PagSeguro Digital Ltd. Q4 FY2023 Earnings Call

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. 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 with 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 with 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 an all-time high level, reaching BRL 28 billion, reinforcing the power of our closing loop which helps lower companies' cost of funding. In our credit portfolio, the share of secured products reached 66%, 25 percentage points higher than one year ago. In the shareholders' return column, we can see our earnings per share reached BRL 5.10, 12% higher than 2022. Net income on a non-GAAP basis reached BRL 1.8 billion in 2023. We also used BRL 400 million to buy back shares in 2023, 37% more than 2022. Finally, our value-added to society stands out. We have become a benchmark among digital banks and fintechs in the Latin American landscape by including millions of Brazilians into the digital financial system, positively impacting clients, suppliers, investors, employees and 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 manage 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% 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 the 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 merchant 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 from another financial institution 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 an all-time high level, reaching almost BRL 28 billion. Now I'll pass the word over to Alex for the commentary on the operating highlights for the quarter.

Thank you, Ricardo. Hello, everyone. In this first session, I 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 activation, healthy cohorts and cross-selling rather than just 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 markets beyond point-of-sale, 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 have enabled our merchants to sell more through a seamless and integrated omnichannel solution. As service levels become more and more relevant in clients' decisions about their acquirer option, we also would like to share the great improvements done in our service levels. Over 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 the fourth quarter of 2022, primarily driven by SMBs followed by micro merchants. As Ricardo mentioned earlier, we also continued to see growth in TPV from large accounts, resulting from our evolution on the development of an integrated omnichannel payments platform for large customers. During Q4 '23, we also observed 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 a 32% year-over-year growth in TPV per merchant. Our current strategy remains focused on disciplined CapEx deployment and merchant activation rather than net adds. We observe once again the growth of our active merchants, 3% year-over-year when excluding nano-merchants. On top of that, POS activation has continued to move up, which represents a positive sign of our strategy playing out. In 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 accounts. Nowadays, not only micro merchants can grow their business faster with one-stop shop solutions, but also small and medium businesses can rely on our app and internet banking to manage multiple sales proceeds, multiple payment methods, and 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 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 on their monthly income usage. Our payroll loans through our digital channel provide affordable APRs and no need to reach out to a bank branch. For savers, our investment platform is robust and our high-yield savings account enables managing 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 client base reached 16.7 million clients, leading to BRL 66 billion in PagBank Cash-in, composed of PIX P2P and wire transfers inflows into PagBank accounts. 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 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. The 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.

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 two factors that have been positively contributing to gross profit. The first one is PIX QR code growth, due to the better unit economics with instant settlement and lower costs in comparison to cards. The second is the growth of total deposits since access to a cheaper funding source enables pricing power with healthy margins. In Q4 '23, total revenue and income grew 10% on a yearly basis, positively impacted by higher volumes from acquiring. The net take rate decreased in the quarter, and this downtrend is natural to continue in the 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 the 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 the fourth quarter of 2023, while strong gross profit increased, 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 for 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 the first quarter of 2019. Operating expenses reached BRL 700 million, a 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 Slide 20, our cash earnings continued to gain momentum, driven by disciplined control of 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 the same period of 2022. On an annual basis, we 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 merchant gross adds and product development in 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. Depreciation and amortization, including POS write-off, totaled BRL 405 million, representing 9.3% of total revenue and income, a slight reduction versus the previous quarter, keeping the pace to cover CapEx levels in the coming quarters to unlock additional profitability in the future. Moving on to Slide 21. The solid results from this quarter contribute 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 share buybacks. 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 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 on a 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.

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, the 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 gaining share in the total payment volumes. 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 it 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 at the net rate, it 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 OpEx, it's important to mention that the growth is according to our growth strategy. So the company is growing. OpEx should grow too, which means OpEx will grow more than inflation for 2024, but will enable a pressure on the margins increase going forward. We are seeing and considering this guidance, marketing a little bit higher than used to be in the 9 months of 2023. 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.

