Earnings Call Transcript - PAGS Q2 2020

Operator, Operator

Hello, everyone, and thank you for waiting. Welcome to PagSeguro's Second Quarter 2020 Results Conference Call. This event is being recorded and all participants will be in a listen-only mode during the company’s presentation. After PagSeguro’s remarks, there will be a question-and-answer session. At the time, further instructions will be given. This event is also being broadcast live via webcast and may be accessed through PagSeguro'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 is concluded. Those following the presentation via webcast may pose their questions on PagSeguro’s website. Before proceeding, let me mention that any forward-looking statements included in the presentation or mentioned on this conference call are based on currently available information and PagSeguro’s current 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 factor sections of PagSeguro’s Registration Statement on Form 20-F and other filings with the Securities and Exchange Commission, which are available on 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 Mr. Ricardo Dutra, CEO. Mr. Dutra, you may begin your presentation.

Ricardo Dutra, CEO

Good evening, everyone, and thanks for joining our second quarter results conference call. Tonight, I have here with me Eduardo Alcaro, our Chief Financial Officer, and André Cazotto, our Head of Investor Relations. We hope you and your families are well and safe. As everyone knows, the past few months have been challenging and we remain focused on supporting our clients, our business partners, society, and our employees. I would like to thank again all PagBank and PagSeguro team who have been supporting our businesses from their homes over the last months. Thank you very much, PagBank and PagSeguro team. As we will see in the next slides, even with all the impacts generated by COVID-19, our results show that our business is exceptionally resilient. Certainly, there were numbers that declined in the quarter; however, the most important operational KPIs, such as total payment volumes, net adds, and PagBank users, have been improving each month throughout the quarter and are growing year over year. Finally, it's important to mention that we have developed features and products and acquired companies to build a complete and unique ecosystem to address the needs of our clients. Regardless of the current moment, we are confident in our strategy and the opportunities ahead of us. We continue investing to grow the company while maintaining our profitability levels. That said, Eduardo Alcaro 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 second quarter, a challenging quarter driven by volume rebound, accelerated growth, and stable margins amidst social distancing measures and economic slowdown. We saw strong financial and operational performance, a lot of traction in PagBank, as well as online TPV and software services growth. It's important to mention that micro merchants proved to be more resilient and faster adopters of new payment channels, and we continue to gain scale in payments and banking, backed by our unique online distribution in an untapped and underserved existing long-tail market in Brazil. TPV reached close to BRL 30 billion, growing 11% year-over-year. In July and August, we saw an acceleration of growth year-over-year, marking 47% and 51%, respectively. When compared with the first half of March, which is pre-COVID-19 in Brazil, the first half of July is 21% above, and in the first half of August, it's 29% above. Our take rate ended the quarter at 2.72%, down 59 basis points quarter-over-quarter, mainly due to a temporary impact of the mix, meaning more debit card transactions and fewer credit installments, directly impacting our prepayment revenues. However, our take rate continues to be significantly above our listed peers. Our net adds in the quarter were close to 300,000, up 32% versus the first quarter of 2020, and 1% higher than the second quarter of 2019. Active merchants reached 5.8 million, with a historic record level of gross adds in June and July, given the higher demand for new devices. Transaction activities and other services revenues grew 4% during the quarter, reaching a pre-tax margin of 31.6%. Non-GAAP net income of BRL 307 million, with a net margin of 22.6%. Moving to PagBank. Our non-acquiring TPV through banking digital account and wallet services reached BRL 10.6 billion, growing 168% year-over-year, another triple-digit growth. PagBank revenue grew 52% year-over-year. In the first half, PagBank revenue reached 7% of total revenue and income, with a growth of 105% compared to the same period in 2019. We added another record of 1.2 million new PagBank users during the second quarter of 2020, reaching 4.9 million users in Q2. We are also proud to surpass more than one million pure PagBank consumers, with the average number of product usages growing 36% year-over-year, showing the success of our go-to-market strategy to reach clients other than acquiring. We had 4.6 million PagBank app downloads in the second quarter, accumulating close to 22 million application downloads in July, being one of the leaders in digital bank adoption. Last week, we announced that we reached an agreement to acquire Wirecard MOIP in Brazil, the most complete online payments platform in the market, which will help us leverage our omnichannel offer. We will discuss that in a few minutes. We also announced the