PagSeguro Digital Ltd
NYSE:PAGS
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PagSeguro Digital Ltd
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Good evening. My name is Victoria, and I will be your conference operator today. Welcome to PagBank PagSeguro's webcast results for the Third Quarter 2022. At this time, all lines have been placed on mute to prevent any background noise. [Operator Instructions] This event is also being broadcast live via webcast and may be accessed through PagBank PagSeguro's website at investors.pagseguro.com. Participants may view the slides in any order they wish. Today's conference is being recorded and will be available after the event is concluded.
I would now like turn the call over to your host, Eric Oliveira, Investor Relations and ESG
Director. Please go ahead.
Hi everyone. Thanks for joining our third quarter 2022 earnings call. Today, we have with us Ricardo Dutra, CEO of UOL Group and Board Member of PagBank PagSeguro; Alexandre Magnani, our CEO; and Artur Schunck, CFO. After the speaker’s remarks there will be a question-and-answer session.
Before proceeding, let me mention that any forward-statements included in the presentation or mentioned on this conference call are based on currently available information and PagBank PagSeguro's current assumptions expectations and projections about future events.
While PagBank PagSeguro believes that the assumptions, expectations and projections are reasonable in view of currently available information, you are cautioned not to place undue reliance on these forward-looking statements. Actual results may differ materially from those included in PagBank's PagSeguro's presentation or discussed on this conference call for a variety of reasons, including those described in the forward-looking statements and Risk Factor sections of PagBank PagSeguro's most recent Annual Report on Form 20-F and other filings with the Securities and Exchange Commission, which are available on PagBank 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, including those disclosed in the presentation. We present non-GAAP measures when we believe that the additional information is useful and meaningful to investors. The presentation of this non-GAAP financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered separately from or as a substitute for our financial information prepared and presented in accordance with IFRS as issued by the IASB.
For more details the foregoing non-GAAP measures and the reconciliation of these non-GAAP financial measures to the most directly comparable IFRS measures are presented in the last page of this webcast presentation and our earnings release.
With that, let me turn the call over Ricardo. Thank you.
Good evening from Sao Paulo and thank you, Eric. Going to slide three, I would like to begin our presentation with the main message for Q3 2022. We reported the highest EPS impact history for third quarters achieving BRL1.16, up 20% versus the same period of 2021. PagSeguro TPV reached BRL90.3 billion, growing 35% year-over-year and one more quarter outpacing by far the industry growth.
Our successful repricing led to a net decrease 24 bps higher than Q1 2022. PagBank deposits reached BRL19.4 billion, 171% higher than the same period of 2021. PagBank net ads accounted for 1.1 million new clients leading to almost 26 million clients we are firming PagBank’s position as the second largest digital bank in Brazil in number of clients. CapEx to revenue ratio was 12.4% lower 230 bps, when compared to second quarter 2022 and trending down moving forward.
Going to slide four, once again, our success with strategy on democratizing the access of financial services and payment solutions in Brazil resulted in record numbers in all main KPIs this quarter. In payments platform, TPV was BRL90.3 billion and our revenues reached BRL3.7 billion growing faster than TPV and reaching almost 50% growth-year-over year. Monthly TPV per merchant grew 39% reaching BRL4.1 thousand and our gross profit reached BRL1.3 billion.
In financial services, PagBank TPV outpaced acquiring TPV for the first time totaling BRL105 billion with BRL339 million in revenues. Our gross profit was BRL76 billion, increasing BRL35 million in comparison to the last quarter due to our cautious approach in credit underwriting given the macro uncertainties.
In Q3, 2022, a 100% of credit underwriting was secured, which helps the company to balance the asset quality at the same time explore a safe entry point in lower for consumers. Our deposits reached an impressive number of almost BRL20 billion, 171% growth year-over-year. Overall, at the center of the slide, total revenue and income reached BRL4.04 billion, 45% higher than Q3 2021. Net income on a non-GAAP basis reached BRL411 million, while the GAAP net income reached BRL380 million, 18% higher than the same period of 2021 and the highest net income of PAGS history for third quarters.
Now I'll pass the word to Alexandre to share some views about our business units. Thank you.
Hello, everyone, and thank you Ricardo for the initial remarks.
Moving to slide five, we compare our performance relative to cards TPV market, and I'm proud to say that we have been able to keep growing with profitability, which reinforce our successful repricing initiatives and unique value proposition for our clients.
The chart on the left, we are the TPV market share gain winner in this quarter, when compared to Q4 ’21, growing 92 basis points considering the Brazilian card association criteria for TPV market share. As we can see in the second chart, although every player has been increasing prices, our repricing initiatives were the most successful. By focusing on creating a strong relationship with our clients and having a unique value proposition we were able to increase our net take rate much more than our peers over this year. Finally in the chart on the right to compare profitability in a fair and easy way to understand, when we look at how much profit each company can extract in net income over TPV, we can see that PAGS is 3 times to 5 times more profitable than peers.
Moving to slide six, I will start the segment highlights with PagSeguro's overview during the quarter. PagSeguro's total revenue and income grew 49% year-over-year, reaching BRL3.7 billion, faster than TPV, thanks to the successful repricing process over the year that resulted in an increase of 24 basis points on PagSeguro's net take rate since Q1 ‘22. TPV grew 35% year-over-year totaling BRL90.3 billion, negatively impacted by deflation during the quarter. With each our market sharing payments reached almost 11% from 8% in Q3 ‘20.
On the next slide, we have been prioritizing recurrency and profitability versus merchant cross addition. We have been more selective in our acquisition strategy during 2022, reducing subsidies and focusing on the best sales channels to improve new merchants acquisition quality. As a result, we grew the new merchants average TPV by 36% through online channel and we also increased it by 39%, the overall average TPV per merchant on a year-over-year basis.
Our number of active merchants, excluding Moip, reached 7.2 million in September 2022. This strategy results in a higher activation of POS device, higher TPV per merchant and higher upselling and cross-selling opportunities for PagBank. Consequently, the positive results to be expected are lower CapEx to revenue ratio, lower POS depreciation per sales and higher LTV over CAC ratio for the new merchant cohorts, which you contribute to margins rebound and cash flow generation in the future.
