Earnings Call Transcript - PAGS Q4 2020

Operator, Operator

Hello, everyone, and thank you for waiting. Welcome to PagSeguro PagBank's Fourth Quarter 2020 Results Conference Call. This event is being recorded and all participants will be in a listen-only mode during the company's presentation. After PagSeguro PagBank's remarks, there will be a question-and-answer session. This event is also being broadcast live via webcast and may be accessed through PagSeguro PagBank's website at investors.pagseguro.com, where the presentation is also available. The replay will be available shortly after the event is concluded. Those following the presentation by webcast may pose their questions on PagSeguro PagBank's website. Before proceeding, let me mention that any forward statements included in the presentation or mentioned on this conference call are based on the currently available information and PagSeguro PagBank's correct assumptions, expectations and projections about future events. While PagSeguro PagBank believes that there are assumptions, expectations and projections are reasonable in view of currently available information, you are cautioned not to place undue reliance on those forward-looking statements. Actual results may differ materially from those included in PagSeguro PagBank's presentation or discussed on this conference call, for a variety of reasons including those described in the forward-looking statements and Risk Factors sections of PagSeguro PagBank's registration statement on Form 20-F and other filings with the Securities and Exchange Commission, which are available on PagSeguro PagBank's Investor Relations website. Finally, I would like to remind you that during this conference call, the company may discuss some non-GAAP measures. For more details, the foregoing non-GAAP measures and the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures are presented in the last page of this webcast presentation. Now I will turn the conference over to Mr. Ricardo Dutra, CEO. Mr. Dutra, you may begin your presentation.

