Earnings Call Transcript - PAGS Q3 2021

Operator, Operator

Good evening. My name is Greg, and I will be your conference operator for today. At this time, I would like to welcome everyone to PagBank PagSeguro Webcast Results for the Third Quarter 2021. This event is being recorded, and all participants will be on listen-only mode during the Company's presentation. After the speaker's remarks, there will be a question-and-answer session. At that time, further instructions will be given. This event is also being broadcast live via webcast, and can be accessed through PagBank PagSeguro's website at investors.pagseguro.com where the presentation is also available. Participants may view these slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via webcast may post their questions on PagBank PagSeguro's website. 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 current assumptions, expectations, and projections about future events. While PagBank PagSeguro believes that their assumptions, expectations, and projections are reasonable in view of currently available information, you are cautioned not to place undue reliance on these forward-looking statements. Actual results may differ materially from those included in PagSeguro'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 registration statement on Form 20-F and other filings with the Securities and 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. 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 Ricardo Dutra, Chief Executive Officer. Mr. Dutra, you may begin your presentation.

Ricardo Dutra, CEO

Good evening from Sao Paulo, everyone. And thanks for joining our third quarter results conference call. Tonight, I have here with me Artur Schunck, our Chief Financial Officer; Alexandre Magnani, our Chief Operating Officer; and Eric Oliveira, our Head of Investor Relations. Let me start by giving you the highlights of this quarter: record TPV in both acquiring and banking, record revenues in EBITDA, and the second-best non-GAAP net income, only behind Q4 last year. We will see more details throughout the presentation. Quick update about COVID-19 in Brazil: while the pandemic is not fully behind us, we have started to see signs of the economy reopening, supported by vaccinations. In Brazil, we have seen a higher acceptance of vaccines compared to other countries. There is also a campaign to provide extra shots to reinforce the immunity of the elderly, and people with high-risk diseases or medical conditions. However, as a consequence of these almost two years of COVID-19, the Brazilian macroeconomic scenario is changing very rapidly. The inflation rate has gone above 10%, the unemployment rate continues to be above double digits, and the interest rates are increasing faster than the market expects. Regardless of these macroeconomic challenges, our track record gives us the confidence we can navigate very well during this crisis and grow our businesses. Our quarterly results further consolidate our winning strategy to continue to invest in technologies to make clients' lives simpler, while ensuring a safe ecosystem, driving profitable growth, and increasing revenue and profits diversification through cross-selling and up-selling PagBank products. Our revenues have accelerated driven by our new growth initiatives, primarily serving larger merchants rather than the long tail, and cross-selling PagBank offers for merchants and consumers while we attract a more diversified client profile. This quarter, we launched the automatic payment called 'Debit-Automatic' in Portuguese, DDA, and several new partnerships targeting the gaming community. Additionally, several milestones were achieved in our PagInvest initiative. We now offer 70 investment funds and several CDs to boost our deposits. We also have a Brazilian treasury bond trading platform, and our home broker trading platform for equities started to roll out this week, with expectations to be available for all clients by the end of November. On the regulatory front, we continue to see the regulator fostering competition, which could create opportunities for PAGS. Therefore, our investment thesis remains the same: we will continue to find the best balance between growth and profitability in the Brazilian payments and FinTech space, while we prepare our Company for the long-term, where we expect to have a larger and more profitable entity. It's only the beginning. We also view credit as one of the key drivers to achieve larger revenues and profits in the future. We are one of the few players in Latin America that have been building gradually and consistently a highly diversified credit portfolio with healthy asset quality. We have a seasoned team, exclusive data, and the right credit policies. There is no need to rush. Our main goal is to build up a solid credit business. Once again, I'd like to stress that I am very encouraged by the recovery trajectory and pleased with the momentum in both PagSeguro and PagBank. Finally, nothing of this would have been possible without the confidence of our shareholders, the commitment of our suppliers, and the best and most committed team working hard every day to promote our mission: being part of the financial life cycle of every Brazilian citizen, and promoting massive financial inclusion in our country. Thank you very much PagBank PagSeguro team. With that, Artur and I will present some slides and have a Q&A session at the end. Turning to Slide 3, we highlight achievements of the third quarter: record total revenue of $2.8 billion, up 56%. In the blocks below, we can see PagBank revenues reaching almost R$240 million and acquiring revenues reaching R$2.5 billion. All-time high consolidated TPV of R$126 billion, up 86%, with PagBank TPV reaching an impressive R$59 billion, growing 158% versus Q3 2020. Acquiring TPV grew 58%, excluding the Corona voucher, reaching R$67 billion, with HUBs TPV growing very rapidly and reaching