Earnings Call Transcript - PAGS Q1 2021

Operator, Operator

Hello everyone and thank you for waiting. Welcome to PagSeguro PagBank's first quarter 2021 results conference call. This event is being recorded and all participants will be in listen-only mode during the company's presentation. After PagSeguro PagBank'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 may be accessed through PagSeguro PagBank's website at investors.pagseguro.com, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event concludes. 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 their 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 on 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 Sao Paulo, everyone. And thanks for joining our first quarter results conference call. Tonight, I have here with me Artur Schunck, our Chief Financial Officer and Éric Oliveira, our Head of Investor Relations. First of all, we hope you and your families are well and safe. Before we move on, just a quick update about the outbreak of COVID-19 in Brazil. It seems the worst is over. However, the economic recovery may take a while due to the speed of vaccination rollout in Brazil. Although we are enthusiastic about the availability of effective vaccines, the rate at which vaccinations are taking place in Brazil is still low when compared to other countries like the U.S. Consequently, merchants and consumers have changed their behaviors to work in this scenario with more digitalization, less cash, and the adoption of alternative payment methods. Meanwhile, our dedicated employees have been doing an extraordinary job to keep serving our clients with excellence. Thank you very much PagSeguro PagBank team. Despite the pandemic, the resilience of our business model and our focused execution allowed us to achieve great results and records in several KPIs this quarter. I am pleased to report that PagSeguro achieved a record consolidated TPV, growing 102% year-over-year and kept adding 300,000 merchants, to more than one million PagBank users per quarter, while total revenues were above BRL2 billion in the quarter. In fact, we are the company with the highest growth in terms of volumes, net adds and have been increasing our acquiring market share in the past quarters, reaching approximately 9% in Q1 2021 versus 5.9% in Q1 2019. Our last quarter's performance has reinforced our belief that both businesses, acquiring and banking, will deliver robust growth in years to come. Talking about banking, we continue to see unprecedented changes in the highly concentrated banking industry in Brazil. Although we have experienced the entry of new players in the last two years, with PagBank being a precursor of this movement, in December 2020 more than 70% of the Brazilian credit portfolio was concentrated among the top five banks. We see that as a huge business opportunity and a reason to bring more competition to an economic segment that has been basically the same for decades. The opportunity to change people's lives gives us the stamina that runs in PAGS' professionals' veins. We consider ourselves exceptionally well-positioned to continue to disrupt banking in Brazil because of three main reasons: First, our tech DNA: Approximately 6,500 engineers in the UOL group, with the best-in-class professionals working for PAGS. Second, our unique expertise and knowledge of the Brazilian internet: Since the early beginning back in 1996, which today, the most visible aspect is the UOL audience with a reach around 90% among Brazilian internet users, right after Facebook with 93% and Google with 96% reach. Third, the fact that we are the first movers, creating a new market unserved by the competition before us. And finally, but not least, a strong culture and excellent execution, which I would presume as PAGS's way of doing business. We operate in an evolving industry whose answers to some questions are not 100% clear. For that reason, we permanently promote self-criticism. But having said that, we can affirm that our investment thesis relies on the following six pillars: First, payments is the best entry point for digital banking. PAGS has the largest Brazilian merchant base that generates recurring revenues through a digital account that naturally provides cross-selling opportunities for additional banking products. The payments industry has consistently grown in double digits in the last two decades driven by merchants accepting new electronic payments. New payment methods such as NFC, P2P, among others, continue to replace cash transactions. For example, in the first quarter, NFC volumes increased almost eight times in comparison to the same period of last year. We consolidated our leadership in the long-tail market and we see limited competition as incumbents have given up serving these clients. Now, we will prove our thesis that it's much easier to go up in the pyramid than to go down in it with our hub strategy. Our hubs are extremely successful and we are gaining market share with profitable SMB clients very rapidly. Second, online is core. Online payments remain core for us, and our focus has delivered growth of 140% in Q1 2021. PAGS is enhancing omnichannel solutions for merchants and increasing cross-border transactions. In the first quarter, cross-border volumes increased three times compared to the same period of last year. Third, cards and lending are core. Because the banking industry is highly concentrated, the Brazilian unbanked population is still huge and the spreads are very high. This presents an opportunity for us 17 times larger than payments in terms of revenue pool. PAGS has been working with cards and loans in the last three years, mainly focused on micro-merchants, creating unique databases and credit models to manage returns and risks, which presents a clear strong entry barrier for new players. Fourth, new financial products are core. PAGS's movement to go up in the pyramid to conquer market share in the SMB market can and will be replicated with other financial services. Fifth, technology, customer experience, and product development are core. Our technology, innovative and client-centric culture combined with a lean structure promotes disruption, awareness, and engagement. In the first quarter, PAGS reached 48 million app downloads and processed BRL81 billion. We believe that value relies on active and recurrent clients. And we are happy to announce that we surpassed the mark of 10 million active clients in PagBank's second anniversary. Sixth, regulatory environment helps. Regulatory changes, such as Pix, marketplace of receivables, and open banking create a positive environment for new players like us. With these initiatives and achievements, we are truly committed to continue promoting financial inclusion in Brazil, making investments that are accretive and will bring higher returns in the future. Finally, the pandemic is not over in Brazil. This year will be another challenging one, but we feel prepared to face it and ready to explore the economic rebound in the coming years. That said, Artur and I will present some slides and we will have a Q&A session at the end. On slide three, we highlight the achievements of the first quarter. We break down into three sections: First, operating and financial results. Second, PagSeguro, our acquiring business. Third, PagBank, our banking business. Starting with the operating and financial highlights. Consolidated TPV of BRL81 billion, up 102% year-over-year. Total revenue and income of BRL2.1 billion, up 30% year-over-year, with consolidated net take rate of 2.41%. Adjusted EBITDA of BRL573 million, up 12% year-over-year, despite PagBank and hubs investments. Non-GAAP net income of BRL327 million, down 11% year-over-year. Excluding one-time events during the quarter, adjusted EBITDA of BRL617 million, up 20% year-over-year and non-GAAP net income of BRL371 million, up 1% year-over-year. Moving to PagSeguro. Acquiring TPV of BRL50 billion in Q1, up 58% year-over-year, despite new lockdowns at the end of March 2021. Online TPV grew 140% year-over-year, while Hubs TPV grew 410% year-over-year, diversifying our exposure to new segments. Active merchants of 7.3 million, with a net addition of 301,000 new merchants or 1.8 million more merchants in comparison to the same period of 2020. Total