PagSeguro Digital Ltd (PAGS) 2018 Q3 法說會逐字稿

Hello, everyone, and thank you for waiting. Welcome to PagSeguro's Third Quarter '18 Results Conference Call. This event is being recorded (Operator Instructions) This event is also being broadcast live via webcast and may be accessed through PagSeguro's website at investors.pagseguro.com, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via webcast may post their questions on PagSeguro's website.

Before proceeding, let me mention that any forward statements included in this presentation or mentioned in this conference call are based on currently available information and PagSeguro's current assumptions, expectations and projections about future events. While PagSeguro believes that their 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's presentation or discussed on this conference call for a variety of reasons, including those described in the forward-looking statements and Risk Factors section of PagSeguro's registration statement on Form F-1 and other filings with the Securities and Exchange Commission, which are available on PagSeguro's Investor Relations website.

Finally, I would like to remind you that during this conference call the company may discuss some non-GAAP measures. For more details, the foregoing non-GAAP measures and the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures are presented in the last page of this webcast presentation.

Now I'll turn the conference over to Mr. Ricardo Dutra, CEO of PagSeguro. Mr. Dutra, you may begin your presentation.

Hello, everyone, and welcome to our third quarter results conference call. Today, I have here with me Eduardo Alcaro, our CFO; and André Cazotto, our Head of Investor Relations.

Before we move to the operational and financial metrics, we want to reiterate our confidence in our strategy. Being an independent company allows us to think exclusively about our clients' financial needs, delivering growth and profitability simultaneously by offering a unique ecosystem [to our listed accounts] .

We expect to deliver, in 2019, some critical new enhancements to take our ecosystem to the next level. Before you ask, we cannot disclose details at this point due to competition that is systematically trying to copy us. However, we will provide you more color in the 2019 quarterly calls.

Being the first mover [and mobile force] , with unreplicable online distribution through the UOL, brings a natural advantage to PagSeguro. We operate in a new and massive market with the ability to launch and cross-sell additional services to additional account which is a key piece of our long-term strategy. PagSeguro proved that operating and winning in long-tail requires an online and mobile approach that is totally different from the traditional [acquiring business model and other new competitor that are really] attracted to the market. We operate in a brand-new market, and we still have a long way to go, constantly putting into practice our vision to develop and democratize financial services through technologies and innovation.

On Slide 3, we started our total payment volume that reached BRL 20.3 billion in third quarter, an increase of BRL 9.6 billion, up 90% year-over-year, and BRL 3.4 billion or 20% quarter-over-quarter, accelerating when compared to the BRL 2.5 billion or 17% growth observed in Q2. This growth is the result of a greater penetration of our ecosystem in long-tail, combined with the trend of [cash to classic switch that is still at the beginning of merchant base] and with lots of room to grow in Brazil and also new innovative products and solutions offered to our clients.

The [net tax rate] which excludes the sale of [new] devices ended the third quarter, at 4.9%, representing a small contraction quarter-over-quarter, mainly related to the higher penetration of debit transactions that went up 110 basis points and a slightly lower penetration of credit card transaction installments in the quarter.

It is important to highlight that although gross take rate went down a few basis points quarter-over-quarter, the net take rate, which is the take rate net from transactions costs, mainly interchange and cards scheme fees, reached 3.3% in Q3 2018, is stable throughout the year. The maintenance of our net take rate enable our net income margin expansion, reaching 26% in the third quarter. And Eduardo Alcaro, our CFO, will give more details later.

On the chart below, we see the number of active merchants. Just to remember the criteria used internally, active merchants are those who made at least 1 single transaction in the last 12 months. We ended the third quarter with 3.8 million active merchants, adding almost 1.4 million new merchants in 1 year, representing an increase of 66% year-over-year.

Quarter-over-quarter, we added 323,000 new merchants within the range that we provided in the last conference call. Compared to Q2 2018, we had a decrease, mainly because Q2 was a very strong quarter, where we had the launch of Minizinha Chip and 0 MDR campaign. In addition, the third quarter usually has a worse seasonality than the second quarter, given the winter vacations in July.

We are confident our growth will keep the same pace of more than 300,000 net [adds] in the following quarters. For instance, in terms of sales of devices, November would be the best month of the year.

