PagSeguro Digital Ltd
NYSE:PAGS
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PagSeguro Digital Ltd
Earnings Call Analysis
Q2-2024 Analysis
PagSeguro Digital Ltd
In the second quarter of 2024, PagSeguro Digital (PagBank) achieved an all-time high in quarterly net income, reporting BRL 542 million on a non-GAAP basis, which marks a 31% increase compared to the previous year. Similarly, GAAP net income reached BRL 504 million, reflecting a 32% year-over-year growth. Such growth was primarily driven by robust operational and financial performance across all business segments.
Total revenue for the quarter grew by 19% year-over-year, reaching BRL 4.6 billion. The gross profit margin remained stable at 40.3%, aligned with company guidance. The revenue growth was bolstered by high transaction volumes in the payments sector and a strong performance in the banking segment, where revenues increased by 41% year-over-year.
The Payments segment generated BRL 4.1 billion in revenue, up 17% from the prior year, achieving a gross profit margin of 38%. In contrast, the Banking segment significantly outperformed, with gross profit margins exceeding 60%. This growth in Banking revenues stemmed from interest income on credit products and fees from customer engagement, highlighting the success of PagBank's strategic focus on higher-margin banking services.
The company reported a significant reduction in transaction and financial costs, with transaction costs down by over 11 basis points as a percentage of Total Payment Volume (TPV). Similarly, financial costs decreased by 16 basis points, contributing positively to profit margins. Operating expenses remained stable at 26% of total revenue, indicating strong cost management in the face of increased investments for client acquisition and personnel needed to fuel growth.
PagBank's deposits climbed to a record BRL 34.2 billion, marking an impressive 87% year-over-year increase. This growth in deposits, combined with a AAA credit rating from both Moody's and S&P, strengthens the company's funding base and enhances profitability through lower average costs of funding. The company expanded its client base significantly, reaching 31.6 million clients, a net increase of more than 2 million in the past year.
Looking ahead, PagBank revised its total payment volume guidance upward to between BRL 480 billion and BRL 505 billion, citing strong performance indicators. The net income guidance on a non-GAAP basis is projected to be between BRL 2.1 billion and BRL 2.2 billion, reflecting a more efficient effective tax rate. The company remains focused on balancing growth with profitability, indicating their commitment to sustainable growth while strategically expanding its banking and payment solutions.
Despite positive developments, PagBank faces challenges, notably the rise in interest rates, which is currently at 10.5%, exceeding earlier expectations of 9%. This environment could exert pressure on financial costs going forward. However, PagBank's management expresses confidence in its capacity to control expenses and maintain profitability through disciplined financial strategies and a diversified service offering.
PagBank is in a developmental phase concerning its credit offerings, particularly working capital and overdraft loans for SMEs. Although this portfolio is in its early stages, growth is expected to accelerate as demand increases. Additionally, the company is investing in product development to enhance customer experience and expand its financial service offerings.
Overall, PagSeguro Digital's second quarter results herald a strong trajectory fueled by strategic decisions focusing on growth, efficiency, and customer engagement. The positive adjustments to revenue guidance reflect the company’s adaptability and potential for ongoing success in Brazil's dynamic financial landscape.
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Good evening. My name is Audir, and I will be your conference operator for today's call. Welcome to PagSeguro Digital Earnings Call for the Second Quarter of 2024.
The slide presentation for today's webcast is available on PagSeguro Digital's Investor Relations website at investors.pagbank.com. [Operator Instructions]
Today's conference is being recorded and will be available on the company's IR website after the event is concluded. I would now like to turn the call over to your host, Éric Oliveira, Head of IR. Please go ahead, sir.
Hello, everyone. Thanks for joining our second quarter 2024 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 PagSeguro Digital's current assumptions, expectations and projections. While PagSeguro Digital believes that those are reasonable in view of currently available information, you are cautioned not to place undue reliance on these forward-looking statements as actual results may differ materially from those included in PagSeguro Digital earnings presentation or discussed on this conference call for a variety of reasons, including those described in the forward-looking statements and Risk Factors section of PagSeguro Digital's most recent annual report on Form 20-F and other filings with the Securities and Exchange Commission, which are available on PagSeguro Digital's Investor Relations website at investors.pagbank.com.
Finally, I would like to remind you that during this conference call, the company may discuss non-GAAP measures. 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 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 appendix of this webcast presentation and earnings release.
With that, let me turn the call over to Ricardo. Thank you.
Hello, everyone, and thanks for joining our second quarter 2024 earnings call. Tonight, I have the company of Alex, our CEO; and Artur, our CFO. And I'm proud to announce the company had a very strong quarter with all-time high in key financial metrics, such as revenues and net income. Hence, you see many all-time highs at the beginning of the slides' titles throughout presentation.
On this first section, I will share the main operational and financial highlights for the quarter. Starting with Slide 4. Total revenue grew 19% year-over-year, reaching BRL 4.6 billion, an all-time high quarter result with a strong TPV and revenue growth in all client segments. Our gross profit margin ended the quarter close to 40%, in line with the current guidance and 86 basis points increase in comparison to Q2 2023.
On a year-to-date basis, we ended the semester with a gross profit margin of 40.3%. We also reached the all-time high net income in GAAP and non-GAAP basis, which reached BRL 542 million, a 31% year-over-year growth. in the less bullet, we can see our EPS reached BRL 1.68, 32% higher than Q2 2023, also an all-time high.
Moving on to Slide 5. We reached 31.6 million clients by the end of June, adding more than 2 million clients in the last 12 months with 17.7 million active clients. We also had an all-time deposit level reaching BRL 34.2 billion, an impressive 87% increase year-over-year. This increase shows the power of our value proposition, which has been contributing to improved client engagement and to lower our cost of funding, supporting our profitability metrics.
Down in the slide, in the first bullet, we can see, we also had a AAA rating from Moody's. Now PagBank has AAA rating from both agencies, Moody's and S&P. Also worth to highlight in the bottom right of the slide, our PagBank app evaluation of 4.9 stars in App store and 4.8 in Google Play.
Moving on to Slide 6. We share some highlights of the Payments and Banking units. In Payments, we have been able to maintain a strong growth and our TPV reached BRL 124 billion, 34% year-over-year growth, 3x more than the cards industry growth, which was 11%. We had strong growth in MSMBs and LMEC merchants as a result of our strategy of attracting merchants with monetization potential on financial services.
On the Banking side, in the mid-column, we can see our Cash-in reached BRL 76.4 billion, a 52% growth year-over-year, aligned to our strategy to successfully stimulate principality from our clients.
Our credit portfolio grew 11% year-over-year to BRL 2.9 billion, the third consecutive quarter of expansion driven mainly by our credit underwriting on secured products.
In the last two bullets, we can see our early prepayment of receivables from other acquirers will start now in Q3 and also our NPL 90 reached 3.2% in Q2 2024.
Now I pass the word over to Alex for the commentaries on the business unit highlights for the quarter.
