PagSeguro Digital Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 13, 2025

Key Takeaways

  • 32 million clients (+600k yoy) and record Payments TPV of BRL129 billion (+16% yoy) drove net revenues up 13% to BRL4.3 billion, with non-GAAP net income of BRL554 million (+6%) and EPS of BRL1.72 (+14%).
  • Banking revenue grew 60% yoy to a record BRL1 billion, with banking gross profit margin rising to 70% and now representing 22% of total gross profit, while the credit portfolio expanded 34% to BRL3.7 billion (expanded portfolio BRL46 billion, +34%) and NPL(90) improved to 2.3%.
  • Capital allocation initiatives include repurchasing over 8 million shares (75% of 2024 program), cancelling 23.9 million treasury shares, and paying the first cash dividend of US$0.14/share, with future dividends targeted at approximately 10% of net income.
  • Disciplined cost management delivered 10 bp of operating leverage yoy, with transaction costs growing 5% (below TPV growth), financial costs partially offset by diversified funding, losses declining through fraud prevention, and operating expenses down 3% qoq.
  • An early repricing strategy in response to higher interest rates helped offset financial expense pressures; while it moderated large retail growth, MSMBs grew 11% and ecommerce/online TPV grew 30%, aligning with the focus on higher-value segments.
AI Generated. May Contain Errors.
Earnings Conference Call
PagSeguro Digital Q1 2025
00:00 / 00:00

Transcript Sections

Skip to Participants
Operator

Good evening. My name is Odu, and I'll be your conference operator today. Welcome to PagSeguro Digital's earnings call for the first quarter of 2025. This live presentation for today's webcast is available on PagSeguro Digital's investor relations website at investors.pagbank.com. Please refer to the forward-looking statements and reconciliation disclosure in this presentation and in the company's earnings release appendix. Finally, be advised that all participants will be in listen-only mode. After the presentation, to ask a live question, please use the raise hand button to join the queue. Once you're announced, a request to activate your microphone will appear on your screen. Please ask all your questions at once. Alternatively, you can also write your question directly into the Q&A icon located in the lower part of your screen. Today's conference is being recorded and will be available on the company's IR website after the event is concluded.

Operator

I would now like to turn the call over to Gustavo Sechin, Head of IR. Please go ahead, sir.

Gustavo Sechin
Gustavo Sechin
Head of Investor Relations, ESG and Market Intelligence at PagSeguro Digital

Hello everyone, and welcome to the PagBank's earnings conference call for the quarter ended March 31, 2025. I'm Gustavo Sechin, PagBank's Investor Relations Director. Thank you for taking the time to join us today. We will begin by sharing the highlights of the quarter, followed by our live Q&A session. Tonight, I am joined by Ricardo Dutra, our Principal Executive Officer; Alexandre Magnani, our CEO and Artur Schunck, our CFO. Now, I would like to turn it over to Dutra. Please, Dutra.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

Hello everyone, and thank you for joining our first quarter 2025 earnings call. I will begin with slide four, where we present our key operational and financial highlights. I'm pleased to announce another strong quarter, delivering growth with profitability despite the challenging macroeconomic environment. We ended the quarter with 32 million clients, growing 0.6 million clients year over year. Our financial performance this quarter was marked by robust upline growth in the resilient bottom line, while earnings per share grew at an accelerated pace. Payments TPV reached a record first quarter of BRL 129 billion, a 16% growth year-over-year. Our credit portfolio and funding are experiencing rapid year-over-year growth, further solidifying our financial strength and competitive position. Going to financial highlights, our net revenues increased 13% year over year, reaching BRL 4.9 billion. Our non-GAAP net income was BRL 554 million, a 6% growth year over year.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

Our diluted EPS on a GAAP basis reached BRL 1.72 cents, 14% growth year over year, which reinforces our commitment to continuously create shareholder value. In this context, following our existing buyback program with BRL 1.9 billion repurchased over the past 12 months, we are pleased to announce the launch of two key initiatives to further enhance shareholder value and drive more efficient capital allocation. We are canceling 23.9 million shares held in treasury, and for the first time, we announced the payment of cash dividend of $0.14 per common share to be paid in June 6th. Going forward, at the discretion of the PagSeguro Board and company and market conditions, among other factors, we expect to pay dividends corresponding to approximately 10% of net income. In conclusion, this quarter's performance highlights our ability to consistently create value and deliver solid results.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

We remain one of the few companies in our segment to have posted positive results every single quarter since our IPO, a track record we have upheld despite evolving industry dynamics and economic cycles. On slide six, we illustrate the consistent growth in our earnings per share. Since our IPO in 2018, we have delivered a 15% CAGR for our reported GAAP-based EPS metric. This trajectory reflects our strong operational execution and our disciplined capital allocation strategy, including increasing buybacks over time, which showcases our confidence in the long-term value of the company. Along the way, we have achieved several key milestones that have expanded our addressable market and increased profitability. The acquisition of our banking license enabled us to broaden our product offering and deepen customer engagement through our credit offerings and digital banking platform.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