acquiring revenues of BRL1.9 billion, with adjusted EBITDA of BRL725 million, margin of 38%. During this quarter, we launched PagPhone, the first worldwide one-stop-shop POS which combines acquiring, banking, and software. We also launched Moderninha ProFit, the smallest POS with integrated printer and Auditek app, our reconciliation software. Moving to PagBank. PagBank TPV of BRL31 billion, up 261% year-over-year, boosted by wire transfers and bill payments. PagBank app downloads of 48 million, with almost seven million downloads in the quarter. PagBank active clients of 9.1 million, up 144%, with a net addition of 1.3 million in the quarter. PagBank consumer clients of 3.5 million, five times larger than the first quarter of 2020. In the first quarter of 2021, consumers represented 38% of PagBank active clients. Credit portfolio of BRL773 million, deposits of BRL5 billion, and PagBank CDs surpassing BRL1.4 billion in March 2021. During this quarter, we also announced the cashback offering for payroll portability and launched new third-party investment funds and personal accident insurance. Moving to slide four. Two years ago, we launched PagBank aiming to explore and capture the existing opportunities in Brazil. At that time, we had a few products in our portfolio, providing the base digital account features only to our merchants. In slide five, we can see all the achievements throughout the last two years, becoming a complete ecosystem now, serving both merchants and consumers, as we were able to combine acquiring, banking, partnerships, software, marketplace, insurance, investments, loans, and cards. Moving to slide six, we show how powerful our ecosystem is and how it is boosting our growth trends. First, I will talk about client acquisition and awareness. We reached 7.3 million active merchants, up 33% year-over-year, and 9.1 million PagBank clients in the first quarter of 2021. It represents a growth of 146% year-over-year. Moving down, we can see we reached 48 million downloads in PagBank as of March 2021. Talking about engagement, we observe the acceleration of volumes growth. Consolidated TPV increased 102% year-over-year, while net new consolidated TPV grew 215% when compared with Q1 2020. Our market share in the Brazilian payments industry reached 9%, more than three percentage points in comparison to the first quarter of 2019. Our products per user ratio increased from 2.5 to 2.7, which also indicates higher engagement of our clients. Last but not least, in the third column, PAGS monetization. Revenue and EBITDA growth shows we are able to monetize our businesses and to balance growth with profitability. Total revenues increased 30% year-over-year and our adjusted EBITDA increased 12%. Moving to slide seven. We will start presenting our operating figures for the acquiring business. Our TPV growth remains strong with a 58% increase year-over-year, boosted by TPV per merchant growth, which grew 18% when compared with the first quarter of 2020 and net merchant adds that reached 300,000 between January and March this year, ending the quarter with 7.3 million active merchants. The strong growth, despite new lockdowns in Brazil, was driven mainly by a fast cash conversion into electronic payments and success in our new verticals and client segments, such as online and hubs. Volumes growth for April and May were very strong, respectively 108% and 91% increase year-over-year, despite the new lockdowns we had in Brazil in 2021. Moving to slide eight. Total acquiring revenues were BRL1.9 billion, up 29% year-over-year, accelerating the growth in comparison to 2020. Acquiring adjusted EBITDA up 28% year-over-year, with EBITDA margin of 38%. TPV mix improved in comparison to the fourth quarter, which drove up acquiring net take rate and payments profitability. Excluding PagBank revenues and transaction costs, acquiring take rate increased 17 basis points in comparison to the previous quarter, reaching 2.23%. Moving to slide nine. Here we present some new acquiring initiatives we have been exploring. First, our online TPV, which has been growing much faster than the previous year. In the first quarter of 2021, our online volumes grew 140% versus 13% in 2020. The acquisition of MoIP, a digitalization process boosted by the pandemic and our several initiatives to incentivize online payments and omnichannel solutions were the main drivers. Also, we are happy to announce card-not-present transactions during this quarter increased 116% year-over-year. Moving to our SMB hubs strategy. Our 2021 volume trends indicate we will be in the top of the range of our current guidance, which was 11% of acquiring TPV. Our forecast is to have 250 to 300 hubs up and running in several cities and regions until the end of 2021, reaching 83% of Brazilian GDP coverage. Finally, software subscribers reached 621,000, 8.5% of PAGS active merchants. We plan to provide additional disclosure of our hubs strategy in the coming quarters. Now moving to slide 10, we will share some PagBank figures. Starting with the strong growth of PagBank TPV, once again a triple-digit growth, totaling BRL31 billion, accelerating the growth in comparison to 2020. On the top right, we have our PagBank active client figures, which was 9.1 million, being 38% composed of consumers. Net adds were 1.3 million, with consumers representing 58% of the first quarter net additions. These figures show our strength to serve both merchants and consumers with our two-sided ecosystem. Bottom left, we share our product per user ratio. In the first quarter of 2021, our products per user ratio reached 2.7, 0.2 higher than the same period of 2020, reinforcing clients' stickiness to our ecosystem. PagBank revenues totaled BRL149 million, up 48% year-over-year and accelerating in April 2021 to above 80% when compared to April 2020, although April 2020 was the worst pandemic month in Brazil impacted by the lockdowns, which drove down withdrawals and card spending. Additionally, for those clients with higher engagement, such as merchants active in PagBank and consumers with payroll portability, we offer some free ATM withdrawals per month, exchanging short-term revenues for higher engagement and future monetization. In the first quarter of 2021, PagBank adjusted EBITDA was a loss of BRL78 million, driven by headcount increase, marketing expenses, and transaction costs. Also, in the first quarter, we had a one-time event related to digital account losses, not related to loans provisions or credit risk management, amounting to BRL73 million. The massive data leak in Brazil which happened in January 2021 did not affect any of our systems, data, or infrastructure. However, it provided information to fraudulent activities in online transactions and bill payments. As we identified these transactions, we immediately blocked them. Again, this is a one-time event. Moving to slide 11, we present some additional data about PagBank and PagInvest. The number of active cards increased three times in comparison to the first quarter of 2019. In May, we launched a new home marketing campaign in partnership with Visa to foster card payments. In this campaign, PagBank clients will receive cash prizes and one of them will get a house. Day-to-day banking, the number of PagBank app logins was 549 million in the first quarter of the year, while bill payment transactions have been gaining a lot of traction. This is a very good sign, since usually clients elect their main banks to centralize bill payments. Finally, PagInvest assets under custody reached BRL4.2 billion, up 127% year-over-year, with PagBank CDs almost doubling in size quarter-over-quarter. Worth mentioning, all this AUC is based in PagBank CDs and a few investment funds. We plan to have equities and treasury bonds in the following weeks, which we expect to help increase assets under our custody. Recently, we allowed our investment platform to receive orders 24 hours a day, seven days a week and we also launched new third-party investment funds managed by well-known investment firms in Brazil, such as Western Asset, Alaska, Hashdex, BNP Paribas, Journey, and AZ Quest. Now, I would like to turn the conference over to Artur, our CFO, who will talk about our credit portfolio and our financial results for the quarter. Artur, please go ahead.

