events during the quarter, adjusted EBITDA of BRL617 million, up 20% year-over-year and non-GAAP net income of BRL371 million, up 1% year-over-year. Moving to PagSeguro.

Acquiring TPV of BRL50 billion in Q1, up 58% year-over-year, despite new lockdowns in the end of March 2021. Online TPV grew 140% year-over-year, while Hubs TPV grew 410% year-over-year, diversifying our exposure to new segments.

Active merchants of 7.3 million, with net addition of 301,000 new merchants or 1.8 million more merchants in comparison to the same period of 2020. Total acquiring revenues of BRL1.9 billion, with adjusted EBITDA of BRL725 million, margin of 38%.

During this quarter, we launched PagPhone, the first world-wide one-stop-shop POS which combines acquiring, banking and software. We also launched Moderninha ProFit, the smallest POS with integrated printer and Auditek app, our reconciliation software. Moving to PagBank.

PagBank TPV of BRL31 billion, up 261% year-over-year, boosted by wire transfers and bill payments. PagBank app downloads of 48 million, with almost seven million downloads in the quarter. PagBank active clients of 9.1 million, up 144%, with net addition of 1.3 million in the quarter.

PagBank consumer clients of 3.5 million, five times larger than first quarter of 2020. In first quarter of 2021, consumers represented 38% of PagBank active clients. Credit portfolio of BRL773 million, deposits of BRL5 billion and PagBank CDs surpassing BRL1.4 billion in March 2021.

During this quarter, we also announced the cashback offering for payroll portability and launched new third-party investment funds and personnel accident insurance. Moving to slide four. Two years ago, we launched PagBank aiming to explore and capture the existing opportunities in Brazil.

At that time, we had a few products in our portfolio, providing the base digital accounts features only to our merchants.

In the slide five, we can see all the achievements throughout the last two years, becoming a complete ecosystem now, serving both merchants and consumers, as we were able to combine acquiring, banking, partnerships, software, marketplace, insurance, investments, loans and cards.

Moving to slide six, we show how powerful is our ecosystem and how it is boosting our growth trends. First, I will talk about client acquisition and awareness. We reached 7.3 million active merchants, up 33% year-over-year and 9.1 million PagBank clients in the first quarter of 2021. It represents a growth of 146% year-over-year.

Moving down, we can see we reached 48 million downloads in PagBank as of March 2021. Talking about engagement, we observe the acceleration of volumes growth. Consolidated TPV increased 102% year-over-year, while net new consolidated TPV grew 215% when compared with Q1 2020.

Our market share in the Brazilian payments industry reached 9%, more than three percentage points in comparison to the first quarter of 2019. Our products per user ratio increased from 2.5 to 2.7, which also indicates higher engagement of our clients. Last but not less important, in the third column, PAGS monetization.

Revenue and EBITDA growth shows we are able to monetize our businesses and to balance growth with profitability. Total revenues increased 30% year-over-year and our adjusted EBITDA increased 12%. Moving to slide seven. We will start presenting our operating figures for the acquiring business.

Our TPV growth remains strong with a 58% increase year-over-year, boosted by TPV per merchant growth, which grew 18% when compared with first quarter 2020 and net merchant adds that reached 300,000 between January and March this year, ending the quarter with 7.3 million active merchants.

The strong growth, despite new lockdowns in Brazil, was driven mainly by a fast cash conversion into electronic payments and success in our new verticals and client segments, such as online and hubs.

Volumes growth for April and May were very strong, respectively 108% and 91% increase year-over-year, despite the new lockdowns we had in Brazil in 2021. Moving to slide eight. Total acquiring revenues were BRL1.9 billion, up 29% year-over-year, accelerating the growth in comparison to 2020.

Acquiring adjusted EBITDA up 28% year-over-year, with EBITDA margin of 38%. TPV mix improved in comparison to the fourth quarter, which drove up acquiring net take rate and payments profitability. Excluding PagBank revenues and transaction costs, acquiring take rate increased 17 basis points in comparison to the previous quarter, reaching 2.23%.

Moving to slide nine. Here we present some new acquiring initiatives we have been exploring. First, our online TPV, which has been growing much faster than previous year. In first quarter 2021, our online volumes grew 140% versus 13% in 2020.

The acquisition of MoIP, a digitalization process boosted by pandemic and our several initiatives to incentivize online payments and omnichannel solutions were the main drivers. Also, we are happy to announce card-not-present transactions during this quarter increased 116% year-over-year. Moving to our SMB hubs strategy.

Our 2021 volume trends indicate we will be in the top of the range of our current guidance, which was 11% of acquiring TPV. Our forecast is to have 250 to 300 hubs up running in several cities and regions until the end of 2021, reaching 83% of Brazilian GDP coverage. Finally, software subscribers reached 621,000, 8.5% of PAGS active merchants.

We plan to provide additional disclosure of our hubs strategy in the coming quarters. Now moving to slide 10, we will share some PagBank figures. Starting with the strong growth of PagBank TPV, once again a triple-digit growth, totaling BRL31 billion, accelerating the growth in comparison to 2020.