More recently, our strategy has focused on winning the MSMBs, attracting and retaining these profitable customers while continuing to scale our platform. The results of this shift are already visible in our improving monetization metrics and sustained EPS growth. Moving to slide seven, we highlight how we've been building the company with a long-term vision. Our fully integrated ecosystem, combining payments, banking, and credit, allows us to use one business to effectively leverage the other by offering a comprehensive suite of products and features to our clients. This approach has allowed us to deepen engagement, boost monetization, and capture a greater share of wallet by becoming a primary financial partner for our clients. Moving to the next slide, we show that on top of our robust performance, there remains significant room for market accreditation and future growth.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

In some banking businesses, we have less than 1% market share, so that we strongly believe we are still scratching the surface in terms of the full potential our platform can reach. As we scale our banking operations, we open up new avenues for sustainable growth, including a deeper focus on cross-selling banking products, strengthening our deposit franchises, and increasingly expanding and diversifying our credit portfolio. Now, I'll pass to Alex, who will deep dive into our operational performance for Q1 2025. Thank you.

Alexandre Magnani
Alexandre Magnani
CEO at PagSeguro Digital

Thank you, Ricardo. Hello everyone. In this section, we'll walk through the performance of our business units for the first quarter of 2025. On slide 10, we announced that from this quarter on, we are adopting a new classification criterion for our client segments. Merchants with a total payment volume up to BRL 3 million per month are now classified as MSMBs, compared to the previous threshold of up to BRL 1 million per month. Additionally, we now define merchants with TPV above BRL 3 million, as well as online merchants, e-commerce, and cross-border under the large retail and online segment, formerly called LMAC. This change was implemented to more accurately reflect the dynamics of our business in line with our strategy of winning on the MSMB space. Moving to slide 11, in first quarter 2025, we reached 32 million clients, adding 600,000 clients in the last 12 months.

Alexandre Magnani
Alexandre Magnani
CEO at PagSeguro Digital

We ended the quarter with 17.7 million active clients, with our client base expansion driven by a sustainable growth of 5% year-over-year in the banking-only clients. As we have seen in previous quarters, we have been focusing on activating higher-value clients, prioritizing monetization and profitability. On slide 12, we show that our merchant acquiring business keeps growing in all segments. TPV reached BRL 129 billion in Q1 2025, growing 16% year over year, with TPV per merchant growing 20% on a yearly basis. In the fourth quarter of 2024, we initiated a strategic repricing process in response to the ongoing interest rate hike in Brazil. Now, six months into this effort, we believe that acting early was crucial in partially offsetting the impact of higher rates, while also helping to manage our product needs more effectively.

Alexandre Magnani
Alexandre Magnani
CEO at PagSeguro Digital

In accordance with the new segmentation mentioned previously, the MSMB segment, which now includes merchants with a monthly TPV up to BRL 3 million, grew 11% year-over-year. For comparison purposes, if we had maintained the previous classification used through Q2 2024, MSMB TPV would have grown 13% over the same period in 2024. This expansion of our core segment is mainly driven by increased productivity in our hubs. Meanwhile, the large retail and online segment, which includes merchants with monthly TPV above BRL 3 million, as well as e-commerce and cross-border operations, grew 30% year-over-year. Excluding the online business, our large retail segment grew approximately 8% year-over-year. Growth was particularly strong in cards-not-present transactions, enabling us to extend our market reach beyond traditional POS channels.

Alexandre Magnani
Alexandre Magnani
CEO at PagSeguro Digital

Now, on slide 13, we show that our strategy to deliver a seamless experience by integrating payments, banking, and value-added service drove cash-in levels to BRL 83 billion in the PagBank accounts. Cash-in per active client, a key metric of our client engagement, grew 23% compared to the first quarter of 2024, reaching BRL 4,800 per client. The evolution of our engagement metrics is shown on the bottom left graph, which demonstrates the increasing usage of our app. Furthermore, we observe the significant penetration increase of due payments and PIX service investments and insurance products across our customer base. On slide 14, we show our strong deposits performance and cost of funding reduction. Total deposits were up 11%, reaching BRL 33.9 billion. This growth is particularly noteworthy given our ongoing efforts to reduce the cost of funding.

Alexandre Magnani
Alexandre Magnani
CEO at PagSeguro Digital

It shows that we are successfully managing our customer deposits while improving the efficiency of our funding base. The ATYs for total deposits decreased by 700 basis points, reaching 90% of the CDI last year as a result of our strategic efforts to lower the average cost of funding, such as adjusting remuneration, the duration, as well as diversifying our funding sources. Our deposits are primarily utilized to fund prepayments to merchants and our loan book. As of December, our loan-to-total funding ratio, which measures our total funding against our expanded credit portfolio, stood at 114%. On slide 15, we highlight that we have been able to expand our credit portfolio gradually in a sustainable way. This quarter, our total credit portfolio reached BRL 3.7 billion, a 34% year-over-year increase led by the origination of secured products, which represents 85% of our book loan.

