PagSeguro Digital Ltd
NYSE:PAGS
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PagSeguro Digital Ltd
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Hello, everyone, and thank you for waiting. Welcome to PagSeguro's 2Q '19 Results Conference call. This event is being recorded and all participants will be in a listen-only mode during the company's presentation. After PagSeguro's remarks there will be a question-and-answer session. At that time, further instructions will be given. [Operator Instructions]
This event is also being broadcast live via webcast and may be accessed through PagSeguro's website at investors.pagseguro.com, where the presentation is also available. Participants may view the Slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via webcast may post their questions on PagSeguro's website.
Before proceeding, let me mention that any Forward-Looking Statements included in the presentation or mentioned on this conference call are based on their currently available information and PagSeguro's current assumptions, expectations and projections about future events. While PagSeguro believes that their assumptions, expectations and projections are reasonable in view of currently available information, you are cautioned not to place undue reliance on these forward-looking statements.
Actual results may differ materially from those included in PagSeguro's presentation or discussed on this conference call for a variety of reasons including those described in the Forward-Looking Statements and Risk Factors sections of PagSeguro's registration statement on Form F-1 and other filings with the Securities and Exchange Commission, which are available on PagSeguro's Investor Relations website.
Finally, I would like to remind you that during this conference call, the company may discuss some non-GAAP measures. For more details, the foregoing non-GAAP measures and the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures are presented in the last page of this webcast presentation.
Now, I would turn the conference over to Mr. Ricardo Dutra, Chief Executive Officer. Mr. Dutra, you may begin your presentation.
Hello, everyone, and welcome to our second quarter's results conference call. Tonight, I have here with me Eduardo Alcaro, our Chief Financial Officer; and Andre Cazotto, our Head of Investor Relations.
Before I get started, I would like to say a few words about competition. Although we have been watching aggressive competition constantly pulling trying to replicate our business model, we continue to deliver strong results.
We would like to reiterate that we continue to focus on the long tail market, taking advantage of being the first mover with the best and most complete digital banking ecosystem and by having non-replicable strengths such as UOL online distribution. We continue to operate in an untouched market.
Still today, 80% of the new devices are sold for merchants that do not accept cards. We do not play the zero-sum game. Competition does every day in their useless struggle. Our price fits all and is in the platform, and there is no negotiation with the platform.
Therefore we have delivered in this quarter, the same consistent performance, we have been delivering since our IPO, healthy net adds growth and a stable decease. In addition, we are now seeing higher adoption of the new banking product and services, generating more engagement in the double-digit growth in average spending per merchant year-over-year.
And before we go through the operational and financial metrics, I would like to play a two-minute audio with Luis Frias, our Founder and Chairman.
Hello, everyone. I would like to say a few words about how we see the banking industry evolving in the next years and how our company is uniquely prepared to serve this incredible wave that is transforming banking as never seen before.
Amazingly, we saw an - impact by the Internet. One of the last industries to resist was banking. But now, banking is changing. The Internet is finally transforming banking. To be competitive in this new banking era, companies must have a tech DNA, understand local needs, and deal with local governments and local regulators.
But most important, probably the unbeatable advantage, they must be the first mover. They must have the first mover scale advantage. Scale is not only a fancy word in the Internet. It is also fundamental in banking. Scale defines retail banking and retail has always been the core of banking.
But while in the world of search and social networks the scale is global, in retail banking, the scale is local. This is why after so many decades of globalization, retail banking is still local in developed markets like America, Europe and Japan as well as in emerging markets like Brazil.
Global retail banking is a tough business. Global scale does not apply for retail banking. The scale that accounts for retail is local. As an example in Brazil, a global bank like HSBC didn't have a local scale to compete against Itau and Bradesco the local banks. We see the digital retail banking through mobile and we believe to be likely to see some similarities between major Internet stories and the banking industry transformation to come.
Remember Google Plus, the dispute in the early social network market between the mighty goliath Google trying to compete against the first mover David, Facebook. Bingo, David beat goliath, first mover work wins. PAGS is tech, PAGS is the first mover and PAGS is local. With that in mind, we are pleased to share with you the beginning of a new banking strategy with PagBank officially launched last May.
We are also pleased to say that PAGS has rich, a spectacular figure of 9.4 million unique active users. These 9.4 million unique active accounts are 4.7 million unique active merchants plus 4.7 million unique active accounts consisting of online buyers using PAGS digital wallet and PagBank consumers.
Out of the 9.4 million unique active accounts, we have 1.4 million PagBank's unique active users. All of them have at least one single transaction in the last 12 months in order to be considered active. PagBank was launched through a massive national online and offline marketing campaign to promote the new brand and its new products.
With PagBank, our market is expanded by 14 times. It is 14 times larger than the payments market. PagBank's offering represents a real opportunity to cross-sell additional products and to expand our relationship, not only with the 4.7 million merchants, but also with the 4.7 million unique online buyers and PagBank consumers.
The 9.4 million unique active users reinforce that PAGS is, today, much more than the payments company. Most importantly, it shows our leading position in digital banking. We are the largest digital bank according to Google Trends and the largest prepaid card issuer.
We continue to believe that the digital banking revolution is disrupting the way banking is offered. Digital, self service, simple, price transparent and affordable financial products are changing lives around the world, including Brazil.
Brazil is a country with a reasonable telecom infrastructure, 98% 3G coverage, a huge smartphone penetration and a massive Internet usage. Fifth largest Internet origins in the world. In addition, PagBank is leveraged by UOL online distribution. UOL covers 87% of the Brazilian Internet origins. UOL is a relevant and exclusive ally to democratize and lead the digital revolution in financial services, just like UOL did for PagSeguro in payments.
There is a blue ocean of opportunities in financial services and a huge number of unbanked people willing to adopt digital solutions and new disruptive finance products. We believe PagBank can capture part of the total revenue pool that is 14 times bigger than the payments market and we believe we will continue to lead digital banking transformation in Brazil in years to come.
