PagSeguro Digital Ltd
NYSE:PAGS
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PagSeguro Digital Ltd
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Good evening. My name is Nihuge, and I will be your conference operator today. Welcome to PagBank Webcast Results for the First Quarter 2023. 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 website at investors.pagseguro.com. Participants may view the slides in any 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, Eric Oliveira, Head of IR, ESG and Market Intelligence. Please, go ahead.
Hello everyone. Thanks for joining our first quarter 2023 earnings call. After the speakers' remarks, there will be a question-and-answer session.
Before proceeding, let me mention that any forward-looking statements included in the presentation or mentioned on this conference call are based on currently available information and PagBank's current assumptions, expectations, and projections about future events.
While PagBank 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 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's most recent Annual Report on Form 20-F and other filings with the Securities and Exchange Commission, which are available on 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, 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 earnings release.
With that, let me turn the call over to Ricardo. Thank you.
Good evening from Sao Paulo, everyone, and thanks for joining our first quarter 2023 results webcast. Tonight, I have the company of Alexandre Magnani, our CEO, Artur Schunck, our CFO, and Eric Oliveira, Head of Investor Relations and ESG.
Before Alexandre and Artur share the main highlights for the quarter, I would like to share some achievements during the first months of 2023 and the main drivers for profits and cash flow generation, balanced with quality growth for the coming quarters.
Going to slide three, on the left side, we are happy to announce the convergence of our brands PagBank and PagSeguro into one single brand: PagBank, the complete bank. We are excited about the next steps of our journey, having a unique two-sided ecosystem combining payments and financial services in one single app, one single ibanking and one customer care.
For us, PagBank brand represents our offering beyond Payments. We are also happy to announce that PAGS has joined FTSE Russell preview list, which can impact positively our average daily volumes, increase exposure to passive funds and further improve PAGS shares awareness.
Another milestone was the brokerage license granted by CVM, the Brazilian Securities Exchange Commission, an important step that enable us to provide a complete set of investment products, through our proprietary and integrated platform.
On the right side of the slide, we highlight our main drivers for 2023 financials. Our drivers for profitability during this year are solid and we keep committed to deliver lower losses, keep our operating expense discipline and further improve our structural competitive advantage by having deposits as a main source of funding and at a lower cost when compared to peers.
In terms of drivers for cash flow generation, we are focused on improving our cash earnings and looking for capital expenditure efficiencies with diligent go-to-market strategy and software development optimization.
Finally, in our drivers for quality growth, we will keep fostering PagBank, secured credit portfolio products and growing volumes in key segments. We also reaffirm our commitment to create a superior value proposition for our clients based on a transparent integration between our Payments and Financial Services platform.
Now, I will pass the word to Alexandre. Thank you.
Thank you, Ricardo. Hello, everyone. After Dutra initial remarks, I would like to present how the growth, profits and cash generation drivers behave during the first quarter of 2023.
PagBank clients reached 28.7 million, accounting for more than BRL200 billion in transactions processed by us, driven by the strong customer engagement which is a consequence of our superior product value proposition.
Our EBITDA reached almost BRL800 million and our net income close to BRL400 million, with Q1 '23 earnings per share of BRL1.13.
Our discipline in capital allocation has been driving up cash earnings momentum. Our cash earnings accounted for BRL379 million versus a cash burn of BRL17 million in Q1 '22, reaching BRL10 billion in net cash balance, while our capital expenditures marked a decrease of negative 40% year-over-year.
In our Financial Services division, the main highlight was the breakeven point reached, with EBITDA close to BRL70 million, led by total banking volume growth and better spreads since deposits reached 18.6 billion with annual percentage yield of 94% of the Brazilian interbank rate.
In Payments division, our TPV grew 10%, with our key segments, micro-merchants and SMBs growing 50% faster than the industry growth, accounting for 16% year-over-year, with BRL1.2 billion in gross profit.
Slide five, we are happy to announce the unification of PagBank and PagSeguro brands under PagBank only. Following our strategy to reinforce our one-stop-shop solution under the PagBank brand, we expect to have a broader reach among merchants and consumers, to simplify our communication strategy and client understanding and increase client awareness about our services beyond Payments.
Moving to slide six, we present our client base and cash-in evolution. Our number of PagBank clients almost doubled in comparison to 2021, moving up from 15 million to 28.7 million in two years. Active clients accounted for more than 16 million, where 62% of consumers and 50% of merchants considers PagBank their primary account.
Our growth in cash-in reached BRL45 billion versus Q1 2022 led by total payment volume from merchant acquiring and strong growth of PIX inflow transactions. As a result, slide seven reveals a deposits growth of 66% on a year-over-year basis with nominal growth of 7.4 billion, reaching a total level of BRL18.6 billion on the 1Q '23.
Also, the respective annual percentage yields on deposits have decreased to 94% of the Brazilian interbank rate due to lower dependence on third-party platforms distribution and improvement in cash flow generation.
Account balance APY in 1Q '23 reached 73% of the CDI, an increase in comparison to the previous quarter, which was mainly related to a higher number of days our clients kept their savings in PagBank, reflecting our successful engagement strategy in SMBs and consumers with higher income.
Talking about our credit portfolio, we kept our strategy of reducing credit underwriting for unsecured products while leveraging secured products origination. In comparison to 1Q '22, we were able to reach BRL2.7 billion in outstanding credit portfolio, where secured products increased its share from 11% in 1Q '22 to 44% in 1Q '23.
The diversification of our credit portfolio has played a pivotal role in our overall business strategy. It has not only expanded our market reach, but has also had a positive impact in our risk management practices. This strategic approach has resulted in a significant reduction in the provision for losses, effectively lowering our exposure to high-risk clients.
Furthermore, we would also like to report a substantial improvement in our credit portfolio performance. The non-performing loans, NPL, above 90 days for our outstanding credit portfolio has significantly decreased to 17.9% compared to the high level of 22.4% in 1Q '22. This reduction reflects our diligent efforts in managing credit risk assessment and enhancing asset quality.