acquisition of Zygo, a multisided loyalty and CRM platform. Online TPV grew 121% year-over-year in July, backed by the structural transformation in sales channels and payment solutions and stronger growth of cross-border transactions. On slide 4, we show the main KPIs I mentioned previously. Moving to slide 5, we want to recap the achievements of the first half of 2020. Despite an unexpected first semester, PAGS continues to be a leading company, maintaining its long-term strategy focused on the unique existing opportunity to provide best-in-class payments and financial products and services to the Brazilian population. TPV reached close to BRL 62 billion, growing 20% year-over-year. Total revenue and income grew 11% compared to Q2 2019, marking BRL 2.9 billion. Active Merchants reached 5.8 million by the end of June; we added 526,000 new merchants during the first six months of 2020. Take rate was 3.04%. Adjusted pre-tax margin was 31.9%, with non-GAAP net income reaching BRL 674 million in the first six months of 2020, up 1% versus the first half of 2019, with a non-GAAP net margin reaching 22.9% in the same period. On PagBank services, non-acquiring TPV through banking, digital account, and wallet services reached BRL 19.3 billion, growing 178% year-over-year, due to the accelerated pace of new financial and digital wallet products launched to serve both merchants and consumers. Active users were 4.9 million, meaning we added 2.2 million new users during the first half of 2020, with pure PagBank consumers accounting for more than one million active users. On slide 6, we show the main first half 2020 metrics I mentioned before. Moving to slide 7, we would like to reinforce our focus on growing with profitability. In the first half, PAGS net income was 60% higher than Brazilian listed peers combined, reaching close to BRL 600 million of GAAP net income, down only 6% compared to the first half of 2019. It's worth mentioning that PAGS results exclude the provision reversal we had in the second quarter of 2020, which positively impacted our bottom line. As we stated in our last conference call and in other interactions with the investor community, we are observing a sharp recovery of our TPV since the second half of April. Year-over-year, our TPV in May grew 11%, in June grew 25%, and in Q2 grew 11% compared to Q2 2019. In July, we observed a better recovery, and our TPV grew 47% year-over-year and we continue to see a strong pace in August, growing 51% year-over-year. This trend shows the accelerated migration from cash to electronic transactions caused by the pandemic, the resilience of our diversified merchant base, constituted by micro, small, and medium merchants, and individual entrepreneurs across the country. The faster adoption of online, card-not-present, and contactless transactions has also been supported by a larger spending backed by government subsidies. It's essential to mention that all these volumes are related only to payments transactions. Due to COVID-19, the Brazilian government disbursed a relief, which we can call a coronavoucher, to approximately one-third of the Brazilian population, and some of the beneficiaries decided to top up and transfer their balances to various banks, including PagBank. However, these top-up volumes are not included in our TPV figures. In the chart below, we can see healthy TPV trends compared to the first half of March, which is pre-COVID-19 in Brazil. TPV has been improving. In the first half of July, we reached 121% of TPV of the first half of March and 129% in the first half of August. Currently, most of the states in Brazil are reducing social isolation; some important cities are reopening, such as São Paulo and Rio de Janeiro, and retail volumes are improving. On the right side of the slide, until August 20th, we have already added more than 250,000 new merchants, surpassing more than 6 million active merchants, facilitated by another incredible consecutive record of gross adds for a unique month in July, which corroborates our view that the addressable market is increasing and accelerating after the pandemic. According to IBGE, since the beginning of the pandemic in late March, the number of new individual professionals increased by 20% year-over-year, and in parallel, roughly 9 million Brazilians lost their formal jobs, meaning that millions of people became individual entrepreneurs out of necessity or opportunity. Additionally, we continue to accelerate the pace of net adds for PagBank, already reaching over 900 thousand new users until August 20th, surpassing more than 5.8 million active users and expanding our addressable market beyond merchants. Finally, on the bottom right side of the slide, we can see some other Q3 trends; record of POS sales in July and daily TPV record in August; Acceleration of non-acquiring TPV growing above 200% year-over-year, backed by coronavoucher top-ups through our virtual cards and net revenues growing high teens on a year-over-year basis. Due to COVID-19, we continue to see a higher participation mix of debit transactions, reaching levels higher than those observed in the fourth quarters. Consequently, we will also have a lower mix of credit and installment transactions, which will temporarily impact our take rates and margins. I will now pass the word to Eduardo Alcaro, our CFO, who is managing our costs and expenses closely so that we can navigate through this unique time together. Thank you. Eduardo, please go ahead.

