PagSeguro Digital Ltd
NYSE:PAGS
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PagSeguro Digital Ltd
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Good evening. My name is Pricilla and I'll be your conference operator today. Welcome to PagBank PagSeguro's Webcast Results for the First Quarter 2022. At this time, all lines have been placed on mute to prevent any background noise. [Operator Instructions] This event is also being broadcast live via webcast and may be accessed through PagBank PagSeguro's website at investors.pagseguro.com. Participants may view the slides in any other order they wish. Today's conference is being recorded and will be available after the event is concluded.
I would now like to turn the call over to your host Éric Oliveira, Investor Relations and ESG Director. Please, go ahead.
Hi everyone. Thanks for joining our first quarter 2022 earnings call. Today, we have with us Ricardo Dutra and Alexandre Magnani, our Co-CEOs; and Artur Schunck, our CFO. [Technical Difficulty] speaker remarks there will be a question-and-answer session.
Before proceeding, let me mention that any forward statements included in the presentation or mentioned on this conference call are based on currently available information and PagBank PagSeguro's current assumptions expectations and projections about future events.
While PagBank PagSeguro believes that the 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 PagBank's PagSeguro's presentation or discussed on this conference call for a variety of reasons, including those described in the forward-looking statements and Risk Factor sections of PagBank PagSeguro's most recent Annual Report on Form 20-F and other filings Securities and Exchange Commission, which are available on PagBank PagSeguro's Investor Relations website.
Finally, I would like to remind you that during the conference call, the company may discuss some non-GAAP measures, including those disclosed in the presentation. We present non-GAAP measures when we believe that the additional information is useful and meaningful to investors.
The presentation of this non-GAAP financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered separately from or as a substitute for our financial information prepared and presented in accordance with IFRS as issued by the IASB. For more details the foregoing non-GAAP measures and the reconciliation of these non-GAAP financial measures to the most directly comparable IFRS measures are presented in the last page of this webcast presentation and our earnings release.
With that, let me turn the call over Ricardo. Thank you.
Thank you, Éric. Hello, everyone, and thank you for joining our call. I'm pleased to announce we reached another set of record numbers this quarter, almost all of them higher than the top of the Q1 guidance and marketing consensus. Also, as you see our Q2 guidance in the next slides, we have been seeing strong momentum in Q2 as well.
Our performance reinforces our core strategy of delivering the best balance between growth and profitability, strengthening our lion share in Payments, while we create one of the most relevant digital banks in Latin America.
Our Management is extremely dedicated, committed and aligned to take decisions oriented to the business success not only in the short-term, but also in the long-term, as we see huge opportunities to be explored in Brazil.
Going to Slide 4, we can see the Q1 main messages. During the first quarter of the year,
our Payments Platform, also known as PagSeguro, had its first wave of repricing, which led an increase in merchant acquiring take rate of plus 35 bps in comparison to Q4 2021.
Our successful strategy to also serve small and medium businesses continues to outperform our expectations, with HUBs TPV reaching 25% of the PagSeguro volumes. The unbeatable combination of the migration from cash to plastic in Brazil, the best-in-class execution in HUBs and the lion share in longtail, led us to have the largest Cards TPV market share gain during Q1 2022, increasing 70bps vs. Q4 2021. These results reinforce our ability to increase prices and, at the same time, keep churn levels under control.
In our Financial Services, also known as PagBank, our net adds marked 1.7 million, almost 19,000 new clients per day in Q1 2022, achieving 24 million clients, of which 14.3 million were active. PagBank has been also diversifying its revenue streams, mostly driven by interest income, and we also plan to launch new secured loan products to be deployed in second half of 2022.
Going to slide 5. Aligned to our mission to keep disrupting and democratizing Financial
Services and Payments, primarily in Brazil, while creating value to investors and stakeholders in a sustainable and diligent way, this quarter we reached BRY 3.4 billion in total revenues and income, the highest level ever in the company, and net income of BRY 371 million.
I would like to highlight the most the most relevant KPIs for the quarter: Beginning from the left side, our Payments Platform highlights: We reached BRY 80 billion in Total Payment Volume TPV. BRY 3.1 billion in Total Revenue and Income. More than BRY 10,000 per quarter in TPV per Merchant; and BRY 769 million in Adjusted EBITDA.
On the right side, our Financial Services highlights: We reached BRY 72 billion in TPV. BRY 305 million in Total Revenue and Income. BRY2.1 billion in Credit Portfolio; and BRY 86 million in Gross Profit.
In the next two slides, we can see some Payments Platform achievements. So, beginning with Slide 6, we are happy to announce that PagSeguro was the TPV market share gain winner this quarter, growing 70 bps in Q1 2022 versus Q4 2021, while the most relevant players lagged.
If we look back to 2016, we went up from 1% to 11%, which reinforces our thesis that it is much easier and profitable to move upmarket, creating the competitive advantages and scale, which can be easily adapted to larger merchants.
Going to next slide, we presented important KPIs about our payments business. Creating
a unique scale backed by a superior logistics infrastructure and leveraging our Marketing and Advertising through UOL. Our customer acquisition costs adjusted by inflation decreased 5% in 2021 in comparison to 2020. It's a rational pricing strategy combined with the strong migration from cash to plastics in the country our paybacks continue to be very short between four and six quarter. This 2021 cohort presented the best performance in terms of return on investment in comparison to the previous cohorts.
In 2022, we expected higher take rates due to reprice focus on TPV per merchant increase, lower POS device subsidies and the efficiencies in marketing expense continue to support the compelling returns we have been obtaining so far. The beauty of this business is that, we do not rely only in number of merchants to keep growing very rapidly differently than business that relies completely into descriptions with flat fees.
We have several market growth opportunities in payments such as growing approximately 80% more than the industry on average. For example, in Q1 2022 the industry grew 36% year-over-year, while PagSeguro grew 60% year-over-year. Cards PCE in Brazil reached 50% in 2021. According to estimates, country can reach more than 70% by 2025 increasing the share of wallet per merchant.
E-commerce penetration as a percentage of total retail sales is still below the global average. And with our complete online payments offerings, we believe we can now take advantage of it. And we have been consistently gaining TPV market share, adding new merchants and volumes to the system and also attracting underserved merchant store solutions.