Moving to slide eight, I would like to update you all regarding our business diversification initiatives. HUBs reached 31% of PagSeguro TPV in the third quarter, maintaining a strong growth as our operation covers approximately 90% of the Brazilian GDP. This accelerated growth is explained by our unique value proposition that combines banking and payments experienced through a single app and customer care operation provides faster POS delivery, instant settlement and a complete value-added service offering as presented in the right side of the slide.
As we see a growth opportunity in the online payment segment, we have been improving our operation and completing our set of solutions for our clients. We always focus on omnichannel sales, integrating different payments in the physical and online channel, also adding payment options beyond cards such as PIX. I would also like to update you that our cross-border operation previously called BoaCompra, was rebranded during the third quarter and now is also recognized as PagSeguro. This is an important step since PagSeguro brand awareness is very strong and as a result, it should reinforce our cross-border payment business.
On slide nine, I'll give you some updates about PagBank operation. PagBank reached 25.9 million clients, being almost 16 million active clients, which around 58% are consumer clients. Moving to the bottom of the chart, primary bank choice keep increasing for both publics, consumers and merchants reaching around 60% for consumers and 50% for merchants.
PagBank cash-in totaled BRL41.9 billion in 3Q ’22, an increase of more than BRL10 billion, compared to Q2 ’22 and most of the cash-in was driven by PIX transactions. I am happy to share that our market share over PIX transactions has been increasing and reached 9.5% during the quarter. Deposits totaled BRL19.4 billion, an increase of 171% versus the same period of 2021 and almost BRL4 billion increase versus Q2. This increase is really important for our business, since it helps us to be more competitive by lowering funding costs.
Moving to slide 10, I would like to do an update regarding our credit products. Total credit portfolio reached BRL2.7 billion, up 71% year-over-year, mainly driven by the increase of payroll loan and FGTS early prepayment, which are consumer focused products, representing now 31% of the portfolio. Asset quality remains a priority for our company, and since last quarter, we decided to increase our exposure to secured products, balancing our portfolio mix. Doing so, secured products reached 35% of the credit portfolio, up from 5% in Q3 ‘21.
Also as Ricardo mentioned, we just launched our secured credit card package by PagBank balance account and have been vocal on advertising this product as it addresses consumer and merchant needs. We expect to keep growing our portfolio gradually, while making important investments to improve our models and the overall credit cycle pillars. These are top to one priority and we have been seen NPL trending down since July ‘22, and we expect to keep this downtrend for the coming quarters. In addition, we are also making important progress in our collection processes to decrease delinquency rate.
On slide 11, we see how PagBank total revenue grew 31% year-over-year, ending the quarter at BRL339 million, stable versus Q2, mainly explained it by our focus on secured loans. Total payment volume reached BRL105 billion, growing 79% year-over-year, as Ricardo said higher than the acquiring TPV for the first time, reinforcing the increasing engagement of our customers on PagBank account, resulting on strong deposits growth and the use of other futures such as bill payments and marketplace.
Having said that, I pass the word to Artur, our CFO.
Thanks, Alexandre, for the segment highlight. Hello, everyone, and thank you to joining us tonight. I will continue the presentation in the slide 12 with our Q3 ‘22 consolidated results. In the left side, total revenue and income reached a record of BRL4 billion, growing 45% year-over-year. Net take rate achieved 2.84% this quarter, increasing 9 basis points versus last quarter, as shown in the bottom right side of the slide. Important to say that this value excludes one-time effect related to [indiscernible] adjustment in the amount of BRL53 million.
On a GAAP basis, net take rates totaled 2.90%. Gross profit neutral of FX grew 7% year-over-year impacted by financial expenses growth and the higher chargebacks mainly related to additional provisions for credit losses. The repricing in acquiring and credit products helped to offset those impacts, leading to higher PagBank gross profit in Q3 ‘22 in comparison to Q2 ’22. This quarter, again, our operating expenses grew less than total revenue and income growth showing the cost-driven approach of the company. Controlling costs and expenses is part of our future and the diligent way we work is a key component of our superior execution.
Adjusted EBITDA closed at BRL770 million, up 4% in comparison to the same quarter of last year. Net income non-GAAP achieved BRL411 million, and net income gap increased 18% year-over-year, reaching the highest level for third quarters in our history, totaling BRL380 million. This represents earnings per share of real BRL1.16 in the quarter, BRL0.19 or 20% better than Q3 ‘21, as shown in the top chart of the right side. PAGs continues to better balance growth and profitability, focusing on improving shareholders' return.
Moving to slide 13. In the first chart of the left side, operating expenses reached BRL615 million in Q3 ’22, up 11% year-over-year. This amount represents 15% of PAGs revenue versus 20% in the same period of last year and stable, compared to last quarter. The improvement efficiency has come from personnel and marketing expenses leverage even with more investments to advertise PagBank’s new products, as well as the contribution of PagBank and HUBs revenue growth. This amount excludes POS write-off and one-time effects related to softer disposals, write-off of our investment on BoletoFlex and payment agreement with our POS supplier related to PAG.
In the right chart, financial expenses closed at BRL921 million versus BRL210 million in Q3 '21. Around 90% of this increase is explained by the hike of SELIC and the remaining portion of 10% was related to higher TPV volume, prepayment of receivables to merchants and credit card mix. These effects were partially offset by repricing in acquiring AP wise increase on credit underwriting and lower cost of funding through deposits growth combined to lower spreads negotiated with capital markets. We continue to focus on improving our funding process, diversifying sources and extending terms to leverage our banking license and support the company growth.
Financial expenses was our biggest challenge during the past quarters. However, the Brazilian Central Bank has been keeping interest rates stable for a while. The last interest rate increase was in August this year, in September and November meetings kept the country interest rates stable.
In the next slide, CapEx to revenue ratio reached 12.4% this quarter versus 16.8% in 2021 and 14.7% in Q2 ’22. This decrease is driven by lower CapEx related to strategy of being more selective in merchant acquisition to leverage PagBank and the increase of HUB and PagBank's revenue. We expect to keep this ongoing downtrend in CapEx to revenue ratio over the coming quarters.
In the following chart, adjusted EBITDA minus CapEx reached a positive amount of BRL268 million, more than double of Q4 ‘21 and slightly better, compared to last quarter. It reflect PAGS' focus on maximize LTV 2 cat ratio and improved cash earnings by reducing POS subsidies and adding more valuable merchants into our ecosystem.