In the next chart, we have the evolution of our average spending promotions that reached BRL 5,500 in Q3, a growth of [17%] year-over-year and 8% quarter-over-quarter, also accelerating when compared to the growth of observed in Q2. This is explained by the higher adoption curves of electronic payments in our merchant base, which is an expected trend, a higher engagement in our ecosystem being converted in more transactions and total payment volume. Remember, the majority of our merchants has never accepted cards before joining PagSeguro.

Now I'd like to pass it over to our CFO, Eduardo Alcaro.

Thanks, Ricardo, and hello, everyone. Before I start, I'd like to mention that in the third quarter of 2018, we had a total of BRL 58.9 million of non-GAAP items, mainly related to our stock-based long-term incentive plan. Let me remind you these items. First, stock-based compensation expense and related employer payroll taxes in the amount of BRL 115.5 million. From the BRL 115.5 million, BRL 33.7 million is the recurrent quarterly provision and BRL 81.8 million is nonrecurring.

BRL 59.4 million of the nonrecurring amount of BRL 81.8 million is related to the vesting of a relevant shared rent in August 2018, and the recognition of the shares at market price versus the original rent price at the IPO in accordance with IFRS 2. At the IPO date, the share price was $21.5 and the exchange rate of the U.S. dollar against the Brazilian Real ended at 3.14. On the other hand, when the shares were delivered in August 2018 to PagSeguro employees, the share price was close to $30 and the exchange rate of the U.S. dollar against the Brazilian Real was about 4.1. The same adjustment can be expected for August 2019 with a similar exchange rate and stock price. The remaining nonrecurring amount of BRL 22.4 million is related to new hires in addition to the share-based program. No material nonrecurring adjustments related to the stock-based compensation are expected for Q4 2018.

We exclude stock-based compensation expense from our non-GAAP measures because they are noncash expenses and they depend on our stock price and exchange rate from the U.S. dollars into Brazilian Real at the time of the vesting of the equity awards. The related employer payroll taxes depend on our stock price and the exchange rate from U.S. dollar into Brazilian Real at the time of the exercise and the vesting date of the equity awards over which, management has no control and does not believe these expenses correlate to the operation of our business.

Second, financial income in the amount of BRL 14.3 million related to the impact of exchange rate variation on the conversion from U.S. dollars into BRL of the proceeds from our sale of new shares in our June 2018 follow-on offering. We exclude this foreign exchange variation from our non-GAAP measures primarily because it is a nonrecurring income. Third, tax related to the remittance of follow-on primary proceeds, IOF tax to Brazil in the amount of BRL 4.1 million. We exclude these IOS tax from our non-GAAP measures because it is a onetime and nonrecurring expense. And the last one, income tax on the non-GAAP adjustment in the amount of BRL 46.5 million. For more details, this foregoing non-GAAP measures and the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures are presented in the last page of this webcast presentation.

Now moving to the slide #4, our non-GAAP total net revenue reached BRL 1.12 billion in the third quarter, up 64% year-over-year. Moving to the top right, we have our main revenue streams composed by transaction services or mainly MDR collected from merchants, financial income from the prepayments and hardware sales.

In the third quarter of 2018, transaction and services represented 55%; financial income, 36%; and hardware sales, only 9% over total net revenue that continues to trend down. And in relative terms going forward should reach low single digits. On the other hand, you can note that our revenues from transaction activities and other services grew 5 percentage points compared to Q3 2017. These demonstrate the strength of our 3.8 million active merchants base delivering high double-digit net revenue growth rates.

On the 2 charts below, we present our total expense figures and the beauty of our lean cost structure, allowing us to have a volume scalable business model. Our non-GAAP total cost and expenses decreased 1 percentage point, and in the third quarter that's 3.4% over total TPV. Related to non-GAAP admin expenses over total TPV, which excludes stock-based compensation expenses, reached 0.3%, a decrease of 0.1 percentage points year-over-year.

Regarding our cash flow, you will note in the line, change in receivables subject to early payments that we repaid with our IPO primary share proceeds in the first 9 months of 2018 approximately BRL 1.7 billion in receivables, which we obtained early payments with the issuing banks as of December 31, 2017. We have only BRL 4 million left to repay in Q4 '18. And beginning in 2019, this line item will no longer impact our cash flow. Adding back the impact of the repayment of the notes receivables for which we received early payment from issuing banks as of December 31, 2017, PAGS had BRL 472 million in negative operating cash flow, driven by the working capital growth, partially offset by the PAGS cash generation.

