Earnings Call Transcript - PAGS Q2 2022

Operator, Operator

Good evening. My name is indiscernible, and I will be your conference operator today. Welcome to PagBank PagSeguro's webcast results for the second quarter 2022. This event is also being broadcast live via webcast and may be accessed through PagBank PagSeguro's website. Participants may view the slides in any order they wish. Today's conference is being recorded and will be available after the event is concluded. I would now like to turn the call over to your host, Éric Oliveira, Investor Relations and ESG Director. Please go ahead, sir.

Éric Oliveira, Investor Relations and ESG Director

Hi, everyone. Thanks for joining our second quarter 2022 earnings call. Today, we have with us Ricardo Dutra and Alexandre Magnani, our Co-CEOs; and Artur Schunck, our CFO. After the speakers' remarks, there will be a question-and-answer session. Before proceeding, let me mention that any forward statements included in the presentation or mentioned on this conference call are based on currently available information and PagBank PagSeguro's assumptions, expectations, and projections about future events. While PagBank PagSeguro 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 PagBank PagSeguro's presentation or discussed on this conference call for a variety of reasons, including those described in the forward-looking statements and Risk Factors sections of PagBank PagSeguro's most recent annual report on Form 20-F and other filings with the Securities Exchange Commission, which are available on PagBank PagSeguro's Investor Relations website. Finally, I would like to remind you that during this conference call, the company may discuss some non-GAAP measures, 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 subset of our financial information prepared and presented in accordance with IFRS as issued by 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.

Ricardo Da Silva, Co-CEO

Hi, everyone. Good evening from Sao Paulo, and thank you, Éric. I would like to begin our presentation with the main message for this quarter. Our successful repricing with the stable churn led to a negative rate 16 basis points higher than Q1 2022 or 8 basis points higher if we consider financial expenses. PagSeguro TPV again outpaced market growth despite pricing increases, growing more than 60% of the Brazilian payments industry. PagBank net adds accounted for 1.6 million new clients, consolidated by Bank as the second largest digital banking number of clients in Brazil. Total deposits reached more than BRL 15 billion, a 163% increase compared to the same period of 2021. CapEx per sales was at 14.7%, down 520 basis points compared with Q1 2022 and trending down moving forward. Despite our moving up-market strategy combined with price increases, HUBs, TPV reached almost 30% of PagSeguro total TPV. Going to Slide 4. Once again, we presented record numbers in all main KPIs, while our purpose remains the same, to democratize access to financial services and payment solutions in Brazil, providing a simple, safe, affordable, and digital ecosystem to merchants and consumers. In Payments Platform, TPV was BRL 89 billion, with revenues growing faster than TPV and TPV per merchant growing above 50%, leading to BRL 1.4 billion in gross profit. In Financial Services, TPV was BRL 86 billion with BRL 314 million in revenues and flattish gross profit compared to Q2 2021, mainly driven by our cautious approach in credit product underwriting in such a challenging macroeconomic scenario. Overall, total revenue and income reached BRL 3.9 billion, 65% higher than Q2 2021, while net income on a non-GAAP basis reached BRL 403 million, 17% higher than the same period in 2021. Our non-GAAP net income grew 35% year-over-year. Moving to Slide 5, we compare our performance relatively to the whole market and conclude that we have been able to keep growing with profitability, which also reinforces our successful ongoing repricing initiatives. In the left chart, we were again the TPV market share gain winner this quarter. Compared to Q4 2021, we grew 80 basis points without buying market share. As you can see in the second chart, although every player has been increasing prices, our repricing initiatives were the most successful, focusing on clients' demands and having a stronger value proposition that allows us to increase our net take rate much more than our peers. Our net take rate grew five times more than that of our peers. In the right chart, to compare profitability in an easier way to understand, when you look at how much profit each company can extract net income from each real transacted in its payment solutions, which means net income divided by TPV, we can see that PagSeguro is five to seven times more profitable than its peers. If you compare the total profit pool of the industry, PagSeguro has almost 11% TPV share and captures the largest portion of the profit share, around 45%. In Slide 6, we present the main highlights of PagBank. We reached 25 million clients in June with more than 15 million active clients, reinforcing our position as the second largest digital bank in Brazil. Moreover, 60% of the new consumer cohorts used the bank as their main bank. Our deposits grew 163% year-over-year, reaching BRL 15.5 billion, and grew faster than our credit portfolio, aiding our funding diversification. Moving to Slide 7, we are happy to announce our secured credit card for all our clients, consumers, and merchants. We have noticed that clients want to have higher credit card limits while we aim to manage asset quality. Addressing both demands, our secured credit card empowers merchants and consumers, tying their credit card limits to PagBank CDs, which have the highest security in the market. This product has zero non-performing loans, maintaining deposits that help manage our cost of funding and increasing our upselling and cross-selling opportunities to become more the primary bank for our clients. Following our mission to be simple and safe, our clients can manage their credit card limits through the app. Finally, in Slide 8, I'd like to update the cash-in process in PagBank and how PIX has been helpful in boosting cash-in transactions in e-commerce and electronic payments. Cash-in, excluding acquiring, grew 149% year-over-year, reaching almost BRL 32 billion. Additionally, PIX has been boosting our deposits while diversifying these sources, leveraging monetizable cash-out strategies that confirm PagBank as the final monetization point for clients since our market share peaks transaction reached 10% this quarter. This also helps collect additional data from our clients. We are not unaware of the sector's evolution, and we see several opportunities to keep exploring not only card payments but all types of payments, including wire transfers, PIX, online payments, and cross-border transactions, while providing business integration and management solutions and upselling and cross-selling PagBank financial services through a single interface: one app, one platform, online banking, one customer support, and a complete and integrated solution.