around 15% of the year-to-date acquiring TPV. Adjusted EBITDA of R$742 million, up 40%, with acquiring adjusted EBITDA reaching R$818 million and PagBank adjusted EBITDA, resulting in reduced losses as a percentage of PagBank revenue, and increasing its margin, gaining traction to reach a bit creeping in the coming quarters. Non-GAAP net income of R$419 million, up 27% year-over-year. CapEx-per-sales has decreased from 32% in Q3 2020 to 15% in Q3 2021. Moving to PagBank, in September, our active client base surpassed 12 million, driven by 1 million net additions in the quarter, while active merchants totaled R$7.7 million. Our credit portfolio reached R$1.6 billion in September, with NPL 90 under control, and new cohorts from August 2020 onward operating at single-digit NPLs. Total NPL 90 is running at low double-digits. Turning to Slide 4, we present PagSeguro's highlights regarding our acquiring business. Our acquiring TPV grew 58%, excluding the Corona voucher, driven by our successful execution to serve not only long-time merchants with excellence, but also SMBs through our HUBs. Our market share has reached between 9.5% and 9.7%, as we can see right below the chart. Shift to the CapEx top right, we can see our acquired TPV growth is accelerating compared to previous years, growing 63% year-to-date ahead of the 45% guidance we provided last quarter. The positive trends remain, and we are pleased to announce that in October, we reached a new all-time high daily TPV for the third consecutive quarter, processing more than R$1 billion in payments in a single day. In Q3, our active merchants reached R$7.7 million, as shown on the chart on the bottom right, and our gross additions remain healthy compared to previous years. However, the net additions were impacted by a higher mortality related to lockdowns, higher churn linked to wildcard news flow during the second and third quarters of 2020. It is important to note that there is no impact on acquiring TPV trends, as for active merchants, we consider any merchant that has made at least one transaction in the last 12 months. Moving to Slide 5, acquiring revenues grew 52% compared to the same period last year, or 35% on a two-year CAGR basis. The growth was due to the expansion of our merchant base and our successful execution with SMBs through our HUBs. Although our SMB merchants have lower take rates, their TPVs are five times larger than the long tail, which is why our net take rate has maintained a flat trend compared to previous quarters. As we have changed our client mix towards larger merchants combined with a larger share of wallet, we can see the growth of TPV per merchant increasing 18% compared to the same period last year. Our adjusted EBITDA reached R$818 million, a 35% growth year-over-year. Despite the higher investments required to roll out our HUBs and continuous improvements in our payment services to our merchants, we were able to gain market share, consolidate our position, and increase EBITDA. On the next slide, I want to emphasize the results of our HUBs evolution shown in slide 6. HUBs TPV continues to deliver strong growth, representing approximately 15% of year-to-date acquiring TPV. This outpaces the best estimate for growth thanks to the economy reopening and strong execution in serving larger merchants combined with our competitive advantage, which is PagBank. I’m also happy to report that in October, we reached more than 300 fully operational HUBs. At the same time, we're observing that HUBs are breaking even between 3 to 4 quarters, and paybacks occurring between 4 to 5 quarters. Our software solution reached 1.3 million subscribers or 17% of PAGS active merchants. Last quarter, we announced a consumer acquisition, one of the most disruptive Fintech companies of 2021 according to Daily Finance Magazine, which has expedited our reconciliation product roadmap. This will also help us expand our reconciliation software offering to SMBs and long-tail clients who were not served by our previous older tech solutions. Moving to Slide 7, PagBank revenues continue to show healthy trends, reaching almost R$240 million, up almost 80% year-over-year, with better trends in the adjusted EBITDA losses, which had a negative margin of 58% in 2020 compared to a negative margin of 32% in Q3 2021. We had a net addition of 1 million new PagBank clients in Q3 2021, surpassing the 12 million active users mark, with 46% of these clients being consumers. Products per user remain stable compared to the same period last year, despite the healthy growth in the number of new clients. On the top right, PagBank's gross take rate improved by 31 basis points compared to the previous quarter, reaching 1.93%. This is due to the increase in monetizable TPV, which increased 52% year-over-year. Moving to Slide 8, a quick update regarding initiatives to improve client convenience and experience. During this quarter, we closed partnerships with major brands that are now available at our PagBank Shopping platform, such as Booking.com, AliExpress, and prominent gaming companies like Xbox, PlayStation, and Steam. Finally, PagInvest assets under custody and deposits surpassed R$6 billion, up 88% year-over-year, driven by our increasing client base and new products available. In September, we had 391,000 active investor clients and were offering more than 7 investment funds in our platform, with expectations to reach 100 funds by year-end. We also have 5 PagBank CDs and 2 of them come with credit card offers using CD balances as collateral. In September, we launched the treasury bond trading platform, and this week, we launched our home broker trading platform for equities, combined with free financial education content to explain the basics of investments to our clients. Now, I'd like to turn the conference over to Artur, our CFO, who will discuss our credit portfolio and our financial results for this quarter. Artur, please go ahead.