Artur Schunck, CFO

Thanks Ricardo and good evening everyone. In slide 12, we show our credit portfolio where the performance is improving every day based on credit models results. We ended the month of March with a total credit portfolio of BRL773 million, being 53% of working capital loans, 43% credit cards, and 3% of other credit products. As we have been tracking very closely the NPLs by cohorts for working capital loans and for credit cards, trends are getting better since August 2020 showing very healthy numbers. Our confidence has been increasing and encouraging us to reach the highest level of credit disbursements in May. We expect to increase credit originations going forward, mainly in the second half of this year. Our cash position remains very strong with a positive balance of BRL8.1 billion, reinforced by the issuance of PagBank CDs to fund the credit disbursements. Loans to deposits ratio was 53%, guaranteeing stamina to grow our credit portfolio in a healthy and sustainable way. Moving to slide 13, we present our quarterly financial results. In the top left, our consolidated net take rate reached 2.41%, representing an increase of 11 basis points in comparison to Q4 2020 and six basis points versus Q3 2020, driven by a better TPV mix with more credit and lower debit transactions and a longer duration for credit card receivables in installments. In the top right graphic, we share our non-GAAP Total costs and expenses which totaled BRL1.6 billion in the first quarter of 2021, up 51% year-over-year. Cost of sales and services represented 70% of total costs and expenses remaining at the same level of Q1 2020, and increased 49% year-over-year. The main drivers were higher interchange and card scheme fees following the TPV growth, higher depreciation and amortization related to our solid active merchant additions during the past quarters, and expenses for new products and services developed for PagBank. Selling expenses represented 23% of total costs and expenses and increased 94% year-over-year due to headcount expansion for our hubs and the one-time digital account losses of BRL73 million, previously explained by Dutra. If we exclude the digital account losses, this line increased 56% versus the same period of last year. In the bottom left chart, our adjusted EBITDA was BRL573 million. Excluding the negative effect of BRL73 million related to one-time digital account losses, not related to loans provisions or credit risk management, and the positive effect of BRL29 million related to tax provision reversal, the recurrent adjusted EBITDA was BRL618 million with a margin of 30%. Finally, in the bottom right, we share our capital allocation strategy. During the first quarter of the year, we invested almost BRL393 million, being 62% in POS acquisitions and 38% in other initiatives, mainly related to product and software development. As a percentage of revenues, CapEx decreased four percentage points, reaching 19% versus 23% in the first quarter of 2020.

Ricardo Dutra, CEO

Thank you Artur. Moving to slide 14, we present PagPhone. During the last quarters, we were working very hard to launch the first device in the world which combines acquiring, banking and smartphone, everything in one single device, creating the real one-stop-shopping solution for our merchants, reinforcing our leadership in the long-tail market and continuing to be a company driven by innovation. Finally, in slide 15, our last slide, we present Moderninha ProFit. This is the smallest POS with integrated printer in the market. Initiatives like this help us to offer a better customer experience and to allocate capital more efficiently, consequently improving our LTV per CAC ratios. With that, we end our presentation and we can start the Q&A session. Thank you. Operator, please.

Operator, Operator

Our first question comes from Jorge Kuri with Morgan Stanley. Please go ahead, Mr. Kuri.

Jorge Kuri, Analyst

Hi and good evening everyone. And congrats on the numbers. I have two questions, please. The first one is on your TPV guidance of 40%. I think that chart on page seven is quite telling. I think you are running significantly above that and hopefully with past the worst of this year. Is it possible that the number is just significantly above that? It wouldn't be surprising given the current trends that you end up about 55% to 60% growth. And what stops you from updating that guidance? Or where do you think things that could potentially go wrong and we end up in 40%, which would be a big acceleration from the first five months of this year? And my second question is on NPLs. And I am not sure if this is related to the digital losses. I am not that I understood properly what that is. But anyway, my question is on NPLs. Going through your slide number 12 where you have the pre-pandemic cohorts on the past August 2020 cohort, can you maybe explain how loan losses are trending over the last few months, particularly given the difficulties of the first quarter? And just if you can explain what those digital losses are and if indeed those are part of the NPLs? Thank you.