Ricardo Dutra, CEO

Good evening from São Paulo, everyone. And thanks for joining our fourth quarter results conference call. Tonight, I have here with me Eduardo Alcaro, our Chief Business Development Officer; Artur Schunk, our Chief Financial Officer; and André Cazotto, our Head of Investor Relations. First of all, we hope you and your families are well and safe. We have been living in unprecedented times since the outbreak of COVID-19 in Brazil that began in the second half of March 2020. Merchants and consumers have changed their behaviors to face this unknown scenario, where people stayed at home for a while and almost every industry was forced to accelerate digitalization and the adoption of alternative payment methods. Meanwhile, our dedicated employees have been doing an extraordinary job to keep serving our clients, both merchants and consumers, with excellence, which led us to reach records in several KPIs. Thank you very much to the PagSeguro PagBank team. Before presenting our achievements, I'm pleased to report that PagSeguro completed the strongest financial performance quarter in our history, achieving record TPV in both PagSeguro and PagBank, record net revenues that surpassed BRL2 billion in a single quarter, and a record non-GAAP net income reaching BRL430 million. These results reinforced our execution capability and our confidence to remain focused on democratizing financial services and promoting massive financial inclusion in Brazil, assuring that everyone has access to the best and most complete financial ecosystem in the country. Therefore, we continue to be the most profitable and leading company in terms of attracting and engaging millions of clients. Looking forward, our opportunities over the next year have never been greater. There will be more online purchasing, more digital banking, stronger migration from cash to digital transactions, and the unique possibility to cross-sell a very profitable combination of payments plus banking for millions of customers. However, to fully capture the growth of these opportunities ahead, we need to keep investing in new initiatives such as PagBank. It's important to mention we are in a very comfortable condition in terms of funding and cash position, and we feel more and more prepared to accelerate important products that will support us to diversify our revenues, increasing the number of products per user and consequently, our revenue per client. However, as the pandemic uncertainty remains, we must be cautious and pay attention to the intrinsic opportunities and risks. We are enthusiastic about vaccines; however, the speed of vaccination at scale is still unknown in Brazil, and you know that this will be key to accelerating the economic recovery. Additionally, the Brazilian government is discussing a potential second round of coronavouchers starting in March 2021, which would increase TPV volumes while impacting our take rate due to a volume mix with more debit transactions. In the regulatory landscape, the marketplace of receivables, which can be an opportunity for us, was postponed one more time by the Brazilian Central Bank, and the new expected launch date is June 7th. On open banking, also another opportunity for us, the first of the four phases began, and by regulation, we will be joining only in the third phase, and we are following this initiative very closely. Regarding PIX, as we predicted, it is replacing wire transfers and is very incipient for P2M. As we have been discussing, we believe PIX is a relevant add-on and will foster the cash conversion into electronic transactions, which helps us to add new clients in both banking and payments. For companies like PagSeguro, which invest in technology and product and have an entrepreneurial culture, there are plenty of opportunities out there, and we are prepared to capture them. That said, Artur and I will present some slides, and we will have a Q&A session at the end. On Slide 3, we highlight the achievements of the fourth quarter and full year figures. Talking about PAGS, record TPV of BRL55 billion in Q4, up 61% year-over-year. In the full year 2020, TPV of BRL162 billion, up 41% year-over-year, while the whole card industry in Brazil grew only 11%. Important to highlight that less than 5% of our volumes come from sub-acquirers. Online TPV grew 147% in Q4 year-over-year. In 2020, online TPV increased 85% year-over-year. We achieved all-time high net merchant adds of 765,000, ending 2020 with seven million active merchants. Excluding MOIP, net merchant adds of 303,000 in the quarter. In 2020, we added a record of 1.8 million net new merchants, much higher than 2019 net additions. Total revenue and income reached BRL2.1 billion in Q4, up 33% year-over-year. In 2020, total revenue and income of BRL6.8 billion, up 19% year-over-year. Net take rate of 2.3% or 2.44% excluding coronavouchers volumes. Full year 2020 net take rate of 2.59%, highly impacted by the pandemic and temporary TPV mix change. Adjusted EBITDA of BRL726 million, up 24% year-over-year. In 2020, adjusted EBITDA of BRL2.3 billion, up 8% year-over-year. Record non-GAAP net income of BRL430 million, reaching a net margin of 21% or 30% net margin excluding interchange and card scheme fees. In 2020, non-GAAP net income of BRL1.4 billion, reaching a net margin of 21% or 30% net margin excluding interchange and card scheme fees. Adjusted net margin excluding pandemic and PagBank investment effect of 30% in 2020, 2.6 percentage points higher when compared to the same period last year. We also started to serve SMBs through hubs, and I'll give more info about it in the next slides. Moving to PagBank, record PagBank TPV of BRL28 billion in Q4, up 256% year-over-year. In 2020, PagBank TPV of BRL71 billion, up 245% year-over-year. We achieved all-time high quarterly app downloads with more than 8.6 million downloads. PagBank clients reached 7.9 million with net additions of 1.2 million in the quarter. For the full year 2020, net additions reached 5.1 million. PagBank consumer clients reached 2.7 million, seven times higher in comparison to the same period of 2019, accounting for 35% of PagBank's active clients. PagBank revenues reached BRL210 million in the quarter, up 146% year-over-year, representing 10% of total revenues and income. Full year, PagBank revenues reached BRL540 million, up 118% year-over-year. The credit portfolio reached 612 million, with working capital loan originations back to pre-COVID levels. We are also launching public payroll loans, and certificates of deposits reached 766 million in December 2020. We are launching third-party funds offered by PagInvest, Marketplace, and home insurance. We also acquired a minority stake of BoletoFlex, a Brazilian company specialized in Buy Now Pay Later service, available only for online transactions. Moving to Slide 4, in Q4 2020, total payment volume reached BRL55 billion, a growth of BRL21 billion, or 61% compared to the same period last year. The main drivers of the volume's growth were the acceleration in cash conversion into electronic payments, combined with a larger and resilient total addressable market in long tail, and higher exposure to online channels such as e-commerce, cross-border, and card-not-present transactions. Our online volumes grew 147% year-over-year, as you can see in the bottom left of the slide. Top right, we show that debit volumes grew significantly compared to the fourth quarter of 2019. But we maintained a similar mix compared to Q3 2020, which is good news. Remember, debit has been the mechanism for government financial aid distribution. In the fourth quarter, Brazilian workers were also receiving an additional salary, which historically increased the mix in Q4 every year. We continue to believe that higher participation in the mix is a temporary effect of COVID-19 due to government financial aid, additional credit limit restrictions imposed by banks for their clients, and changes in consumption behavior. It's important to mention that according to the Brazilian Internet Association, 75% of credit card users in Brazil purchase in credit card installments. Therefore, once social distancing measures start to relax, credit volume should increase and return to previous levels. Finally, bottom right, active merchants reached seven million in the quarter, adding 1.8 million new sellers year-over-year, and close to 800,000 new ones only in Q4 2020. In November, we finished the acquisition of MOIP, which contributed to the all-time high net merchant add figures. Excluding MOIP, net merchant adds were 303,000, a solid quarterly growth. Turning to Page 5, we present our revenue figures. In Q4 2020, total revenue and income grew 33% year-over-year, reaching BRL2.1 billion in the quarter, accelerating the pace of growth quarter-over-quarter. This is another record achieved in this quarter. To be comparable to our peers' reports, our net total revenue and income, excluding interchange and card scheme fees, reached BRL1.4 billion, up 31% year-over-year, as you can see in the top right of the slide. Bottom left, we present our operating revenues. Transaction activities and other services revenues reached BRL1.4 billion, up 43% year-over-year, also showing a very strong recovery. Financial income of BRL0.6 billion grew 8% year-over-year, driven by consumer behavior during the pandemic, leading to fewer credit card transactions in our transaction mix. It is important to remember that our prepayment model is automatic for our clients, meaning that every credit installment transaction is automatically prepaid instantly in D plus 14 or D plus 30 days. Bottom right, our net take rate, which is the blended take rate net from transaction costs such as interchange, processing, and currency fees, reached 2.3%. Excluding the coronavouchers impact, our net take rate reached 2.44%. Moving to Slide 6, we highlight the main operating and financial KPIs for PagBank. In the first chart, PagBank TPV known as non-acquiring TPV reached BRL28 billion, up 256% year-over-year or 244%, excluding the BRL1 billion volumes related to coronavouchers top-up. On the top right, we show the graph of PagBank TPV as a percentage of PagSeguro TPV, which reached 51% due to higher engagement of our merchants into PagBank products and services. Bottom left, we move to PagBank clients. We ended the year with almost 8 million active users, adding 5.1 million new clients in 2020. PagBank consumers reached 2.7 million, already representing close to 35% of our PagBank active client base. PagBank revenues reached BRL210 million in the quarter, up 146% year-over-year. Full year PagBank revenue surpassed BRL0.5 billion, up 118% year-over-year, maintaining triple-digit growth despite our decision to be more cautious on new credit originations between March and September 2020, resuming in Q4 2020. As a percentage of total revenue income, PagBank revenues represented 8% in full year 2020 and 10% in Q4 2020. On the right side, we highlight our new initiatives, investments, and insurance. PagInvest assets under custody reached BRL4.7 billion, a combination of current balance, deposits, and investments. Yesterday, we launched a crypto fund and incentivized debentures fund distribution, adding more options to our third-party investment fund distribution strategy, officially launched in January 2021. We expect to roll out in the coming months our own home broker platform and distribution of Brazilian treasury bonds. In terms of insurance products, we are launching two more products: home insurance and personal accident insurance, expanding our portfolio which already included Pagbank Health since 2020. Finally, our credit portfolio and transactional account products increased their share in PagBank revenues in 2020 compared to the same period last year. We remain confident that card issuance and credit offerings will be the main drivers of PagBank revenues, reinforcing our commitment to reaching 30% of total revenue and income being generated by our banking initiatives in 2024. Now we will move to the financial performance slides, and I turn the call over to Artur, our CFO, who, by the way, has been doing an amazing job as we navigate through this unique time together. Thank you very much. Artur, please go ahead.