On top right, we have our PagBank active client figures, which was 9.1 million, being 38% composed by consumers. Net adds were 1.3 million, with consumers representing 58% of the first quarter net additions. These figures show our strength to serve both merchants and consumers with our two-sided ecosystem.

Bottom left, we share our product per user ratio. In first quarter 2021, our products per user ratio reached 2.7, 0.2 higher than the same period of 2020, reinforcing clients' stickiness to our ecosystem.

PagBank revenues totaled BRL149 million, up 48% year-over-year and accelerating in April 2021 to above 80% when compared to April 2020, although April 2020 was the worst pandemic month in Brazil impacted by the lockdowns, which drove down withdrawals and cards spending.

Additionally, for those clients with higher engagement, such as merchants active in PagBank and consumers with payroll portability, we offer some free ATM withdrawals per month, exchanging short term revenues for higher engagement and future monetization.

In first quarter 2021, PagBank adjusted EBITDA was a loss of BRL78 million, driven by headcount increase, marketing expenses and transaction costs. Also, in first quarter, we had a one-time event related to digital account losses, not related to loans provisions or credit risk management, amounting BRL73 million.

The massive data leak in Brazil which happened in January 2021 did not affect any of our systems, data or infrastructure. However, it provided information to fraudster activities in online transactions and bill payments. As we identified these transactions, we immediately blocked them. Again, this is one-time event.

Moving to slide 11, we present some additional data about PagBank and PagInvest. The number of active cards increased three times in comparison to the first quarter of 2019. In May, we launched new home marketing campaign in partnership with Visa to foster card payments.

In this campaign, PagBank clients will receive cash prizes and one of them will get a house. Day-to-day banking, the number of PagBank app logins was 549 million in the first quarter of the year, while bill payments transactions has been gaining a lot of traction.

This is a very good sign, since usually clients elect their main banks to centralize bill payments. Finally, PagInvest assets under custody reached BRL4.2 billion, up 127% year-over-year, with PagBank CDs almost doubling the size quarter-over-quarter. Worth to say, all this AUC is based in PagBank CDs and a few investments funds.

We plan to have equities and treasury bonds in the following weeks, which we expect to help increase assets under our custody.

Recently, we allowed our investments platform to receive orders 24 hours a day, seven days a week and we also launched new third-party investments funds managed by well-known investments firms in Brazil, such as Western Asset, Alaska, Hashdex, BNP Paribas, Journey and AZ Quest.

Now, I would like to turn the conference over to Artur, our CFO, who will talk about our credit portfolio and our financial results for the quarter. Artur, please go ahead..

Thanks Ricardo and good evening everyone. In the slide 12, we show our credit portfolio where the performance is improving every day based on credit models result. We ended the month of March with a total credit portfolio of BRL773 million, being 53% of working capital loans, 43% credit cards and 3% of other credit products.

As we have been tracking very close the NPLs by cohorts for working capital loans and for credit cards, trends are getting better since August 2020 showing very healthy numbers. Our confidence has been increasing and encouraging us to reach the highest level of credit disbursements in May.

We expect to increase credit originations going forward, mainly in the second half of this year. Our cash position remains very strong with a positive balance of BRL8.1 billion, reinforced by the issuance of PagBank CDs to fund the credit disbursements.

Loans to deposits ratio was 53% guaranteeing stamina to grow our credit portfolio in a healthy and sustainable way. Moving to slide 13, we present our quarterly financial results.

In the top left, our consolidated net take rate reached 2.41%, representing an increase of 11 basis points in comparison to Q4 2020 and six basis points versus Q3 2020, driven by better TPV mix with more credit and lower debit transactions and a longer duration for credit cards receivables in installments.

In the top right graphic, we share our non-GAAP Total costs and expenses which totaled BRL1.6 billion in the first quarter of 2021, up 51% year-over-year. Cost of sales and services represented 70% of total costs and expenses remained at the same level of Q1 2020 and increased 49% year-over-year.

The main drivers were higher interchange and card scheme fees following the TPV growth, higher depreciation and amortization related to our solid active merchants additions during the past quarters and expenses to new products and services developed to PagBank.

Selling expenses represented 23% of total costs and expenses and increased 94% year-over-year due to headcount expansion for our hubs and the one-time digital account losses of BRL73 million, previously explained by Dutra. If we exclude the digital account losses this line increased 56% versus the same period of last year.

In the bottom left chart, our adjusted EBITDA was BRL573 million.

Excluding the negative effect of BRL73 million related to one-time digital account losses, not related to loans provisions or credit risk management and the positive effect of BRL29 million related to tax provision reversal, the recurrent adjusted EBITDA was BRL618 million with a margin of 30%.

Finally, in the bottom right, we share our capital allocation strategy. During the first quarter of the year, we invested almost BRL393 million, being 62% in POS acquisitions and 38% in other initiatives, mainly related to product and software developments.

As a percentage of revenues, CapEx decreased four percentage points, reaching 19% versus 23% in the first quarter of 2020. Thank you all to joining us tonight. Now, I pass the word back to Dutra to conclude the presentation..