I just wanted to remind you that this is not a cash burn but an investment in working capital. PAGS ended the quarter with receivables from credit card insurers that are very liquid and no credit risk in the amount of BRL 7.5 billion and payables to merchants of BRL 3.7 billion, a net working capital of BRL 3.8 billion plus BRL 2.5 billion in cash.

On the next slide, we show our non-GAAP net income growth. In the third quarter, we reached BRL 290 million, an increase of BRL 143 million and up 97% year-over-year. The non-GAAP net margin reached 26%, an increase of 4.4 percentage points year-over-year. This shows the unique profile of PAGS, delivering growth and profitability. In the quarter-over-quarter comparison, our non-GAAP net income grew 20%, accelerating when we compare to the 14% growth in Q2, while the non-GAAP net margin expanded 1 percentage point.

Now I'd like to hand over back to Ricardo, who will comment on new products recently launched.

Thank you, Eduardo. On the next slide, we introduce Moderninha Smart, our smart POS. Moderninha Smart offers a full integration of hardware, [PAGS' simple apps] and its fast and secured payment network. By combining the Android operational system with all the high-end functionality such as Wi-Fi, Bluetooth and 4G connections as well NFC and QR code acceptance Moderninha Smart offers a robust managed payment experience to any kind of business. This product was built for simplicity and ease-of-use. It requires no setup and it comes with features like product catalog, inventory management, installment calculator, bank slip issuance and payment links. The integration of software and hardware helps merchants to be more [productive] , serve clients better and manage their businesses.

PAGS single point-of-sales software also gives merchants the ability to run their businesses efficiently by managing their PagSeguro accounts, including bill payment, mobile top-up, balance transfer among other functionalities available in our ecosystem. It costs 12 installments of BRL 69.90, around $19 per installment or BRL 839. It has 5-year warranty.

On Slide 7, we have mapped our portfolio of functionality already available to our merchants. PagSeguro has built a unique and world-class payment ecosystem, focusing to deliver a frictionless online and physical payment experience.

Recently, we launched our lending product, PAGS Capital. We just started and still testing our model with a very small pool of clients, manageable according to some categories such as account history, TPV, payment frequency and so on. On average, PAGS' charge rates are almost 3x lower than banks. We are still in baby steps and for now, this product is marginal to our financial results and we expect to increase stickiness and loyalty of our merchants. In November, we also complemented our cash in and cash out process through the digital accounts, allowing instant transfers from and for any bank.

On Slide 8, we show you the evolution of our bill payment transaction, which grew 288% quarter-over-quarter. We believe engagement is key to the success of our ecosystem. As we promote the higher stickiness through the adoption of additional products and features, more transactions and growth are expected.

On the next slide, we can see the strength of our brand. PagSeguro is the first mover in this market. And in fact, it can access UOL audience the third largest online audience in Brazil, only behind Google and Facebook, with more than 75% Internet reach to promote our products and solutions in the long-tail market helped the PagSeguro to reach a unique brand recognition.

In 2018, according to Google Trends, we have 4x more searches than the second player. PagSeguro reached the level of brand awareness where the business has a word-of-mouth effect. And consequently, we have lower acquisition costs than our competitors.

Finally, on the last slide, it is important to highlight the size of our total addressable market and the huge opportunity that PagSeguro has ahead. Considering our last 12 months' total payment volume, which is BRL 65 billion, we have only 4% of our addressable market and we still have a long way to go. We have been facing a sustainable TPV growth in our platform. For instance, we have our historical total payment volume peak last August, 1 day before Father's Day in Brazil. On September, we surpassed this effort, then had a new TPV record in October, and again, historical new record in November.

I also want to say that from Q1 to Q3 2017, our total payment volume was BRL 24.8 billion. And in Q3 2018, our TPV was BRL 51.5 billion. We more than doubled our TPV year-over-year, which means we added BRL 26.6 billion this year. Being first mover, having a fully verticalized and a low-cost ecosystem with 3.8 million active merchants, mobile-first, strong brand, focus on user experience, the best rated financial services app on Google and Apple Stores and unreplicable online distribution through UOL, brings a natural advantage in addition to long tail market. In Q4, we continue to see higher adoption of our ecosystem, translating in healthy TPV growth. Net additions grew at the same pace observed in the average of the past quarters, while take rates, despite possible muted effects, remained at the same previous levels as well. We are confident our business will continue to deliver long-term shareholder value.

Now we finish our presentation, and we start the Q&A session. Operator, please.