This strong momentum reflects our strong fundamentals,. PAGS is uniquely positioned because it was the first mover to create a business model and solutions for the long tail market by offering a digital, simple, self service, price transparent, complete and affordable finance ecosystem and by having UOL as an exclusive online distributor among other things.
Being the first mover, investing in people, R&D products, distribution and branding in the last 13 years brings to PAGS a nature advantage.
Thank you for your time and now, I will turn back to Ricardo.
Now, we start our presentation highlighting the great achievements of the quarter. On Slide 3, starting with our solid results, non-GAAP net income to reach BRL343 million, up 42% year-over-year and 5% quarter-over-quarter, with a net margin at 25%. Our adjusted net revenue reached BRL1.3 billion, up 53% year-over-year and our net take rate ended at 3.23%, up 11 basis points quarter-over-quarter.
Moving to our operating figures, we ended the quarter with 9.4 million active unique users, which means active merchants, active PagBank consumers and online buyers using our wallets that did at least one single transaction in the past 12 months. Our TPV reached BRL26.8 billion, up 59% year-over-year, closing the quarter with 4.7 million active merchants, adding 1.2 million when compared to the second quarter 2018.
Our average spending per merchant in Q2 2019 reached BRL5,900, up 15% year over year. We believe the adoption of additional features through the digital account will be translated into higher stickiness and more transactions. Our goal is to be the merchants' final money destination. These figures reinforce, not only that we are in the right path with a broad ecosystem, but also our execution capability.
Now moving to PagBank, we had 2.5 million downloads in the quarter. Our customer average balance grew 58% year-over-year, pointing that over time, our active users see PAGS as their final money destination. We also ended the quarter with 1.4 million PagBank active users, which means merchants, online buyers and consumers adopting, at least, one additional product or feature beyond acquiring services, considering at least one transaction in the last twelve months.
Finally, PagSeguro has proven that operating and winning in the long tail requires an online and mobile approach that is totally different from the traditional acquiring business and new competitors that were attracted to the market after our IPO. We operate in a brand-new market that we created, and we still have a long way to go, constantly put into practice our vision to disrupt and democratize financial services through technology and innovation.
Moving to next Slide. We believe PAGS is well positioned and with a robust ecosystem that combines payments, lending, banking and software products to serve our more than 9.4 million active unique users and new customers we will acquire in the future. By up selling new products such as credit, banking and software and expanding our approach to consumers, we will multiply our market.
Considering the new initiatives already available for merchants and consumers, we estimate revenue pool is almost 14 times larger than payments market. Being the first mover, having a robust and low-cost ecosystem, with 9.4 million unique active users, mobile-first, strong brand, focus on user experience, the best rated financial services app on Google and Apple stores, and unreplicable online distribution through UOL, brings to PAGS a natural advantage and leadership in the long tail market.
On Slide 5, we start presenting some figures about the potential market. According to IBGE and Brazilian Central Bank, there are 68 million unbanked people in Brazil. Additionally, 28 million of the low-income population do not have a bank account and 57% of the population are interested in adopting digital banks. Still, 40% of the paychecks are paid in cash, 65% of the bill payments are also made in cash and, finally, 51% of the new bank accounts are opened just to receive payroll checks.
On Slide 6, PAGS is leading the digital transformation and democratizing financial services. Brazil already has a solid infrastructure, with 3G network covering 98% of the Brazilian population, while 96% already count with 4G coverage and the smartphone penetration in the country reached 71% of the Brazilian population.
When it comes to global internet figures, Brazil is one the most relevant countries, being the fifth largest country in the number of internet users, fourth in time spent on internet and second one in time spent in social media. And when it comes to our relevant and unique position to capture this digital transformation, it is worth to remind that UOL has 87% internet audience coverage in the country, with 105 million unique monthly users as of June 2019.
On next Slide, we present our outstanding results. We ended the quarter with 1.4 million active users. It means merchants, online buyers using PAGS digital wallet and consumers that use at least one additional product or feature beyond acquiring. Our PagBank app was rated at 4.8 stars in Android and iOS, being the best rated app among payments and digital banks peers according to more than 600,000 reviews and PagSeguro is also the largest digital bank searched by Google.
We had 58% increase in digital accounts average balance year-over-year, reflecting the higher adoption and usage of the new products. And according to internal survey with our clients, 94% of the users would hire products and services offered by PagBank.
Additionally, we ended the quarter with over 2.5 million downloads, growing almost 200% year-over-year and 75 million logins on PagBank app during the quarter, a record in our history. In the quarter, a record in our history. Those initial figures indicate we are in the right path and we will keep enhancing our ecosystem in order to increase PagBank usage.
Moving to Slide 08, we provide some additional color about our lending product, PAGS Capital. We are gradually scaling the product to our best merchants, eligible according to their account history, TPV behavior and payment frequency. Since the beginning of the operations in May 2018, we reached 26,000 lending contracts.
In Q2 2019, we had 14 times more contracts than what we had in Q4 2018 and ended with a total credit portfolio net of losses of BRL132 million. So far, we are being very careful with credit. However, these initial results are encouraging, as we had very low level of delinquency. Credit is an important tool to create higher engagement with our merchant base and may generate additional revenues for the company in the future.
Now, I would like to turn the conference over to Eduardo.
Thanks, Ricardo and hello everyone. On the next slide, before I start, I would like to mention that in the second quarter of 2019 we had a total of BRL20.1 million of non-GAAP items related to our stock-based long-term incentive plan. In addition, I would like to remind you that in the next quarter we will have vesting of the fourth grant of the initial stock-based plan like we had in the third quarter of 2018.
Based on the current stock price, we estimate a one-time net income market-to-market adjustment of approximately BRL50 million on the top of the quarterly recurrent provision. For more details, the reconciliation of these non-GAAP measures is presented in the last page of this webcast presentation.
On the top left of Slide 9, our adjusted net revenue, the sum of net revenues from transactions and financial income from installments reached BRL1.296 billion in this quarter, up 53% year-over-year and 13% quarter-over-quarter.