Artur Schunck, CFO

Thanks, Ricardo, and good evening, everyone. Following our presentation in slide 9, September ended with a total credit portfolio reaching R$1.6 billion, consisting of 57% in working capital loans, 39% in credit cards, and 4% in other credit products. The performance is improving day by day based on efficient credit models, team experience, and numerous learnings from past quarter results. All our credit products have grown rapidly over the last 12 months, mainly due to low credit origination from April to August 2020, while we have been careful with asset quality. Our delinquency rates continue to be under control and trending down due to the phase-out of the effects related to the lockdowns and the adoption of the new credit models. From August 2020 onwards, the cohorts based on the new credit model are presenting a single-digit NPL 90 days ratio, maintaining our asset quality as we expand our credit products. The total NPL 90 days is running at a low double digit. This quarter, we launched the overdraft loans, providing one more product to our broad merchant base. It is important to maintain a diversified portfolio to offer the right products for our clients' needs. Moving to slide 10, we present our costs and expenses analysis. Our non-GAAP total costs and expenses totaled R$2.2 billion, up 66% year-over-year, reflecting volume growth and investments to develop and launch new products and services for merchants and consumers, as well as expenses to expand sales channels to serve all business sizes in Brazil. On the cost of sales and services, there was an increase of 42% compared to Q3 2020, mainly related to higher transaction costs reflecting strong acquiring TPV growth, with a more significant credit card mix and higher G&A due to investments in R&D, technology, and POS devices. Selling expenses presented an increase of 95% year-over-year, driven by higher personnel expenses for the expansion of our HUBs salesforce and bank teams, as well as increased marketing expenses to consolidate PagBank brand awareness. The most relevant increase in expenses came from the financial expenses line due to higher working capital needs to fund accelerated growth of prepayment TPV, alongside a higher basic interest rate that grew from below 2% per year to more than 6% per year. Compared to Q3 '20, the positive working capital needs due to lockdowns and the acquiring TPV mix towards debit transactions with lower durations assisted in reducing financial expenses last year. It is important to mention that for every 100 basis points of increase in the Brazilian interest rate, the net income is impacted by approximately R$17 million, and financial expenses increase R$90 to R$110 million, both on an annual basis. Moving to slides 11, despite the challenging environment for financial expenses due to increasing interest rates, our team once again delivered solid quarterly results. In the top left, our consolidated net take rate reached 2.44%, slightly better than Q2 2021, and 9 basis points higher than Q3 2020, driven by a better TPV mix with more credit transactions and a lower share of debit transactions, complemented by our larger PagBank revenue. In the bottom left chart, the adjusted EBITDA achieved R$741 million in the third quarter, with an 18% growth compared to last quarter; the adjusted EBITDA margin remains flat at 26.7%. Excluding the changes in cards and fees, our adjusted EBITDA margin was at 41.4%. In the top right graphic, we share our robust cash position with a positive balance of R$8.7 billion, bolstered by the issuance of PagBank CDs to fund credit disbursements. This positive position increased by R$500 million compared to last quarter, driven by the rise in accounts receivable from issuers. Finally, in the bottom right, we display our capital allocation. During the third quarter of this year, we invested almost R$426 million, with 52% in POS acquisitions and 48% in R&D to develop new products, features, and services. As a percentage of revenues, CapEx decreased 18 percentage points, reaching 15% compared to 33% in the third quarter of 2020. Moving to the last slide of this conference call, as Dutra mentioned in his initial remarks, the positive trends we have seen this year led us to revise our acquiring TPV growth guidance from 40% to above the 45% we set last conference call. As we continue to witness these very positive trends, we are raising the bar to between 50% and 53% for 2021. Additionally, we project a reduction in capital expenditures in R$100 million, setting our new level to R$1.7 billion for this year, optimizing cash flow generation. Finally, I slightly updated the D&A levels expected to end the year between R$800 and R$900 million. After this, we will move to the Q&A session. I would like to turn it over to Alexandre Magnani, our new Chief Operating Officer, to say a few words.