(Operator Instructions) Our first question comes from Bryan Keane, Deutsche Bank.

Two questions. I guess, on the net new merchant ads, it was towards a little bit the lower end of your guidance that you gave. Anything material you're seeing out of the competition? It seems like you had record sales in the month of November, so I'm just trying to reconcile that. And then my second question is on the government's push for instant payments and QR codes. What would be an impact to your model if you saw more adoption towards instant payments in Brazil?

Brian, this is Ricardo. Thank you very much for your question. As we said during the call, we -- the Q3 has a worse seasonality when compared with Q2. Q2 was a very strong quarter. We are not seeing a huge deceleration in our business. It's the opposite. We are seeing business growing. So it is within the range that we gave before, the 323. Regarding the government and pushback and the push regarding QR code instant payments, it is too early to forecast any potential impact. The discussion is still in the early stages with the market participants. From our side, regardless of regulation, we are developing our own QR code solution. We are in favor of new payment methods believing that it will complement our portfolio. So at the end of the day, it's still at the very beginning in the discussion and there's nothing definite. But we are developing our own QR code solution meanwhile.

If you -- Bryan, it's André speaking. If you just allow me one specific comment here. It's very important to mention that we're in favor about the new payment method. We do believe that this could help in terms of migrating more cash transactions for the electronic payments in the Brazilian system. And that's exactly what PagSeguro is intending to do, to be more disruptive and help to bring more cash transactions through electronic payments. And QR code is a good way to do it.

The next question comes from Carlos Macedo, Goldman Sachs.

A couple of questions here. First, I want to talk a little about the -- on the equipment sales that you guys have, the moderating the prices and obviously there's been a lot of competition. And the Minizinha now is going for BRL 5 per month as competition has pushed it down, the Cielo with Stelo now is at BRL 2 per month. I'm not sure if you're going to match or not. But looking at the numbers that you reported, on a gross margin basis, they're already minus BRL 53 million in the third quarter for equipment sales. And I know equipment sales aren't the core business, it's just the way you get there, but that number is up from 32 in the -- from 37 in the second quarter. I'm just wondering if there's -- if you believe that with competition going strong, we still -- on that level, that number can increase as you sell more terminals at a bigger loss going forward. Second question, on the marketing side, marketing expenses came down. What's the thinking here? I mean, obviously, competition is not -- is very strong as you mentioned before and you count on word-of-mouth and advertising to get your brand out there, is this just a one-quarter thing? Or should we be factoring, probably, weaker or lower advertising going forward?

Carlos, this is Ricardo. Thank you for the question. Well, let's go to the first part regarding the sales of the equipment. We are the leader in this long-tail market. We are not leading the prices down. We are evaluating competition pretty close. As we have the largest base, we have today the lowest acquisition cost, so it is important for us to win the merchants. Because when we win the merchants, we won't have to [bring] the base to offer additional services and so on. So we are looking for the lifetime value. If we need to, let's say, subsidize part of the equipment, we'll do it. We know that the competition is doing, as you said, 12 installments of almost BRL 2. I don't know if they're going to keep it. But we'll try to keep making our population, not to make anything very, let's say, aggressive to hurt our P&L. In the Q4, I would say that you will not see a higher number in terms of subsidized, although we are selling a lot. And at the end of the day, what I'm trying to say is we'll keep evaluating the competition pretty close. For us, the acquisition cost is much cheaper than to them. But we are not leading the prices down in terms of equipment. We are just looking at the competition. If they go down, we can evaluate if we're going to match or not.

And Carlos, this is Alcaro speaking. I think one point is the fact that earning -- is the fact that our net income margin had an expansion in Q3 compared to Q2. So even with this higher investment in the subsidies to the devices, we're able to expand our margins and grow our net income margin by a little bit more than 1% quarter-over-quarter. So our lean structure -- our lean structure model, in terms of expenses, allows us to take those price subsidies and do not hit our margins as you can see in our numbers in Q3.

Just one additional commentary here, Carlos, André speaking. It's very important to mention that in the long-tail market, our merchant is more sensitive to fixed costs. So the price of a hardware matters more. And you can see the company has been able to keep the take rate stable, despite any kind of mixed effects like we had in the quarter with more debit card transactions. And we know that combined with all the strength that we have in the business, like the strong brand, the UOL distribution, the POS is a good way to capture these clients and bring to our ecosystem, thinking about the long value of our merchant going forward.