Alexandre Magnani, Co-CEO

Hello, everyone, and thank you, Ricardo, for the initial remarks. Moving to Slide 9, I will start the segment highlights with PagSeguro's overview during the quarter. PagSeguro's total revenue and income grew 68% year-over-year, reaching BRL 3.6 billion, faster than TPV, which grew 58% year-over-year, totaling BRL 89 billion. As a result, our market share in payments reached almost 11%, growing 150 bps over 2Q '21 and 10 bps over 1Q '22. In the next slide, we show how we have been working with our merchants to combine growth and profitability as we have the largest share of active merchants in the Brazilian market. We have been more selective in our acquisition strategy during 2022, reducing subsidies and focusing on the best sales channels to improve new merchants' acquisition quality. As a result, we grew the average TPV of new merchants' acquisitions by 53% through our online channel, and we also increased overall average TPV per merchant by 56% on a year-over-year basis. Our number of active merchants, excluding MOIP, reached 7.4 million in June 2022. In terms of MOIP, we have been prioritizing merchants with a strong online operation and cleaning up our base of inactive resellers from some marketplaces, positively affecting TPV, revenue, and net income trends. Excluding MOIP's merchants and nano-merchants from PagSeguro, we observe an 11% year-over-year growth in our active merchant base. This strategy results in higher activation of POS devices, higher TPV per merchant, and more upselling and cross-selling opportunities for PagBank, as nano-merchants represent only 2% of PagSeguro's TPV. Consequently, the positive results we expect are lower CapEx per sale, lower POS depreciation per sale, and a higher lifetime value to customer acquisition cost ratio for the new merchants cohort, which will contribute to margins rebounding and cash flow generation in the future. In Slide 12, I want to share some updates about PagBank operations. Total revenue grew 62% year-over-year, ending the quarter at BRL 314 million, representing 80% of PagSeguro's total revenue and income. Total payment volume reached BRL 86 billion, growing 87% year-over-year with engagement TPV gaining traction driven by cash-in, bill payments, and card spending, among others. Moving to Slide 12, I would like to recap our milestones in credit products. Total credit portfolio reached BRL 2.3 billion, up 104% year-over-year, mainly driven by the increase of payroll loans and FGTS early prepayment, which are consumer-focused products. As asset quality remains the top priority for our company, we understood that in navigating such a challenging macroeconomic scenario, we had to increase our exposure to secured products, which went up from 5% to 23% in 2Q '22 compared to 2Q '21. Also, as Dutra mentioned, we just launched our secured credit card backed by PagBank CDs, which will contribute to an even faster share of collateralized products in our portfolio. With this strategy in place, we expect to keep growing our portfolio gradually, while making important investments to develop our policies, models, and the overall credit cycle fundamentals. We are preparing PagBank to scale and diversify credit offerings for most of our clients in the future with a proper balance between risk and return. Finally, before I turn it over to Artur, I would like to review our guidance for Q2 '22 and establish a ballpark for Q3 '22. Total revenue in Q2 '22 was BRL 3.9 billion, BRL 300 million higher than the guidance midpoint. For Q3 '22, we expect a ballpark between BRL 4 billion and BRL 4.1 billion. PagSeguro TPV in Q2 '22 reached BRL 89 billion, almost BRL 5 billion higher than the guidance midpoint. For Q3, we expect something around BRL 91 billion to BRL 92 billion. Net income on a non-GAAP basis was almost BRL 30 million higher than the guidance midpoint. For Q3, we expect a ballpark between BRL 400 million and BRL 410 million, mainly due to the higher average interest rate of the period and higher marketing investments to promote the launch of new products.

