PagSeguro Digital Ltd (PAGS) 2021 Q3 法說會逐字稿

Good evening. My name is Greg, and I well be your conference operator for today. At this time, I would like to welcome everyone to PagBank PagSeguro's webcast results for the third quarter 2021. This event is being recorded.

(Operator Instructions)

This event is also being broadcast live via webcast and may be accessed through PagBank 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.

(Operator Instructions)

Before proceeding, let me mention that any forward statements included in the presentation or mentioned on this conference call are based on currently available information and PagBank PagSeguro's current assumptions, expectations and projections about future events. While PagBank 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 PagBank 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 sections of PagBank PagSeguro's Registration Statements on Form 20-F and other filings with the Securities and Exchange Commission, which are available on PagBank 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 Ricardo Dutra, Chief Executive Officer. Mr. Dutra, you may begin your presentation.

Good evening from São Paulo, everyone, and thanks for joining our third quarter results conference call. Tonight, I have here with me Artur Schunck, our Chief Financial Officer; Alexandre Magnani, our Chief Operations Officer; and Eric Oliveira, our Head of Investor Relations.

Let me start by giving you the highlights of this quarter. Record TPV in both acquiring and banking, record revenues and EBITDA, and the second best non-GAAP net income, only behind Q4 last year. We will see more details throughout the presentation.

Quick update about COVID-19 in Brazil. While pandemic is not fully behind us, we have started to see signs of economy reopening in the back of the vaccination. In Brazil, we have been seeing a higher acceptance of vaccines in comparison to other countries. There is also a campaign to give extra shots to reinforce the immunity of the elderly and people with high-risk diseases or medical conditions.

However, as a consequence of these almost 2 years of COVID-19, the Brazilian macroeconomic scenario changed very rapidly. Inflation rate went up above 10%, the unemployment rate continues to be above double digit, and the interest rates are increasing faster than the market expects. Regardless of this macroeconomic challenge, our track record gives us the confidence we can navigate very well during the crisis and grow our businesses.

Our quarterly results, one more time, consolidate our winning strategy to continue to invest in technology to make clients' lives simpler, while guaranteeing a safe ecosystem, driving a profitable growth and increasing revenue and profits diversification with cross-sell and upsell of PagBank products.

Our revenues have accelerated, driven by our new growth initiatives, mainly in serving larger merchants than long tail and cross-selling PagBank offerings for merchants and consumers, while we attract a more diversified client profile.

This quarter, we launched the automatic payment, called débito automático in Portuguese, DDA and several new partnerships targeting the gaming community. On top of that, several milestones were achieved in our PagInvest initiative. We now offer 70 investment funds and several CDs to foster our deposits. We also have a Brazilian Treasury bond trading platform and our home broker trading platform for equities, started the roll-out this week, and we expect it to be available for all clients until the end of November.

On the regulatory front, we continue to see the regulator fostering competition, which could create opportunities for PAGS. Therefore, our investment thesis remains the same. We will continue to combine the best balance between growth and profitability among Brazilian payments and fintech space while we prepare our company for the long term where we expect to have a larger and more profitable company. It's only the beginning. We also know credit is one of the key drivers to achieve larger revenues and profits in the future. And we are one of the few players in Latin America that has been building gradually and consistently a very diversified credit portfolio with a healthy asset quality. We have a seasoned team, exclusive data and right credit policies. There is no need to rush. Our main goal is to build up a solid credit business.

One more time, I would like to reinforce that I'm very encouraged by the recovery trajectory and pleased with the momentum in both businesses, PagSeguro and PagBank. Finally, nothing of this would have happened without the confidence of our shareholders, the commitment of our suppliers and the best and most committed team working hard every day to promote our mission: being part of the financial life cycle of every Brazilian citizen, promoting a massive financial inclusion in our country. Thank you very much, PagBank PagSeguro team.

That said, Artur and I will present some slides and we'll have Q&A session at the end.

So turning to Slide 3. We highlight the achievements of the third quarter. Record total revenue of BRL 2.8 billion, up 56%. In the box below, we can see PagBank revenues reaching almost BRL 240 million and acquiring revenues reaching BRL 2.5 billion. All-time high consolidated TPV of BRL 126 million, up 86%, with PagBank TPV reaching an impressive BRL 59 billion, growing 158% versus Q3 2020.

Acquiring TPV grew 58%, excluding coronavoucher, reaching BRL 67 billion with HUBs TPV growing very rapidly and reaching around 15% of the year-to-date acquiring TPV.

Adjusted EBITDA of BRL 742 million, up 40%, with acquiring adjusted EBITDA reaching BRL 818 million and PagBank adjusted EBITDA, reducing losses as a percentage of PagBank revenue and increasing its margin, gaining traction to reach the break-even in the coming quarters.

Non-GAAP net income of BRL 419 million, up 27% year-over-year. CapEx per sales went down from 33% in Q3 2020 to 15% in Q3 2021.

Moving to PagBank. In September, our active clients surpassed 12 million, driven by 1 million net addition in the quarter, while active merchants totaled 7.7 million.