Thank you Artur. Moving to slide 14, we present PagPhone.

During the last quarters, we were working very hard to launch the first device in the world which combines acquiring, banking and smartphone, everything in one single device, creating the real one-stop-shopping solution for our merchants, reinforcing our leadership in long-tail market and continue to be a company driven by innovation.

Finally, in the slide 15, our last slide, we present Moderninha ProFit. This is the smallest POS with integrated printer in the market. Initiatives like this help us to offer a better customer experience and to allocate capital more efficiently, consequently improving our LTV per CAC ratios.

With that, we end our presentation and we can start the Q&A session. Thank you. Operator, please..

[Operator Instructions]. Our first question comes from Jorge Kuri with Morgan Stanley. Please Mr. Kuri, go ahead..

Hi and good evening everyone. And congrats on the numbers. I have two questions, please. The first one is on your TPV guidance of 40%. I think that chart on page seven is quite telling. I think you are running significantly above that and hopefully with past the worst of this year.

Is it possible that the number is just significantly above that? It wouldn't be surprising given the current trends that you end up about 55% to 60% growth.

And what stops you from updating that guidance? Or where do things that could potentially go wrong and we do end up in 40%, which would be a big acceleration from the first five months of this year? And my second question is on NPLs. And I am not sure if this is related to the digital losses. I am not that I understood properly what that is.

But anyway, my question is on NPLs.

Going through your slide number 12 where you have the pre-pandemic cohorts on the past August 2020 cohort, can you maybe explain how loan losses are trending over the last few months, particularly given the difficulties of the first quarter? And just if can explain what those digital losses are and if indeed those are part of the NPLs? Thank you..

Hi Jorge Kuri. Good to hear you. Thank you for the question. And thank you for the compliments as well. This is Ricardo. I will start with the TPV and then begin to answer your question number two. And then Artur can complement. But talking about TPV, you are right. We are running above the 40% guidance. We are confident with this guidance.

And the reason that we do not update is because we are still in the mid of the pandemic in Brazil. I mean, we have some uncertainty looking forward. We have tougher comps in the second half 2020, because the government had BRL300 billion in Coronavouchers last year in second half. So we have tougher comps.

And we need to wait and see how is going to be the economy recovery in Brazil. So that's why we don't update at this point. As time passes by, we will be more than happy to update that. So that's why we are confident with this 40% at this time. Talking about the digital losses. Just to be clear here, there is no relation with credits.

No relation with loans. That happened because we were, I would say, more aggressive than what we should in terms of authorizing some bill payment transactions. And then what we had is people coming here paying bills, some of them with credit cards and then we had chargebacks afterwards.

So we had this, we are saying here in Q1, but actually it was in February and March. We already adjusted that. We didn't have any impact in April and May. So it is really a one-off. It is really a thing that happened in February and March and that's it. There is nothing that is going to happen in Q2 regarding to that.

And again, there is no relationship with NPLs or things like that. Just to be clear here, I want to reinforce that we didn't have any problems with our infrastructure, with our data or data leak. What we had was a massive data leak in Brazil in January 2021.

It was in the news and probably we were aggressive in authorizing some bill payments transactions through to credit card. So that's it. We already adjusted that and it will not happen in Q2. And talking about the NPLs in slide 12, I will ask Artur to help us here. And again, Jorge, thank you very much for question..

Hi Jorge. It's Artur speaking. And thank you so much for your question. It's a pleasure to talk to you. I think the idea of this graph is to show you that when we start to offer credits again in August 20, our NPLs are which better than we have before, because we learned a lot during the pandemic.

And so you know that in March 20, we stopped our originations and we learned a lot, adjusted our models, hired new people, more experiences of that. And so now we are having much better results than we had before. And the idea is just to give you more color about it because we don't give the number.

So it's important to you to understand that we have a better performance right now than before. And that's it. So we are very happy with the numbers and encouraging us to accelerate the originations going forward..

All right. Thanks Ricardo and Artur for that. Thanks again..

Thank you..

Our next question comes from Mariana Taddeo with UBS. Please Ms. Taddeo, go ahead..

Hi. Hello everyone. Thanks for the opportunity to asking a question. It's regarding the SMB segment. You mentioned that should represent 7% to 11% of your total TPV here.

But could you share how much it represents to-date? Also, if you could give us some color where are the merchant in the segment coming from? Are from the incumbents from Stone or any other player? I don't know if you can share that. And also in the presentation, you mentioned the penetration of the software within the SMB clients.

I want to understand if you are offering the banking credit products to them? And how is this penetration? Thank you..

Hi Mariana. This is Ricardo. Thank you for the question. So we are not disclosing the exact number of hubs TPV in the total TPV at this point, Mariana. As we said at the presentation, we plan to give more color as time passes by. Just we don't want to give this information at this point for strategic and competitive reasons.

Regarding the players that we are getting in this segment, it varies but usually it follows the market share in the SMBs. So the majority of them we are getting from incumbents. And then we have some others coming from new players. But it follows a little bit the market share of this segment. We are the, let's say, newcomer here.