Artur Schunck, CFO

Thanks, Alexandre, and hello, everyone. I will continue the presentation on Slide 14 with Q2 '22 financial results. On the left side, total revenue and income reached a record of BRL 3.9 billion, growing 65% year-over-year. The net take rate achieved 2.75% this quarter, increasing 15 basis points versus Q1 '22 as shown in the bottom right side of the slide. Gross profit, neutral of FX impact, grew 28% year-over-year, impacted by the growth in financial expenses and higher chargebacks, but remained stable as a percentage of PagSeguro TPV quarter-over-quarter. The ongoing pricing strategy in acquiring credit products has been helping to offset those impacts. Adjusted EBITDA closed at BRL 831 million, up 32% compared to Q2 '21 and up 25% versus Q1 '22. Net income on a non-GAAP basis achieved a record of BRL 403 million for all second quarters in our history. Net income, on a GAAP basis, increased 35%, reaching BRL 367 million compared to the same period last year. This represents earnings per share of BRL 1.10 in the second quarter of 2022, BRL 0.28 or 35% better than Q2 '21. PAGS continues to achieve better balance between growth and profitability, focusing on improving shareholder returns. Moving to Slide 15. On the left side, operating expenses reached BRL 603 million in Q2 '22, up 22% year-over-year. This amount represents 15% of PAGS revenue versus 21% in the same period of last year. The improved efficiency has come from personnel and marketing expenses leverage as well as PagBank and HUBs revenue growth. In the right chart, financial expenses closed at BRL 756 million versus BRL 134 million in Q2 '21. Almost 87% of this increase is explained by the hike of SELIC, with the remaining portion of 13% related to higher TPV volume, prepayment of receivables to merchants, and credit card mix. These effects were partially offset by ongoing repricing in acquiring, APRs increase on credit underwriting, and lower cost of funding from deposits growth, combined with better spreads negotiated with the market. Our focus is on improving funding processes, diversifying sources, and extending terms to leverage our banking license and support company growth. On the next slide, CapEx per revenue reached 14.7% this quarter versus 16.8% in 2021 and 19.9% in Q1 '22. This decrease reflects PagSeguro's strategy to be more selective in merchant acquisition to leverage PagBank. For this year, we expect to reduce the CapEx per revenue ratio moving forward. In the second chart, adjusted EBITDA minus CapEx reached a positive amount of BRL 256 million, up 187% compared to Q4 '21, showing a better trend than previous quarters. This reflects PagSeguro's strategy to maximize the lifetime value to customer acquisition cost ratio by reducing POS subsidies and adding more valuable merchants. Cash position on Slide 17 ended the second quarter at BRL 8.6 billion, improving BRL 300 million quarter-over-quarter. This was driven by TPV growth, higher share of credit card transactions, and larger penetration of same-day prepayment to merchants. We have also been improving our capital structure, ending the quarter with 71% of financing position funded by third-party capital. Furthermore, PagSeguro is diversifying funding sources to support volume growth. Additionally, in July '22, based on the good share price opportunity, we bought back 1.7 million shares, increasing our treasury position to be distributed in the long-term incentive plan, without diluting shareholders.