Our credit portfolio reached BRL 1.6 billion in September, with NPL90 under control, with new cohorts, those after August 2020 operating at single digit. Total NPL90 is running at low double digits.

Turning to Slide 4, we present PagSeguro's highlights, our acquiring business. Our acquiring TPV grew 58%, excluding coronavoucher, driven by our successful execution to serve, not only longtail merchants with excellence, but also SMBs through our HUBs, increasing our market share that reached between 9.5% and 9.7%, as we can see right below the chart.

The chart on the top-right, we can see our acquiring TPV growth is accelerating versus previous years and growing 63% year-to-date, ahead of 45% guidance we gave last quarter. The positive trends remain, and we are happy to announce that in October, we reached a new all-time high daily TPV for the third consecutive quarter, processing more than BRL 1 billion in payments in one single day.

In Q3, our active merchants reached 7.7 million. As the chart on the bottom-right shows, our gross additions remain healthy in comparison to previous years. However, the net adds were impacted by a higher mortality related to lockdowns, a higher churn related to Wirecard news flow during the second and third quarter of 2020.

Besides that, it is worth to remember that there is no impact on acquiring TPV trends. As for active merchants, we consider at least one transaction in the last 12 months.

Moving to Slide 5. Acquiring revenues grew 52% in comparison to the same period in the last year or 35% on a 2-year CAGR basis. The growth was due to the growth of our merchant base and our successful execution to service SMBs through our HUBs. Despite our SMB's merchants have lower take rates, their TPVs are 5x larger than longtail, and that's why our net take rate maintained a flattish trend in compared to the previous quarters.

Bottom-left, as the client mix is changing towards larger merchants, combined with a larger share of wallet, we can see the growth of TPV per merchant increasing 18% versus same period last year. Our adjusted EBITDA reached BRL 818 million, a 35% growth year-over-year. Despite the high investments to roll out our HUBs and continuous improvements in our payment services to our merchants, we were able to gain market share, consolidate our position and increase EBITDA.

Moving to the next slide. Taking the opportunity to explore in the previous slide, I want to share the results of our HUBs evolution in Slide 6. HUBs TPV continues to deliver a strong growth and represents approximately 15% of year-to-date acquiring TPV, outpacing the best estimate for our models due to the economy reopening and a strong execution to serve larger merchants, combined with a powerful competitive advantage, which is PagBank.

I'm also happy to say that in October, we reached more than 300 HUBs fully operating. At the same time, we are also observing HUBs breakeven between 3 to 4 quarters and paybacks between 4 to 5 quarters. Our software solution reached 1.3 million subscribers or 17% of PAG's active merchants.

Last quarter, we announced Concil's acquisition, one of the most disruptive fintech in 2021 according to Daily Finance magazine, which speeded up our conciliation product roadmap. This will also help us to expand our conciliation software offering to SMBs and longtail clients, which were not served by our previous solutions, Auditek.

Moving to Slide 7. PagBank revenues continues to present healthy trends, reaching almost BRL 240 million, up almost 80% year-over-year, with better trends in the adjusted EBITDA losses, which had a negative margin of 58% in 2020 versus a negative margin of 32% in Q3 2021. We had a net addition of 1 million new PagBank clients in Q3 2021, surpassing the mark of 12 million PagBank active users, being 46% of these clients composed by consumers.

Products per user remains stable versus the same period last year despite the healthy growth in number of new clients. On the top-right, PagBank's gross take rate improved 31 basis points compared to previous quarter, reaching 1.93%. This is the result of the increase in monetizable TPV as we've shown in the chart bottom-right, increased 52% year-over-year.

Moving to Slide 8. Quick update regarding initiatives to improve client convenience and experience. During this quarter, we closed partnership with big brands that are now available at our PagBank Shopping, such as Booking.com, AliExpress, and recognized gaming companies such as Xbox, PlayStation and Steam.

Finally, PagInvest assets under custody and deposits surpassed BRL 6 billion, up 88% year-over-year, driven by our increasing number of clients and new products available. In September, investors active clients were 391,000, and we are offering more than 70 investment funds in our platform, expecting to reach 100 funds by year-end.

We also have 5 PagBank CDs, and two of them with credit card offerings using CD balance as a collateral. In September, we launched the Treasury Bonds trading platform. And this week, we launched our Home Broker trading platform for equities, combined with free financial education content to explain the basics of investments for our clients.

Now I'd like to turn the conference over to Artur, our CFO, who will talk about our credit portfolio and our financial results for this quarter. Artur, please go ahead.

Thanks, Ricardo, and good evening, everyone. Following our presentation in the Slide 9, September ended with a total credit portfolio reaching BRL 1.6 billion, being 57% of working capital loans, 39% of credit cards and 4% of other credit products.

The performance is improving day after day based on efficient credit models, experienced team and several learnings from the results of best cohorts. All our credit products grew very fast in the last 12 months, mainly due to low credit origination from April to August 2020, always being carefully with asset quality.

Our delinquency rates continued to be under control and trending down, due to the phaseout of the effects related to the lockdowns and the new credit models adoption in August 2020 onwards. The cohorts on the new credit model are presenting a single-digit NPL 90 days ratio, maintaining our asset quality while we expand our credit products. The total NPL 90 days are running at a low double digit.