Finally, having created the lion's share in number of merchants with multiple times more merchants than the second player, allow us to be rational and to keep focusing our strategy to prioritize high-quality merchants in our gross adds, while cross-selling and upselling our products and services. Our execution has been very successful which is also reflected in our lion share in the profit pool of the industry. On the next two slides, I will show why we believe payments is one of the ways to build up a profitable digital bank and how the value proposition is created for merchants and consumers.
On Slide 8, in the left side, we can see three charts comparing merchants that do not use PagBank with those that use it. The PagBank value proposition for our longtail merchants is clear here. Merchants that use PagBank have four times more revenues, higher NPS and much lower churn when compared to those that do not use PagBank. We also aim to increase PagBank penetration in SMBs and have been launching new features to serve these clients.
For instance, in this quarter we launched Corporate Accounts, Direct Deposits from other acquirers and Debit Cards. Our confidence is consolidated when we look at the market growth opportunities for banking in Brazil. Looking at the opportunities, our Cost-to-Serve clients continues to be 10 times lower than incumbent banks, in a country where the top five banks concentrated 91% of the total credit portfolio.
As I mentioned before, we also see opportunities to cross-sell and up-sell financial services do our SMBs clients. There is no other acquirer that serve SMBs with a complete digital account that include transactional, cards, investments, et cetera. Also, Brazil has a young population that is very active online which creates a perfect landscape for a digital bank like PagSeguro.
On slide 9, we can see more numbers to reinforce our successful PagBank execution. In less than three years, we were able to create the second largest digital bank in Brazil, with almost 24 million clients, adding almost nine million new clients only in the last twelve months.
In addition, when we go deeper in our numbers, in two years we reached 7.6 million active clients being composed by consumers, which is incredible, since our credit offering is still limited for consumers and PagBank is much more a transactional account at this time.
Our confidence increases when we run our internal research with our clients to know how engaged they are. Looking at the chart in the right-hand side, we see that for new cohorts, more and more consumers are using PagBank as their primary bank.
Before I turn over to Alexandre, I would like to reinforce we are very encouraged by the momentum in both businesses PagSeguro and PagBank, and all the opportunities ahead. We keep working to grow our businesses and to create value in a sustainable way for investors and other stakeholders.
Our controlling shareholder is convinced that PAGS will continue to consolidate Payments and Financial Services in Brazil and holds approximately 40% of the shares since 2019. Thank you very much for those who have been supporting us throughout the journey: our shareholders, suppliers, partners, other stakeholders, and our PAGS' team. Thank you very much.
Alexandre, please go ahead.
Thank you, Ricardo. Hello everyone. Moving to slide 11, I'll start the segment highlights with PagSeguro's overview during the quarter. PagSeguro's Total Revenue and Income grew 63% year-over-year, reached R$3.1 billion and reflecting the TPV growth of 60% year-over-year, totaling R$80 billion.
I would also like to remember that this growth happens even after a quarter of strong volumes due to holiday seasonality. As a result, PagSeguro was the TPV market share winner, as Dutra mention, reaching almost 11% of Brazilian Acquiring Industry Market Share.
In the next slide, we show PagSeguro's net take rate evolution since October 2021, when we started the repricing process, following the Interbank Rate hikes. We were able to increase our net take rate by 34 basis points since October, maintaining stable levels of churn on our client base.
This stable churn, even with higher pricing policy, shows the importance of our superior value proposition which consists in a complete banking offer through PagBank, Instant settlement offering with same day prepayment and our best-in-class SLAs with a robust logistic distribution.
We ended this first repricing cycle in April and will follow closely Selic's behavior in order to determine if others repricing rounds will be needed. I would also like to highlight the successful execution on HUBs operation that was even better than our own expectations.
HUBs reached 25% of PagSeguro's TPV in Q1-22, showing the results of our accretive sales strategy for the SMB segment.
Slide 13. I want to share some updates about PagBank operation. Total revenue grew 95% year-over-year ending the quarter at R$305 billion approximately 9% of total revenue and income of tax. Total payment volume reached R$72 billion, up 129% year-over-year with engagement TPV gaining traction driven by cashing, bill payments, card spending among others. Up right we show our net interest income, which grew 164% totaling R$142 million in Q1 2022 and gross profit including revenue from service, minding provision for losses, grew 83% year-over-year accounting for R$86 million. PagBank metric rate reached 1.54%, an increase of 61 basis points reflecting the increase of monetizable TPV and higher float revenues due to the increase of deposits and the higher Brazilian interest rate.
Moving to slide 14. I would like to recap our milestones in credit on the right. Since 2018 we have launched several products such as credit cards, working capital loans, supply chain finance, payroll allowance and overdraft credit line within PagBank accounts. Given the challenging scenario that Brazil has been facing now, we have focused our development into collateralized products such as credit cards backed by CDs and FTTS early prepayment.
On the first quarter, our credit portfolio surpassed R$2 billion with working capital and credit cards, representing around 90%. And other initiatives such as payroll loans and FTTS, so the prepayment reached 10%. We are very focused on the consolidation of our credit offerings since we know that this is a fundamental piece to become the customer primary bank choice. We have been executing this in a very consistent way, making sure that our underwriting, credit policies, provisions are under control and well-priced, guarantee that any major change in asset quality in the near-term will be adequately provisioned. We are highly confident that PAGS will consolidate the credit business in Brazil through PagBank by cross-selling and up-selling strategies for existing clients.
Moving to slide 15. I won't share some facts regarding peak impacts on our operations. As we can see on the left chart, peaks has been promoting the PagBank cash in growth in 250% year-over-year, totaling R$24 billion in first Q 2022. PagBank accounted for almost 10% of peaks transactions market share on this quarter. Peak has been key to boost the opening of new accounts since we offer an easy and simple boarding process for the population to have access to this instant transfer network.
Another positive effect of Peak is the increase in the average balance of new accounts. Consequently this is leveraging a cheaper funding source for prepayment operation and promoting the growth of monetizable cash out throughout card spending through payments and top-ups. Furthermore, this is an important tool to collect additional client behavior data to improve customer knowledge and ascertain of new offerings and products.
Finally, before I turn over to Artur, I would like to review our guidance for Q1 2022 and establish a ballpark for the Q2 2022. Total revenue in first Q 2022 was BRL 3.42 billion higher than consensus. For the second quarter 2022, we expect a ballpark between BRL 3.5 billion and BRL 3.6 billion.