The successful diversification of our credit portfolio allows us to maintain a cautious yet proactive approach, balancing prudent risk management with the potential for long-term growth. By reducing our exposure to high-risk clients, we have enhanced the overall stability of our credit operations while optimizing our risk-return profile.
These achievements underscore our commitment to prudent lending practices, rigorous risk management, long-term stability, and profitability of our credit operations. As we navigate uncertainties, we remain focused on maintaining a robust risk management framework and driving sustainable growth in the future.
Before I turn over to Artur, I would like to give you more color on the growth of the Payments business on slide nine. As shown before, our TPV has grown 10% compared to 1Q '22. Our revenue growth can be attributed to a combination of factors.
Diving into the specifics, our MSMB have experienced a 16% growth during the quarter. When we exclude nano-merchants, which are merchants with less than BRL1000 monthly TPV, this growth was 17% comparing to 1Q '22. When we compare total active merchants base, we had a reduction of 10% comparing Q1 '23 versus Q1 '22.
When we exclude nano-merchants, we notice a 3% growth on the active base. These figures are a direct result of our focused efforts to address MSMB needs, prioritizing the merchants with higher average TPV within the segment, which demonstrates the effectiveness of our strategy to allocate our efforts into growing on MSMB and overall TPV.
Therefore, we remain confident in our decision to prioritize categories with higher profitability potential.
Now I will pass the word to Artur to present our financial results.
Thanks, Alexandre. Hello, everyone, and thank you for joining us tonight. As we usually do, I want to share the financial highlights for the quarter.
Once again, PAGS presented another set of records for a first quarter in company's history TPV, gross profit, net income and cash earnings marked all-time high figures. Adjusted EBITDA grew 18% year-over-year despite revenues growth of 9% versus Q1 '22, revealing our earnings power and cash generation that is a result of our strategy of balancing growth and profitability.
From Q1 '23 onwards, we will change the managerial methodology to allocate float between Payments and PagBank now on called Financial Services vertical. 100% of the float will be booked in financial services vertical, similar to other financial institutions. There is no change in revenues for Payments vertical, but an increase in financial expenses, since the share of such expenses offset by the float usually booked in Payments vertical will no longer occur.
Consequently, gross profit and adjusted EBITDA will decrease. On the other hand, revenues for financial services vertical will increase since the float will lead to a higher interest income. Consequently, gross profit and adjusted EBITDA will increase.
Important to say that there is no change in PAGS consolidated basis. And for comparison reasons, we provide in the appendix the four quarters of 2022 using the same metric applied to 1Q '23 to equalize our historical results by vertical.
Financial services vertical achieved a positive adjusted EBITDA of BRL69 million this quarter. Even considering the old managerial float allocation, the result closed Q1 '23 in the positive side as a result of better performance of the credit portfolio with secured products that demand lower level of delinquency provisions.
Net income non-GAAP achieved BRL392 million and net income GAAP increased 6% year-over-year, totaling BRL370 million. This represents an earnings per share of BRL1.13 in the quarter, BRL0.08 or 8% better than Q1 '22. In March and April, we repurchased 2.5 million shares under our buyback program. Our strategy and focus continue to better balance growth and profitability, targeting to improve shareholders' return.
On slide 11, revenues for Payments vertical grew 10% year-over-year, due to the positive result from the massive merchant's repricing done in 2022. As a result, gross profit reached BRL1.2 billion, an increase of 2% when compared to the same period of last year, with financial expenses offsetting uptrend given the higher average interest rate versus the Q1 '22.
In the next slide, financial service vertical's total revenues reached BRL331 million in Q1 '23, 1% lower than Q1 '22 due to the shift to secured products underwriting, which have lower APRs and longer duration in comparison to unsecured products.
On the other hand, gross profit reached BRL179 million, an increase of 274% year-over-year, mainly due to the secured products portfolio, that naturally leads to lower provision for losses. Based on that, we are creating a safe and solid path to restore a better mix of credit underwriting composed by secured and unsecured products in the coming quarters, reinforcing our one stop shop value proposition and further increase PagBank principality.
Moving to slide 13, financial expenses closed at BRL813 million versus BRL621 million in Q1 '22. This increase is mainly explained by the higher average interest rate in the period in comparison to Q1 '22. It was partially offset by the higher share of deposits and retained earnings in the period that lowered funding spreads and led to lower financial expenses in comparison to last quarter.
Total losses decreased 50% year-over-year. This great performance comes from lower expected credit losses of credit portfolio driven by healthier coverage ratio and credit underwriting mostly for secured products. At the same time, chargeback as a percentage of TPV decreased versus Q4 '22 and Q1 '22.
Important to highlight that total losses in Q4 '22 reduced around 30% over Q3 '22 and this quarter reduced more 34% over Q4 '22. Operating Expenses reached BRL587 million in Q1 '23, up 5% year-over-year. This amount represents 15.7% of PAGS revenues versus 16.4% in the same period of last year and stable when compared to last quarter. The improved efficiency has come from Personnel and Marketing expenses leverage.
This quarter, we had the one-time expense related to the headcount resizing around BRL12 million. Excluding this, operating expenses in nominal terms were flattish versus Q1 '22. Jumping to slide 14, we present a summary about how PAGS results evolved during this quarter.
Revenue growth, lower losses and operating expenses discipline more than offset the increase in financial expenses and D&A plus POS write-offs. In the next slide, cash earnings continued to gain momentum, reaching a positive amount of BRL379 million versus a negative amount of BRL17 million in Q1 '22.
Cash earnings represented around 10% of revenues, reflecting the company's focus on maximizing LTV to CAC ratio by balancing POS subsidies, client engagement and monetization and the dilutive process to leverage profits and cash generation.
CapEx to revenue ratio reached 10.9% this quarter versus 19.9% in Q1 '22. This decrease was mainly driven by the go-to-market optimization in POS, being more selective in merchants' acquisition to leverage PagBank and sustainable growth at the same time setting a higher bar for investments, amortization in software and engineering teams.