Ricardo Dutra, CEO

Hi Jorge Kuri. Good to hear you. Thank you for the question. And thank you for the compliments as well. This is Ricardo. I will start with the TPV and then begin to answer your question number two, and then Artur can complement. But talking about TPV, you are right. We are running above the 40% guidance. We are confident with this guidance. And the reason that we do not update is because we are still in the midst of the pandemic in Brazil. I mean, we have some uncertainty looking forward. We have tougher comps in the second half of 2020, because the government had BRL300 billion in Coronavouchers last year in the second half. So we have tougher comparables. And we need to wait and see how the economic recovery in Brazil will unfold. So that's why we don't update at this point. As time passes by, we will be more than happy to update that. So that's why we are confident with this 40% at this time. Talking about the digital losses. Just to be clear here, there is no relation with credits. No relation with loans. That happened because we were, I would say, more aggressive than what we should have been in terms of authorizing some bill payment transactions. And then what we had is people coming here paying bills, some of them with credit cards, and then we had chargebacks afterwards. So we had this, we are saying here in Q1, but actually it was in February and March. We already adjusted that. We didn't have any impact in April and May. So it is really a one-off. It is really a thing that happened in February and March and that's it. There is nothing that is going to happen in Q2 regarding that. And again, there is no relationship with NPLs or things like that. Just to be clear here, I want to reinforce that we didn't have any problems with our infrastructure, with our data or data leak. What we had was a massive data leak in Brazil in January 2021. It was in the news and probably we were aggressive in authorizing some bill payments transactions through credit cards. So that's it. We already adjusted that and it will not happen in Q2. And talking about the NPLs in slide 12, I will ask Artur to help us here. And again, Jorge, thank you very much for the question.

Artur Schunck, CFO

Hi Jorge. It's Artur speaking. And thank you so much for your question. It's a pleasure to talk to you. I think the idea of this graph is to show you that when we start to offer credits again in August 20, our NPLs are better than we had before, because we learned a lot during the pandemic. And so you know that in March 20, we stopped our originations and we learned a lot, adjusted our models, hired new people with more experience. And so now we are having much better results than we had before. And the idea is just to give you more color about it because we don't give the number. So it's important for you to understand that we have better performance right now than before. And that's it. So we are very happy with the numbers and encouraging us to accelerate the originations going forward.

Jorge Kuri, Analyst

All right. Thanks Ricardo and Artur for that. Thanks again.

Ricardo Dutra, CEO

Thank you.

Operator, Operator

Our next question comes from Mariana Taddeo with UBS. Please Ms. Taddeo, go ahead.

Mariana Taddeo, Analyst

Hi. Hello everyone. Thanks for the opportunity to ask a question. It's regarding the SMB segment. You mentioned that should represent 7% to 11% of your total TPV here. But could you share how much it represents to date? Also, if you could give us some color where are the merchants in the segment coming from? Are they from the incumbents or from Stone or any other player? I don't know if you can share that. And also in the presentation, you mentioned the penetration of the software within the SMB clients. I want to understand if you are offering the banking credit products to them? And how is this penetration? Thank you.

Ricardo Dutra, CEO

Hi Mariana. This is Ricardo. Thank you for the question. So we are not disclosing the exact number of hubs TPV in the total TPV at this point, Mariana. As we said in the presentation, we plan to give more color as time passes by. Just we don't want to give this information at this point for strategic and competitive reasons. Regarding the players that we are getting in this segment, it varies but usually it follows the market share in the SMBs. So the majority of them we are getting from incumbents. And then we have some others coming from new players. But it follows a little bit the market share of this segment. We are the, let's say, newcomer here. We are the company that is, let's say, competing with the other ones being aggressive here. So that's why we are getting all these new merchants and TPV grew 410% year-over-year. Regarding the software, the 8.5%, we actually use the information we had from software to put in our models, in our credit models, because we have more information from those using software versus the others that don't utilize it. I don't have the exact penetration of credit for these clients at this moment. But it is one variable in the model. It's not the main one, but it helps us to improve our models. I don't know if I answered your question.

Mariana Taddeo, Analyst

Yes. On this second part of the question in terms of banking and credit. I just want to understand if you are offering, if they have their credit products or I don't know, a credit for SMBs as well?

Ricardo Dutra, CEO

Yes. We are offering credit for SMBs as well. We are growing our credit portfolio by BRL160 million this quarter. Almost 100% of this BRL160 million, we focus on the merchants. A very small part of that is focused on consumers, for small pilots here and there. But the majority of that is for the merchants. And yes, we are offering credit for SMBs as well.

Mariana Taddeo, Analyst

Thank you.

Operator, Operator

Our next question comes from Bryan Keane with Deutsche Bank. Please Mr. Keane, go ahead.

Bryan Keane, Analyst

Hi guys. Congratulations on the results, especially given the tough economic environment. Two questions. I guess I would be interested in some more color on the increase in the TPV per merchant. I think it was up 18% year-over-year versus 3%, looking at last year's increase. And so just trying to understand how much of that is stimulus versus what's been the driving factor there? And then my second question on the margins. Obviously, you guys are making a lot of investments and the margins were impacted by those investments. So just was hoping you guys could give us some color on what the net income margin might look like going forward for the rest of the year and how much to expect for the investments in the hubs and PagBank, et cetera? Thanks.

Ricardo Dutra, CEO

Hi Bryan. Thank you for the question and thank you for the compliment. Talking about the average TPV per merchant, there are some drivers here. If we look in Brazil, we are seeing the penetration of cards and PCE increasing. It used to be, I guess, 40% and now it's close to 44%. So we see more adoption of credit card payments and we are also increasing our participation of online and hubs in our total TPV. So as we go up a little bit in the pyramid, the average TPV per merchant will grow as well. So I guess those are the two main drivers here, people using more cards and less cash and also we are having more TPV coming from online and for hubs.

Artur Schunck, CFO

Bryan, it's Artur speaking. Thank you so much for the question. It's a pleasure to talk to you again. And so regarding margins, as you said, we invested a lot during the last months. And also in this quarter, we invested a lot in PagBank to hire more headcounts in product development to develop products like PagInvest, insurance, credit. And also, we are investing in hubs with sales force, facilities, rentals, and also marketing to promote our new products and services. And also right now, in terms of nominal, we are slightly better bottomline in 2021 even though our focus is to reach the best balance between growth and profitability, looking for our comp in the future and gain scale to leverage expenses. And so we are much more focused right now on the company's growth to leverage expenses in the future and improve margin as well in 2022 or 2023 in the more mid to long term.