Artur Schunk, CFO

Thanks, Ricardo, and good evening, everyone. It is an honor to be with you today for the first time as PagSeguro PagBank's CFO. Certainly, the foundations built by Eduardo during the last years were extremely relevant for now and for the coming years, and I am looking forward to lead from here. Moving to Slide 7, we are presenting our costs and expenses, EBITDA, and net income performance. Our non-GAAP total costs and expenses ended the quarter totaling BRL1.5 billion, up 48% year-over-year. Breaking it down by category, sales and service costs grew 54% due to the TPV growth of 61% versus the last quarter of 2019. Interchange costs increased by 37% year-over-year, impacted by the mix change towards more debit versus credit during the period. The growth of 78% in personnel expenses is related to the hiring of more tech developers and professionals to support the expansion of PagBank, PagInvest, and hubs initiatives. Our depreciation and amortization increased by 188% year-over-year, driven by an unprecedented addition of merchants during all of 2020, boosting POS acquisitions depreciation and higher amortization of product development. Marketing expenses allocated in sales and services increased by 40% year-over-year with higher investments to promote digital wallets, PagBank products such as Pix, CDs, and marketplace, and to enhance client engagement. Q4 2020 selling expenses reduction of 12% are explained mainly by chargebacks, which decreased by 26% year-over-year as a percentage of the TPV, reaching 14 basis points in the quarter. Even with higher exposure to online sales, showing an operational improvement and a credit portfolio more than doubled compared to Q4 2019, we maintain a better delinquency rate performance in the new cohorts. The graphs in the middle of the slide present our results for the quarter. The first is the adjusted EBITDA that reached BRL726 million, up 24% year-over-year for the quarter. In the graph below, our Q4 2020 non-GAAP net income was BRL430 million, 4% higher in comparison to the same period of 2019 even with the pandemic effects. The net margin for the quarter achieved 21%, improving 250 basis points versus Q3 2020. Moving to Slide 8, we updated our managerial analysis on PagSeguro core business margins, which was presented last quarter by André Cazotto, our Head of Investor Relations. As we discussed, due to partial shutdowns in Brazil, TPV growth was negatively impacted, mainly during the second and third quarters. Additionally, there was a temporary change in consumer behavior, meaning less leverage and more spending oriented toward essential goods. The consequence was a change in TPV mix, with faster growth on debit card transactions, including the coronavouchers and slower growth on credit installments, extremely correlated with market credit availability and lower appetite from banks in recent months. All these temporary changes drove lower take rates and margins. We estimate the pandemic impact was BRL420 million, decreasing our margins by 6.2 percentage points in 2020. This negative impact is expected to be transitory and should recover over time, not only for PagSeguro but for the entire payments industry. Moving to PagBank investments, we began our initial investments in May 2019. Despite the pandemic, we continued investing in the most important verticals. PagBank is essential for our growth strategy, which unlocks a market 17 times larger than acquiring. In 2020, the impact was BRL187 million of PagBank investments, or a 2.7 percentage point negative impact on net margins. We expect PagBank to be accretive in 2022, becoming a bottom-line accretive initiative for our company in the coming years while we cross-sell products and diversify revenues. In comparison to 2019, our net margin would be 2.6 percentage points higher, reaching 30% or close to 40% as our peers report, a total revenue excluding interchange and card scheme fees. Our focus right now is growth, entering a market 17 times larger than payments as we discussed in the last quarters. Profitability is part of our DNA, and we will continue to deliver solid bottom-line results; however, PagBank Investments and new initiatives are the most efficient capital allocation strategy for now. Moving to Slide 9, we want to share a few comments about our investment in the short term. In 2020, our capital expenditures reached BRL2 billion, representing 30% of our total revenue and income. 72% of this investment was related to POS acquisition driven by a record of 1.8 million net merchant additions in our platform last year and a much higher demand for additional POS from our active merchants, given a faster adoption of new sales channels such as takeout and delivery. Regarding intangible assets, the increase is related to our growth in software, platform investments, product development, and IT teams. In the next slide, we show our main trends in the credit portfolio, where performance is improving every day. We ended 2020 with a total credit portfolio of BRL612 million. Working capital loan originations are back to pre-pandemic levels since November 2020. With all the data collected, model improvements, and a seasoned team, we could increase our origination by approximately 10 times. We have strong demand from merchants; however, we have decided to wait until we have more visibility about vaccines rollout and economic recovery before being more aggressive in credit offers. Working capital loans represented 54% of the credit portfolio, reaching BRL311 million and an average ticket of BRL4,000. Although our NPLs are low and under control, we saw a significant decrease in the current NPLs compared to pre-pandemic cohorts, as we show in the first graph on the right side. Credit cards represented 42% of our total credit portfolio. We have already issued more than 0.5 million credit cards focused on our best merchants. We also started offering credit cards for consumers with collateral, meaning clients that invested in PagBank CDs or chose PagBank to receive their salaries. As you can see in the chart below, trends in the new cohorts for credit cards, NPLs continue to be encouraging. Knowing that nobody will assume a credit risk without receiving the proper return related to the risk assumed, we continue our focus on improving our credit models, teams, and processes that allow us to show current performance and drive the company to improve earnings per share accretion in the future. Finally, other initiatives such as payroll loans represented just 4% of the credit portfolio. We launched public payroll loans in some cities, and we are ready to scale up this product during 2021. Now before I pass the word back to Ricardo, I would like to comment on our cash position and funding strategy. In December 2020, our cash position, considering cash and cash equivalents, financial investments, account receivables from issuers, and credit portfolio reached almost BRL19 billion. Our credit portfolio represents only 3% of current assets. Excluding PagBank client balance, PagBank certificates of deposits, and accounts payable to our merchants, we ended the year with a solid net positive cash and working capital position of BRL8 billion. The right graph compares our PagBank CD balance to our credit portfolio. 100% of our credit operations are funded by third parties. Our operation generates cash to support our business growth, and we also have BRL16 billion in AAA accounts receivable to be securitized if needed. We are always evaluating other potential alternatives of funding, remembering that PagSeguro is the only Brazilian acquirer with a full banking license, helping us to reduce our funding costs. Currently, it is below CDI, the Brazilian interbank rate. Now I pass the word back to Ricardo.