Eduardo Alcaro, CFO

Thanks, Ricardo, and hello everyone. On the next slide, we present our operating figures. Total payment volume reached close to BRL 30 billion, growing BRL 3 billion or 11% when compared to the same period of last year. Our diversified merchant base, no geographic concentration, resilience in the micro merchant segment, and adoption of online and card-not-present transactions supported this strong rebound that continues in July and August. In the next graph, we break down our mix. Like Ricardo said earlier, our take rates are being temporarily negatively impacted by this mix effect. The acceleration on TPV is coming mainly through debit cards, supported by the government subsidies, known as coronavouchers, a BRL 600 paycheck for the most vulnerable families. As a consequence of the pandemic, lower consumer confidence and higher unemployment rates are impacting personal credit card leverage and driving financial institutions to reduce credit limits. This impacts regular and credit card transactions in installments, which is the main driver of our financial income. Additionally, economic sectors where credit installments are more relevant, such as general merchandise retailers, clothing stores, and others, were more impacted during the partial shutdowns in Brazil. The debit mix reached an unprecedented level of penetration, surpassing 50% of our overall TPV in some weeks of Q2, even higher than the highest seasonality observed in Q4. Again, we expect this mix effect to be temporary and it should normalize after the COVID-19 pandemic, and the good news is that we continue to gain market share and increase volumes on a year-over-year basis. On the chart below, our net take rate, which is the blended take rate net from transaction costs such as interchange, processing, and card scheme fees reached 2.72%, down 59 basis points quarter-over-quarter and 25 basis points compared to Q4 2019. On the next graph, we break down the take rate composition quarter-over-quarter, highlighting the most relevant impacts, which are temporary as a consequence of the COVID-19 pandemic. The most significant impact is the mix effect, impacting 36 basis points, with 23 basis points explained by the product mix due to lower installment transactions and 13 basis points attributed to temporary promotional discounts to support our clients during the pandemic. Additionally, 13 basis points on transaction costs. Remember that in Q1, we had a positive impact coming from a card scheme rebate. The last 11 basis points related to others, mainly due to our temporary decision to reduce our credit exposure during the crisis. As discussed earlier, the largest negative impacts are temporary and should recover as the economy and consumer confidence improve, leading to more credit instead of debit card spending. On the next slide, we show our total net revenue and income that reached almost BRL 1.4 billion, down 2% year-over-year. Operating revenue and income remained flattish, down 0.6%. Transaction activities and other service revenues grew almost 4% year-over-year, while financial income decreased by 8% in the same period due to lower installment transactions. Bottom right, GAAP net income reached BRL 296 million, a decrease of 8% year-over-year. Non-GAAP net income in the second quarter reached BRL 307 million, down 10% year-over-year. In this quarter, we had a positive impact of BRL 56 million after-tax due to a tax provision reversal. Thank you all, and now I am passing the word back to Ricardo, who will comment on the latest business developments.

