PagSeguro Digital Ltd. Q2 FY2024 earnings call

Management Statement and Operational Highlights:

• Total revenue grew 19% year over year to BRL4.6 billion, with gross profit margin close to 40% and net income reaching an all-time high of BRL542 million (31% year-over-year growth). EPS was BRL1.68, a 32% increase from Q2 2023.
• Ended June with 31.6 million clients, adding over 2 million clients in the last 12 months, and 17.7 million active clients. Deposits reached an all-time high of BRL34.2 billion, a 87% year-over-year increase.
• Payments TPV grew 34% year over year to BRL124 billion, with strong growth in MSMBs and LMEC merchants. Banking cash-in reached BRL76.4 billion, a 52% year-over-year growth, and credit portfolio grew 11% year over year to BRL2.9 billion.

Segment Performance:

• Payments: Total revenue grew 17% year over year to BRL4.1 billion, with a gross profit margin of 38%. Total Payment Volume (TPV) reached BRL124 billion, a 34% year-over-year growth, with strong growth in MSMBs and LMEC merchants.
• Banking: Revenue grew 41% year over year, primarily driven by interest income from credit and service fees. Gross profit margin from the banking segment remained at 60% or higher for the third consecutive quarter. Deposits were up 87% year over year to BRL34.2 billion, and the credit portfolio grew 11% year over year to BRL2.9 billion.

Guidance:

• Total payment volume expected to achieve between BRL480 billion to BRL505 billion.
• Gross profit margin remains unchanged, above 40% over total revenue and income.
• Non-GAAP net income should be between BRL2.1 billion to BRL2.2 billion.
• CapEx remains unchanged, with D&A plus POS write-offs amounting to between BRL1.7 billion to BRL1.8 billion.

Risks:

• Forward-looking statements may not materialize as actual results may differ materially from projections.
• Risks include those described in the forward-looking statements and risk factors section of PagSeguro Digital’s most recent Annual Report on Form 20-F and other SEC filings.

Q: Kaio Prato from UBS asked about the guidance change and net income revision.

A: Ricardo Dutra responded that interest rate factors and balancing growth and profitability played a role, mentioning the economy's base interest rate at 10.5% vs. initial expectations of 9% and the need to manage various P&L variables.

Q: Pedro Leduc from Itau BBA inquired about SG&A reinvestment and income revision.

A: Ricardo Dutra explained that investments in marketing and personnel were part of supporting growth, with expectations of stable SG&A expenses in the second half.

Q: Mario Pierry from Bank of America asked about LMEC segment growth and take rates.

A: Ricardo Dutra stated that LMEC grew 50% due to platform integration and various factors, with both segments growing faster than the industry, though LMEC has lower margins but is accretive to the bottom line.

Q: Tito Labarta from Goldman Sachs questioned competitive dynamics and take rates in segments.

A: Alexandre Magnani responded that LMEC growth is faster than MSMB, with MSMB still growing healthily, and growth related to market dynamics rather than specific company privatizations.

Q: Jorge Kuri from Morgan Stanley asked about marketing/selling expenses and revenue growth confidence.

A: Ricardo Dutra and Artur Schunck replied that investments in marketing and personnel are part of building strong client cohorts, with confidence in future growth due to qualitative client engagement and product launches.

Q: John Coffey from Barclays asked about geographic expansion and early prepayments of receivables.

A: Ricardo Dutra mentioned geographic expansion in specific Brazilian regions and early prepayments related to receivables from other acquirers, with potential in the large TPV market in Brazil.

Q: Yuri Fernandes from JPMorgan asked about financial costs, net cash, and cash earnings.

A: Ricardo Dutra discussed lower financial costs due to deposits, plans to use excess cash for growth, and that lower non-cash expenses have minimal impact on guidance revision due to balancing various P&L factors.

Q: Bryan Keane from Deutsche Bank asked about acquiring pipeline and cross-selling opportunities.

A: Ricardo Dutra stated that the company looks for acquisitions to bring clients or talents, but no specific current opportunities to disclose.

Q: Gustavo Schroden from Bradesco BBI asked about LMEC economics and loan-to-deposit ratio.

A: Ricardo Dutra replied that LMEC is profitable, and there's no specific loan-to-deposit ratio guidance, with deposits growth aiding overall operations.

Q: Daniel Vaz from Safra asked about credit portfolio future and LMEC growth convergence.

A: Ricardo Dutra and Alexandre Magnani responded that credit portfolio is expected to balance, with LMEC still having growth room due to lower market share in card not present transactions.

Q: Gabriel Gusan from Citi asked about CapEx and future trends.

A: Artur Schunck explained that CapEx is aligned with strategic plans, with investments stabilizing and expected to remain in line with annual guidance.

Q: Renato Meloni from Autonomous Research asked about profitability and cost of funding.

A: Alexandre Magnani and Ricardo Dutra discussed margin compression related to segment mix and ongoing efforts to reduce funding costs through diversifying sources.