We believe that these two operational revenue and income lines best represent our core business, which grows at healthy high-double-digit rates. On the other hand, despite any mix effect, our MDR prices are public in our website and remained the same quarter-over-quarter, having the benefit from additional products and services of our digital accounts.
Moving to the top right, we have our main revenue streams, we have our main revenue streams, composed by transaction services, financial income from the installment prepayment and hardware sales. In the second quarter of 2019, transaction and services represented 59%, financial income from installments 37%, and hardware sales only 5% over total net revenues that continue to trend down as expected.
On the chart below, we present our non-GAAP total costs and expenses that decreased 0.4 percentage points year-over-year, ending the second quarter at 3.4% over total TPV. Related to non-GAAP admin expenses over total TPV, reached 0.3% flat when compared to one year ago.
On the next Slide, we show our non-GAAP net income growth. In the second quarter we reached BRL343 million, an increase of BRL101 million and up 42% year-over-year. The non-GAAP margin reached 25%, remaining stable even with higher hardware subsidies and new marketing expenses related to the PagBank campaign in the quarter.
On Slide 11, we have mapped the current functionalities of our unique ecosystem broken by payments, software and banking features. You can see that there are four new features we launched after our first quarter earnings call and I will give more details about them in the next slides. On the superior block, there are features oriented to merchants. Instant payments and sales app in the software column are the new ones.
Below, you can see our robust banking ecosystem. Cash and credit cards as well as payroll portability are the new launched features. We believe these banking features will enable us to attract, engage and monetize both merchants and consumers, helping us to improve our merchants loyalty and stickiness creating more and more engagement. The total market of banking and credit is 14 times larger than the merchant acquiring business, and PAGS is well positioned to reach this new market.
Moving to the next Slide, we have our number of total unique active accounts. Let me first remind you our criteria again, since this is the first time we are sharing this metric. These 9.4 million unique active accounts are 4.7 million unique active merchants, plus 4.7 million unique active accounts consisting primarily of online buyers using PAGS digital wallet and new PagBank consumers.
All of them have at least one single transaction in the last 12 months in order to be considered active. It is important to remember that PAGS started its business as an online digital wallet provider before entering in the POS market back in 2013, just like PayPal. So we have a large number of unique active online buyers holding our e-wallet for e-commerce purchases in our online check-outs, generating TPV but not monetized as consumers.
And now through PagBank, we will offer products and services for them, with the advantage of already having their purchase profile and this is the reason why we began to share this additional metric since our value proposition goes beyond merchants and acquiring services, and we are expanding our capabilities to a new pool of services and consequently users. As we mentioned earlier, from the 9.4 million total unique active accounts, 1.4 million are PagBank active users.
On Slide 13, we have the evolution of our average spending per merchant that reached BRL5,900 in Q2, a growth of 15% year-over-year. This strong and continued growth is explained by a higher adoption curve of our solution in our merchant base, which is an expected trend, higher engagement in our ecosystem being converted into more transactions and TPV.
Just reminding you what we said in the initial remarks, most of our merchants did not accept cards before joining PagSeguro. This is a blue ocean and a new market created by PagSeguro as we are not stealing clients from competition.
In the next chart, we have our number of active merchants. Just to explain the criteria we use internally, active merchants are those who made at least one single transaction in the last twelve months. We ended the second quarter reaching 4.7 million active merchants, adding more than 1.2 million new merchants in one year, representing an increase of 35% year-over-year.
Quarter-over-quarter, we added 296,000 new merchants. On the charts below, we see our TPV. Our total payment volume reached BRL26.8 billion in the second quarter, an increase of almost BRL10 billion and up 59% year-over-year, and growing almost 10% quarter-over-quarter.
This growth is the result of a higher penetration of our ecosystem in the long tail, combined with the trend of cash to plastic conversion that is still at the beginning in our merchant base with lots of room to grow in Brazil and having the upside of cross-selling additional products and services to our clients with our PagBank initiative.
The net take rate, which is the blended take rate net from transactions costs such as interchange, processing and cards scheme fees, reached 3.23% in Q2 2019, or 11 basis points up when compared to previous quarter.
Now, I would like to turn the conference over to Ricardo who will talk about engagement metrics and new products.
Thanks, Eduardo. On Slide 14, we show some of the most relevant engagement trends in our ecosystem. We believe engagement is one of the most relevant metrics to follow, once it will help the company to increase the switching cost, add more transactions and TPV and will enable future monetization and revenue diversification.
On the top of the chart, we have the number of active prepaid cards that increased 78% in 2Q 2019 when compared to 2Q 2018. According to Card Monitor, PAGS is the largest prepaid card issuer in Brazil. Additionally, we also have the volume of prepaid cards top-up, that increased 75% when compared to the same period in 2018.
In the chart below, we see the number of bill payment transactions that rose 719% since its launch back in the second quarter of 2018, reaching 1 million transactions in the quarter. Our mobile top-up feature is also ramping up, growing almost 400% percent when compared to 4Q 2018, when we launched it, and 84% growth quarter-over-quarter.
On next Slide, we have the evolution of our additional revenues growth or revenues generated by new products in our ecosystem such as lending, cards, software and others, that grew 131% year-over-year. Additionally, we have the evolution of our P2P transfers, that started to get traction and already grew 474% when compared to 4Q 2018 and 39% quarter-over-quarter.
On the chart below, we have also the customer average balance that increased 58% year-over-year, showing that through new products and features more and more our merchants are seeing our digital account as their final money destination.
Finally, we see the evolution of new transaction methods like NFC. Our TPV through near field communication or contactless increased 92% quarter-over-quarter. We believe that offering NFC and QR code acceptance in our terminals and in our wallet increased the value proposition to our customers.
On Slide 16, we highlight our roadmap of products already delivered in the year. Being an independent company allow us to think exclusively on our clients' financial needs, by delivering growth and profitability simultaneously and offering a unique ecosystem through our digital account.
With cash and credit cards and payroll portability, we expect to diversify our addressable market and start gaining penetration with the consumer vertical, besides our higher engagement on the merchant segment. Worth to say we will be very cautious in the credit offer as we know it is important to understand credit behavior so that we can manage delinquency accordingly.