PagSeguro TPV grew 60% year-over-year in First Q 2022 reaching the top range of the guidance. For the Q2, we expect something around BRL 84 billion to BRL 85 billion. Net income non-GAAP will be higher than Q1 around BRL 370 million to BRL 380 million.
Having said that, I pass the word to Artur, our CFO. Thank you.
Thanks Alexandre and hello everyone. I will continue the presentation with our Q1 2022 financial results. On the top left of the Slide 18, our consolidated net take rate reached 2.60% representing an increase of 21 basis points year-over-year even with changes in the client mix due to HUB’s operation growth. The increase reflects the company ongoing pricing process for all segments, whose second round was fully implemented in April.
In the table on the right side, we present our P&L for the first quarter of 2022. Our total revenue and income reached a record of BRL 3.4 billion, growing 66% year-over-year. Excluding transaction costs related mainly to interchange and card scheme fees, financial expenses related to cost of funding to prepayment receivables, exchange expenses and other financial income related to financial investments, our gross profit grew 28% year-over-year. Adjusted EBITDA closed at BRL 665 million, up 16% in comparison to Q1 2021.
Net income non-GAAP achieved a record of BRL 371 million for all first quarters in our history. Net income GAAP increased 29% reaching BRL 350 million versus the same period last year, despite of the hike in Brazilian interest rate.
Backing to the left side in the graphic below, as a result of our TPV market share gain, revenue growth and expenses leverage, we delivered an earnings per share of BRL 1.05 in the first quarter of 2022. It is BRL 0.23 or 29% better than the same period of last year, on our shareholders' return.
Moving to Slide 19. In the top left side, operational expenses and other costs excluding chargebacks reached BRL 560 million in Q1 2022. This amount represents 16% of PAGS total revenue income versus 20% in the same period of last year. The improvement of 400 basis points reflects operating leverage, mainly from personnel and marketing expenses and on top of that HUBs and PagBank revenue growth helped to dilute our OpEx.
In the bottom left, financial expenses reached BRL621 million versus BRL44 million in Q1 2021. 50% of this increase is explained by the hike of SELIC from 2.1% per year in 1Q 2021 to 10.4% per year in this quarter. The other 50% was related to higher TPV volume, prepayment of receivables to merchants, and credit card mix. These effects were partially offset by ongoing repricing in acquiring, APRs increase on credit underwriting and lower cost of funding through deposits growth.
In the next slide, CapEx per sales reached 20% this quarter versus 17% in 2021. This increase reflects an additional POS purchase to recover the inventory's coverage ratio and to prevent a potential new lack of semi-conductors due to lockdowns in some geographies.
For 2022, we are focused on reduce POS subsidies, keep healthier LTV to CAC, and maintain our best-in-class SLAs on PagSeguro operation.
In the graphic below, depreciation and amortization are under control and totaled BRL244 million in Q1 2022, representing 7.1% of PAGS total revenue and income with slightly improvement versus full year of 2021.
The next and final slide shows our cash position which ended the first quarter at BRL8.3 billion, improving BRL400 million year-over-year. This was driven by TPV growth, higher share of credit cards with larger penetration of same-day prepayment to merchants.
At the same time, we have been improving our capital structure, ending this quarter with 68% of our financing position funded by third-party capital. Our full banking license is key to diversify funding sources and extending average terms.
On top of that, the company is focusing on increase deposits from merchants and consumers to keep lower financial costs. Our PagInvest platform is also an important tool to distribute PagBank CDs to our clients or bring new clients to PAGS.
Now, we ended our presentation, and we will open to the Q&A session. Operator, please.
Thank you. The floor is now open for questions. [Operator Instructions] And our first question comes from Mario Pierry Bank of America.
Hi everybody. Good afternoon. Congratulations on the results. Let me ask you two questions. Can you talk about the evolution of your take rate? You showed the monthly figures up to the end of the quarter, but I was wondering if you will continue to reprice in the second quarter? So, if you can talk a little bit about the evolution of your take rates?
And then the second question is related to -- if I take the midpoint of your net income guidance for the second quarter, you're basically going to be at about BRL750 million for the first half which then annualizes to BRL1.5 billion, which is in line with the net income that you posted in 2021. Is that how we should think about the full year, or do you think there's room here for growth in the second half of the year to be better than the first half? Thank you.
Hi, Mario, this is Ricardo. Thank you very much for investing the time to talk to us and thank you for the questions. Well, the first one about take rate. Indeed, we had some increase in price in April. So what we are following here in Q2 about take rate, we see take rates going up.
Important to say that even if you get the take rate and also discount the financial expenses, we also see this metric increasing. So the price increase we've been doing is showing some positive results. And as we said during the presentation there is no impact in churn. So we expect Q2 to have a better take rate than compared to Q1.
About the net income guidance you're right. If you get the midpoint of Q2 is going to be around 750. And by just annualizing that it's going to be BRL 1.5 billion. I just want to reinforce that that's the best information that we have so far, but we are here working always to beat the top of the guidance. That's what we will try to do. So that's the first point.
And the second one is -- we expect also the TPV to keep growing in the following quarters. So I don't want to give you here a hard guidance, but with higher volumes we also expect to have better net income looking forward. But we cannot guarantee that at this point. But, of course, we -- again we are working here to beat the guidance and to keep this net income being better in the following quarters.
That's clear. Just a follow-up then on the take rate. Just so that we have a better understanding like what percentage of your clients have already been repriced? And if you're repricing both the MDRs and the prepayment product?
Mario, we are repricing the MDRs and also the prepayment. Usually, we repriced MDRs more for credit because that's why we had the impact with the cost of funding right? Because the debit transaction is settling in the next business day and in credit cards in 30 business days. So -- but we are increasing both MDRs and prepayments.
We don't give the details about the percentage of the clients or the percent of TPV that we are increasing. First because of the strategic reasons; and second because it's a very let's say live situation here that we keep following different clients with different industries which are retail or fast food and depending on what went on we keep increasing adjusting. And even for some clients we did some price that fluctuates a little bit with SELIC.
So we are, kind of, protected for large clients that will not have any impact and we don't need to keep going back to them to increase prices very often. So unfortunately we cannot give the details about the number of clients in TPV, but we are increasing the price for both MDRs and prepayments.