This quarter, we launched the Overdraft Loans, offering one more product to our best merchants. It is important to have a broad portfolio to offer the right product for the client need.

Moving to Slide 10, we present the cost and expenses analysis. Our non-GAAP total costs and expenses totaled BRL 2.2 billion, up 66% year-over-year, as a reflection of volumes growth and investments to develop and launch new products and services to merchants and consumers, and expenses to expand sales channels to serve every size of business in Brazil.

On cost of sales and services, there was an increase of 42% compared to Q3 2020, mainly related to higher transaction costs, reflecting strong acquiring TPV growth with more credit card mix and higher D&A due to investments in R&D, technology and POS devices. Selling expenses presented an increase of 95% year-over-year, driven by higher personnel expenses, for the expansion of HUBs, sales force and for PagBank teams and higher marketing expenses to consolidate PagBank brand awareness.

The most relevant increase in expenses was on financial expenses line due to higher working capital needs to fund the accelerated growth of prepayment TPV and higher basic interest rate that grew from below 2% per year to more than 6% per year. Comparing to Q3 '20, the positive working capital needs due to lockdowns and acquiring TPV mix towards to debit with lower duration of credit transactions helped to reduce financial expenses last year.

It is important to mention that for every 100 basis points of increase in the Brazilian interest rate, the net income is impacted by approximately BRL 70 million, and financial expenses increased BRL 90 million to BRL 110 million, both in annual basis.

Moving to Slide 11. Despite of a challenger environment for financial expenses due to higher basic interest rates, our team delivered once again a solid quarterly result. In the top-left, our consolidated net take rate reached 2.44%, slightly better than Q2 2021 and 9 basis points higher than Q3 2020, driven by better TPV mix with more credit transactions with a lower share of debit transactions and helped by a larger PagBank revenue.

In the bottom-left chart, the adjusted EBITDA achieved BRL 741 million on third quarter with a growth of 18% versus last quarter. Adjusted EBITDA margin remains flattish at 26.7%. Excluding the change and card scheme fee, our adjusted EBITDA margin was 41.4%.

In the top-right graphic, we share our strong cash position with a positive balance of BRL 8.7 billion, reinforced by the issuance of PagBank CDs to fund the credit disbursements. This positive position increased BRL 500 million in comparison to last quarter due to rise of accounts receivables from issuers.

Finally, in the bottom-right, we share our capital allocation. During the third quarter of this year, we invested almost BRL 426 million, being 52% in POS acquisitions and 48% in R&D to develop new products, features and services. As a percentage of revenues, CapEx decreased 18 percentage points, reaching 15% versus 33% in the third quarter of 2020.

Moving to the last slide of this conference call. As Dutra said in his initial remarks, the positive trends of this year led us to review our acquiring TPV growth guidance from 40% to above 45% last conference call. As we continue to observe a very positive trend, we are increasing the bar to between 50% and 53% in 2021. We project a reduction of capital expenditures in BRL 100 million, setting a new level of BRL 1.7 billion this year, optimizing the cash flow generation.

Finally, a slightly update on D&A levels, expected to end the year between BRL 800 million to BRL 900 million. After we move to the Q&A session, I would like to turn to Alexandre Magnani, our new Chief Operating Officer, to say some words.

Thanks, Artur. Hello, everyone, and thanks for joining our quarterly results call. It's a great pleasure to talk to you and let you know a little more about me.

I've been working in the payments industry for 28 years. starting my career at Credicard and Redecard, where I had different roles on sales, planning and products. Right after that, I spent a 15-year tenure at MasterCard where one of my main accomplishments was the implementation of a non-financial institution licensing program to foment the development of new issuers across the Latin American markets among retailers, prepaid program managers and fintechs.

In January 2015, I have joined PagSeguro with the mission of building the acquirer and issuer businesses. It has been an exciting journey since then, transforming the card acceptance landscape in Brazil by including millions of underserved businesses and individuals in the electronic payment system and providing them simple and smart financial services.

I have no doubt, after almost 7 years within PagBank PagSeguro that we have developed the most dynamic fintech in the market, which is capable to generate more value for all the stakeholders in a faster way. We are very proud of our capacity to innovate, execute and deliver strong results. I'm very excited about my new role as COO, and will keep our focus on growing profitably, consolidate PagBank, developing new capabilities to simplify our customers' lives, doing all of that in a safe and seamless way, and most importantly, with the passion and excitement of our team. Thank you.

Now we will end our presentation, and we can start the Q&A session. Operator, please.

(Operator Instructions)

Our first question comes from Mario Pierry with Bank of America.

Congratulations on the quarter. I have two questions. First one is on the prepayment business, right? As you showed, that financial expenses now represented 22% of your revenues, and this was like 3% 1 year ago. So I was wondering about your ability to pass on these higher costs into your final prices or your desire to do so. So that's question number one.