Ricardo Dutra, CEO

Thanks, Artur. Moving to Slide 12, I want to comment on our new initiatives to move upmarket in payments, a natural and additional business vertical that will complement our acquiring strategy. In the past years, small and medium businesses have been proactively reaching out to PagSeguro to serve them. We know for a fact that to compete in the long tail market, PAGS unique strengths such as brand, first mover advantage, online reach, and banking ecosystem created a natural entry barrier. Having said that, it is easier to move up the pyramid than to move down. After several discussions, we decided to test and roll out a few hubs in 2020, working in an omnichannel model, combining physical presence with our online self-service know-how. We tested our hubs in all geographic regions of Brazil, evaluating the merchants' profiles, needs, paybacks, and returns on existing investments. Since our IPO, we became a more mature company with an even stronger brand than three years ago. Now we are prepared to increase our penetration in SMBs. PagBank has the most complete digital banking offer among acquirers that serve SMBs. SMBs are still poorly served on both payments and banking. The TPV addressable market accounted for BRL700 billion. Cost discipline, combined with our execution capability and ability to efficiently scale up our payments platform, led us to conclude that the SMB segment is a profitable market. We know that current acquiring SMBs margins as a percentage are not as high as long tails. However, SMBs positive contribution margins will be accretive to our EPS in four to five quarters, which is an attractive payback period considering only acquiring. As time passes and we scale our banking strategy for those clients, we believe EPS accretion could be anticipated and become more meaningful. In 2020, volumes from hubs, meaning net adds, POS, and TPV, were not relevant, and we were the only acquirer to deliver same-day POS activation for SMBs. For 2021, we expect to accelerate investments and explore this market, reaching around 250 to 300 hubs by December and volumes achieving 6% to 11% of total PAGS TPV. This means that our focus will remain in the long tail market, and hubs will complement our client and product offering. On the next slide, we provide some initial thoughts and initiatives around ESG. PAGS is committed to reinforcing ESG guidelines in our business strategy, and we will present some important achievements so far. On the environmental side, we are working to foster new printless payment solutions such as NFC, QR code, and link of payments. Currently, more than 60% of our active POS base does not print receipts. We also aim to implement more efficient and rational processes of water and energy use and are preparing our gas emissions inventory. On the social side, inclusion is part of our DNA and mission since our foundation. PagSeguro was created back in 2006 with the purpose of democratizing digital payments on the internet. We moved to in-store businesses in 2012. We have included millions of Brazilians in the financial system and offered them the option to accept cards in a simple, easy, non-bureaucratic, and frictionless process. Today, we have more merchants than our competitors in Brazil and almost 8 million PagBank active users. Almost 80% of our new clients did not accept cards before joining us. A large percentage of our TPVs comes from individual entrepreneurs, from younger individuals starting their professional lives to senior clients above 50 years old hiring our service to complement their retirement income. Worth highlighting, PagSeguro is one of the few companies in Brazil with three women on the Board of Directors, representing 43% of the Board members. On the governance side, our company continues to improve. Today, 43% of our Board members are independent, which helps us strengthen our committees, such as credit risk and liquidity and data policy and protection. PAGS also has a relevant and structured data security department. Our security strategy follows the most relevant pillars of our business, which is to keep a safe and protective environment for our clients. Our company has a data security master plan, establishing our guidelines. The master plan includes 28 objectives, and its governance follows controls and indicators of the ISO 27000 family. The guidelines are based on more than 15 policies defined and approved by our executives and directors, with confidentiality, integrity, and availability as a fundamental basis. We are working on our sustainability report, which should be released during 2021. Moving to our slide before the Q&A session, I'd like to share some trends in January and our 2021 guidance outlook. Volumes in January and February 2021 are growing above 50%, in line with the organic growth we have observed in recent months, excluding coronavouchers impact. Important to remember that January and February 2020 were not affected by COVID-19. Therefore, even compared with a higher base from 2020, we are accelerating and growing more than 50%. For 2021, we expect acquiring TPV to grow above 40%, still backed by healthy net merchant adds, which will require a similar level of capital expenditures experienced last year, which is around BRL2 billion or low 20s as a percentage of our total revenues. In 2022, we expect our capital expenditures as a percentage of our total revenues to return to 2019 levels, meaning low to mid-teens. Given the higher investments, we expect depreciation and amortization to be around BRL800 million to BRL1 billion this year. Important to highlight that our TPV guidance does not consider potential upsides coming from the second round of coronavouchers expected to be distributed from March until June 2021. Also, for 2021, we will focus on our growth, investing in PagBank, hubs, and new initiatives to keep expanding faster our digital banking plus payment ecosystem to millions of clients, boosting our acquiring and non-acquiring TPV, and accelerating our revenue growth through diversification. We are on track to have PagBank revenues reach 30% of the total revenue of the company by 2024. Payments, banking, and financial services industries have become very dynamic in the past years, and our company has been moving forward and taking advantage of these opportunities. We are adding millions of users per quarter and experiencing very efficient paybacks and strong ROI on our investments for both acquiring and banking. Our plan is to keep investing to grow and build one of the most relevant financial digital ecosystems for both consumers and merchants, including long tail and SMBs. Our unique platform combination, composed of payments and banking services, will allow us to explore these opportunities ahead. In terms of profitability, we believe that PagBank can be accretive by 2022 as we expect investments to decelerate over time, with the banking business becoming more mature and posting a stronger monetization. Additionally, banking margins could be similar or even higher than acquiring margins, leading us to a strong operating leverage after this period of reinvestment. With that, we end our presentation, and we can start the Q&A session. Thank you. Operator, please.