Okay. That’s great. Thank you very much, guys.
Thank you very much, Mario.
Our next question comes from Bryan Keane, Deutsche Bank.
Hi, guys. Congrats on the results as well from me. I guess two questions. Is the idea that you guys will continue to raise price in order to cover the cost of the rise in the Selic rates. So, if Selic rates stop rising and just let's stay flat, it might take I don't know another 12 months to 18 months to catch up to the full amount. But at some point, I guess, the plan is still to catch up and pass through the entire higher rate. I just want to make sure the higher interest rates will get passed through the Selic rate?
And then secondly, on merchant account it sounds like more of the strategic focus now is to expand and grow within the higher TPV per merchant and create higher revenue per merchant than it is maybe to land a micro merchant that might not be as profitable. Just obviously you guys had a slide on that. I just want to make sure I understand that strategy. Thanks.
Hi, Bryan, thank you for the question. It's Ricardo here again. Regarding the prices, just remember that, the base interest rate of – in Brazil went from 2% to 12.75% at this point. And there's going to be another meeting of the Central Bank in June 14 or 15. So we are following the probably increase in base interest rates, and if necessary we can increase our price. But I would say you that, the largest part of the price increase we already did because – that's the high impact from 2% to almost 13%. If necessary, we will increase the price, but it'll be more customized according to some clients and some adjustment that we need to do, but I don't think that is going to be a massive price increase looking for. That's one thing.
But it's important to say that, Brazil started increasing prices much earlier than other countries. And we had hyperinflation engages in Brazil, inflation 90. So Central Bank acted very quickly here to increase price to increase base interest rates. And we expect that at some point, this interest rate could go down maybe next year or 18 months from now as you mentioned.
So when that happens, we will not decrease our prices proactively. So the same situation that, we took a while to increase the prices in Selic rises, we will also take advantage. We will not decrease the prices immediately, if Selic goes down. So what today is a headwind, it could be a tailwind two quarters from now. But going back to your question, the majority of the price increase is already done.
And regarding net adds – you're right. We are looking for clients. We are not looking for big clients, but we are kind of not focused too much on the nano-merchants, the smaller ones. We – we – of course, we follow what happened with the previous cohorts, the payback that we had, and we evaluated here and conclude that the best decision right now is to increase POS prices, and decrease POS subsidies, improved the LTV versus CAC ratio, and look for clients that use not only PagSeguro but also PagBank. So that's why we are focusing a little bit higher merchants.
And I'll take advantage of your question just to complement that, different than other companies that the number of subscribers is key to model revenue and so on. When you have five seats, it's very different here because we have many growth drivers, the clients that work with us usually, they grow their TPV. We can cross-sell products, so the idea is to also bring this client and increase the revenue promotion that we have today. So that's what we have in mind. That's what we are looking for.
Bryan, this is Éric. Just to add my queue [ph] sense here related to the spreads, when we think about spreads, remember that, as we move up market, larger merchants, they have slightly lower spreads in comparison to micro merchants. And this is okay for us because it is EPS accretive, so not necessarily spreads will be fully recovered even though EPS will continue to grow, okay, while due to the client mix change towards larger merchants that have much higher TPV per merchant in comparison to long tail. So the summary here is consolidated long-tail, increasing share of wallet and also moving up market with clients with larger volumes and slightly lower take rates, but still very profitable for us.
Got it. Thanks for taking the questions.
Thank you, Bryan.
Our next question comes from Pedro Leduc, Itaú BBA.
Good evening everybody. Thank you so much for taking the question. I have two please. First, if I think about your net margin evolution for the coming quarters, of course, you're working on the top line on the repricing. OpEx seems to be getting diluted. I'd like to get your views on that as well for the coming quarters. But also on the funding cost side, especially in the light of the strong deposit figure, what can you expect from the funding side as a help to net margins in the coming quarters? Is this something that you can do not to offset a little bit the Selic pressure is still lingering? So that will be the first. Thank you.
Hi Pedro, this is Ricardo again. I will start and Artur can complement if he wants to. Just before answering you about the margin, just pretty quick math here. Our financial expenses in Q1 2021, was R$44 million and in Q1 2022 was R$621 million. So it's a difference around R$580 million in financial expenses. Of course, that's happened because of the increase in base interest rates.
If you analyze that, this R$600 million times four, we are talking about R$2.4 billion as an increase in financial expense, a big headwind. And even with that, we are growing our net income in absolute terms, which for us is a huge, huge achievement because you can imagine R$2.4 billion before taxes is a big headwind and we're still delivering a net income higher than last year of 29%, if you look in GAAP measures. So with all the scenarios that we have looking forward, we will focus to remain and to increase our EPS. We always look for growth and profitability. So, we have this volatility, not only in Brazil, but around the world and residential access in Brazil and so on.
So to be sincere, we are trying to look some operational leverage as we had in personnel and marketing for instance. But we're now looking for margin as a percent of revenues in the following quarters because of the volatility that we may have and so on and with this headwind in financial expenses. But I don't know, if Artur would like to complement.
And regarding funding costs, we – of course, we are following that very close. And we also have the advantage by having the bank with BRL11.2 billion in the products that we – it helps us to decrease the average cost that we have in funding. And it's going very fast mainly because of the deposit that we have in the balance account and also the CDs that we've been launching since last year.
And just to add my two sentence here Pedro. This is Éric. When we combine the full banking license and all the products that we have been rolling out, remember that the deposits that we are capturing here is a winning go-to-market strategy to keep attracting new clients with high AP wise – at the same time that we foster cheaper balancing accounts to help to diversify the cost of funding and the heat that we have been seeing in our profits in the short-term related to the interest rate hikes will not be as high as it was right now because in the next interest rate hike cycle, we do expect to have a larger deposit base which will be a natural hedge for the company to deliver much higher profits in the future since we have the full banking license and PagBank.
That's very clear Éric, especially sort of getting to know the deposit was an impressive figure. Congrats. And I'll go back in line for a second question. Thank you.
Thank you.
Our next question comes from Jeff Cantwell, Wells Fargo.