Alexandre Magnani
Alexandre Magnani
CEO at PagSeguro Digital

Since second half 2024, we have gradually resumed credit underwriting for unsecured products, mainly focusing on working capital loans for merchants. This has been driven by the continued improvement in asset quality, risk assessment, and collection processes. Consequently, there has been a 16% increase in working capital loans in the last quarter. When we consider the financial operations related to prepayment to merchants, facilitated by our instant settlement feature on the acquiring side, our expanded credit portfolio exceeds BRL 46 billion, a 34% increase over the past 12 months. Our NPL 90 on the bottom right of the slide demonstrates the improvement in our asset quality in the last 12 months, moving from 4.5%-2.3% in the period, which is significantly below the market average. Now, I turn over to Artur for the financial highlights of the first quarter of 2025. Artur, please.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

Thanks, Alexandre. Hello, everyone, and thank you for joining us today. I am pleased to present our consolidated financial results for the first quarter of 2025. Turning to slide 17, we delivered total revenue and income of BRL 4.9 billion, representing a 13% year-over-year increase. This growth was driven by sustained strength across both our payments and banking segments, as previously highlighted by Alexandre. Our consolidated gross profit margin reached 39% of total revenue, reflecting the ongoing repricing process that partially offsets the impact of higher interest rates throughout the quarter. Looking at the charts on the right side, payments revenue totaled BRL 4.3 billion, supported by TPV expansion and the evolution of our clients and product mix. Banking revenue reached a record of BRL 582 million, growing 60% year-over-year, driven primarily by higher interest income from our expanding credit portfolio and increased float from our cash position.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

Additionally, revenue from service fees grew, supporting our strategy to deepen client engagement, improve principality, and drive greater profitability. Finally, the gross profit margin of our banking segment reached 70%, marking its fifth consecutive quarter of growth. Moving on to the next slide, here we present a comparison of our gross profit from Q4 2024 to Q1 2025. The most significant impact comes from our repricing strategy, which helped offset the negative effects of quarterly seasonality and an average interest rate hike of 31 basis points compared to the last quarter of 2024. It is important to note that we initiated repricing at the beginning of Q4 2024. On the right side of the slide, I want to highlight the strong performance of our banking business, which has become an increasingly strategic pillar in our overall results.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

Banking gross profit grew 85% year-over-year, with its share of total gross profit rising from 13%-22% in the last quarter. This growth was accompanied by a margin expansion from 60%-70% of the same period. These results reinforce our resilience, the diversification of our revenue base, and our ability to scale complementary products and services efficiently. Moving on to the next slide, we take a closer look at our costs and expenses, providing deeper insights into their evolution and impact on our financial performance. Our continued financial discipline, a key lever in balancing growth and profitability, was instrumental in delivering this quarter's result. We achieved an additional 10 basis points of operating leverage compared to the same period of last year.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

On the cost side, transaction costs rose 5% from Q1 2024, growing at a slower pace than TPV due to the shift in product usage by our clients. Financial costs increased 42%, driven by higher interest rates and TPV growth, which required larger prepayment volumes. These effects were partially offset by funding initiatives aimed at diversifying sources and reducing interest expenses. Meanwhile, total losses declined, reflecting the evolution of our fraud prevention processes. Operating expenses decreased by 3% quarter-over-quarter, with marketing costs remaining in line with Q4 2024 and reductions in personnel and other administrative expenses. This reflects our disciplined approach to cost management and the efficiency achieved. Finally, tax efficiency remains a fundamental pillar of our business strategy. We continue to advance tax optimization initiatives aimed at enhancing profitability and driving long-term value creation for our shareholders.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

Moving on to slide 20, as demonstrated throughout the presentation, this quarter was characterized by resilient operational and financial performance. We achieved a non-GAAP net income of BRL 554 million, reflecting a 6% growth compared to Q1 2024. Shareholder value creation, measured by diluted GAAP earnings per share, reached BRL 1.72 cents in the last quarter, reflecting a 14% year-over-year increase. On the right side of the slide, I am pleased to present the improvement of 140 basis points in our annual return on average equity, which increased to 15% from 13.6% as reported in Q1 2024. Despite maintaining a conservative capital structure, the company continues to deliver consistent returns. On the next slide, we will take a deeper look at our capital allocation strategy. On slide 21, I would like to share the initiatives we are executing to create value for shareholders and strengthen our capital structure.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

We maintained consistent execution of our buyback program throughout 2025, repurchasing over 8 million shares. To date, we have executed more than 75% of the current program, approved in August 2024. In addition to that, I would like to highlight two main initiatives that we are announcing this quarter, aligning to our commitment with sustainable shareholder value. First, we are immediately canceling approximately 24 million treasury shares, reflecting our confidence in the long-term value and performance of our business. Finally, as Dutra mentioned earlier, we have announced the first cash dividend in the company's history, $0.14 cents per common share, to be paid on June 6. Going forward, we expect, at the discretion of Pag's Board of Directors, to pay dividends correspondingly to approximately 10% of net income, subject, among other factors, to market and company performance and financial conditions.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

This demonstrates the company's ability to balance growth and profitability and our commitment to strengthening the capital structure and creating value for shareholders. Our Basel Index consistently declined from December 2023 to Q1 2025, reflecting an improvement of approximately 5% points in capital structure. Moving on to the next slide, let us take a quick look at this year's guidance. Q1 results are well aligned to the company's outlook for the year, confirming that we have started on the right path to delivering our expected performance. Diluted earnings per share, based on the same share count as of December 2024, excluding the effects of the new shares repurchased in 2025 and the new shares to be distributed under the 2025 long-term incentive plan, grew 15% year-over-year, demonstrating the resilience of our performance and the disciplined execution of our strategy.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

We expect this metric to continue improving throughout the year as we balance growth and profitability while exploring initiatives to strengthen our capital structure. Regarding CapEx, current investment levels align with expectations for this point in the year. Now, I will turn it back to Alexandre for the closing remarks.