Alexandre Magnani, COO

Thanks, Artur. Hello, everyone, and thanks for joining our quarterly results call. It's a great pleasure to discuss with you and share a bit more about my role here. I have been working in the payments industry for 28 years, starting my career at Credicard and Redecard, where I had various roles in sales, planning, and products. Following that, I spent a 15-year tenure at MasterCard, where one of my many accomplishments was implementing a non-financial institution licensing program to promote the development of new issuers across Latin American markets among retailers, prepaid program managers, and FinTechs. In January 2015, I joined PagSeguro with the mission of building the acquiring and issuing business. It has been an exciting journey, transforming the card acceptance landscape in Brazil by including millions of underserved businesses and individuals into the electronic payments system and providing them with simple and intelligent financial services. After almost 7 years at PagBank PagSeguro, I have no doubt that we have developed the most dynamic FinTech in the market, capable of generating more value for all stakeholders in a faster manner. We take pride in our capacity to innovate, execute, and deliver strong results. I am excited about my new role as COO and will maintain our focus on profitable growth, consolidating PagBank, developing new capabilities to simplify our customers' lives, and doing all of this in a safe and seamless way, driven by the passion and excitement of our team. Thank you. Now, we will conclude our presentation and can start the Q&A session. Operator, please.

Operator, Operator

Ladies and gentlemen, we will now begin the Q&A session. If at any point your question is answered, and you would like to remove yourself from the queue, please do so. Our first question comes from Mario Pierry with Bank of America.

Mario Pierry, Analyst

Good evening, everybody. Congratulations on the quarter, and thank you for taking my questions. I have two questions. The first one is on the prepayment business, right? As you show that financial expenses now represented 22% of your revenues, and this was like 3% one year ago. So, I was wondering about your ability to pass on these higher costs into your final prices or your desire to do so. So, that's question number one. Question number two is regarding your HUBs strategy. You show that your TPV HUBs is already at 15% of total TPV; you are guiding for 6% to 11%, so it's clearly going better than expected. Can you give us some color on why this is going better than expected? You mentioned, right, it's because part of this is because of PagBank, offering the banking solution combined. You also talked about opening 300 HUBs. Maybe you can help us understand if these 300 HUBs were better than what you expected, what are the targets for the number of HUBs, and why not change the guidance for the HUB TPV from 6% to 11% to something closer to the 15% level that you're already seeing. Thank you.

Ricardo Dutra, CEO

Hi Mario, this is Ricardo. Thank you for your question. It's great to hear from you. I'll begin with your first question and then move to the second. Let’s start with the HUBs. We are performing better than we anticipated. Initially, we expected to reach 11% in the best-case scenario, but we are already at 15%. This success is partly attributed to our ability to cross-sell by combining acquiring with PagBank. Furthermore, we took advantage of the pandemic to accelerate our efforts. We projected having 300 HUBs by the end of the year, and we managed to achieve that sooner, bringing more people to the streets. When we initially estimated the HUBs KPIs, we believed it would be significantly harder to attract clients from our competitors than what we are experiencing. Most clients at HUBs already accept cards, so our approach differs from how we handle long-tail clients. We thought attracting clients from competitors would be challenging, but we found many merchants unhappy with their current service providers. This is why we are performing better than expected, and we stay focused on execution. HUBs revolve around having people in the field, engaging with the right merchants, and providing suitable propositions while closely monitoring the productivity of the HUBs salesforce. This is why our results in the HUBs are exceeding expectations. As for prepayments, I know you alluded to...

Mario Pierry, Analyst

Just before we move to prepayment, then. If I can just ask a follow-up on the HUBs. Sorry about that. Can you talk about your pricing then? Since you're taking clients from competition, are your prices similar to the competition?

Ricardo Dutra, CEO

It's very similar, and in some cases even a little bit higher. Many merchants are not satisfied with their current providers. We integrate PagBank, which is why we do not believe competing solely on price is the best strategy, as it can lead to a price war that ultimately harms everyone. If I lower the price, competitors will undercut it next week, and we can predict the resulting consequences. The salesforce team has some options to present to the merchants, but we manage those carefully to prevent price wars. I’m not suggesting that we couldn't be aggressive in some situations, but that's not the norm; we generally avoid competing on prices.

Mario Pierry, Analyst

Okay. Thank you.

Ricardo Dutra, CEO

Thank you. Regarding prepayment, Artur can add some insights. Looking at the numbers, the 3% compared to 22% seems unbiased. Last year, we had a strong cash position in the company due to COVID-19. When we saw a slowdown in TPV last year, we began generating cash. The decrease in prepayment contributed to our solid cash position, which is why the 3% looks like an outlier compared to last year. Additionally, the rising interest rate environment in Brazil has played a role. As we grow our TPV, we need to plan for prepayments. Those are the key points, but Artur can share more details.