Depreciation and amortization, including POS Write-off totaled BRL365 million, representing 9.7% of PAGS revenue, keeping the ongoing convergence of CapEx and D&A to unlock additional profitability in the coming years.
On slide 16, our net cash balance ended the first quarter at BRL10 billion, increasing BRL1.7 billion year-over-year. At the same time, we have been improving our capital structure, and diversifying funding sources to support volume growth, with deposits now representing around 59% of our third-party funding source.
Our equity position continued to increase, with 54% being composed by retained earnings, reinforcing our commitment to shareholders about capital allocation and returns.
To conclude our presentation, I turn back to Alexandre for the final comments. Thank you.
Before ending our presentation, we would like to delve into a key point regarding the prepaid cards interchange fee cap impact on our business. First and foremost, it's important to recognize that PAGS ecosystem is a robust and adaptable platform that leverages our complementary businesses, namely acquiring and card issuance.
This combination creates a natural hedge for the company, allowing us to mitigate risks and capitalize on opportunities in the market. By observing the impacts on the month of April and looking ahead to 2023, we anticipate that the net income will remain relatively stable, since the impacts on net income due to prepaid cards new interchange regulation are relatively negligible.
Before jumping to the Q&A session, I would like to emphasize our focus for 2023. Grow with profitability, combining optimization and expansion cycles. Consolidate PagBank penetration, customers engagement and revenue diversification.
Develop an integrated, unique and superior value proposition under a single brand. Foster security in all operating levels to reduce losses and improve customer experience. Invest in our human resources to keep building a pleasant and highly productive work environment.
Now, we have ended our presentation, and we will open the Q&A session. Operator, please.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from John Coffey, Barclays.
Great. Thank you very much for taking my question. My question was really on TPV growth, particularly some of the numbers you said on slide nine of the deck. I see that I know you reported 10% TPV growth, but if you were to exclude the large accounts in several quarters, you'd be at 16%. So I guess I was wondering what is happening with the large accounts and some acquirers given that six PPT magnitude between those growth rates? Are these just certain accounts are moving off platform? Or does it speak to any kind of underlying factors that you're seeing in Brazil?
Hi, John. Thank you for the question. Yeah, you're right, on slide nine, if you exclude the nano-merchants and the large accounts and sub-acquirers, the growth is 16%, which is higher than the industry. That was 10.7%.
What happened is that, of course, with the high interest rates in the economy, some sub-acquirers are decreasing their volumes. That's part of that. But the majority of the movements here are the moving parts here is because we are looking for profitable accounts with positive net take rates.
So we as we always say, we are not looking for market share as the main driver for the company. Market share is a consequence of what we're doing, looking for positive accounts with positive net take rates and eventually some large accounts and sub-acquirers may migrate to other players that are looking for market share.
And that's fine, that's fine. We are fine with that decision. We are looking for profitability in a sustainable way. We are looking for clients that could also use PagBank so that we can cross-sell, we can get data, we can eventually offer credit to them in the near future.
But that's the explanation. Some of the clients moving to someone else and also some sub-acquirers have been decreasing in volumes because they are struggling with the high interest rates. In a situation like that, it is important to have scale as we have here in PAGS.
Right. Thank you. And I just have one quick follow up just related to that. When do -- when does the impact of the nano-merchants essentially go away? Like when do all the ones who are going to leave your platform leave such that all the numbers start moving, the growth rates start moving in the same direction again?
Well, we are not. We were -- we are seeing the nano-merchants some of the nano-merchants. What happened is we see some mortality. As you may know, last year we did not focus on nano-merchants because we had subsidized the POS more than what you think is healthy and sustainable for the company.
So that's why we are seeing the churn is stable, but the gross adds are lower because we took this conscious decision not to accelerate nano-merchants anymore. But important to say that part of the nano-merchants that are not using or acquiring, they keep working with us with PagBank, maybe someone got a job, but they keep using PagBank as their bank. So the main focus is really the micro merchants and the SMBs.
All right. Thank you.
Thank you.
Our next question comes from Mario Pierry, Bank of America.
Hey, guys, congratulations on the results. Let me ask you two questions. First one, the market is starting to price in lower rates in Brazil later this year. Can you remind us of your sensitivity of your earnings or lower rate environment? Also, how would that impact your strategy, especially on pricing? Would you, you know, clearly you have a benefit on your financial expenses. I was just wondering if you would be willing to pass on that improvement to your clients, especially because we're seeing some of these non-listed companies becoming more aggressive in market share. So just wanted to hear your thoughts on how a low rate environment would impact your business. And the second question, I thought it was interesting that you're choosing the name PagBank. The bank today represents about 10% of your revenue. So when we look, you know, over like a five year time, do you think that the bank clearly is going to become a bigger part of your business? But like just wondering, how do you see that evolving? Is the banking revenue is going to be 30%, 40%, 50% of your revenues? How do you look at that? Thank you.
Hi, Mario. Thank you for the questions. Regarding interest rates. You're right that some people are saying that interest rates could go down in Brazil this year. Of course, that's something that is very dynamic.
No one knows what exactly is going to be the interest rates in the near future. So and as you mentioned in your question, as we have many moving parts here, we have some part of our clients are long tail that once the interest rates go down, we can recover margins in the next business day because we charge this clients a fixed rate regardless of the SELIC.
There are some other clients that we may eventually call us to negotiate because probably they can have some information about the interest rates and they may call us to negotiate, but that's not going to happen immediately. So we will also take advantage of that. And we have some small part of our TPV that is already linked with SELIC.
So if SELIC goes down the MBRs and the prepayments that you have for these clients may go down with the SELIC. So we have many moving parts here. In addition to that, we have competition, as you mentioned.
So we'd rather not to give you the exact number. But I would say to you that if the or when the interest rates go down, we'll be the company that will benefit the most with that because of the long tail that you have, because of the service that we offer for our clients and the stickiness that they have in our base.
