PagSeguro Digital Ltd
NYSE:PAGS
Earnings Call Analysis
Q4-2023 Analysis
PagSeguro Digital Ltd
The company proudly reported the highest net income in its history for 2023, marking a significant financial milestone achieved through diversification beyond payments, POS, and long-tail activities. Successful navigation through the pandemic and interest rate cycles has borne fruit, with 31 million clients added. The culmination of these efforts led to the processing of nearly BRL 1 trillion in financial transactions, symbolizing a remarkable 30% year-over-year growth. The company's earnings per share reflected this success, increasing by 12% to reach BRL 5.10.
The fourth quarter of 2023 continued the company's success story, with earnings per share climbing by 24% to BRL 1.53 compared to the same period in 2022. Total revenue also saw a healthy 10% growth, amounting to BRL 4.3 billion. The company's astute capital expenditures led to a robust net cash balance of BRL 11.2 billion, which is 13% higher than the previous year. Furthermore, cash and financial investments soared by 112%, indicating a strong financial position.
Client engagement showed significant promise as PagBank client numbers surged by 12%, exceeding 31 million—a figure on par with the most prominent Brazilian financial institutions. The active client base expanded to 16.7 million, leading to BRL 66 billion in PagBank Cash-in. This impressive metric, representing a 43% increase in cash-in per active client, demonstrates deepening relationships with the consumer base. Deposits reached a new precedent, hitting nearly BRL 28 billion, buoyed by the company's AAA S&P Global rating and robust checking account balances.
The company's credit portfolio benefitted from proactive initiatives, including the reduction of working capital loans and tax-planned write-offs of nonperforming loans, which started in the second quarter. This led to a stable and more secure portfolio, with payroll loans and FGTS withdrawals exceeding 50%. The shift towards secured lending resulted in a total credit portfolio share of 66%, driving the nonperforming loan ratio to the lowest level since the second quarter of 2022. These strategic movements signal a focus on asset quality and a reduction of credit risk.
The company highlighted a 27% increase in non-GAAP net income for Q4 '23, reaching BRL 520 million. The growth narrative continued for the annual figures, with an 11% increase to BRL 1.8 billion. The gross profit as a key metric stood out, hitting a record BRL 1.7 billion in the fourth quarter, up by 19%. This profitability is attributed to factors such as the growing adoption of PIX QR codes and the rise in total deposits, enabling the company to maintain healthy margins despite a reduction in net take rates.
Though operating expenses increased by 13%, this was offset by cost leverage in other areas, such as a reduction in financial expenses thanks to a lower average cost of funding. Impressively, total losses were reduced by 36% year-over-year, demonstrating the efficacy of the company's risk management strategies. The culmination of disciplined cost control and favorable revenue trends led to a significant increase of 65% in annual cash earnings, reaching over BRL 1.5 billion. The commitment to a balanced approach towards growth and profitability resulted in a robust year-end net cash balance, reinforcing the commitment to shareholders on capital allocation and returns.
Looking ahead, the company has set an ambitious target for 2024, expecting total payment volume to range between BRL 441 billion to BRL 457 billion. Forecasts include an improvement in gross profit margins, surpassing the Q4 '23 level of 38.5%. Non-GAAP net income projections are set between BRL 2.05 billion to BRL 2.15 billion, anticipating a maintenance of the effective tax rate seen in 2023. Furthermore, the company plans to continue investing in growth, with capital expenditures forecasted between BRL 2 billion to BRL 2.2 billion and depreciation and amortization, including POS write-offs, anticipated to be between BRL 1.9 billion to BRL 2 billion.
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Good evening. My name is Audir, and I will be your conference operator for today's call. Welcome to PagSeguro Digital Earnings Call for the fourth quarter of 2023. The slide presentation for today's webcast is available on PagSeguro Digital's Investor Relations website at investors.pagbank.com. [Operator Instructions] Today's conference is being recorded and will be available on the company's IR website after the event is concluded.
I would now like to turn the call over to your host, Éric Oliveira, Head of IR. Please go ahead, sir.
Hello, everyone. Thanks for joining our fourth quarter 2023 earnings call. After the speaker's remarks, there will be a question-and-answer session.
Before proceeding, let me mention that any forward-looking statements included in the presentation or mentioned on this conference call are based on currently available information and PagSeguro Digital's current assumptions, expectations and projections about future events. While PagSeguro Digital believes that the 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 Digital's earnings presentation or discussed on this conference call, for a variety of reasons, including those described in the forward-looking statements and risk factor sections of PagSeguro Digital's most recent Annual Report on Form 20-F and other filings with the Securities and Exchange Commission, which are available on PagSeguro Digital's Investor Relations website at investors.pagbank.com.
Finally, I would like to remind you that during this conference call the company may discuss some non-GAAP measures, including those disclosed in the presentation. We present non-GAAP measures when we believe that the additional information is useful and meaningful to investors. The presentation of this non-GAAP financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered separately from, or as a substitute for, our financial information prepared and presented in accordance with IFRS as issued by the IASB.
For more details, the foregoing non-GAAP measures, and the reconciliation of these non-GAAP financial measures to the most directly comparable IFRS measures, are presented in the last page of this webcast presentation and earnings release. With that, let me turn the call over to Ricardo. Thank you.
Hello, everyone, and thanks for joining our fourth quarter 2023 earnings call. Once again, I have the company of Alex, our CEO; and Artur, our CFO.
Going to Slide 3. I'm happy to announce in 2023, we had the largest net income in the history of the company. We successfully passed through a pandemic and a high interest rate cycle for a longer-than-expected period. Meanwhile, we have diversified our business model beyond long tail, beyond POS and beyond payments, managing the risk related to the credit cycle and, at the same time, reshaping our funding structure backed by deposits.
