Pagbank - Q3 2023
November 16, 2023
Transcript
Operator (participant)
Good evening. My name is Carolyn, and I will be your conference operator for today. Welcome to PagSeguro Digital Earnings Call for the third quarter, 2023. At this time, all lines have been placed on mute to prevent any background noise. Should any participant need assistance during this call, please press star zero to reach the operator. This event is also being broadcast live via webcast and may be accessed through PagSeguro Digital's website at investors.pagbank.com. Participants may view the slides in any order they wish. Today's conference is being recorded and will be available after the event is concluded. I would now like to turn the call over to your host, Éric Oliveira, Head of IR. Please go ahead.
Éric Oliveira (Head of Investor Relations)
Hello, everyone. Thanks for joining our third quarter 2023 earnings call. After the speaker's remarks, there will be a question and answer session. Before proceeding, let me mention that any forward-looking statements included in this presentation or mentioned on this conference call are based on currently available information and PagSeguro Digital's current assumption, expectations, and projections about future events. While PagSeguro Digital 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 PagSeguro Digital's earnings presentation or discussed on this conference call for a variety of reasons, including those described in the forward-looking statements and risk factors 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'd like to remind you that during this conference call, the company may discuss some non-GAAP measures, include those disclosed in the presentation. We present non-GAAP measures when we believe that the additional information is useful and meaningful to investors.
The presentation of this non-GAAP financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered separately from or as a substitute for our financial information prepared and presented in accordance with IFRS, as issued by the IASB. For more details, the foregoing non-GAAP measures and the reconciliation of these non-GAAP financial measures to the most directly comparable IFRS measures are presented in the last page of this webcast presentation and earnings release. With that, let me turn the call over to Ricardo. Thank you.
Ricardo Dutra (Principal Executive Officer)
Hello, everyone, and thanks for joining our third quarter 2023 earnings call. Once again, I have the company of Alex, our CEO, and Artur, our CFO. Going to slide three. I'm happy to announce in Q3 2023, we have reached the largest net income, both GAAP and non-GAAP, in the history of the company. In the past years, we have successfully managed the impacts related to the high interest rates for a longer period while reshaping our funding structure backed by deposits. More recently, we have been seeing better operating trends in our volumes, combined to Brazilian interest rate decrease, which should positively contribute to our funding strategy to keep delivering growth with the profitability. Our non-GAAP net income reached BRL 440 million, growing 7% year-over-year.
Despite our increasing footprint in merchants larger than the long tail, accretive to gross profits besides lower take rates, our margins continue to improve, resulting in BRL 894 million EBITDA, reaching the highest margin since Q3 2021. Total revenue was flattish year-over-year and grew 5% quarter-over-quarter, reaching BRL 4 billion. Disciplined CapEx deployment resulted in BRL 10.6 billion in net cash balance at the end of the quarter, 17% higher than previous year, driven by 36% growth in cash earnings versus Q3 2022. Going to the financial services section, we have continued our credit underwriting journey, constantly improving our risk management models.
We have been exploring new addressable markets by offering collateralized products, and despite the interchange cap impacting our revenues from financial services division, revenues posted a quarter-over-quarter growth and EBITDA was positive again, reaching BRL 2 million. PagBank cash-in was BRL 56 billion, driving up deposits to the all-time high level, reaching BRL 21.6 billion, reinforcing the closed-loop advantage, backed by a comprehensive set of payments beyond cards accepted, while lowering company's cost of funding. In payments, we keep growing in a profitable way, and our TPV reached almost BRL 100 billion, 11% year-over-year growth. Going to slide four. Our focus on new technologies and product developments continuing in 2023. In this slide, we share the main milestones of our company. In October, our company executed its first transaction using Drex, the Brazilian digital currency, through the blockchain platform, embracing the digital assets revolution.
This month, we just announced the facial authentication feature for clients aiming to use our payment link option, reinforcing our security proceeds while improving user experience and confidence. On payments, we announced our Tap on Phone solution, fully embedded in PagVendas app, our proprietary ERP software with more than 1 million users. We also launched our collection platform, a comprehensive set of payment solutions covering card acceptance, Pix QR code, and Boleto issuance, empowering merchants to accept all payment options. On financial services, in addition to products launched for consumers such as investment options, debit cards, and so on, we also launched products focused on SMBs and larger merchants.
This year, we have launched our payroll solution, allowing entrepreneurs to manage their employees' paychecks in a seamless way, and we also launched our PagBank Business Account that allows direct deposits from third-party acquirers into PagBank account. Now, I pass the word over to Alex for the commentaries on the third quarter 2023 operational highlights.
Alexandre Magnani (CEO)
Thank you, Ricardo. Hello, everyone. We show on slide five that our merchant acquiring business remains solid, and through the combination of our superior value proposition and the broad reach of our sales channel, we have been able to accelerate TPV growth faster than the industry, driven by our merchant segments. TPV reached almost BRL 100 billion, growing 11% year-over-year. We continue to observe better TPV growth through the first weeks of the fourth quarter. MSMB TPV posted 15% growth versus third quarter 2022, primarily driven by SMBs, followed by micro merchants. As Ricardo mentioned earlier, we also noted a rebound in TPV growth from large accounts, which is composed by merchants with TPV above BRL 500,000 per month.
Moving on to slide six, the instant and prepaid product, which combines payment service and financial service through PagBank account, has promoted an increasing footprint in larger merchants, resulting in 22% year-over-year growth in TPV per merchant. Our strategy to focus on disciplined CapEx deployment did not interfere in our POS sales uptrend. In August, we presented the record POS sales level since January 2022, with the highest POS activation ratio since mid-2021. Consequently, we reached 6.7 million active merchants. At first glance, the net merchants loss has been raising concerns about our ability to grow our business and revenues. However, when we consider active merchants with at least one transaction in the past 30 days, excluding nano merchants, the positive trend is revealed, supported by our TPV growth rebound in all segments and the improved cash earnings generation.
PagBank clients grew 16% year-over-year, surpassing 30 million clients, placing us among the most relevant Brazilian financial institutions, adding more than 4 million new clients in the past 12 months, as shown on slide seven. Our active clients base reached 16.7 million clients, leading to BRL 56 billion in PagBank cash-in, composed by Pix and P2P wire transfers inflows into PagBank accounts from other financial institutions. Combined, TPV and PagBank cash-in led deposits up 11% compared to the third quarter of 2022, and 18% quarter-over-quarter, reaching a record of BRL 21.6 billion. This deposit level was boosted by our AAA rating attributed by S&P Global, which enhanced our CD distribution among institutional and retail investors on and off platform.