Alexandre Magnani
Alexandre Magnani
CEO at PagSeguro Digital

Thank you, Artur. Before we finish, let's turn to the next slide for closing remarks. Overall, this quarter results captured the disciplined execution of our strategy, focused on diversifying our revenue sources and preserving profitability in a challenging macro environment. I would like to highlight once again the increasing contribution from our banking business, which now represents 22% of our total gross profit, and how the company, through resilient performance, starts the year on track to deliver the expected guidance. In the coming quarters, we'll focus on mitigating macroeconomic uncertainty, executing our repricing strategy, and maintaining financial discipline. In addition to that, we should keep working on ways to improve our capital structure, executing the initiatives that were recently announced.

Alexandre Magnani
Alexandre Magnani
CEO at PagSeguro Digital

Finally, I should also emphasize that our long-term focus is to become the primary interface for our clients' financial lives, exploring the significant opportunities to drive future growth highlighted in this presentation. Now, let me give the word back to the operator, and we'll start the Q&A session. Thank you.

Operator

Thank you for the presentation. We'll now begin the Q&A session for investors and analysts. If you wish to ask a question, please press the Raise Hand button. If your question has already been answered, you can leave the queue by clicking on the same button. There is also the possibility to ask questions throughout the Q&A icon at the bottom of your screen. You may select the icon and type your questions with your name and company. Written questions that are not answered during the earnings call will be returned by the Investor Relations team. Wait while we pull for questions.

Operator

Our first question comes from Arnaud Shirazi from CITI. Mr. Shirazi, your microphone is open.

Arnaud Shirazi
Arnaud Shirazi
VP of Equity Research at Citi

Hi guys. Thank you for the opportunity of making a question. My question is related to TPV. We saw the growth was slightly above 16% year-over-year this quarter, decelerating from 28% from the fourth quarter. What explains this? Thank you.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

Hi, Arnaud. This is Ricardo Dutra speaking. Thank you for the question. I'll take advantage of your question just to remember that we are not a payment-only company anymore, right? 82% of our gross profit comes from the banking operations. We already have more than BRL 3 billion in credit portfolio, control NPLs, close to 18 million active clients. Two-thirds of the clients are from the bank. Just to remember that the company is much more diversified as of today than it used to be in the past, and it is diversifying quarter after quarter. Going back to your question about TPV, you're right. We grew 16%. It decelerated a little bit from Q4. Important to say we had a kind of, I'll not say easy comp, but the volumes in Q1 2024 were a little bit higher than what we had in the past.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

It is a difficult comp compared to Q1 2024. Remember we have been saying that our focus is in winning the MSMBs and online. If you look at slide 12, you are going to see that in large retails, we grew 8%. In e-commerce and cross-border, we grew more than 30%. In MSMB, we grew 11%. It is aligned with the strategy that we have been saying to the market in the last, I would say, two years. Our plan is to win on MSMBs and win e-commerce. Part of the explanation is because we had this repricing. As interest rates in Brazil go up, the tool to mitigate this increase in financial expenses is to make the repricing. The larger retail are more sensitive to this type of movement, which is fine, which is fine because our focus is in the MSMB.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

We are always trying to balance growth with profitability. We delivered very decent growth in Q1, very decent profitability. In large retails, we had this kind of deceleration, which is fine because these clients usually have lower margins. Part of the explanation is because it is natural that we made the repricing, then we had a decrease in growth in the larger clients. Remember, if you look at the financial expenses, we had a 42% year-over-year growth. We had to make this reprice to keep the profitability of the company. Some of the clients are more sensitive, and they have, I would say, moved part of the volumes to another company. That is the explanation.

Arnaud Shirazi
Arnaud Shirazi
VP of Equity Research at Citi

Okay, got it. Super clear. If I may, I have another question here regarding the announcement of 10% dividend distribution on future net income for the following years. Why only 10% and not more since the company has a lot of capital on the balance sheet?

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

The dividends that we are announcing, it's initiatives that are combined with the share buybacks. We will keep working in both initiatives. As you could see, we have been much more aggressive in buybacks in the past quarters. We bought more than BRL 1.1 billion in shares in the last 12 months. The idea is to combine dividends with buybacks. We keep doing the share buybacks, and we plan to keep doing so. The 10% is just to have a sense of what we have in mind at this point. It does not mean that we could not change, but remember, this is a combined initiative with buybacks.