Thank you, Ricardo. Hello, everyone. On this section, we will break down our business unit's performance through the second quarter of 2024.
Starting with Payments on Slide 8, we show that our merchant acquiring business keeps growing faster than the industry with strong growth registered in all segments. TPV reached BRL 124 billion in Q2 '24, growing 34% year-over-year, with TPV per merchant growing 42% on a yearly basis and Active Merchants on a 30 days criteria, excluding nano-merchants, grew 4% year-over-year. These results are a consequence of our strategy to expand our payments business focused on merchants profile with better engagement and profitability.
Moving on to Slide 9. Let's look further into the MSMB segment, which gathers merchants with monthly TPV up to BRL 1 million. MSMB's TPV grew 28% year-over-year, reaching BRL 83.6 billion in the second quarter of 2024. The strong merchants gross adds positively contributed to this performance, combined with higher productivity and expansion in our HUBs resulting year-over-year TPV addition of BRL 18.2 billion, which is 5x larger than in the previous year.
We have been recording strong POS sales across multiple channels and geographies, which is an important sign of how consistent and robust our current growth and performance are. This is only possible due to the unique value proposition that our company has for MSMB clients in Brazil. Through unrivaled instant settlement solution, we offer the cheapest working capital source empowering businesses to thrive without financial strength. In addition, we provide a fully integrated platform combining a complete set of payment products, a broad suite of financial service and a comprehensive portfolio of embedded software solutions from more than 350 partners.
On the next slide. Here on Slide 10, we show how our TPV from LMEC segment has performed comprised by Large Merchants, e-Commerce and Cross-Border clients. In the second quarter of 2024, this segment posted 50% TPV growth in comparison to Q2 '23, reaching BRL 40.8 billion in volume accounting for approximately 1/3 of our total TPV.
We are increasing our share of wallet on larger merchant, segment that gathers business with monthly TPV above BRL 1 million with the strong growth on cards-not-present transactions, expanding our market beyond POS. We have also seen a strong TPV growth on new growth verticals in special our online segment with e-Commerce and Cross-Border.
Our Online Payments platform ensures trust and reliability for online clients and an integrated solution under the brand PagSeguro International for the Cross-Border segment.
Moving on to the Banking business on Slide 11. Our strategy to provide a seamless experience combining payments, value-added service and banking through multiple interface for merchants and consumers continues to drive engagement up.
These engagement increase resulted in over BRL 76 billion in PagBank Cash-in, composed by PIX, P2P, wire transfers and deposits through boletos and invoice into PagBank accounts from other financial institutions. Our Active Banking Clients base reached 17.3 million customers, growing 5% year-over-year.
As a result, Cash-in per Active Client, an important indicator of our client engagement grew 44% year-over-year, reaching BRL 4,400 per client. The constant evolution of engagement is shown in the bottom right graph, which demonstrates the increasing penetration of our investments and credit products, expanding at a much faster pace than our Active Client base.
On Slide 12, we shared that deposits were up 87% compared to the second quarter of 2024, reaching a record of BRL 34.2 billion, boosted by our AAA rating attributed by S&P Global, which enhanced our CDs distribution among retail and institutional investors, on and off-platform. Just last month, we received a AAA rating by Moody's as an additional sign of the financial strength of our Banking platform.
Checking Accounts balance, the cheapest funding source and a key performance indicator to measure client engagement, grew 39% year-over-year, reaching BRL 11.5 billion. Annual Percentage Yield for Checking Accounts and total deposits remain compelling, creating a unique engine connecting pricing power without harming profitability by lowering the average cost of funding for the company. In this sense, as we grow deposits franchise, we are also exploring alternatives to further reduce the current cost of funding.
Moving on to the next slide. Slide 13 shows that our credit portfolio grows at a steady pace since presuming growth on Q3 '23. This quarter, it reached BRL 2.9 billion with increasing share of secured products, which currently represent 80% of our book loan, promoting financial inclusion, education and important financing lines to our clients through these products. Our NPL 90, on the bottom right of the slide, demonstrates the improvement on our asset quality in the last 12 months, moving from 14.4% to 3.2%.
Now I turn over to Artur for the financial highlights of the second quarter of 2024. Artur, please?
Thanks, Alexandre. Hello, everyone, and thank you for joining us in the call. In this last section of our presentation, I will share our consolidated financial results for the second quarter of 2024. Here on Slide 15, I am proud to announce, once again, an all-time high quarterly net income, which reached BRL 542 million on a non-GAAP basis, growing 31% versus Q2 '23, with non-GAAP earnings per share reaching BRL 1.68.
Net income on a GAAP basis reached BRL 504 million, in the second quarter, growing above 30% year-over-year with earnings per share on a diluted basis, marking BRL 1.56, a 32% increase on yearly comparison. This result was especially driven by a strong operational and financial performance as shown in the coming slides.
Moving on to Slide 16. Q2 '24 total revenue and income growth accelerated to 19% on a yearly basis, positively impacted by higher volumes from acquiring and the acceleration of our Banking platform. Consolidated gross profit margin keeps in line with the current guidance, reaching 40.3% over the total revenue on a year-to-date basis as we have been successful in balancing growth on all segments and profitability, driven by the execution of our strategy, focus on clients with better unit economics and higher engagement.
Looking at our business segments. In the graph on the right side, Payments revenue reached BRL 4.1 billion, a 17% year-over-year growth, with a gross profit margin marking 38%. Banking revenue grew 41% year-over-year, mostly driven by interest income from credit, float from cash position combined to service fees linked to client engagement with a higher profitability.
Gross profit from our Banking segment remains at 60% or higher for the third consecutive quarter. It is important to mention that the gross profit margin in Banking is higher than Payments even based on our strategy of underwriting mostly secured credit products that naturally presents low yields combined to high yields paid on deposits to attract and engage new clients in the short term.
In the next slide, we share how our discipline in capital allocation has been an important tool to balance growth and profitability, leading to higher value creation with an earnings before tax growth of almost 20% this quarter versus the same quarter of last year. Here, let me focus on our cost breakdown and operating expenses and what do we expect moving forward.
I would like to start by highlighting the increasing efficiency coming from our main costs, including transaction and financial costs. Transaction costs decreased more than 11 basis points as a percentage of TPV, benefiting from the TPV mix driven by a higher share of PIX. On a similar trend, financial costs also show a positive performance of 16 basis points as a percentage of TPV, mainly due to our powerful deposit franchise. We expect to keep this trend in the next quarters.
Operating expenses remained at 26% of our total revenue and income, same level of last quarter. The year-over-year increase was mainly driven by marketing expenses to acquire new payment clients and distribute financial services and personnel expenses, reflecting the strengthening of our sales force concluded at the end of Q1 '24. The expansion was aimed at supporting the company's current growth cycle with a positive impact on our TPV. The increase is on the quarterly basis as most of those initiatives are already concluded or should register a more stable trajectory, thus creating opportunity for operating leverage in the next coming quarters.