Hey, great. Thanks for taking my question. I wanted to follow up on the PagBank commentary that you were highlighting earlier and more specifically, on Slide 9 of your presentation. I was hoping you could talk a bit more about the active client base of the growth that you're seeing in active clients right now. One of the things we're trying to unpack is just sort of the marginal profitability of the consumers that you're bringing on board. I was hoping you can kind of give us a little bit of a sense of what you're seeing in some of your more recent adds and how you think about profitability going forward? Thanks a lot.
Hi, Jeff. Yes Slide 9 you see that we grew very fast in consumers. And right on the right side you see there, they are using PagBank as a primary bank more and more. So – we also think that we have been cautious in terms of giving credit for consumers. And even with that more than 50% of our clients use us as their main bank, which is very good for us when we decide to launch new products or to give some price for these clients. But going straight to your question here, what we do with the merchants to monetize of course, we have the transaction that we have with these clients. When they pay a deal, when they top up a mobile phone, a prepaid mobile phone and so on to have this revenue streams.
But we also have another two adventures here, our two product lines I would say. But the first one is the deposits that help us in the funding which is important. Of course, we will have these days of clients growing and deposits and balance accounts growing help us in the funding costs. And you can imagine that in accounts with 13% base interest rates per year so that helps. And we've been launching new products that we will give credit for the consumer with collaterals. So we already have some CDs that we offer for these consumers. When they deposit the CD, we can give them a credit card and then we can receive revenues for interchange and so on and with a very, very limited credit risk. So that's what we have in mind at this point.
And we still have been cautious about giving credit. Although, we had an increase in deposits in Q1 compared to Q4 around BRL 200 million from BRL 1.9 billion to BRL 2.1 billion, it was mostly collateralized products based on deposits that companies make for employees in the government. So if the consumer doesn't pay us, we can -- we are kind of backed from the government to receive this money. So that's why we also launched it and that's the majority of the growth that we had in Q1.
Thank you very much. That's great color. I will jump back in the queue. I appreciate it.
Thank you, Jeff.
Our next question comes from Pedro Leduc, Itaú BBA.
Thank you guys for taking the follow-up. I would like to switch subjects quickly for credit it's small and I appreciate you guys have been prudent on it. Portfolio is growing steadily, now down BRL 2.1 billion. Can you discuss a bit, how we should expect it evolving in the coming quarters, especially between the secured lines, which seem to be growing faster? And then other than growth, a second question now related to credit risk. How you're seeing that on the ground? How was the ex-provision expense figure for this quarter? And how should we think about that one evolving in the coming quarters? It seems like you've adjusted some standards et cetera. May it have peaked or stabilized? Thank you.
Hi, Pedro. What I've seen so far will start from backwards and then again Artur can help me here. But I've seen so far in the market, in the Brazilian market and we've been hearing from big banks that know how to give credit in the market. There was a little bit of deterioration of NPLs. And of course because of that is the macro scenario. We've been seeing here with the inflation employment and so on. So -- and here the sales was not different. We had a little bit deterioration in NPLs nothing to be concerned. But we also expected that we've been seeing the cohorts. And that's what is going on with us and Artur can give more color.
But looking forward, I would say you that we do not expect to grow our current portfolio too much. If you grow slower or just a little bit. But there will be a transition from quarterized products non-quaterized products to quarterizing profit. So we are already doing that. We did that in Q1 with this FGTS product that you know very well in Brazil what I'm talking about. So we have this government guarantee. So that's very important and secure and safe collateral. So what we -- probably what we will have what we see in the future is more and more collateralizing products taking share from other products with more credit risk.
Of course, our goal here is to have a balanced portfolio with products with higher risk, but of course with higher returns and a huge part of the portfolio with collaterals that we can also navigate to different times and depending on what's going on in the macroeconomic scenario. But at this point, the majority of our credit portfolio is still without collateral, the working capital for the merchants, we are what you see is going to see this migration from non-collateral to collateralized products.
And Pedro just to complement, we are seeing difficulty in the economy, difficulty in the market all the incumbent said that the portfolio deteriorated a little bit and happy to hereto, but remember that our net income non-GAAP for this quarter was R$371 million. Imagine if the asset quality should be better, we could have a better results too. And this is the reason that we are observing the market, trying to understand when will be the right moment to accelerate again. And at this moment we are -- as Dutra said, we are working to provide credit for merchants and consumers that could provide collateral to us.
That's perfect, very full. And just regarding the provision expense line, this quarter as you mentioned net income could have been even higher. Can you see -- has that provision expense line may be plateaued, or do you think that it will continue going up as the portfolio also grows?
Yeah, I can say that it's -- we can say that it could be stable. And the most important thing to us is that we are using the most advanced accounting process to the credit portfolio. And we are not expecting a huge impact in the future because our provisions are based on IFRS 9 expected losses taking a look at the next 12 months. And so we are positioning. And so there is no problem for the future.
But Pedro, this is Éric. More important to ask about provisions and you're completely right to make this question is the APRs that we charge, okay? In light of this challenging environment, we also increased the APRs potentially or expecting to see deterioration in asset quality to keep these spreads, okay? So this is the main message here. The APR has increased to cover the higher provision for losses. And remember that the IFRS 9 makes the company to make the upfront provision for losses and capturing higher margins as time passes by and as we book as an interest income, okay? Thank you.
Super useful guys. Thank you so much.
Thank you, Pedro.
Our next question comes from Neha Agarwala, HSBC.
Hi. Congratulations on the results, and thank you for all the comments. I just have one quick question. You mentioned that the earnings in the coming quarter should continue to improve with the pricing mostly done, and I believe the funding costs will continue to go up because as you do more of repayment and the volumes grow. So that should put some pressure on the funding cost in the coming quarters as well. So what would be the main drivers for the expansion in earnings in the coming quarters? Also the monetization at PagBank has been a bit weak. And I understand that's mostly because you're not being very aggressive on credit and that perfectly makes sense. So how do you think that contribution will look like by next year for PagBank? Thank you so much.
Thank you, Neha for questions, for investing time to talk to us. Regarding the unit pricing, it's an ongoing process. I guess what I mentioned before that was not clear. It's because, I would say, the majority of the price increase was always done because the interest rates grew from 2% to almost 13%.
And if there's going to be an increase, we expect that it will not be that huge looking forward. It's going to be a big -- we do not expect a big increase in the following two meetings in Central Bank about interest rates. So, that's why I said that it could be adjustments. There will be adjustments, that's for sure. But, the majority was already done.