Arnaud Shirazi
Arnaud Shirazi
VP of Equity Research at Citi

Got it. Super clear.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

Thank you.

Operator

Our next question comes from Beatriz Abreu from Goldman Sachs. Ms. Abreu, your microphone is open.

Beatriz Abreu
Beatriz Abreu
VP of Equity Research at Goldman Sachs

Hi, everyone. Good evening, and thanks for the call and taking my question. My question is on deposits, right? We saw some contraction there in the quarter. Is the decrease on checking accounts somewhat understandable given the higher cost of opportunity due to the higher rate environment, right? CDs also fell in the quarter. I just wanted to understand a bit what drove the decrease there in deposits, and if the 90% of CDI is a floor of what you can pay on deposits without seeing any significant outflows. Thank you.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

Hey, Beatriz, it's Artur speaking. Thank you for your question. When we take a look on the deposits, we are managing all the actually, we are managing all the funding lines. Sometimes we have more deposits. Sometimes we have other deposits growing or even interbank deposits. When we compare quarter over quarter, part of the explanation is related to seasonality. When we put more focus on analyzing deeply checking accounts and CDs, sometimes we have amount moving from checking accounts to CDs. In terms of CDs, we are putting together in-house distribution, third-party distribution, and the most important point to me is to put attention on the average total cost that is stable in terms of comparison to other and past quarters. Actually, we are doing a great job on working to reduce the cost of funding for the company.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

The second point is the 85% of the distribution of CDs in-house versus 74% of the distribution in Q1 2024. We are doing a great job on reducing costs, and also we are distributing more deposits to our clients that will engage them more and allow us to cross-sell more products for them.

Beatriz Abreu
Beatriz Abreu
VP of Equity Research at Goldman Sachs

Great. Do you think you can lower even more the ATY paid on total deposits, or is 90% sort of a floor that you're seeing?

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

We are working to do that. There are initiatives that we are thinking about to reduce the cost, but also we need to balance the total amount that we have versus the cost that we are or the percentage that we are paying for our clients. We can reduce, but losing amount is not good for the company because we need to move to other lines that are more expensive than deposits. We are working hard to focus and distribute those products to our clients to engage them in the ecosystem and also working to reduce the cost for the company too.

Beatriz Abreu
Beatriz Abreu
VP of Equity Research at Goldman Sachs

Super clear. Thank you so much.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

Thank you.

Operator

Our next question comes from William Barranjard from Itaú BBA. Please, Mr. Barranjard your microphone is open.

William Barranjard
Senior Equity Analyst at Itaú BBA

Thank you. Thank you. Good night, everyone. My question goes on the gross margin. Looking at slide 18 you provided, it seems like repricing is more than offsetting funding cost growth, right? My question goes, if it is fair to believe that from now on, as the average interest rate will grow slower than it grew sequentially in the first quarter, is it fair to believe that from now on, gross margins should improve sequentially, or could there be any effects on lower repricing efforts from now on, or even TPV mix changes that could impact eventual margin gains from the second quarter onwards?

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

William, it's Artur speaking again. Thank you for your question. When we have this comparison, this bridge on slide 18, as you mentioned, we are including repricing and mix of products together in the same bucket. The majority of the positive result comes from the repricing that we had, but not 100%. I could say that we did not compensate 100% of the increase from the Selic rate. On top of that, during the first quarter, we have two increases from the central bank on the basic interest rate for the country. The full impact on the cost will be in the second quarter and also in the third quarter because we had an increase last week. What we can say is we are working hard to reprice our clients to reduce the cost of funding for the company.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

On top of that, taking care of the costs, transactional costs, total losses, and even compensate to expenses to continue to grow in our results going forward. I see that we can have more impact on gross profit in Q2 and Q3. In the end of the day, we have the guidance that shows a growth from 7% to 11% versus last year. We are confident that this guidance will be achieved until the end of the year.

William Barranjard
Senior Equity Analyst at Itaú BBA

Thank you, Artur. Just checking, how would you compare the magnitude of repricing effect in your gross margins maybe in the second quarter? How would you compare the expectations with what happened in the first quarter?

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

We use it to say that we are repricing. In each round, we are repricing 60%-70% of the clients. That will be a little bit less in terms of amount. We are not sharing exactly the amount that we are doing. As we communicated before, our strategy of repricing is aligned to the central bank increase. After the increase from the central bank, we have some days to take all the repricing 100% implemented. It is difficult to set exactly the magnitude of the impact going forward. We are doing all the efforts that we can do to reprice our clients without losing volumes, without losing clients, and also keeping the margins up as much as possible.

William Barranjard
Senior Equity Analyst at Itaú BBA

Okay. Very clear. Thank you.

Operator

Thank you. Our next question comes from Antonio Ruette from Bank of America. Please, Mr. Ruette, your microphone is open.