Congratulations on the results. I have two questions. First, regarding your potential for credit or prepayment growth, it's evident that you are experiencing lower losses and a strong cash inflow, indicating improvement in the principal. This suggests that clients are increasingly using PagBank as their primary bank, leading to higher deposits. What is holding you back from expanding your asset base further? If you expand, your results could improve at a quicker pace. My second question pertains to dividends. It seems clear that you are buying back shares, which is positively impacting your earnings per share. However, you are also generating substantial cash and have a capital expenditure plan that won’t increase. Given that you are producing more cash than necessary, why not consider paying dividends as well?

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 had a very strong Cash-in in Q4, BRL 66 billion. Deposits growing to BRL 28 billion, the all-time high. 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 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, as you know very well, with 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 when we think it is appropriate, but we're going to do it cautiously. We are finding that because at this point, we are building these deposits and building the cyclical portfolio, which is important for the future. Depending on the economic cycle, we should be more aggressive in unsecured or if it is more challenging. We can focus on secured, and if it's more favorable, we go to unsecured, but you've got to build this credit portfolio as time passes by. But we're going to do it cautiously in the following quarters, probably going to have some good news.

Eduardo and Artur here, it's good to speak with you. Regarding capital allocation, specifically dividends and share buybacks, you are correct that we utilize it to repurchase shares. The last buyback took place in October 2023, and we plan to continue doing so opportunistically. In 2023, we repurchased BRL 400 million, which is a 37% increase compared to 2022. Currently, we hold 4% of our outstanding shares in treasury, and there is $45 million left to utilize in the approved program. We are also considering a new buyback program and will reveal details once we finalize the current buyback program established in 2018. At this time, there are no discussions concerning dividends. We are focusing on numerous growth opportunities and investments in new ventures that we believe will yield higher returns in the future. Thus, we are not addressing dividends at this moment.

I have two questions, if I may. The first is about the credit card portfolio. I understand that the product is secured, and at the same time, we're observing an increase in deposits and investments in PagBank, which is positive. My question is, why aren't we seeing a sequential increase in the credit card portfolio even though it is secured and investments are rising? I would like to understand the reasoning behind any caution you might be exercising concerning the credit card portfolio, whether or not it's related to the investments. Additionally, do you foresee any opportunities to gain traction in fixed credit products, as some of your peers seem to be doing, considering that you hold a significant share of the fixed market? I have a follow-up question after this.

Thank you for your question. Regarding the credit card portfolio, you're right. We have been growing our deposits, as I said before, close to BRL 28 billion, the all-time high. The 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 gaining share. And the other part is because we are replacing part of our unsecured credit card portfolio to secured credit cards. So you probably don't see the growth because we are changing this mix from unsecured credit cards to secured credit cards 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 two moving parts. Regarding the PIX market share, we keep working with our acquiring solution, and we see that big credit are not gaining share from the credit card product because of many reasons. So we are following that very closely, but at this point, it's very small. We see that still consumers prefer to use a credit card because they have all the systems regarding chargebacks, all the security and so on, not to mention 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 it is considered, I would say, implied in your guidance in terms of effective tax rate for 2024, please?

Kaio, you're right. When you see 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 explain it to you, but it's pretty straightforward here.

Yes, Kaio, thanks for the question. Considering for 2024, we are considering the effective tax rate in the same level of 2023. So that's the point.

I have two questions also. One is on the credit regarding the NPL. You mentioned and it improved again, now running around 7.5. My question is, do you have any 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 in administrative expenses because you're growing, revenues are growing, everything, you're investing more, and so it called my attention that administrative expenses if you look at non-GAAP or GAAP are improving. So that's my second one.

Yuri, regarding the NPLs, we see that NPLs one year ago were around 20%, and now it's down to 7%. It's a very good achievement, a lot of work here to do so. Looking forward, we see these trends with the same path, the NPLs going down mainly because we are getting more control over credit concessions 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 the 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 had there part of the long-term incentive plan booklet, and there were some reversals on that plan.

This is Éric. In Q4 '22, we had 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 properly model the administrative expenses moving forward.