Ricardo Dutra, CEO

Thanks, Eduardo. Moving to Slide 11, I want to share some figures about our online volumes. PagSeguro was born online in 2006, starting as a new wallet paper-like model for millions of Brazilians to pay online in a safe and easy way. On the left side of the slide, we can see our online ecosystem. Over time, we built new services and became a very complete online payment platform, including features such as different checkouts, cross-border transactions, online QR codes, links of payments, split payments, and also logistics support to our merchants through third-party partnerships. More recently, we also launched our own food delivery app. Our online results are encouraging. Year-over-year, the number of online transactions doubled in Q2 2020, and online TPV grew more than 70%. Transactions of the link of payments solution, easily shared through any social networks, such as WhatsApp or Facebook Messenger, and also through email or SMS, grew 69%. Our cross-border TPV increased 2.5 times. Below in the chart, we see that in July 2020, our online TPV grew more than 120% year-over-year. It is important to note that we have very low exposure to sub-acquiring companies, meaning that almost 100% of our online transactions refer to our own merchants using our payment solutions. The pandemic is driving a faster adoption of online, card-not-present, and contactless transactions. According to a Visa Global Study, 67% of SMBs are moving to a digital-first mindset, with Brazil being one of the leading countries in this transition. We are investing to promote the best omnichannel experience to millions of micro, small, and medium businesses, many of whom are selling online for the first time. On Slide 12, we present some highlights in terms of online distribution, Google searches, and our app rating. Starting with Google searches for digital banks, PagBank remains at the top, with 66% of the total share over digital banks, a consequence of our marketing efforts and product rollout. The PagBank app also continues to be the top-rated app among digital banks, maintaining a 4.8-star rating in iOS and a 4.7-star rating in Android, being the most reviewed app among digital banks and payment peers, all due to our best-in-class product development and user experience-oriented culture. Since its launch, the PagBank app has reached 22 million downloads. In terms of revenues, we observe a 50% increase in revenues from merchants that, in addition to acquiring, use three PagBank products. If the merchant uses five products, its revenues increase by 108%. Finally, some UOL figures: in June, UOL reached 113 million unique users, or 92% of the Brazilian internet audience. As we can see in the chart below, UOL has the third largest audience in the country, just behind Google and Facebook, and all this reach and brand awareness helps PagSeguro and PagBank distribution. On Slide 13, we show some relevant engagement trends in our PagBank ecosystem. We believe that engagement is a relevant metric to follow at this stage, as it will help the company to increase the switching costs of our clients and enhance their stickiness and loyalty, enabling future monetization and revenue diversification. In terms of PagBank users, we reached close to 5 million active PagBank users, adding 1.2 million new active users during the quarter, driven by merchants' conversion into PagBank users and the acceleration of net adds of consumers, surpassing more than 1 million active PagBank consumers, showing our ability to expand our banking and digital wallet addressable market through the launch of new products and services combined with marketing and online distribution. Non-acquiring TPV reached BRL 10.6 billion, up 168% year-over-year. Our total credit portfolio, combining loans and credit cards, reached BRL 465 million, down 6% quarter-over-quarter. Since the beginning of the pandemic, we decided to block new credit disbursements to limit our credit exposure during this period. In Q2, our focus was to support and renegotiate our portfolio on a case-by-case basis with our merchants. For some merchants, we offered a 90-day grace period for repayment. Both measures helped us control NPL levels. Despite the current environment heavily impacted by the pandemic, mainly in late March and April, most of the merchants operating with PAGS Capital continued to sell and are recovering volumes. In July, we started gradually to make new credit offers to our best merchants. Credit is an important tool to create higher engagement with our merchant base and will continue to generate additional revenues for the company in the future. On financial services, we reached BRL 2.4 billion in PagBank deposits, a 41% increase compared to the same period of 2019, mainly driven by a larger inflow of boletos or bank slips and wire transfers. QR Code transactions grew 40 times compared to Q2 2019, driven by higher usage of alternative payment methods, and NFC transactions grew 450% year-over-year, boosted by the pandemic. In the first half of 2020, PagBank revenues increased 105% year-over-year, already representing 7% of total revenue and income, on track to reach 30% of the total revenue and income in five years. Lastly, we are expanding our investment products through the issuance of new certificates of deposits by PagBank, with daily liquidity and higher interest rates. For clients holding investments in PagBank CDs, we offer a free PagBank credit card with credit limits linked to their investments. On Slide 14, we highlight our product roadmap delivered over the past two years. Being tech and independent allows us to think exclusively about our clients’ financial needs and combine growth with profitability. Since May 2018, we have delivered almost 50 new products, including hardware, software, banking, and services in our Super App. In June, we launched a Bilhete Único top-up feature. PagBank clients can top up their public transportation ticket in the PagBank app using the balance of the digital account. This new feature brings more convenience and helps reduce lines at ticket counters of buses, subways, and