Checking accounts balance, the cheapest funding source and a key performance indicator to measure client engagement, grew 43% year-over-year, driving down our annual percentage yields to 93% of the CDI. Slide nine shows that our credit portfolio reached BRL 2.5 billion due to our ongoing runoff of the working capital loan portfolio, combined to the tax planning write-off of non-performing loans started in the last quarter. Payroll loan and FGTS already accounts for half of the portfolio, expanding our offerings to consumers primarily through a seamless experience and a cheaper cost structure.
Our go-to-marketing strategy for secured loans is based on competitive APRs and a digital end-to-end onboarding, risk assessment, underwriting, and collection. This also includes our offering of credit cards backed by investments and savings. The total credit portfolio share, composed by secure products, reached 60%, resulting in the ongoing downtrend in NPL 90+ to 10.7%. Now, I turn over to Artur for the financial highlights of the third quarter 2023. Artur, please.
Artur Schunck (CFO)
Thanks, Alexandre. Hello, everyone, and thank you for joining us in the call. This quarter, I am proud to announce all-time high net income GAAP and non-GAAP. Total revenue and income grew 5% due to TPV growth, and gross profit grew 3% on quarterly basis. Also positively impacted by lower losses and higher level of deposits that reduce financial expenses. Our commitment to efficiency led another decrease in operating expenses, driving 5% EBITDA growth quarter-over-quarter, with similar improvement in EBITDA from payments vertical, while EBITDA from financial services got back to the positive territory, despite the effects related to the cap on interchange of prepaid cards, lowering our revenues since second quarter. Net income on a non-GAAP basis reached BRL 440 million, growing 6% quarter-over-quarter and 7% year-over-year.
Earnings per share reached BRL 1.27, BRL 0.09 better than last quarter and 10% higher than third quarter 2022. Cash earnings amounted to BRL 365 million, 40% higher than the second quarter of 2023, and 36% versus the same quarter of last year. On slide 11, revenues from payments unit grew 5% quarter-over-quarter, while gross profit grew 4% in the same period. TPV growth and transaction cost savings due to interchange cap impacted positively the current performance versus third quarter 2022. Comparing quarter-over-quarter, the increase was due to lower take rate, partially led by client mix change towards large merchants with lower take rates, but incremental gross profit contribution.
Adjusted EBITDA on the payments division reached BRL 892 million, an increase of 5% quarter-over-quarter and 7% year-over-year. In the next slide, financial services verticals, total revenues reached BRL 260 million in third quarter of 2023, 8% higher than the second quarter. On the other hand, gross profit decreased to BRL 101 million, down 9% on a quarterly basis, mainly led by an increase in provisions for losses due to a credit model update based on IFRS 9. Besides the higher provision levels, adjusted EBITDA grew BRL 64 million from third quarter of 2022, back to the positive territory.
Moving to slide 13, financial expenses closed at BRL 820 million, versus BRL 921 million in the third quarter of 2022. This decrease is mainly explained by our lower average cost of funding, driven by higher level of deposits. On a quarterly basis, financial expenses increased due to more two working days in third quarter 2023 versus last quarter. Total losses decreased 39% year-over-year, accounting BRL 165 million, driven by lower provisions for expected credit losses, healthier coverage ratio, and credit underwriting, mostly on secure products. On the other hand, the increase quarter-over-quarter is mainly due to higher provisions led by modeling review for working capital and payroll loans. Operating expenses reached BRL 583 million, down 5% year-over-year and 1% quarter-over-quarter.
This amount represents 14.5% of total revenue and income, lower than the level of third quarter 2022. Despite of lower revenue levels derived from the regulatory change, and even with 5% of inflation in the last 12 months, our headcount resizing and marketing and infrastructure optimization led to the leverage. In the slide 14, our cash earnings continued to gain momentum, driven by discipline in total cost and expenses, revenue growth, stable CapEx, and higher margins, reaching a positive amount of BRL 365 million, up 36% versus same period of 2022. CapEx marked BRL 529 million, up 5% year-over-year due to inflation and the upbeat trends in merchants gross adds. That requires additional POS inventory levels, but lower quarter-over-quarter, driven by better merchants cohorts and POS activation.
Our discipline in capital allocation and efficiencies in IT investments remain, which we expect to result in a similar or lower capital expenditures disbursement versus last year. Depreciation and amortization, including POS write-off, totaled BRL 393 million, representing close to 10% of total revenue and income, keeping the pace to coverage to CapEx levels in the coming quarters to unlock additional profitability in the future. We expect this stabilization to happen in the second half of 2024, in line with the CapEx. On the final slide, our net cash balance ended the third quarter at BRL 10.6 billion.
In the past twelve months, our cash generation amounted to BRL 3.7 billion, which we invested BRL 1.8 billion in POS purchase and technology developments, and BRL 330 million in buyback shares. In October, treasury holds more than 4% of total shares issued. The company bought back BRL 1 billion since 2021. That represents 81% of the total program approved in 2018. Our equity position continued to increase, with 58% being composed by retained earnings, reinforcing our commitment to shareholders on capital allocation and returns. Now, we have ended the presentation, and we will start the Q&A section. Operator, please.
Operator (participant)
Thank you. Ladies and gentlemen, we'll now begin the question and answer session. If you have a question, please press the star key, followed by the one key on your touchtone phone now. If at any time you would like to remove yourself from the questioning queue, please press star, then two. Please hold while we collect your questions. The first question comes from Mario Pierry with Bank of America. Please go ahead.
Mario Pierry (Managing Director)
Hey, guys, good afternoon. Congratulations on the quarter. Let me ask you two questions, please. First one is on the take rate, right? We saw that it declined quarter-over-quarter from 4.06% to 3.97%. You talked about a change in client mix to the large accounts. It seems like it, but I was wondering if that's all of the impact was just from changing mix. How are you seeing the pricing environment? How are you seeing the competitive environment? And how do you think your take rate behaves going forward?
Then the second question is related to, you know, like you talk about having BRL 10.6 billion in cash, how you have this buyback program open since 2021, that you executed 80% of the program so far. But I was wondering, like, how do you see future distribution of excess capital, either in buyback or dividends? Thank you.
Éric Oliveira (Head of Investor Relations)
Hi, Mario, this is Éric. Thanks for the question. When we think about the take rates trajectory, we always have to remind that the breakdown take rates are based on the merchants mix, like you said, duration mix, and also, promotional prices that we also make for a certain period of time. If you remind, we started doing, the promotional prices for our Online Sales channel in the beginning of the year, and necessarily, as we continue to see uptrend, beat and uptrend in gross adds, naturally, most of these gross adds comes from micro-merchants, which have access to the promotional prices for the first month's transaction with us. So promotional prices for a certain period of time, merchant mix, and also duration mix.