Yes, Kaio, I think it's important to mention that administrative expenses are significant. Eric, I can follow up with you after the call and in another meeting, no problem. However, it’s essential to highlight that operating expenses are the primary focus before diving into specific details.

Our next question comes from John Coffey from Barclays.

Great. I have two questions I’d like to ask at once. Regarding your guidance for the total payment volume in 2024, it appears the range is between 12% and 16%, with a midpoint of 14%. Given that you experienced 21% growth in Q1, can you help us understand the growth pattern in the other three quarters? Will it be approximately 12%, or will it fluctuate throughout those quarters? Additionally, since you provided guidance for 2024, does this take into account the expectation of about seven more 50 basis point cuts in the remaining seven meetings of the Brazilian Central Bank this 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 digits, 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 as 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 the Central Bank is to have CDI or SELIC at the end of the year as 9%. As you know, 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 to the end of the year with 9%.

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 correct that we're experiencing more growth in SMBs, but when we analyze SMEs and SMBs, you'll see that our growth is indeed greater in SMBs. We expect to continue growing in this area because our entire sales force is focused on these types of clients. Additionally, they benefit from a higher TPV promotion compared to smaller merchants. Therefore, we anticipate that SMBs will continue to gain share in the overall mix. This is part of the explanation for why the net take rate may decline while the gross profit as a percentage of TPV remains stable. This stability will be supported by adjustments in other areas, such as reduced financial expenses and other modifications we will implement in the company to meet our guidance. To reiterate, we expect SMBs to gain share in the total mix.

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 as 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, which is a big number of merchants but that they have a very small percentage 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.

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 the competitive landscape in that segment that has allowed you to outperform so much in the quarter?

Thank you for the question, Gabriel. As you might expect, there isn't a single answer to this. It's a combination of several factors. We have slightly increased our sales force and have been concentrating on small and medium-sized businesses with a strong value proposition for our banking products. We are continuing to gain market share from competitors due to the high level of service we provide, including instant settlement and superior logistics, which are among the best in the industry. All of these elements contribute to our success in attracting SMB clients. Ultimately, it's about serving our clients as effectively as possible. In the 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 were gaining share in Q3. For instance, some of the companies lost share in Q4. So we see everyone being more rational, which is good for the market. So pretty much the same that has 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.

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 your question. Looking back at the pandemic and shortly after, we provided quarterly guidance due to significant market uncertainty, which raised concerns about total payment volume and consumption. We opted for quarterly guidance to reassure the market and investors about our observations, as there were worries about potential volatility and declining consumption. When we decided to stop offering quarterly guidance, the primary reason was that focus was mainly on specific quarterly figures rather than the overall trajectory of the company and its ongoing developments. We've chosen to provide guidance for 2024 because it’s beneficial for investors to understand our perspective. This isn’t short-term or quarterly guidance. We have a plan for 2024 that we believe can be executed against this guidance, offering a clear direction for everyone to understand our thoughts and the anticipated results for the company. So that covers our approach to guidance. Regarding the evolution of small and medium-sized business clients, the HUB strategy is crucial for attracting and serving clients. The HUB helps not only in acquiring clients but also in supporting them, cross-selling products, and providing services. We are utilizing the HUBs in various ways, focusing not just on client acquisition but also on support and client relationship development. We experienced some growth in the third quarter of 2023, which highlights the effectiveness of the HUB strategy.

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 have seen declines in the acquiring business, typically clients obtain the device and many choose to use our cards as a means to cash out. With our cards, they can withdraw cash and make purchases. These two products generally complement each other well for our clients. We also aim to provide them with additional services like investments and insurance. A portion of our clients are utilizing these services, but typically they focus on the POS devices and cards. In terms of the investments platform, we are continuously making progress. A few months ago, we didn’t offer stocks, but now we do, although options are still unavailable. We will continue to enhance this platform based on what our clients need. We have received numerous inquiries about cryptocurrency, but that hasn’t been included in our offerings. As we advance this investment platform, it will help us attract clients and enhance engagement. We are prioritizing features and expect to develop a comprehensive platform in the coming quarters. Now, I’ll hand it over to Alex to discuss chargebacks.