Question number 2 is with regards to your Hub strategy. You showed, right, that your TPV HUBs is already 15% of total TPV. You were guiding for 6% to 11%, so it's clearly going better than expected. Can you give us some color on why this is going better than expected? You said, right, it's because part of this is because of PagBank, you're offering the banking solution combined. You also talked about that you opened 300 HUBs.

So maybe you can help us understand if these 300 HUBs was better than what you expected. What are the targets in number of HUBs? And why not change the guidance for the Hub TPV from 6% to 11% to something closer to the 15% level that you're already seeing?

Mario, this is Ricardo. Thank you for the question. I will start answer here the first question, and then I can go to the second one -- or backwards. Let's make it backwards. I will start backwards. I will start from the HUBs. And then we go to prepayment because Artur can also help me here.

Well, in terms of HUBs, as you said, we are doing better than we expected. We expect to reach 11% in the best scenario. Now we already had 15%. Part of success is because we cross-sell, acquiring with PagBank. The other reason is also because we took advantage of the pandemic and we focused to accelerate, and we expect it to have 200 hubs by the end of the year, and we could anticipate that. So we have more people on the streets.

And also because when we made these assumptions about the HUBs' KPIs, we thought that would be much more difficult to get clients from competition than what we see in the streets that we are seeing in reality. So we -- as you can imagine, all clients from HUBs, they already accept cards. So we don't go there and make the inclusion of these clients different than what we have in long tail. So if you go there, we need to take clients' competition.

We thought they would be harder. But when we went out there, we see that there are many, many merchants very unsatisfied with their current providers. And that's why we are being more successful than what I thought. And we always say that we are very, very, very focused on execution and HUBs is essentially that, you have people on the streets, making the right route, talking to the right merchants, is the right offer and following the productivity of all the sales force team and so on. So that's why we're doing better in the hubs.

In terms of prepayments, I know that when you look at...

Just before we move to prepayment then, if I can just ask a follow-up on the HUBs, sorry about that. Can you talk about your pricing then since you've taken these clients from competition? Are your prices similar to the competition?

It's very similar. In some cases, even a little bit higher because, as I said, many merchants are not satisfied with their current providers. And also, we bring PagBank together. So that's why we are not -- we know that is not the best way to compete in prices, to have this price war because at the end of the day, everyone is going to lose because I would decrease the price, competition would decrease next week. And then you can imagine what's going to be the end of that.

So the sales force team has some offers they can offer to the merchant. But you control that very much to avoid this price war. I'm not saying that, in some cases, we could be aggressive, but that's not the majority. The majority of the case, we try not to compete in prices.

In terms of prepayment, Artur can complement here. But just when you look at the numbers, the 3% versus the 22%, I guess, is kind of, I would say, unbiased here because last year in Q3, we had a strong position of cash in the company because of the COVID-19. So when we had a deceleration of TPV last year, we start generating cash. So because the prepayment decreased, so we started generating cash. We had a strong position of cash. That's why we look, it's only 3%, and now it's 22% because, I guess, the 3% is an outlier from last year.

The other reason that is increasing, as you can imagine, is because of the basic interest rate of the economy in Brazil and also because we are growing TPV and we need to anticipate. So those are, let's say, the main highlights here, but Artur can give you more color.

Mario, it's Artur speaking. And just to complement what Dutra said, in 2020 before -- just in the beginning of the COVID, we had a movement here to advance receivables with bank issuers, and we prepare our cash flow to follow the next months in the COVID because it was difficult to predict what would happen with the world on that time. And so we had a good cash flow until Q3 '20.

And also the mix of transactions moving to debit, that helped us in the case of our cash flow. The duration of credit reduced. And also, when we take a look in Q3 '21, part of the financial expenses that we have is related to the volumes of our TPV that grew very fast. And based on the model that we have here, also, the prepayment volumes that we had requires more working capital, so the cost increases.

Okay. But the -- what I'm trying to get at, it seems to me that the profitability of the prepayment product is lower than what it used to be just because your funding costs are going up with the higher Selic rate. So are you willing then to continue to operate the prepayment business with a lower profitability, or would you be inclined of increasing the prices of your prepayment product to compensate for the higher financial expenses?

You asked that and I forgot to mention, Mario. We -- of course, we will be rational here. We tend to increase the prices because at the end of the day, the basic interest rate is the raw material for us and for our competitors. So we intend to increase the prices. Of course, we also follow the market, what's going on with the market. We see some of our competitors that were -- had a prepayment lower than ours coming to the same level that we have. We are following that very close.

But we have the ability to increase and to be sincere, I think it's going to be unavoidable not to increase because we are going to -- we have right now 75%. Some people are saying that next meeting of (inaudible) in December, it will increase 200 basis points. So we are reaching close to 10%, 9.75%. So it's going to be unavoidable to increase. We have the ability to do so. And we also imagine or expect that competition will follow this price. So we have today a lower profitability, as you mentioned, but we have the ability to increase the price and pass for the merchants.

No, that's very clear. So just to be clear then, when you said on your remarks that a 100 basis points increase and interest rates will have a negative impact of BRL 70 million on your net income is assuming nothing else changes, right? But -- so at the end of the day, this impact could be lower.