On slide 15, PAG's net cash balance ended the third quarter at BRL9 billion, improving BRL400 million quarter-over-quarter. This was mainly driven by TPV growth, higher share of credit card transactions and larger penetration of same-day prepayment to merchants. At the same time, we have been improving our capital structure, ended this quarter with 74% of financing position followed by third-party capital. On top of that, PAGS diversifying funding sources to support volume growth, lowering funding costs to consolidate a strong balance sheet.
To conclude our presentation, I will turn back to Alexandre for the final remarks.
Thanks, Artur. I would like to review our guidance for Q3 ‘22 and establish a ballpark for the full-year 2022 results. Total revenue in Q3 ‘22 was BRL4.04 billion, higher than the guidance low end. For 2022, we expect to reach between BRL15.36 billion to BRL15.46 billion. Net income, non-GAAP was higher than the guidance high-end, totaling BRL411 million.
For 2022, we expect to deliver a net income non-GAAP between BRL1.57 billion to BRL1.6 billion. Net income GAAP reached BRL380 million. For 2022, we expect to reach between BRL1.45 billion to BRL1.48 billion, the highest of our history, mainly due to efficient capital on marketing and personnel expense in a year with high pressure over financial expenses due to the hike of Brazilian interest rate.
Before we move to Q&A, I would like to share our priorities for the coming year. Our focus is to keep the consistent execution of our strategy, balancing growth and profitability to deliver EPS growth while we keep the development of the capabilities that we will enable our banking and acquire businesses to capture even more value in the future. The key components of this consistent execution are very diligent cost and expense control to leverage OpEx and CapEx to revenue ratio, relevant chargebacks and loss reduction, consolidation of PagBank business by growing deposits, cards TPV, secured credit portfolio and usage increase in the merchant base, grow faster than the market in payments in a profitable way. Lastly, to reinforce our one-stop shop value proposition by merging banking and acquiring.
Now we ended our presentation, and we will open for the Q&A session. Operator, please?
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Mario Pierry with Bank of America. Please go ahead.
Hi, everybody. Good evening. Congratulations on the results. Let me ask you two questions. One is how are you seeing the competitive environment in Brazil and your ability to continue to reprice your products?
And then second is related to your guidance. We noticed you did not provide guidance for TPV growth, something that you normally do. And also, when we look at the net income in the fourth quarter implied on your guidance, we're getting BRL385 million to BRL415 million, which would be down to flat versus the third quarter. So just wondering why would net income fall or remain flat in the fourth quarter. Thank you.
Hi, Mario, this is Ricardo. Thank you for the question. Good to hear you. Regarding the competitive environment, just sometimes we forget here to point out the accomplishment that we've been reaching in PagSeguro, which is the -- summary is on slide five that we showed in the presentation, because I mean, with less than 40-days for the end of the year, this year is going to be the year that we're going to have the highest net income for the company overall.
If we look at the first nine months of the year compared to other listed companies such as Stone Ciel and GetNet, we are 3 times to 5 times more profitable than our peers. We have 3.2 times more clients than the second player. And even with that, we've been able to increase prices and with no additional churn. So -- and combined with that, we also were market share winner in the first two quarters, plus 92 bps.
And I'm making this, let's say, a little bit long answer to you here just to show how solid and resilient our business model is. And it's very difficult to duplicate it. And having said that, the competitive environment is not different than what we've been seeing in the past quarters. I guess the competitive environment was even harder right after our IPO in 2018, 2019. But nowadays, we've been seeing that competition is not as tough as it used to be in the past. And we do have the ability to keep repricing if necessary. We think that repricing is an ongoing process depending on how it's going to be the dynamics for the macroeconomic scenario next year. If necessary, we will keep increasing and raising our prices, because we do believe we have a powerful combination that is acquiring plus banking, all developed propositions that we have that is very unique. So if necessary, we will keep repricing.
Also important to say that to reach the net income that you have in Q3, if you look at the numbers, we had an increase of more than BRL700 million in financial expenses versus last year. And even with that, we were able to reprice our base. And if you do the math, financial income minus financial expenses, was even better than last year in absolute terms. So just to show that we are able to keep repricing if necessary, we will do it.
Regarding the guidance, you are right. In the bottom of the guidance, the implicit net income, non-GAAP for Q4 is BRL385 million and the top of the guy is going to be BRL415 million. Of course, we do this range, because we have many moving parts here. But just to give an overview of what's going on in Brazil here. We have some moving parts that can help TPV, such as the additional salary that people have received the 13th salary and also the holiday season with Black Friday and Christmas season that people usually spend more money. But this year it's kind of weird, because we don't know how it's going to be the usage of this additional salary.
All the population is very, very with debit at this point after the pandemic. We see some consumptions constrained due to the lower credit offer in the market from bank issuers. And we also have -- we had right after the elections, we had this truck driver strike right after the second round of the presidential elections for two or five days depending on the region of Brazil. So they also create a little bit of mess. Not to say that we just see the beginning of the World Cup and you don't know how it's going to be the impact. We estimate here that could impact us between BRL3 billion to BRL4 billion. So it's going to be a one-off situation with this World Cup in the fourth quarter.
Fourth quarter, we have more debit transactions than the rest of the year. Usually, net take rate is lower than the rest of the year. Although this year, the Q4 is going to be higher than last year usually, there is a decrease between Q3 and Q4. So those are the moving parts, and that's why we are giving this range between BRL385 million and BRL415 million. So that's why we are giving this range.
Okay. [Technical Difficulty] a follow-up then. The first one is on the take rate. So have we seen the full impact of all the repricing they have done? Is that already reflected on your numbers? Or did you do any price hikes during the quarter they are not yet reflected?
And then the second, I understand you have less visibility on TPV, but this is a key metric that you normally provide guidance and so on. So I was just wondering like when you come up with your bottom line estimates -- what kind of growth are you expecting on TPV?
Mario, there is going to be growth against the Q3. We are not disclosing the exactly growth for TPV in Q4, but there's going to be growth. So when we have this, as I said, this estimate that World Cup impact, not to say the other events that I mentioned before. But yes, there will be growth in TPV.