Alexandre Magnani, Co-CEO

To conclude our presentation, I will turn it back to Alexandre for the final remarks. Thanks, Artur. Before moving to the Q&A, I would like to remind everyone of our key milestones for our business. In Slide 18, we have recapped our achievements. In terms of growth, our company continues to maintain consistency in growing faster than the industry, but in a profitable way, which shows that we have a superior value proposition, and we do not rely solely on prices to grow our business. Regarding profitability, we continue to post one of the highest levels of EPS among acquirers in Latin America. In Brazil, we maintain 45% of the acquiring industry's profitability and exhibit profit margins over TPV that are five to seven times higher than competitors. Even with the macroeconomic headwind scenario, we were capable of growing our EPS by 35%. Finally, this is what we expect for the next quarters. We are focused on consolidating PagBank as the second largest digital bank in Brazil by providing a superior banking and payments experience through a multichannel single interface. One app, one banking solution, and one customer support. Differently from incumbents that operate in banking and acquire through segregated platforms, we deliver both solutions in an integrated way to our customers. We also intend to increase exposure through secured credit products, which will continue helping us to find a safe entry point in consumer lending, reinforcing our strategy of growing fast with profitability. Now we conclude our presentation, and we will open the Q&A session. Operator, please.

Operator, Operator

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

Mario Pierry, Analyst

Congratulations on the results. Let me ask you two questions. One is related to your ability to continue to reprice your product. How are you seeing the environment? Have we seen the full benefits of all the price increases that you have implemented? And then the second question is related to your guidance. When we look at revenue and TPV growth, we see a slowdown from the growth you provided in the second quarter, particularly regarding revenue growth of about 46% on your guidance. Can you explain this slowdown? Is it just because of tougher comps, given that the first half of last year, we still saw the impact of COVID, and now you're facing more difficult comps in the second half of the year?

Ricardo Da Silva, Co-CEO

Mario, this is Ricardo. Thank you for the question. Good to talk to you. First, talking about repricing. As we said before, repricing is an ongoing process. I won't say that it's over because we are continually evaluating our net take rate after financial expenses, and if necessary, we will make adjustments; we will increase prices again. We never do that massively for all clients. We always see some clusters where we believe we can increase prices selectively to manage client relationships and the profitability that we have for each cluster. So we did this repricing again in Q3 because we knew that SELIC would increase again. And if necessary, we will adjust it one more time. What I can say at this point is that the net take rate in Q3 so far is higher than in Q2. So we will see what the full Q3 will be like. But so far, the net take rate is slightly better than Q2. When you factor in financial expenses, it is stable. Thus, I say to you that this never ends; we are always evaluating opportunities to enhance profitability for specific clusters. Regarding growth, you're correct that the percentage growth is slower. But in Q3, as you mentioned in your question, we are facing hard comps from 2021 because it was really when we had the opening of the economy in 2021. The full economic reopening started in Q3 2021. So it is primarily hard comps affecting our growth rates. We still see strong numbers, as you can see, exceeding BRL 90 billion. That's the guidance we're giving. I would say the main reason is those hard comps from the previous year.

Mario Pierry, Analyst

Perfect. Just a follow-up on the pricing. Can you talk about your pricing under different segments in the micro merchants and the SMB segment?