Operator, Operator

Operator Instructions: Our first question comes from Jeff Cantwell with Guggenheim Securities.

Jeff Cantwell, Analyst

Congrats on the results. And as always, you're very detailed in your prepared remarks; thanks for that as well. I just want to circle back on your comments and ask a couple of questions. First off, on your merchant base, you added a record 765,000 merchants this quarter, and that was well ahead of where we were. So can you maybe tell us more about what's happening right now? Can you talk a little more about what's driving that increase? For example, are you seeing merchant demand strengthen due to this one-stop-shop platform that you built? Is it because of maybe less competition in the long tail? I just would love to hear more about what you're seeing and help us understand how the merchant base is expanding this quickly. And then as a related question, I guess I'm wondering since it sounds like you have real momentum here, and now there's this new hubs strategy with SMBs, which looks like it could potentially be meaningful to TPV, I was hoping maybe you can give us some thoughts about what you're thinking for total net merchant adds in 2021. And any color on the outlook there would be great. Thanks.

Ricardo Dutra, CEO

Jeff, this is Ricardo. Thank you for the question. Regarding the merchants, we had more than 700,000 in Q4. But in this figure, we included MOIP. We have more MOIP merchants that we integrated after November. So if you exclude MOIP, we are talking about 300,000, a little bit more for PagSeguro. So what we saw in January at the beginning of the year, we are maintaining the same pace that we had in the past. We had this close to 300,000 per quarter. So that's what we've seen so far. Looking to this year, we don't have the exact number for the hubs, for the number of clients of the hubs. You can imagine it's much lower than the long tail clients. Our models have already incorporated our expectations. The result is TPV growing more than 40% in 2021.

Jeff Cantwell, Analyst

Okay. Great. And that was my follow-up question. I was hoping you could talk a little bit about the guidance. Your acquiring TPV guidance is for growth of 40% plus this year. That looks pretty strong, especially when we consider how much TPV increased in 2020. So can you walk us through that guidance? Just help us understand where that incremental growth will come from? Is it a rebound in your existing merchant base? Is it new online volumes? Is it the move you're planning to make upmarket? Is it merchants you're adding here in the fourth quarter? Any additional color that can help us unpack the thought process about your TPV guidance would be great. Thanks.

Ricardo Dutra, CEO

Jeff, well, just going backward. The hubs' TPV, as you saw in the presentation, we expect it to be between 6% to 11%, so of course it will contribute. But the main driver is the base that is growing in the long tail that we are adding. Hubs TPV at this point is not relevant, and you could see that we grew already more than 50% in January and February. So it's part of the dynamics: the base and the net adds that we are increasing here. You are right in your previous question. You asked about the competition in the long tail. That is not the same as it used to be in the past. Some of the players that tried to enter the long tail decided not to compete with us anymore. We are strengthening our position in the long tail and also taking advantage to move up a little in the pyramid to serve these kinds of clients in the hubs. But going back to your question, hubs are going to contribute between 6% to 7%. The majority of the growth is going to come from the base that we have, as you could see already in January and February, growing more than 50%.

André Cazotto, Head of Investor Relations

Just one additional commentary here, Jeff. André speaking. We should expect online volumes to continue to be extremely strong. We just completed the acquisition of MOIP, so now we have the operation up and running. We continue to see a very strong demand from small and medium businesses going online for the first time and we're prepared to serve them. So we're also expecting a good contribution from online TPV in our total guidance.

Jeff Cantwell, Analyst

Okay, great. Thanks for all the color and congrats on the results.

Operator, Operator

Our next question comes from Jorge Kuri with Morgan Stanley.