train stations. We also launched the Caixa virtual card, providing our users an option to top up and transfer the coronavoucher paid by Caixa Econômica Federal. Finally, we signed a new partnership with Roldão Atacadista, fostering the usage of QR codes, offering a 10% cashback capped on BRL 30 per Social Security number. In July, we announced the acquisition of Zygo, a multisided customer engagement and loyalty platform. Lastly, we launched more options for our proprietary CDs, with different durations and interest rates that range from 100% to 150% over the Brazilian Interbank Rate. Despite the current health crisis, we decided to keep investing in product development and remain committed to our roadmap agenda. The constant development of our ecosystem is key, and we will continue to deploy new products and services across payments, banking, and software fronts. On the next slide, we would like to share some thoughts about the acquisition of Wirecard MOIP. As we remain confident about our long-term growth opportunity, we took the advantage to move forward and strengthen our online payment solutions. Wirecard MOIP is an independent institution regulated by the Brazilian Central Bank, providing an end-to-end payment processing solution for e-commerce and the marketplace. With the closing of the deal, PAGS will combine its best-in-class offline business model with the most relevant online platform for millions of merchants, strengthening its omnichannel strategy and accelerating our growth in online sales. Online sales in Brazil is still in early stages, with only 4% penetration of total retail sales; however, it is expected to keep growing as a consequence of the pandemic. Wirecard MOIP has 200,000 clients and is expected to reach close to BRL 5 billion in TPV in 2020, a CAGR of almost 40% in the last five years; its revenues will reach close to BRL 120 million, a CAGR of almost 30% in the same period. It's important to say that Wirecard MOIP has positive EBITDA. On the next slide, we show our software initiatives. We have several initiatives to help merchants manage and grow their businesses. In June, we reached 311,000 software subscribers, up 267% year-over-year. In July, we announced the acquisition of ZYGO, a multisided loyalty platform that enables micro, small, and medium-sized merchants to acquire, engage, and grow their customer base by offering customized marketing and loyalty programs and providing consumers insights and analytics. We believe our software offering is one of the key value-added services to keep adding, engaging, and monetizing our clients. On the next slide, we show some of the new products, services, and partnerships. Some of them were already described before, such as Bilhete Único, Roldão Atacadista, and the coronavoucher virtual card. Additionally, we have included new merchants on PedeFácil, such as Bráz Pizzaria, a famous one in Brazil. PedeFácil has been supporting thousands of clients to sell online by providing payments, software, online menu, and orders, and even supporting logistics through partnerships with third-party companies. Finally, we are happy to announce that we signed a partnership with TikTok. TikTok is the most popular video-sharing social networking service, surpassing two billion app downloads worldwide. TikTok influencers and content developers may generate revenues by developing short videos, product promotions, and so forth. With this partnership, PagBank PagSeguro offers a straightforward and rapid cash-out button, allowing users to transfer their TikTok balances directly to a PagBank account in up to one day, enabling them to use all the banking and wallet services we provide. This partnership will help us scale our PagBank accounts with millennials, heavy users of TikTok who are starting their financial lives. Finally, moving to slide 18, I would like to comment on the existing opportunities in Brazil and how PIX could unlock massive financial volumes to be captured and incorporated into the financial system, consequently boosting the usage of PagBank. PIX presents the opportunity to boost electronic transactions and leverage financial services for millions of unbanked and underserved Brazilians. Additionally, we believe that P2P, boleto, and wire transfers are the most impacted by PIX, due to the nature of the fast payments transactions, the inefficiency of those products in terms of pricing, user experience, settlement period, and also because of the size of its market, which is five times larger than the card market in Brazil. We believe PIX will be complementary to card payments, mainly because of the maturity of card payments in Brazil, already established in our consumption culture, with roughly two debit cards and one credit card per adult, representing 41% of total PCE, Private Consumption Expenditure. PagBank and PagSeguro are positioned to capture PIX opportunities as a payment and banking provider for both merchants and consumers, offering an integrated end-to-end and flexible platform ready to integrate with several stakeholders through our APIs. In conclusion, we are prepared to increase and consolidate our leadership in the long tail market, which is still massive due to the large number of micro merchants and informal employees and will grow due to the acceleration of the shift from cash to electronic transactions, expanding our addressable market into the consumer vertical through PagBank. Although we are pragmatic in understanding and managing the short-term impacts of COVID-19, we are confident about the strong fundamentals of our businesses, the strength of our brands, and the PagBank PagSeguro ecosystem we have built so far. We will keep investing in our long-term strategy, in people, products, services, and growth. We believe PAGS is leaving this crisis uniquely positioned to lead the digital transformation of payments and financial services in Brazil for both merchants and consumers. Having said that, we finish our presentation and will start the Q&A session.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Mr. Craig Maurer, Autonomous Research. You may proceed.