Ricardo Da Silva, Co-CEO

For the micro merchants, we have the same price on the website. You can take a look there. We didn't change the price for the longtail. We just made some adjustments to the promotions. Some clients in the base with promotions we transitioned to regular pricing. For SMBs, we are continually monitoring margins and net take rates after financial expenses from specific clusters. You have to consider merchant category codes, as they affect costs differently. That's why we continually evaluate different clusters in terms of merchant category codes and the profiles of these merchants. Some have more credit card transactions with installments, and others have more debit card transactions. Therefore, we regularly assess these profiles to determine pricing adjustments. That's our methodology. We have several clusters here, and we're always looking, of course, at churn and maintaining good client relationships while optimizing profitability for specific clusters.

Pedro Leduc, Analyst

First, regarding the financial results and financial income. There's a repricing effect here, as financial results are starting to outpace financial expenses in nominal amounts. We're seeing deposits at the bank now nearing BRL 15 billion. Can you elaborate a little? How is this helping you? If you can help us quantify this, and can you say this will help you in the future even if TPV cools, as we discussed before, while continuing to improve profitability on the financial results front?

Ricardo Da Silva, Co-CEO

Pedro, this is Ricardo again. I will start the question, and then Artur or Éric can assist me with more specific numbers. But conceptually, deposits help us because with the banking license, we can use these deposits as a funding source for our operations here at PagSeguro. TPV is not cooling off; it is just experiencing a growth deceleration. However, this growth remains strong, with year-over-year growth of almost 50%. In past quarters, we have consistently grown between 60% and 70% more than the industry. So, to rephrase, TPV is strong. We have around BRL 16 billion in deposits that we can use to help us with our funding. The growth of PagBank supports this initiative, and we expect to see more and more deposits in the future. Is that clear?

Pedro Leduc, Analyst

No, that's clear. I do have one more technical question on the POS write-off. I appreciate the disclosure and explanation around it. This value, BRL 93 million, just to understand if it's a linear rate of the full amount that we reassessed or if it's just this one number, and for the next quarter should be smaller depending on how you reassess those values?

Artur Schunck, CFO

Pedro, thank you for the question. It's Artur speaking. This is an evaluation we conducted in this quarter, and the impact of BRL 93 million is an adjustment at this level just for Q2, but we will continue to evaluate our client relationships, and the write-off of POS will be a recurring process in the coming quarters. We are expecting something in the range of BRL 40 million to BRL 60 million per quarter related to those write-offs.

Ricardo Da Silva, Co-CEO

It's already accounted for in the guidance we provided, Pedro, just to clarify, for the following quarter.

Domingos Falavina, Analyst

To us here, congrats on your ability to pass through the rising SELIC; it's good to see the net take rate moving up. I have two quick questions, actually adding to yours. As you mentioned, the Q3 is evolving nicely compared to Q2. Can you provide a note of magnitude on the net take rate movement? Is it similar to what we saw in Q2, or is something more pronounced regarding margin improvement? And the second question: If you could differentiate sort of the net financial result evolution, was it predominantly driven by the acquirer? Or did you have savings on the bank side like paying lower deposits and so forth? And is there more you can do on the bank side too?

Ricardo Da Silva, Co-CEO

The net take rate for Q3 compared to Q2, as we have observed so far, and of course, we still have half of the quarter remaining. It is indeed increasing, yet not at the same level as in Q2. It is growing, but not as markedly. As I mentioned, we constantly evaluate and implement repricing. Regarding funding, we leverage the bank funding, where our cost is lower than 100% CDI. I wouldn't qualify it as cheap, but it is more favorable than the CDI, which benefits us. This advantage stems from having the banking license. Looking ahead, we want to grow our deposits even further by launching new products that incentivize clients to retain their funds with us, transforming PagBank into a primary destination for their money. However, there isn't a silver bullet; we must continuously increase our deposits. Deposits tend to become a less expensive source of funding when compared with other sources used in the company.

Neha Agarwala, Analyst

Congratulations on the results. Can you talk a little bit about PagBank? When we assess the revenues and gross profit, there was only a slight increase in revenues, and monetization appears to be a bit more challenging in PagBank. However, your gross profit increased much better than revenues. Can you help us understand the dynamics of PagBank and how we should view its revenue evolution? When do you foresee breakeven at PagBank?

