Sign in

    PagSeguro Digital (PAGS)

    Q3 2023 Earnings Summary

    Reported on Nov 16, 2023 (After Market Close)
    Pre-Earnings Price$8.64Last close (Nov 16, 2023)
    Post-Earnings Price$8.95Open (Nov 17, 2023)
    Price Change
    $0.31(+3.59%)

    What went well

    • PAGS is experiencing strong TPV growth, exceeding market growth, with TPV up 11% year-over-year in Q3 and growing higher than 11% in early Q4, indicating accelerating business momentum.
    • The company's deposits grew 20% quarter-over-quarter, reducing funding costs and increasing insulation from SELIC rate changes, leading to lower financing expenses and improving net income margins.
    • PAGS is generating strong cash earnings, with a net cash balance of BRL 10.6 billion, and is planning to reinvest in the business, continue buybacks, and potentially increase shareholder returns, demonstrating disciplined capital allocation and commitment to shareholder value.

    What went wrong

    • Declining take rates and potential margin pressure: The company experienced a decline in take rates from 4.06% to 3.97% quarter-over-quarter, attributed to a change in client mix towards larger accounts with lower take rates and promotional pricing strategies. Management indicated that take rates may slightly decrease in the short term due to seasonality and merchant mix, with stabilization expected only in 2024. This could pressure margins if not offset by gross profit growth.
    • Increased provisions for expected credit losses and higher chargebacks: During the quarter, the company increased provisions for expected credit losses due to a modeling review based on IFRS 9, impacting payroll loan and working capital loan portfolios. Additionally, there was a sequential increase in chargebacks that surpassed TPV growth, signaling potential issues in credit risk management and operational losses.
    • Continued high CapEx levels impacting cash flow: Despite efforts to optimize, CapEx remains stubbornly high, partly due to investments in technology developments and POS inventory for SMBs. Management expects CapEx levels in 2024 to be similar to 2023, which could continue to strain cash flow and delay benefits from reduced depreciation and amortization expenses.

    Q&A Summary

    1. Take Rate Decline and Outlook
      Q: Why did take rates decline, and how will they behave going forward?
      A: Take rates declined from 4.06% to 3.97% due to merchant mix, duration mix, and promotional prices, especially among micro merchants receiving promotional rates. In the short term, take rates may slightly decrease, particularly in Q4 due to seasonality. However, as their footprint in larger merchants stabilizes, combined with financial services revenues, take rates should stabilize over 2024.

    2. TPV Growth Acceleration
      Q: Is TPV growth accelerating in Q4?
      A: Yes, they are growing higher than 11% in the first weeks of Q4, with a very good growth trend. This is a result of a new growth cycle that started in the second half of the year.

    3. Credit Portfolio Strategy
      Q: What's the strategy for the credit portfolio, especially unsecured loans?
      A: They are focusing on secured credit products like payroll loans, FGTS, and credit cards backed by CDs. They are not currently offering unsecured loans to SMBs, as they see risks in the market and prefer to wait until conditions improve. They are, however, testing unsecured credit for small volumes and are ready to expand when the time is right.

    4. Capital Allocation and Buybacks
      Q: How will you distribute excess capital—buybacks or dividends?
      A: With a net cash balance of BRL 10.6 billion, they intend to continue buying back shares due to the company's attractive valuation. They've executed 81% of the 2018 buyback program and have BRL 200 million available. A new buyback program is under discussion. They are not planning to distribute dividends at this time.

    5. Margin Outlook and EPS Growth
      Q: What is the outlook for margins and EPS growth?
      A: They focus on EPS growth rather than margins, achieving the highest net income both GAAP and non-GAAP in the quarter. They aim to continue delivering results, with margins being a consequence of their profitable growth strategy.

    6. Funding Costs and SELIC Rate Impact
      Q: How does the SELIC rate impact your funding costs?
      A: As deposits grow, they use them more for funding operations, reducing reliance on third-party funding. Deposits are linked to the SELIC rate at about 93% of SELIC. If SELIC goes down, they will benefit from lower costs.

    7. Competitor Behavior and Pricing
      Q: How are competitors behaving in terms of pricing?
      A: Competitors are not being irrational; while some try to gain market share, they step back once profitability challenges arise. PagSeguro grew 8% quarter-over-quarter in Q3, outperforming the market's 4% growth.

    8. CapEx Levels and Outlook
      Q: Why is CapEx high despite focusing more on SMBs?
      A: CapEx includes not only POS devices but also technology developments to improve features for clients. They expect CapEx this year to be slightly lower than 2022 and similar in 2024.

    9. Expected Credit Losses and IFRS 9 Impact
      Q: What caused the increase in expected credit losses this quarter?
      A: The increase was due to the IFRS 9 review of payroll loan and working capital loan models, leading to higher provisions. It's a one-time impact from this quarter.

    10. Deposit Growth Acceleration
      Q: What drove the acceleration in deposit growth?
      A: Deposits grew 20% quarter-over-quarter due to enhanced client services, management focus, and the AAA rating from S&P Global. Growth in TPV also contributed, as part of the deposits come from merchants.

    11. SMB Growth and Take Rate Stabilization
      Q: Will SMB growth affect take rate stabilization?
      A: While they are growing more in SMBs, which have lower take rates but higher absolute TPV, they are not concerned about take rates but rather profit growth. Take rates may stabilize as their merchant mix stabilizes, but they focus on EPS accretion.

    12. Operating Expenses and Selling Costs
      Q: Why did selling expenses increase in Q3?
      A: The increase is due to a mix of factors, including higher sales force expenses and increased provisions for chargebacks and credit losses. Chargebacks increased in amount but decreased in basis points compared to last year.

    13. Clients Using PAGS as Primary Bank
      Q: What percentage of clients use PAGS as their primary bank?
      A: Approximately 60% of consumers and 50% of merchants use PagBank as their primary bank, similar to previous levels.

    Analyst Coverage

    Research analysts covering PagSeguro Digital.