Bryan Keane, Analyst

Got it. And any guidance on where we should set our models in terms of the net income margin going forward for this year, just given those investments you talked about?

Ricardo Dutra, CEO

Yes. Bryan, we gave the guidance for TPV for CapEx. What we can say here is that in absolute terms, our net income this year will be better than last year. We don't have the exact number here. But as Artur said, we are looking for, let's say, more growth this year than profitability. But in absolute terms, you are going to see a better net income this year versus 2020, even with the challenges that we are seeing in the first quarter with lockdowns and so on and more debit transactions and so on. So that's, I would say, the best guidance I can give at this point.

Bryan Keane, Analyst

Got it. Great. Thanks so much.

Ricardo Dutra, CEO

Thank you.

Operator, Operator

Our next question comes from Craig Maurer with Autonomous Research. Please Mr. Maurer, go ahead.

Craig Maurer, Analyst

Yes. Hi. Thanks again for taking the time. I appreciate it. I was wondering just a couple of housekeeping items. You provided TPV growth for the acquiring channel through April and May. Could you provide what the total consolidated TPV growth was for April and May? Second, I wanted to return to the noncredit digital account losses, just some additional clarification. I mean, it sounds like you are authorizing bill pay on credit cards, but that something went awry and you wound up with a lot of chargebacks. Were these fraudulent bill payments? I am trying to understand what went wrong in that? I know, it's one time. But what went wrong in that authorization process that might be a learning experience for you? And lastly, in the SMB hub business, are you seeing a strong variety of software uptake? And to what degree are you seeing perhaps an omnichannel opportunity in the SMB software, in the SMB business? And can you bring MoIP to address some of that? Thanks.

Ricardo Dutra, CEO

Hi Craig. This is Ricardo. Thank you for the question. We must discuss here internally how it's going to be if we can give the TPV for PagBank. We didn't give in this call. Just what is the best way to give this disclosure, of course, it's growing a lot. We just closed May. But I mean, we can discuss if we can make it public before the next call. I don't have the answer to you at this point. Talking about the digital account losses that you asked. We were aggressive in authorizing some transactions. The models for bill payments were, let's say, authorizing more transactions than they should. So it's not credit-related. It's not NPLs related to loans or things like that. It's just that people came here to pay bills through credit card, and the majority of the chargebacks. We authorized some of the transactions that after we review we should not have authorized. I mean, we were aggressive in doing that. So that's what happened. There is no data leak. There is nothing like that. Just people came here, decided to pay a bill and then we had this chargeback. That's as simple as that. Regarding SMB and hubs, yes, they are using our software. Although, we know that our software at some point is very complete, but some type of merchants, they require something more sophisticated. At the end of the day, what we are looking here, we are bringing the merchants that are four to five times larger than the long tail. So there are too small. They are not very sophisticated. Part of them could be omnichannel. But we know that part of them will not be omnichannel because of their business. Just to give an example here, the guy from a restaurant sometimes is going to find a new platform to make delivery, and PagBank will not provide that for him, although we have a small platform. So we see some opportunity for omnichannel. For those who we think that is feasible, we can offer solutions, link of payments, and things like that. But I would say, the majority of them, still today, they are not omnichannel. They are more physical stores, because we are going, let's say, in the bottom of the pyramid of SMBs. So they are not well sophisticated for software and part of them are not ready for omnichannel. And that's fine. At the end of the day, our aim is to bring them for acquiring and make them choose PagBank, get the data at some point, increase the relationship, and strengthen the relationship with them. We could offer credit and credit cards and so on. So that's our idea, which is much more to have the financial services embedded with our solution than other solutions at this point.

Craig Maurer, Analyst

Thanks. And are you seeing any change in behavior around Pix? Any P2M transactions? Or is it still mainly a P2P channel?

Ricardo Dutra, CEO

Well, Craig, we don't see Pix hurting our acquiring business or people using Pix to make payments. What we see is Pix replacing wire transfers. So let's say, if you had a bill that you used to pay through wire transfer, so people did not use cards. Now they are using Pix, because Pix is free and is instantaneous and so on. But we don't see Pix, I would say, cannibalizing our acquiring business. As you could see, our growth is 58% year-over-year. So that's the thesis that we have, the hypothesis that we have from the beginning since when we started talking about Pix in the beginning of last year. Pix is much more to replace wire transfers; at some point to replace cash and help the digitalization of some people in Brazil. And then we can take advantage by offering PagBank, and you could see that we are growing more than one million PagBank clients per quarter.

Craig Maurer, Analyst

Thank you.

Ricardo Dutra, CEO

Thank you.

Operator, Operator

Our next question comes from Mario Pierry with Bank of America. Please Mr. Pierry, go ahead.

Mario Pierry, Analyst

Good afternoon everybody. Congratulations on the results. Let me ask you two questions as well, primarily related to revenue generation. How should we think about the direction of the take rate on the acquiring business taking into consideration the hub expansion and also taking into consideration that the economy is opening up, so we should see a better mix of credit versus debit? And also when we think about the take rate at PagBank, I think it's fair to say that PagBank is growing much faster than we anticipated. So I was wondering if you think that you can achieve your target or your soft target of 30% of revenues coming from PagBank three years from now? If maybe we could anticipate that? Thank you.