Recently, we have been accelerating our growth, already reflected in the quarterly operating trends, which combined to the easing cycle of the Brazilian interest rate should positively and additionally, contribute to the business evolution, delivering growth, revenue diversification and profitability.
By the end of 2023, we reached 31 million clients, and we processed almost BRL 1 trillion in financial transactions in 2023, a 30% growth year-over-year.
In Payments, we keep growing in a profitable way and our TPV reached BRL 394 billion. Aligned to our strategy to become a comprehensive one-stop shopping payments gathering cards, boletos, PIX, among others, our Cash-in reached BRL 217 billion, a 59% growth year-over-year. Combined, they drove up deposits to all-time high level, reaching BRL 28 billion, reinforcing the power of our closing loop which helps lowering companies' cost of funding. And in our credit portfolio, the share of secured products reached 66%, 25 percentage points higher than 1 year ago.
In the shareholders' return column, we can see our earnings per share reached BRL 5.10, 12% higher than 2022. Net income in non-GAAP basis reached BRL 1.8 billion in 2023. And we also used BRL 400 million to buyback shares in 2023, 37% more than 2022.
Finally, our value-added to society stand out. We have become a benchmark among digital banks, fintechs in Latin America landscape by including millions of Brazilians into the digital financial system, positively impacting clients, suppliers, investors, employees and the society. That was possible due to our unique lean and high technological infrastructure in terms of security, AML and data privacy with much lower impact on climate in comparison to the banking industry around the world, allowing us to roll out new products faster and managing new and existing risks with an affordable price for our clients.
Moving to the next slide, our Q4 '23 highlights. EPS reached BRL 1.53, 25% (sic) [ 24% ] higher than Q4 2022. Total revenue grew 10% year-over-year, reaching BRL 4.3 billion with all-time high non-GAAP net income of BRL 520 million.
The disciplined CapEx deployment resulted in BRL 11.2 billion in net cash balance by the end of the quarter, 13% higher than previous year, driven by cash earnings generation. Cash and financial investments reached BRL 6.2 billion, 112% growth year-over-year.
On the payments' side, TPV growth accelerated in all merchants' segments, reaching BRL 114 billion, 21% higher than Q4 2022 and TPV per merchant and SMB TPV grew 32% and 31% respectively.
In Financial Services, we see client engagement constant growth. Our Cash-in, which is composed by all PIX P2P and wire transfers sent from another financial institutions into PagBank account, marked BRL 66 billion with Cash-in per active client, growing 43% when compared to Q4 2022, reaching BRL 4,000 per active client. This increase drove up deposits to the all-time high level, reaching almost BRL 28 billion.
Now I'll pass the word over to Alex for the commentaries on the operating highlights for the quarter.
Thank you, Ricardo. Hello, everyone. On this first session, will show how our value proposition in Payments has unlocked new addressable markets by reaching relevant milestones throughout 2023.
Going to Slide 6, our strategy to expand our service to a more diversified merchant profile led our payments business to move beyond micro-merchants. Our go-to-market strategy has been focusing on merchant's activation, healthy cohorts and cross-selling rather than merchants' net adds growth since 2022. On top of it, we have been strengthening our sales force since September 2023. As a result, our TPV from SMBs and large accounts grew, respectively, 31% and 11% year-over-year in Q4 '23.
We have also unlocked new market beyond point-of-sales, ramping up online payments with the conclusion of MoIP integration and the revamp of our cross-border payment business unit called PagSeguro International. Furthermore, additional features such as Tap on Phone and facial authentication for payments via link has enabled our merchants to sell more through a seamless and integrated omnichannel solution.
As service levels become more and more relevant in clients' decision about their acquirer option, we also would like to share the great improvements done in our service levels. During the past 3 years, our teams have been working hard to increase client satisfaction, while promoting additional cost savings through processes, automation and optimization.
We show on Slide 7 that our merchant acquiring business remains solid and through the combination of our superior value proposition and the broad reach of our sales channels, we have been able to accelerate TPV growth faster than the industry, driven by our merchants' segments. TPV reached BRL 114 billion in Q4 '23, growing 21% year-over-year with similar trends observed in the first weeks of 2024.
MSMB TPV posted 27% growth versus fourth quarter 2022, primarily driven by SMBs followed by micro merchants. As Ricardo mentioned earlier, we also continued to see growth in TPV from large accounts, which is a result of our evolution on the development of an integrated omnichannel payments platform for large customers.
During the Q4 '23, we also observed a relevant growth of 14% among the long tail segment, in which we are already the market share leaders.
Moving on to Slide 8, the instant prepayment product, which combines payment service and financial service through the PagBank account, has promoted an increased footprint in SMB merchants and larger share of wallet, resulting in 32% year-over-year growth in TPV per merchant.
Our current strategy remains focused on disciplined CapEx deployment and merchants' activation rather than net adds. We observe it once again the growth of our active merchants, 3% year-over-year when excluding nano-merchants. On the top of it, POS activation has continued to move up, which represents a positive sign of our strategy playing out.
On this next section, we'll share some highlights about the financial service business.
Our strategy is to provide a seamless experience combining payments, value-added services and banking through multiple interfaces for merchants and consumers.
In 2023, we reached an important landmark in SMB bank account. Nowadays, not only micro merchants can grow faster their business with one-stop shop solution, but also small and medium business can rely on our app and internet banking to manage multiple sales proceeds, multiple payment methods, multiple sales channels in a simple, digital, safe and seamless way.
For consumers, we are in the very early stages to capture the opportunities we have ahead of us. Still, we were also able to create a complete retail digital banking experience, simplifying the financial lives of our clients. Our credit cards backed by investments help to educate our customers and their monthly income usage.
Our payroll loans through our digital channel provides affordable APRs and no need to reach out a bank branch. For the savers, our investment platform is robust and our high-yield savings account unable to manage cash liquidity while providing the best returns.