Ricardo Da Silva, Co-CEO

PagBank is based on three revenue sources: transactional, interchange of cards, and interest-bearing credit products. What we've seen in Q2 is almost a 100% increase in collateralized products, particularly in salary payroll loans. These products have a longer duration compared to other items in our credit portfolio. We are witnessing a shift towards collateralized products with longer terms rather than non-collateralized products that have shorter durations. We're still early in this transition, as you could see on the slide; one year ago, we had 5% of our credit portfolio in collateralized products, and today it's at 23%. It will take time for these revenues to accumulate each month for us to see the impact of these cohorts in the following quarters. Thus, we are satisfied because the cautious approach is necessary to build a balanced credit portfolio, but it will take time for revenues to manifest because of their longer duration. As for breakeven, I don't have an exact date in mind right now, but I believe Éric can assist me further.

Éric Oliveira, Investor Relations and ESG Director

I think PagBank's breakeven is strictly correlated to the evolution of engagement among PagBank clients, with more appetite for credit underwriting as we aim for a safe entry point by rolling out secured loans for both merchants and consumers. In terms of costs and expenses, we do not foresee much growth in the coming quarters. However, we expect stronger revenue growth, as Dutra mentioned, with a waterfall effect on payroll loans, leading to a positive outlook for PagBank's revenues. We prefer not to set an exact date for breakeven at this moment, but we are getting closer as we scale products, especially with secured loans.

Neha Agarwala, Analyst

That's very clear. Can I ask one more question on the SMB segment? Are you done with your HUB expansion and hiring personnel, or do you anticipate adding more, given your traction in the SMB segment? What percentage of global TPV is now coming from the SMB segment? If you have any target numbers for the end of this year or next year, that would be great.

Alexandre Magnani, Co-CEO

This is Alexandre. Thank you for the question. We have been very successful in executing our expansion in the SMB segment. We have reached 20% of our TPV in this segment. We do not plan to expand our HUBs significantly moving forward. We are stable in terms of hiring sales personnel for the HUBs. However, we anticipate an increase in team productivity due to the intelligent tools we utilize to operate our sales team in the HUBs. These tools enable our team to activate PagBank accounts instantaneously for merchants. This makes a significant difference for us in terms of productivity and revenue generation, not only from the operating side but also from the digital bank.

Ricardo Da Silva, Co-CEO

Regarding the figures you asked about TPV, we don't have a specific number at this moment. However, I can tell you that the recent performances in Q1, Q2, and what we have observed in Q3 indicate that TPV from HUBs grows faster than the rest of the company because these clients have a significantly higher average TPV compared to our micro-merchant customers; they are five to six times larger. TPV from HUBs will continue to grow. As Alexandre Magnani mentioned, we still have room for improvement in productivity and optimization of our salesforce on the ground. Growth, if any, will be negligible.

James Friedman, Analyst

It's Jamie at Susquehanna. So, in light of the previous question, how are you thinking about the profitability of the bank? Is it still consistent with your expectations at the Analyst Day?

Ricardo Da Silva, Co-CEO

James, a quick recap for those who are not familiar: we launched PagBank in May 2019. We anticipated starting credit offerings in 2020, mainly in the latter half of that year. However, after the launch, the COVID pandemic hit in March 2020, impacting plans significantly for two years. Now we are balancing our credit portfolio with secured and unsecured products, and we expect breakeven to occur soon. However, we are reluctant to set a specific date for that breakeven. We aim to ensure that it occurs soon, and the bank is performing well as evidenced by revenue growth too. Even with our cautious approach to writing credit, the gross profit remained stable year-over-year.

James Friedman, Analyst

Okay. And one more question about the bank. On Slide 6, it shows 15 million active clients, with 60% using it as their primary bank. I'm curious if you have data on how many of those use it exclusively? What percentage of that 15% are 100% reliant on PagBank? Data on whether they maintain a secondary bank account?