We understand that the take rate trajectory in the short term should be, is slightly down, especially in Q4, for seasonality reasons, since debit cards tends to increase the penetration in comparison to overall TPV. But moving forward, as our footprint in larger merchants stabilize, take rates combined to the financial services revenues should also stabilize over 2024. So I think it's reasonable to expect take rates in a consolidated view to stabilize in 2024, but naturally, always consider merchants mix, duration mix, and promotional prices that we do. Let me pass the word to Artur.
Artur Schunck (CFO)
Hey, Mario, it's Artur speaking. Thank you for your question. Good to talk to you. Regarding to buyback program and the BRL 10.6 billion of net cash balance that we have, the BRL 10.6 billion, it's important to mention that is a comparison of assets and liabilities, operational assets and operational liabilities. At this point, we do not have the intention to distribute dividends. We have been buying back shares every quarter.
We are expecting to continue doing that due to the current attractive valuation of the company. The buyback program launched in 2018, we executed 81%. There is BRL 200 million available at this point. There is a new buyback program under discussion in the company, and as soon as possible, and as soon as we decide to launch this new one, we will inform the market. So this is the things that we are thinking about the share buyback.
Mario Pierry (Managing Director)
Great. Thank you. Let me follow up then on what Éric talked about, the promotions, that you started promotions right for online at the beginning of the year. So is it fair to assume that these promotions have been going on since the beginning of the year, or have you stopped the promotions?
Éric Oliveira (Head of Investor Relations)
Yes, since the beginning of the year, but when we look the cohorts evolution in the timeline, we see the decisions that we took six, three to six months ago, posting benefits, especially in the gross adds six months later. So the decisions that we took in the beginning of the year are reflecting in better gross adds trends, and necessarily, this share of promotional prices for a certain period of time, much more now than the first half 2023.
Mario Pierry (Managing Director)
Okay. How are you seeing the competitors behaving, Éric?
Ricardo Dutra (Principal Executive Officer)
Hi, Mario, this is Ricardo. We don't see competitors being rational. Of course, there are some competitors that try to get some market share for a while, but once they realize that it's hard to make money, they give up, they step back. So we don't see anyone being irrational. If you look at what happened in Q3, looking at the trend more recently, we were the company that grew more quarter-over-quarter than all the market.
We grew, like, 8% quarter-over-quarter, and the market grew 4%. So, I mean, we've been executing well. As Éric said, we also have these promotions that we are getting some results at this point. Going back to your question, we don't see anyone being irrational, and we think we have a good pricing point as of now to keep growing. As you could see in our results, we had the highest net income in both GAAP and non-GAAP. I mean, we think we are in the right level in terms of price and growing.
Mario Pierry (Managing Director)
Thank you very much.
Ricardo Dutra (Principal Executive Officer)
Thank you.
Operator (participant)
The next question comes from Jorge Kuri with Morgan Stanley. Please go ahead.
Jorge Kuri (Equity Research Analyst)
Hi, everyone, and congrats on the numbers. I wanted to ask you about your credit portfolio. I'm looking at slide eight of your presentation. We continue to see the total loan book coming down quarter-over-quarter. I'm wondering, where is your risk appetite? You know, at what point do you think this can start inflecting? Some of the smaller, more fintech driven lenders, like Banco Pan and Banco Inter and NuBank, are showing significantly more growth. What do you need, either internally or externally, to start to see the portfolio of credit really taking off and, you know, making best use of your capital and your deposits? Thank you.
Artur Schunck (CFO)
Hey, Jorge, it's Artur speaking. Our credit portfolio is growing when you consider where we have focus on, payroll loan, FGTS, and credit card backed by CDs. So the portfolio is growing. But at this quarter, we also had some write-offs for the working capital loans. It's our running off operation. Regarding to when we come back to offer credit, at this point, we consider focus on credit on secure way. We still see difficulties in the market when we compare to other players, and the banks reducing the limits for credit cards. We are waiting the conditions in the market improves to back to offer maybe in a different way, credit.
But at this point, and in the coming quarters, we will focus 100% in the secure portfolio, in the secure originations, and focus on payroll loan, FGTS, and credit card backed by any investment that we receive from the clients. We continue working in the models and all the, I will say, infrastructure to offer credit, and at the right moment, we will back in the future to talk in a different way about credit.
Jorge Kuri (Equity Research Analyst)
Got it. Thank you very much.
Artur Schunck (CFO)
Thank you.
Operator (participant)
The next question comes from Gabriel Gusan with Citi. Please go ahead.
Gabriel Gusan (Sell-Side Research Analyst)
Good evening. Maybe to follow up on Jorge's question about the credit portfolio. Can you talk about your appetite, specifically to the SMB segment? I understand, of course, in your first attempt, there was a mix of micros and SMBs, and now you continue to see the growth in SMBs outpacing micros. Is that something that we should continue seeing, that we will see PagSeguro more active in this SMB space? And my second question is about CapEx. We see it's stubbornly high, despite you reducing your exposure to micro merchants, focusing more on SMBs. So I'd like to hear your thoughts on that. Thank you.
Ricardo Dutra (Principal Executive Officer)
Hi, Gabriel, this is Ricardo. Regarding the SMBs, as Artur said to Jorge, at this point, we are focused on secured products, secured credit products, which means FGTS, payroll loan, and credit card backed by CDs. It doesn't matter if you are a consumer or if you are an SMB business, that's the, those are the products that we're gonna focus, and we're gonna keep accelerating in the following quarters. At some point, of course, if you wanna be a bank, you've gotta have unsecured products, but we just don't think that's the right time to do so. When you look at the market, we see even the incumbent banks struggling with some NPLs and delinquency rates. It seems that it's getting better, the scenario, but at this point, we don't think it's worth to take the risk.
We are growing a healthy way in this, secured products, and we will keep investing on that. So if your question was re-related to unsecured products to SMBs, we do not expect to do that in short term. If something changes, we would like to know, but we don't expect to have this type of products in the short term. We'll keep working on secure products. Yeah, and I'll pass the word to Artur about CapEx.
Artur Schunck (CFO)
Hey, Gusan, it's Artur speaking. Thanks for the question, and good to talk to you too. Regarding to CapEx, we remain disciplined on these investments that we are doing. It's important to mention that the CapEx is not only related to POS, but also related to technology developments. And we see many opportunities to develop new features and also improve the features that we have today, to getting better the offer to our clients as much as possible. We are expecting to have a CapEx this year, slightly lower than 2022. That means the level of CapEx today is reasonable for us, and it's a good level to maintain the company running and attract new clients, increasing the gross merchants for the company.