But we'd rather not to give an exact number here because as you mentioned in your question, there are many moving parts here. That's the first part. The second one regarding PagBank, at the end of the day, what we are -- we are a technology company offering financial services and payments.
That's what we are. That's we are -- have been building all these years and we think PagBank represents more what we already have today, regardless of the revenues that you mentioned, is 10%. But regardless of the revenues of 10%, PagBank represents what we have today in terms of products, in terms of stickiness and even the number of clients.
We have more clients in PagBank than in PagSeguro and that's the future of the company, that's for sure. We are going to offer more and more financial services and we think that's the right time to do that. In addition to that, we also that -- we are also we are sure that we may optimize our marketing investments by having only one brand.
When you are a multi brand company is always kind of you have some this inefficiency when you advertise and you may generate some confusion even in some part of our clients. So we rather take the decision at this point, move to PagBank, invest in this brand and of course in the future we're going to have more and more revenues coming from the financial services and related to that.
And I'm very clear, let me just follow up then like if you can be a little bit more specific on competition in the SMB segment. I think that's where we're seeing the bulk of competition today. And I'm hearing a few players that think that they should be increasing their sales force. Are you and you've done an amazing job with your expenses. Is this something also that you could consider like increasing your sales force in order to face competition?
Mario, we two parts here, and thank you for the follow up. First, when you have these headcount resizing, we kind of not affected our sales force. Of course, if you have some sales force that is not performing, but that's different.
So when you have this headcount resize, we try to preserve our sales force because you think it's one of the strengths that you have in the company. We are executing very well. The results say by itself and regardless the growth of this team, we are always evaluating. There is no fixed decision here that we will not increase.
Once you see there is opportunity for growth with decent net take rates, we will invest. But I would say you that just to give a quick number here, our productivity per sales people doubled in last year because we are being more assertive in the way that you make the routes.
We are more assertive when the way that we send the sales people to sales person to the right merchant with the right pricing, they are as time passes by, they get more trained, they have a better sales pitch. So but going back to your question, we are evaluating that very carefully. We are not, let's say, concerned about competition, increase the sales force. We keep doing our job. Look what we are doing, our productivity, and if you think there is some opportunity to increase our sales force. So that's for sure.
Okay, guys. Thank you very
Thank you. Our next question comes from Craig Maurer, FT Partners. Please proceed.
Yeah. Good afternoon. Thanks for taking the question. Just one question on the take rate in the acquiring business. Could you give us some thoughts on how that should trend over the coming quarters considering that it sounds like there will be a slowing of attrition in the nano-merchant business? And you also made a statement that you're shifting the focus in large merchants from share gains to profitability in terms of large merchants that you'll be taking on the platform. Plus you also talked about some attrition in sub-acquirers, sub-acquirer volume. So the take rate, it would just be great to get some thoughts on the directionality.
Hi, Craig. Well, going straight to the answer, we expect the take rates from the acquiring business to be stable in the following quarters. Of course, remember that in Q4 we have a seasonality with more debit card transactions and it may go down eventually, but not because of our pricing, but because of the mix with more debit card transactions.
And we expect to be stable because we also have some moving parts here. At the same time that we are increasing our SMB efforts and also micro merchant efforts. And as you said, we lost part of our nano-merchants, but it's only 2% of TPV. On the other hand, when you have these sub-acquirers and large accounts moving out, it also helps our net take rate because they have a lower net take rate as you may know. So with all these moving parts and all the execution that we've been doing, we expect the net take rate in the following quarters to be stable.
Okay. Thank you very much.
Thank you.
Our next question comes from Bryan Keane, Deutsche Bank.
Hi, guys. Just wanted to figure out if we could get the percentage of TPV that comes from large accounts and also sub-acquirers?
Hi, Bryan. Thank you for the question. But to be honest, unfortunately we don't give this disclosure because of competitive reasons. But I would say you that the MSMB is the largest portion of our TPV already, but we don't give the disclosure or the breakdown between the other parts of the TPV. I'm sorry.
Okay. And then just on the bigger picture question, I mean, most of your investors and analysts on the call are mostly coming from the tech side of things. When you say you want to get more growing into financial services, how much credit risk are you guys willing to take and look like a traditional financial bank? Because that's a totally different investor base and a totally different kind of company.
Yeah, Bryan, you're right. That's eventually a different dynamic. So as I answered the question from Mario, we are a tech company that offer financial services and also payments. But of course, it's unavoidable that we at some point we're going to take some credit risk.
At this point, we don't have this appetite. We stop giving credit without collateral in the first quarter of 2022. Since then, 100% of the new or the underwriting is 100% secured. As you can see in our deck of slides today, 44% of our credit portfolio is 100% secured. And we don't think that's going to change in the following quarters.
But at some time in the future, we will start to give in some credit without collateral. Of course, we starting with the clients that we already have in the base. But right now the macroeconomic scenario doesn't help us to have this appetite. We can see even the big banks in Brazil having some struggling to charge some of their clients seeing higher NPLs and not to say about the macroeconomic environment in the world.
So here we are accelerating in the 100% secured. We found a way to grow PagBank in a sustainable way with a path to profitability through the secured products and we don't think that's going to change in the future. That's the big picture of the company. In terms of the investor base and the point that you brought, I don't think that should change that much because at the end of the day, we are a tech company.
We have a diversified product offering here. So we will not be a company that is going to rely in credit in the near future. So that's what we expect.
Okay. Thanks for the clarification.
Thank you.
Our next question comes from Pedro Leduc, Itau BBA.
Thank you guys so much. A little bit on the losses and operating expenses lines that are a little more on your control. First on losses, very good delivery here on reducing chargebacks. We want to understand if you think this is just a path that started. It's got to do with the clean-up of the base if there's more to go. Also, on the credit losses on the portfolio as you've been adjusting, and if this is maybe a new run rate here in terms of cost of risk, this 40 million. And then later I'll jump on the OpEx side. But first on the losses, chargebacks and credit, please.