And answer to your question in repricing, we did make some reprice in Q4 as well. We did some increase in reprice in Q4 as well. So what you see is some decrease in net take rate. But when we make this math, net take rate minus financial expenses, the decrease between Q3 and Q4 is lower than the net take rate before financial expenses, because we increased the prices. So that's we've seen so far. We have still, I mean, 40-days to the end of the year. Of course, we have some visibility. But as a Brazilian that you were, you know, that World Cup and soccer in Brazil, is kind of people pay attention to that. So that's why you have this uncertainty about TPV, but there's going to be growth. We just are not disclosing exactly growth at this point, Mario.
Okay. Fair enough. Thank you very much.
Thank you.
Next question comes from Bryan Keane with Deutsche Bank. Please go ahead.
Hi, guys. For the third quarter, I think you guided acquiring TPV to BRL91 billion to BRL92 billion, and it fell a little bit below that. We've been used to you guys kind of beating numbers. So anything to call out in the quarter in particular that had you fall a little bit below expectations in acquiring TPV?
Bryan, yes, I would say you that there are two main variables here that impacted the Q3 TPV. One is deflation surprise as it might be, but we had deflation in Brazil in Q3 in two months out of three in Q3. And also, we see some bank issuers decreasing the credit offer for the consumers. We are seeing that the scenario for consumers with debt is kind of hard. So banks are decreasing the credit offer. So that's why we see this, let's say, a little bit below than what we thought before in our Q3.
But I'd just like to highlight that -- and you know that TPV is one of the metrics that we have. But of course, we are working on to keep growing the company in terms of revenues and also growing in terms of net income. So although we stay a little bit below in TPV, because of the reasons that I mentioned to you, we are bidding the other two metrics that is that are very important in our view, related to P&L, which are revenues and net income GAAP and non-GAAP.
I think -- this is Alexandre, Bryan. It's important also to mention during Q3, the Brazilian cards industry has shrunk from second Q. And we normally -- we grow our total TPV comparing to second Q. While the industry grew 20%, we grew 35% on a year-over-year basis.
Got it. And then when we look at the fourth quarter, I know, we talked about net income and some of the same factors are going to obviously apply, but the total revenue and income growth, I think we got it at 23% to 26% for the fourth quarter, which is quite a bit below the run rate you guys have been doing this fiscal year. It sounds like World Cup and maybe some economic factors to consider there. Anything else to think about? And how much of that is one-time so when we get into first quarter next year, can we see a reacceleration of that total revenue and income growth?
Bryan, in absolute terms, we estimate that World Cup could impact us between BRL3 billion or up to BRL4 billion. So that's one-off. And just to reinforce here that when you look at the percentage, the growth as a percentage, Q4 last year was -- is a hard comp for us because at least in Brazil, last quarter 2021 was when really the economy was reopened in Brazil. So people spent a lot in Q4 last year. So when you look at the percentage you could look at that we are not growing that much, but we had a hard comp from Q4 last year. But as a one-off, I would say that World Cup mainly is the main, I would say, headwind in this quarter.
And then how about when we jump off into next year, obviously, we won't have the World Cup headwind, but is there a possibility we can reaccelerate in the first quarter on a total revenue and income basis?
Bryan, it is possible, but we cannot be, let's say, disconnected that we are growing much more than the industry. If you look in the past six years, we are growing 60%, 80% more than the industry. So this quarter, industry grew 20%, we grew 35%. So 7%, 7% more than the industry. So what I'm trying to say here is we cannot be disconnected from what's going on in the industry as a whole. So if there's going to be growth in the industry in Q1, reaccelerating we will accelerate even more. If we have this credit consumption constraint and the industry doesn't grow that much, we will grow more than the ides but not as much as we'd like to.
So that's the macro overview. I mean, the best answer to give it to you is we plan, and we do believe that we are able to keep growing more than the industry, as we've been doing in the past six years. But of course, we cannot be disconnected from the industry as a whole.
Got it. Yes, market share gains are obviously important. So that's the best you could do. All right. Thanks guys.
Thank you, Bryan.
Next question comes from Domingos Falavina with [Banco] (ph) JP Morgan. Please go ahead.
Hi, [indiscernible] everyone on the call. Thanks for taking the question. My question -- two follow-up question here as well or less on, I guess, non-controlled items like new industry TPV and more on the pricing, which you have more control. So when we look at the MDR revenues, ballpark, you grew low 1%, similar to TPV Q-on-Q, which is perfect, right? I mean no major price contract or anything?
When we look at the net financial result, however, and we do add all the lines, as you guys know, it shrank by 8% Q-on-Q. We look at your deposit base, it grew massively, right, especially the banking side, like BRL5 billion in deposits. The cost of your funding, I think, went down 2 percentage points from like BRL119 million to BRL117 million.
So I guess my question to you here is a true for that it seems obviously the positive impact part of it, maybe BRL20 million, BRL30 million. But out of the BRL100 million you shrank in Q-on-Q on financial results, there was some squeeze in pricing. So on that front, why pay so much for deposits growing so much the deposit base and impact the negative net financial result?
Question within that as well, why did this shrink, why not increase more? One of your peers that was the latest one to pass through, had 50% increase in net financial results Q-on-Q. What can we expect on this? Like we want to see price increases, I guess, and this is not consistent with the TPV growth and is on the opposite direction? And the glass half full between the second one already is on OpEx. OpEx was very good, basically down even Q-on-Q 1%, especially in cost of services. Can we expect this sort of cost discipline going forward basically and growing below TPV? Thanks.
Hi, Domingos, I'll start with the answer. Thank you for the question. Good to hear, I will start with the question in -- regarding repricing and your question about that you said paying the interest that you pay in deposits. And then Artur get in details of the numbers with you. But we are not discarding to keep making repricing in Q4. We made at the beginning of Q4 a little bit -- but if necessary, we can do more. But we are happy with the growth that we and the net income that we have been presenting so far.
So answer to your question. Could we increase price a little bit more? Yes, we will do it. We don't know. We are growing more than the industry. We are 2 times more profitable than our peers. So some extent, we think that we are in good levels and we need to keep growing and taking advantage of the acquiring as a mean for people to use PagBank more and more. So that's also important for us to use this power combination between acquired and PagBank.