In 2024, we probably will have the similar CapEx of 2023. It's important to mention that in the second half of 2024 onwards, our CapEx levels tends to be similar to our D&A+POS write-off. In the past years, the expenses related to D&A and write-off increased a lot and put pressure on our bottom line. We are seeing that in the second half, we have a better way to see the bottom line for the company.
Gabriel Gusan (Sell-Side Research Analyst)
Perfect. Thank you.
Artur Schunck (CFO)
Thank you.
Operator (participant)
The next question comes from John Coffey with Barclays. Please go ahead.
John Coffey (VP of Equity Research)
Great. Thank you very much for taking my question. Alex, I had one question for you on some of your prepared remarks. I think you said that you continue, you continue to see better TPV growth through the first weeks of the fourth quarter. Should I interpret that as meaning that you're seeing growth around 11%, more than 11%? So I'd just be interested in your thoughts on that.
Then, for my second question, it was really on the financing expenses that you have, and I'm just I think going over to slide 13 in your deck, where I think one of the drivers for having the lower financing expenses year-over-year have been your deposits. Should we take this to mean that you're becoming more and more insulated from the impacts of the Selic rate? That perhaps as the Selic declines, it makes less of a difference on your financing expenses because you're almost funding most of the book or a lot of the book from your deposits? So those are my two. Thanks.
Alexandre Magnani (CEO)
Okay, John, this is Alex, I will answer the first part of your question. Actually, we are growing higher than 11% in the first weeks of the fourth quarter. We see a very good trend in terms of growth moving forward. This is a result of this new growth cycle. We just starting the beginning of the second semester of this year. First semester, we did a lot of optimization and adjustments in our operation, and we suffered in terms of TPV growth. And now we are regaining this growth momentum, and we are doing better in the fourth quarter than we did in the third quarter.
Ricardo Dutra (Principal Executive Officer)
John, this is Ricardo. We start the answer of the second question regarding the dependence or the linkage with Selic. You're right, when you look at the slide 13, we are more and more using deposits for funding and for all operations that we have, meaning prepayment and also the credit that we offer for our clients. We at the end of the day, if Selic goes down, it's good news because we're gonna have lower costs. And even if you have deposits, they are linked with Selic. If we look at the slide eight, we see that our deposits, we are paying the blended 93% of Selic. So if Selic goes down, we're gonna take advantage.
So as deposits grow more and more, we don't need to rely on third parties for the funding, and we have a lower cost as a percentage of Selic, considering the deposit. So answering in a different way, if Selic goes down, we're gonna take advantage because at the end of the day, the cost that we have for financial expenses are linked to Selic, and deposits have a lower cost than third parties operations that we might have in the market.
Artur Schunck (CFO)
Yeah, complementing the answer, when we talk about deposits, especially when we see deposits on our platform, it's most cheaper than the deposits received from out of our platform, in third-party platforms. So we have a funding structure that considers deposits on capital that is based on returned earnings that there is no impact in the PNL, in the cost of the PNL. And we mix with other funding structures that also help us to run the business. Going forward, we are expecting to have or to continue to have this good performance in financial expenses because we are most efficient every time.
So this was the first time when we compare year-over-year that we are reducing nominal terms, so it's good for the company. Obviously, part of that is related to Selic down, I would say downtrend, because we are expecting to have one more cut in December, but also because we are more efficient in the funding structure that we developed for the company.
John Coffey (VP of Equity Research)
Great. Thank you.
Artur Schunck (CFO)
Thank you.
Operator (participant)
The next question comes from Yuri Fernandes with JPMorgan. Please go ahead.
Yuri Fernandes (Executive Director)
Hey, everybody. I have a question here on Pix, P2P. I would like to know if you can share anything with us, how relevant is this becoming? Some competitors are starting to disclose that information, so just checking if you can help us to understand a little bit these Pix. And then I will ask a second question. Thank you.
Artur Schunck (CFO)
Hi, Yuri, this is Ricardo. Thank you for the question. Well, first of all, it's important to say that in our take rates, we consider Pix QR code revenues, and we also consider Pix volumes in the denominator. We know some other players in the market, they may differ, but we use the Pix QR code revenues, and we also use the Pix TPV denominator. We don't disclose the exact number or the volumes of Pix that we have, but they are similar to what you see in the market with other players. Yeah, so the as a percentage of TPV, is very similar to what you see in other players in the market.
Yuri Fernandes (Executive Director)
No, that's super clear. That helps a lot. And on deposits, you already discussed in the previous question, but it was very good, right? 20% quarter-over-quarter, this is not a seasonal quarter, right? It seems we're doing something differently. What is the drivers for this growth? Why was deposits stable for, I don't know, three quarters, and now we are seeing, you know, deposits accelerating? What are you doing to bring these deposits on the PagBank? Thank you.
Artur Schunck (CFO)
It's Artur speaking. Related to deposits, it's not a silver bullet that we are doing. It's many things differently. The management is 100% focused on that because we know that it's important to us increase the number of deposits. We are working to provide better service to the clients. The triple A rating that we received from S&P Global is also helping us to bring this money to the company in the cheapest way.
TPV volume growing help us because part of this deposit come from merchants. So it's several things that we are doing. And also I can tell you that we increase the level of the features that we are offering to the clients is much better than in the past. So many things that we are doing. It's not only one thing that brings this result to us.
Yuri Fernandes (Executive Director)
No, perfect. Super clear. Thank you, and congrats.
Artur Schunck (CFO)
Okay, thank you.
Operator (participant)
The next question comes from Kaio Prato with UBS. Please go ahead.
Kaio Prato (Equity Research Analyst)
Hello, everyone, and good evening. Thank you for the opportunity to ask questions. I have two on my side, please. First, on your reported losses this quarter. So we saw that the expected credit losses increased during the quarter, and you mentioned that it was related to some change regarding the IFRS 9. So just would like to have more details here. What was the change, if this was a one-off effect or no? And also still on losses, if you could better explain the drivers behind the sequential increase on chargeback, which surpassed the level of TPV growth.
So just would like to understand the drivers behind that and if this is related to the prepayment product with instant settlement or not, if you are offering this nowadays or no. And the second question is related to the expectations for 2024, if you can provide some details and if you expect to provide any type of guidance for the year, I don't know, in the coming quarters. That's it on my side. Thank you.