And to the second part of your question regarding marketing. We are evaluating marketing every month. What happened in Q3 is a small decrease. It doesn't mean that we are going to decrease forever, but we are just evaluating to have the best mix in terms of marketing online, off-line and equipment subsidies. At the end of the day, we are looking for the acquisition costs. If we see there is opportunity to increase the margin, we're always thinking we should keep it at the same level, we're doing the same. So it's part of -- it's very dynamic, but there is no plan for the future to go down with the market investment.

Okay. So just a follow-up then, I'm not asking for guidance, just a rule of thumb or some kind of direction. It's likely that marketing expenses will move together with TPV to some degree. Is that a good way to look at it?

I don't think so, Carlos. I guess, the marketing -- if you compare, the TPV market is going down. I guess, over the top of my head, like, 0.46%. So typically, it's going faster than the market investment. And I guess, that's the answer for your question.

The next question comes from Alexandre Spada, Itaú BBA.

I have one actually. Can you comment on the implication that the reduction in debit interchange will have on PagSeguro from Q4 onward, are you passing through the benefit to the merchants? Or will the prices be kept unchanged starting October -- or were kept unchanged starting October?

Alexandre, this is Ricardo. Thank you for the question. As you know, the cap for interchange in debit transactions is starting October 1. We started a promotion in September only for new merchants, for the MDR for debit. For these merchants, [we are passing through, but for all the days that we have,] we're keeping the same level. So we're going to have positive impact in our P&L in Q4 because the largest part of our base is still paying the same rates, the same MDR that we charged before. For the new merchants, we made this promotion. So part of that -- to answer the question, a small part of that, we are passing through but the largest part is we kept the same level. So we're going to have a positive impact in the P&L.

Okay. And is -- a quick follow-up, is that promotion temporary? Or is that -- actually not a promotion, just a new pricing scheme?

We have this promotion, it is temporary, because it's for the first year right. So 1 year from now, they're going to keep -- they're going to start paying the full MDR.

Okay. So if that's the case, there will be no pass-through in the end of the day?

That's what we expect. But let's see. What happened in overseas is that in the medium term, this gap between the MDRs before and the MDRs after the cap, we'll pass it to the merchants. We don't know how fast it's going to happen in Brazil, but in the medium term, it's going to happen at some point.

Our next question comes from Josh Beck, KeyBanc.

I wanted to ask about the other side of acquisition costs. Is there any color you could provide on how long it takes you to recover those customer acquisition cost, because don't you think the economics that you have are quite favorable? So is there any color you can provide in that area?

Well, Josh, thank you for the question. We -- it's hard to make this calculation because it depends on the device we acquired. It depends on the device, you'll have a better payback, depending on the device, you'll have a worse payback, depending on the subsidies that we do, it depends on many factors. But the payback, if you do the average, is not that long. I guess you can make the math using our P&L numbers. You can have a better [approximate] of what is our payback because you have our TPV promotions, the take rates and the net, MDR, so it's -- you can make this math. But overall, the average you can do it through the P&L, but it depends on the device that we are selling for the merchant. I can assure you that we are doing these calculations very often, and that we are looking for lifetime value. As I said before, we have in mind to win the merchants because once you have the base, there are many other services that we can offer to them, and then we can monetize in the future.

Okay, very helpful. And I also wanted to ask, have you seen any changes in the churn of your installed base? So that's one part. And then secondarily, the margin expansion, when you look at the pretax margins, has been quite positive. Is that something that you expect to continue?

In fact, our churn is going down. I know the base is -- once the base, the number of merchants go up, you have the largest base to, let's say, to dilute the trend. But when you compare the churn that we have, let's say, this year with previous year, it is coming down. So we are having a very healthy base of merchants, very healthy TPV. There are some merchants that decide not to -- they can certainly come back, but at the end of the day, if we look at the churn this year, it's smaller than last year, for instance. And in terms of margins, I mean, it's hard to predict that every quarter we are going to have this kind of margin expansion. But what you need to factor in is we operate in a volume-driven business. As we bring more TPV, obviously we dilute admin costs, fixed cost, things like that. But you can see, for example, in this part we have to invest more, for example, in the device -- the price of the devices. And even investing more, we had a margin expansion. So it is hard -- it's something that is very hard to predict going forward but we don't see margin contractions, for example.

Your next question comes from Rafael Frade, Bradesco.