Ricardo Dutra, CEO

Hi Mario. This is Ricardo. Thank you for the question. Regarding acquiring take rates, as you could see we grew 17 basis points in Q1 versus Q4, even with more TPV coming from SMBs, which has a lower net take rate because they are somewhat larger merchants. Looking forward, what we expect from the acquiring take rates is to be stable. There is going to be some variation here and there, but to be stable because we are going to have more clients coming from hubs that would put some pressure in the net take rate coming down. On the other hand, we have the tailwind that is the mix of payments, more credit. So what we are looking for here this year; we expect to be stable or improve a little bit. But let's see how it's going to be. In Brazil, we have a lot of ups and downs and lockdowns certainly. Unfortunately, the rate of vaccination is not going pretty fast as we see in other countries. Some people are talking about a third wave and some cities making lockdowns while others are opening. So there's still a lot of uncertainty. But to give, let's say, a soft guidance here, let's consider it stable even with the pressure coming from the hubs which, in our opinion, would be a very good performance. The other question about the 30% PagBank, it's hard to say if we are going to be able to make it earlier than that, Mario. We prefer to keep the 2024 target. Let's follow the following quarters. And then we can update. What we saw in April is good level of revenues in April much better than Q1. Let's wait a little bit and then we can update it. But it's feasible to have it before that. I just don't want to affirm that at this point.

Éric Oliveira, Head of Investor Relations

Yes. Hi Mario. It's Eric. I just want to enforce here that we will reach the 30% in one of the quarters in 2024. This is not an easy task, right, because we haven't seen PagBank grow very fast and solid, right. And even our new verticals such as hubs and the online. So it's a hard task here but we can just be committed to this 30% in one of the quarters in 2024. Thank you.

Mario Pierry, Analyst

Okay. Let me follow-up then here on PagBank. Even if we add back these losses that you booked of BRL73 million, we are calculating revenues per client of about BRL24. Is that about right? When we look at the first quarter, we have around BRL27 and one year ago at around BRL27. Any reason why revenues per client are coming down at PagBank?

Ricardo Dutra, CEO

Well, Mario, we should make the math here just to see if we have the same numbers that you have. But usually the dynamics for PagBank monetization are the following. We bring the client. They stay here for a while. They start using and engaging with the solution. And then we see monetization afterwards. So there is some lag between bringing the client and having the revenue. So that's why, at some point, we see the number of clients coming to 9.1, but the revenues not coming at the same pace because it takes a while. And that's even more so if we think about consumers because the consumers don't have the automatic cash out that we have from the acquiring clients. So even if the client loves our app and finds it easy to use, with very good UX and so on, if he doesn't have any money there, he cannot do anything. So that's why we see some lag between bringing the clients and then the revenue. So that's the main explanation of that. We also said in the presentation, for some of the clients, we decided to give free ATM withdrawals which could bring revenues a little bit down. It's not material. But of course, it does help. So those are the main reasons here. But the main reason, the main driver is the lag between bringing the client and having the revenue from this client.

Mario Pierry, Analyst

Perfect. Very clear. And just a final follow-up on PagBank here. I think in the past, you had talked about maybe breaking even at PagBank in the second half of next year. Is that still your view?

Ricardo Dutra, CEO

Yes. That's my view.

Mario Pierry, Analyst

Thank you.

Operator, Operator

Our next question comes from Jeff Cantwell with Guggenheim. Please Mr. Cantwell, go ahead.

Jeff Cantwell, Analyst

Hi. Thanks for taking my question. Can you hear me?

Ricardo Dutra, CEO

Yes.

Jeff Cantwell, Analyst

Great. I wanted to ask you one quick question on PagBank. You have grown your clients to 9.1 million over the course of two years, which is impressive. And underneath that, the active card base has increased by over three times while you are also layering in new products and clearly they are seeing uptake and more and more adoption. And I think that all suggests that your average revenue per user should continue to increase perhaps more materially if things continue to normalize. So you agree with that idea? And the reason I ask is because we see other guys, some in Brazil, with fairly high average user numbers. And so I think it's still early days for you guys. So I am just curious if you agree with that view? And if you can give us some updated thoughts on what your ARPU at PagBank might grow to over time? Any color or thoughts there would be appreciated. Thanks very much.

Ricardo Dutra, CEO

Hi Jeff. Thank you for the question. I was trying to, let's say, explain that as well for Mario. But yes, in the medium to long term, we expect the revenues from PagBank users to go up. That's one of the drivers for us to reach 30% of the revenues of the company coming from PagBank by 2024. What we have here is that there is, I would say, a longer time between opening the account and starting to generate revenues. And this is even more true when you have the consumers because the consumers don't have the cash in. So you need to open an account and then wait to receive the card and then they are going to receive some money here, some wire transfers from other banks or Pix or the payroll or so on. But yes, you are right, we are bringing in this client. That's the first, let's say, we have this framework to bring the client, engage and then monetize. I would say, we are between the first and second step today. We are still having lots of accounts, millions of accounts every quarter, so bringing new clients. The engagement is increasing. The monetization is happening, but it doesn't happen at the same pace. There is this lag between bringing the client and then start monetizing. But looking in the medium term, that's the idea. I said before we are already in some pilots with consumers, making some additional products to them, testing with them. We are going to have, in a few weeks, we are going to have equities here so people could buy stocks here. We are going to have treasury bonds. We just launched two options of insurance, personal insurance and home insurance. So the idea is to make this cross-sell and increase the average revenue per user in PagBank. That's the idea. That's the dynamics that we expect to happen.

Jeff Cantwell, Analyst

Great. I appreciate that. And then a quick follow-up on the platform. I was hoping you could give us some thoughts on why now? I mean you just had a few changes to the strategy and maybe just consolidate on the acquiring side while you are going to one-stop-shop for micro-merchants and how that might sort of be a driver for you guys maybe in terms of net adds, volumes, et cetera? Thanks.

Ricardo Dutra, CEO

Yes. So you are right. That's exactly for the micro-merchants or the long tail. We don't think that's a device for someone who has a lot of transactions every day because as you know, POS is better for this type of volumes when you have a lot of transactions than when you have a few transactions per day. So it's focused on the micro-merchants. Everyone has a smartphone. Some of the guys use it to have the smartphone and pair through Bluetooth with our mPOS with Minizinha. So the idea here is to have everything as one device. They already receive the device with a PagBank account because they create this account when they buy the device. They create, let's say, the login and password. So they have the app there. They can order a card and so on. So the idea is to have an additional option for the long tail for the micro-merchant. The average ticket is much higher than other POS. So although we are selling better than what we expected, we don't have seen volumes that we have for smaller POS in Minizinha Chip and things like that because of the price. But I mean, it's doing well. The idea, as you said, is to have for the long tail one-stop-shop and people can use it as a POS, acquiring digital account, and as a smartphone. And it is a very good smartphone, by the way, with cameras and so on. So that's the idea.