The year-over-year increase in D&A and POS write-off in nominal terms, is aligning to the current capital expenditure cycle and is steady in comparison to the previous quarter. It is important to highlight that tax efficiency initiatives are part of our strategic plan and are running well above expectations, reducing income tax charges. This quarter, we have successfully advanced in optimizing our tax structure abroad and the use of Lei do Bem benefits.
Considering the volume growth level, also above expectations, and efficiencies identified as mentioned before, during the second quarter, we decided to further improve our client experience and actively address clients' needs by strengthening our initiatives in customer care, product development and service level agreements, which increased operating expenses.
However, we are confident that these investments will return in higher client engagement, strong cross-selling, lower churn and a larger profit to be captured in the coming years as the cohorts mature, without impacting 2024 net income guidance.
Moving on to Slide 18, we show how solid it is the capital structure for this PAGS momentum. Equity position expanded to BRL 14.3 billion with a retained earnings representing 62% of the total, which demonstrates the success of our strategy of best balancing growth and profitability.
Cash and financial investments ended the second quarter of 2024 with BRL 6.2 billion within the 40% to 50% range of our equity balance, which is what we consider a good reference for a recurrent level.
Here we highlight, as mentioned in the previous call, that in the last week of March, we anticipated fund raising from April, that increased cash position in Q1 '24, which led to the higher cash position on the previous quarter.
On the final slide, we are increasing our guidance for the year, enforcing our sentiment that we have started the year at a very good pace. The current performance is a positive surprise in terms of growth rate, especially in larger segments and its new growth avenues such as Cross-Border.
We are also happy with the results coming from our Banking platform. The success of our strategy to reach those larger merchants to foster our deposit franchise is key to balancing a higher country interest rate than expected.
As a result, we take the opportunity to increase our guidance as shown. We now expect the total payment volume to achieve between BRL 480 billion to BRL 505 billion, with a healthy profitability. The guidance on gross profit margin remains unchanged, above 40% over total revenue and income as we are currently delivering 40.3% in the first half.
Net income on a non-GAAP basis should be between BRL 2.1 billion to BRL 2.2 billion, considering a more efficient level of effective tax rate than 2023, as we have been currently achieved. CapEx remains unchanged higher investments deployed this quarter are in line with business expansion, while we raise the coverage ratio to support future growth.
Nonetheless, the current guidance remains between BRL 2 billion to BRL 2.2 billion. D&A plus POS write-offs amount should end the year between BRL 1.7 billion to BRL 1.8 billion, benefited by an ongoing improvement in POS management.
Now let me give the word back to the operator, and we will start the Q&A session.
[Operator Instructions] Our first question comes from Kaio Prato from UBS.
I would like to explore a little bit more the guidance change that you made for this quarter. So we saw a big adjustments in the TPV expectations acquired. It was an increase of around 10% versus your previous guidance. Then we had a reduction of around BRL 200 million in D&A and write-offs. However, your net income guidance increased only by 2% versus the midpoint that we had previously.
So it seems a little bit conservative, especially after the net income of the first half of the year and even lower than expected effective tax rate. So just wondering if you can provide more details around that, what lines of your P&L are your expect to be worse than previously expected in order to offset this better TPV, D&A and also tax rate? Please, thank you.
Kaio, thank you for the question. This is Ricardo. You're right. When you already did the guidance, the increase in TPV and also the decrease in D&A. But remember, there are many moving parts in our P&L, and it is very dynamic.
Just to give an example of one of the assumptions that we had at the beginning of the year that by the end of the year, interest rates would be around 9%, base interest rate of the economy in Brazil. And today, it's 10.5% and there is no visibility that it's going to go down.
So that's one of the variables that impact our P&L, and then we need to manage in such a way that you can decrease financial expenses by having more deposits by having different source of funding and so on. So that's one of the examples that would be worse than what we expected. But at end of the day, the company has the ability and the discipline to control costs. We've shown that in 2022-2023. So that's why we -- even with this moving parts, some tailwinds, some headwinds, the best information that they have today is that our net income could be higher than the previous or the original guidance that we had at the beginning of the year.
And remember, we're always looking here for sustainable growth to build the company for the future to grow in this new avenue, which is Banking, grow our credit operation and so on. So the idea here, as we always said is to balance growth and profitability. We could prioritize short-term profit. However, we think that the best way is to increase profit and at the same time, keep growing the company. So that's mainly the overview of the guidance that you have today.
Our next question comes from Pedro Leduc from Itaú BBA.
Congrats on the quarter. A little bit on the SG&A side. In the prepared remarks, you mentioned a rollout of higher commercial investments, part of this is driving revenues now, part to come. I would just like to understand a little bit how you're looking at this reinvestment pay? And is it perhaps one of the reasons also that net income revision was a bit more modest in the revenue or gross margins.
Just for -- and also in the call, you mentioned efficiencies in the second half. Again, trying to get a little more color around this line. Thank you.
Pedro, this is Ricardo. Well, in terms of SG&A, we invested in the second quarter and not to say in the first semester, as you could see in our P&L. We invested more in marketing, we invested more in personnel, we don't think there is going to be an increase in the level of investments or expenses that you had in these 2 lines of our P&L in the second half. So we expect that to be kind of stable. So the size of the sales personnel that we have today, it seems to be stable and at the same size for the second half. That's one of the -- let's say, the expectation that we have.
We invested also in our customer experience or call center and everything that relates to customer relationship. And we also invested in product development. We've been launching new products, just to name a few here, investing in -- we launched the multiple cards now in Q3. We're also in the multi acquiring and other features for the SMB.
So that's why when you look at the expenses, the operating expenses, we see this increase, but specifically in SG&A marker, it seems to be -- we expect to be stable. And that's looking forward. That's why we reviewed the guidance BRL 50 million more in the middle point for the net income, even with this all moving parts with the interest rates that it seems to be higher than what you expected.
D&A lowered what we expected. So there are many moving parts. But I would say the big one is D&A, it should be lower as we see in the guidance and financial expenses should be higher because of the basic interest rate of the economy, and we should offset that with more deposits and cost controlling in other lines that you -- at the end of the day, we have conditions to control.
Okay. That's clear on SG&A. And if I may, for the second question that's unrelated, but also important on the credit portfolio, especially on the SME side, merchant clients, the working capital loans were more modest. Of course, you're banking more for this guy. Are you feeling on the comfort of going originating more in working capital?
Well, Pedro, we do expect that to grow. We are still, to be honest, in baby steps. We launched it now by the end of Q2, to be honest, we launched the working capital and also the overdraft. These two products are still small in terms of credit portfolio, but it is growing. We do have expectations that we will be able to grow these two products a little bit faster in the following quarters in such a way that we can see the results in the financial services P&L.
The small tests that we have so far have been very successful, very, very successful the way that the SMBs ask for the working capital, the way they are paying. So today, I don't have a guidance to give to you because it's still very small in baby steps, as I mentioned before. But we do have expectations. These two products will grow faster in the following quarters.
Our next question comes from Mario Pierry Bank of America.