Jorge Kuri, Analyst

Congrats on the numbers. Could you please expand more on the hub strategy? What type of size of SMBs are you trying to go after? Is this sort of like an overlap of where Stone operates, merchants that process BRL350,000 to BRL400,000 a year in cards? Or is it smaller merchants? Is the hub strategy based on boots on the ground? Is this an intensive people strategy? How many people are you going to hire to run the hubs? If you can tell us what the pilot hubs that you've been operating in 2020 produced in terms of volumes and take rates, any overall, I guess it's a big announcement and so more details around exactly what type of businesses and how you're going to run it will be great. That's my first question.

Ricardo Dutra, CEO

Jorge, this is Ricardo. Thank you for the question; good to hear from you. So I'll try to address the points that came up here. So, well, the first one the size of the merchants, what we've seen so far, they are not as big as the competition at this point. But I could say that they are between five to seven times larger than what we had in long tail on average. The volumes and take rates are very similar to what the competition operates. As I said in the presentation, they are smaller than long tails; however, it is additional to our business plan, and as they have a TPV that is five to seven times larger, it is accretive to our business in four to five quarters, as I said before. So the results that we got in the pilot are exactly those: similar take rates from competition, TPV five to seven times larger, and paybacks between four to five quarters. That's what we're seeing. This calculation about payback considers only acquiring. If we cross-sell some banking products, we could anticipate that. It's too early to give some guidance on that. The way we're going to work is going to be very similar to what competition does, but we are going to try to make a hybrid model or omnichannel that we also try to take advantage of our size, along with our online capabilities to serve these clients in the hubs. We will add some people in the suites that we envision. It is important to have local presence. But we try to mix the way we get the clients and the way we serve them afterward. That strategy is going to be our secret sauce. And important to say, we are today probably the only one serving hubs that can deliver the device on the very same day. So that's something that we intend to utilize and is working very well. So that's what we have at this point.

Jorge Kuri, Analyst

And a follow-up, thanks Ricardo for that. That was very useful. My follow-up is are these merchants already operating with existing acquirers? Or are you taking market share from any of the competition? Or are these still small enough SMBs that you're finding many of them who don't have terminals or did not accept cards before? Or is this an outright, I need to take market share away from existing players?

Ricardo Dutra, CEO

Well, Jorge, just before I answer your question, we decided to go after this market because we've been receiving inquiries from this type of SMBs for PagSeguro to serve them. We cannot make a general statement here, however. Usually, still today, SMBs are poorly served. Some of them are non-acquired, and some of them are existing clients in both banking and payments. So the idea here to put the hubs up and running is because we received some requests from these SMBs and we want to go after them. The majority of them, not to say very close to 100%, already have another payments provider, and to answer your question, we are indeed taking market share from others in this hubs strategy.

Jorge Kuri, Analyst

Thank you, Ricardo. My second question is on the net take rate. There seems to have been stabilization on the transaction part of the take rate, as you pointed out, with the debit mix being now more normal. The compression seems to have been mostly on the financial income. Is this related to something temporary, something cyclical, or is it just related to more competition, lower benchmark rates, making it difficult to continue charging the same level of prices? What explains that 10 basis point contraction in the take rate of the financial income?

Ricardo Dutra, CEO

Well, Jorge, it is hard for us to say when we will have the recovery because we still have a lot of uncertainty here. But when you look back at what happened in Q4, we saw kind of a stabilization, as you said, in terms of the mix of TPV between debit and credit. The point is there are some other variables that compose this take rate. One of them, for instance, is duration. We are not changing prices, we are not decreasing prices. But as I said, people in Brazil receive an additional salary, so they may keep buying through installments but with a lower duration, which also impacts the financial income. Important to say, if we look at Q4 2019 versus Q3 2019, we saw a decrease of 20 basis points in our take rate from 3.17 to 2.97. This year, we had just increased by 5 basis points from Q3 to Q4. When you look at January, it's interesting because we are growing 50% TPV; we never disclosed it. But the revenue growth is similar to what we had in Q4, close to 30%. In Q4, TPV was growing 60%. So the revenue yield so far in January is healthy. It's too early to celebrate; there is a lot of uncertainty here regarding vaccination and coronavouchers; however, this stabilization is good news. To go straight to your question, we are not decreasing our prices; that's not the reason for this decrease in financial income.

Jorge Kuri, Analyst

Thanks, Ricardo, and congrats again to everyone.

Operator, Operator

The next question comes from Rayna Kumar with Evercore.

Rayna Kumar, Analyst

Starting off with your margins, you gave some very good detail on really investing in your hub strategy in 2021. How is that going to play out for your net income margin in the first quarter and for 2021 as a whole? And then separately, the potential March second round of coronavouchers, is that included in your 40% plus TPV guidance for the year? Or would that be incremental? Thank you.

Ricardo Dutra, CEO

Rayna, thank you for the question. Also starting from the end, going backwards. The guidance that we gave that is above 40% TPV growth expected does not include coronavouchers starting in March, which would be an add-on to our business plan. Also, worth to say that we have the TPV that will grow, but on the other hand, we have the change in the mix, meaning we have this tailwind that is TPV growth and the headwind that is the change in the mix that may impact take rates. So just to be clear, the guidance does not include a probable second round of coronavouchers. Regarding the impact of hubs in our P&L, what I can say at this point is that hubs in 2021 will be slightly negative. So they will impact net income in 2021 slightly negative. As I gave the payback period during the presentation, they should break even by 2022. Let’s say if you don’t cross-sell banking services aggressively, it could be better than our assumptions in our plan. But just what we have today will be slightly negative in 2021 and positive in 2022.

Rayna Kumar, Analyst

Is that a net number you're speaking about? Or would operating leverage in your own business offset that potential decline in your margin that you could see from the hub strategy in 2021?