Jeff Cantwell, Analyst

Okay. Great. I appreciate all the color. Thanks again and congrats on the results.

Ricardo Dutra, CEO

Thank you Jeff.

Operator, Operator

Our next question comes from Rayna Kumar with Evercore. Please, Ms. Kumar, go ahead.

Rayna Kumar, Analyst

Good evening. Thanks for taking my question. Really good to see the strong TPV coming out of PagBank and of course your acquiring. I am just curious to understand if COVID-19 had any material impact on the prepaid card interchange revenue that you make with PagBank?

Ricardo Dutra, CEO

Hi Rayna. Thank you for the question. The reason that our revenues in PagBank were not even higher than what they were is because we did have some impact that people not using prepaid cards because the cash in and even, let's say, the Coronavoucher from the government didn't happen in Q1 and also people using less cash. We also make some revenues from people taking the money through ATMs; we charge some taxes there. There was a decrease in that, with people at home not using cash. So that's part of the explanation why the revenues from PagBank in Q1 weren't even higher. So I mean, it's not a big issue. It's good volumes. We are still the number one in prepaid cards in the country by far. And we are sure that once the economy rebounds, we are going to have the rebound as well. And part of our investments, we didn't mention before, but part of the investment that we have been doing since 2020 and 2021 is because we know COVID, although is a little bit longer in Brazil when compared to other countries, COVID is something temporary and the economy will rebound. And when the economy rebounds, we just want to be ready to take advantage. That's what we did in 2020. That's what we did in 2021. That's why we were the company with the highest growth in terms of TPV in our market, taking share from others, creating this new market, and bringing these new customers. But going back to your question, yes, there was a little bit of impact in the prepaid card because of a little, let's say, lower spending in the prepaid cards in Q1. But it's something temporary. It's not a big issue.

Rayna Kumar, Analyst

Got it. Very helpful. And then on your hub strategy, you gave us some clues on your potential volume contribution from hubs in 2021. Could you help us better understand what the potential revenue and earning contribution could be this year?

Ricardo Dutra, CEO

Well, Rayna, we can give you more color about our hub strategy when we think it is appropriate. Of course, we are having this operation here trying to beat other companies that are already there on the street. So we are here as the challengers. So we just don't want to give too much information about our performance at this point. We gave the guidance about TPV. Once we think it's feasible to give more color on that, we can give you. It's not because I don't want to. It's just for, let's say, competitive reasons we just don't want to give too much information about it. And let's say, let's have this operation up and running and then we can when it is more mature, we can give more color even with more confidence about the numbers and our performance. But so far, we are doing very well. We are beating our estimates. That's why we said that we expect to be at the top of the range of TPV, which was 11%. That's the guidance. So we are doing well.

Rayna Kumar, Analyst

Understood. Thank you.

Operator, Operator

Our next question comes from Tito Labarta with Goldman Sachs. Please Mr. Labarta, go ahead.

Tito Labarta, Analyst

Hi. Good evening. Thanks for the call and for taking my question also. Maybe just one quick follow-up on PagBank. In terms of the client additions at PagBank remain pretty healthy. Do you think and you kind of alluded to it, but about one million clients per quarter is sustainable? Or like for how long that's sustainable? Or maybe in another way to get the 30% of revenues, how many clients do you think you would need to have at the pace you are going, you would need over 20 million clients in a few years? Is that a reasonable assumption? And maybe in terms of the products that they use, is the main cash just like the prepaid cards? Or like which product do you think is generating the most interest amongst the PagBank clients? Thank you.

Ricardo Dutra, CEO

Thank you Tito. Thank you for the question. Yes, we do think it's feasible to have one million new clients per quarter. Hard to say when it's going to be over. I remember, just to make a quick parenthesis here, but we have got this question about acquiring in merchants in the past few years. How it could be sustainable? If it could be sustainable for us to add one million merchants per year or 250,000 per quarter? And we are doing this since 2018, since we became public. So every year, we at some point think is going to be a challenging one, but we always beat our estimates because we are still playing in a huge market. So in terms of merchants, we expect to have 30 million people in Brazil that work by themselves or may need a POS. So there is still, according to our estimates here, one-third penetration at this point. In terms of PagBank, some estimates say that we have 25% to 30% of people without a bank account even after COVID without digitalization. Maybe it's a little bit lower than that. But it's still huge. And that's why we have 9.1 million, more than a million per quarter. We also said in the presentation here. We closed April with 9.1, and in May, we already surpassed 10 million. So we already added 900,000 in Q2, in the previous Q2, and we still have part of May and full June. So we think it's feasible to have this one million for a while. To be sincere, I don't have in the top of my mind the number of clients in PagBank to give the number, but you can imagine we already have more than 10 million. I don't think it's impossible to have this 20 million that you mentioned. And about why people come to us, I guess there are many reasons here. First, because of our brand, the strength of our brand, people know how we work, people know it's a, let's say, company that you can have confidence you can put the money here. We have the distribution through UOL that covers more than 90% of eyeballs in Brazil, right after Google and Facebook. We invest in marketing. We have been investing in account acquisition. We do a lot of research on how people use it, where they are having some difficulty, to try to make it better, easy to use. It's very simple. Just download the app and in up to three minutes you open an account. You send your picture and it's done. And it is a full free account. People just come to us because they know it's a free account. They can have interest on their balances. And although we make it free for the consumers or for the user, we are receiving money from the companies we are, let's say, receiving the bills and so on. So those are the main reasons. People come to us because it's free, the strength of the brands, efficient distribution that we have, and investing as well.