Yes. Exactly. Thank you, Mario.

Our next question comes from Tito Labarta with Goldman Sachs.

A couple of questions as well. One, I guess, a bit of a follow-up on the financial expenses. Just more -- if I look on your balance sheet, I mean, clearly, you've had a big increase in deposits, right? You have about BRL 2.7 billion in deposits. And I think on average, the cost of that deposit was about maybe 150% of Selic because I think you were paying maybe 200% to some clients.

One, are you reducing what you're paying on deposits because, I mean, it's easy to pay 200% of Selic, 2% of Selic, or 8% Selic, becomes harder. So help us think a little bit about the cost of deposits. Also, what else on the liability side? You have about BRL 11 billion in payables. Is that part of like the working capital that you're saying that as interest rates increase, would you have to plan those payables is increasing? Just to understand the balance -- sort of the balance sheet perspective and how that's impacting financial expenses.

And then my second question. To think about, I guess, the profitability and the margins. So a little bit of improvement in the margins, kind of consistent with what you said last quarter. How should we think about that maybe for next year, right? PagBank is becoming more profitable? You said the HUBs take 3 to 4 months to kind of break even, I think, 5 months to start generating profits. Any color you can provide on the evolution of the margins from here given the rising rates and the investments you continue to make.

Tito, thank you for the question. Regarding BRL 6.2 billion in deposits, as I said, close to BRL 7 billion here, we do pay some percentage of CDI for some of the deposits. We also are following that very close. We don't have the plan, let's say, to decrease right now because it helps us to get new PagBank clients. We know it is important for us to make PagBank as the main bank for our clients. And at the end of the day, the BRL 6.2 billion is not that expensive when we compare with the TPV that we need to anticipate and -- from a, let's say, acquisition cost perspective today is something that we can keep doing for a while.

But of course, we're going to follow that if you reach 10% or 9 75, as I mentioned, we need to make the calculation here again. But that's something that we can also adjust any time. In terms of balance sheet, if I got your question right, if we need to anticipate more of the receivables that you have. Is that right or you asked a different thing? Just for me to be clear in the answer here.

Yes, I think it's along those lines, right? Just to understand where on the balance sheet do we see sort of the impact of that higher interest rates? Is it your payables are going up and you have to pay more on those tables? You have about BRL 11 billion in payables in this quarter. Is that balance would cause is part of -- the other part of what's causing those financial expenses to rise?

So related to the payables, yes, we expect that payables will increase because we are considering there the deposits that we have for the company. And so the merchant's money in our PagBank account is booked there. And so our expectation for the future is growing this number to help us to have better in terms of funding, okay?

Just one thing that is important here, Tito, is when Selic was 2%, and we anticipated from the banks, some banks charged us like 2% plus a few basis points or some banks charged us a percentage of CDI. When Selic goes to, let's say, this 8% that we have today, it's very common that as a percentage of Selic, the anticipated -- the prepayment is lower because at the end of the day, they are looking more for the spreads and for the nominal basis points.

So what I'm trying to say here is that 120% of 2% of Selic is 40 basis points, 110% of 8% Selic is 0.8 basis points. So when the base interest rate of the economy goes up, we can also negotiate better with banks to decrease as a percentage of CDI because at the end of the day, they are looking much more in the nominal spread than the percentage itself. So that's something just to be -- to bear in mind here.

And you're asking about margins as well.

Yes. Related to margin, I would like to reinforce that as we mentioned in the last conference call, Q3 will be better than Q2, and we did. The expectation for Q4 is the same that we disclosed there, and we are -- we believe that we can have a slightly better margin, so we can compensate the financial expenses that will be higher in Q4.

Taking a look in 2022. We are more focused on nominal growth. And you know that margin for next year will depend on pricing and market conditions for acquiring business. If conditions improve, it's possible to have a slightly better margin for next year. And the macroeconomic conditions in the country is tough right now, and we probably will continue in 2022.

On top of that, we will have a hard election process next year that will create more volatility and stability in the market.

But what we expect at the end of the day, Tito, is to have better margins than what we're seeing right now. I'm not saying that's going to be much, much better. But what you have in mind is to have slightly better margins, of course, depending on the -- all the variables that Artur just mentioned, just like elections and unemployment. Inflation is coming up. Basic interest rate and this stuff. But what you have in mind is to get a better margin, something that we saw in Q3 versus Q2 this year. And we will probably see in Q4 versus Q3 as well.

Great. That's helpful. Maybe if I could have just one follow-up, I guess, a bit on PagBank and the -- do you still expect to breakeven next year? And I'd say that in the context there was a discussion about capping the interchange on prepaid, which is a big revenue driver of that. I mean does that change anything at all about when you expect PagBank to become profitable because of that?

Yes. Tito, it didn't change our plan. The idea is to be breakeven by the end of next year. The public hearing is, as the name, it's clear here is a public here and there is nothing defined. We can update this date of breakeven as we have more information, but it didn't change anything.