And we think that we are in a good level of spreads when you compare the financial income that we are charging and the financial costs that we've been having. So, I know when you say that the prepayments will increase, volumes are increased, because the company is doing very well in acquiring growing 60% year-over-year.
But of course, the revenues -- the financial income revenues grow at the same pace or even faster than that. So, the spreads between the financial income and financial expenses, we think that we are in good levels. Of course, always -- there is always some room to improve a little bit. But we'll keep fully.
I just don't want to say that we will increase the price for everyone. And I would not affirm that we will not increase price for anyone. So, the majority of the price increase is already done. So, that's the main message.
And looking forward for next year, as I mentioned before, Central Bank in Brazil was very rapidly to increase the prices here, despite the spike in the interest rates. So we expect that inflation could be controlled in the following quarters. And when that happens, if the interest rate goes down, we will not decrease the price for our clients.
We try to keep at the same line at least for a while and of course, make that as a tailwind as much as we can. So, that's why it's hard to say you, what's going to be margins going to be better or not and how much it's going to be, because we have this macro situation here.
But the whole company, with the things that you have under our control, we are doing like leveraging the operational expenses, personnel and marketing, increasing price for some clients, making more rational acquisition clients and so on. So that's the main message about the acquiring.
I know we’ve say that the revenues maybe a little bit lower than what we expected, but the fact that we are not giving credit, because of the macro scenario, of course, affects the revenue in PagBank. It could be higher, yes, it could be, but it's a higher risk that we don't think it is time to do that right now.
But in our opinion, the fact that we already have 23 million people with open accounts in PagBank, 14 million active clients. For us, it's a very, very, very huge opportunity that when we decide to go to give credit to monetize more, we can speed up, and probably I hope we can catch up part of the revenues that we are not capturing at this point because of the macro scenario, the credit concessions we are not doing right now.
Two things, Neha. First one, remember -- always remember, spreads for larger merchants are slightly lower than micro merchants, and we are not a company anymore that relies only in micro merchants. Since 25% of our volumes in Q1 came from hubs, small and medium merchants.
Secondly, revenues grew 66% year-over-year, while personnel plus marketing and advertising expenses combined grew half of that. I mean the investments that we did in new ventures such as PagBank and hubs they are already playing out delivering operating leverage to the bottom line. The big headwind is financial expenses. And despite that we are working hard to deliver a higher net income in 2022 in comparison to 2021.
Understood. Could you just talk to you about the competition especially in the long tail? Do you see competition being more rational? I believe all the players are now achieving the prices. So there should be more rationality -- but anything that has changed and anybody being aggressive or irrational in the space?
Hi Neha, this is Alexandre. What we have observed in the market is that all the value players have been more rational either pricing strategies in the long-tail segment. We have the lion's shares in terms of number of merchants. And through our experience of having the largest merchant network in Brazil for all these years, we learned how to manage properly how these retail customers and we have a very good value proposition on this segment.
We have superior logistics. We deliver our terminals in the same day between one day or two days mostly. We also have a value proposition between the banking business and acquiring business that no one has in the market. We provide this service with a single app and with a single customer care contact for our merchants. So we believe that our value proposition and how the assets -- we have maker, the strongest competitor in this area and being more rational about terminal subsidies and promotional offerings is making us to capture more value out of these clients.
We are raising the average TPV of our merchants. And we are also to capture merchants that has a higher propensity to use financial service and this is helping us to boost by the bank.
And just complementing the initiatives from other incumbent companies, acquiring companies such as CLO and credit card apart from [indiscernible] they kind of decided not to keep with these inactive anymore. So, it seems that there were more competitors in the past than what it had today in longtail. So that's the situation. If you look at one year 1.5 years ago there are many, many more players trying to come to longtail. And just to give an idea these two companies decided not to serve them the way more because of the reasons that Alexandre just said the logistics that we have at PagBank and so on. So to more rationality and less players serving longtail at this point.
Perfect. That’s very helpful. Thank you so much.
Thank you Neha.
Our next question comes from Kaio Prato, UBS.
Hello, everyone good evening. Thanks for the opportunity for asking question. I have two here on my side please. The first one is on PagBank revenues. So in the last quarter, you mentioned a guidance for PagBank revenue of R$240 million to R$260 million, and the date that you disclosed the results were really close to the end of the first quarter, but you delivered more than R$300 million this quarter, while the NII remained flat quarter-over-quarter. So I just would like to have a sense on what happened if this is indeed an impact of fees, and in which line of fees we saw the enquiry. And also what can we expect in terms of revenue growth from PagBank going forward?
And if I may just to add my second question here is related to the tax rate. If you could first give more details about the impact on effective tax rate this quarter? And what can we expect going forward? And, of course, I'm trying to better understand what could we expect in terms of earnings before taxes if we could see this expanding over the next quarters? That’s it. Thanks a lot.
Hi Kaio. This is Ricardo. I will start backwards here and then Artur can complement and also talk to you about the PagBank revenue guidance. When you look at the tax rate this quarter if you look at the specific line, you see a lower effective tax rate, right? But the point is in other lines of our P&L, we had a negative revenue tax impact in the line of other financial income. We have a headwind in the other financial income. And then we could offset that in our tax rate for income, income tax rate.
So if you make the sum of the parts and the puts and takes, there is no real benefit in the bottom line. It's just a trade-off in tax collection between different lines. So for this reason I will reinforce here that net income impact was negligible here in the situation. There's just a trade-off between this two different lines. Artur?
And Kaio just talking about going forward related to effective tax rate, the same as Dutra explained it. We will continue, so our effective tax rate will close around 16%, 18%, 20%, okay? And just to be aligned here. What happened with the guidance in Q1 2022 with the revenues for PagBank was that we had -- we were more a little bit pessimistic about the revenues, but we beat our estimations for credit, for cards, for many services there. That's it.
Okay. Thank you.
Thank you, Kyle.
Our next question comes from Sheriq Sumar, Evercore ISI.
Hey everyone. Thanks for taking my question. My question is a two-part question and it's on the churn. So, I understand that you started increasing the rates in January and then obviously, it has continued until April. How much more runway do you think is there for the churn to go up? Is that -- is all the churn fully reflected in the price increases or in your estimates?