Due to all of that, in Slide 11, we present that PagBank clients grew 12% year-over-year, surpassing 31 million clients, placing us among the most relevant Brazilian financial institutions with more than 3 million new clients added in the past 12 months.
Our active clients base reached 16.7 million clients, leading to BRL 66 billion in PagBank Cash-in, composed by PIX P2P and wire transfers inflows into PagBank accounts from other financial institutions. Finally, Cash-in per active client, an important indicator of the increasing engagement with our client base grew 43% year-over-year, reaching BRL 4,000 per client.
Moving on to the next slide. Combined, TPV it and PagBank Cash-in led deposits up 33% compared to the fourth quarter of 2022, reaching a record of BRL 27.6 billion. This deposit level was boosted by our AAA rating attributed by S&P Global, which enhanced our CDs distribution among institutional and retail investors, on and off-platform. Checking accounts balance, the cheapest funding source and a key performance indicator to measure client engagement grew 31% year-over-year, driving down our annual percentage yields to 94% of the CDI.
Slide 13 shows that our credit portfolio reached BRL 2.5 billion due to our ongoing runoff of the working capital loan portfolio combined with the tax planning to write-off nonperforming loans started in 2Q '23. We expect this runoff effect to stabilize over the next quarters.
Payroll loan and advancing FGTS withdrawal already accounts for more than 50% of the portfolio, expanding our offerings to consumers primarily through a seamless experience and cheaper cost structure. Our go-to-market strategy for secured loans is based on competitive and digital end-to-end onboarding, risk assessment, underwriting and collection. This also includes our offering of credit cards backed by investments and savings.
The total credit portfolio share composed by secured products, reached 66%, resulting in the ongoing trend in NPL90 to 7.5%, the lowest since 2Q '22.
Now I turn over to Artur for the financial highlights of the fourth quarter and full year 2023. Artur, please.
Thanks, Alexandre. Hello, everyone, and thank you for joining us in the call. This quarter, I am proud to announce all-time high net income GAAP and non-GAAP.
Net income on a non-GAAP basis reached BRL 520 million, growing 27% versus Q4 '22. On a yearly basis, non-GAAP net income reached BRL 1.8 billion, 11% higher than 2022. GAAP net income reached BRL 488 million in the last quarter of 2023, growing 20% year-over-year. On a yearly basis, GAAP net income reached BRL 1.7 billion, 10% higher versus 2022. Earnings per share reached BRL 1.53, BRL 0.26 better than in the last quarter. For the year, EPS reached BRL 5.10, 12% better than 2022.
Moving on to Slide 16. This quarter, we had a record of BRL 1.7 billion in gross profit, a 19% growth in comparison to Q4 '22. On a yearly basis, gross profit reached BRL 6 billion, a 9% increase versus 2022. We consider the gross profit as the best KPI to capture our margins evolution, since it considers the impact of financial expenses and total losses in the spreads.
We highlight 2 factors that has been positively contributing to gross profit. First one is PIX QR code growth, due to the better unit economics with instant settlement and lower costs in comparison to cards. Second is the growth of total deposits since the access to a cheaper funding source enables pricing power with healthy margins.
Q4 '23, total revenue and income grew 10% on a yearly basis, positively impacted by higher volumes from acquiring. Net take rate decreased in the quarter, and this downtrend is natural to continue in coming quarters, due to the growing share of larger merchants in our TPV, which has lower churn and lower take rates.
On Slide 17, revenues from Payments unit grew 8% quarter-over-quarter, while gross profit grew 13% in the same period. TPV growth and transactional cost savings due to interchange cap impacted positively the current performance versus Q4 '22. Comparing quarter-over-quarter, the increase was mainly due to client mix change towards larger clients with lower take rates but incremental gross profit contribution.
In the next slide, Financial Services vertical's total revenues reached BRL 253 million in fourth quarter of 2023, while a strong increase in gross profit, reaching BRL 125 million, up 24% on a quarterly basis, mainly driven by higher margins. We ended 2023 with BRL 515 million in gross profit, a 30% increase versus last year.
Moving to Slide 19. We continue observing leverage on costs and expenses. Financial expenses closed at BRL 841 million versus BRL 855 million in the fourth quarter of 2022. This decrease is mainly explained by our lower average cost of funding, driven by a higher level of deposits and lower basic interest rate, partially offset by strong TPV growth.
Total losses decreased 36% year-over-year, accounting BRL 123 million, driven by lower provisions for expected credit losses and credit underwriting mostly on secured products. This performance is very important as it shows the evolution of our risk assessment tools and the quality of our collection process. The 2.8% is the lowest level of losses as a percentage of revenue since first quarter of 2019.
Operating expenses reached BRL 700 million and 13% increase year-over-year. The increase is mainly due to the strengthening of our sales force and marketing expenses to support and accelerate the positive momentum of the company's growth, which will continue to contribute to the revenue expansion and product cross-selling going forward.
In the Slide 20, our cash earnings continued to gain momentum, driven by disciplined control in total costs and expenses, as mentioned in the previous slide, but also revenue growth with higher margins reaching a positive amount of BRL 454 million, up 11% versus same period of 2022. On an annual basis, we have ended 2023 with over BRL 1.5 billion in cash earnings, a 65% increase versus the previous year.
CapEx marked BRL 521 million, mainly due to the upbeat trends in merchants' gross adds and product development on tech, but lower quarter-over-quarter. Looking forward, our discipline in capital allocation and efficiencies in tech investments will remain without harming the new ventures we are entering into it.
Depreciation and amortization, including POS write-off, totaled BRL 405 million, representing 9.3% of total revenue and income, a slightly reduction versus previous quarter, keeping the pace to coverage to CapEx levels in the coming quarters to unlock additional profitability in the future.