And remember that regardless of the results of the public hearing, for the company as a whole, it's -- the impact is negligible because we have the 2 side ecosystem. We have the 2 side business, so to say. We have the acquiring business and the issuance -- the card issuance. So if you have slightly better conditions in one side, it's going to be worse in the other side and vice versa.

So for the company as a whole, it's going to be manageable, but let's wait for the public hearing and then we can give more information. But it didn't change that plan to be breakeven by the end of 2022.

And Tito, just let me remember you that we have been diversifying our PagBank products, which has been reflected into our PagBank revenues breakdown, okay, with crop products such as credit underwriting, gaining more traction with a healthy asset quality, delivering very good results and revenue diversification. So it's going to be negligible for us for 2022 if the public hearing is approved without any change.

The next question comes from Bryan Keane with Deutsche Bank.

I wanted to ask about the merchant count. Obviously, the merchant count was lower due to some churn in mortality at some of the merchants. Can you just talk about what you expect going forward? Does that change much? It doesn't seem to be impacting volume growth. Volume growth is still really healthy. But just curious on how we should model out for net merchant adds.

And then secondly, on the financial expenses and the higher rates, historically, at some point, does that usually get passed on to the client and it's just a timing issue because I think the market is a little bit confused of how much you will have to permanently eat these higher rates going forward versus, I think, historically, you've always just passed them on eventually to clients. And so that -- a lot of that expense will go to the merchant.

Bryan, thank you for the question. Regarding the -- I'll start backwards here. So the financial expenses, it is a matter of timing for us to increase the price. As I said, we are following that very close. But to me, and we are under discussion here, is going to be unavoidable to pass on to the merchant.

So I know the market is confusing because we don't want to give more details what's going to be the trigger or when we're going to do that, but we have this ability to pass to the clients, and it's going to be unavailable to do that, in my opinion.

Regarding the net adds. You're right, we had a net adds that is lower than what we used to have in past quarters. There are two main variables here. One is related to the mortality of businesses, I guess, that's a behavior that is happening not only in Brazil, but also around the world. Many, many small businesses closed their doors. And of course, we're going to see this mortality coming to our base.

In terms of gross adds. We are doing well, we are doing the same that we used to do in the past in terms of gross adds. So we keep selling devices at the same level. But of course, we had this mortality from the past that we -- it is impacting our churn. That's the first variable.

And the second one is that remember, we bought Wirecard in July 2020. And because of regulatory processes, we only could get the company or start managing the company in November. So there was all these negative news flow about Wirecard in Germany with these accounting stuff and so on. And of course, there are some clients from Wirecard that decided to work with another provider. And we are seeing this churn right now. And we will probably see this churn in Q4 as well from Wirecard.

That's not something, in my opinion, is structural because we are having the same gross adds we used to have in the past. It's something more that you're going to see for, let's say, a few quarters, maybe Q4 and Q1 next year, let's see. But the volumes are coming because at the end of the day, we are measuring the active merchants looking for 12 months. And when we are having this call, we are looking for TPV only for the quarter. So there is disconnection.

What I can say is that when you look at the 90 days active merchants, it is growing quarter after quarter. So of course, we would like to have the base as big as possible. But we have this disconnection, the 12 months versus the quarter. And also, the mortality from COVID and from Wirecard MOIP from last year. Q4, we're going to have the same impact from Wirecard as well, just anticipating here. Net adds in Q4 is going to have the same levels we are having here probably.

The next question comes from Jorge Kuri with Morgan Stanley.

Jorge Kuri from Morgan Stanley. Congrats on the quarter. I have two questions, if I may. The first one is on top bank, which have an impressive amount of clients. So congrats on that. And I wanted to see if there's any way that you can help us understand the monetization profile of the client base and how the different cohorts are improving over time. And I know your talk about the cost of business that maybe 2 years old is probably not the best way to think about it. But if you can just help us understand the early clients versus the today clients, the cross-selling metrics, the ARPU per client, the gross profit per client?

And help us understand the velocity at which this business is becoming revenue profit generator, and help us just understand how quickly that will really add to the overall business because I think that 12 million clients, if you and I thought about it a year ago, you would probably think that maybe further out into the future. And so congrats on that.

And the second question is on this whole issue about the higher prices. So I'm hearing it's inevitable, we will increase prices. It's inevitable. I'm just wondering, what are the triggers for that to happen, right? So why isn't it that you're increasing prices today, or why is that you haven't decided not to increase prices? Are you kind of like in between A and B and there is no clarity? And so I wanted to see if you can help us understand what would be the things you need to see from here in order to be certain about increasing prices or the other way around.

One of the things that you need to see in order for you not to increase prices because it doesn't seem that there is a hard decision made yet or -- and maybe because you don't think rates are going to be high forever. But that could also be the case where rates just don't go back to single digits anytime soon. And so then that's many more years of -- or many more months, sorry, of lower margins. And so help us understand how you think about it. And at what point you move, what are the things you need to see to move?

Jorge, this is Ricardo. Thank you for the question. We -- regarding PagBank, we have many metrics, as you mentioned during your question. We measure the products per user that we are giving disclosure for you, 2.8 per user. We follow the cross-sell. We follow the first product that users use here. We follow how many of the new clients order cards, activate use and so on.