And the second thing is I understand that how the churn works where we won't see the actual churn until like 12 months from now. So -- where do you think we would be ending by the year-end in terms of the active merchants within your PAGS business and also your focus on high-impact lines. Will that increase the churn within your within the merchants. So, long story short my question is like how should we think about the active merchants for the full year?
Thank you for the question. As we talk about this quarter and then we can talk about the following quarters. So, what we had in this quarter we still have some legacy clients from MOIP that we see this churn. But as you mentioned in your question they are not making any transaction with us in the past 12 months.
So, if we just exclude MOIP, we have grew in decent numbers. Of course, it's not the same 250 that we used to have every quarter, but it was a conscious decision here. We decided to increase price to get better merchants not to focus on nano merchants. So the gross adds were a little bit lower than what we used to have in the past. And of course we're seeing churn for one year ago.
But for us what are following very close is the -- how active these merchants are in our base? How big is TPV per merchant? And how it's been our growth which was 60% year-over-year and revenues growing 66% more than the volume the TPVs? So that's why we although we see this number of churn maybe number of net adds not the same levels we used to have in the past, we are not losing TPV because there are small merchants that we are losing here.
In terms of price increase, we didn't see any spike or additional churn because of the price increase because all the market increase prices. So there is no -- the [Technical Difficulty] will churn only if the -- it doesn't sell with cards anymore which is not a reality. So we increased the prices all the market also increased prices. So we didn't see an increase in churn because of the price increase.
Looking forward, I guess, the best estimate that I can give to you that it is not likely that we will have the same 250 that used to have per quarter before. But again we are looking for merchants with better TPV and the impact of the churn that we're seeing is from 12 months from now. The churn that you have -- the behavior that you're seeing the base right now we don't see deterioration because of price increases and nothing that. So let's say, we're straightforward here.
Gross adds are lower because we decided to -- we took this decision to get less merhchants and more TPV and the churn from the big base for mortality from nano-merchants that we had one year ago was impacting the total net adds. But again it's better to look at the total TPV, TPV per merchant, revenues per merchant and so on. So -- it's hard to give an estimate how it's going to be for the following quarters. So that's the best information that I have right now I'm sorry..
Sorry. Thank you so much.
Thank you.
Our next question comes from [indiscernible] from Cantor Fitzgerald.
Hi, guys. This is [indiscernible] from Cantor on for Josh today. I was hoping you could share a little more color about the diversified revenue streams around PagBank. What services are clients specifically engaging with? And is that going to be a trend that continues into the future? Thank you.
Thank you for the question. When you mentioned diversification is because we use it to have -- if you look back the majority of the revenues we're having were related to interchange of the card, people just spending money with the cards so will interchange every time they made a purchase or they buy online or things like that or even the money in an ATM.
And then we've been seeing that engagement is increasing of this 14 million clients. So the transaction is also helping the revenues and also the fact that we increased our credit portfolio helped us to increase the revenue. So -- as we mentioned in the Q1 May message slides, we are seeing this revenues coming from interest getting more share in PagBank.
And probably we will see that increase in the following quarters, because although we will not increase the credit portfolio too much, it seems that we have – we expect to have the credit portfolio stable and with more collateralized products. So that's what we see looking forward.
The other growth drivers that we have – we talked about SMB's digital account. We launched many products during the quarter but I would say, I will highlight three of them that we have in these slides. One is the debit card for SMBs that were asking us for – to have a debit card.
We also had direct deposits from other acquirers to PagBank. And also we are launching CDs with credit cards for SMBs because it didn't have credit cards for formalized companies. It was only for consumers at this point for let's say people, not for companies. So those are the drivers that expect to help us in the revenues looking forward, because we see this huge opportunity for SMBs, as I mentioned in my picture at the beginning, we are the only acquirer that we serve SMBs with payments in digital account.
If we look at other acquirers that are trying to service SMBs or they don't have any bank account. They are a subsidiary of banks but they don't have their own bank accounts or others that are trying to do that they are behind us at least three years. So we are the only one with a payment solution in digital accounts. So we expect also to extend and penetrate more in our SMBs, not only in terms of clients but us in terms of engagement and consequently revenues.
Okay. That’s really helpful. Thanks for taking our question.
Thank you.
Our next question comes from Tito Labarta Goldman Sachs.
Hi, good evening. Thank you for taking my question. I have a follow-up I guess on the guidance a bit and on the margins that are implied, right? I mean at the midpoint of the guidance, it implies that the margins fall a little bit from this quarter. I mean you mentioned most of the repricing is done, where do you think that we can begin to see some operating leverage in the business and the margins begin to go up? I mean is it – do you need to wait for interest rates to come down? Is it PagBank and the hub decline profitable? Just to get a better sense of when we can begin to see an inflection point there.
And then maybe a follow-up to that. I mean you mentioned you would have proactively reduced rates when rates come down. But what if your competitors start to lower rates when interest rates decline would you be forced to follow, willing to follow? And – or do you think you could then be able to maintain prices in a lower interest rate environment as well? Just to get a sense also on some of the potential operating leverage there if and when rates eventually may be coming down. Thank you.
Hi, Tito, this is Ricardo. Well, definitely we will have some – we expect to have better margins when the interest rate goes down because of this mismatch of timing between the decrease of course versus the level of revenues that we have at this point. So increasing the spreads because of interest rate goes down then you keep the price at the same levels.
Regarding your question, if competition decreased the prices, I don't think it's let's say a simple answer like we're going to follow or will not follow. We have 7.7 million merchants, almost eight million merchants. So you can imagine you have every type of merchants in all the cities in Brazil more than 5,500 cities. Many of our clients use us, not because of the prices. We have the highest net rate of the market, but the users because of the ecosystem because they have PagBank, because we are the first mover and so on.
So part of our clients are not that price sensitive. So I don't think that, there's going to be a move to other players, because we did not decrease the price. So we don't need to follow immediately, if some competitors decided to decrease the price. And many of our competitors don't have a strong presence in long tail for instance. So we think that, we will take advantage of that.
Of course, if we think about large clients that they have all the financial manager, or things like that, there could be some competition there. But again, we try to make to differentiate PagSeguro from other these better services, better logistics, and so on, to try to sustain higher price when compared to competition. And if you look at the industry, we have the highest rustic rate and also net tick rate.