We are the company that is, let's say, competing with the other ones being the aggressive here. So that's why we are getting all this new merchants and TPV grew 410% year-over-year.

Regarding the software, the 8.5%, we actually use the information we had from software to put in our models, in our credit models, because we have more information from the ones with software versus the other that don't use it. I don't have here in the top of my mind, how is the penetration of credit for these clients to be sincere.

But it is one variable of the model. It' not the main one. But it help us to improve our models. I don't know if I answered your question..

Yes. On this second part of the question in terms of banking and credit.

I just want to understand if you are offering, if they have their credit product or I don't know, a credit for SMBs as well?.

Yes. We are offering credit for SMBs as well. We are growing our credit portfolio BRL160 million in this quarter. Almost 100% of this BRL160 million, we focus on the merchants. Very small part of that is focused on consumers, for small pilots here and there. But the majority of that is for the merchants. And yes, we are offering credit for SMBs as well..

Thank you..

Our next question comes from Bryan Keane with Deutsche Bank. Please Mr. Keane, go ahead..

Hi guys. Congratulations on the results, especially given the tough economic environment. Two questions. I guess I would be interested in some more color on the increase in the TPV per merchant. I think it was up 18% year-over-year versus 3%, looking at last year's increase.

And so just trying to understand how much of that is stimulus versus what's been the driving factor there? And then my second question on the margins. Obviously, you guys are making a lot of investments and the margins were impacted by those investments.

So just was hoping you guys could us some color on what the net income margin might look like going forward for the rest of the year and how much to expect for the investments in the hubs and PagBank, et cetera? Thanks..

Hi Bryan. Thank you for the question and thank you for the complement. Talking about the average TPV per merchant, there are some drivers here. If we look in Brazil, we are seeing the penetration of cards and PCE is increasing. It used to be, I guess, 40% and now it's close to 44%.

So we see more adoption of credit card payments and we are also increasing our participation of online and hubs in our total TPV. So as we go up a little bit in the pyramid, the average TPV per merchant will grow as well.

So I guess those are the two main drivers here, people using more cards and less cash and also we are having more TPV coming from online and for hubs..

Bryan, it's Artur speaking. Thank you so much for the question. It's a pleasure to talk to you again. And so regarding to margins, as you said, we invested a lot during the last months. And also in this quarter, we invested a lot in PagBank to hire more headcounts in product development to develop products like PagInvest, insurance, credit.

And also, we are investing in hubs with sales force, facilities, rentals and also marketing to promote our new products and services.

And also right now, in terms of nominal, we are slightly better bottomline in 2021 even though our focus is to reach the best balance between growth and profitability, looking for our comp in the future, gain scale to leverage expense.

And so we are much more focused right now in the growth of the company to leverage expenses in the future and improve margin as well in 2022 or 2023 in the more mid to long term..

Got it.

And any guidance on where we should set our models in terms of the net income margin going forward for this year, just given those investments you talked about?.

Yes. Bryan, we gave the guidance for TPV for CapEx. What we can say here that in absolute terms, our net income this year will be better than last year. We don't have the exactly number here. But as Artur said, we are looking for, let's say, more growth this year than profitability.

But in absolute terms, you are going to see a better net income this year versus 2020, even with this challenge that we are seeing in first quarter with lockdowns and so on and more debit transactions and so on. So that's, I would say, better guidance I can give at this point..

Got it. Great. Thanks so much..

Thank you..

Our next question comes from Craig Maurer with Autonomous Research. Please Mr. Maurer, go ahead..

Yes. Hi. Thanks again for taking the time. I appreciate it. I was wondering just some housekeeping items. You provided TPV growth for the acquiring channel through April and May.

Could you provide with the total consolidated TPV growth was for April and May? Second, I wanted to return to the noncredit digital account losses, just some additional clarification. I mean, it sounds like you are authorizing bill pay on credit cards, but that something went awry and you wound up with a lot of chargebacks.

Were these fraudulent bill payments? Were these, I am trying to understand what went wrong in that? I know, it's one time.

But what went wrong in that authorization process that might be a learning experience for you? And lastly in the SMB hub business, are you seeing a strong very of software uptake? And to what degree are you seeing perhaps an omnichannel opportunity in the SMB software, in the SMB business? And can you bring MoIP to address some of that. Thanks..

Hi Craig. This is Ricardo. Thank you for the question. We must discuss here internally how it's going to be if we can give the TPV for PagBank. We didn't give in this call. Just what is the best way to give this disclosure, of course, is growing a lot. We just closed May. But I mean, we can discuss if we can make it public before next call.

I don't have the answer to you at this point. Talking about the digital account losses that you asked. We were aggressive in authorizing some transactions. The models for bill payments, let's say, authorizing more transactions than it should. So it's not credit related. It's not NPLs related to loans or things like that.

It's just that people came here to pay bills through credit card that the majority of the chargebacks. And we authorized some of the transactions that after we review we should not have authorized. I mean, we were aggressive in doing that. So that's what happened. There is no data leak. There is nothing like that.