Moving on to Slide 21. The solid results from this quarter contributes to the increase in our equity position with 60% being composed by retained net income, reinforcing our commitment to shareholders on capital allocation and returns.
Our net cash balance ended the third quarter at BRL 11.2 billion. In the past 12 months, our cash generation amounted to BRL 3.7 billion from which BRL 2 billion were invested in POS purchases and technology developments and approximately BRL 400 million were used in buyback shares.
As of December, Treasury held more than 4% of total shares issued and the company bought back BRL 1 billion in shares since 2021 that represents more than 80% of the total program approved in 2018. Cash and financial investments ended 2023 with over BRL 6.2 billion, a 112% increase year-over-year, which demonstrates the success of our strategy of best balancing growth and profitability with a solid balance sheet to support our business evolution.
On the final slide, we would like to share our guidance for 2024 based on the current scenario. We expect total payment volume to achieve between BRL 441 billion to BRL 457 billion, with healthier gross profit margin above Q4 '23 level of 38.5% over total revenue and income.
Net income in non-GAAP basis should be between BRL 2.05 billion to BRL 2.15 billion, considering the similar level of 2023's effective tax rate.
Following up, CapEx should be between BRL 2 billion to BRL 2.2 billion and D&A plus POS write-offs amount between BRL 1.9 billion to BRL 2 billion.
Now we have ended the presentation, and we will start the Q&A session.
[Operator Instructions] Our first question comes from Antonio [indiscernible] from Bank of America.
Congrats on the results. Very strong guidance. Let me focus on this. So please, if you could share a little bit on operating expense assumptions and also take rate assumptions for further guidance.
Antonio, thank you for the question. This is Ricardo. I will start with the take rate. If you look at the take rates moving forward, take rate should go down a little bit, not because we are decreasing prices, but because of changing the client mix with more SMBs. SMB is getting share in the total payment volumes. And to be honest, as the financial income and financial expenses are very important to our business, it's better to look at the gross profit yield, so to say, which captures the financial expenses.
So if you look at the gross profit yield, you're going to see that is very stable regardless of the growth, regardless of the change in the client mix. You're going to see that the percentage of the gross profit compared to TPV, is very stable throughout the quarters. But if you look specifically net rate should go down a little bit again because of the change in the client mix with more SMBs. Regarding OpEx, Artur will clarify to you. Thank you.
Antonio, it's Artur speaking. Regarding to OpEx, it's important to mention that the growing is according to our growth strategy. So the company is growing. OpEx should grow too that means OpEx will grow more than inflation for 2024, but enable to pressure the margins increase going forward, okay. We are seeing and considering this guidance, marketing a little bit higher than used to be in the 9 months of 2023.
So something similar to Q4. Personnel expense is higher because we strengthened our sales force in the end of Q3 and also other expenses more related to infrastructure that we are considering to support the volumes that we will have.
Our next question comes from Eduardo Rosman from BTG Pactual.
So congrats on the numbers. I have two questions here. First, on your potential credit growth or prepayment growth. We can see that you have lower losses, a very strong Cash-in, right, which suggests improvement in the principality. So clients using more PagBank as their main bank and a lot of deposits, right? So what are you waiting for in order to expand a little bit more on your asset base, because clearly, if that happens, your results can improve faster. That would be the question number one.
And question #2 would be about dividends, right? We can see naturally that you are buying back shares. So I think your EPS has been even better, right? So -- but you're still generating a lot of cash. You have a CapEx plan that is not going to go up anymore. You have -- you're generating more cash than you need. Why not paying dividends as well? So that's it.
Eduardo, thank you for the question. I will start, and then Artur can talk about the dividends and so on. Regarding the Cash-in, you're right, we have -- we had a very strong Cash-in Q4, BRL 66 billion in Cash-in. Deposits growing to BRL 28 billion, the all-time high. And as you know, deposits are important for a bank because you can have this cost of funding to be competitive and then you can offer better products on the other hand, regarding to credit and so on.
We know that we're going to have a diverse top five portfolio. That's part of our plan. In the past 2 years, we have noticed an unfavorable scenario in Brazil that you know very well, what you saw in delinquency and given the big banks and incumbent banks. And then we decided to create this portfolio with secured products. We've been building this portfolio in the past years. We will keep building this portfolio in 2024.
We are running some tests in unsecured products. We have the team here. We have the processes in place. And we will start offering this credit and secure when you think it is appropriate, but you're going to do in a cautious way, but we are finding that because at this point, we are building these deposits and building the cyclical portfolio, which is important for the future.
Because depending on the economic cycle, we should be more aggressive in unsecured or if it an economic cycle, it's easy. We can go to -- I'm sorry, if the economic cycle is more hard, we can go to secure and if it's more easy, we go to unsecure, but you've got to build this credit portfolio if time passes by. But we're going to do it cautiously in the following quarters, probably going to have some good news.
Eduardo, Artur speaking. Nice to talk to you. Talking about capital allocation and more specific to dividends and share buyback. You are right, we use it to buyback shares. In the past -- the last buyback was executed on October '23, and we will continue executing in an opportunistic way.
In 2023, we bought back BRL 400 million and 37% higher than 2022. Now we have in our treasury, 4% of outstanding shares, and there is $45 million remaining to execute in the program approved. But we are discussing internally a new buyback program as -- and we will disclose as soon as we conclude the buyback program that we have approved in 2018, but there is no discussions on dividends at this moment. We see many growth opportunities and investment in new ventures that will provide higher returns in the future. So this is the reason that right now we are not discussing dividends at this point.
Our next question comes from Kaio Prato from UBS.