Congratulations on the results. I wanted to ask a little bit about your volume growth on the LMEC segment, growing 50%.
I wanted to understand a little bit better the take rates and the profitability of this product versus volume growth at the MSMB segment because what I'm trying to get to is given the increase in the guidance that you're giving for volumes, how come that's not translating into a higher net income and you already explained that you are facing higher financial expenses? But I was wondering if the growth is -- the higher guidance is because of stronger growth at the LMEC and that's a lower profitability product? Thank you.
Mario, thank you for the question. You're right. We grew 50% TPV in LMEC and 28% in SMB. And they do have a lower margin in larger merchants, e-Commerce and Cross-Border. At end of the day, in absolute terms, in absolute figures, it makes sense because it is accretive, not as accretive as it is in the MSMBs. But in terms of volumes, they bring more volumes and it is accretive in the bottom line. But if you look at what we have in terms of results in both segments, LMEC, we grew 50% and SMBs, we grew 28%.
All of these figures, they are much, much higher than what is in the market. Remember, the market grew 11%. The cards industry in Brazil grew 11%, and we grew 28% in MSMB and 50% in LMEC. So yes, it is growing faster. But if you look at the core or the beginning of the company, the origin of the company, MSMBs and [ longtail, so one ] is still growing 28%, which is very healthy.
But as we have the opportunity to grow more in the LMEC, we keep growing there and getting these clients. But going back to your question, yes, they do have lower margins, it's growing faster, but they are accretive by the end of the day, and both segments are growing much, much faster than the whole industry in Brazil.
Right. That's clear. What explains the acceleration in growth in the LMEC because you were growing close to 30% and now you jumped to 50%. Does it have to do like gaining on the increase, we keep hearing about sports betting and things like that in Brazil, is that one of the drivers? And why did the growth accelerate so much?
There are many reasons here. One of the reasons, say, we finally integrated all the platforms. Remember, we acquired MOIP by 2020 and then you had all this work to bring MOIP inside the company and then integrate the platform. Now we have the unique platform -- only one platform to serve the online clients. That's one of the reasons. The other one, we try to bring Large Merchants and also integrate our Banking solutions to them.
So some of the bankings are using our CDs and so on, which is a kind of way to be different in the market in order to go there and compete with price. And also in that, we are having new clients in [indiscernible] when you think about Cross-Border and also online.
So it's a mix of everything. But I would say that is very balanced. There is no growth in one specific area that we are concentrating. It's a mix of online clients, Cross-Border, larger merchants coming because of the bank. So it's a combination of these reasons, I would say to you.
Our next question comes from Tito Labarta from Goldman Sachs.
Actually, a little bit of a follow-up to Mario's question on the TPV. I guess, one first to clarify, is the pressure on the take rate, simply a function of mix, just to make sure , you kind of mentioned that you're not really competing on price. But just to think about the competitive dynamics a little bit in the 2 different segments. I think with the Large Merchants, one competitor is in the middle of being privatized? So I don't know if that's maybe contributing as well to your ability to grow with Large Merchants and again, the first part of the question, is all the take rate pressure just mix?
And should we expect this trend to continue where you can continue to grow faster with larger merchants, at least in the shorter term, that could maybe put further pressure on the take rate going forward.
Tito. Yes, the growth of our larger merchants is going to be larger than the MSMB. And remember, I just answered, Mario, that even MSMBs, if you look at the growth in MSMB is 28%, it's much more than the cards industry in Brazil.
It's a very healthy growth in MSMB. But in larger merchants, e-Commerce and Cross-Border, we are growing almost double of that, reaching 50%. And part of that, we'll keep growing this dynamic. So today, 67% of our TPV in Q2 was MSMB TPV and 32% in LMEC. So if we look forward probably, the share of MSMB should go down because LMEC growing faster.
But again, it's accretive to the bottom line. There is no relation with the one company being privatized or some policies -- pricing policies and other companies much more related to what we've been doing out there in the street.
And one thing that is very important, also to mention, is that larger merchants for us as you don't have a definition in the market, what is larger merchant? Remember, for us, larger merchants is a merchant with the TPV of cards larger than BRL 1 million per month.
If you look at the competitors or in the incumbents, the acquirers from the incumbent banks, probably this is going to be a medium clients to them. So the definition for us is around after BRL 1 million. We consider larger merchants. So it's not that large, if you look at the market, but still we are growing in a very healthy in both segments today.
Okay. Great. That's helpful. And following up a little bit, like continued strong growth in deposits. Are you seeing -- any color you can provide, and some of these deposits because you're growing with larger merchants and that's helping to drive that growth in deposits? Any color on the mix of the deposits between large merchants and SMB?
So I would say to you that larger merchants, of course, helped, but it's not the main driver for this growth. This growth is much more related to the SMBs and also consumers than to the larger merchants because as we expect, some larger merchants, they do have corporate accounts in larger banks at this point and some of them just uses acquiring in CDs, they're not exactly in deposits.
So that's why, we -- I would say to the main driver for the deposits are SMBs and consumers at this point.
Our next question comes from Neha Agarwala from HSBC.
My first question is on your guidance. What is the implied average SELIC that you have incorporated in your guidance, both the old and the new one? Has that changed?
Second question is, again, on the LMEC segment that you have here, which is growing extremely strongly. Is this comparable to the ABECS TPV that we look at for the system because I believe the e-Commerce and the Cross-Border volumes which you're including, it's probably not included in the ABECS system. So that kind of distorts comparison on apples to apples. And will it be possible for you to break it down for us to see what is comparable to that of the system to get a more -- a better sense of the market share? And maybe we'll go with that and then I'll ask my third question.
Neha, thank you for the question. I'll start backwards. The TPV that we report here is not 100% compared to ABECS. So that's why when I say the card industry in Brazil is growing 11% and our TPV includes PIX as well. But let's say the participation of PIX in our TPV is a high-single digit today.
So even if you discount the PIX participation in our TPV, we are growing much, much more than the ABECS and much more than the competitors. Regarding the interest rates, I'll pass to Artur to answer.
So Neha, this is Artur speaking. In terms of guidance, what we are considering in the interest rate for our country is something above our business plan, the original business plan that we had at the beginning of the year. And today, it is 10.5%, and we do not consider any reduction going forward, okay?
Neha, just to complement here. We do have some scenarios because, of course, we don't know what's going to be the interest rate by the end of the year. So we have some scenarios, if you have some increase in interest rates as some banks have been saying the past weeks. We also have some other scenarios to control other lines of P&L in order to deliver the guidance that we're showing to you in this presentation.
So of course, we have some conservative interest rates, some aggressive. And then depending on the scenario, we're going to manage the company to deliver the guidance that we have here in this presentation.
Great. Perfect. That's very helpful. And lastly, on the MSMB segment. So we see the overall take rate has been going down, which is mostly because of the strong growth in the LMEC segment. But just talking about the core MSMB segment, what is the take rate for that particular segment? And how has that take rate evolved over the last year?