Just people came here, decided to pay a bill and then we had this chargeback. That's as simple as that. Regarding SMB and hubs, yes, they are using our software. Although, we know that our software at some point, they are very complete but some type of merchants, they require something more sophisticated.

But at the end of the day, what we are looking here, we are bringing the merchants that are four to five times larger than long tail. So there are too small. They are not very sophisticated. Part of them could be omnichannel. But we know that part of them will not be omnichannel because of their business.

Just let's say, the guy from restaurant sometimes he is going to find a new platform to make delivery and PagBank will not provide that for him although we have a small platform, just to give an example here. The guy that has auto parts probably will not sell, I would say, fix cars and reached these customers through online.

So we see some opportunity from omnichannel. For those who we think that is feasible, we can offer solutions, link of payments and things like that. But I would say, the majority of them, still today, they are not omnichannel. They are more physical stores, because we are going, let's say, in the bottom of the pyramid of SMBs.

So they are not well sophisticated for softwares and part of them are not ready for omnichannel. And that's fine. At the end of the day, while one is to bring than for acquiring and make them choose PagBank, get the data at some point, increase the relationship, strengthen the relationship with them. We could offer credit and credit cards and so on.

So that's our idea is much more to have the financial services embedded with our solution than other solutions at this point..

Thanks.

And are you seeing any change in behavior around Pix? AnyP2M transactions? Or is it still mainly a P2P channel?.

Well, Craig, we don't see Pix hurting our acquiring business or people using Pix to make payments. What we see is Pix replacing wire transfers. So let's say, if you had a bill that you use it to through wire transfer, so people did not use cards. Now they are using Pix, because Pix is free and is instantaneous and so on.

But we don't see Pix, I would say, cannibalizing our acquiring business. As you could see, our growth 58% year-over-year. So that's the thesis that we have, the hypothesis that we have from the beginning since when we started talking about Pix in the beginning of last year. Pix is much more to replace wire transfers.

at some point to replace cash and help digitalization of some people in Brazil. And then we can take advantage by offering PagBank and you could see that we are growing more than one million PagBank clients per quarter..

Thank you..

Thank you..

Our next question comes from Mario Pierry with Bank of America. Please Mr. Pierry, go ahead..

Good afternoon everybody. Congratulations on the results. Let me ask you two questions as well, primarily related to revenue generation.

How should we think about the direction of the take rate on the acquiring business taking in consideration the hub expansion and also taking in consideration that the economy is opening up so we should see a better mix of credit versus debit? And also when we think about the take rate at PagBank, I think it's fair to say that PagBank is growing much faster than we anticipated.

So I was wondering if you think that you can achieve your target or your soft target of 30% of revenues coming from PagBank three years from now? If may be we could anticipate that? Thank you..

Hi Mario. This is Ricardo. Thank you for the question. Regarding acquiring take rates, as you could see we grew 17 basis points in Q1 versus Q4, even with more TPV coming from SMBs, which has a lower net take rate because I mean they are a little bit larger merchants. So looking forward what we expect from the acquiring take rates is to be stable.

There is going to be some variation here and there but to be stable because we are going to have more clients coming from hubs. It would put some pressure in the net take rate coming down. On the other hand, we have the tailwind that is the mix of payments, more credit.

So what we can looking forward here this year, we expect to be stable or improve a little bit. But let's see how it's going to be. In Brazil, we have a lot of ups and downs and lockdowns certainly. Unfortunately, the rate of vaccination is not going pretty fast as we see in other countries. Some people are talking about third wave.

Some cities making lockdowns. Some others opening. So it's still a lot of uncertainty. But to give, let's say, a soft guidance here, let's consider it stable even with the pressure coming from the hubs which, in our opinion, I would say is a very good performance.

The other question about the 30% PagBank, it's hard to say if we are going to be able to make it earlier than that, Mario. We prefer to keep the 2024. Let's follow the following quarters. And then we can update. What we saw in April is good level of revenues in April much better than Q1. Let's wait a little bit and then we can, let's say, update it.

But it's feasible to have before that. I just don't want to affirm that at this point..

Yes. Hi Mario. It's Eric. I just like to enforce here that we will reach 30% in one of the quarter in 2024. This is not an easy task, right, because we haven't seen PagBank grow very fast and solid, right. And even our new verticals such as hubs and the online.

So it's a hard task here but we can just to be committed to this 30% in one of the quarters in 2024. Thank you..

Okay. Let me follow-up then here on PagBank. Even if we add back these losses that you booked of BRL73 million, we are calculating revenues per client of about BRL24. Is that about right? And when we look in the first quarter, we have around BRL27 and one year ago at around BRL27.

Any reason why revenues per client are coming down at PagBank?.

Well, Mario, we should make the math here, just to see if we had the same numbers that you have. But usually the dynamics for PagBank monetization are the following. We bring the client. They stay here for a while. They start using, engage with the solution. And then we see monetization afterwards.

So there is some lag between bringing the client and having the revenue. So that's why, at some point, we see the number of clients coming to 9.1, but the revenues not coming at the same pace because it takes a while.