On Slide 17, we can see the strength of our brand. PAGS is the first mover in this market and the fact it can access UOL audience, the third largest online audience in Brazil, only behind Google and Facebook, with more than 87% internet reach as of June 2019, to promote our products and solutions in long tail, helped PAGS to reach a unique brand recognition.
In the past twelve months, according to Google Trends, filtering by the financials category, we have on average approximately six times more searches than the second player. PAGS reached a level of branding awareness where the business has a word of mouth effect, and consequently, we have lower acquisition costs than our competitors.
On Slide 18, we show our new device, Minizinha Chip 2. It is an upgraded version of our entry-level device, with a promotional price of 12 installments of BRL9.90 or BRL118.8. This device is NFC enabled and comes with the usual sim card and a larger screen, combined with a thinner hardware. It will offer a better user experience for self-employed segment.
Moving to next Slide, we present our software solutions. Through M&A transactions, we now have Tilix, an automated application that innovate the customer experience in paying bills. From utilities to tax bills, Tilix offers a simple and user-friendly interface to manage bill payments and will be fully integrated in our digital account app in the following months.
We also have R2Tech, a company acquired in 2017, that offer a streamline process of credit card transactions reconciliation. And finally, NetPOS that provides ERP software to retail and foodservice segment.
Built for front and back office, with sales and management tools like inventory control, detailed reports, cash management and invoicing, NetPOS will be fully integrated with PAG's mPOS, POS and SmartPOS devices as well in our PAGS's sales app. We had 84 thousand clients using our software products by the end of June 2019. PAGS will continue to monitor possible M&A activities that can speed up the building of a more complete ecosystem.
Finally, on next Slide we show our new acquisition. After Tilix and NetPOS, Yami is the third software acquisition in the year. Yami is a back-office platform for e-commerce and marketplace, helping online merchants to run their businesses and it is compatible with the major e-commerce software-as-a-services platforms, such as VTEX and Oracle.
Yami provides a relevant product in Brazil for e-commerce exchanges and returns and it is the first PCI gateway specializing payment splits. Additionally, Yami works with more than 100 fashion online stores, a segment where exchange and returns are recurrent, which adds some complexity to transactions, requires split payments and so on.
Now, we finish our presentation and we will start the Q&A session. Operator, please.
Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question from Greg Maurer, Autonomous. You may proceed.
Yes, hi, thanks for taking my question. So couple of things. The take rate on transactions improved substantially and I was wondering if this was mix shift back to credit as if I remember correctly debit was suppressing that take rate. Secondly, can you talk about the revenue potential of PagBank as we think ahead for 2020, and if you will be breaking that out separately. Thanks.
Hi, Greg. This is Ricardo. Thank you for your question. First, regarding take rate, you are right. The increase in the net take rate is mainly due to mix shift. In the past quarter, we had more debit transaction and now in the second quarter, we had more credit transactions and more credit through installments as well. So that helps to increase net take rate.
Regarding the potential that you asked about the revenues, our business plan is to have at least 30% of our revenues coming from additional services in three years to five years. So that is what we have in mind, that is what we have in our business plan. If something changes, we will let you know in the following quarters. But so far, that is what we had in our plan.
Next question comes from Rayna Kumar, Evercore ISI.
Good evening. Thanks for taking my question. Could you quantify some of the investment spending you are making on PagBank and just help us understand the operating leverage in the business for the remainder of the year and then also for the next two years to three years, please.
Hi, Rayna. Thank you for the question. Let's go when we talk about PagBank in May 15, we give more information about the ecosystem we were building for PagBank consumers, so to say. And we added two features into the ecosystem which was the salary portability and also the cash card. So the investments in terms of the ecosystem was not that big.
What we did since then, was a little bit of investment in marketing and that is what we had so far. So we try to have the same ecosystem that we already had for the merchants and added these two features, so that we can serve the consumers as well.
And remember, our merchant is so small that some point he behaves like a merchant and at sometimes, he behaves like a consumer. So, we didn't have to change the ecosystem too much in order to serve the consumers. So, going back to your question, the majority of the investment so far was in marketing.
Our next question comes from Otavio Tanganelli, Credit Suisse.
Hi, thanks for taking my question and congratulation on the results. I have a question on PagBank. Actually, I know, it is a little bit early, but if you could share with us some of the statistics on either the delinquency or the rates that you are charging on the credit. It would be great for us to have an idea of how should we think about this line going forward. Thank you.
Hi, this is Eduardo speaking. First, we are not doing lending for consumers and our credit products, what I can tell you that we continue to learn and increasing the number of originations here. Right now, we are cherry-picking our clients eligible to these products, merchants that have an account history, solid TPV, growth and payment frequency.
Our focus is having the lowest delinquency in the market. That is our focus right now. So we believe that we are finding the right model and that is what we are doing right now and we do not have any rush to accelerate it.
We just want to make the product right. We continue to see electronic transaction as the main driver of growth in PagBank as additional products is still to engage and to engage people in our ecosystem. The Square Capital is one of our benchmarks and at least from now, we are funding all the transactions on our balance sheet.
Next question comes from Bryan Keane, Deutsche Bank.
Hi guys, congrats on the quarter. Wanted to ask about the net merchant adds. It is running ahead of our expectations and kind of running ahead of your guidance projection for the year, I think, of one million. Can you talk a little bit about that target. Do you guys expect similar numbers for the year or now that you are off to a good first half of the year, we should see something north of a 1 million.
And then secondly on net income guidance for the year, for fiscal year 2019, would you reiterate that or do you think about maybe investing further in some of these additional services to generate faster revenue, just thinking about the balance of investments like PagBank versus dropping into the bottom line. Thanks.
Hi, Bryan. This is, Ricardo. Thank you for your question. You are right. We had a better net adds in this quarter than what we had in our original plan. We don't see deceleration so far, but we prefer to keep the guidance that we had last year, which was one million net adds.
The same, but you are right, we already had half of the year and we are almost 600,000. So it seems that you are going to be better than what we had in mind back in December but we prefer to keep the guidance in terms of net adds in the same 1 million. In terms of guidance of net income, would you like to answer that, Eduardo.