Antonio Ruette
Antonio Ruette
Equity Research Analyst at Bank of America

Hey, good evening, team. Thank you for your time. I have two questions. I would like to continue on our own questions. First, on TPV, as for the deceleration, I'd like to check if you also had some impacts of the repricing strategy on MSMBs, as I understood that you had some on large accounts, and also that you have tough comps here as for Q2 2024 or stronger than usual. We do see volumes coming down from growth coming down from 20%-11% year-on-year. I would just like to deep dive here. If you could share if you have an impact from churn related to repricing or any other effects that you could share. That's on volumes. On your capital distribution, I was just curious if you could share a little bit more on why cash dividends and not more buybacks.

Antonio Ruette
Antonio Ruette
Equity Research Analyst at Bank of America

I understand that you mentioned that this will be a strategy combining both, but why? If you could share a little bit more, it would be great. Thank you for your time.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

Hi, Antonio. Regarding the first one, the repricing and how it could have affected the MSMBs. When you look at the MSMBs segment, it goes from one real to BRL 3 million per month. There could be some impact in these clients. As we said before, in the large retail, they are more sensitive, and the impact on churns are more immediate. In the MSMBs, it could take a while. We keep following that to control the churn rates. The larger the merchant, the higher the probability that he could have some churn. When I say churn, it does not mean that he is going to stop working with us, but he could move some of the volumes to another company. We keep monitoring that. I would say nothing is popping up in our screens here saying that we have a crisis or that the churn is spiking up.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

Yes, there could be some churn in the staff of clients. Remember that also in the 11%, there could be some mortality of the clients throughout this year. When you look at the MSMBs, that goes from BRL 1 million-BRL 3 million, you have, I would say, different profiles of clients. Yes, it's natural that when you increase prices, you have some friction with the clients. The whole market is increasing prices. Some companies have different strategies. They make one increase based on the future curve. As Artur mentioned before, we wait to see what's going to be the interest rate, and then we decide to reprice. We do not reprice all the clients at the same time. We have different clusters for different MCCs, different geographies in Brazil. I mean, answer your questions.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

There could be some impact in the MSMBs in repricing, yes, but it's not something that is popping up in our screens here saying that we have a problem. Yes, there could be. Regarding dividends, yeah, we could keep going with the share buybacks and only buy back shares. We decided to combine part of the discussions that we had in the past quarters. Dividends appeared as an option, and we decided to make this BRL 250 million round, this BRL 250 million. Again, it's going to be combined. Both initiatives are going to be combined to deliver or to increase the shareholder value of the company. To some extent, we're going to increase our return on equity because the equity will go down. It's the following initiatives we've been doing in the past year to increase our return on equity and increase the shareholder value.

Antonio Ruette
Antonio Ruette
Equity Research Analyst at Bank of America

Okay. Okay. Thank you. If I may follow up on the first one, you mentioned that on MSMBs, you could have some impact related to mortality. What do you mean by that? Is the usual mortality of the long tail pressured by the hybrid environment or something rather than the usual impacts? Also, on the large accounts that you mentioned that you had some deceleration related to repricing. Among those segments within those clients, could you share which segments it was? Was it large merchants online? What was the part here? That's it for me. Thank you very much.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

Okay, Antonio. Just to reinforce that we keep looking at many metrics here, but we think that gross profit reflects the best metric for the company because it includes many, many variables. It includes the TPV times take rate, it goes revenues, minus interchange costs, minus card scheme fees, minus losses, minus financial expenses that you know is very important for our business here. Going back to your question, TPV, the large retail grew 8% year-over-year. That is something that we keep working with these clients, but it is not the main focus. The main focus is the winning on MSMBs. It grew 8%. The e-commerce and cross-border grew more than 30%, and the MSMBs grew 11%. When you look at the MSMBs, part of the mortality, it is related to usually smaller merchants.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

Many merchants that we have, some of them, you've been seeing the unemployment in Brazil. Some of the merchants they could have employed, they have lower volumes. I would say to you that the mortality is related to the mortality of the companies in Brazil overall. With these interest rates, it tends to have more difficulties for some type of businesses. It's a mix of everything. There's no silver bullet here. It's a mix of many, many variables. It's the mortality, it's a little bit of repricing, and so on. I don't have the specific number to give you here, but usually large retailers are more sensitive to increases. That's why it grew 8% year-over-year versus the 16% of the company on average.

Antonio Ruette
Antonio Ruette
Equity Research Analyst at Bank of America

That's perfect. Thank you.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

Thank you.

Operator

Our next question comes from James Friedman from Susquehanna. Please, Mr. Friedman, your microphone is open.