And that's even more to, if we think about consumers because the consumers don't have the automatic cash out that we have from the acquiring clients. So even if the client loves our app and it's easy to use, very good UX and so on, if he doesn't have any money there, he cannot do anything.

So that's why we see some lag between bringing the clients and then the revenue. So that's the main explanation of that. We also said in the presentation, for some of the clients, we decide to give free ATM withdrawals which should bring revenues a little bit down. It's no material. But of course, it does help.

So those are, let's say, the main reasons here. But the main reason, the main driver is the lag between bringing the client and having the revenue from this client..

Perfect. Very clear. And just a final follow-up on PagBank here. I think in the past, you had talked about maybe breaking even at PagBank in second half of next year.

Is that still your view?.

Yes. That's view..

Thank you..

Our next question comes from Jeff Cantwell with Guggenheim. Please Mr. Cantwell, go ahead..

Hi. Thanks for taking my question.

Can you hear me?.

Yes..

Great. I wanted to ask you one quick question on PagBank. You have grown your clients to 9.1 million over the course of two years, which is impressive. And underneath that, the active card base has increased by over three times while you are also layering in new products and clearly they are seeing uptake and more and more adoption.

And I think that all suggest that your average revenue per user should continue to increase perhaps more materially if things continue to normalize. So you agree with that idea? And the reason I ask is because we see other guys, some in Brazil, with fairly high average of user numbers. And so I think it's still early days for you guys.

So I am just curious if you agree with that view? And if you can give us some updated thoughts on what your ARPU at PagBank might grow to over time? Any color or thoughts there would be appreciated. Thanks very much..

Hi Jeff. Thank you for the question. I was trying to, let's say, explain that as well for Mario. But yes, in the medium to long term, we expect the revenues from PagBank users to go up. That's one of the drivers for us to reach the 30% of the revenues of the company coming from PagBank by 2024.

What we have here is that there is, I would say, a longer time between opening the account and starting to generate revenues. And this is even more true when you have the consumers because the consumers don't have the cash in.

So you need to open an account and then wait to receive the card and then they are going to receive some money here some wire transfers from other banks or Pix or the payroll or so on. But yes, you are right. We are bringing in this client. That's the first, let's say, we have this framework to bring the client, engage and then monetize.

I would say, we are between the first and second step today. We are still having lots of accounts, millions of accounts every quarter, so bringing new clients. The engagement is increasing. Monetization is happening, but it doesn't happen at the same pace. There is this lag between bringing the client and then start monetizing.

But looking in medium term, that's the idea. I said before, we are already in some pilots with consumers, making some additional products to them, testing with them. We are going to have, in a few weeks, we are going to have equities here. So people could buy stocks here. We are going to have treasury bonds.

We just launched two options of insurance, personal insurance and home insurance. So the idea is to make this cross-sell and increase the average revenue per user in PagBank. That's the idea. That's the dynamics that we expect to happen..

Great. I appreciate that. And then a quick follow-up on platform.

I was hoping you could give us some thoughts on why now? I mean you just had a few changes to the strategy and maybe just consolidate it on the acquiring side while you are going to one-stop-shop for micro-merchants and how that might sort of be a driver for you guys maybe in terms of net adds, volumes, et cetera? Thanks..

Yes. So you are right. That's exactly for the micro-merchants or the long tail. We don't think that's a device for someone who has a lot of transactions every day because as you know POS is better for this type of volumes when you have a lot of transactions than when you have a few transactions per day. So it's focused on the micro-merchants.

Everyone has a smartphone. Some of the guys use it to have the smartphone and pair through Bluetooth with our mPOS with Minizinha. So the idea here is to have everything as one device. They already receive the device with a PagBank account because they create this account when they buy the device. They create, let's say, the login and password.

So they have the app there. They can order a card and so on. So the idea is to have an additional option for the long tail for the micro-merchant. The average ticket is much higher than other POS.

So although we are selling better than what we expected, we don't have seen volumes that we have for smaller POS in Minizinha Chip and things like that, because of the price. But I mean, it's doing well. The idea as you said, is to have for the long tail one-stop-shop and people can use it as a POS, acquiring digital account and as a smartphone.

And it is a very good smartphone, by the way, with cameras and so on. So that's the idea..

Okay. Great. I appreciate all the color. Thanks again and congrats on the results..

Thank you Jeff..

Our next question comes from Rayna Kumar with Evercore. Please, Ms. Kumar, go ahead..

Good evening. Thanks for taking my question. Really good to see the strong TPV coming out of PagBank and of course your acquiring.

I am just curious to understand if COVID-19 had any material impact on the prepaid card interchange revenue that you make with the PagBank?.

Hi Rayna. Thank you for the question. The reason that our revenues in PagBank were not even higher than what they were is because we did have some impact that people not using prepaid cards because the cash in and even, let's say, the Coronavoucher from the government didn't happen in Q1 and also people using less cash.