Artur Schunck (CFO)
Kaio, it's Artur speaking. Good to talk to you. Regarding to expected credit losses, this quarter, we had the impact of payroll loan and working capital loan, IFRS 9 review. That increased the provisions. This is the explanation why increased the provisions at this point. In a yearly basis, we use it to review the models to ensure we have the right level of provisions to cover expected losses or future expected losses. But the most important point is the new credit originations are secured, which relies on a lower level of provisions going forward, because we are increasing this origination related to secure products that will represent a lower provisions going forward.
Regarding to chargebacks, we include their operational losses. We include other things related to issuing cards and chargebacks from online and POS chargebacks. If we compare the amount, okay, it's higher, but when we compare in terms of basis points, it's lower than the last year. That is most important to us because we are seeing that our fraud prevention is increasing.
Ricardo Dutra (Principal Executive Officer)
Regarding 2024, Kaio, we still maybe soon, a little bit earlier to give some-some color about 2024, but I would say to you that, as Alex said in the speech, we are seeing very good growth in terms of volumes, TPV growth in Q4. We also expect the interest rate of the country still to have another cut, maybe 25 or 50 basis points at the beginning of December.
Artur Schunck (CFO)
So we are optimistic with Q4 to be a very good one. Usually Q4, we have more volumes because of the holiday season, with Black Friday and Christmas and so on. So we are very optimistic with Q4, and from there, we can think, give more color about 2024. But, I mean, we are confident it's gonna be a good quarter as far as we have the previous numbers. We are in half of the quarter at this point, so we are optimistic about it.
Kaio Prato (Equity Research Analyst)
Okay, thank you very much.
Ricardo Dutra (Principal Executive Officer)
Thank you, Kaio.
Operator (participant)
Next question comes from James Friedman with Susquehanna. Please go ahead.
Jamie Friedman (Senior FinTech and IT Services Research Analyst)
Hi, thank you for taking my question. Thank you. So Artur, just in response to the prior answer, because the IFRS issue came up with one of your competitors as well, though it may have been for a different reason, but do you mind just elaborating on what you just said in the prior response about the impact of the working capital? And as you answer that, are there any other changes in IFRS that you're anticipating that we should also be aware of it before they happen?
Artur Schunck (CFO)
Hey, James, it's Artur, and thank you for the question. So, the most relevant impact is related to the runoff operation of working capital. So we increase a little bit the provisions at this point. It's, I would say that it's like a one-time impact in this quarter. We are not expecting any other change in the coming quarters.
Jamie Friedman (Senior FinTech and IT Services Research Analyst)
Okay, clear. And then just a kinda higher level question, but I realize for a while now, you have, to some extent, emphasized SMB to de-emphasize the less structured long tail. But, I'm just wondering if you're anticipating any additional consequences of that, whether it's, you know, how you see, like, the take rates evolving longer term or the additional opportunities that, that will create. Just as you transition the company that way for... And I know it's a very, you know, open-ended and big-picture question, but as you move the company in that direction, how do you anticipate the financial results are gonna evolve? Thank you very much.
Ricardo Dutra (Principal Executive Officer)
Hi, James, this is Ricardo. Just to be clear, we are not de-emphasizing the long tail. We're just saying that we're seeing a big opportunity in SMBs. As you can see in one of our slides here, we are growing like SMBs 18% and long tail growing 9%. Important in slide number-
Alexandre Magnani (CEO)
Five.
Ricardo Dutra (Principal Executive Officer)
Five. So we are growing. Even if you consider long tail, we are growing 9%, which is the same growth of the industry. And remember, some of our long tail clients, they become SMBs as time passes by. They keep working with us, at some point, their businesses grow, and then they become an SMB. So if you look at the composite of these two parts, both SMB and long tail, we are growing 15%, which is like 60% more than what the industry grew in Q3. So, it doesn't mean that we are de-emphasizing, but we are seeing a very good opportunity in SMBs as well, not only in acquiring, but also in the banking side. We have a very strong, very powerful value proposition for this type of clients. That includes instant settlement, banking, high-yield CDs, consolidation software.
So that's why we see opportunities coming there. In terms of coming from there. In terms of financial results, as we tried to explain before, our take rates might go down as a percentage, but in absolute terms, makes total sense because SMBs have much more volume when compared to long tail, sometimes 10x bigger. So as a percentage, in the net take rate is lower, but as absolute term, absolute dollars, makes total sense. So that's why we keep growing. That's why in Q3, we had the highest net income of the company ever, and we don't think that is gonna change.
I mean, take rates might go down, as we said before, of maybe stabilize or slightly go down, but in absolute terms, we expect to keep growing. So that's the overall picture. We still see opportunities in long tail, and we also see opportunity in consumers as well. We keep growing. In Q3 this year, if you look at net adds in PagBank, was the best quarter of the year. So I mean, we still see some avenues, opportunities to explore, going forward.
Jamie Friedman (Senior FinTech and IT Services Research Analyst)
Great. Thank you, Ricardo.
Alexandre Magnani (CEO)
Also, I would just like to complement that in this quarter, we had a record of POS sales since January 2022, and with the highest POS activation since mid-2021.
Jamie Friedman (Senior FinTech and IT Services Research Analyst)
Thank you both.
Ricardo Dutra (Principal Executive Officer)
Thank you.
Operator (participant)
The next question comes from Neha Agarwala with HSBC. Please go ahead.
Neha Agarwala (SVP)
Hi, congratulations on the results, and thank you for taking my question. So a few observations from your comments so far. It seems like on credit, you are not even testing or piloting the unsecured loan product at the moment because you're fully concentrated on the secured lending side. But first, is that right or it's something different, and I do not understand correctly? Because when we talk to most of the other players in the market, while they had been restricting origination so far, even the larger banks are now talking about the potential acceleration in growth. So just want to understand that, you know, if you're not testing, if you're not open to lending in the unsecured market, then your competitors will be ahead of you when the market conditions improve. So what are your thoughts on that?
Did I understand correctly that lending to the SMB in the unsecured space is not your priority? Because I would assume that the SMBs are probably less risky than the long tail when it comes to unsecured lending product. So classification there. And this goes to my next question, which is on the take rates, right? The take rates have been coming down given the change in mix, and next year you see more stability in terms of mix, so take rates should stabilize. But what about 2025, 2026? Do you see take rates continue to come down due to competition, or do you think new products like banking or credit would be able to offset any pressure on take rates from competition or lower rates? So some clarification on the trends there. Thank you so much.