Yes, hi, Bryan. In terms of the guidance, we are keeping the same guidance, the non-GAAP guidance of BRL1.322 billion to BRL1.500 billion. What we are seeing right now is a number close to the top of the guidance. That is our estimate right now.
Our next question comes from Domingos Falavina, JPMorgan.
Hi, good evening, everyone. Also, thank you for taking the question. My question is on the OpEx side. Not a substantial investment on the PagBank launch. And I would have expected you to disclose how much of that was one-off so that we could, like, clean the income statement to see what is the earnings power. So, my question is, I guess, how much do you spend in the launch in the marketing or how much was like an unusual launch expenses, so that we can adjust marketing going forward.
And my second question is, congrats on results. We are pretty surprised of the figures on the size of PagBank and even more with the size of the online digital accounts. So, my question is how should we think about that, meaning the 4.7 million clients that you have on digital, which were not your merchants, should we think of that as a more easily reachable addressable market for PagBank.
So, you intend on growing on this client base with cross-selling banking products or do you see that as not an addressable market. You want to monetize that in some other way and you want to expand your net additions elsewhere. Just trying to understand exactly how to correlate the online digital accounts with the PagBank offer.
Hi Domingos, this is Alcaro speaking. I think, first, PagBank is designed for both consumers and merchants, and we will monitor the progress on a consolidated basis. So I think, Ricardo mentioned earlier, we are already doing heavy investments in the whole platform or you can look at our R&D expenditure.
We spent in the first half of the year, you can see in our cash flow, about BRL150 million in R&D and when we look at our client base, our client base is really a mix. We have clients using sometimes the merchants had sometimes, the consumers had. So to start to split or break down, how much of investments go to one on another, we just have one consolidated platform that serves both merchants and consumers.
And, hi, Domingos. This is, Ricardo. Thank you for your question. Regarding the 4.7 million online buyers, we plan to approach these guys to offer PagBank. Remember that since until May, we didn't have a good offer for the consumers so far. So, we had all this base of online buyers that use our wallet, but didn't have the right product for them.
Now, we have some products, we can approach them. We have been having some mixed results. Some of them stick with the products, some don't. Part of that is also worth to remember that most of them, they have a wallet with us, they already have a credit card, so and PagBank is very oriented to unbanked people as we said in the presentation.
So, our focus is not to get people from other banks. If they want to come, they will be welcomed for sure, but our focus is to get people unbanked and these 4.7 million part of them, they already have banks and not all of them are going to stick with our offer, but we are working to bring them to PagBank.
Domingos, just one additional commentary. We also have the advantage of knowing this consumer profile because we know how much these guys are spending in online transactions once they are using eWallet and for sure that the CAC to acquire this guy is much lower one he is already in the ecosystem. So we benefit from that too.
Yeah. And also quickly, just one follow-up on the answer from Ricardo, I understand that investments were around BRL150 million, super clear, but my question is just like more on the marketing like you launched. If you look at the run rate of marketing expenses and selling it was what BRL80 million, BRL90 million, it came maybe BRL30 million, BRL40 million above in this quarter. It seems like an one-off expense linked to the launch of PagBank. Does that number makes sense, like, should we see maybe one-off of BRL30 million in expenses or BRL40 million or BRL20 million in this quarter or no?
Your comparison is right we spent in marketing BRL80 million in Q1 and a BRL116 million in Q2, BRL36 million more. At this point we are not providing specific disclosure on the marketing efforts, how much went through PagBank. I also believe that you should not consider the investments in PagBank as one-off as we will continue with the marketing investments going forward as well.
Okay, thank you.
Next question comes from Mario Pierry, Bank of America.
Hi, everybody, good afternoon. May I ask you two questions as well. First one, staying on PagBank, if I look here, the data that you disclosed, you said you have disbursed a BRL132 million to about 26,000 contracts. So we get an average ticket size of BRL500 roughly. But when we look at your average client, they are transacting roughly BRL2,000 per month.
So I wanted to understand there, are you being too conservative right now? Could you be increasing your ticket size to at least, like, the value of one month of transactions? If you could also talk a little bit about the interest rates that you are charging on this loan, so that we have an idea and if you could give any color on service fees. Are you charging monthly fees to your clients? Do you plan on charging fees?
Also. last quarter you said that you are going to start to issuing cards to your clients, but I don't know if I missed it, but I didn't see any figures on number of cards issued, if you could discuss that a little bit as well. So basically these questions are related to PagBank. Just trying to quantify what could be the potential revenues for you.
And then my second question is related to one of your peers, right, announced a strategy to get into the micro merchant segment that pretty much replicates what you are doing. Just wanted to hear your views about this potential new entrant. How do you think you are prepared to face this competition and seeing your competitors coming into your markets, does it put pressure on you to eventually move up into the SME segment and become more aggressive there? Thank you.
Hi, Mario. This is, Ricardo and thank you for the question. I will start for the last one, regarding the micro-merchant competition that you asked. We have been facing competition from the big banks and the big guys and also from other companies since the end of 2017. Right before the IPO when we became public we started having more competition in the market. So, nothing has changed that much.
We see with you, we do not fear competition that is coming at this point and from the latest mover. If you think about some announcements that we had in the last weeks buying broadcast media with equity in our view is not a strategic move. Also, there is some potential conflict, who is going to the owner of the customer, if it is going to be the JV or the other company.
So we don't think that is going to change the dynamics of the market that much. Long tail market is also worth to remember. That is huge and is still under-penetrated. We sell 80% of our device for people that did not accept cards before joining us. There are millions of SMBs and entrepreneurs in Brazil. So we see still a lot of potential in this market.
And remember, that we have some very strong positions here such as we are the first mover. We have a strong brand. We have UOL as online distributor. We have a very, very complete ecosystem and so on. So I don't think the market is going to change that much, the dynamics of the market are going to change that much with one more player at this point.