We have made significant improvements to our onboarding process and the collection and validation of biometrical information from our customers. We have also added a second authentication factor for cashing out. In our online payment solutions, we have introduced facial authentication for transactions. This enhances both chargeback management and conversion rates. Additionally, we are utilizing intelligence and data analytics to more effectively prevent fraud in our payment and financial services ecosystem. We have been conducting thorough scans of our customer base and have tightened our onboarding procedures to reduce the risk of fraudulent activity.

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 has 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 correct. The company began with micro merchants during the IPO six years ago, and it's natural for us to adapt and evolve in this dynamic market. I would describe our efforts as an expansion rather than a transition, as our focus has broadened to include SMBs alongside micro merchants. We are increasing the overall market size we can address. In my view, we've been very successful in this expansion, evident in our growth within the SMB segment. The micro merchant market isn't growing at the same rate as it did six years ago due to greater credit card acceptance among these merchants, which is why we don’t see the same growth in the number of micro merchants. While the market is not saturated, it is growing slower than before. However, we do see credit cards capturing more market share in the PC sector and opportunities in micro merchants and SMBs arise from acquiring new clients. Some of these merchants partner with multiple acquirers, and we aim to capture that transaction processing volume for ourselves, which helps explain why we're outpacing market growth. Nevertheless, our expansion among micro merchants alone hasn’t significantly increased our growth rate, as the overall scale of the company has also grown. The market is projected to experience high single-digit to low double-digit growth in 2024, whereas our guidance is between 12% and 16%. I wouldn’t say our strategy has changed drastically; we are simply trying to attract as many SMBs as possible while encouraging a shift from other acquirers to partner with us.

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 from 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 competitors are doing that and some of your bank-owned competitors kind of compete from a 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. Regarding 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 integrated between payments and financial service. 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 they also use these funds as limits for their cards. So we have these all integrated. What we see looking at some of the competitors is that they have two big legacies, the acquiring legacy systems and the banking legacy systems. It will take time and be hard for them to get integrated to offer superior value propositions like we do, so this is actually good news. And as we see right now, some players are working on this integration mode between acquiring and banking for a while, we don't see that many challenges in the competitive landscape. What we observe is that there are cycles of market share gain, alternating between market share gain and profitability recovery. So what we see is a more rational competition and it's fine for us.

In response to your question about our lending strategy and credit portfolio, we have established strong customer engagement in our banking sector, leading to significant growth in cash deposits into our accounts. We are also seeing increased traction in revenue-generating services like cards, insurance, and payment features on our platform. Credit has been a key element of our banking strategy over the past few years. Currently, we are focused on building a solid portfolio of secured loans while enhancing our infrastructure to manage risk effectively. This will enable us to later combine our secured loans with a portfolio of unsecured loans to improve our spreads and margins in this area.

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? At the end of the day, how significant could these two opportunities become?

The origin of our cross-border operation began in 2012 when we acquired a company named BoaCompra. We have been managing this business separately from our PagSeguro operations for some time. Recently, about a year ago, we chose to fully integrate this cross-border payment business into our main operations to leverage the competitive advantages we hold in the acquiring sector. This integration has allowed us to serve more and larger customers, including more complex ones than before. The revamp of this business has been quite successful, resulting in new client acquisitions and accelerated growth. We see significant potential for growth by developing our cross-border operations, consolidating all of our resources and brand into this effort. Additionally, we have rebranded BoaCompra to PagSeguro International to enhance business visibility.

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?

The participation of PIX QR code is comparable to industry standards, remaining in the low single digits, and we do not anticipate significant changes in 2024. This reflects what we observed in 2023 and what we expect for the upcoming year. While we do not disclose the exact figure, it aligns with the performance of other industry players. It's important to note that we are referring to the PIX QR code, which drives some revenue for us.

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, 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 settlements that need to fund the transactions. 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. What I'm trying to say here is that the 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 the importance that we have for the cost of funding.

Thank you everyone for your participation in the call. Thank you for the questions. I would like to take advantage here to say a big thank you to 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.