Ricardo Dutra (Principal Executive Officer)
Hi, Neha, this is Ricardo. I'll try to address your question. If it's not clear, let me know. But we are testing unsecured credit for small volumes for some clients. And we have some credit pilot. We are doing a small test for different clusters of clients, so we do have processes in place. We have the models, we have the billing process in place, and so on. So we are testing that. But the point is, even when you look at the credit cycle, as I said before, it seems it's getting better. It doesn't mean it is already the time to jump in, but it seems getting better. Many big banks or the incumbent banks in Brazil, they struggled with NPLs in the previous quarters.
Now in Q3, it's getting a little bit better for some of them, but it doesn't mean that it's time to jump in. We are ready to do that when we think it's the right time, when we think the risk return makes sense. But to be honest, we found a way with secured products that we are happy with that, and we accelerate that as much as we can. It doesn't mean that we cannot make unsecured products in the near future. We're just saying that's not the focus, but we are testing, just to answer your first question. In terms of SMBs, we see that we have a strong value proposition that doesn't require us to offer credit for these clients that we are getting in our base.
Of course, there could be some SMBs out there that they just wanna have an acquiring company if there is any loan or lending offer and so on. But we don't see that as a block for us to keep growing. As I said before, in slide five, we are growing like 18%, double of the industry in SMBs year-over-year. It's still lots of room to grow in SMBs. We see there is bad service out there, and we can get these clients with the value proposition that I mentioned, instant settlement, digital free banking, and so on. But we don't think that we are, we don't have the plan to keep offering loans for the SMBs at this point. Regarding take rates, we, as we said, in 2024, it's likely downward stable.
In 2025, 2026, it's hard to give you some visibility, but remember that as we grow our, financial services business unit, we also are gonna have, a tailwind in our take rate because we're gonna have more revenues with the same client. So it, it's hard to say to you how it's gonna be the net take rate in 2025, 2026. But structurally same, what we see at this point is TPV that we are seeing Q4 is growing.
Interest rates seems to go down, not only Brazil, but all over the world. So all the headwinds that we had, like two years ago, we are seeing that they are disappearing or getting better as we look in the future. So I mean, I cannot give you what's gonna be 2025, 2026, but it seems like Q4 is gonna be a good quarter. We expect to have a good 2024 as well.
Neha Agarwala (SVP)
Thank you so much, Ricardo. Very helpful.
Ricardo Dutra (Principal Executive Officer)
Thank you, Neha.
Operator (participant)
The next question comes from Josh Siegler with Cantor Fitzgerald. Please go ahead.
Josh Siegler (Equity Research Analyst)
Yeah. Hi, good evening. Thanks for taking my question. Nice print today. First of all, I was wondering if you could comment on how you're thinking about the longer-term capital allocation of the business, given the cash generation you have going?
Ricardo Dutra (Principal Executive Officer)
Well, Josh, it's Ricardo speaking. Thank you for the question. Regarding to long-term capital allocation, what I can tell you is, we are 100% focused in continuing to delivering the results that we are delivering, growing quarter-over-quarter, and using part of these results, to reinvest in the company, in the, in the, to reduce the dependency on, on other financial institutions to fund part of the operation.
We have a very good margins on, advancing receivables to merchants, and we will continue doing that. On top of that, we have this, buyback program that we expect to approve a new program in the coming months, and then we will, inform to the market that we have a new program and the rules of this program. And at this point, we are not discussing dividends. So, we just are focused on continuing delivering results, investing part of this money to buy back shares, investing part of this money in the operation.
Josh Siegler (Equity Research Analyst)
Great, that's helpful. And I just want to dive a little bit deeper into the 2024, you know, potential stabilization of take rate. Can you give us some more, you know, KPIs that would be integral to seeing that take rate really start to stabilize?
Éric Oliveira (Head of Investor Relations)
Hi, John, this is Éric. Hi, Josh, this is Éric. I'm sorry. Well, when we see, again, take rates, we are not stock moving at market only to post higher take rates, because by the end of the day, I think we have been showing quarter after quarter, that as the company keeps moving your strategy to extend the services beyond long tail, this business looks accretive to EPS. What are the drivers for that? Primarily, better spreads, given the deposits base by lowering our cost of funding structurally, and also the financial services uptrend in terms of revenues that can contribute positively to the take rate evolution moving forward.
Naturally, we expect in some point, a more, much more stabilized TPV mix, breaking down by merchant size than we have nowadays. That necessarily should bring a more stable take rates moving forward. But again, we are not looking take rates, we are looking merchants growth and how they contribute to the bottom line. If we look only take rates, we are losing the focus here, which is necessarily grow with profitability by delivering EPS growth quarter-over-quarter and year-over-year.
Josh Siegler (Equity Research Analyst)
Okay. That's, that's very helpful, Éric. Thank you, and congrats again on the quarter.
Éric Oliveira (Head of Investor Relations)
Thank you.
Soomit Datta (Partner and Analyst)
The next question comes from Soomit Datta with New Street Research. Please go ahead.
Hi, guys. Thanks very much. Yeah, great, great numbers. Just on that point, you know, it seems like the momentum in the business in Q3 and in early Q4 is really strong. You talked about, you know, some initiatives in the first half of the year really coming through. I mean, just to dig into that in a bit more detail, you talked about some promotional pricing being part of that. Maybe just help us understand what else you've done and what else is happening to continue that TPV momentum would be helpful. Thank you. And then I had a quick follow-up, please.
Ricardo Dutra (Principal Executive Officer)
Hi, Soomit. Thank you for the question. Good to hear. This is Ricardo. The promotions that we have, we always had promotions all the time, depending on the seasonality, if it's a holiday, if it's Black Friday, we always have promotional prices. But at the end of the day, the idea is to have a driver to get new clients that are looking for specific promotions and specific features and specific, I don't know, pricing structure. But, to be honest, this promotions doesn't move the needle because they are very small in terms of the TPV that we have today. So we have BRL 100 billion in TPV in Q3. So imagine that we are getting new clients, but they are a small portion of the total.
So I don't think that, to be honest, these promotions will move the needle in terms of, I don't know, take rates going down dramatically and so on, because it's like very small when compared to the whole, volumes. What we do have is, like, when you go to mix of clients shifting towards SMBs, because again, they have much more volume than long tail, although they have a lower take rate, it does make sense for us to go for these clients because they use not only the acquiring, but we are getting more penetration of digital banking in these clients, and as time passes by, we can cross-sell more products to them.
So, going back to your question, we do have promotions all the time, depending on the type of clients, depending on some period that we have, limited—sometimes limited to volume, sometimes the promotion is only in debit, other times in credit. So we always have promotions, and sometimes we may have more than one promotion at the same time. It's very common. So, it's not an issue and it's not something new.