Going back to PagBank and the lending, the bank's capital. I know we just disclosed the numbers 30 minutes ago, but you are right, ticket is not BRL500, it is BRL5,000. It is BRL130 million divided by 26,000 contracts.
So is around BRL5,000. We are offering this for the best merchants that we have, for the merchants that have the account history, the TPV behavior, a lot of information to accounts and we are not disclosing the exact percentage of the lending that we are offering and mainly because we have a variety of prices depending on the risks that we see in each of these merchants.
But I can tell you that the interests are very low, and that is why we believe that we need to bring people to our ecosystem so that they are going to increase the stickiness and use our products more. Regarding the cards. I will let Alcaro answer that for you.
Hi, Mario. About the cards, we provided some specific metrics on the prepaid cards as well, it is in our 20-F. We are by far the largest prepaid card issuer in the country. In terms of number of prepaid cards, we grew 78%.
You could see in our presentation and the volume, the prepaid card top-ups increased 75%. If your question is about the pure credit card, not the prepaid credit cards, this operation is really in the beginning. We are extending credit cards to also to our very best merchants at this point.
I think, as I mentioned earlier, I mean, our focus here is to have very, very low delinquency. Credit, I always say that is very, very easy to provide and very hard to collect. So we need to be careful with the product but we are making very good progress so far.
And what about service fees? Are there any service fees with the accounts you are charging like a monthly fee?
No. Our accounts are free of charge. We don't charge any maintenance fees. Although, we have some revenue string lines. So, for example, we don't charge wire transfers, but beginning on the sixth wire transfer we do charge and it is extremely lower than what is offered in the market. It is BRL1.99 versus the prices that you can see in the market.
We also received interchange on prepaid cards. We also get rebates from utilities and telecom companies on the bill payments. We get float from the checking accounts and also we have the landing that I have just mentioned. So, those are the main revenue streamlines.
Our next question comes from Joseph Foresi, Cantor Fitzgerald.
Hi. I wanted to ask a couple of questions. First, just on PagBank, maybe you could talk about how you view risk in that business and the use of your balance sheet to take on that risk and what the reward is there. And then, maybe as a second question, you could talk a little bit more about sort of how you think about the penetration rates in the market right now and some of your thoughts around what the long-term targets are from a growth rate margin and net income perspective? Thanks.
Hi. Talking about the risk, just to be clear, we don't have any consumer lending in our balance sheet. All that we have is what we disclosed, a BRL132 million so far with our balance sheet. This represents about 1% of our total receivables. So, the credit there is really limited.
Regarding the potential of the market, James, we have around almost 70 million people unbanked in Brazil. 28 million are low income people that don't have a bank account. And so, all the stats about people that are out of the system. So it is a similar situation that we had back five years ago when we launched the POS devices that we brought millions of people to the financial system.
We had the same plan for the consumer, bring these people into the system. Our plan is to have at least 30% of our revenues in three years to five years coming from these PagBank -- for PagBank revenues. Got it. But just to go back to the amount of risk, are you comfortable? I realize it is very low now. I assume you are going to continue to use the balance sheet.
Do you have a target of maybe 5%, 10% of total revenues or is that not or maybe a partnership that you might develop down the line. I'm just trying to get a sense of how you are thinking about the risk associated with it over the long term.
Well, what we are really thinking about now is engagement. It is offering a product that creates more stickiness. For most of our clients, it is the first time that they are receiving a credit offer. In terms of what is the level of risk or size, I think it is too early to say.
As I said before, we are doing very nice progress. We are really pleased with the product, but to set targets right now is not our main concern here. As I said before, it is a product that we continue to learn and we are making very good progress here.
And also James, just complementing what Eduardo said, we will see what is going on with these products in the next quarters and then if necessary or if we think it is feasible, we can make partnerships based on commission fees or commission plus profit fees for part of our consumers or merchants that we think are too risky for instance. So, as Eduardo said, it is still too early to give you an overview about that, but we will keep posting you in the quarter results.
Our next question comes from James Friedman, Susquehanna. You may proceed.
Hi, thank you for taking my questions. I wanted to ask two. I will just ask them upfront. One, you mentioned in your prepared remarks and you showed the math that there is 15% growth in the revenue per merchant year-over-year. I know you said that that is blue ocean. but that was actually an acceleration from the Q1. I was wondering how we should think about modeling that going forward. That is the first question.
And then with regard to the take rate, the 11 basis point sequential increase, usually those two don't go together like you had more revenue per merchant, but you also had a higher take rate. I realize you said earlier there is a credit/debit mix, but should we be thinking about that trend to continue or should we stay here, how should we be thinking about the take rate? Thank you very much.
Hi, Jamie. Thanks for your question. Eduardo speaking. About this average spending per merchant. About this average spending per merchant should continue to trend just like the best quarters. I think that the main reason why we are still observing these, let's say, strong double-digit growth year-over-year because we are still perceiving more merchants migrating cash to electronic payments. This is still an ongoing trajectory for the Company. So we should keep this growth stable in the near term.
When it comes to take rate, we explain it. I think that this is also a very similar trajectory as we have said in this quarter. We are not seeing pressure coming from competitors in our take rates. We are diversifying the business. We had a better mix in the second quarter. So what we had control in terms of pricing, there is no change. We are not observing any type of pressure.
Okay, great. Thank you.
Our next question comes from Tito Labarta, Goldman Sachs.
Hi, good afternoon. Thanks also for the call and the additional information you provided. A couple of questions also just, I guess, following up on the revenue potential of the other businesses, particularly from PagBank, you mentioned about 30%. Any color in terms of like how much of that would come from lending those fees.
Again, do you see a preference for how you would like to generate that revenue? Just trying to get a sense, right, just kind of tying it into the risk of lending versus just being able to generate some fee income, which would be less risk, but just trying to get a sense of how you might think of that split over the next few years.
And then the second question in terms of competition, just following up a bit more there, and given all the information you provided, I know the banks haven't been successful and going after these unbanked merchants in the past and maybe they have gone about it the wrong way, but with this additional information you are providing, do you think that this could prevent the bigger risk for the banks to maybe see another way to attack this market and sort of trying to go after it in a different way, given what you aren't providing?