But going straight to the end here, if you look at the monetization per client, the ARPU in the quarter, if I'm okay here in the math, is something like BRL 82, BRL 83 versus BRL 76, BRL 77 in Q3. So we are doing the best combination here, which is grow the base and grow the revenue per user.

We know that, as we mentioned before, that the monetization of some PagBank clients takes a while to start because they come here, they start using the account, they only send money from one side to the other, and we don't make any revenues in this type of activity. So it takes a while for them to test the accounts, see if it works. The majority of the clients we are bringing, they already have a bank account with another player.

So they kind of test us before, use us more often or use PagBank as the main bank. So that's why the amortization takes a while. But we can look at the ARPU that is growing quarter-after-quarter, and the number of users is growing as well.

Regarding the price. We did that in the past already. We increased the prices in invest. As I said before, to me, it's going to be unavoidable to increase the prices. We are just waiting for, let's say, the right moment. We are discussing here what's going to be the new price, and there are management discussions here and following the basic interstate of the economy.

We just don't want to, let's say, give more details what's going to be the new price, when we're going to do it, of course, because of competition and strategic decisions here. But we do have the ability to do that. We always say that mainly the long tail base is not price sensitive. They just want to sell as fast as possible when -- as I said, it's going to be unavoidable to increase the prices. We are in the discussion here. And once we have more decisions, we can give more color on that.

Our next question comes from Neha Agarwala with HSBC.

Just very -- two quick questions. First, on the HUB business. Should we expect that the investments regarding HUBs both employment of new personnel and opening of new HUBs? Are we done with that already by third quarter, or should we expect a bit more expenses on that front in the fourth quarter?

And the second question is on credit. I mean, we saw some good pick up in the credit book this quarter. But what kind of growth should we expect in the coming quarters and in the next year? And I'm asking that more in light with the tough market environment that we are seeing ahead of us.

Do you think this is an environment where you are comfortable lending and we can see good growth in credit book coming years or not as much? Plus any initiatives you have related to consumers, how you are monetizing your consumers on your platform?

Thank you for the question, Neha. Good to hear you as well. This is Ricardo. I'm going to answer the first and the third question, and then Artur can talk about the credit.

Well, talking about the HUBs. We launched already 300 HUBs up and running. With these HUBs, we have more than 80% of the coverage in the Brazilian GDP. There will be new HUBs here and there, but I would say that's going to be marginal. The majority of the HUBs, we already open. They are in the main capitals, the main cities, the largest cities of the country, in places with more demographic, let's say, that makes sense for us with more people.

But there could be some HUBs here and there, probably smaller HUBs to serve some clients in specific cities. But I would say the majority of the investment is already done.

In terms of consumers. We keep using the same drivers that used to generate those revenues, which is the main one is the interchange of the cards. The other one is the transaction of the account. When they use the account, we make some revenues, depending on the activity they do. And also for some clients, we have the credit with the invest in a CD, we give them credit cards so that we receive interchange and other fees from credit card.

We are also launching this week the home broker for equities. So there's going to be some promotions. Some of the orders are going to be free. And after, if I'm not wrong, the second order, we're going to charge. So that could help also the revenues. It's not going to be transformational, but it could help.

And also, we are launching -- we already launched actually, but it's a kind of a pilot. We are not -- we didn't make advertise yet, but we will do it, the multiple card. Today, our cards are more related or is a cash card or a credit card. In the credit card we limit for the consumers, only if they invest in a CD. Now we are launching a multiple card with debit and credit. For the consumer's credit is going to be 0 at the beginning. And then if we decide to give credit to them, it's going to be much more easier. We don't need to send a new plastic to them, just make the credit limit available. That's something that we also believe it could help.

Also, we launched some insurance products, and there's going to be more insurance products in the near future that could also help monetize the consumers. Those are the -- what we have in mind in terms of product road map for consumers. In terms of credit book, I guess, Artur can help me here.

Yes, I'd like to say and -- I would like to say that there is a huge opportunity in the market. As you know, 70% of credit is held by the top 5 banks in Brazil. And based on the exclusion that we have in our clients, we know that there is a big opportunity to grow the credit book.

But we are not in a rush. We are doing all things in credit step by step, learning a lot. The NPLs are better than we had before. The new cohorts are performing a single digit NPL. The whole book is in a low double digit, NPL 90 days. And also, based on that, we are very confident that we can accelerate and the conditions allow us to do that.

But we are not in a rush. We are doing everything step by step. But the opportunity is too high. I would like not to set to you a level of portfolio, but there is a lot of room to grow in terms of credit here.

And also for consumers, we are not offering credit, just credit with -- just credit card with a collateral. And so in the end of the year or in the beginning of next year, we will start some offers to consumers.

If I can just quickly follow up. You mentioned in terms of monetizing your customers, you already charge them interchange. You already make money on interchange. Is that mostly from the prepaid cards that you currently issue to the customer -- to the consumer?

Yes, it is the -- what you say here is cash card is the prepaid card, yes.

And that's of the prepaid credit?

I'm sorry, Neha?