Ricardo Dutra, CEO

Rayna, it's important to highlight here and to be clear that the platform we use for long tail and for SMBs that we will serve to hubs, they are exactly the same. We're not transforming the company and moving around to serve SMBs. The platform is exactly the same. What changed a little is some of the features that they may use in the accounts, some of the features they may require in the acquiring, and the way we come to them. The distribution channel is of course different than the online that they use for long tail. The investment we are doing is mainly in hiring processing sales personnel. So this is an investment. We are not talking about large investments in platform to serve them. However, it is these additional salaries for the sales personnel that will negatively impact our P&L this year because we're going to have the sales personnel getting the clients, making transactions that will have a payback between four to five quarters. That's why we expect that to be slightly negative this year, and then will be positive by 2022.

Rayna Kumar, Analyst

Very helpful, thank you.

Operator, Operator

Our next question comes from Craig Maurer with Autonomous Research.

Craig Maurer, Analyst

I wanted to ask about the credit opportunity in SMB. We see that competitors that are disintermediating incumbents are showing extraordinary growth in credit with very positive ROAs in the SMB segment. Will entering the SMB segment significantly accelerate the growth in your credit portfolio? Thanks.

Ricardo Dutra, CEO

Craig, thank you for the question; good to hear you. Our business plan at this point focuses on the long tail for credit. We started serving hubs, and we are achieving good results in terms of acquiring. I would say it is still too early to assess how the credit offering for the SMBs from our base will pan out. We know for sure that we can disintermediate incumbents; that's for sure. There will be some dynamics in the industry starting in June with the receivables marketplace. So it is an add-on for our business plan. There is a lot of potential there. However, I just don't want to make any promises or generate expectations that we are going to explore that aggressively right now because we are still evaluating. But for sure, it's a good opportunity. In our business plan, we are considering to continue serving the long tail the way we've been doing since last year: offering credit for them, charging through Square Capital, through the MDRs, and so on. That's what we have at this point. There is still a lot of uncertainty down here in Brazil with the COVID-19 impact; that's why we are trying to provide you with the best estimates or the best information we have, and we may update you as time passes by.

Craig Maurer, Analyst

Just one follow-up on what you said. Can you discuss how the receivables marketplace is going to work? If you know, I mean how you'll be able to pursue receivables within that marketplace? Is it daily, monthly? Is it batched? How is that process going to actually work considering merchants in Brazil, I would imagine, are generating hundreds of thousands of requests for prepayment on a daily basis?

Ricardo Dutra, CEO

Yes. Craig, just to try to explain here quickly for everyone. In terms of long tail, we don’t see risk in our base for the simple reason that once they started to work with PagSeguro, they need to prepay their sales. They need to receive in D plus zero, D plus 14, or D plus 30. They are not price-sensitive and they don't possess the sophistication to discuss with lenders in regards to chambers of receivables. What we see is that the type of merchant looking for this chamber of receivable are large accounts and large SMBs. They have the sophistication; they have their financial managers that can negotiate rates and fees. At the end of the day, the chambers of receivables will be a centralized hub with information that everyone in the market can use once a merchant gives a receivable in guarantee for a credit; no other can take it. Today, there is no centralized chamber, which is why it's inefficient. We see a huge opportunity. If you look at our market share, we are close to 8%, meaning there is still 92% of large clients making transactions outside of PagSeguro's ecosystem. We could go after them, allowing them to anticipate receivables regardless of their current position as our acquirer. The expected launch date for this initiative will be June 7.

Craig Maurer, Analyst

So this is about visibility not necessarily about mechanics. This is showing you where to go, but it’s not facilitating you actually making that credit?

Ricardo Dutra, CEO

I would say it's both, Craig. Visibility will be crucial to see the receivables there, along with providing credit through your ecosystem, in your app, website, and so on. However, you have the visibility in mechanics that will help both because through the receivables, collection becomes more efficient. This is why you gain visibility; you also offer lending, and the mechanism to make collections is efficient, which is not the case today.

Craig Maurer, Analyst

Okay. Thank you. That's very helpful.

Operator, Operator

The next question comes from Mario Pierry with Bank of America.

Mario Pierry, Analyst

Congratulations on the results. I have two questions. First, on your TPV growth guidance of more than 40%, I just want to understand that this number, 40%, if we take it as the bottom of your guidance, it just seems to me too cautious. Your volumes are already growing over 50% year-on-year. You have easy comps over the second quarter of last year. You added 1.1 million clients in the second half of 2020 alone. And you're adding the SMB volumes. So just trying to understand then why you're going to say TPV growth of more than 50% rather than 40%. My second question is related to your CapEx, right? You're giving guidance here of CapEx of BRL2 billion, which is basically your CapEx in 2020, even though you're doing this hub expansion. So trying to understand if the hubs costs show up as OpEx and there's no CapEx associated with that. When we think about your hub strategy, are you targeting a specific region of the country, or are you going to go nationwide right away? Thank you.