And I guess, thinking about the margins, right, they have been holding up. Well, longer term, I mean do you think there is room for margin expansion or will competition bring that down? Yes, if you can give some color on that, that will be great. Thank you.
Hi, Tito, thanks for your question. I think that for this 30% that we just mentioned, it is too early to say. I think that is going to be a mix of all the products that we are developing the ones that are starting to scale right now. Like Eduardo explained earlier, we are very worried about right now create to the ecosystem, engage the people.
We have this aspiration of 30%, but it is too early to comment from where it is going to come, probably overall products that we have like the interchange. The interchange that we capture in our cards, lending among others that we have in our ecosystem and others that could come in the near term.
And Tito, this is Ricardo. Thank you for the question. Regarding competition, even with all this competition that a news flow that we had in the past one year and a half, we didn't change our price. So, we have the same price that we had one year and a half ago. So our customers, our merchants are not price sensitive. Again, they are coming into the system they did not accept cards, they have a very low average spending per month.
So, it is not 10 basis points or 15 basis points that are going to make the change for one company to another, and we have this complete ecosystem that we keep repeating every call and in every meeting that we have with you guys. And so, I don't see short-term pressures in the margins, because we didn't see in the last year and a half.
Maybe there is going to be more attempts from other competitors. That is part of the game, but we are working to build this ecosystem and make PagSeguro a company different than other companies in the market.
So, that is why you keep investing in launching products, launching features, increased engagement, giving lending for the best merchants and so on. So I don't see short-term pressures in prices or margins. It is hard to say if there is going to be margin expansion at this point, but I don't see price pressures at this point.
Great. That is very helpful. I guess maybe a follow-up, just in terms of kind of thinking about the long-term potential of the business, I mean you started as a payment company and coming more of a bank, I mean, is that kind of the way to think about it versus the large banks or the as banks and you got into payments or doing payments and sort of profit it from that, but is this sort of you were able to start in payments that you are usually developing, I guess, that full ecosystem in the year, not really just the payment company for competing with banks and other providers, is that the way to think about sort of the profit potential?
Hi, Tito. Alcaro speaking. The right way to think is, I think, Luis in the beginning of his speech, he laid out really, really well. PAGS is a tech company that operates in payments and now, we are expanding through PagBank. So any comparison with traditional banks.
I think it is not a fair comparison just because we have a different cost structure, the way that we attract clients, that we acquire clients is totally different from traditional banks. So again, PAGS is tech, PAGS is local, and we have all the advantage of being for the first mover.
Great, thank you. Very helpful.
Next question comes from Josh Beck, KeyBanc.
Thank you for taking the question. I wanted to ask about PagBank. So you had some pretty good stats on engagement, and I'm just wondering for the most engaged users that are staying on the platform. Are there certain features that they are adopting whether it is cards or payroll portability that is driving that engagement.
Hi, Josh. The most common used features are bill payments and wire transfers, and third, they use the cards if the need to buy something or to withdraw the money, but first is the bill payments and then wire transfers. Those are the most used features.
Okay, very helpful. And I wanted to ask about margins. You have obviously had some very good early success with PagBank. And I noticed the pre-tax profit margin, looks like it was down a little bit year-over-year. So when we think about 2020 and the size of the opportunity, should we be thinking about continued reinvestment so that margins are kind of flat, or anyway just to help us think about margin trajectory given the early success that you have had with PagBank?
Hi, this is Alcaro speaking. In terms of margin, I have a different view. When your margins are stable, they are pretty much the same percentage. And when you compare to one year ago, we did not have the subsidies or the subsidies were materially lower than what we have right now. And even with higher, higher subsidies than one year ago plus all the marketing investments, we were able to maintain our margins.
Okay. That is a very important call out. So thank you for that. Really appreciate it.
Next question comes from Olavo Carvalho, Santander.
Hi, everybody. Thank you for taking my question. And I have two. So the first one, I totally understand that you don't have a straightforward answer for this, but which credit lines could we expect PagBank to start offering to its customer base in the future.
You mentioned the potential market is way larger than the acquiring. So credit card loans is one very clear for us, but how about personal loans, consumer finance or working capital, which one of these are a more plausible for us to see, excluding the credit card?
And if I may, my second question, we have seen in the newspaper that MasterCard recently increased the interchange fees for credit transactions, so could we expect PagSeguro to pass this increasing cost to final customers or it should be absorbed by the company and we may see slight margin decrease in the acquiring business for the following quarters? So thank you.
Hi, Olavo. Andre speaking. About your first question, I think that we are starting with personal loan, let's say, for our merchants, according to TPV, according to payment frequency, according to account history, just like we explain it earlier the best clients, the top-notch, that is what we are doing right now. That is what we can say at this point.
And regarding the MasterCard that you asked, of course, we are totally against this move by principle because it means we are changing those in the mid of the game. And this is going to be increasing our cost. So, we are fully against that move. But having said that, the impact for us is minor or is marginal.
Next question comes from Neha Agarwala, HSBC.
Hi, thank you for taking my question. I have few questions. First one on credit, you are not giving much information in this regard I understand. But would you eventually like to -- like to give credit to your consumers as well? You have almost an equal base of individuals now as you have for merchants and we see MercadoLibre doing that with its merchants as well as consumers. Could we expect PagSeguro to at least start piloting on that front?
My second question is, you talked about payroll portability. How many of your users are currently transferring the payroll to PagSeguro's digital account? And my third question is are you providing any incentive to your consumers to have them on-boarded on your digital account and use your wallet? Also could you think about creating marketplace of thoughts and collaborate with third parties to increase the usage of your wallet? Thank you so much.
Okay. The first question about the credit, the disclosure is what we provided in the presentation, a credit portfolio of BRL132 million, 22,600 originations. And at this point, we are providing credit only to our very best merchants. That is all that we can say right now.