I have two on my side, if I may, please. The first one, it is also related to credit, but more specifically to the credit card portfolio. I understand that the product is secured. And at the same point, we are seeing the level of deposits and investments in the PagBank continuing to increase, which is really good. So my question is, why are we not seeing, I would say, a sequential increase in the credit card portfolio since it is secured, and we are seeing an increase in terms of investment.
So I just would like to understand the rationale behind that if you are being more cautious on the credit card even if the -- backed by the investments or not? And also, if you think at some point, I would say, to gain some traction in the fixed credit products that we are seeing from some other peers, as probably you are one of the main players in terms of fixed market share nowadays. And then I have a follow-up with the second question.
Thank you for your question. Regarding the credit card portfolio, you're right. We are -- been growing our deposits, as I said before, close to BRL 28 billion, the all-time high. Explanation for -- when you look at our data and you don't see the credit card growing faster is because we have the payroll and the FGTS products growing faster than the rest of the portfolio. That's the first one. So they're getting share.
And the other part is because we are replacing part of our unsecured credit card portfolio to secure the credit card. So probably you don't see the growth because we are changing this mix from unsecured credit card to secured credit card because when you look at Slide 13, this 30%, 12% is secured and 18% is still unsecured and then we are making this shift. So that's why you're not seeing the growth because of these 2 moving parts.
Regarding the PIX market share, where we keep working with our acquiring solution, and we see that big credit are not going -- getting, let's say, share from the credit card product because of many reasons. So we are following that very close. But at this point, it's very small. We see that still consumer prefer to use a credit card because they have all the system regarding chargebacks, all the security and so on, not to say the installments. And so we are following that, but we don't see that changing dynamic because of this new product that some players are trying to develop.
Okay. And my second question is around the effective tax rate. We saw that it actually reduced this quarter. Again, I think it's around 18%, down from 21% last quarter. So I just would like to understand the drivers here. And why is considered, I would say, implied in your guidance in terms of effect tax rate for 2024, please?
Kaio, you're right. When you see the Q4 compared to Q3. But if you look at the whole year, you're going to see that in 2023, when compared to 2022, we have a higher tax rate, which means that our earnings before tax is growing. And regarding the guidance, I'll let Artur just explained to you, but it's pretty straightforward here.
Yes, Kaio, thanks for the question. And considering for 2024, we are considering effective tax rate in the same level of 2023. So that's the point.
Our next question comes from Yuri Fernandes from JPMorgan.
I have two questions also. One is on the credit regarding the NPL. You mentioned and it improved again, now running around 7.5, so my question is, if you have any kind of outlook for this NPL? Like should we continue to see NPL improvements for you? So that's the first one.
And I have a follow-up on COGS. When I check your administrative expenses, here, it was pretty good down year-over-year. You mentioned some seasonal effects here. I would like to understand a little bit what is driving your improvement on administrative expenses because you're growing, revenues are growing, everything, you're investing more, and it called my attention that administrative expenses if you look at non-GAAP or GAAP is improving. So that's my second one.
Yuri, regarding the NPLs, we see that NPLs 1 year ago was around 20%, and now it's down to 7%. It's a very good achievement, a lot of work here to do so. And looking forward, we see these trends with the same path, the NPLs going down mainly because we are getting more control with the credit concession with the collection and all the processes that we have in place and also because of the change in the mix with more secured products. So looking forward, with the credit portfolio that we have at this point and that we plan for 2024, we expect the NPLs to keep going down. Regarding second question, Artur will explain to you.
So Yuri, thank you for the question. In terms of administrative expenses, we had a decrease in comparison to Q4 '22, mainly due to seasonal efficiencies captured in this quarter. We also have there part of the long-term incentive plan booklet. And so there are some reversal on that plan.
I think Artur what are the seasonal efficiency that you capture this quarter?
This is Éric. In Q4 '22, we have a reversal in our long-term incentive plan. So this created like an easier comp in order to not fully capture the effect. So I recommend you to observe the non-GAAP basis in order to proper model the administrative expenses moving forward.
But Éric, even on the non-GAAP, it was down and it's adjusted by the [indiscernible]. We can check this later. It's not that material, but it's call my attention that it's down.
Yes. Kaio, I think it's important -- sorry, Yuri it's important to mention that, okay, administrative expenses -- Eric, you can follow up with you after the call and another meeting, no problem. But it's important to say to you that OpEx is the most important then only take a look in specific lines, okay?
Yes, Yuri, it's all about long-term incentive plans, okay? We can follow up, but it's a difference between the long-term incentive plans in Q4 2022 and in Q4 2023, okay? So this is the main difference here. But definitely, we can follow up with you, okay?
Our next question comes from John Coffey from Barclays.
Great. Basically my follow -- I had two questions. I was asking both at once. So when it comes to your guidance for the TPV in 2024, it looks like the range is about 12% to 16%, midpoint 14%. Given that you had a 21% growth in Q1, can you help us think about the cadence of the growth in the other 3 quarters? Is it roughly going to be 12% perhaps? Or is it going to be moving up and down as those quarters go on?
And the second question is, given that you did give 2024 guidance, does this contemplate that we're going to have about 7 more 50 basis point [indiscernible] cuts in the -- I think it's remaining 7 meetings of the Brazilian Central Bank over the course of the year?
John, thank you for the question. You're right. Our guidance between 12% and 16%, midpoint is 14%. The industry expects to grow in the high single digit, low double digits. So we expect to grow a little bit more than the industry. What we saw in Q1 is not the same number but a similar trend than what you had in Q4 2023.
So it's a good momentum in TPV. So that's why we are confident to give this guidance at this point with the best information that we have, which is the performance from Q4, January and almost the full month of February. So that's regarding TPV.
Regarding the interest rate that is going down, the last report you saw from Central Bank is to have CDI or SELIC by the end of the year as 9%. And you know that when we have this decrease, we have a lower cost of funding. So we are considering that in our business plan and in our guidance for 2024. So that's the assumption that we have at this point, getting the end of the year with 9%.