So I have 2 questions. The first one is related to the POS price, the follow-up from Macedo's question. In the -- a few weeks ago, you reduced -- you are making some promotions related to the Black Friday, but you are keeping those promotions. So I would like to understand if it's something that we should see the previous price in coming weeks or it's something that probably would be more permanent, those new levels of pricing to us? The second question is related to your financial expense. I'm getting some hard time to reconciliate here. You had a strong growth in TPV and consequently on the receivables, but you are -- I would expect that your financial expense to increase to funding those prepayment of receivables. Both it don't seems to be the case, so if you could help me to understand how should we expect this line to evolve.

Frade, just on this, are you talking about financial income or financial expense?

Financial expense.

So financial expense should trend to 0 because we are using the IPO proceeds to fund the prepayment business. So if you look at the financial expenses line, it's trending to 0 compared to the last year. I'd let Ricardo answer the first question.

Yes. Regarding POS prices, as I said we are looking at the market pretty close. We started this promotion in November. We are looking for the demand. We're evaluating investment in marketing and all of these variables to see what is the acquisition cost per merchant. If we keep thinking that it's reasonable to keep this pricing, we'll do it. Our plan was to come back for the original pricing. That's what we are evaluating. But it's hard to give you a financial like we will increase the price or keep the same because we're evaluating, and as you know, it's very dynamic, this price for POS in Brazil at this point.

Right. Perfect. Just a follow-up on the financial expense, just to understand, maybe I'm doing something wrong here. But -- so there's a gap between the receivables and payables of, more or less, BRL 4 billion. You have around BRL 2.5 billion in cash, so I understand that you fund part of this with this. But still, you would have 1 -- a little more than BRL 1 billion in mismatch between the receivables and payables that, I understand that, this would be prepaid with banks. But maybe you have another working capital here that I'm not seeing, just to understand.

We are doing now all the prepayment with own cash. So if you look at the growth in our receivables [beginning] in Q2 compared to Q3, we have a little bit over -- in the first 9 months of the year, we have like BRL 2.4 billion in receivables, and we repaid about BRL 1.7 billion from receivables that we had discounted last year. So at the end of the day, the combination of both, we are not discounting receivables with issuing banks anymore, so that's why you don't see the financial expenses line hitting our P&L anymore.

The next question comes from James Friedman, SIG.[

] It's Jamie at Susquehanna. I -- a couple questions. I want to ask about your Q4 expectation. I know you don't give explicit guidance, but you had the 13th month phenomenon in the Q4. My understanding is that, that came after Black Friday and Cyber Monday. Is there any reason to think that the sequential growth in the Q4 relative to the Q3 would be different in 2018, say, than it was in 2017?

James, thank you for the question. We're going to talk about guidance later on in this call. Regarding Q4 and Q3, I don't have here in the top of my mind what would be this change. I know 2017, we had a very strong Q4 when compared with Q3. But as I said before in the call, we are having these total payment volume records month after month. We grew 20% in Q3 when compared to Q2. We've seen a very strong Q4 quarter, but I don't have here in the top of my mind to say you if it's going to be stronger or the same level as 2017. I would say you it's a very healthy TPV. We're not seeing changes in the variables that could hurt our P&L.

Okay. I also want to ask you about this Slide 7, it's the one about the digital ecosystem. Over time, do you have any objective or any commentary about how many products per merchant you anticipate, or even if you have something now, like how many products -- like if you look at the Slide 7, this digital ecosystem, how -- this is the one with the prepaid and P2P and e-commerce and the wallet, how many typically of these are your merchants purchasing?

James, we do not disclose the exact number, but I would say there are some products that are having more good engagement, as we showed you in the presentation like bill payments. That's something that we knew that our merchants were waiting for because we have a lot of people in Brazil that are underserved in terms of financial services. So thousands of our merchants didn't have bank accounts and they need to pay bills, they need to top-up mobile phones. So those are the services that have more engagement. But we are trying and we are testing all these products. So I would say [lending] , as I said before, we aren't being stretched, but there's also a lot of demand because people are underserved in Brazil and the banks charge very high rates. But we unfortunately do not disclose the exact number because of competition and all the dynamics that we have in this market right now.

Okay. And if I could add just one more about your previous answer on interchange, I just want to make sure we get the facts right. So I apologize if this is wrong, but my understanding is interchange was reduced by policy by the Central Bank in October. Is that right? That's debit interchange, debit interchange. And then the follow-up to that is, how much -- remind us how much of your TPV is debit? I think you disclosed that in your [F-1] , but if you have that, that would be helpful?