Regarding the other questions, portability. We started on May 15. So it is still getting traction. We already have some of the consumers that made this operation with us, but still at the very beginning. Regarding incentives for consumers to use our digital accounts, we do that and we do very often, but also depends on the - we have some promotions like if you opened the account, you can receive some incentive if you pay using QR code, you are going to receive our incentive; if you pay using our card, you are going to have lunch and receive other gift or things like that, but that is not something transformational for us. We don't believe that by giving all the time offers and promotions for the consumers is the best way to bring people to the ecosystem. I guess it is part of the acquisition cost for sure, but we are not the type of compare that keeps doing this give it is forever. We think that the project is good for itself.
Okay. So you have such a strong base of customers using either your wallet or your PagBank, what do you think has driven that having 4.6 million customers?
Yes. This 4.7 million is part of our legacy business, the online payment that where PagSeguro was launched in 2006. So similar to what you guys have in US with PayPal that you can use PayPal wallets to pay the stuff online, so 4.7 million is part of the legacy that we have brought since our foundation back in 2006. We didn't have the right products for this type of consumers in addition to the wallet. So now we have the PagBank and we will approach then, so that we can bring them to use PagBank and all these features that we launched in May 15th.
And lastly, how can we think about growth for this customer base? Thank you so much.
As far as growth on the customer base, we are not setting targets at this point.
Thanks a lot.
Our next question comes from Jeff Cantwell, Guggenheim Securities.
Hi, thanks for taking my question. Thanks for squeezing me in. I may have missed this earlier, but can I just ask about the PagBank data points this quarter, 2.5 million downloads, 1.4 million active users clearly quite significant amount.
So, do you just mind talking more about how sustainable do you think that is because we have noticed that PagBank ranking in the Android Appstore is Number three in Brazil, which is well above what it was the previous quarter. And that seems like a nice leading indicator to us. So I'm just curious if you could talk about our sustainability, if you just help us out that would be great. Thanks.
Hi, Jeff. It is scaled very fast since we started the campaign. It is just to give an idea PagBank users grew 40% since early this year. I think that like Eduardo said, we don't have targets at this point. We are still investing a lot in marketing campaigns. We are developing the products. We are sending notification to our merchants and now online buyers. So we are in a phase of building up this process, building up the branding.
As you can see in Google Trends, we are the largest digital bank in Brazil. So, we are not setting targets. We are seeing a very decent growth, a very healthy growth from the -- our entry point when we started and for sure, that we are still expecting strong growth going forward, but we are not, let's say, sharing expectations at this point.
Okay. Thanks very much.
Next question comes from Julie Chariell, Bloomberg.
Good evening, and thanks for taking my question. I wanted to ask you about MercadoLibre. I mean, they seem to be the only competitor who really seems to be doing well and gaining some traction in the long-tail along with you guys. And they seem to be offering a lot of similar products, they are adding accounts and on asset management and lending and so on to merchants recently in the last quarter, so they added a more complex POS that they saw at least as becoming more on par with yours. I want to see how you perceive them in the market, if you tend to come up head-to-head with them and where you think your advantages are? Thanks.
Hi Julie. Thank you for your question. Yeah, for sure, they are one of the main competitors that we have. But I also like to remember that in terms of products, I would say we are at least two to three years ahead of them. They are launching the first device that print receipt right now.
We launched our device three years ago. We have this reconciliation company. We have a portfolio of six devices. We have a strong brand. So, yeah, they are building. We have the online distribution through UOL. So, they are building an ecosystem the same way that we did a few years ago, but we will keep investing, we will keep adding some features to our ecosystem. We will keep invest in our brand.
And that is what makes us different than them. And remember that even with the competition, the long-tail market is huge, it is still under-penetrated. 8% of the devices that we sell every month we sell for merchants that did not upset cards before joining us. So there is food for everyone. And we are here working hard to build this ecosystem and make it better every day.
Understood, thanks. And if I can just get one more on the software revenue model, adding a nice suite of software as we go here and I'm wondering what the revenue plan is for that. Will you expect to be charging separately for the software at some point or will it be something that you are bundling with your transactions, I mean, that can help to keep the take rates at a healthy level or…
Julie, there is part of the customers that pay for the software, but it is a small revenue when compared with the rest of the Company. Even if there is any revenues, we don't think that is going to be transformation at this point. We are going to use it as an additional product for our acquiring businesses and for other business that we may have in the future.
And even if it makes sense, for instance Tilix is focused on consumers, so we can offer this type of software to bring consumers to our digital account and make them using more and increase engagement and things like that. So I don't think that is going to be a strong business unit in the future, but there are some additional revenues there. And it helps increased engagement.
Next question comes from Felipe Salomao, Citibank.
Hi. Alcaro, Luis, Andre, thanks for the opportunity and congrats on the results. I have a question about the international expansion. Latin America is a full continent. Thousands of millions of micro-merchants and hundreds of millions of unbanked population, I mean outside Brazil, in Peru, Colombia, Argentina, Chile and so on so forth. You were able to do it a very robust business model over time and you are now entering on the banking business. Mitchell's results has mentioned on its initial remarks about importance of being the first mover in the market and he made the analogy of Facebook versus Google for social media. All that said, how can we think about international expansion for PagSeguro? I mean, don't you think it would be a good move, I mean try to be the first move player in the rest of the continent.
Hi, Felipe. This is Alcaro speaking. Thanks for the question. What we can say is that we are actively evaluating other market opportunities. However, at this stage, there is nothing decided about international expansion. Brazil at the end of the day is a huge market. It is still under-penetrated in terms of payments. And in the micro-merchant landscape and in financial services for under-bracket people, underserved population, there is lots of room to grow and I mean as Ricardo said before, we have about 60 million people in Brazil aiming to have a bank account that are underserved in terms of financial products. So there is a blue ocean here in front of us, but we are not disregarding other market opportunities, but what that is all that I can tell you right now.
This concludes today's question-and-answer session. I would like to invite Mr. Ricardo Dutra to proceed with his closing statements. Please go ahead, sir.
Hi everyone. Thank you very much for the participation and for the time. I will see you in the next call. Thank you very much and have a good night. Take care.
That does conclude the PagSeguro audio conference for today. Thank you very much for your participation.