Regarding deposits, yes, we did grew a lot. But when you make the mix between what is paying the base accounts and what we pay for the CDs, on average, we are having a cost that is a few basis points below CDI in our deposits is too high that we think, but it should go down, because as time passes by, deposits will be more and more important, and it is going to take share from CDs. So it used to be higher two quarters ago. Now it's a little bit lower, a few basis points below CDI. So that's why we are still growing this base. The average cost for deposits, of course, it's not at the level of other big financial institutions have in Brazil, but we are decreasing quarter-after-quarter, a few basis points here and there.
But regarding the numbers, I guess, Artur can give you more data. And also important to say, I guess, after we said about that. But in Q3, we have five more working days when compared to Q2, and that creates an impact in financial expenses and Artur can explain.
Yes. I think -- Domingos, thanks for your question. And I think two things here. The first one is exactly what Dutra said. We have five days working days more in Q3 than Q2. And this impacts our costs, because it's based on working days, okay? And the TPV obviously, is a whole month not exactly by working days. And so this is difference and create this gap when you analyze the growth of TPV and the growth of financial expenses.
Doesn't -- sorry again to ask you here, but doesn't the prepayment revenues also take into consideration working days? Because the net down right, so it's not like you increase prices in a way or another, you shrank like results in nominal terms, shrank Q-on-Q.
No, no. The price that we have here is based on the transactions that we have for the month not exactly for working days, because our prices are a pre rate instead of a rate linked to CDI. This is the point. And also, when we think about the cost, the cost is based on the CDI. And the CDI moves up or down depending on the working days for each month or each quarter in the case of Q2 versus Q3.
Regarding to expenses, as you mentioned, we have a very good approach on expenses as part of our future control costs, investments and everything that we need to do. It's more under our control, taking this attention on expenses. As you know, we are moving up we had deflation from July to September. We have inflation in October, but we are paying attention a lot in these movements related to inflation, because it affects our costs. And also, we are -- we're pretty close to the movements of interest rate in the country, because it was the biggest expense or costs that we have in our P&L.
Very clear.
And pretty quick here that you mentioned about 1 of the other companies that increased the financial income. If I got it right, your question, if you make this math between financial income minus financial expenses, you're going to see that year-over-year, they grew BRL34 million, and we grew almost BRL50 million. So maybe we didn't grow at the same pace that they had. But if you look at these net financial expenses, minus financial income, we had an increase as well. So in [Technical Difficulty]
Certainly. But I think like the delta last Q-on-Q is especially important given SELIC moving up, right? We went from a scenario of SELIC expected decreasing around 150 basis points to 250 basis points. Certain days a couple of weeks back to SLEIC increasing. So I think it's important to understand what management had is as far as doing more price increases. If we don't have those rate cuts, especially if we have rate increases, right, I think it's something that should be vocal about.
Okay. So going back to your question, we are able to reprice if necessary.
Alright. Thank you guys.
Okay, thank you.
Next question comes from Neha Agarwala with HSBC. Please go ahead.
Hi, congratulations on the results. And thank you for taking my question. On the funding cost, how much are you paying on average for the customer deposits that you're gathering? And should we expect a similar increase in customer deposits next quarter strong increase, which should lead to higher financial expenses?
My second question is on your funding structure. Could you please elaborate how are you funding the prepayment business? What percentage is coming from factoring of receivables with the large banks, how much is coming from your deposit base
o on and so forth? And my last question is on taxes. The tax rate was quite low this quarter. And you mentioned the two specific benefits, which led to a lower tax rate. What should we expect going forward in the coming quarters? Thank you so much.
Yes. It's Arthur speaking. Thank you for your three questions. So I think regarding funding costs, to be very straight to the point. The cost that we have related to deposits is a few basis points lower than CDI, okay?
The second point related to the funding that we have. First of all, we use the equity position that we have, it's like BRL10 billion. The second point is factoring -- or sorry, the second point that we use is deposits, the balance accounts from the clients.
The third point is factoring into the bank issuers. And the third one is issuing CDs in the market in retail investors or also institutional companies. And the third point related to tax income. We have 11% of effective tax rate this quarter, compared to 17% last quarter, and it's related to incentives to R&D investments that we do. Since the beginning of the company, we have this incentive from the government.
And the second point is related to revenue that we have abroad. And so those two benefits helped us in this effective tax rate. Going forward, you can expect something from 10% to 15% for Q4 and something below 20% in the coming years.
And Neha, this is Eric. Just to sense here. This positive impact on lower tax rate is offset by higher tax collections in the top line, okay? So financial income should be higher excluding taxes. But since -- the Brazilian Central Bank changed the regulation and there is a full disclosure in our earnings release about that. We are collecting more taxes in the top line, primarily in financial income. So by the end of the day, this is a net event because the positive effect on lower tax rate offsets the higher tax collection in the top line on the financial income.
Perfect. If I can just quickly follow up. Regarding the funding cost, should you -- should we expect you to continue gathering deposits at a similar pace? Or could you think about maybe lowering the remuneration a bit and lowering your funding cost for the deposits in the coming quarter?
Neha, we don't see that decelerating at least at this point. We are keeping growing in our deposits. I don't have it on top of my mind, if it's going to be the same 170% this astonish number that we had in Q3, but we don't see that accelerating. We still keep growing, getting new clients and getting new deposits and CDs.
Okay. Thank you so much.
Thank you, Neha.
Next question comes from Tito Labarta with Goldman Sachs. Please go ahead.
Q - Tito Labarta
Hi, good evening. Thanks for the call and taking my questions. A couple of questions also. I guess, first, just to think about your ability to grow earnings for next year. When you look at your margins, the kind of continues to come down on your guidance, it looks like margins could begin to stabilize perhaps quarter. When we think about the margin, should that be just mainly a function of interest rates once interest rates start to come down, your margins can go up. I don't know if there's any color you can give on how your margins sort of -- the difference in margins between your SMB clients versus micro merchants, if that's going to have any impact as well?
And then my second question, going back on your market share. I know you've been -- you've gained a lot of market share this year. But when we look at the quarterly evolution, most of that market share gain came at the beginning of the year. And then the last couple of quarters, you've gained more like 10 bps per quarter or so. So just to think about, is that mainly a function of your repricing and that has slowed your market share gains? How should we think about your ability to continue to gain share going forward? Thank you.