Tito Labarta, Analyst

Okay. Great. Thank you very much.

Ricardo Dutra, CEO

Thank you.

Operator, Operator

Our next question comes from Otavio Tanganelli with Bradesco BBI. Please Mr. Tanganelli, go ahead.

Otavio Tanganelli, Analyst

Hi. Thanks for taking my question. I wanted to ask on PagBank as well. The credit portfolio increased a little over BRL200 million this current quarter. I wanted to understand if NPLs are behaving well and the economy is expected to improve in the coming quarters, why not accelerate loan or originations? When should we see, I would say, more aggressiveness in terms of the loan book here? Thank you.

Artur Schunck, CFO

Yes. Otavio, it's Artur speaking. Thanks so much for the questions. It's a pleasure to talk to you. So we are showing that we have better NPLs for credits but we are a conservative company. We have a lot of caution about the uncertainty of the market. As Dutra said, some people are saying that we could have a third wave here or other issues related to COVID. We don't know exactly when the economy will rebound, but we have all the conditions to accelerate. We are starting to do that in Q2. And so you will see in the coming quarters better volumes. We will increase our portfolio in the right way. So we are understanding the models, understanding the NPLs, understanding the performance and growing our portfolio. We understand that this is the best way to do that. And so we have the conditions to accelerate more but we are cautious related to the economy, related to the moment that we are living in the country. And so you will see in the future our portfolio growing.

Ricardo Dutra, CEO

And Otavio. This is Ricardo. Thank you for the question. Good talking to you as well. We were ready to accelerate last year. But of course, when we have the model and have COVID with many ups and downs and lockdowns, there is a lot of noise in the data. So that's why we didn't accelerate before. We just want to have the right moment to do it. We are not in a hurry to do that. We know it is important. We just want to do it in the right way. We see some other players in the market doing some aggressive growing in the portfolio and the NPLs will come. We know that. And you know that. So the NPLs will come if you don't give the right credit for the right person and you don't have the collection processes and so on. So we just want to be ready and be confident that we can accelerate a little bit. We are ready with the BRL700 million, almost BRL800 million, close to BRL1 billion. So we are growing but step-by-step, not doing any crazy movements here and doing step-by-step. But we will accelerate it at some point that we think it's feasible and we are confident to do so.

Otavio Tanganelli, Analyst

That's great, guys. Thank you.

Ricardo Dutra, CEO

Thank you.

Operator, Operator

Our next question comes from Neha Agarwala with HSBC. Please Ms. Agarwala, go ahead.

Neha Agarwala, Analyst

Hi. Thank you for taking my question and congratulations on the good results. Most of my questions are answered. But very quickly and I know you can't give more information on the hubs. But it seems like the hubs are doing quite well and exceeding your expectations. What do you think are the strengths of PagSeguro which is helping you to gain clients, either from incremental or the other peers? Is it the service quality? Is it the brand image? Or are you doing something different on the distribution? So what are your strengths in the particular segment? And my second question in the monetization of the software opportunity. I mean you already have a take-up with 8.5% of the client base users of the software. So are you already monetizing it? Can you give us some range of what percentage of revenue comes from software and what is the opportunity that you see here? Thank you so much.

Ricardo Dutra, CEO

Thank you, Neha, for the question. Let's talk first about the hubs. We always said and we mentioned that during the presentation that our thesis is that it's easier to go up in the pyramid than to go down when you think about size of the merchants in terms of TPV. So we started with the long tail. As you know, we had all this platform that is very scalable, easy to use, self-service. So we have all this, let's say, online in DNA here that we can serve the small clients here. When you go up in the pyramid, it's just a matter of distribution. The platform is the same. The solution is the same. The easier the solution, the better for the merchant. It doesn't matter how the size of the merchant, but if it is easy to use, every merchant will like it. It doesn't matter if you are a small one or a big one. So it's a matter of distribution here. And as I said before, we have a strong brand. We see a lot of unsatisfied merchants in the SMBs. So at some point, they don't have the right service and that's why we come there and we can bring these merchants to us. We have good devices here. We have a portfolio of seven devices. The merchants also like our devices. So there are some components here that we can use, some instrument that we can use to bring these merchants. It's not a matter of price and trying to just being the price at some point. The merchant even wants to pay you more if they have good service. So that's the dynamics behind going to SMB. But we are proving here the thesis that it's much easier to go up in the pyramid than to go down for us. And talking about software, the 8.5%, a very small part of that we monetize. We are not charging the majority of them. We think today is not a lot of money. Our merchant is not sophisticated to pay for a software. So we try to we are making it for free. At some point, if we see an opportunity that we can charge, we will do it. But from all the software that we have, we have some premium features from the loyalty software and also premium features from the conciliation software. The other software that we have, the point of sale that you can use, let's say, put some products like coffee, croissant, and all the stuff and you just can have a database of clients. Of course, we are giving this for free. So today we are not charging, just to be sincere. It is a very small part of that that is paying for our software. It could be an opportunity in the future. But I mean, we don't have that in the short-term plan.

Neha Agarwala, Analyst

Very clear. Thank you so much for that. And congratulations once again.

Ricardo Dutra, CEO

Thank you, Neha. Thank you very much.

Operator, Operator

That concludes our Q&A session. I would like to turn the floor over to Mr. Ricardo Dutra for his final remarks. Please Mr. Dutra?

Ricardo Dutra, CEO

Hi everyone. Thank you very much for your time. As you could see, the company is doing well. All the KPIs are growing, number of clients, TPV. We are seeing a lot of traction in PagBank. So it seems the worst is over in terms of the pandemic. We are not 100% okay in Brazil. Still waiting for the vaccination. But it seems the worst is over what we had in Q2 and Q3 last year. So the future is bright. And thank you very much again. See you in the next quarter. Thank you very much.

Operator, Operator

The PagSeguro PagBank's first quarter 2021 results conference call is concluded. Thank you for your participation. Have a good night and thank you for using Chorus Call. You may now disconnect.