We also make some revenues from people taking the money through ATMs, we charge some taxes there. There was a decrease in that, people at home, not using cash. So that's part of the explanation why the revenues from PagBank in Q1 weren't even higher. So I mean, it's not a big issue. It's a good volumes.

We are still the number one in prepaid cards in the country by far. And we are sure that once the economy rebounds, we are going to have the rebound as well.

And part of our investments, we didn't mention before, but part of the investment that we have been doing since 2020 and 2021 is because we know the COVID, although is a little bit longer in Brazil when compared to other countries, COVID is something temporary and the economy will rebound.

And when the economy rebounds, we just want to be ready to take advantage. That's what we did in 2020. That's what we did in 2021. That's why we were the company with the highest growth in terms of TPV in our market, taking share from others, creating this new market, bringing these new customers.

But going back to your question, yes, there was a little bit impact in the prepaid card because of a little, let's say, lower spending in the prepaid cards in Q1. But it's something temporary. It's not a big issue..

Got it. Very helpful. And then on your hub strategy, you gave us some clues on your potential volume contribution from hubs in 2021.

Could you help us better understand what the potential revenue and earning contribution could be this year?.

Well, Rayna, we can give you more color about hub strategy when we think it is appropriate. Of course, we are having this operation here trying to beat other companies that are already there on the street. So we are here the challengers. So we just don't want to give too much information about our performance at this point.

We gave the guidance about TPV. Once we think it's feasible to give more color on that, we can give you. It's not because I don't want. It's just because of, let's say, competitive reasons we just don't want to give too much information about it. And let's say, let's have this operation up and running and then we can.

When it is more mature, we can give more color even with more confidence about the numbers and our performance. But so far, we are doing very well. We are beating our estimates. That's why we said that we expect to be in the top of the range of TPV, which was 11%. That's the guidance. So we are doing well..

Understood. Thank you..

Our next question comes from Tito Labarta with Goldman Sachs. Please Mr. Labarta, go ahead,.

Hi. Good evening. Thanks for the call and for taking my question also. Maybe just one quick follow-up on PagBank. In terms of the client additions at PagBank remain pretty healthy.

Do you think and you kind of alluded to it, but about one million clients per quarter is sustainable? Or like for how long that's sustainable? Or maybe in another way to get the 30% of revenues, how many clients do you think you would need to have at the pace you going, the need would be over 20 million clients in a few years? Is that a reasonable assumption? And maybe in terms of the products that they use, is the main cash just like the prepaid cards? Or like which product do you think is generating the most interest amongst the PagBank clients? Thank you..

Thank you Tito. Thank you for the question. Yes, we do think it's feasible to have one million new clients per quarter. Hard to say when it's going to be over. I remember, just to make a quick parenthesis here, but we have got this question about acquiring in merchants in the past few years.

How it could be sustainable? If it could be sustainable for us to add one million merchants per year or 250,000 per quarter? And we are doing this since 2018, since we became public. So every year, we at some point we think is going to be a challenging one, but we always beat our estimates because we are still playing in a huge market.

So in terms of merchants, we expect to have 30 million people in Brazil that work by themselves or they may need a POS. So there is still, according to our estimates here, one-third penetration at this point. In terms of PagBank. Some estimates say that we have 25% to 30% of people without a bank account even after COVID without digitalization.

Maybe it's a little bit lower than that. But it's still huge. And that's why we have 9.1 million, more than a million per quarter. And we also said in the presentation here. We close it April. In March, with 9.1. And in May, we already surpassed 10 million. So we already added 900,000 in Q2, in previous Q2 and we still have part of May and full June.

So we think it's feasible to have this one million for a while. To be sincere, I don't have in the top of my mind the number of clients in PagBank to give the number. But you can imagine we already have more than 10 million. I don't think it's impossible to have this 20 million that you mentioned. And about why people come to us.

I guess there are many reasons here. First, because our brand, the strength of our brand, people know how we work, people know it's a, let's say, company that you can have the confidence you can put the money here. We have the distribution through UOL that covers more than 90% of eyeballs in Brazil, right after Google and Facebook.

We invest in marketing. We have been investing in the account. We do a lot of research, how people use it, where they are having some difficulty, to try to make it better, easy to use. It's very simple. Just download the app and in up to three minutes you open account. You send your picture and it's done. And it is a full free account.

People just come to us because they know it's a free account. They can have interest in their balances. And although we make it free for the consumers or for the user we are receiving money from the companies we are, let's say, receiving the bills and so on. So those are the main reasons.

People come to us because it's free, the strength of the brands, efficient distribution that we have and investing as well..

Okay. Great. Thank you very much..

Thank you..

Our next question comes from Otavio Tanganelli with Bradesco BBI. Please Mr. Tanganelli, go ahead..

Hi. Thanks for taking my question. I wanted to ask on PagBank as well. The credit portfolio increased a little over BRL200 million or almost BRL200 million current quarter.

I wanted to understand if NPLs are behaving well and the economy is expected to improve in the coming quarters, why not accelerate loan or originations? When should we see, I would say, more aggressiveness in terms of the loan book here? Thank you..