Ricardo Dutra, CEO

Mario, thank you for the question. Good to hear you as well. We have three questions here. I'm going to answer the first and the third, and then Artur can handle the CapEx question. Again, going backwards, the plan here is to serve all regions of the country. Of course, we will not be able to cover the 5,500 cities in Brazil, but we'll prioritize those with more potential, less competition, and where we can judge that it's going to have better performance. So yes, and the idea is to serve all regions of the country. Regarding the guidance, you're right, 40% is the bottom. That's why we put in this slide higher than 40%. Some people may think that is conservative, as you mentioned. But remember, we're still in the middle of the pandemic in Brazil, so there’s a lot of uncertainty. Just to give an example, the city of São Paulo is planning partial lockdowns. Some cities in the countryside of São Paulo today are having full lockdowns. Vaccination is happening, but maybe not at the speed we expected; so there remains uncertainty. We will update that as time passes, but there’s a lot of uncertainty at this point. We have many dynamics going on, lockdowns here and there. That’s why we decided to give you the guidance that we believe is the best information we have at this time. You are correct that 40% is the bottom. In January, we grew 50%; in February, 50% as well. So let’s see; we can update you as time continues.

Artur Schunk, CFO

Yes, Mario, I will follow with the second question. It's a pleasure to talk to you today. First of all, in 2020, we had BRL2 billion in CapEx. Part of this CapEx is related to the POS that we purchased to support the growth of the company. We had a record of 1.8 million net additions in 2020, meaning we needed to buy POS to support this addition. Also, in our CapEx, we include R&D investments. We are accelerating our product road map; therefore, we had a huge amount in R&D investments in our CapEx. Regarding hubs, we don't consider CapEx for hubs. It’s not necessary, just the purchase of POS for hubs, okay? In 2021, we consider the same amount of CapEx as in 2020 as guidance because we think we will continue to grow our company and accelerate the net additions for 2021.

André Cazotto, Head of Investor Relations

Just one additional commentary here, Mario. Just like Ricardo said in the guidance for 2022, we expect CapEx as a percentage of our total revenues to return to regular levels that we had in 2019, for instance. It’s like a one-off that we had to support the unprecedented demand for terminals as explained by Artur—additional terminals for active clients due to takeouts and delivery. So that’s part of the growth.

Mario Pierry, Analyst

Okay, thank you. Very clear.

Operator, Operator

The next question comes from Bryan Keane with Deutsche Bank.

Bryan Keane, Analyst

I just wanted to follow up on the net margin question. I get the investment in the hubs and investment in PagBank. What I'm trying to figure out is what should we expect for that first quarter in net margin? And then for the year, what will net margins do? Because you got some puts and takes with hopefully the pandemic getting behind us, which will increase margins but also the investments, so just looking for some thoughts there.

Ricardo Dutra, CEO

Bryan, thank you for the question. Talking about what you saw so far, as I answered Jorge before, we saw in January and February that although TPV is growing 50%, revenues are growing the same, close to 30% as we saw in Q4 last year. So we are seeing a better revenue yield. We always say here that it may be too early to celebrate. As I said before, some ups and downs, lockdowns here and there, and coronavouchers that might come starting in March. However, what we saw in January and February was a good revenue yield at this point overall. Talking about the margins for the year, I know it seems repetitive, but we will keep investing in PagBank. Of course, we have our plan for how much we're going to invest. Currently, we have eight million active PagBank clients and seven million active merchants; we have a record number of downloads, with acquiring volumes growing 50% only in these first two months. The idea here is not to decelerate. We need to keep investing in order to take advantage. The market we are after is at least 17 times larger than our current acquiring market. Profitability is part of our DNA, and we will continue to deliver solid bottom-line results; however, PagBank Investments and new initiatives are our most effective capital allocation strategy for now. We plan for PagBank to be profitable in 2022. We are investing in creating a platform. As you can see, we are launching a home broker, distributing treasury bonds, and recently launched our distribution of crypto funds. So we are in investment mode for some of the business units of the company: PagBank, PagInvest, and insurance. We expect that 2022 starts to show profitability. That’s the best answer I can give you at this point.

Bryan Keane, Analyst

No. That’s helpful. Those factors are helpful for us to understand the impact on margins. And then my second question is looking at PagBank revenue. It was great to see the acceleration in the revenue growth. I think it was close to 146% growth, something like that. But I noticed for 2020 in general, the card revenue looked like it declined a little bit. So will that card revenue, should that pick up in growth as we go into 2021? And can we expect still that triple-digit growth rate in PagBank revenues?

Ricardo Dutra, CEO

Well, Bryan, just the participation in the mix for credit cards or for cards in the PagBank went down; you are right. When you look at the slide, you can see the participation decreased. However, the main reason for that is the lockdowns and the overall COVID impact on Brazil last year. People stayed at home, they didn't use cards as much, and they didn't withdraw money, which is why we saw a decrease in revenues from cards due to it being a part of the mix. We offset that with our credit offerings. As you could see, we are not being aggressive in that area either. Our credit portfolio closed Q4 with BRL600 million, so we are not talking about billions here. We have been cautious from March until about September, and then we started issuing loans. We saw a lot of traction even while being cautious, leading us to grow the company's revenues for PagBank and surpassing BRL540 million. So absolute figures are up in all lines: in cards, credit, and transactional.

Bryan Keane, Analyst

And should we see a bounce back, especially in the cards portion in 2021? Or is it still dependent on the economy and the comeback and the recovery?

Ricardo Dutra, CEO

It depends on the economy, Bryan, because if people stay at home, they don’t use the card very often and this declines overall. This is why we anticipate an increase, that’s for sure. We are adding one million PagBank clients each quarter, so those figures will grow. It’s just hard to predict the strength or impact of that growth.

Operator, Operator

Hello, everyone. So here, we conclude our Q&A session. Thanks for your time. See you next quarter. Thank you. Bye. PagBank PagSeguro earnings conference call has concluded. Thank you for your participation, and have a good night.