Tito. So regarding the margins, we -- to be honest here, we are not looking for margins expansion. We are looking for EPS accretion, EPS growth because we are 3 times to 5 times more profitable than our peers. So when you reach this kind of position, it's kind of we have a very decent EPS. If we look last year, our EPS BRL0.90 per quarter and this year is BRL1.10 from BRL1.15 this year. So we are growing EPS. That's what we're looking for, keep growing the company and keep growing EPS. Margin is not a main focus for the company at this time and I don't think it will be in the short-term because for us, these two main drivers are very important to keep growing the company and keep growing EPS.
Regarding market share, you're right, we grew like 10 bps in the past quarter or a little bit more than that, but we have been consistent gaining market share. I don't think that we're going to see a change in the trajectory there could be a quarter that we could gain more share, a quarter, they're going to gain like 10 bps, as you mentioned. But I guess the trajectory that we've been having so far is a very consistent transaction of gaining share quarter-after-quarter. And to be honest, market share is a consequence of what we've been doing here. We also -- we don't see that we need to grow market share at any price. We don't go to be clients decreasing prices to gain market share and to hurt our profitability. So the market share is consequence what we've been doing at this point, getting new clients, profitable clients and growing EPS.
That's helpful. And sorry, just a follow-up on the margins. I mean I understand the target is to grow EPS. I think that will just help us understand how much your EPS can grow. So would potential margin expansion come mostly from lower interest rates, also just trying to think how the mix impacts the margins? Just to think how much earnings can grow sort of kind of longer term from here?
Tito, this is Eric. I think company's profitability, we think here does not rely only in lower interest rates moving forward. We have some tailwinds here that we expect to unlock moving forward already in 2023. The first one is revenues growth on PagBank. And revenues grow, remember, as the duration of the new credit products that we have been underwriting are 4 times longer in comparison to the working capital loans, naturally, the NII 2023 onwards tends to be stronger as we underwrite more, but with a longer duration products. And the market share gains in payments naturally should lead revenues growth in combination with PagBank ran. So revenues grow is the first tailwind.
The second one is when you look the operating expenses as a percentage of revenues, this decreased from 20% last year in Q2 and Q3 to 15% in Q2 and Q3 2022. So necessarily, we are getting operating leverage and investors should expect this level or even a lower level of our operational expenses as a percentage of revenue. So this would be the second tailwind that we have here.
Third, it's important to mention that there are no cash effects mainly related to depreciation and amortization that impacts profitability but there's no impact in cash flow generation. For example, when we look at Q3 cash flow, operating cash flow minus investing cash flow or capital expenditures, we had more than BRL0.5 billion in cash flow generation, but depreciation and amortization should be higher in 2023 on the back of previous capital expenditures that we had. But having said that, these are the main tailwinds that we see. And naturally, we are working to see EPS growing in 2023 in comparison to 2022.
That's great. That's great color, Eric. Just one quick follow-up on that. Would the SMB segment -- should that be a headwind or a tailwind just I mean as the HUBs become maybe more profitable, can that also be a tailwind just to think about how the mix impacts it as well.
We expect it to be a tailwind and the tailwind is captured by revenue growth and operating expense savings as a percentage of revenues.
Great. Thank you, Eric.
Thank you, Tito.
The next question comes from Jeff Cantwell with Wells Fargo. Please go ahead.
Hey, thank you very much. Just wanted to follow-up on -- a little bit on that last round of questions. And I was hoping we could focus on slide seven of the presentation. If we look at the active merchant base over the past three quarters, it's gone BRL7.7 million, BRL7.5 million and then BRL7.3 million. So I guess the question is, and clearly, this is in the context of what you're discussing, which is you're focusing on the quality of merchants, which is completely understandable.
So I was just hoping you could help us out anything through where that merchant base potentially might go over time. I mean, in other words, just that like very intentionally, kind of, like barbell-type of gas it won't decline perpetually with it, meaning at some point, the thinking would be that merchant base would level out. So -- and then you start to increase again. So I was hoping you might be able to provide a setting type of color in order to help us calibrate some expectations for 2023 and beyond? Thank you very much.
Jeff, I'll try to answer your questions with the data that you have so far, and we've been seeing in this -- in the company in the past quarters and what we planned for the near future. But we said a few quarters ago, that was the conscious decision not to focus nano-merchants at this point because with the services that we offer for the POS and so on, it was very hard to get profits from this kind of merchant. So we took this conscious decision to get merchants a little bit higher than nano-merchant to get the year one, the long-tail merchants. And it is working because the TPV per cohort in the slide seven is growing 36% in the fourth month after the merchant came to -- come to us. So that's one why we took the decision not to keep investing in the number of merchants and focus more on the quality, as you said.
Also important to say, when you look at the 90-days, although we don't give this disclosure, the base is growing on 90-days base. It's not decreasing. And when you look at the merchants that we've been losing, let's say, the 7.5% to 7.3%, it's a very, very small amount of TPV that you have. As you can see, industry grew 20%, we grew 35%, even losing some clients. So it's really conscious decision that we took to grow our base -- or not to grow our base, to focus on bringing gross adds or new adds with higher TPV per month. And then we may be losing some small nanomerchants.
I don't have here the answer to say to you when it's going to be growing again. But I would say that as we measure these active merchants in a 12-month base, I guess part of the churn is already happening. So maybe in 2023 in the first quarter 2023 we can give you more color about that. So -- or when it's going to be the churn decreasing, because the gross adds we are having a decent number of gross adds with decent TPV promotion. But the number that is -- the dynamic that is impacting these numbers because we are having churn for small than immersions that we had in the base already. But again, very small PV from these merchants.
Okay, okay. Great, appreciate all the color. And then just moving further down the slide deck to your net take rate, when we look at that, it's up 48 bps over the past few years. It looks like about 15 basis points over the past quarter. So I was hoping, could you walk us through, there's so many puts and takes to that number these days. And I was just trying to get a little more color. We're not trying to think about 2023 obviously beyond.
So how should we think about the net take rate given what you're clearly expanding in PagBank, other value-added services such big piece of the puzzle of these days. And clearly, we're also looking at financial income and so forth. So I was hoping you can kind of walk us through any type of high-level thoughts on the trajectory of that take rate from here? Thanks very much.