Ricardo Da Silva, Co-CEO

James, we had that number, but I don't have it at the top of my mind right now. A large part of clients in Brazil typically hold accounts at multiple banks. Many clients come to us from incumbent banks and initially use PagBank for transactions or to make investments in our CDs. Over time, they discover that our services work well, the experience is excellent, and they start relying more on us. Eventually, we reach the point where we become their primary bank. However, many clients still possess accounts at other banks. What we are following, as seen on the chart on the right, shows that new cohorts increasingly engage with PagBank as their main bank compared to older cohorts. Currently, we are around 60%, which is a very favorable index for us.

Sheriq Sumar, Analyst

My main question is regarding the active merchants. I recognize that we observed a decline this quarter, and I understand this is a strategic decision towards prioritizing high-yielding clients. However, I would like to gauge how much more downside we could see in this aspect. Given the rolling 12-month metrics and your price adjustments at the beginning of the year, combined with your target customer shift towards high-yielding clients, will the decline accelerate from here, or can we reasonably expect stabilization?

Alexandre Magnani, Co-CEO

This is Alexandre. We took a strategic decision to decelerate lower-quality acquisitions by reducing POS subsidies and targeting the best sales channels to improve our LTV over CAC ratio. This decision has led to an improvement of 53% in the average TPV of our new merchants acquired in the longtail segment. We believe we have stabilized the sales level, and we are actively working on new projects and channels to further boost our sales. It's important to note that our primary focus is adding new merchants of higher quality, with greater average TPV, rather than overwhelming our system with numerous nano-merchants. Therefore, we can expect stability in our active merchant base moving forward, with potential for slight growth.

Sheriq Sumar, Analyst

Got it. One question regarding financial expense. I heard previously in the first question that financial expenses are expected to be stable. Can you provide a sense of the dollar amount, given that we are more than halfway through the quarter, regarding what that number would be, noting the yield increase and the increase in volumes you are seeing?

Ricardo Da Silva, Co-CEO

I don't know if I understood your question correctly — this is Ricardo — but financial expenses will not be stable in Q3; they will, in fact, be higher. We expect them to rise due to both increased volumes and a spike in SELIC. The average SELIC or CDI in Brazil is going to be approximately 110 basis points higher in Q3 than in Q2, which will contribute to this increase in financial expenses. We aim to counterbalance this rise with price adjustments. However, it’s essential to expect higher financial expenses in Q3 compared to Q2 due to those two key reasons: an increase in SELIC and higher transaction volume.

Joshua Siegler, Analyst

Congratulations on the strong execution this quarter. I wanted to touch on the competitive environment. Have you observed any shifts in competitor behavior in terms of their pricing strategy over the last quarter?

Ricardo Da Silva, Co-CEO

Josh, thank you for the question. No, we haven't observed any irrational movements thus far. Perhaps one player here and there has acted irrationally in the nano-merchants space, but for the most part, the market remains rational. If you analyze the performance of major companies, especially the banks, you will notice that all have raised prices, as we showed in earlier slides. We've seen a 16 bps increase in our market share, while other players grew by 3 or 4 bps; they lack our pricing adaptability due to our large customer base. In conclusion, all players are increasing prices, not just in MDRs but also in prepayment, and rationality remains a critical aspect of the industry, which is positive news for everyone. To delve deeper into your inquiry regarding PagBank products, we've observed strong engagement with the credit card we recently launched, as it benefits both our clients and us. Our clients desire higher credit card limits, while we prioritize managing asset quality. This secured credit card allows clients to invest in CDs, enabling them to acquire higher credit limits conveniently through the app. This is one of the most engaged products we have seen, as it aids our deposit growth. Overall, the company is experiencing growth; if you assess the TPV for PagBank, you will find that activity is thriving. The engagement is notable for newly launched products.

Operator, Operator

Our next question comes from Alex Markgraff, KeyBanc.