Well, I'll give you the -- what we had in Brazil, that interchange, on average, before October 1 was around 80 basis points, 8 0, right? The Central Bank decided to make this new regulation where the goal is to bring this average down to 50 basis points. So there is a 30 basis points' gap between the debt interchange before October 1, when compared what Central Bank is trying to achieve. Our TPV, although we have only 5% of the market share in Brazil, our TPV reflects the industry as a whole. The industry as a whole has around 40% of the TPV debit and we have the same level. So you can use 40%.

Our next question comes from Jason Kupferberg, Bank of America Merrill Lynch.

This is actually [Brent Avon] on for Jason. It was encouraging to hear you guys say that you think you could add at least 300,000 new merchants sequentially in 4Q. But as we sort of look ahead, the environment is getting more competitive but you guys have suggested you have that first mover's advantage and a still underpenetrated market. So I mean, is there any reason why we couldn't see that pace of merchant addition continue beyond just fourth quarter and into 2019?

Jason, as are planned in our expectations, and according to our business plan, is to keep the same pace. Q4 is going to be strong. You are right in saying there is more competition, but we have the first-mover advantage. We are focused on the long-tail market. Although some of the incumbents say they are competing with us, they are serving merchants that has -- that have a higher TPV or are larger than our long-tail merchants. So our merchants are very concerned about fixed cost. We know how to deal with that. We know how to deal with them. We know what works, what doesn't work. So we don't see any reason for deceleration in short term.

Okay. No, that's really helpful. And I mean, just shifting over to -- in capital allocation. I know you guys kind of discussed a lot of these new products rolling out, which are really interesting and helpful, and you've talked about that earlier in the year about wanting to ramp up investment spending, but you've also recently announced a share repurchase authorization. I'm just curious sort of where we are today, what your priorities are from a capital allocation standpoint.

I'll get the one on the share repurchase. You may remember that we announced just a few days that we were blacked out. So I mean, we do not have time to do share -- large share repurchases. So we did some, but very -- few -- still very small. In terms of capital allocation, our capital allocation continue to have the trend of growth. So when you look at the rate that we did in our follow-on was to further develop our digital ecosystem and it's how we are focused. I mean, we are putting growth as our first priority here.

Our next question comes from Domingos Falavina, JPMorgan.

As we progress, we would expect some slowdown on net addition. And I'm just thinking that volumes can be very strong, and in spite, I should even say, of slower net additions, which is indicative of good trends in same-store sales. So I think it might be helpful to us to understand, like when we look at your volume growth of 20% Q-on-Q, or however you want to put it, or 90% year-on-year, could you provide some idea on like half of it or more than half is coming from the existing clients, 70%, like a ballpark number? And how much is coming from net additions? Because as those net additions, they shrink, we just want to be comfortable that the existing base will continue to grow. And then I'll ask my second question.

Domingos, I'll say it's hard to make this calculation because what we're seeing now with our merchant base is that they usually start small and they keep growing. So as we are adding new merchants to the base, we try to stop the base and take this forward, that you are saying the new merchants are having this behavior and the tax base are having a different behavior because -- what I'm trying to say here is that as we are growing pretty fast and the merchants grow as well because we have this trend of cash to plastic in Brazil, I don't have this picture to give you right now, but I'll say the churn is very under control. When you look at the cohorts, they are growing, although there are some churn, of course, because of the mortality of the merchants or whatever is the reason. But when you look at the cohorts, when you compare the same TPV or the cohort's TPV 1 year after they started, we see a very healthy growth. So that's -- I guess, this is the best that I can give you.

No, super clear. On the second question, the long-term incentive plan, you explained share prices were super high at $30 and FX also didn't help and that sort of put some pressure on that. But then you break -- you broke down BRL 33 million as what you consider recurring, and basically, the remaining portion, BRL 80-something million, has been nonrecurring. Just curious to understand what criteria was used to consider -- to break this down as recurring and nonrecurring? So the point I'm trying to get is, next quarter, should we expect somewhere on 30-something, or why exactly would you separate those?