Hi, Jeff, you're right. We've been increasing our net take rate because of the repricing, of course, part of that to offset the increase in financial expenses -- the way we look here, looking in the short-term and with all the uncertainties that we have at this point. But in short-term, it's going to be flattish or a little bit low. And not because we are decreasing prices or because we are going to decrease prices in the near future, but just because of a mix of clients, because as we get a little bit larger clients than we have -- we used to have in the past with the SMB is growing in the mix, genetic rates a little bit low, but of course, they have 5 times to 6 times more TPV than long tail. So this is the moving part here that may affect net take rate, increasing mix for SMBs and a little bit larger clients than long tail.
But going back to your question, is straight to the point is going to be flattish or a little bit lower. And of course, we will try to work to offset that through OpEx leverage, as Eric mentioned, and other lines that you can control in the financial expenses or and other costs that we may control here.
And in the financial expenses, Jeff, this is Eric. Let me remind you that as we replace factory receivables against the card issuers, which impacts upfrontly our financial expenses to deposit growth. Naturally, we can manage better these spreads moving forward. So necessarily, this is what we expect, not only relying on lower interest rates to get operating leverage in 2023, but also work much more in the spreads, balancing deposits and factoring receivables against the bank items.
Okay, thank you very much. Appreciate all the color and congrats on the results.
Thank you, Jeff.
Next question comes from Josh Siegler with Cantor Fitzgerald. Please go ahead.
Yes. Hi, thanks for taking my question this evening. I was wondering if you could provide a little more color on the market forces at play that allow you to have the best-in-class take rate gains, right? Like how were you able to achieve the highest repricing in the industry? Thank you.
Hi, Josh, thank you for the question. So I will not say there is one silver bullet here to answer that. But I would say you that one advantage that we have that is very, very powerful, it is the fact that you have a combination between acquiring and banking, and that's something that clients really use, they give value, they understand the value proposition. And by the fact that you have this acquiring plus banking also allow us to make this automatically or instant settlement right after the transaction. So when you have a sale in a Sunday morning, you have access to this money, two minutes after the transaction. It doesn't matter if it's a week and holiday and so on. So that's a very powerful combination that we leverage.
The fact that we also have a huge base of long tail clients also helps us because we are able to, let's say, cut some promotions that it had in the past, and these clients, they are much more focused on getting the money as fast as possible than to the price itself. So I would say this is the main reason why we are able to increase prices and still gaining share and be more profitable than others. So not to say here, it's not a, let's say, more like the DNA of the company is attack DNA, self-service and so on.
But I would say you that the value proposition that we have with banking plus acquiring and the instant settlement not to say the execution, customer service, one app, one-stop shop also help us. The combination of all of the things make us a different company and allow us to increase price in a very successful way.
Got it. That's very helpful. And then for my follow-up, I was wondering if you are currently expecting traditional seasonality between debit and credit mix as we head into 4Q, especially considering the world's comp impact?
Yes, we do expect a little bit increase in debit for the fact that people receive an additional seller in Brazil, so they have liquidity. We don't know how it's going to be this year that is said at the beginning, Josh, because people after the pandemic, they have a lot of debit. So we don't know if they're going to use this additional sale to pay back their debate to pay down their debits or if they're going to use for consumption. But we do expect a little bit increase in debit as a percentage of our volumes in Q4.
Okay, that’s helpful. Thank you for answering my question.
Thank you very much.
Next question comes from Kaio Prato with UBS. Please go ahead.
Hello, everyone. Good night. Thanks for the opportunity. So I have on cash flow -- here related to CapEx. It reached close to BRL250 million this quarter, while you continue to show negative net adds. I understand the moving parts on nano-merchants that you mentioned during the call, but I was wondering if you can give a little bit more color about your gross adds, all this has evolved during this year and more specifically in the third quarter. And moreover, how should we think about CapEx moving forward?
And the second part of my question, if I may, if you can talk a little bit more about your expectations on the purchase of intangibles as well if we should expect the same pace of growth in 2023 or not? And what should be the drivers for that? Thank you very much.
Kaio, regarding the CapEx related to POS, we -- if we exclude the nano-merchants, we are growing our base. So when you look at these numbers, the total number may be decrease in 12 months. But if excluding nano-merchants, we are growing double digit, more than high double-digits here, high teens if we look at the -- excluding the nano-merchants So that's why we're still investing in CapEx, that's the first thing.
The second one is usually the merchants that we are getting different than they had in the past today as they are SMBs, they usually require POS with higher prices, so that's why in volumes, they are a little bit small, but in absolute terms in reals, we don't see this impact. The average price of these devices with printers and so on, they are a little bit higher.
But it's fine because these are the clients that we are looking for, clients that really use, they buy the device, they use the devices printers because they have some volumes. So are 100% aligned with the strategy that we had. So that's the main explanation, I would say, for the CapEx in terms of POS. Regarding the IT investments and so on, I can give you -- Artur to -- I can ask Artur to give you more color on that. Thank you.
Yes, Kaio, thank you for your question. Regarding to IT investments that we are doing is part of the control of expenses that we also are doing. If you take a look on the trend, Q1, Q2, Q3, we are pretty flat, you say, in the investments that we are doing. And we do not expect to grow too much next year due investments of R&D, but it's an important part of our business to develop new features, new products to launch for PagBank and PagSeguro.
Okay, thank you. So I understood that probably regarding to intangibles, we should not grow in the same pace, please correct me if I'm wrong. And on the CapEx side, if you could mention your expectations for next year, we should see growth but not at the same pace as well. Is that right?
Exactly. You're right. We see some growth basically in IT, but not the same rate that we saw in the past. And for the POSs, we see more stable than growth. I think it's more flat than what we see this year.
Okay. Thank you very much.
Thank you, Kaio.
Next question comes from Geoffrey Elliot with Autonomous. Pleae go ahead.
Hello, thanks very much for taking the question. Quick one on PIX. First of all, could you confirm whether PIX's included at all within the acquiring TPV that you report? And then how big has PIX become in terms of the acquiring side of the business and any insights you can share on the profitability that you're generating there? Thank you.
Hi, Geoffrey, yes, PIX it is in these numbers of the acquiring. We have a footnote, so every volumes that we have in our ecosystem that generates revenues regardless, if it's MDR prepayment or even if it is fixed fee, we do include in our RTP, because that's -- we understand where we make some revenues and we should report. So PIX is there. PIX is very small, PIX QR code that goes to our POS, it is still very small. It is growing quarter-after-quarter, but it's very, very small.