That is prepaid credit, Ricardo?

Yes. There's prepaid card, yes. I just -- I would take advantage. I don't know if we are, let's say, worried about the public hearing. But again, I just want to take advantage here that everyone is listening to us. The impact of the public hearing 89, which is the discussion about this cap is negligible for the company as a whole because the volumes that we have in spending for the prepaid cards is very similar than what we have in the acquiring when we are capturing these prepaid cards using our acquiring. Because in the acquiring we receive, we capture prepaid cards from all the banks in Brazil. So the volumes are very similar.

So any change that you have on one side, there will be an offset in the other side. So that's why -- I mean, I just want to take advantage here to make it clear. And if it's not clear, I can -- we can say it again. Just take advantage of your question, Neha.

That's very clear. So on to the consumers, I'm assuming that you're not in a rush. And maybe you will think about it in the second half of '22 or maybe after.

To give credit for consumers?

Yes.

Yes, credit for consumers, our attention is launched and start with credit card in the end of this year or in the beginning of Q1 '22.

But remember, Neha, that we are already offering payroll loans for consumers, okay, which is a very low product risk and helps to engage clients from consumer or consumer profile into PagBank, okay? Artur was talking about credit cards, okay? But we already have credit products with low risk for consumers.

The next question comes from Caio Prato with UBS.

Congrats on the results. So I have two questions, please. The first is about the SMB strategy again. Just to understand better what is the profile of these SMBs today. You mentioned that you are taking share from competition. And one of the reasons is the combination of acquire and banking. But just to understand, before you reach the merchant, I believe it already had a bank relationship before you, right? If so, are you saying that they are entirely replacing the previous banking account to yours? And if so, what's the reason for this? And if you are already originating credit for them.

And the second is a follow-up on the question about the cap on prepaid cards. I understood what you said about the potential impact. But I would like to better understand your general view about this product hearing if you believe this makes sense? And if there is any chance of this not vesting. And also, if you could share with us what's the percentage today of PagBank revenues coming from the interchange, if this is around 60%.

And finally, if this is actually imposed by the Central Bank, if -- does that change your guidance of reaching 30% of total revenues coming from PagBank until 2024?

Caio, thank you for the question. Talking about SMBs. When we have 300 HUBs, we have everything, right? We have -- everything is going on. We have different type of clients, different type of merchants. But I'd say that the common behavior is that why -- they do have already a banking relationship, you're right. Why they consider PagBank as an advantage and why they come to us because many of them pay fees for the banks. In some case, they don't have good service. In some cases, they don't have good products. So that's why they come to use us.

Again, that's the average client. If they come straight to us, probably not, because they start using us, they're starting testing the account, they're going to receive the card in a few days. And then once they get the confidence that the account is, okay, the app is working, they can withdraw the money and so on, they start sending, let's say, more money it us. And I'm not sure if they cancel the bank account right after that. But probably if they are paying fees, they do cancel and start working with us or they negotiated with the banks or things like that.

But you know that in Brazil that even banks that today charge for basic activities. If you want to make a wire transfer, for instance, they charge. Some people would say there is peaks. But peaks, there are some limits. And so sometimes you need to make these wire transfers and so on. So there are many, many fees that banks charge for SMBs, and that's why some of them come to us.

Also, we -- some of them asked us to have this multiple card that we didn't have, and we launched it last week. So that's another thing that we can advertise more and be more close to the SMBs.

Regarding on the cap of the prepaid. Again, it's a public hearing. And regardless of the outcome, the impact for the company as a whole is negligible because there is the offset. Should we change the -- and also, you ask it about the 60% revenues from interchange of the cards, today is lower than that. It's less than 60%. Does that change -- the public hear changed our guidance for 30% of revenue in 2024? No. It didn't change at this point. Again, it's a public hearing. We are looking for 2024. There are many variables, many assumptions in our business plan here to reach this 30%.

Some of the assumptions we are more conservative. Some of the sets that are more aggressive. But it's a very dynamic situation here. And so we don't need to change that at this point. We don't think it's feasible to change that. We are part of the public hearing. Central Bank. What we've seen in Central Bank this past year is that they are fostering competition. They try to make the financial system more competitive which is good for us because we are a flexible and agile company, tech DNA and so on. So we don't see the Central Bank changing their behavior in terms of fostering competition, which is very, very good news for us. So it's too early to say.

The public hearing is going to be over in November 21, and we don't know the outcome. It could be that the outcome is going to be keep same -- everything is the same as it is today because the Central Bank is going to look at the impact and so on. So it's too early to give the probable outcome. But again, the impact for us is negligible. That, to me, is most important message.

This does conclude our Q&A session for today. I would like to turn the floor back over to Mr. Ricardo Dutra for his closing remarks.

Hi, everyone. Thank you very much for investing the time to listen to us. Thank you very much for the questions. Look forward to talk to you next Thursday in our first PAGS Day. Have everyone a great night, have a good night, and talk to you next week. Thank you very much.

The audio conference for PagBank PagSeguro's results for the third quarter of 2021 is over. Thank you very much for your participation, and have a good evening.