Artur Schunck, CFO

Mario, good to talk to you and it's hard to speak in. Just to complement what Dutra has said: in 2020, just at the beginning of COVID, we initiated a movement here to advance receivables with bank issuers, preparing our cash flow for the ensuing months amid uncertainties. So, we maintained a good cash flow until Q3 '20, and combined with the mix of transactions shifting to debit, that allowed us more predictability with the cash flow, subsequently shortening the duration of credit. If we look at Q3 '21, part of the financial expenses we are incurring is related to the rapid growth in our TPV volumes, along with our prepayment requirements that necessitate more working capital, and consequently, higher costs.

Mario Pierry, Analyst

But what I'm trying to get at is that the profitability of the prepayment product is lower than what it used to be, just because your funding costs are going up with a higher rate. Are you willing to continue to operate the prepayment business with lower profitability, or would you be inclined to increase the prices of your prepayment product to compensate for the higher financial expenses?

Artur Schunck, CFO

You asked a challenging question, Mario. We plan to be rational in our approach. We generally expect to raise prices because the basic interest rate acts as a key factor for us and our competitors. Thus, we anticipate price increases. We are closely watching the market for competitive trends. Some competitors with lower prepayment rates than ours are adjusting their prices to align with ours. We are monitoring this situation and are prepared to make necessary adjustments. Honestly, I believe an increase is inevitable as rates have reached 7%, and we are currently at 7.75%. There are speculations of a 200 basis point increase in the upcoming December meeting, which could push rates near 10%. Consequently, raising our prices seems unavoidable, and we also expect that our competition will follow this trend.

Mario Pierry, Analyst

No, that's very clear. So just to clarify: when you mentioned in your remarks that a 100 basis point increase in interest rates will have a negative impact of R$70 million on net income, is that assuming nothing else changes? But at the end of the day, this impact could be lower?

Artur Schunck, CFO

Yes, exactly.

Mario Pierry, Analyst

Thank you.

Operator, Operator

Our next question comes from Tito Labarta with Goldman Sachs.

Tito Labarta, Analyst

Hi, good evening. Thank you for the presentation and for allowing me to ask a couple of questions. First, I’d like to follow up on the financial expenses. Looking at your balance sheet, it's evident that your deposits have significantly increased, totaling about R$2.7 billion. It seems that you might be paying around 150% to 200% of Selic on average for those deposits. Are you planning to reduce the interest paid on these deposits? Paying 200% of Selic becomes increasingly difficult as it rises from 2% to 8%. Could you provide some insight into the cost of deposits? Additionally, concerning your liabilities, you have around R$11 billion in payables. Is this included in your working capital? As interest rates rise, will you also have increased payments on those payables? I would like to understand how this affects your balance sheet and financial expenses.

Ricardo Dutra, CEO

Hi, Tito. Thank you for the question. Regarding the R$6.2 billion in deposits, as you mentioned, we do pay a percentage of CDI for some depositors, and we are closely monitoring this. We don't have plans to reduce rates immediately because it helps us acquire new PagBank clients. It’s crucial for us to establish PagBank as the main bank for our clients. In the end, our R$6.2 billion cash is not overly expensive when compared to the TPV debt we need to anticipate, from an acquisition cost standpoint today, we can continue this for a while; however, of course, we will follow market conditions. If rates come close to 10% or 9.7%, we would need to reassess calculations, but it's something we can adjust anytime.

Tito Labarta, Analyst

Yes, I think it's along those lines. Just to clarify where on the balance sheet we see the impact of the higher interest rate. Are your payables increasing and are you paying more on those payables? You have about R$11 billion in payables this quarter, and what is contributing to that balance is part of what is driving those financial expenses to rise?

Artur Schunck, CFO

So related to the payables, yes, we expect that payables will increase because we are considering there the deposits that we have for the Company. The merchants' money in our PagBank account is booked at there. Therefore, our expectation for the future is to grow this number to help us with better funding.

Ricardo Dutra, CEO

Just one important point here, Tito, is that when Selic was 2% and we anticipated from banks, some banks charged us around 2% plus a few basis points. Or some banks charged us a percentage of CDI. As Selic rises to about 8%, it's common that as a percentage of Selic, the prepayment rates go down. At the end of the day, banks focus more on the nominal spreads than just the percentage. So, as the base interest rate of the economy increases, we can also negotiate better terms with the banks to lower our CDI rates. That’s just a point to consider. As for margins, Artur, you might want to add to that as well.