The profitability of this type of transaction is very, very good for us because we charged an MDR that's a little bit lower than debit, but we don't have the costs that we have in a debit transactions such as interchange and card scheme fees. So that's the dynamics and the economics of this transaction more profitable than debit. It is growing quarter-after-quarter, but very, very, very small.
And Geoff, the market share gains in the slide five is on a best criteria considering only debt, credit and prepaid cards.
Yes, that's a good point. These volumes regarding PIX and other payments that you have even online, such as Boletos, bank slips they are not in this market share calculation that we did in Slide five.
That’s great. You have read my mind on the follow-up question. Thanks very much.
Thank you, Geoff.
Next question comes from Soomit Datta with New Street Research. Please go ahead.
Hi, guys. A couple of questions, please, if that's okay. Firstly, on the HUBs contribution, which is 31% of TPV, I think up from about 28% in the last quarter. So one of the dynamics we're thinking about is with as we're looking forward with the take rate is the mix of TPV mix between micro and SMB. I just wondered where do you think we are in terms of that HUBs contribution? Are we close to it leveling out? Or do we just think it will continue to expand as a percentage of total. And I guess, as a result, that will have a dilutive effect on take rates going forward. Be interested in your perspectives on that one?
And then a quick follow-up, please. Just on the credit product, we've seen a nice lift in the loan book this quarter, increase coming through from secured lending. Just trying to get a sense as to the underlying yield on that credit book. Obviously, it must be declining as the secured lending becomes a higher component. Just sort of curious how that underlying credit revenue is evolving loan book is going up, yield is coming down in the near-term. Is the underlying credit revenue expanding a little sort of help there would be really appreciated.
Hi, Soomit. Starting with the HUBs question, we are not opening new HUBs as used to in the past. Maybe there could be a new HUB here and there to serve part of the city or a neighbor of the city, the high concentration of merchants and so on, but the majority -- or the largest amount of investments in HUBs is already done. So as Alexandre said in their presentation, we are covering with our HUBs 90% of our GDP. We are growing productivity of salespeople on the street is very well. I guess, we reached a very good point of productivity from our people -- for our salespeople.
How big HUBs can be? Well, I don't have to hear the final answer, but if you look at the past quarters, it's been growing like 3%, 5% quarter-after-quarter in the mix. Last quarter was 28%, now it's 31%. I don't see that decelerate in the short-term. So how is going to be the percentage of the HUBs, I guess, we need to wait a little bit. But we see that growing in Q4, and you see that growing in Q1 and Q2 next year. So that's -- you're right when you say that in terms of net take rate, it could be a headwind. But if we consider that they have five to six more volumes than long tail in nominal margins, it makes total sense.
And with all the products that we've been launching for SMBs in our PagBank accounts, such as debit cards that we launched recently. We also see the opportunity that we can not only bring these SMBs for our acquiring but also expand the penetration of the PagBank in the SMB space. So that's the dynamics for the HUBs.
Regarding the lending, what happens here is that in the secured products, we have the duration much longer than what we had in the working capital is to give a sense to you is like 3 times to 4 times longer than the working capital in terms of duration. And they use, it's kind of half of what we had in the working capital. So you can imagine that in the short-term, the revenues are not as big as they used to be for the working capital. But when we start to stack different cohorts, this revenue will keep growing. And we are bringing these clients that we will guarantee the revenue, so to say, for a longer term, when compared to the working capital. So that's the dynamics.
And that's why maybe we don't see the revenue impact been growing as fast as we expected before, because we are changing the mix to have this asset quality a little bit more shift to security lending. And again, they have 4 times more duration and half of the yields. And it's not secret for anyone that the payroll low in Brazil for public employees is limited to 2.14% per month. That's the top of the yield that any financial institution can charge from the clients in this product.
Okay, that’s great. Thank you.
Thank you.
Next question comes from Pedro Leduc with Itau BBA. Please go ahead.
Thanks you guys, so much for taking the question. First, on cash flow, I would like to pick your brains a little bit as you're calling off on TPV. We already saw better cash flow dynamics this quarter as we look into 2023, even if it's macro driven, -- is it reasonable to expect a more meaningful cash flow picture here? And then if so, what you believe is the best way to deploy it this quarter, we saw you paying down some debt, you bought back some shares. So cash flow outlook and ways to deploy it? Thank you.
So for the cash generation, obviously, we are in a positive side right now, and we expect to use this to also help us to fund in the operation, it's a good way to use the money to help us in the growth of the company. Obviously, we have repurchase of shares program. We use it almost 40% of this program until now. And for now, I don't have any answer to buy or not buy any shares, but it's a possibility in the future. The price is pretty low now in the understanding, it's a good price range to buy more shares to have in the treasury and use this money to do that. But the most important thing is the generation that we have in our cash flow right now. It's important to us to support the growth of the company.
Got it. And then the second unrelated question on credit. I'm not sure if you commented a bit on credit quality. This quarter, how provision expenses evolved if there -- we're seeing it peaking already? Just to take your brains a little bit on credit quality? Thank you.
Pedro, I'll start here and then Artur can complement. Well, 100% of the credit that we had in Q3 was secured. So of course, that helps in NPLs. If you look at the NPLs, NPLs are trending down, and we plan to give more disclosure on that once the credit portfolio grow in the following quarter. So that's what in terms of disclosure that I can give to [indiscernible] point, but Artur can give you more details about the numbers and provisions and so on.
Yes. We have everything that we understand that is necessary is provisioning. If you take a look at the income statement, we have some write-off there that we not executed because of -- it's not efficient in terms of tax. When we think it's efficient, we will do the write-off. But regarding to provisions, we have everything provisioned. And based on the quality of our book right now and going forward, we understood that the level of provisions that we are taking every quarter can be reduced going forward.
Super. Thank you, I will look forward to the tireless figure. Appreciate it.
Thank you.
Thank you. I would like to turn the floor over to Mr. Ricardo Dutra for his final remarks. Please, Mr. Dutra, you may proceed.
Hi, everyone, thank you for investing the time to listen to us and for the questions that we had. Happy holidays to all of you, talk to you in the call at the beginning of next year with the full-year 2022. Thank you very much.
This concludes PagBank PagSeguro’s conference call. Thank you very much for your participation. You may now disconnect, and have a great rest of your day.