Q2 2024 Earnings Summary
- PAGS achieved exceptional growth in Total Payment Volume (TPV), increasing by 34% year-over-year, significantly outpacing the industry growth of 11%, demonstrating strong market share gains.
- The company's expansion into the LMEC (Large Merchants, e-Commerce, Cross-Border) segment resulted in a 50% TPV growth, contributing to increased absolute profits and providing significant growth opportunities despite lower margins compared to MSMBs.
- Robust deposit growth of 87% year-over-year strengthens the company's funding base, particularly from SMBs and consumers, supporting profitability and enabling a lower cost of funding.
- The company's marketing and selling expenses increased by 42% year-over-year, which is 2.5 times the revenue growth and 2 times the MSMB TPV growth. This raises concerns about the efficiency of these investments and whether they will translate into proportional revenue growth, especially since competitors are also increasing their marketing efforts.
- Gross profit as a percentage of Total Payment Volume (TPV) declined by 11 basis points this quarter, indicating potential margin pressure. This decline may be due to the faster growth of lower-margin segments like LMEC, which could negatively impact overall profitability.
- The loan-to-deposit ratio is around 8%, suggesting the company is not fully leveraging its growing deposit base to expand its credit portfolio. This could limit profitability improvements from the banking segment and impact the overall return on assets.
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Net Income Guidance Increase
Q: Net income guidance up only 2% despite better TPV and lower D&A?
A: The company explained that while TPV expectations increased by around 10% and D&A and write-offs reduced by about BRL 200 million, many moving parts affect net income. One significant factor is higher-than-expected interest rates, currently at 10.5% instead of the initially projected 9%, impacting financial expenses. Despite these challenges, they have the ability to control costs and aim for sustainable growth, balancing profitability and investment in future avenues like Banking and Credit.
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LMEC Growth Impact on Profitability
Q: Is high LMEC volume growth affecting net income guidance due to lower profitability?
A: The LMEC segment grew 50%, but it has lower margins compared to MSMBs. However, in absolute terms, it is accretive to the bottom line due to higher volumes. Both LMEC and MSMB segments are growing faster than the market, with MSMB growing 28%. The net income guidance reflects the balance between these dynamics and other factors like higher financial expenses.
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Sustainability of TPV Growth
Q: How sustainable is your TPV growth outpacing the market?
A: The company believes it is sustainable to continue growing faster than the market by not competing on price but offering a differentiated value proposition with cross-selling opportunities and leveraging Banking as a differentiator. They've consistently grown more than the market, and this trend is expected to continue in the following quarters.
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Marketing and Selling Expenses
Q: Will high investments in marketing and selling pay off?
A: The company is confident that investments in marketing and selling, which increased expenses by 42% year-over-year, will pay off. They've achieved all-time high metrics, including TPV growth of 34%, revenue growth of 19%, and deposit growth of 87%. The investments aim to bring sustainable growth, with clients engaging more with their ecosystem, leading to long-term profitability.
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Take Rate Pressure Due to Mix
Q: Is take rate pressure simply due to mix, and will LMEC growth continue to affect it?
A: The pressure on take rates is primarily due to the mix, as LMEC has lower margins but contributes higher volumes. The company expects LMEC growth to continue outpacing MSMB. However, MSMB growth remains strong at 28%, and overall, they are capturing more market share without significantly compromising profitability.
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Interest Rate Assumptions
Q: What is the implied average SELIC rate in your guidance?
A: The net income guidance considers an average SELIC rate of 10.5%, higher than the original assumption of 9%. The company does not anticipate a reduction going forward and has modeled different scenarios to manage potential interest rate fluctuations.
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SG&A Increase and Guidance Revision
Q: With increased SG&A, why is net income guidance only modestly revised?
A: The increase in SG&A is due to investments in marketing, personnel, customer experience, and product development. The company expects these expenses to stabilize in the second half. Despite higher financial expenses due to interest rates, they offset this with cost control and operational efficiencies, leading to a BRL 50 million increase in the midpoint of net income guidance.
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Gross Profit Percentage Decline
Q: Gross profit as a percentage of TPV declined; what's the reason?
A: The decline of 11 basis points in gross profit percentage is attributed to the growth of the LMEC segment, which has lower margins, and the product mix, including increased use of PIX and QR code transactions. The company emphasizes that overall profitability is managed through multiple levers, not solely gross profit percentage.
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Cost of Funding Strategy
Q: What's your target cost of funding for deposits?
A: The company doesn't have a specific target cost of funding but is focused on reducing costs wherever possible. The average cost for time deposits is 68% of CDI, and total deposits cost 96% of CDI, which is below the country's base rate. They continue to diversify funding sources to optimize costs.
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Payroll Loans Growth Potential
Q: What's the potential of your payroll loan business?
A: The payroll loan portfolio is currently around BRL 2 billion, within a total addressable market of approximately BRL 600 billion. The company offers products mainly to retirees and FGTS borrowers and sees significant growth potential as they further digitalize offerings and reduce reliance on intermediaries.
Research analysts covering PagSeguro Digital.