James Friedman
James Friedman
Senior FinTech and IT Services Research Analyst at Susquehanna

Hi. Thank you for taking my question, James Friedman. My questions are also about this, slide 18 and 19. These are good slides. I'll just ask my two upfront. So Artur, in terms of the transaction costs, this is slide 19. The transaction costs actually declined as a percentage. They grew at 5% less than the total volume. You said in your prepared remarks that was partly due to mix. I was wondering if you could elaborate on that. That's my first one. In terms of, I know you get a lot on this on the repricing on slide 18, how durable do you think the repricing is? What are you expecting from, if anything, the competition on the repricing front? What's embedded in your outlook on repricing for the remainder of the year? Thank you so much.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

Hi, Jamie. I will start with the last one, and then Artur can answer the first one. Interest rate of the economy in Brazil used to be 10% in 2024, and today it's close to 15%, 14.75% to be more specific here. It's an increase that nobody, I'd say at the beginning of Q1 2024, nobody expected that. The expectation was that the rates should go down by the end of 2024. As I could see, we have this grow in this interest rate, not only in Brazil, but in many countries of the world. That's the raw material for part of our company and for competitors as well. The increase for the companies that are looking for profitability, and we understand that everyone in our sector today is focused on profitability, not in market share or other metric. It's a matter of time.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

Everyone will increase the prices because that's the raw material for everyone. We will keep working with our clients and make this price increase in a very smart way. I mean, with the lowest impact in churn and lowest impact in the growth of the company, try to balance these two variables, increase prices, and keep growing. I would say looking forward, I would stick with the guidance. We are reaching the guidance in this first quarter 2025. We expect to reach the guidance for the whole year. The gross profit, earnings per share, and capital expenditure. That is, I would say, the best answer I could give to you at this point. Regarding the first one, I'll leave Artur to answer.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

I don't know if it was clear, Jamie, but if you need more explanation, I can help you.

James Friedman
James Friedman
Senior FinTech and IT Services Research Analyst at Susquehanna

No, that was great. I was just, the second question was about the mix in transaction costs. Is that, what are you referring to there? Is that the PIX mix or is that the debit credit? If you could elaborate, that was 1.3%, only grew 5%. Slide 19.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

Yeah. Slide 19. Transaction costs that we have here is related to all the costs that we have for the transactions in terms of banking and payment. Includes scheme fees, interchange fees from cards, and other small items that also we include here that is related to banking and payments. The majority of this transaction cost is related to interchange scheme fees.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

Perfect. Thank you so much. I'll drop back into you.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

Thank you.

Operator

Our next question comes from Renato Meloni from Autonomous Research. Mr. Meloni, your microphone is open.

Renato Meloni
Renato Meloni
Equity Research Analyst at AllianceBernstein

Hi, everyone. Thanks here for taking the questions. I just wanted to go back to your deposit and credit growth and how you're being balancing the two. If you are looking at the loan-to-total funding ratio that you put on your slides, that has been growth for you about 110%-115%. I wonder if you have a target there, you aim to stay here. Going forward, right, do you see the deposit base at the current cost as a limitation for credit growth? If you have to face the decision between growing credit more and sustaining lower cost of funding, which one would you do? Thank you.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

Hi, Renato. The first one, we do not have a target for this loan-to-funding chart that we see in slide 14. Just giving this information to the market, but there is no specific target. I would say to you that we could have more deposits if we wanted to. As you could see in the same slide in the bottom left, we moved it from 74% from third-party off-platforms to our own platform. Today it is 85% in Q1 2025, which is great news because we are just having the clients using our platform. We could have more in an off-platform if we wanted to. I would say to you that our credit portfolio today of BRL 3.7 billion, if we decide to grow this credit portfolio, funding will not be a problem.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

With these spreads in Brazil, the cost of funding that we might need to have and additional funding that you might need to access to have growth in credit portfolio will not be a limitation, will not be a constraint because there will be a few basis points higher if we decide to grow aggressively. The spreads of the loans support that with no constraint. There will be no decision between one or the other, as you asked. If we decide to keep growing the credit portfolio, funding will not be a constraint, I would say to you.

Renato Meloni
Renato Meloni
Equity Research Analyst at AllianceBernstein

The marginal cost is similar regardless of how much you're accelerating.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

Yeah, exactly. Because when you think that we have BRL 40 billion in total funding and our credit portfolio is BRL 3.7 billion. Even if you grow, I do not know, let's say 30% one quarter, we are saying to grow BRL 1 billion. With BRL 1 billion growth compared to BRL 40 billion that you already have, it would be a small amount compared to the volume that you already have. It is not a constraint.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

Renato, on top of that, and that is the reason we are providing total funding in that slide, not only the deposits that we have, because we have been working in the last two years to diversify funding source lines, players, products. We have a lot of space to grow credit portfolio as we want with a similar cost that we are presenting in slide 14.

Renato Meloni
Renato Meloni
Equity Research Analyst at AllianceBernstein

Perfect. Thank you.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

Thank you.

Operator

Our next question comes from Maria Gadges from Sofra. Please, Mrs. Gadges, your microphone is open.

Maria Gadges
Analyst at Sofra

Hi, guys. Good evening. Thank you for taking our question. Most of them have been answered, but maybe two quick ones. First, a follow-up on the credit portfolio. Just wanted to get a quick update on your guys' appetite towards credit lines. We saw a slight uptick in the working capital loans. I know it's not representative, but just wanted to get a quicker view on your guys, if anything in terms of appetite has changed. Also, you provided the Basel ratio and just wondering if you guys are targeting an optimal level in terms of Basel ratio as well. Thank you.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

Maria, thank you for the question. The credit portfolio, you're right. We've been growing faster in the working capital in the last quarter. We plan to keep doing so. We see this, I would say, opportunity to increase this exposure to our best merchants in terms of credit profile. There is no change in the guidance or what you had in mind. This is part of the plan. We expect to grow working capital faster than other lines for this year. We'll keep growing the other lines, but working capital will grow faster. The second question is about the Basel Index. Yes. I can help on that one. We don't have exactly a target of this Basel Index, but it's important to mention that since December 2023, we reduced it from 33%-27%.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

All the efforts that we have here is to optimize in a solid way our capital structure. We are taking decisions to dividends, decisions to buy back, and also investing in the company through our CapEx. We do not have exactly a target to pursue. We know that we can do more and more as time passes by, but in a solid way for the company.