Our next question comes from Neha Agarwala from HSBC.
Congratulations on the results of the strong quarter. Two quick clarifications. First on the tax rate. So you clearly mentioned that you're expecting in your guidance effective tax rate to be stable year-on-year in 2024. But given that we've seen an increase between '22 to '23 and with growing relevance of PagBank, shouldn't the effective tax rate be gradually moving upwards. So if you could explain the dynamic there.
And my second question is on the TPV. All of last year, you've been focused more on the MSME, but it seems like now the volume growth is improving both in the SME as well as in the micro merchants. How do you see the TPV mix evolving during 2024? Any noticeable changes that we should be mindful of?
Thank you for the question. I will start with the TPV and then Artur can clarify the tax rate.
Regarding TPV, you're right, we're growing more in SMBs, but when we break down [ SMEs ] and SMBs, you're going to see we're going more in SMBs. And we expect to keep growing more in SMBs because we have all the sales force focused on these type of clients.
And of course, they have a TPV promotion higher than in the small merchants. So that's why we expect the SMBs to keep gaining share in the total mix, and that's part of the explanation or the main reason that's why net take rate should go down, but the gross profit as a percent of TPV being stable because they're going to have other adjustments in other lines such as lower financial expenses and other adjustments that we are going to do in the company for -- to achieve this guidance.
But going back to your question, SMB will gain share in the total mix. That's what we expect.
So Neha, in terms of tax rate, naturally, you are right. When we have more revenues in the banking, legal entity, the effective tax rate should go up, but we have an efficient tax planning here to work with all the legal entities that we have in the group.
And we are not considering any increase in comparison to 2023. So this is the reason that we said in the guidance that we have the same level of 2023, even considering that financial sales should increase the revenue for the company.
If I could just clarify one thing. Last year has been a bit weak in terms of merchant net adds in the long tail. You've been losing nano merchants. And that's been more of a conscious decision to improve profitability. How is that evolving during 2024? Should we see stability there? Are you done with all the cleaning up that you had to? Any color on the long tail would be very helpful.
Neha, if we look at the total merchants, it should stabilize at some point in 2024. We don't have a specific quarter that's going to happen. But if you go one of the slides in the presentation or remember Slide 8, you're going to see that if we exclude the nano merchants that it's a big number of merchants but that they have a very small percent of TPV, it's only 1.3% of TPV.
If we exclude these merchants, you see that our base grew 3%. So -- but going back to your question, it should stabilize at some point, but we are looking more at the total TPV that we are giving this guidance to grow between 12% and 16% in the whole company.
Our next question comes from Gabriel Gusan from Citi.
My question is about the TPV acceleration in SMBs. I'd like you to double-click on the strategy that's been implemented. Is it more regions? Is it more salespeople? Are you doing more adds or overall spending more in marketing? Is it helping? And can you please comment on competitive landscape in that segment that has allowed you to outperform so much in the quarter?
Gabriel, thank you for the question. As you can imagine, there is no silver bullet here. It's a mix of many things. So we did have more -- a little bit more people in the sales force, but we also have been focused on the SMBs with a very strong value proposition for the banking products. So we are offering them our banking products, and then they can decide to work with us not only because of the acquiring, but because of the whole package or the whole value proposition that you bring to them.
We keep gaining share from other players because of the service, because everything that we offer, the instant settlement, the logistics that you have that are one of the best in the market, if not the best. So all these things, the service levels and the service that you offer help us to get this SMB client. So there is no one specific reason with the mix of many things, at the end of the day is to serve the client the best way that we can.
And about the competitive landscape and pricing environment?
In competitive landscape, to be honest, Gabriel, everyone is being more rational. We don't see any company trying to buy market share, even the companies that was gaining share in Q3. For instance, some of the companies loss share in Q4.
So we see everyone being more rational, which is good in the market. So pretty much the same that have been seen in the last year. No irrational movements. Everyone looking for profitability. And the industry is growing. As you can see in the total year, the industry grew 10%. So I mean the industry is growing. Everyone is trying to get the clients and not making irrational movements.
Our next question comes from William Tang from Susquehanna.
It's Jamie Friedman at Susquehanna. So two questions. One, with regard to guidance, over the years, you've given guidance, sometimes not giving guidance. I'm just curious philosophically in terms of where your thinking is now as to do you feel like your visibility has improved such that you can guide? That's one thing.
And then in terms of the SMB mix shift, which I know is an evaluation. How are we thinking about the HUB support strategy related to the evolution of the merchant base? So the first is on the guidance, the second is on the HUBs.
James, thank you for the question. Regarding the guidance, yes, if we look back during the pandemic and even a little bit after the pandemic, we used to give a quarterly guidance because there is a lot of uncertainty in the market, so people are concerned about TPV, consumption and so on.
So we took this decision back there to give a quarterly guidance to give the comfort for the market and for the investors what we are seeing because there was some, let's say, people think there could be more volatility in the market, consumption going down and so on. So that's why we decided to give the quarterly guidance.
And when we decided to stop to give the quarterly guidance, the main reason was that everyone looks only for the specific numbers for the quarter, and we're not looking for the whole picture for the trajectory of the company -- for everything that the company was developing and all the clients and so on.
And we decided to give the guidance for 2024 because I think it's a good decision to give this comfort to the investors so that you can understand what you're thinking. It's not a short term guidance, a quarterly guidance. We have this, let's say, plan for the 2024 that we can execute against this guidance, and we think it's going to be a good north for everyone to understand what we're thinking and what we are seeing and the results of the company that you expect. So yes, that's regarding the guidance.