Hi, Pedro. It's Artur speaking. So related to total losses. It's the reductions that we are having right now is 50% in comparison to Q1 '22, 30% in comparison to Q4. That was 30% better than Q3 in '22 and totally as a result of the shift of our credit portfolio from unsecured products to secured products. And we expect that we continue to have good results in terms of losses. That, as Dutra mentioned, is the right path that we identify to move PagBank to the profitability.
Okay. And on the chargebacks side of the losses?
I'm sorry, inside the total losses, we have the chargebacks that also improved in comparison to 2022. So we did a great job here in my opinion, in terms of fraud prevention and all the systems, teams and process that we developed during 2022 to help our acquiring business to perform in a good way to control chargebacks.
And important to say, Pedro, this is Eric, that our unique value proposition that offers to merchants instant settlement does not necessarily increase chargebacks. And this is something that we have been improving our systems, improving our KYC processes in order to further decrease chargebacks as a percentage of TPV.
Okay. Thank you, Eric. If I may on the second question and on the operating expenses. First, if you could help us on the personnel side, there's a 11% increase year-over -year. You mentioned there's a one-off impact related to the downsizing. If you can just help us understand how these 11% would look like without this one-off impact. And then the second there on the marketing advertising run rate for the remainder of the year, if you think this lower level here is something that is more reasonable for this environment. Thank you.
Okay. In personnel experiences, you are right. We have this headcount resizing in the beginning of this year in January, and the severance cost was around BRL11 million, BRL12 million. That was a non-recurring item for the Q1. And also in terms of marketing expenses, we are expecting to spend a little bit more than Q1 in Q2 because of this I would say rebranding of PagBank PagSeguro to PagBank, but we will continue to apply our disciplined cost control not only for OpEx, but CapEx. And the best as you can do right now is control costs as much as possible to keep our company healthy.
Thank you so much for the answers.
Thank you.
Thank you.
Our next question comes from Neha Agarwala, HSBC.
Hi. Thank you for taking my question and apologies if there's any disturbance. My first question is on choosing the brand PagBank. I believe PagSeguro created a very strong brand name in the acquiring business, especially in the long tail. And I'm sure you've done studies to understand what would be the impact of moving from PagSeguro brand to PagBank brand. How seamless do you think will it be for your customers? So if you can comment on that. And my next question is, I understand you do not break down your TPV by how much is large accounts, how much is in SMB? But could you give us some sense of what is the take rates in the large accounts and sub-acquirer segment? Because from what we understand, looking at your peers, the take rates are much lower for that part of the business, which probably is about 30%, 40% of your business by now. So if you could give some sense about where the take rates are, what kind of proportions do you see and where is it headed? Do you plan to increase your share in the large accounts in the sub-acquirers, or are you planning to reduce your share there? Some color on how the TPV mix should evolve. That would be very helpful. Thank you so much.
Hi, Neha. Regarding the brand, you're right. We have a strong brand with PagSeguro, but we also have a strong brand with PagBank. I know we started PagSeguro before PagBank, and that was the beginning of the company offering POSs. But we launched PagBank in 2019, so we are completing now four years and it also has a very strong brand already in Brazil. Many of our merchants use both of the brands.
They sell through the POS and they make the transaction and they use the app. In the app they use their, use PagBank already since the beginning. So and of course, we will not make the migration from one day to the other. That's something that we will start to use more and more PagBank, but the POS they have there still use PagSeguro. So while making this transition, there is this communication project so that we can communicate our base that PagSeguro is now PagBank and so on.
So we don't see there's going to be friction there. Because mainly because many of our clients already use the app PagBank when they want to cash out or use our cards and so on. Regarding the second question.
And Neha, this is Alexandre. Just to give you more color on that question regarding to the brand. Today, 60% of our active customer base use only PagBank has relationship only with financial service. And out of the 40% remaining, which is the merchant base that primarily uses the acquiring service, 90% of them uses PagBank too. So these customers, they use on a daily basis our PagBank app. And since 2019, our POS terminals are PagBank branded only, and all of our cards issued since then are also PagBank branded only.
Yes. So the second question about take rates and the moving parts, Neha. You're right, we don't give this disclosure about the percent of TPV coming from large accounts and sub-acquirers. But I'd say you that if you look at the market, the other players that are more focused on large accounts and sub-acquirers, our net take rate is similar to them. So it's not that different, similar to what other players in the market that operate in this type of clients have.
As you can see or as you know it's much lower than what you have in SMBs and also in micro-merchants. We will look for accounts that have positive net take rates that has some returns that we think is feasible for the capital of the company. And again, we are not concerned about the market share of total TPV. We will focus on the key segments that we decided last year, which is micro-merchants and SMBs.
And with all the moving parts and even some large accounts that we will get because, of course, we may lose some large accounts, but some of the clients come to us because they want to work with us and even sub-acquirers. So with all these moving parts, that's why I answered in the previous question that we expect net take rate to be stable throughout the year, except Q4, because of the seasonality of debit card transaction.
We have not talked much about exposure to large accounts or sub-acquirers in the previous quarters. This is something that we're talking about in this particular quarter. So what led to this kind of pivot to having exposure to large accounts? Because you started from the bottom of the pyramid, you moved up to SMB, but we never really talked about gaining exposure to the large accounts. So -- has this been something that you've been planning for the past couple of quarters? Or do you see opportunities coming your way, which makes sense economically? And that's why in the last one or two quarters, you're gaining more share in large accounts? How has that come through? Thank you so much and that's my last question. Thank you, Dutra.
Neha, we may not say that, I'd say, the exposure, but we always said that we have large accounts. Remember, we started e-commerce back there. And e-commerce at the beginning, we had also large accounts. We bought the other company acquired in 2020 and then we brought some large accounts in e-commerce. So we always had some large accounts and even sub-acquirers. We also had some sub-acquirers.
We're not saying that we will not focus on this type of clients anymore. We are just saying that we will not compete with price with players that are looking for market share. We'll keep working with this type of clients once they have the returns that we think is feasible and sustainable for the company.