Neha, we don't disclose this exactly take rate. Let's say to you, it decreased a little bit from 1 year to the other, not a big decrease but it decreased a little bit, a few basis points. But I'd say to you is very healthy to-date. Competition has been rational. We keep growing in a very healthy way in this segment, as you could see, it's 28% growth. But let's say, the take rate went down just a little bit, but it's still very healthy margins, very accretive to the bottom line, a very good business, to be honest.
Our next question comes from Jorge Kuri from Morgan Stanley.
I wanted to go back to the marketing and selling expenses. And your -- for the first half of the year, according to your press release, your selling expenses are up 42% year-on-year. That's 2.5x the revenue growth, 2x the MSMB-TPV growth. If I look at just the marketing expenses, they're up like 70%, I believe. And I guess the question is what gives you comfort that this is going to allow you to accelerate revenue or keep the same pace of revenue without necessarily having to continue investing in marketing and selling at this space? And I asked that because we're seeing exactly the same thing from your peers.
The same thing happened at Stone, at Cielo, at Rede, at Getnet, I mean everyone is adding sales people. Everyone is adding sales capacity, marketing capacity. So if everyone is adding, you're all at the same place, right? I mean you're not better than the guy next door.
So what gives you confidence that this is indeed an effort that surpasses your peers and will allow you to grow above average going forward? And then I'll ask my second question.
Jorge, thank you for the question. Let me start and then Artur can complement more with the numbers, but I would say in a more qualitative way, so to say, here, when you look at what happened with the company in this quarter, we've been investing. And as I said at the beginning of the presentation, it is an all-time high presentation. All the slides that we have starts with all-time high. So TPV grew 34%, revenue grew 19%, deposits 87%, Cash-in 52%. Banking net adds accelerated versus Q1. Banking revenues grew 41%. We had a TPV record in June 8 and now a new record in July 6.
So listen. So the company is doing very well and it's growing. And part of the investment, of course, is to bring this growth. We could have a look at the short-term profits and not to invest in the growth.
But you do have the confidence that these investments will be paid back because I've seen in terms of cohorts, the way that clients come to us, the way they engage with the app, the way they do the Cash-in and the way they start using our products gives us the confidence that we are bringing very good cohorts for the company. And of course, there is a lag between the investments, getting the client and then start generating the revenues.
But when you look at the qualitative way that the clients are using our products and all the ecosystem, that's why we keep investing on that. And I know that sometimes we do compare peers and so on. But to reinforce that, probably, we are the only one with this very, very powerful combination of acquiring and banking at the same app. Not only the players, they have the [ D+0 ] they don't have the same logistics that they have. They don't have the same complete accounts that we do have today and that we invest and also for MSMB. So I would say that it's not the same animals. So that's why we are confident that our value proposition is stronger than competition.
Maybe 1 competitor is better in a specific feature. The other one is better than another one. But a competitor that has all the combinations and features that we have in our ecosystem, I don't see one to compete with us in a very powerful way for longtail MSMB and the consumer as well, I would say. So we're launching new products. Portfolio is growing, NPL is trending down. So when you look at the numbers and the qualitative cohorts, that gives us the confidence to keep investing.
And regarding the numbers, and specific percentage, I guess, Artur can give us more color. Thank you.
Well, to complement what Dutra mentioned, I would like to reinforce that the higher expenses and investments that we are seeing right now are in 2024. And by the way, we achieved at the level that we expected for this year in the second quarter. It's a little bit higher than the first quarter, but it's in the same level when you compare quarter over quarter.
But those investments are part of our strategy for 2024 as we reduced costs and expenses in 2022, part of our strategy for that moment. In 2023, we also had a very good discipline on the cost and expenses, part of our strategy again in 2023. And based upon the big strategy that we have that is balanced growth and profitability, not reaction on competition and so on but the balance of growth and profitability now is a moment of growth, and we achieved the level of investments that we see important to the growth, the growth that we are expecting going forward. And as Dutra mentioned, we had a lot of all-time high numbers in this quarter, and we are expecting to have very good numbers going forward in terms of growth engagement and activation of clients.
Let me ask a second question, if you don't mind. A different topic on payroll loans, which you basically doubled over the last year in terms of RHB portfolio. Can you help us -- can you give us some color on what is your payroll loan business? Are these payroll loans for retirees, for government workers, FGTS loans, private workers? What is the ticket size? How many clients? What percentage of your clients have a payroll loan?
And if you can also help us dimension just how big this business could be either you have x number of retirees in your base and only x percent have a payroll loan or government workers, any way you want to help us try to get our arms around how big this could be given that, indeed, it's growing very rapidly.
Jorge, at this point, we are not doing for private employees, but we do have some products in our ecosystem, which are FGTS, products for retirees. The size of the average ticket for this product is similar to what we have in the industry. We keep growing and trying to digitalize all this products in such a way that we can take it out the friction that some products have today that you've got to talk to someone and then send the commendation and so on. The total addressable market for these products is around BRL 600 billion.
So if you look at our portfolio, it's a percentage of the 3%, it was like BRL 2 billion out of a term of BRL 600 billion. But going back to your question, we are not doing private at this point. It doesn't mean that we'll not do in the future. But at this point, we are focusing more in retirees and FGTS, and try to digitalize this process as much as we can and the size it's similar to what you have in the industry. It's not different than we have in the market.
And are these like fully originated digital loans or you're using [ pastinas ] or you're buying portfolios from some of the intermediaries, is 100% of the origination done at your point of your clients mobile?
Jorge, for some products, it is 100% online; for other products, it's part -- it's [ pastinas ] is online. At this point, we haven't bought any credit portfolio from someone. So we bought in the past, but at the very beginning, but if you look at the last 1.5 years, we didn't buy any credit portfolio from other companies.
So today, everything is originated through us. Some products are 100% digital, some products, we still use [ pastinas ]. But as time passes by, the participation of [ pastinas ] is going down. So more and more, we are having more digitalized, more through the app without friction or without intermediaries.
Our next question comes from John Coffey from Barclays.
2 questions I had just referred to a couple of things that you had in your slide deck. So the first was on Slide #6. I think your third bullet where you're talking about early payments and receivables from other acquirers. Could you help me size this? I just want to get to see it better -- I guess trying to understand there's a different kind of economics here than maybe some of your other prepayments and just really how big this opportunity is.
And I can just ask my second question here. And that was on Slide 9, you talk about geographic expansion. Were you not fully expanded in Brazil? Or were there pockets in which you really didn't have a lot of penetration. So I'd just be very interested in knowing more about where that geographic expansion was, if there's still a little bit more runway to expand more in that particular area or other areas in Brazil.
John, thank you for the question, starting backwards again. So in terms of geographic expansion, of course, digital, we serve everyone in Brazil, but we do -- we've seen some opportunity to have hyperlocal sales force to serve some clients in specific regions of Brazil. So that's why we reached some -- we hired some new personnel and part of the operating expenses increase is because of that for specific regions, specific niche where we see some potential TPV.