Craig Maurer, Analyst

Yes. Hi, thanks a lot. A couple of questions for you. First, you had discussed the impact that stimulus is having on volumes. Are there – what's your expectation going forward for stimulus to be renewed? And how important is that for continuing acceleration in TPV? Secondly, in looking at MOIP. MOIP seems to play across the spectrum in terms of merchant size for e-commerce. So if you're getting into large merchants through e-com via e-com through MOIP, will that lead to an omni-channel opportunity that might pull PagSeguro's traditional acquiring up to large merchants? Thanks.

Ricardo Dutra, CEO

Hi, Craig, this is Ricardo. Thank you for the question. Good to hear from you. Regarding volumes, the emergency relief or coronavoucher the government is providing to part of the population is expected to be extended until December based on discussions happening in Brazil. This will involve close to BRL 50 billion per month that the government is depositing for one-third of the population in Brazil. This will likely help in the upcoming months. After that, it’s hard to say because it depends on how the recovery will occur, how the unemployment will be affected, etc. About MOIP, you're correct; they have a solution that serves clients across all sizes, including larger e-commerce and marketplaces. This will indeed open doors for us to offer omnichannel solutions for e-commerce and large merchants that want to have POS or other solutions, consolidating our offerings.

Rayna Kumar, Analyst

Hi. Good evening. Thanks for taking my question. It's really good to see the strong acceleration in TPV growth that you're seeing in July and into August. How much of that, do you think is sustainable? We know some of that's obviously being benefited from the Brazilian stimulus plan. But going forward, how should we think of a sustainable TPV growth for PagSeguro? And secondly, you've added massive merchant net adds, 299,000 in the quarter. Is that a sustainable rate for merchant adds going forward? Thank you.

Ricardo Dutra, CEO

Hi, Rayna, thank you for the question. We think these volumes, part of the volumes are driven by the financial relief from the government, but it’s a small part of that. I would say the majority of this TPV is the acceleration we are seeing in net adds, close to 300,000 in Q2 and over 250,000 already in part of Q3. So, it’s an acceleration of more people entering our ecosystem. The recovery of our merchants when compared with the first half of March shows significant improvement in July and August. While part of the recovery is related to government relief, the majority is about the recovery we see as our solutions gain traction, especially amidst the pandemic, with more people using online solutions and digital payments overall. Therefore, I believe it’s sustainable to have these levels, and in terms of net adds, we've already given a preview suggesting we can reach over 300,000 in Q3.

Bryan Keane, Analyst

Hi guys. Good to see the recovery here. I want to ask about non-acquiring volumes. I know they were up 190% in the first quarter, and revenues look like they were up about 158% in that first quarter. In the second quarter, non-acquiring volumes are up 168% with revenues up 52%, so, there’s a much larger gap between volume and revenue growth in the second quarter. So just trying to understand the deceleration in the non-acquiring revenues considering the volumes are still significant? And then second question is just thinking about this sequentially on take rate given the mix changes you guys are seeing for the first two months. Should the take rate continue to deteriorate a little bit with the mix in the third quarter? And same question on net margins. What about net margins in the third quarter as a result of that mix change and investments? Thanks.