Alex Markgraff, Analyst

One question regarding PIX and another about the credit portfolio. Firstly, regarding PIX, historically I think you referred to it as largely replacing wire transfers. Do you anticipate this changing in the future, particularly if PIX products begin to resemble credit or installment offerings?

Ricardo Da Silva, Co-CEO

Alex, we don't see PIX cannibalizing card transactions. PIX is replacing cash transactions and also replacing bank slips in e-commerce. Currently, those are the two key products replaced by PIX. We don't foresee PIX replacing cards due to multiple reasons, including the way people typically utilize cards, as well as chargeback provisions and associated warranties. Additionally, PIX transactions go straight to our balance, resembling debit card mechanics. That said, with credit in Brazil, there is a grace period, allowing consumers to perform transactions today while paying for them 30 days later. PIX lacks that feature, so its role is primarily to facilitate cash-in actions seamlessly, assist with transactions across accounts effortlessly, and ultimately replace wire transfers.

Alex Markgraff, Analyst

That's insightful. Regarding the credit portfolio, much of the growth in the short term appears to stem from secured products. How do you envision the appropriate mix of secured versus unsecured credit in your portfolio in the mid to long term?

Ricardo Da Silva, Co-CEO

That's something dynamic, Alex, as you can imagine. The proportion of secured and unsecured credit can shift depending on macroeconomic conditions; banks often have a greater appetite for unsecured credit when economic conditions are favorable. Given today's challenging macro conditions, there is an increased focus on collateralized products. I would say that 100% of the credit underwriting we performed in Q2 and are doing in Q3 is collateralized. In the subsequent quarters, you will see the growth we achieve with collateralized products. We plan to maintain a focus on collateralized products until macro conditions permit us to feel more confident about reintroducing unsecured credit offerings. Admittedly, there isn't a specific target for each portfolio percentage; it adjusts based on macroeconomic conditions and profitability considerations.

Jeffrey Cantwell, Analyst

Congratulations on the results. I wanted to ask about your net margins. It appears they are projected at about 10% to 11% this year, including the next quarter. Could you share your thoughts on the motivation and ability to expand margins beyond this point? Acknowledging that there are multiple factors influencing TPV, pricing, and operational leverage; could you break it down as best you can regarding margin expansion potential?

Ricardo Da Silva, Co-CEO

Jeff, as you noticed in our guidance for Q3, the margins will remain flat compared to Q2. However, I want to share our perspective on the company's status and the growth opportunities available. Currently, we capture 45% of the industry's profits with just an 11% TPV market share. Our profitability is five to seven times higher than our competitors. We've successfully implemented repricing that has outperformed our competitors significantly, and we gained 16 basis points of market share while others, including Cielo and Stone, lost market share. Additionally, we consistently see earnings per share (EPS) growth quarter-over-quarter and year-over-year. While we certainly monitor margin performance, our primary focus is on EPS growth due to our growth trajectory and low TPV market share. To summarize, while we continue to evaluate margins, achieving EPS growth stands as our key objective currently.

Éric Oliveira, Investor Relations and ESG Director

Let me also remind you that Brazilian interest rates have increased sevenfold in a span of 12 to 15 months, which poses significant challenges for many companies in Brazil, not just us. We understand the market dynamics and are making decisions aimed at preserving profitability. As time proceeds, we will find an inflection point concerning interest rates. We anticipate that operational expenses will benefit from scale through personnel, marketing, and revenue growth, which should positively influence margins in a natural fashion. However, we prioritize EPS growth as our immediate objective in the current situation of elevated interest rates.

Operator, Operator

Thank you. We now conclude the Q&A session. I pass the floor over to Mr. Dutra for his closing statements.

Ricardo Da Silva, Co-CEO

Hi, everyone. Thank you very much for your time and for listening to us, as well as to those who posed questions. I look forward to meeting you all in person in the coming weeks and seeing you at the next conference call next quarter. Thank you very much.

Operator, Operator

Thank you. The PagBank PagSeguro conference call has now ended. We wish you a good night. Thank you.