Artur Schunck, CFO

Regarding margins, I want to highlight that as we mentioned in the last conference call, Q3 performed better than Q2, and indeed it did. We expect Q4 to be in line with what we shared earlier, and we believe there is potential for a slightly improved margin to counterbalance the anticipated financial expenses for Q4. Looking ahead to 2022, our focus will be on nominal growth. Next year's margin will be influenced by pricing and market conditions in the acquiring business. If conditions improve, we could see a marginal increase in next year's margin. However, the current macroeconomic environment in the country is challenging and is likely to persist into 2022, particularly with a tough election cycle that may introduce greater volatility and instability in the market.

Ricardo Dutra, CEO

But what we expect at the end of the day, Tito, is to have better margins than what we're seeing now. I'm not claiming it will be a significant improvement, but our aim is to see slightly better margins. Of course, this depends on various factors that Artur just mentioned, including elections, unemployment, inflation increases, basic interest rates, and so on. However, we remain hopeful for improved margins compared to Q3 versus Q2 this year, and similarly, we anticipate seeing growth in Q4 versus Q3.

Tito Labarta, Analyst

Great. Thank you. That's helpful. Maybe if I could just have one follow-up. A bit on PagBank: do you still expect to break even next year? I say that in light of discussions around capping interchange on prepaid, which is a significant revenue driver for that. Does that change anything regarding when you expect PagBank to become profitable because of that?

Ricardo Dutra, CEO

Tito, it didn't change our plan. The goal is still to break even by the end of next year. The public hearing is just that; a public hearing. There is nothing definitive at this moment. We can update the breakeven date as we gather more information, but it hasn’t changed our plans for breakeven by the end of 2022. Remember that regardless of the public hearing outcomes for the Company as a whole, the impact is negligible because we have a two-sided business model. We generate revenue through card issuance and current business models, so an improvement for one side negatively affects the other, and vice versa. Therefore, for the Company, the impact is likely to be minimal; however, we should wait for the public hearing outcome before providing further updates.

Artur Schunck, CFO

And Tito, I would like to remind you that we have been diversifying our PagBank product offerings, which is reflected in our PagBank revenue breakdown, with products such as credit underwriting gaining more traction, combined with healthy asset quality delivering strong results and revenue diversification. The public hearing won't significantly affect our plans for 2022 if the PagBank results are approved without any changes.

Tito Labarta, Analyst

Great. Thank you for that. I appreciate it.

Operator, Operator

The next question comes from Bryan Keane with Deutsche Bank.

Bryan Keane, Analyst

Hi guys. I wanted to ask about the merchant count. Obviously, the merchant count was lower due to some churn and some mortality of some of the merchants. Can you just talk about what you expect going forward? Does that change much? It doesn't seem to be impacting volume growth. Volume growth is still really healthy. But just curious on how we should model out for net merchant additions. Then, secondly, on the financial expenses and the higher rates, historically at some point, does that usually get passed on to the client? It's just a timing issue. The markets might be confused about how much you will have to permanently absorb higher rates going forward versus traditionally passing them on to the client so that a lot of that expense will go to the merchants. Thanks.

Ricardo Dutra, CEO

Hi Bryan. Good to hear. Thank you for the question. I'll start from the back here. So, regarding financial expenses, it is a timing matter for us to increase the price. As I said, we are monitoring this closely. I believe that it will be unavoidable for us to pass some of these expenses onto the merchants. The market might be confused because we don't want to provide more details on triggers and our timing for these changes. Nonetheless, we have the capacity to pass these expenses along, and it's something we will need to address. Regarding net additions, yes, you're right. Our net additions have been lower than what we've seen in past quarters. There are two main factors: first is the mortality of businesses; this is a trend that is reflected not only in Brazil but globally, where many small businesses have closed their doors. Of course, this impacts our net additions. In terms of gross additions, we are doing well and maintaining levels compared to previous years. However, you have to consider the previous sentiment affecting our churn mentioned, coupled with the acquisition of Wirecard in July 2020. Due to regulatory processes, we could only begin managing the company afterward, leading to negative news flow regarding Wirecard that affected us directly. We are seeing churn as a result of this, which we anticipate will continue into Q4. We will likely face similar churn levels in Q4 as we have witnessed in the past. However, our active merchants based on our TPV metrics are increasing, and we are measuring active merchants who have been active in the last 90 days, which continues to grow quarter over quarter. We want to maximize that base, but currently face temporary disconnects when comparing the last 12 months to quarterly metrics, especially with mortality during COVID and Wirecard's fallout.

Bryan Keane, Analyst

Okay, great. Thanks for taking the questions.