Ricardo Dutra, CEO

Hi, Bryan, thank you for the question. When you look at the gap between the growth in non-acquiring and the revenue growth, part of that we can explain, because we’ve seen more people working with wire transfer during this quarter, using products that are not generating revenue for Q2. As we show in the presentation, we decreased the exposure we had in terms of credit; so, we did not grant new loans for our base which affects revenue. Additionally, lower TPV leads to decreased card usage which means reduced interchange revenue. We expect to recuperate these metrics in the following quarters. André, would you like to complement?

André Cazotto, Head of Investor Relations

Yes. Part of the clients in the tax capital product, we also decided to give a larger grace period for repayment, meaning we didn't capture the interest from the transactions during this quarter. Thus, this also explains why we saw less monetization in the credit product. Again, a temporary decision driven by the pandemic, and we are starting to see the environment improving, with our best merchants recovering sales and transacting more—this brings more confidence to gradually restore credit activity with those merchants.

Eduardo Alcaro, CFO

And, Bryan, this is Eduardo Alcaro speaking. Regarding your question on take rates, the main impact on our take rates is related to our TPV mix. The industry has seen an increase in debit transactions, driven by the coronavouchers and consumer trends. Consumers are focusing on essential needs, thereby reducing their purchases in installments, especially in segments where installment use is prevalent, like apparel and electronics. As people focus more on basic needs, we are experiencing more debit transactions. Moreover, the number of online transactions doubled during the quarter, boosting online TPV year-over-year. Therefore, take rates from some of these payment methods like links of payments are lower than our average. In the short term, take rates will continue to be under pressure due to the mix, and we see similar levels in Q3 compared to Q2, but we expect normalization in TPV and positive trends for PagBank revenues should help take rates in the long term.

Bryan Keane, Analyst

Got it. And what about the net income margins, Eduardo, when you think about them sequentially from Q2 to Q3?

Eduardo Alcaro, CFO

I would say we can expect the same net income margin levels.

Mario Pierry, Analyst

Good evening, everybody. Thank you for the presentation. Let me ask two questions then, as well. Again, you talked a lot about the growth in online transactions. Can you give us a breakdown of how much online transactions represent of your total transactions today? And how do you see this changing over time, especially since your strategy here seems to be to grow more online transactions? And what you mentioned, right, that you do have a lower take rate there. So just, if you can give us some color on what percentage of your volumes today are coming online? And what do you see this going? Second question is related to your financial income. It took a big hit. Can you give us any sense if there's any pressure in financial income from the lower rate environment? Are we seeing historically low levels in Brazil, is that also impacting — or should that impact your take rate on financial income? Thank you.

Ricardo Dutra, CEO

Hi, Mario. Thank you for the question and it's good to hear from you. We don't provide exact disclosures about the participation of online in our overall mix, but I can tell you that we know, as I said before, that the world is becoming more digital. Some people have been forced to do online transactions during this pandemic everywhere, and in Brazil specifically. It has been a great time for us to have this agreement with Wirecard. They have a good solution to serve merchants of all sizes and marketplaces. Hence, we will grow online much faster than POS while our POS base is larger, it is impossible to grow at the same percentage as the online market. Additionally, as we observe people using online more in Brazil, the take rate varies in two different e-commerce environments. For the link of payments, it tends to be lower than the offline solutions, but pure e-commerce tends to see a higher take rate than POS because we bear more risk in online transactions. So it will ultimately be accretive to us. We expect contributions to our take rate to grow in the future.

André Cazotto, Head of Investor Relations

And also, a larger presence of credit installment transactions, especially in e-commerce and marketplaces, Mario. So, over time, this could be important for us as well in the product mix and take rate.