And in our analysis, the coverage was not good enough to get the clients and to give the right treatment for this type of merchants. So that's why that's geographic expansion. It is within Brazil in specific regions of Brazil.
Regarding the Slide 6 that you mentioned about the early prepayments. Today, we have in Brazil, this chamber of receivable that is finally is working properly. And we have some clients that use PagSeguro and other acquirers and have the opportunity to early prepay for these clients through our app. If we look at the total addressable market, 2/3 of TPV in Brazil is done through credit, so with installments or without installments, but 2/3 is done through credit.
So you can -- at the end of the day, you can anticipate everything of these 2/3. Part of them already anticipate because they receive [ D+0 ] or they have some specific contracts with some acquirers but part of them are not included in this, I would say, lock up.
So we know that for larger clients, it's a pricing war like you have been acquiring with the big, big clients the acquiring is based on price and the acquiring for incumbents are working there, incumbents banks are working with these clients. So we are more in the SMBs. And it's too early to say the economics of this product. But at the end of the day, we're going to anticipate with a spread based on the cost of funding that we have that is very competitive when compared to competitors because we do have deposits. But I mean, it's too early stage. I guess we can give you more color, I don't know, next or 2 quarters from now, we could have more information about this project. But we will launch now in Q3.
Our next question comes from Yuri Fernandes from JPMorgan.
And congrats on the volumes and creating this closed [ loop ] here. I have a question on financial costs. When I go to Page 8 of your press release, we see securitization cost down a lot, like 40% quarter-over-quarter. And I understand this is likely because of your deposit growth, so maybe it makes less sense for you to continue doing securitization.
So just want to track, if this makes sense, if the costs are similar, if you are paying somewhat the same for your time deposits? Because I know the average cost is [ 96 ], that maybe is lower than the securitization.
But not all your deposits are paying like [ 96 ], right, this is a blended. So probably on time deposits, you are paying higher than that. So just checking, if you will continue to do more deposits and less securitization.
And then my second question, this is related to this one is regarding our net cash. If you continue to do more deposits, you have BRL 12 billion of net cash that we report on your presentation. You continue to generate cash, you are relying less on proprietary cash as deposits grow, I would assume.
So what you do here, like M&A, dividends, buybacks? Like what should you do with this excess cash you have been accumulating given your funding has somewhat migrating towards deposits?
And finally, just a very quick follow-up on the first question from Kaio. I understood your message on the guidance. People already explored this. But given your D&A is moving down, right, your write-off of POS is moving down, is it fair to say that your cash earnings is going down, like with all those moving parts because you have a lower noncash expenses, but like a very marginal guidance revision? Thank you.
Well, Yuri, It's Artur speaking. Let's try to talk about each one in generally. And so financial cost, when you talk about financial costs, it's really that we are doing here a great deposit franchise. Our time deposit presents today a very low cost to us, 68% in average. The total deposits that we have to fund the operation 96%, that is awesome to see that we are funding the operation below the country cost in Brazil, specifically to the second quarter and it's part of the decisions that we take. We reduced it a little bit AR securitization through bank issuers, but it was only for the Q2.
If you remember in the first call, we commented that we had a large AR securitization in the end of March. And then we used this cash during April in the second quarter.
But going forward, we expect to have our deposits growing more and more. All the management is focused on increasing the volumes on deposits. And also, we are balancing AR securitization and third-party distribution of products or financial ladder or CDs that we distribute in third-party platforms.
It's important to mention that the financial cost in Q3 is also affected by 4 working days more than Q2. So everybody needs to prepare it's model to understand that we have 4 days more in the Q3. And we are working to balance all the funding sources that we have to mitigate any impact that we can have in this more number of days.
In terms of cash balance, it's true we achieved BRL 12 billion. We are growing quarter-over-quarter, every time we see the company growing in the volumes, growing prepayment for merchants and also we measure this net cash balance as a very healthy for the company because we are increasing quarter-over-quarter.
This excessive cash, as you mentioned, we are always assessing the capital structure based on this cash flow generation. At this moment, we are seeing our business growing faster than expected, and we decided to use on cash to support that growth.
Obviously, we can do using on cash or third party. But at this moment, we prefer to support the growth based on our own cash that is cheaper, and it's better when you are negotiating with the banks and other financial institutions in a more positive scenario.
Furthermore, we see several initiatives to better invest our cash. Increased volumes that we are seeing right now, engage clients, improve customer care and launching new products, as we mentioned in the call and in the presentation. On top of that, financial industry is huge and beyond payments. And we are on the very early stage of exploring credit bank investments, insurance opportunities as we have been doing with our complete banking offer.
And we are always balancing growth and deploy capital. It's part of our strategy to maximize shareholders' return, and we're always doing that management in the capital structure.
And the third question related to write-off of POS that it's part of our P&L. So we have some policies to read the usage of our POS. And when the POS is not used anymore, we have this practice of write-off POSs. It's only impacting our economics, but not impacting our cash flow because we have this CapEx in years before of this write-off.
Super clear, thank you. If I may, just a follow-up on the second point on the use of cash. Like just a more openative take from yourself and if you believe like this industry should be consolidated at some point, like what are things going to happen in this industry, right?
Because there are so many economies of scale, like you have this ecosystem, you have the deposits, you have the banks. So I would like to hear your thoughts on how you see this industry? I don't know what's going to happen with the Payment industry in Brazil like 5, 10 years from now?
Yuri. Well, it's hard to give a prediction of what's going to happen with the industry in 5, 10 years from now because, I mean, the industry is very dynamic. Remember, this has been changing a lot in the past years. We are -- to be honest, we are very active looking for opportunities in the market in different business units of the company. So payments, credit and other products.
When you think that you have a good target that we could approach and with the right price and similar culture to us and so on, of course, we move forward. But I mean, it's hard to predict, there's going to be consolidation or not. We keep very active in the market looking for accretive M&A that could create shareholder return. But at this point, there is -- I mean, nothing to be announced and then nothing happening too that should give you some information in this call.
Our next question comes from Bryan Keane from Deutsche Bank.
Congrats on the quarterly results. Just wanted to follow up on the acquiring TPV. It continues to kind of beat and gain share versus the market. And I know the comps start to get a little more difficult, especially as we get into the fourth quarter. So thinking about SMB and the LMEC separately, how sustainable do you think some of the changes you guys are making that you will be able to continue to outpace and take share from the market in those 2 segments?
Bryan, this is Ricardo. Well, we've seen what happened this year. We've been growing faster than the market. We've seen that happened in Q1 and Q2. Q3 is not that different. We keep growing in a very healthy way. And what we always say is it's trying not to compete this price, try to have a different value proposition with cross-selling opportunities and trying to use Banking as a differentiator for our clients. That's why I've been -- that's why we've been investing in PagBank since 2019 -- 2019. But going back to your question, we do think it is sustainable to grow more than the market in the following quarters.