So just to be clear here, we always had this type of clients. We worked with them. Some of them come to us because they wanted to work with them with us. Sub-acquirers came to work with us because they like our POS.
So this type of clients that we always had in the base and it was not the main focus of the company and it won't be the main focus of the company. I guess what you're saying here in this slide, when you say the growth of TPV of 16% is that we did not make too much effort to keep accounts with net take rates that are not sustainable or not in the level that the company expects to have.
Understood. Thank you so much.
Thank you.
Our next question comes from Soomit Datta, New Street Research.
Hi, there. Yeah, thanks very much. A couple of questions, please. Just first of all on PagBank merchant base versus the acquiring merchant base. The two are kind of moving in sync or alternatively put the PagBank merchants as a percent of acquiring merchants is pretty stable at around 90%. I guess, given you're losing nano-merchants or you're willing to lose nano-merchants, I would have thought your kind of percent of acquiring merchants, which are PagBank, would be going up and up, but it seems to be stable. So I'm just curious, as you kind of move up the pyramid, why that sort of percentage increasing? That's the first question, please. And then secondly why don't I hold it there and then if we could go with that one first please.
Soomit, this is Eric. Just to recap here, you're asking about the merchants engaged in PagBank that we basically had a slightly decrease in this number. Am I right?
Yes, exactly. Exactly. So as you lose your acquiring merchant, that's typically the kind of low kind of TPV nano-merchants who I would have thought would not be necessarily PagBank customers.
Perfect. Thank you. Thank you. So just to answer your question, I think it's important to highlight that, for the long tail clients base that we have, which is composed by nano-merchants and micro-merchants, I would say to you that probably 100% of them are engaged in PagBank.
So necessarily, as we run off and de-prioritize nano-merchants, which are barely profitable, we necessarily tend to lose these clients at first glance in PagBank. But if you take a look closer to the PagBank clients of merchants, this decrease is lower than the decrease in the active merchants because we have several nano-merchants that, for example, got back to the formal economy and still works with us, but they receive a monthly paycheck and use PagBank as their primary bank. So this doesn't concern us. In fact, we have an opportunity to further cross-sell other products for them.
And as we keep moving that market, our concern here is not anymore growing very rapidly our number of clients because we already have 13% of the Brazilian population having a relationship with us. Our focus is increase the cross-sell of financial services, increase deposits per clients and necessarily increase profitability per client. This is our goal.
Okay. That's clear. Thank you. And maybe a quick follow-up, if that's okay, just on, again, sort of financial services profitability. Either on the old or the new EBITDA basis, if we could pro forma that EBITDA for the interchange cap, is it fair to say that financial services is now EBITDA positive and those no reason to think it won't stay that way going forward? Thank you.
Thanks for the question, Soomit. This is Eric again. Naturally, as the interchange cap came in force since April 1st of this year, as we disclosed previously in our material facts, we expect a negligible impact in our bottom line. In financial services vertical, necessarily revenues should decrease, but the gross profit and EBITDA evolution should decrease not in the same magnitude. So investors should expect a lower revenue in 2023 versus 2022 in the financial services vertical, but to be completely offset by the savings in the merchant acquiring division.
And is it possible to say in absolute BRL terms, what the sort of run rate is on a quarterly basis for that impact. I take your point, it's neutral to the group, but just in terms of modeling out the splits between the two parts of the business.
I think at this time, we are not giving any kind of ballpark of these impacts. We can evaluate here. But I think the main message is it's a negligible impact for bottom line. So any potential revenue and gross profit reduction in financial services vertical that analysts can assume should be completely offset by the savings in the merger and acquiring vertical.
Okay. Thank you.
Thank you.
Our next question comes from Josh Siegler, Cantor Fitzgerald.
Yeah, hi, guys. Good evening. Thanks for taking my question. I think to start with, can you discuss how competition has trended specifically in the payment space? Are you still seeing rational pricing from some of your peers?
Hi, Josh, thank you for the question. Yes, we are seeing rational pricing from the peers that we compete with, mainly in the micro-merchants and SMBs. We cannot say about the guys that are looking for larger clients because you see some changes in market share in Q1 between the big acquirers.
But in the markets that we are competing, that we are focused, which is micro-merchant SMBs, we are seeing very rational prices. Everyone looking for profitability, as you could see in the quarter call results from us and from other players. So, yes, that's the rational pricing at this point.
And we don't think it's going to change because interest rates are high in Brazil. So everyone is looking for profitability. Of course, not only in Brazil, but around the world, and not only in payments industry, but also in all the industries. So everyone looking for profitability, so we don't think this rationale to change in the near future.
Okay. Great. I appreciate that. And then you guys have been repurchasing some shares recently. I'm curious how you're thinking about your capital allocation strategy moving forward. Thanks.
Yes, it's Arthur speaking again. So the capital allocation strategy that we have today is based on the results that we have. We are reinvesting in the business, all the results that we have right now, or even using the good results that we are achieving to repay the expensive debts that we have are also reducing the CDs that we are issuing to fund in the operation.
At this point, with 14% -- around 14% interest rate in the country, not makes sense to distribute dividends. It's something that we can rethink going forward, depending on the interest rate level.
And the strategy that we are using to repurchase shares is based on the price of share, if it's a good opportunity for the company or not, the shares that we have in treasury is used it to distribute for the long-term incentive plan for employees. And at this point, we are using the buyback program that we launched in 2018. We achieved around 50% of this buyback program. And for now, we are thinking that we need to use the money to fund the operation.
Great. Thank you very much.
Thank you, Josh.
Our next question comes from Kaio Prato, UBS.
Hi. Thanks for the opportunity to ask questions. I have two on my side, please. First, on the costs of PagBank. We saw a quarter-over-quarter drop, it decreased by 10% quarter-over-quarter. I understand that the TPV went now, but the drop in deposits was actually higher. So just wondering if you can provide us some details behind that, please? And moreover, what do you expect in terms of deposit growth going forward? And my second question is related to CapEx. Just wonder if you could help us understand the moving parts on CapEx this quarter, both related to PP&E and intangibles? And what can we expect going forward in terms of growth for these two lines and on a consolidated basis as well? Thank you very much.