Operator, Operator

The next question comes from Jorge Kuri with Morgan Stanley.

Jorge Kuri, Analyst

Hi. Jorge Kuri from Morgan Stanley. Congrats on the quarter, well done. I have two questions, if I may. The first one is on PagBank, which has an impressive number of clients, so congratulations on that. I wanted to see if there's any way that you can help us understand the monetization profile of the client base and how the different cohorts are improving over time. I know you mentioned that cohorts from two years ago may not be the best way to think about it; but if you can help us understand early clients versus today clients, the cross-selling metrics that you are tracking, gross profit per client, and how this business is evolving into a revenue and profit generator, and help us understand how quickly that will translate into overall business growth. You might think that with 12 million clients today, many would have thought that number would lie further out into the future, so again, congratulations on that. My second question is regarding the higher prices. From what I’m hearing, it appears inevitable that prices are going to be raised. I'm just wondering what the triggers for that would be? Why not raise prices today? What are the things that you need to see from here in order to be sure about increasing these prices? Alternatively, what would lead you to refrain from increasing prices, given that it doesn’t seem like the hard decision has been made yet? Or could it be that you don't predict rates will remain high for the future, which could also be the case, leading to possible reductions in margins for a more extended period? Please help us understand your thought process behind this.

Ricardo Dutra, CEO

Hi, Jorge, this is Ricardo. Thank you for the question; it's a good one. Regarding PagBank, we measured products per user, and we're reporting around 2.8 products per user. We are keenly monitoring cross-sell figures to observe how many of our new clients open cards and activate with SO-1. Ultimately, the monetization process can take time; especially considering that many clients prime their funds into our bank after initial testing, which doesn’t immediately generate revenue for those initial transactions. We are attracting many new clients who previously had accounts with other banks, and it takes time for them to integrate with us fully. That’s why the monetization process is slower; however, we are excited to see positive trends. The ARPU in this past quarter has reached around R$80 to R$82, an increase from R$76 to R$77 in Q3. We are pursuing the right combination of expanding our user base alongside increasing revenue per user. Regarding your question about pricing, we have been through this before and have raised prices in the past. As I mentioned, it will be unavoidable to increase our prices, and we're continually discussing the right moment to do so and the new price structure. As I said, we don’t want to disclose when exactly we plan to increase our rates due to strategic decisions around competition, but we have the ability to react appropriately. We are aware the long-tail clientele is not particularly price sensitive; they simply want to maximize their sales, which influences how we strategize moving forward. It is an ongoing discussion, and once we settle on a decision, we will share more information.

Jorge Kuri, Analyst

All right, thanks again.

Operator, Operator

Our next question comes from Neha Agarwala with HSBC.

Neha Agarwala, Analyst

Hi. Thank you for the presentation and for taking my questions. Just very two quick questions. First, on the HUB business. Should we expect that the investments regarding HUBs, both the employment of new personnel and the establishment of new HUBs, are we done with that already by the third quarter, or should we expect a bit more expenses on that front in the fourth quarter? The second question pertains to credit. We saw some good pickup in the credit books this quarter, but what kind of growth should we anticipate in the coming quarters and the next year? I am inquiring in light of the tough market environment we are facing ahead. Do you believe this is an environment conducive to lending and could we see good growth in the credit book over the coming years? Also, any initiatives related to consumers and how you are monetizing them on your platform? Thank you very much.

Ricardo Dutra, CEO

Thank you for the question, Neha; good to hear from you. As Ricardo, to tackle the third question, Artur can elaborate on credit later. Regarding HUBs, we have launched 300 active HUBs already. We represent over 80% of Brazil's GDP coverage. While there will be additional smaller HUBs added here and there, the impact of this will be marginal. The majority of investments in HUBs are now concluded. We have positioned HUBs in the significant capitals and cities with larger populations, but we may still roll out some smaller HUBs to serve specific clients in niche markets. In terms of consumer initiatives, we continue to leverage our core drivers for generating revenues, which remain predicated largely on card interchange as the primary revenue stream, alongside any account-related transactions. This week, we also launched a home broker for equities, with specific promotions, including free transactions for initial orders to help drive new customer interest. Furthermore, we are introducing multi-functional cards, combining debit and credit offerings. Currently, credit will remain at zero until we evaluate their creditworthiness, allowing us to extend credit more seamlessly. We are also rolling out additional insurance products, which can positively impact customer monetization. These efforts will drive further customer engagement specifics in our future openings.

Neha Agarwala, Analyst

If I can just quickly follow-up: you mentioned in terms of monetizing your customers already charging them, and you already make money. Is that mostly from the prepaid cards that you currently issue to the customer and to the consumers?