And regarding the SMB evolution, the HUB strategy, the HUBs, of course, helps us to get the clients. And of course, the HUB is also helped us to serve the clients. So not only to acquire the clients but also to make some farming to cross-sell some products and even to deliver some support and some service for the client -- the SMB clients. So we are using the HUBs in very different ways, not only to acquire the clients but also to support them and to make some farming, and we keep working with the HUBs. We grew a little bit in Q3 2023. Yes, so that's why we've seen the HUB so far.
Our next question comes from Josh Siegler from Cantor Fitzgerald.
This is Will Carlson on for Josh. Two questions. The first one is, what services are you seeing new clients onboard with? And how is this shaping the way you think about platform investments looking forward?
And then second question, can you dive into the improvements you're implementing for onboarding and risk assessment to reduce chargebacks and losses?
We -- of course, the declines that we have in the acquiring business, usually, they get the device, and many clients decide to use our cards because it's a way for them to cash out so they can have a card, they can withdraw the money, they can make purchases and so on. So usually, these 2 products go very well with the clients.
And we try to offer them another additional services such as investments, insurance and so on. So part of the clients are buying or acquiring this service, but usually, they acquire the POS -- the device and the cards.
Regarding the chargebacks -- and regarding the investments platform, your second question, we keep evolving the platform. A few months ago, we didn't have, for instance, stocks. Today, we do have stocks, but we don't have options for instance. So we'll keep evolving this platform and the prioritization takes into account what our clients are looking for.
I know we've got many questions in the past about crypto and so on, but that was not the type of price that we had in our base. So right now, we keep evolving this investment platform because it helps us to get the client to increase engagement. But we are having some prioritization here. We are in the path to have a complete platform in the following quarters. Regarding chargebacks, I'll pass the word to Alex.
Well, we have done many improvements on our onboarding and also getting biometrical information and validation of our customers. We also implemented some second authentication factor in our cash out. Some of our solutions for online payments, we have implemented facial authentication for the transaction.
So we can improve not only chargeback but also conversion rates, and we have been putting in place a lot of intelligence and usage of our data to prevent -- to better prevent fraud in our ecosystem in payments and financial service altogether. And we have been scanning our base and being more rigorous on the onboarding process to avoid fraudulent activity in our ecosystem.
Our next question comes from Bryan Keane from DB.
It's Bryan Keane at Deutsche Bank. Just thinking back here strategically, going through thinking about the IPO process, when you guys came out, you were growing mostly micro merchants in the payment business and growth rates were well above industry. Then over the past 18 months, well, I guess the recent 6 months, there's been a massive transition. But I guess going back, we went to in the Payments business of basically growing at market.
And obviously, the stock was under quite a bit of pressure under that. And then now we've completely reversed, and we're back to gaining share versus the market significantly in the Payments business, in particular. Can you just talk about structurally what's changed in the strategy that's worked? And how sustainable you think the share gains are now in the payments business?
Yes, you're right. The company started with micro merchants in the IPO 6 years ago. And of course, it's part of this dynamic market for the company to evolve and to change.
I would not say that we are making this transition, but I would say we are doing this expansion because we are not only focused on serving the micro merchant, but also addition we are having the SMBs as well. So we are growing the size of the pie that we can work with. And in my opinion, we've been very, very successful in doing this expansion, as you can see in our SMBs.
Part of the market in terms of micro merchant, doesn't grow at the same pace that used to grow 6 years ago because, of course, we have more penetration of credit cards, acceptance in the micro merchant so that's why we don't see the growth. It's not saturated, but it's not only at the same pace that it used to grow in the past.
So that's why you don't see this number of merchants growing at the same pace that it used to grow in the past. But what we do see is credit cards getting more penetration in PC. We also see opportunity in micro merchants -- in SMBs, not only because they're getting any clients, but because they are getting TPV from other acquirers they work with. Sometimes they have more than one acquire about trying to make this TPV for us so that also helps to understand why we're growing more than the market.
But we are not growing significantly more as we have only the micro merchants because -- I mean, the size of the company is also much bigger than it used to be in the past. So markets expect to grow high single digit, low double-digit in 2024, and our guidance is between 12% and 16%.
So I'll not say that the strategy has changed that much. We are just trying to get SMBs as much as we can, try to make the shift from other acquirers to work with us. And of course, we also take advantage of the credit card penetration in PC that is still happening in Brazil.
Yes. It just looks like the execution on the share gain side of what you're growing versus the market has improved, especially over the last 2 quarters. So I was just trying to see if there's anything in particular to think about the mix of business. Obviously, all those [ call outs ] you bring up are logical, but the amount of share gain that you guys are now getting is better than the market expected and better than our expectations.
It's important to mention that we also have done in the past year many investments to explore new and nonprofitable segments where we didn't have too much participation and penetration such as online payments, cross-border payments and also serve larger merchants with integration, with automation systems and all these integrated partners that we have been integrating our payment platform into them. So this is also helping us to explore other markets that we wouldn't reach before and also in a profitable way.
Our next question comes from Tito Labarta from Goldman Sachs.
Congratulations on the strong results. A couple of questions. I guess a little follow-up just on the competitive environment. Just kind of curious how you think if there could be any changes we're seeing one of your competitors, potentially being privatized by its owners. We've heard Pfizer in the U.S. wants to grow Clover in Brazil.
And just as things get better, I mean could there be any potential changes in the competitive environment? I mean you seem pretty comfortable with growing faster than the market going into next year. But just any thoughts about how that could potentially change, if anything?
And then second question on the loan book. From a different angle, a little bit, as you grow more in SMBs, is that something you would consider perhaps doing some working capital loans, so those SMBs, some of your are competitors doing that and some of your bank-owned competitors kind of compete from the banking perspective? So is that something that you would look into or consider another way to increase your take rate potentially?
Okay. Tito, thank you for your question. Well, I will start with the competitive landscape. Well, regarding to the move you mentioned about some of the contractors getting together their banking and acquiring operation. This is good news for us because it only proves our successful model.