What we're seeing is that we are getting more clients, more SMBs, they are getting mature. Some of them may be using another acquirer, now they are using us more and more because they have the instant settlement and so on.So, but as you said in your question, we are having a good momentum in our view and growing more in the market quarter over quarter, and a strong TPV growth in Q4 as well.
Soomit Datta (Partner and Analyst)
Okay, that's clear. Thanks. And quick follow-up, if possible, please. Again, just referring back to slide five, where there's a bit of granularity on the different segments. Can you just maybe help us understand how much of the volume is SMB today? And can you remind us of what the cutoff is, what the definition of SMB versus long tail is? And then just finally, the chart on the right-hand side showing the relative growth rates, you know, not precisely, but is that broadly how you'd expect to see the kind of relative segments grow going forward, that relative difference between the three? Thank you.
Ricardo Dutra (Principal Executive Officer)
Hi, Soomit. We do expect SMBs to grow more in TPV because, again, they have more absolute TPV than other clients that we have, the long tail. We are seeing a good momentum in these SMBs, and as I said before, some of their clients they became SMBs, so that's why once they reach some level of TPV, they go to the SMB niche or cluster, so to say here.
So that's why SMBs may take advantage of clients that are growing within our base. But yes, we do expect SMBs to grow more than long tail. I don't know if it's gonna be the same difference that you have in this slide number five, but we do expect SMBs TPV to grow more than in long tail. Would you like to complement or no? Anything else, Soomit? I don't know if I answered fully your question.
Soomit Datta (Partner and Analyst)
I just wondered, did you have the cutoff, the TPV definitions between SMB and long tail and enterprise? Would be helpful.
Ricardo Dutra (Principal Executive Officer)
Hi, Soomit. We don't disclose exactly the level of each one, but you may expect that long tail with smaller clients and SMBs, you have a small business with a few employees and so on. So, we don't have the exact number here, don't disclose that, but it's similar to what some other players in the market, they disclose. And usually the TPV from SMBs are 5x-10x larger than long tail.
Soomit Datta (Partner and Analyst)
Okay, that's helpful. Thank you.
Ricardo Dutra (Principal Executive Officer)
Thank you.
Operator (participant)
The next question comes from Pedro Leduc with Itaú BBA. Please, go ahead.
Pedro Leduc (Equity Research Analyst)
Good evening, everybody. Thank you for taking the question. Also, congrats on the quarter and, and good disclosure. Question quickly on the selling expenses that have been quite controlled year to date, but they seem to have moved up in 3Q. I'm looking at almost 20% Q-on-Q jump, wondering if it's related to that heavy activation of currencies that you mentioned more recently, or if it has to do with the greater SMB profile. Again, essentially trying to brush here the pace of your total cost and expenses, but this line in particular, everything else was quite controlled. This one caught our attention. Just wondering if there's any specifics here you want to share with us. Thank you.
Artur Schunck (CFO)
Well, Pedro, thank you for your question, this is Artur speaking, it's a mix of things in this line, moving up, moving down. We have a little bit of a sales force increase in the last months of the quarter. That is pushing a little bit this line up, but also we increased the level of chargebacks and provisions for credit. And so the most relevant impact is coming from total losses.
Éric Oliveira (Head of Investor Relations)
Exactly, Pedro, because by the end of the day, even though chargebacks as a percentage of total payment fraud has decreased one base point in comparison to Q3 2022, naturally, it grows, right? With TPV. But also the higher level of expected credit losses, given the credit model update accordingly to the IFRS 9, that made us to additionally increase our provisions in the short term. We had also an increase in sales force, reinforcing in some geographies our operation, a slight increase. So necessarily, when we combine all of these deployments, necessarily, we had this kind of trend in Q3.
Pedro Leduc (Equity Research Analyst)
Super, super clear, because indeed, personnel expenses doesn't look like to have gone up that line specifically, but selling did. So I'm assuming it's got more to do with those. Much appreciated, Éric and Artur. Thank you.
Éric Oliveira (Head of Investor Relations)
Thank you.
Operator (participant)
The next question comes from Alex Markgraff with KeyBanc. Please go ahead.
Alex Markgraff (VP of Equity Research)
Hi, everyone. Thanks for taking my question. Just one for me. I was wondering if you all could comment on a metric that you disclosed in the past, the clients using PagBank as a primary bank. I don't think you've shared it for a couple of quarters. Just wanted to get your observations around that metric, both for consumers and merchants. Thanks.
Ricardo Dutra (Principal Executive Officer)
Hi, Alex. This is Ricardo. You're right, we don't have the information here, but we usually to have, like 60% using that in the consumers and 50% in the merchants. That didn't change too much. It might grow a little bit a month and so on, but it's. You can—I don't have the numbers on top of my mind here, but you can consider that as the, the same level, 60% for merchants, for consumers and 50% for merchants using PagBank as the primary bank.
Alex Markgraff (VP of Equity Research)
Okay. Is that true as well for some, you know, the newer cohorts that have onboarded?
Ricardo Dutra (Principal Executive Officer)
Yes, I think it's true for the new cohorts. To be honest, for some of them it's even higher, but you can consider that is similar to what we have.
Alex Markgraff (VP of Equity Research)
Sure. Thank you.
Ricardo Dutra (Principal Executive Officer)
Thank you.
Operator (participant)
The next question comes from Sheriq Sumar with Evercore ISI. Please go ahead.
Sheriq Sumar (Equity Research Analyst)
Hey, thanks a lot for, for taking my question. It's nice to see the trajectory on the margins. Just wanted to get a sense as to, you know, how should we think about for next year in terms of the margin, trajectory, as to how focused is PagSeguro on driving margin expansion? And also on the operating expense side, also, like, we saw a nice, decline as a percentage of, top line to, like, 14.5%. I mean, I know you kind of also answered to that, but is there, like, a target on that as to what's the baseline for that, which we could, see for 2024 and even for the fourth quarter as well? Thank you.
Ricardo Dutra (Principal Executive Officer)
Hi, Sheriq. Thank you for the question. I'll let the word for Artur in a few minutes for him to complement. But in terms of margins, it's also worth to say and to remember everyone, that we are the most profitable company in this market. If you consider TPV for every reais or every dollar that you have in volumes, transaction in our POS devices or online solutions, we are the one with that translate that in profits in the bottom line, more than any other player. So relatively to our competitors, we are the most profitable company in this market.
So, margins is a consequence of what you're doing and what we're growing in terms of clients, and as we said, as we have this mix shifting from less from long tail, more to SMBs, we see that the net take rate is lower, but in absolute terms is higher. So in dollars, in absolute dollars, is higher. So, we don't look to margins as the main driver for the company, because at the end of the day, what we wanna do is to have EPS accretion.