Regarding margins in short term that, you were looking at our guidance, depending on if you're looking at the bottom of the guidance the mid and so on, but it seems to be stable in Q2. Of course, we still have some days to finish Q2. But it seems to be stable. Operational leverage we do expect to happen, because we already invested in hubs in the past two years with our 300 hubs. And we are not let's say opening new hubs at the same pace that you used to have in the past, only small hubs here and there.
So all the base that, these hubs that we invest in the past they create the base of merchants TPV that we are having right now. Of course, we can take some – we can get some leverage there. But again, I just don't want to promise here better margins, because we don't even know how it's going to be the next interest rate increase, if we have by June. And then of course, we had this interest rate increase, we increased the price as much as we can and we have the ability to pass the price as we could see in Q1.
For me, we had a very successful price strategy here. We were able to increase the price, increase take rates, and churn levels under control. And that's why our revenues grew more than our volumes, 66% versus 60%. And in Q2, we are seeing better take rates when compared to Q1. So – it's a matter of time for this operational leverage to happen, but I just don't want to promise you when will happen, but I guess, the best answer here at this point is just to say some of the headwinds that you have today could be tailwinds in the future. So let's see, when they will become some tailwinds and we can take advantage of that.
Great. Thanks, Ricardo. That's helpful. Maybe just one follow-up then on that. In terms of PagBank, I think you had initially said breakeven maybe end of this year, I think last conference call you said maybe that gets delayed a quarter or something because of sort of slower credit origination. Is that still the case? Do you think PagBank turn to profit next year? And then also a similar question on the hubs, would you say how long does the hubs take to become profitable? Is that this year, next year? Any color on the profitability of the hub?
Regarding PagBank, Tito, we -- what you see so far down here in Brazil is, with all the changes that we saw in the market, even if the money, with the access of capital that it had last year and the easy money is not so easy anymore. So opportunity to grow [indiscernible] some clients even for other smaller players that had funding from venture capitals and so on.
So we are following the idea here or the rationale here to speed up our PagBank acquisition of clients. We are doing very well, I can see the numbers. Monetization could not happen in the class or the same pace that we expect to have, but we are already the second largest regional bank in Brazil, so keeping in profitability will be a consequence.
To give you the specific date, if its not -- can you hear me?
Yes.
Okay, Tito. If it’s not in the Q4 this year, that we said, it’s going to be in the following quarter. But this issue doesn’t move the need of the profitability of the company. We are building the second largest digital bank R$14 million, increase engagement, increasing deposits, helping us refund and so on. So we are in the path of breakeven. I just can not assure you its going to be this year, as I said before, but it’s not going to be very soon. So, honestly, we are taking advantage of the scenario to grow PagBank as fast as we can.
And the hubs, I guess, Artur can help you with the hubs. Artur, probably a little with the hubs.
Yes. Tito, this is Alexandre. Regarding to the hubs, hubs represent today 25% of our TPV. We have around 300 hubs spread all over the country covering around 80% of the Brazilian GDP geography locations.
We have a very compelling paybacks in our hubs operations between four to six quarters. What we see is that through our superior logistics infrastructure same-day prepayment and PagBank offering, we have been growing much faster than the competition in our hub strategy, exploring and gaining share on the SMB segment. And we see that we are gaining that traction and that markets are much faster than we originally would think about.
Okay. Yes. Thank you. That's helpful.
Thank you, Tito.
Our next question comes from Soomit Datta, New Street Research.
Hi, there. Thanks for taking the question. Just a quick one at this point please. You've given some data on the hubs contribution to TPV over the course of the last few quarters. I'm trying to kind of plot that progress over time, i.e. how much is hubs contributing over time, it's a bit hard to get to the exact numbers. I'm curious to what degree is, is the long tail still growing TPV relative to hubs. I think, for example, you said hub TPV is up to 25% of total. Now I think it was 20% at the end of at the end of the year. So when I look at the TPV progress through Q1, it was flat. Does that mean long-tail TPV is down, and hub TPV is up? And when you're guiding for TPV into the next quarter are you assuming long tail is still growing, or is it really coming from the hubs at this point? Thanks very much.
Hi. Thank you for the question. Well, long-tail TPV is growing. We were the first mover. We have a very loyal base of long tail and small merchants that work with us. So this TPV is growing in long tail. But of course, when you look at the TPV metric, hubs are growing faster, because they usually are five, six times higher than the size of a long tail. So that's why the [Technical Difficulty] rapidly get a share of TPV is 25%, which is good, because we are again growing 60% TPV [ph], 66% in revenues and so on.
So, looking at TPV, we expect that hubs will take share because the hubs operation is doing very, very well. We thought it would be even harder than what we see in the market. So, are doing very well. So, they will keep taking share, but long tail is growing. But it's not growing at the same pace as hubs because of course the maturity of TPV compared to hubs is not at the same level. We are growing hubs more fast or faster than long tail, but both of them are growing.
And as I mentioned before although hubs have lower net take rate as a percentage, in absolute terms, it's a very decent profit and it helps because they are five times larger than long-tail. So -- it's hard to give you what's going to be the size of hubs looking forward. We expect to take share and it's not bad news because they are growing faster than long tail. And as I said before we will cross-sell our PagBank solutions for hubs as well. So Éric?
So, just my two cents here, it doesn't matter the size of the merchant that we are serving. If it's a long tail, it's an SMB -- this might be a tricky and misleading question. And why is that? Because we are cherry-picking always the best merchants and this is why we have the highest take rate for the market and we are the most profitable acquiring company building up a banking with 23 million clients and capturing more than 40% of the net profit for the sector.
So, we are not concerned that if long-tail SMB what we know. What we know is we are cherry-picking the best merchants and for those with poor economics, we are not focused on that. We are focusing on cherry-picking the best merchants with higher TPV per merchant and health take rates.
Okay, got it. Thanks.
Thank you.
This concludes the question-and-answer session. At this time I would like to turn back -- turn the floor back to Ricardo Dutra and Alexandre Magnani for any closing remarks. Please go ahead.
Hi everyone. Thank you very much for investing the time to talk to us. Thank you very much for those who made some questions to us as well and hope to see many of you in person in the following weeks. Thank you very much.
This concludes today's PagBank PagSeguro conference call. Thank you for attending today's presentation.