But again, the industry is very dynamic, but we have a strong value proposition, the processes in place, and there is some inertia that we've been seeing in our sales force, productivity per employee is growing because they get more and more trained and understand better the ecosystem. We've been launching new products such as CDs that serves not only MSMBs, but also LMEC. So I mean, looking forward, I don't see many changes in the dynamics. It's hard to say what's going to be the level, but I don't see a change in these dynamics that we keep gaining share.
Got it. Got it. And then as a follow-up, just thinking about the pipeline for acquisitions or what you guys are thinking about that you might want to add to the portfolio?
Are there things out there that you guys are looking at that could make sense for acquiring or building internally to build on the portfolio for cross-selling opportunities?
We look for I mean sometimes we can bring some clients and try to bring the P&L of the company out there. And sometimes we are only looking for kind of the acquihire to bring some new talents and to bring the product that could complement our ecosystem. So those are the 2 rationales that you have here. One is more related to the economics of the company we are looking to acquire. The other one is more related to the knowledge and to the talent that this company could bring to us.
If you look at the history of the company, we have some acquisitions in the past years, most of them related to the second vertical, I'd say, more related to the products. We keep looking to that.
What is the type of start-up or companies that could bring new features and speed up or time to market, but there's nothing that we can give more information on this call at this point. I mean, we keep working on. We have our own proprietary M&A team, but there's nothing new at this point, to be honest.
Our next question comes from Gustavo Schroden from Bradesco BBI.
Sorry to insist in this LMEC economics, but I think it is very, very important. It is -- my question here is, would it be correct to assume that these marginal TPV that you are including in the LMEC, is it still or hasn't reached the breakeven. I'm asking this because we have all these positive news on the TPV in the quarter. But the pretax earnings were stable, and you already explained that there is -- there was some pressure on the operating expenses side.
You already mentioned that the take rate is below the average below the other products. So my question is, would it be correct to assume that it is -- you are still ramping up in this segment and maybe the operating leverage will come in the coming quarters? Or is it was just 1 quarter with some specific investments and is -- I mean, that would be like a nonrecurring, let's say, let's put in this words, a weaker quarter for the LMEC.
Gustavo. the LMEC, they are profitable, they are positive. The company doesn't have any policy here to buy market share or just to get TPV, increase our market share and not to make margins from this specific TPV. Remember, our Large Merchants start with BRL 1 million in cards. So it's not, sometimes you say Large Merchants, people think that we are talking about the Walmarts in Brazil. So they are not. BRL 1 million per month in LMEC. They are positive. We're looking for clients that they have positive margins. In the LMEC, we also have e-commerce, and we also have Cross-Border. So it's not only Larger Merchants.
Indeed, the margins of these clients, they are smaller than MSMBs as a percentage. But if you look at in absolute terms and absolute figures, as they have higher volume, it is accretive to the bottom line. And it is a good business at the end of the day. When you think -- when you grow 50% year-over-year in a profitable way, it's a very strong growth and healthy growth, I would say. Also, these merchants, they also bring deposits because, again, when I said that larger merchants could not bring deposits, I'm talking about the Walmarts in Brazil.
They have their own banking solutions out there. But when you think about the merchants that is BRL 1 million in cards, we are very competitive for these clients. We have higher CDs and other options that can use as an account to them.
So when you think of the mix and the client is in the whole portfolio, not only the acquiring but also the Banking, your cost of funding and so on, they are positive, and they help us our deposits. And yes, so that's why we do think it's going to grow. It keeps growing, and it's a good business at the end of the day.
If you could grow more in both segments, of course, we'll grow. But to think we grew 28% in MSMBs, it's very strong growth as well. It's not that we are only focused on LMEC. Both segments are growing in a very strong way, I would say, and they are both profitable.
And if I may, the second question is related to your deposits and also your credit portfolio. As you mentioned, indeed, your deposits, it is growing very fast. But when we analyze the loan-to-deposit ratio is around 8%, so below 10%.
And you mentioned that while we should expect some acceleration in the loan portfolio in the coming quarters. But what is the reasonable target here in terms of a loan-to-deposit ratio? I'm asking this because it is very important to monetize and to improve the profitability of the whole business, right? So what would be a fair launch deposit ratio that we could forecast?
Gustavo, we don't have a specific number to these guys to you or to give this you because remember, we also use deposits for the prepayment. So in a daily basis, we look at the best capital allocation also to support our prepayments because sometimes we should go to refactoring with the banks, and sometimes we do use our own deposits. So we don't have a guidance to give to you about the loan-to-deposit ratio. But I mean, at the end of the day, it's very good news that deposits are growing in this space and 87% year-over-year is a very strong growth.
And it helps the company as a whole. We can use these deposits for the credit business or for the prepayments in the acquiring. So I mean, I don't have here specific loan duration to give to you at this point. And just to complement the first question that you asked about the earnings before taxes, we took the conscious decision to invest in the growth of the company because we knew that we could have higher operating expenses and still grow the bottom line. So that's why we invested more in operating expenses in Q2 in order to keep the growth, keep supporting this growth.
And as I said before, in key metrics, we are growing much, much more than the market, 34% TPV, 19% revenues and so on. So that's why we knew that would have this efficiency in tax rate and then we reinvested part of that in the growth of the company.
Our next question comes from Daniel Vaz from Safra.
Congrats on the results again. And thank you for the Q&A. I think most of the questions have been answered. I wanted to touch base on your credit. I know you're rolling out working capital loans and overdraft. And when I look at your current credit portfolio, it's still disconnected to your payment strategy. So you're moving up from long tail and individuals to SMBs and Large Merchants. So trying to pick up your brains for the long term here. How this credit portfolio look like in the future, right?
So do you expect retail loans to be a smaller portion as you grow further in wholesale? So I mean any breakdown or any color you would pass to us, it would be very helpful to try to forecast for the next years your wholesale and retail portfolio here?
Daniel. Looking forward, we expect this credit portfolio to be more balanced because it is pretty much focused on the payroll and also credit cards. But it just started working capital again and overdraft as well. Overdraft, we are offering not only for consumers but also to merchants. So looking forward, we do expect this to be more balanced with more credit portfolio based on consumers and also in merchants, merchants from different sizes. Of course, it depends on how it will evolve in the following quarters, the acceptation of our offers, NPLs and so on.
At the end of the day, we are looking for credit margins, not only NPLs, of course, but it's going to depend how it's going to evolve in the following quarters. But to give, let's say, a big guidance here will be to have a more balanced credit portfolio with merchants and consumers and merchants from different sites using different products. We just launched the working capital and overdraft in last month, 2 baby steps.
But following quarters, probably, we're going to have more color to give on that. But it's a huge opportunity at the end of the day.
If you look at -- we have -- we're going to have this year, if you look at the guidance of around BRL 500 billion in TPV and the credit portfolio is only BRL 3 billion. So it's a huge opportunity. We just need to find the right offer and the way that we work with our merchants in order to increase the credit portfolio for the merchants as well.
Okay. If I may, a quick follow-up on the LMEC. When do you expect this to convert to similar growth rates to MSMBs?