They're not -- we -- they're nonrecurring. There are 2 different types of nonrecurring. In this quarter, we collected 5 -- the nonrecurring, the new adds to the program and new hires that we did, that was about BRL 20 million, and the largest portion was this IFRS 2 effect that we had to recognize the market value of the shares. So for example, when we did our IPO, our IPO was at 21.5%, and the FX rate was roughly at 3.14. When we delivered the shares to the employees right now, the stock price is close to $30 and the FX was [above] 4.1. So we have to recognize this BRL 59 million of nonrecurring. For Q4, we should expect pretax recurrence of BRL 35 million and we are not seeing -- no, we are not seeing any items in terms of nonrecurrent items.

Okay. So just to be clear here, is it accurate if I say basically, if share price had not moved nor FX and you did not hire anyone, we would have been seeing something around BRL 30 million, BRL 35 million this quarter?

BRL 35 million in every quarter.

The next question comes from Felipe Salomao, Citibank.

I have 2 questions actually. The first one is about competition. So are we continuing to see little correlation between discount rates and net adds or are you noticing that [context] become more sensitive to prices? And the reason I'm asking this is because 2 of your competitors have brought prices significantly down. [Clearly, you got to prop them some up.] So I'm just wondering what to think about it? And then I'll ask my second question.

Felipe, as we said before, our merchants, the long-tail merchants are more concerned about fixed costs. So that's why we follow the competition pretty closely in terms of device prices. In terms of take rates, we can see the pressure. That's why I say that the fact that we are born online, we built this ecosystem thinking about long tail, we are creating these new features like bill payments, mobile top-up, prepaid card, lending. Now we just launched [digital] payments this week. So we have a more complete ecosystem for the small merchants. We have a strong brand, as we showed in the presentation, 4x more Google searches than the second player. So we don't think that if we keep decreasing the price, we're going to sell that much more, so to say. So we are following the competition pretty close. We are trying to find the optimal price in terms of devices, in terms of take rates. The fact that, as I said before, that we're born online, we distribute online, easy on board and so on, that's what makes us different. That's why we can monetize. And again, just remember, in terms of acquisition cost, that we have a strong brand, we have a lower acquisition cost when compared with our other players in the market. So summarizing, we are finding this optimal price between device prices and MDRs.

Okay, that looks clear. So my second question is actually a follow-up on Domingos' question about stock option expenses. So I understand the accounting impact of the mark-to-market of the FX and the stock price, and I understand that 4Q '18 should not bring any nonrecurring, non-expected stock option [expense] . And then I'm just curious about what should we expect in terms of nonrecurring stock option expenses for, let's say, next year when probably another trench of stock options are going to be exercised and probably you guys need to do the same mark-to-market on those stock option expenses, right? So just want to confirm if you continue to see the guidance of, let's say, BRL 30 million on stock option expenses per quarter as a good one or if we should also consider that some quarters are going to bring these nonrecurring stock option expenses? That's my second question.

Okay. If we -- you should consider BRL 35 million pretax per quarter without any nonrecurring items. If next year, for example, in August next year, the FX, for example, is again at [12.1] and the stock price is close to $30, you should expect an additional BRL 59 million, BRL 60 million that we posted this quarter.

This concludes today's question-and-answer session. I would like to invite Mr. Ricardo Dutra to proceed with his closing statements. Please go ahead, sir.

Before closing this call, I would provide net income guidance for 2018 and 2019. For 2018, we expect GAAP net income in Q4 in the range BRL 280 million to BRL 290 million, and in the fiscal year in the range of BRL 888 million to BRL 898 million. Estimated non-GAAP net income in Q4 2018 in the range of BRL 305 million to BRL [315] million, and in the fiscal year 2018 in the range of BRL 1.05 billion to BRL 1.06 billion. For 2019, we expect GAAP net income in the fiscal year in the range of BRL 1.182 billion to BRL 1.36 billion. Estimated non-GAAP net income in the fiscal year 2019 in the range of BRL 1.32 billion to BRL 1.5 billion. Important to say, the bottom of the guidance number, BRL 1.322 billion for our non-GAAP net income for 2019 is exactly the same number that we shared with research analysts before the IPO. We feel possible 13% upsizing this figure, reaching BRL 1.5 billion. In our view, delivering a 2019 full year net income higher than the number presented at the IPO, not only shows our confidence in PagSeguro's business model, but also the company's ability to operate in a competitive market. We would like to thank all for the time spent with our management team. We'd like to reinforce our commitment and focus on delivering solid results. See you all in our next conference call. Thank you very much.

That does conclude the PagSeguro audio conference for today. Thank you very much for your participation. Have a good afternoon, and thank you for using Chorus Call.