And this quarter we had 7% EPS accretion quarter-over-quarter, and 10% EPS accretion year-over-year. So that's the main driver that we look for to generate value to our shareholders, EPS accretion. Margins is kind of the consequence, but to be honest, it's not the main focus. You can see that the margins are very stable in the past quarters. Even this quarter, if I'm not wrong, it grew, like, 10, 10 basis points. So that's the main view, how we see margins, but Artur can give you more color to you. Thank you.
Artur Schunck (CFO)
As Dutra is saying, we keep growing our business in payments, in financial services. All of the segments are contributing to the bottom line. We had the all-time high net income GAAP and non-GAAP this quarter, that we are proud to announce. We are not putting a lot of focus on margins, but in nominal growth, yes, we are focused on that. And it's true that going forward, lower interest rates and better performance in financial service can help us to increase margins. We are not providing any guidance for the future, but it's true that those two things and the focus on reducing expenses and continue to growing both business can help us to deliver that.
Sheriq Sumar (Equity Research Analyst)
All right. Thank you so much. That's it from me.
Ricardo Dutra (Principal Executive Officer)
Thank you.
Operator (participant)
The next question comes from Tito Labarta with Goldman Sachs. Please go ahead.
Tito Labarta (VP)
Hi, good evening. Thank you for the call and for taking my question. Just a follow-up on the slide five. Yeah, thanks for that disclosure on the growth by the different segments. And I know you mentioned that the SMB probably still grows faster, but should we expect some type of convergence between SMB and long tail, just in the sense of, you know, for the take rates to stabilize? You know, they probably have to begin to stabilize, so there could be some deceleration in SMB and maybe some acceleration in long tail.
And maybe not a completely fair question, but, you know, one of your competitors gave some long-term guidance on, you know, 13% CAGR and MSMB TPV growth. Just, you're growing 15%, but how do you think about the sustainability of the micro and SMB TPV over time? Is, you know, you think you should be able to gain share growing above the market? Is like a mid-teen type TPV growth sustainable, over the coming years? Thank you.
Ricardo Dutra (Principal Executive Officer)
Hi, Tito, this is Ricardo. I will start backwards and then Éric or Artur can talk about the rates. We always say that we, we try to go more than the industry in a profitable way, and we try to keep doing that in the following years. So we, we kind of decelerate a little bit our TPV in Q1 this year or a little bit in Q2, but in Q3 we saw this rebound again. Q4, we have very good numbers in the first 45 days, and we will try to keep growing more than the industry in a profitable way, in the niches that we decide to grow, which is MSMBs, long tail and also SMBs. Of course, if you look TPV, we have relatively more penetration in long tail than SMBs related to the market.
That's why SMBs TPV grow more when compared to long tail. We keep working on these two different niches, so to say. But we have lower exposure to SMBs at this point, and that's why we're growing, and we don't see good service out there that we need to grow there and decrease prices and so on. We can go there with our value proposition. We try not to compete with price.
Looking forward, the long-term view here is to keep growing more than the industry, the niches that you decide to play. If there is a huge growth in large accounts and we don't grow in this type of client, that's fine. We will play in MSMBs. We cannot comment in someone, other companies' CAGRs, and we don't know what is the assumptions behind that. But our view is to keep growing more than the industry in these two niches, MSMBs.
Éric Oliveira (Head of Investor Relations)
And one of the things, Tito, that if the CAGR is a reality, I think this is positive news, especially for new players like us, right? Because by the end of the day, when we look at the small and medium businesses, despite we see much more companies talking about this existing opportunity, we have the merchant acquiring and digital bank fully integrated. We have been growing almost 20% year-over-year, so there is still further room to keep growing on that. And necessarily, if it's feasible, that's good. It implies to say that the economic outlook and the industry trend should continue to improve, as we saw in Q3 in comparison to Q2. This also implies that the card penetration should increase, and necessarily our market share gains in all segments and overall market share.
So I think it's a good message when we hear that the outlook for the next years is compelling, because the opportunity will primarily be for the new players like us. And secondly, we have the advantage of having the lower average cost of funding, similar to bank acquirers, and we have a value proposition similar or better than the new players. So we have this best combination. So this is why, again, we are not looking for take rates, because when we look, the total addressable market is huge, right? We only have 10%-11% market share.
So we are aiming to explore this market share. And when we look at the take rates trajectory, again, it will depend on mix. Right now, we have been seeing better momentum on all the segments. If we grow faster in large accounts, necessarily there will be a take rate trajectory differently, right? If it's accretive to bottom line, that's amazing, right? So this is what we are looking for, and this is what we are working for, okay? So thank you so much.
Tito Labarta (VP)
Great. No, thanks for that color. That's helpful, appreciate it. And but just one follow-up, kinda on the first point. But is it fair to say that for the take rate to stabilize, you do need a little bit of a convergence between the SMB and the long tail on the growth, just given the different dynamics there?
Éric Oliveira (Head of Investor Relations)
Conversion. It depends on how the both segments work. It's early to say anything about conversion right now.
Tito Labarta (VP)
Yeah, no, I think my question is more for the take rate to stabilize, you would need to see the growth be closer between the two segments, right? Because otherwise, if you keep growing faster in SMB, just by nature, the take rate will come down. You know, so for the take rate stabilization that you pointed to, they would be growing a little bit more at a faster pace. That's just what I'm trying to understand.
Éric Oliveira (Head of Investor Relations)
Tito, we are not concerned about take rates. We are concerned about profits growth, necessarily as the convergence of SMBs, micro-merchants, and overall market share breaking down in large accounts, SMBs and long tail. Necessarily, if this stabilize, take rates stabilize. So it's. We don't have, right now, any commentary on the convergence of take rates of SMBs and long tail, but what we can say is for the long tails, they necessarily keep growing their businesses. They can have better offerings, if it makes sense. But we always evaluate the cross-selling opportunities and how to create a win-win relationship for merchant acquiring take rates and financial services revenues, and what are the gross profits accretive transactions that we have here.
Tito Labarta (VP)
Okay. No, thanks. But I can follow up with some more specific stuff. Thank you.
Ricardo Dutra (Principal Executive Officer)
Thank you, Tito.
Operator (participant)
Thank you all very much. This concludes our Q&A section of the call. I'd like to turn the conference over back to the management for your closing remarks. Please go ahead.
Ricardo Dutra (Principal Executive Officer)
Hi, everyone. Thank you very much for participation in the call. Thank you for investing the time. Talk to you next call. Thank you very much.
Operator (participant)
This concludes today's conference. Thank you for attending today's presentation. You may now disconnect.