Yes. Otavio, it's Artur speaking. Thanks so much for the questions. It's a pleasure to talk to you. so we are showing that we have better NPLs for credits but we are a conservative company. We have a lot of cautions about uncertainty of the market. As Dutra said, some people are saying that we could have a third wave here or other issues related to COVID.

We don't know exactly when the economy will rebound, but we have all the conditions to accelerate. We are starting to doing that in Q2. And so you will see in the coming quarters better volumes. We will increase our portfolio in the right way.

So we are understanding the models, understanding the NPLs, understanding the performance and growing to the portfolio. We understand that this is the best way to do that. And so we have the conditions to accelerate more but we are cautious related to the economy, related to moment that we are living in the country.

And so you will see in the future our portfolio growing..

And Otavio. This is Ricardo. Thank you for the question. Good talking to you as well. We were ready to accelerate last year. But of course, when we have the model and have COVID with a lot of up and downs and lockdowns, there is a lot of noise in data. So that's why we didn't accelerate before. We just want to have the right moment to do.

We are not in a hurry to do that. We know it is important. We just want to do in a right way. We see some other players in the market doing some aggressive growing the portfolio and the NPLs will come. We know that. And you know that.

So that the NPLs will come if you don't give the right credit for the right person and you don't have the collection processes and so on. So we just want to be ready and be confident that we can accelerate a little bit. We are ready with the BRL700 million, almost BRL800 million, close to BRL1 billion.

So we are growing but step-by-step, not doing it like, say, crazy movements here and doing step-by-step. But we will accelerate it at some point that we think it's feasible and we are confident to do so..

That's great, guys. Thank you..

Thank you..

Our next question comes from Neha Agarwala with HSBC. Please Ms. Agarwala, go ahead..

Hi. Thank you for taking my question and congratulations on the good results. Most of my questions are answered. But very quickly and I know you can't give more information on the hubs. But it seems like the hubs are doing quite well and exceeding your expectations.

What do you think are the strengths of PagSeguro which is helping you to gain clients, either from incremental or the other peers? Is it the service quality? Is it the brand image? Or are you doing something different on the distribution? So what are your strength in the particular segment? And my second question in the monetization of the software opportunity.

I mean you already have a take up with 8.5% of the client base users of the software. So are you already monetizing it? Can you give us some range of what percentage of revenue comes from software and what is the opportunity that you see here? Thank you so much..

Thank you, Neha, for the question. Let's talk first about the hubs. We always said that and we mentioned that during the presentation that our thesis is that it's easier to go up in the pyramid than to go down when you think about size of the merchants in terms of TPV. So we started with long tail.

As you know, we had all this platform that is very scalable, easy to use, self-service. So we have all this, let's say, online in DNA here that we can serve the small clients here. When you go up in the pyramid, it's just a matter of distribution. The platform is the same. The solution is same. The easier the solution, the better for the merchant.

It doesn't matter how is the size of the merchant, but if it is easy to use, every merchant will like it. It doesn't matter if you are a small one or a big one. So it's a matter of distribution here. And as I said before, we have a strong brand. We see a lot of unsatisfied merchants in the SMBs.

So at some point, they don't have the right service and that's why we come there and we can bring these merchants to us. We have good devices here. We have a portfolio of seven devices. The merchants also like our devices. So there are some components here that we can use, some instrument that we can use to bring these merchants.

It's not a matter of price and try just being the price at some point. The merchant even want to pay you more if they have a good service. So that's the dynamics behind going to SMB. But we are proving here the thesis that it's much easier to go up in the pyramid than to go down for us.

And talking about software, the 8.5%, a very small part of that we monetize. We are not charging the majority of them. We are giving the software for free. We think today is not a lot of money. Our merchant is not sophisticated to pay for a software. So we try to we are making here for free.

At some point, if we see an opportunity that we can charge, we will do it. But from all the softwares that we have, we have some premium features from the loyalty software and also premium features from the conciliation software.

The other softwares that we have, the point of sale that you can use, let's say, put some products, coffee, croissant and all the stuff and you just can have a database of clients database. Of course, we are giving this for free. So today we are not charging, just to be sincere. It is a very small part of that is paying for our software.

It could be an opportunity in the future. But I mean, we don't have that in the short term plan..

Very clear. Thank you so much for that. And congratulations once again..

Thank you, Neha. Thank you very much..

That concludes our Q&A session. I would like to turn the floor over to Mr. Ricardo Dutra for his final remarks. Please Mr.

Dutra?.

Hi everyone. Thank you very much for your time. As you could see, the company is doing well. All the KPIs are growing, number of clients, TPV. We are seeing a lot of traction in PagBank. So it seems the worst is over in terms of the pandemic. We are not 100% okay in Brazil. Still waiting for the vaccination.

But it seems the worst is over what he had in Q2 and Q3 last year. So the future is bright. And thank you very much again. See you in next quarter. Thank you very much..

The PagSeguro PagBank's first quarter 2021 results conference call is concluded. Thank you for your participation. Have a good night and thank you for using Chorus Call. You may now disconnect..