We were born in an integrated way between payments and financial service. And we believe we have a strong value proposition that makes a total difference in the market because it addresses our customers' needs in our platform. Our customers, they get paid instantly 24 hours a day, 7 days a week. They say they have the automatic savings features. They're getting their money returns in a much higher way than other competitors and also they use these funds as limit for their cards. So we have these all integrated.
What we see looking at some of the competitors is that they have 2 big legacies, the acquiring legacy systems and the banking legacy systems. And in order to get this integrated, working properly to offer a superior value proposition like we do, we think it will take time. It will be hard for them. So this is actually good news.
And as we see right now, there are some of the players that are working in this integration mode between acquiring and banking for a while, and we don't see that much challenge in the competitive landscape. What we observe is that there are some market share gain cycles, the alternate between market share gain and profitability recovery cycles. So what we see is a more rational competition and it's fine for us.
Regarding to your other question about our lending strategy -- our credit portfolio. What we see is that we have been able to create a very strong customer engagement in our banking business, and we see a very big growth of Cash-in into our accounts and also deposits. And also, we have been able to generate more traction on service that generate revenues for us, such as cards, insurances, due payment and other features we have in our platform.
So it's important we know that credit is a fundamental pillar of our banking strategy on the last year or the last few years. And right now, we are focusing in creating this strong portfolio of secured loans as we are also, in parallel, improving all of our infrastructure to manage risk properly and that we can be in the future, mixing our loans with nonsecured loans portfolio in order to raise our spreads, our margins in this activity.
Important to say, Tito, that we don't see that as a differentiation when we try to get the acquiring clients. So we are not seeing any pressure from players that work or that offer working capital versus our value proposition. So that is important just to be clear here.
Our next question comes from Soomit Datta from New Street Research.
I just wanted to go to the reference in the slides on online and cross-border. You touched on it briefly. I'm just intrigued, you're calling that out. Maybe you could talk a little bit about the opportunity in a shade more detail just in terms of what are the different competitive dynamics, what exactly are you doing in that area of the acquiring market. And at the end of the day, how significant could these two opportunities become?
Okay. The origin of our cross-border operation started in 2012 when we acquired a company called BoaCompra, and this business -- we have been running this business in parallel to the PagSeguro business for a while in a more segregated fashion. And just recently, about a year ago, we decided to really integrate these cross-border payment business platform into our core business -- into our core payment business in order to get some of our competitive advantages we have in acquiring business in that platform. So we could serve a lot more customers and bigger customers, more complex customers that we were doing in the past. This has been very successful. We did a real revamp in this business.
Now we have been able to gain some new clients and accelerate growth. So we see a very interesting growth avenue by exploring these cross-border business, uniting all the assets and capacity, our brand into it. Actually, by the way, we have changed the name from BoaCompra to PagSeguro International in order to leverage the business visibility.
That's interesting. And maybe just a quick follow-up. So are you sort of up against the same competitors? Is it a different set of peers that you're up against? Any different kind of dynamics in the market?
Our focus on this business, today, we offer payment solutions for all countries in Latin America, for any foreign company. So the competitors might be different depending on the solution. Let's say, for the cross-border, probably there's going to be different players than what we have in the online environment in Brazil and different than what you have in the POS business in Brazil.
So there are players that are, let's say, focused on this type of services so the competitors are, might be different than what we have in the POS market in Brazil -- the acquiring market in Brazil.
Our next question comes from Andrew Geraghty from Morgan Stanley.
Congrats on the results. I was hoping you could elaborate on the contribution of PIX to total TPV growth. And then when we think about the 2024 guidance, how much of that is being driven by PIX, if we can maybe disaggregate PIX from it? Just kind of create a fair comparison versus the rest of the industry?
And maybe if we want to think of it relative to the ABECS projections and whatnot. If you could kind of just give us a sense of how much of the growth is being driven by PIX, that would be great.
Well, the participation of PIX QR code is similar to what we see in the industry, is low single digit, and we don't think that's going to change dramatically in 2024. So that's why -- that's what we saw in 2023. That's what we expect for 2024. We don't give disclosure of the exact number, but it's similar to what we see in other players in the industry. And of course, we are talking about PIX QR code, which is the type of transaction that generates some revenues for us.
Our last question comes from Renato Meloni from Autonomous Research.
I had a follow-up on take rates. So first, if you could break down the decline in 4Q between seasonality and mix change? And then I know you already said that you expect some compression in 2024, but I would appreciate if you can give some level here that we should expect? And also, when you're thinking that we will stabilize?
Renato, to be honest, here, we, of course, we follow many KPIs and net take rate is one of the KPIs. But we follow more closely the gross profit as a percent of TPV because gross profit captures the financial expenses that we have. And of course, it is important for us because we have all these instant settlement that you need to fund the transaction.
And of course, we have financial expenses to get this funding. So I don't have here in the top of my mind or even in my hand to give you the exact net take rate for 2024. What I do have here that we follow very closely is the gross profit as a percentage of TPV, which has been stable around 1.5% throughout the past quarters, and we don't think that's going to change dramatically in 2024.
So what I'm trying to say here is that net take rate, I don't have the information to give to you at this point. And I don't think that is the most important KPI for us at this point because, again, of the financial expenses line that we have in our P&L and importance that we have for the cost of funding.
Thank you. That's all the questions that we have for today. I will pass the line back to PagSeguro Digital's team for their concluding remarks. Please, go ahead.
Thank you everyone for participation in the call. Thank you for the questions. And I would like to take advantage here for -- to say a big thank you for all the Pag's team for the great results in 2023. Thank you very much. See you in next quarter. Thank you.
This does conclude PagSeguro Digital's conference call. We thank you for your participation, and wish you a very good evening.