Maria Gadges
Analyst at Sofra

Thank you.

Ricardo Dutra
Ricardo Dutra
CEO of UOL Group at PagSeguro Digital

Thank you.

Operator

Next question comes from Eric Ito from Bradesco BBI. Please, Mr. Ito, your microphone is open.

Eric Ito
Equity Research Analyst at Bradesco BBI

Hi, guys. Good evening. Thanks for the call. I think my question. I have just a quick follow-up on your banking. I think throughout the presentation, you guys were pretty clear on saying how important the banking business is. And it's already representing 22% of the total gross profit compared to 13% in the first quarter. I just want to understand if you guys have any target here or any idea of how much you think it could represent maybe by the end of this year on your total gross profit expectation for the year and maybe 2026, how much you think this line can grow. A second follow-up here is still on credit, but maybe if you guys could give more color on your expectations for growth for the unsecured credit line, the working capital, how do you see this growth under this scenario?

Eric Ito
Equity Research Analyst at Bradesco BBI

Just some numbers on the previous question from Maria. Thank you.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

Hi, Eric. Thank you for the question. We are not giving disclosure about how important could be the gross profit of the banking in the following quarters. I would say to you that once you create this credit portfolio, you start to generate operational leverage because the system is the same. It does not matter if you have BRL 10 million in credit portfolio or BRL 10 billion. Usually, the technological system, the back office is the same. We do expect to have operational leverage. We have been growing the credit portfolio in a very sustainable way, I would say. NPLs are under control, and the credit portfolio keeps growing. We have been growing working capital faster than other lines, and we think that is going to be what is going to happen in the following quarter as well. We are not giving the specific number here.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

I just would say to you that we expect that credit portfolio keeps growing, and then we have operational leverage because of the items that I just mentioned to you.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

In terms of just to complement here, in terms of the unsecured growth in credit portfolio and the products that we are developing, we resumed our overdraft account last year. Now it is a positive margin. It is performing well, and we are working to scale that part of our business. Regarding working capital, we resumed the operation this year. Now we are working to measure, track the results, and working hard to also scale that business. We invested a lot in the past years in terms of developing a better process, hiring a seasoned team, investing to develop credit models, collection process, behavior model. We have been investing a lot to develop this piece of our business because we know that it is very important to the future. That is the beautiful piece of our business. We have the payments very well developed.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

We also have on the other side the banking to navigate in macro scenarios that are not doing great in a positive way for our company.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

Just to complement, Eric, and take advantage of your question, in slide 8, we gave some numbers about our penetration. You could see that we are, to be honest here, scratching the surface in terms of banking businesses and credit portfolio that could reach in our platform. We are not giving the guidance, but we do expect to grow in these banking businesses faster. As you could see, our gross profit grew 86% year-over-year. It is, let's say, good possibilities here and good opportunities in the banking.

Eric Ito
Equity Research Analyst at Bradesco BBI

Very helpful. Thank you, guys.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

Thank you very much.

Operator

Thank you.

Operator

Thank you. That is all the questions that we have for today. I will pass the line back to PagSeguro Digital's team for their concluding remarks. Please go ahead.

Artur Schunck
Artur Schunck
CFO of Investor Relations and Chief Accounting Officer at PagSeguro Digital

Hi, everyone. Thank you very much for investing the time to listen to us. Thank you very much for the questions. Thank you.

Operator

This does conclude PagSeguro Digital's conference call. We thank you for your participation and wish you a very good evening.

Executives
    • Alexandre Magnani
      Alexandre Magnani
      CEO
    • Ricardo Dutra
      Ricardo Dutra
      CEO of UOL Group
    • Artur Schunck
      Artur Schunck
      CFO of Investor Relations and Chief Accounting Officer
    • Gustavo Sechin
      Gustavo Sechin
      Head of Investor Relations, ESG and Market Intelligence
Analysts
    • James Friedman
      Senior FinTech and IT Services Research Analyst at Susquehanna
    • William Barranjard
      Senior Equity Analyst at Itaú BBA
    • Antonio Ruette
      Equity Research Analyst at Bank of America
    • Arnaud Shirazi
      VP of Equity Research at Citi
    • Eric Ito
      Equity Research Analyst at Bradesco BBI
    • Maria Gadges
      Analyst at Sofra
    • Renato Meloni
      Equity Research Analyst at AllianceBernstein
    • Beatriz Abreu
      VP of Equity Research at Goldman Sachs
Powered by Quartr