Thank you, Kaio, for your question. Regarding for the first point related to deposits, it's true that it reduced from Q4. The main impact comes from the seasonality. As you may know, in Brazil, there are a lot of bills to pay in the beginning of the year. And people use this money to pay those bills.
One point that we are paying attention closely is to change the deposits that we are -- the CDs that we are issuing with third-party platforms and try to originate internally in our own platform. So we are trying to change the third-party to our platform internally in PagBank.
The second point is related to CapEx. We achieved this quarter, BRL408 million. It's much lower than Q1 '22. That impacted our cash earnings in a positive way. Last year, our cash earnings was BRL17 million negative. And this year close to BRL400 million positive. In terms of CapEx going forward, we are expecting to have a lower CapEx per revenue in comparison to 2022 and more related to technology investments around 60% of technology investments versus 40% in POS acquisition.
And we'll continue to invest in CapEx for POSs in the same strategy that we launched last year, focusing on client selection with a high engagement and companion paybacks, combined to eventually some promotions that we can offer to the clients.
Okay. This is clear. Thank you very much. Just a quick follow-up on deposits question. I'm just wondering if you have any type of target in terms of deposit growth for this year that you could share with us?
What I can say about deposits related to this question is that all of our management is focused to increase deposits. Deposits, as you know, is the cheapest funding source that we have after return on earnings. And we have all of the management focus to increase those deposits.
Okay. Thank you, Dutra.
Thank you.
Our next question comes from Eduardo Rosman, BTG Pactual.
Hi, everyone. Good evening. I have a question here regarding all these noise related to the revolving credit card theme. I think the sector as a whole has been a little bit more under pressure recently. I think on concerns that something might happen with the parcelados, with no interest, right? So which, in theory, if that happens, that would be potentially bad for the prepayment business. So can you share your thoughts on what's being discussed? If you're being part of the working group, what's your belief here? I think, Alexandre, I saw, I don't know, some comments to broadcast. So I just want to make sure everybody is in the same page here. Thanks a lot.
So Eduardo, thank you for the question. We know there have been some discussions with the Brazilian authorities about the possibility of implementing a cap on interest rates for revolving credit cards. As you may know, this discussion is not new and is being carefully evaluated by regulators.
And of course, regulators talked to everyone. What we may say from the government or from the regulators in the past years, the Brazilian government, both Brazilian government and regulators, they have been playing a very relevant role to promote competition and financial inclusion in Brazil. And of course, they listen to everyone. .
So just before I go straight to your question, some of the players link this cap in interest rates with changes in installments. As you may know as well, interchange in Brazil is one of the highest in the world. Credit card business in Brazil is very profitable. But as I said, some of the players try to link this discussion with the change in installments, which, in our view, is very unlikely to have or to happen any change in installments because of many reasons.
But the main two, I would say, change in installment is not the way to decrease the high interest rates in revolving credit lines. By change in installments, revolving lines will not decrease. So that's not linked with topic to the other. And the other one is that installments are very important for the economy in Brazil. They are 50% of the total volume of credit cards, the total volume that we have transaction in Brazil, 50% is made through installments. In 2022, that number was BRL1 trillion, 10% of Brazilian GDP is largely accepted by merchants from any sizes. And of course, it gives the power of consumption for consumers, mainly low income people that don't have the money to buy without installments.
It is also the cheapest working capital for merchants. So we think that any change in installments is very unlikely to happen because it doesn't solve the duration of the discussion and is very important for the economy. So that's our view at this point.
Great. Super clear. Thanks a lot.
Thank you.
Our next question comes from Geoffrey Elliott, Autonomous. Please proceed.
Hello. Thanks very much for taking the question. I know you've introduced some new offers on the website Vista, Multi and Maximize, which look quite a bit more competitive in terms of pricing than what you're advertising previously. Who are you marketing those at? And what are you doing to mitigate the risk of cannibalization of clients on the older offers with higher pricing, trying to move on to the newer cheaper ones? Thank you.
Hi, Geoffrey. Thank you for the question. We always make promotions. Some of the promotions we do through online, targeting some type of merchants. Some of the promotions targeted some type of consumers. And we also make some tests in our website. Of course, we -- a large part of our demand comes from paid media and from media that we buy for third parties. And part of the demand comes from the website.
The promotions that we are making, website, they require the merchant to have a minimum TPV of BRL3,000 per month. So it's not for everyone. And we are always, of course, looking in the terms of attrition with the clients that we have in the base. That's not an issue at this point.
That's something very common for companies like us when you have millions of clients, right? It's very common when you have a telecom company and then eventually, you see a promotion from a telecom company that you are a client and then you are having a better condition there for the new client than the other one, but that's part of the dynamic of the business.
We try to control that eventually in the call center in a more reactive way. But I don't think that's an issue at this point because we are requiring a minimum TPV, and there are some other requirements as well.
So it's part of the dynamic of the business to make promotions and turn off and try the cohort, see what's going on. If they're going to have a TPV that is much larger than the BRL3,000, if you're going to use PagBank. So -- but it's part of the promotion, it's not something that we are changing the way that the company operates.
Thank you. And then maybe just to clarify on some of the comments from earlier on. You talked about the prepaid interchange cap. And then you talked about adjusted net income being similar to what you delivered in the first quarter. Was that just a statement saying the interchange cap is not going to have a significant bottom line impact? Or was that more an all-encompassing statement saying that you think 2Q net income plus or minus is going to look similar to the first quarter? Thank you.
Hi, Geoffrey, well, thank you for the question because it's an opportunity to clarify that. What you are saying is that with the change in the cap and interchange for prepaid cards that started in April 1st, didn't change the net income of the company as a whole because the benefit that we had in acquiring business by having a lower interchange is very similar in absolute terms than the losses that we had in the revenues from the PagBank as a card issuer.