Ricardo Dutra, CEO

Yes. It is the prepaid card, yes.

Neha Agarwala, Analyst

And that's off the prepaid credits?

Ricardo Dutra, CEO

Yeah. That's a prepaid card. I just want to clarify regarding the public hearing, and I don’t know if everyone is concerned about it, but I want to take this opportunity to clarify something. The impact of public hearing 89, which discusses this GAAP, is negligible for the Company overall. The volumes we are generating and spending for prepaid cards is very similar to what we have for acquiring, given that we capture prepaid cards from all banks in Brazil. Therefore, the volumes are closely matched, and any changes that occur on one side will result in an offset on the other. So, I want to stress again that the various outcomes present minimal risk for us.

Neha Agarwala, Analyst

Thank you so much. That's very clear. So, onto credit to the consumers, I'm assuming that you're not in a rush, and maybe you'll think about it in the second half of '22 or maybe after?

Ricardo Dutra, CEO

To provide credit for consumers?

Alexandre Magnani, COO

Credits for consumers, our intention is to launch the credit card at the end of this year or beginning of Q1 '22. But remember, Neha, we are already offering favorable loans for consumers, which presents very low risk and helps us engage clients with consumer profiles in PagBank. Artur was discussing credit cards earlier, but we are already providing some credit products with low risk for consumers.

Neha Agarwala, Analyst

Thank you so much, everyone.

Operator, Operator

The next question comes from Kaio Prato with UBS.

Kaio Prato, Analyst

Hello, everyone. Congrats on the results and thank you for the opportunity to ask questions. I have two questions, please. The first is about the SMB strategy again; I just want to understand better the profile of these SMBs today. You mentioned that you're taking share from the competition, and one of the reasons is the combination of acquiring and banking. But just to clarify, before you reach the merchant, I believe they already had a bank relationship before you, right? If so, are you suggesting they are entirely replacing their previous banking accounts with yours? And if so, what's the reason for this, and have you already begun originating credits for them? The second question is a follow-up about the cap on prepaid cards. I understood your thoughts on the potential impact, however, I would like to get a better general impression of this hearing; whether you believe it makes sense, and if there's any possibility of this not passing. Additionally, could you share with us what percentage of PagBank revenue is derived from interchange? If it's around 60%, and finally, if you weren't hindered by the central bank, does that change your guidance of reaching 30% of total revenues from PagBank by 2024?

Ricardo Dutra, CEO

Kaio, thank you for the question. With the 300 HUBs operational, we have various client profiles among merchants, but most commonly, they generally have some form of pre-existing banking relationship. They come to us for a number of reasons, such as the often debilitating fees that other banks impose. In many instances, they lack satisfactory services or suitable products from their current banks. That’s why they often decide to choose us. It is essential to reiterate that if they approach us directly, they may not immediately cut ties with their original banks; however, once confident in our services, they will likely deactivate the second account or negotiate better terms directly. In Brazil, even for conventional bank accounts, fees are a common frustration. So for some running a business, it becomes critical to make such changes to avoid costs. Regarding the cap on prepaid, again, it's a public hearing. Whether this becomes a significant factor impacting the outcome remains uncertain. We must wait until November 21st for the hearing's conclusion; predicting the result at this point is speculative. Nevertheless, the impact of this hearing on us, I believe, will likely be negligible should it materialize. With respect to the percentage of revenue derived from interchange, today, it is less than 60%. As for guidance for reaching 30% of PagBank's total revenues by 2024, this scenario remains unchanged. This is a very dynamic situation with numerous variables, and it's still too soon to determine what adjustments would need to be made. Furthermore, we believe that the central bank's emphasis on promoting competition is a beneficial sign for us. The central bank has consistently encouraged enhancements in competitive circumstances, which serves us well, as we are agile, tech-driven, and focused. So, it’s too soon to announce definitive conclusions – let’s see where the public hearings lead us, but I think overall we’re in a good situation.

Kaio Prato, Analyst

Great. Thank you very much.

Operator, Operator

This does conclude our Q&A session for today. I would like to turn the floor back to Mr. Ricardo Dutra for his closing remarks.

Ricardo Dutra, CEO

Hi everyone, thank you very much for investing your time to listen to us today. We appreciate your questions and look forward to talking with you next Thursday during our first PAGS day. Have a great night, everyone, and we'll talk next week. Thank you very much.

Operator, Operator

The audio conference for PagBank PagSeguro's result for the third quarter of 2021 is over. Thank you very much for your participation, and have a good evening.