I mean, are you still seeing opportunities for further penetration way higher than the MSMBs that we are seeing right now?
This is Alexandre speaking. We still see room for growth and fast growth on LMEC segment since a big portion of this segment is related to e-Commerce and Cross-Border, which are card-not-present transactions. And our first fair share in card-not-present transactions is much lower than our fair share on card-present transactions. So we still have room to grow in this segment. And even though the margins are smaller, they provide good margins for us and accretive profit on this segment. But obviously, MSMB segment is our core, and we keep invest in the growth of this segment, and that's why we are growing MSMB 28%, which is much higher than the market growth.
Our next question comes from Gabriel Gusan from Citi.
My question is about CapEx. It is running above the higher end of your guidance at BRL 2.4 billion annualized. And my question is more on the qualitative side.
Should the business continue to require the same over BRL 2 billion per year in CapEx going forward now that you have less Micro-merchants or are you investing less in that segment. You're going more into LMEC. So over time, we should expect that line to be nominally reduced?
It's Artur speaking. Thank you for your question. Related to the investments that we are doing since -- or over the past 4 years, we achieved at the same level on average, BRL 2 billion per year. Part of these investments are not related to POS, as we always mentioned, the majority of the investments or more than 50% is related to technology, our products, services features that we launch, new products and -- to our clients and that the remaining portion is related to POS.
For this year or the first half of this year, we anticipated purchases of POSs, increasing the coverage ratio. It is totally aligned to our strategic plan for the year. That means in the coming quarters, we will reduce, in nominal terms, the investments that we are doing to achieve the CapEx that we remain stable since the beginning of the year from BRL 2 billion to BRL 2.2 billion in this year.
Our next question comes from Renato Meloni from Autonomous Research.
So for my first question, I wanted to focus again on profitability. I'm looking here as gross profit as a percentage of TPV, which had been stable in line to your previous comments, but we saw 11 bps decline this quarter.
So my question here is, was this also related to LMEC or if there's other elements here? And then looking into the second half, do you still expect some compression here given the growth in the segment?
And if you allow me for a second question, I wanted to focus on your cost of funding for deposits. And going back to your remarks, during the call when you said you were exploring some alternatives to reduce costs here. So if you could expand on those comments and maybe if there is a target of, as a percentage of CDI, where you're trying to get there.
Well, I'll start with the first part, and then I'll move on to that. LMEC may pressure a little bit down, the percentage of gross profit over TPV and there is also the mix of products that we have seen in all segments, not only in LMEC, but also in MSMB segment, the growth of some of the products such as PIX, PIX QR Code, P2M.
And just to complement here, I mean we cannot overlook the genetic rate/gross profit as the only drivers for the company's profitability. There are many other cost expenses in the P&L that we need to manage, such as financial costs, which is one of your questions.
So I mean, at the end of the day, there are several drivers that could impact the kinetic rate gross profit and so on. But we are here reinforce in our guidance because we are confident that we can manage the company. We keep growing in a sustainable way, looking for the future, not only for the specific quarter, building a sustainable business, bringing new clients, thousands of clients, hundreds of thousands of clients.
And so that's why we keep growing pretty strong in the top line, and it's still reinforcing the guidance. Just not to keep focus on only one metric because, at the end of the day, there are many moving parts and many movements and actions that we could take in the company to keep the profitability of the company as a whole.
Artur Speaking, I will talk about the target of funding costs that we have. There is no specific target that I can provide to you at a certain level that we would like to have in terms of cost versus CDI. But we are always looking for opportunities to reduce as much as possible the cost that we have based on the strategy that we also have, sometimes we pay higher yields to some clients to attract them to the company and then cross-sell other products. And we have a rationale behind that.
And what we are doing as much as possible to diversify the funding sources that we have. We would like not to depend on one bucket to take money from the market, but we identify many lines, many different third-party providers that we can use, and we are doing that as time goes by.
Our next question comes from William Tang Susquehanna International Group.
Good results here. I just had a quick question on Slide 8. I was looking at your merchant count. And it looks like your Active Merchants are falling, but I think that's largely due to the offboarding of nano-merchants. Is that right? And then if so, what's a good way to think about your gross or net adds at the MSMB level? Can you help us there?
Thank you for the question. You're right in your -- in your conclusion. If you look at Slide 8 in the graph in the bottom right, you're going to see that the -- excluding nano-merchants, we grew 4% year-over-year. And even if you look at the bottom left that you said that the merchants are going down, but it's slowing down. This decrease is lower and lower. So it used to be like 100,000, 150,000 one year ago and today it is around 40,000. So it's kind of stabilizing the sales -- the number of Active Merchants. The loss is more related to nano-merchants as you said in your question.
And to be honest, of course, we look for Active Merchants, but the main focus here is to bring merchants with decent volumes of TPV in such a way that they could be profitable very soon. I mean, the payback in terms of subsidies of the POS and so on, they can be profitable very soon.
So that's why we look at the -- This slide, we see the TPV per merchant grew 42% year-over-year because. We're bringing merchants that they activate more, they use more and so on. But yes, going back to your question, if you do not consider nano-merchants, we grew 4% in our base and it is kind of stable. If you look at the numbers of merchants, the Active Merchants, it's kind of stable.
Thank you. That's all the questions we have for today.
I will now pass the line back to Artur for his closing remarks. Mr. Artur, you may proceed.
Before we end the call, I would like to inform you of our recent change within our company's Investor Relations team. Éric Oliveira has accepted a new position in the company. In this new role, he will lead the team focused on Banking growth initiatives, which is a key element of our strategy. We would like to sincerely thank Eric for his dedication and invaluable contributions during his tenure in our IR team.
Where, among many milestones, he enhanced our communication and engagement with our investor community. Éric, thank you very much for all the support and results we achieved together. And I wish you the best in the new challenge.
In light of this transition, I am pleased to announce that Gustavo Sechin is joining our team on August 26 as the new Head of Investor Relations, ESG, Market Intelligence and economy. Gustavo brings his extensive experience in investor relations and finance positions. His last position was as CFO of subsidiaries at Santander Brasil. Before that, he was CFO and CRO at Getnet and has led the proprietary M&A team in Brazil.
He has got a long journey in the financial market, including equity research for Banco Votorantim and Investor Relations of ABN Amro Bank. Gustavo completed an MBA in Finance from FGV and graduated in accounting from the University of São Paulo.
I am confident that Gustavo will continue to uphold our commitment to transparency, effective communication and a strong relationship with our valued investors and analysts. Éric and Gustavo will work together for a while to make a smooth transition.
Please do not hesitate to reach out to Éric, Gustavo and I, if you have any questions. Gustavo, welcome to PAGS team, and thank you for engaging in our proposal of making the financial life of individuals and businesses easier.
Thank you all for participating in our second quarter 2024 earnings call, and we look forward to meeting you in our next call.
This does conclude PagSeguro Digital's conference call. We thank you for your participation, and wish you a very good evening.