So it's -- we are just saying that the change in the cap and interchange for prepaid cards is neutral to the company as a whole. We are not saying that the net income is going to be the same in Q2 versus Q1 or things like that. We're just saying that this cap in interchange did not impact the expected net income of the company because the impact of these moving parts, puts and takes, it's zero, is neutral. So that's why we try to say that. And let me know if it's not that clear -- it's not clear.
It was totally clear the second time. So thanks very much.
Thank you.
Our next question comes from Juan Recalde, Scotiabank.
Hello. Thank you for the opportunity to ask questions. My question is related to the NPL ratio. And I noticed a decline from around 30% or more than 30% in the fourth quarter to 18% this quarter. So can you talk about what drove this improvement, whether there were some sales of loans or write-offs? And also, can you comment on how you see asset quality evolving? And how do you think that the credit portfolio can grow in the rest of 2023? Thank you.
Okay, Juan. It's Arthur speaking again. Thank you for your question. It's important to clarify that the numbers that you have in the income statement is related to past due. So all the calculations there in terms of percentage of our portfolio is a past due when the installment is not paid, so you have this past due.
This quarter, we decided to give this information more clear in the slide eight in the webcast presentation and the NPLs for 90 days in Q1 '22 achieved 22.4%. The worst moment was in Q2 '22. And next quarter, you will see that.
And now we have 17.9%. And since June, we have a reduction in this NPL in 90 days. And also, it's important to mention that our secured credit portfolio presented 1% of NPL. So our whole portfolio is moving down pretty fast and quarter-over-quarter. And the main impact related to that is because our credit underwriting now is 100% focused on secured products.
And the same page in the webcast, you can see that our total portfolio now is split in 44% secured products, 56% unsecured products. And the strategy going forward is continue to underwriting secured products related to payroll loans and also credit card backed by CDs or balanced account reserve.
And Juan, it's important to mention that most of financial institutions, they write down their nonperforming loans after 360 days. And we did not write down yet for exclusively tax planning reasons, okay. For the coming quarters, we do expect to start to write down these NPLs over 360 days.
And this is why there is a mismatch between the NPLs 90 days that we provide in our presentation in comparison to the financial statements that disclose the full nonperforming loans over 90 days, considering the NPLs over 360 days. We are very comfortable about the provision levels, so necessarily a down trend in NPLs is something natural moving forward.
That's very helpful. Thank you for the comments.
Thank you.
Our next question comes from William [Paine] (ph), Susquehanna.
Hi, guys. Thanks for taking my question here. I wanted to ask about NPLs as well. So I noticed on slide eight. It looks like your 90-day plus NPL ratio has been going down. Can you say a few words about the status of the Brazilian consumer credit quality? I imagine some of that decrease that you see is perhaps due to the shift towards more secured lending, but any commentary on consumer credit quality would be helpful. Thank you.
I will. This is Eric. I think since we made some changes in our management team in terms of risk management, we have been delivering lots of improvements on the credit risk assessment processes and KYC. So necessarily, this implies to say that as we keep underwriting secured products in the short-term and keep proving our risk assessment models. As the economy improves, there's a natural path to restore unsecured credit products in the future.
They struggle for the credit industry in Brazil or the main question is related to when the asset quality will improve. And in our case, it's the opposite because since we took the decision in early '22 to focus exclusively on secured products, our NPLs peaked in June '22, and they have trending down since then. So the asset quality concerns that surround the Brazilian credit industry does not affect us because we already changed our credit underwriting, focused on secured products in early '22.
Got it. That's super helpful. That's clear. And I guess one quick follow-up I'll have is, can you talk briefly about Carnival and how the timing of the holiday may impact year-over-year comparables in the second quarter?
You're right. This is Eric again. You're right. We had, last year, a very strong first half, driven by the reopening of the economy and a number -- a higher number of work days. This year, we have a lot of holidays in Brazil, which necessarily brings a TPV behavior similar to weekends, especially Sundays that we have, and the industry have lower TPVs in comparison to the workdays. So necessarily, the first half tends to affect the industry. Since the first half '23, have more holidays in comparison to the first half of 2022.
Got it. Okay. Thank you.
Thank you.
Our next question comes from Alex Markgraff, KeyBanc Capital Markets.
Hey, guys. Thanks for taking the question. I just wanted to maybe pile on the credit questions asking about secured credit mix. I think last quarter you had mentioned a 60% mix target in the near term. So just first question is whether or not that's kind of still in the plan for the year that 60% mix?
And then secondarily, just pairing that with what you just mentioned around an eventual restoration of unsecured credit and your earlier comments around general credit risk appetite, just wanting to understand what the right long-term mix you think is between secured and unsecured? Is it above, below that 60% level?
Hi, Alex, well the -- we plan to keep growing secure products is running is on the way. So we've been growing the participation of secured products in the total mix quarter after quarter, and we will keep growing in the following quarters. If we don't reach 60% this year, it's going to be close to that is a little bit lower to that because in short-term, we will keep offering only secured products, so it is going to be close to that.
We expect to be close to that by the end of the year. When you ask about the credit without collateral in the future, I would say we don't have the exact number here to give to you because there are many products. When you think about unsecured products, there are many products. There are overdrafts, there are credit cards, there are working capital for merchants. So there are many products here.
I would say you that we will keep looking at the risk and return to have a balanced portfolio so that we can navigate in times of expansion and times of a contraction. So honestly, I don't have a target here to say to you, it's going to be 50-50 or things like that. But it's going to be something that we're going to build as time passes by, looking at the risk and return, looking at the demand for the products because, of course, you offer the products, you've got -- you need to price the product, you may have demand or not.
So I mean the best way to answer you is we will keep building these unsecured products to control the risk and return quarter-after-quarter. But in short-term, we will keep doing -- keep offering secured products. And this mix, this 44%, we'll keep growing in the following quarters.
Makes sense. Thank you.
Thank you.
Thank you. The PagBank conference call is now concluded. We wish you a very good night. Thank you.