Eduardo Alcaro, CFO

And Mario, this is Alcaro speaking. Regarding your question about financial income, the impact is purely coming from the mix. As you can check on our website, we are charging exactly the same price that we charged last quarter, last year, or in the past two years. At the end of the day, it's really a function of mix, having more debit transactions. Brazilians are focusing now on very basic needs, which are not sold in installments; whereas things that are sold in installments usually pertain to apparel, general merchandise, travel, and other areas where we saw a significant slowdown in the whole economy.

Mario Pierry, Analyst

Okay, this is very helpful. Just then a follow-up. Alcaro, do you think eventually you're going to have pressure on your ability to maintain your same prices even though interest rates have declined sharply? Is this something that you should try to lead, to try to reduce the rates before someone else does? And then I also had a follow-up on the previous question from the caller before me—the revenues from PagBank are growing at a very good pace but they're growing much slower, right, than the net adds. So if you can give us an idea then of these net adds from PagBank, how many of them are coming from this government package? And if you can give us a breakdown of the revenues that you're getting from PagBank. You mentioned it was the interchange and also some of the credit, but just to give us an idea of what percentage of these revenues come from online?

Ricardo Dutra, CEO

Mario, let me address your first question regarding pressure on discount rates. We are not seeing any pressure in the market. In fact, our prices have remained stable. If you compare our prices tothose of our competitors in the online space, it's the same. We don't see a reason to adjust simply because we aren't feeling the heat. If you compare our credit offerings or revolving credit with expenses, we are still within a very attractive range charging 8% per month.

André Cazotto, Head of Investor Relations

Yeah. Mario, regarding the revenues of PagBank, the majority of the revenues today come from interchange. When we see the acceleration of net adds in PagBank and the revenues not following at the same speed or trend, it’s because it takes time for the new clients to start generating revenues. They will grow over time, but not instantly. For example, I can sign up for a PagBank account in three minutes, and then I receive the card after a few days. Until I receive the card, I won't generate interchange revenues. I need to fund it initially. If I invest in SCD, I will receive the credit card in a few days. So it takes a while for revenues to come in, but we are promoting cross-selling and trying to encourage clients to stick with our solutions and use multiple products; that’s actually happening, but it takes time to generate revenue.

Jorge Kuri, Analyst

Hi, Jorge Kuri, Morgan Stanley. Congrats on the numbers. Two questions if I may. The first one is on expenses. You did a pretty good job on personnel and marketing expenses during the quarter. Evidencing on a normal quarter, can you talk about expense projection for the remainder of the year and for 2021? As revenues pick up, are you still going to continue to invest in the business above the revenue growth? And should we expect expenses to grow along with revenues? Can you grow both at the same time? What does that mean for EBITDA margins? My second question is—sorry to go back to this—but on the take rate: is it possible that the debit mix is actually a permanent change in how cards are used in Brazil because the substitution of cash has evidently been very strong post-COVID is really a substitution by debit, not really credit, and that may not come back? So maybe we have just a more debit-heavy mix in your business; I think you do see in other places that have a higher penetration of overall electronic payments versus cash. What gives you pause to say that this is temporary and not potentially permanent? Thank you.

Ricardo Dutra, CEO

Hi Jorge. Thank you for the question. Good to hear from you as well. I'll address the first question. We managed expenses well in Q2 and we will do the same in Q3. The only thing I’ll mention is that, in Q3, we will have an opportunity to grow and will need to invest accordingly. We want to balance growth with profitability, as we often say. So, marketing expenses in Q3 will be between Q1 and Q2, which means it will not be the same as Q1. It will be higher than Q1 as we see opportunities for growth and want to capitalize on it. Personnel expenses will also be kind of similar—there's current information at the moment. We'll invest a little more in marketing and try to accelerate growth, as seen earlier, from Q3 such as net adds being 250,000 and 900,000 consumers. Regarding take rates, Alcaro can talk about that and I'll complement if necessary.

Eduardo Alcaro, CFO

Jorge, good to hear you. On debit transactions, if we go back to four years ago when there was a deep economic crisis, we saw similar trends. I think it was not as dramatic, but we saw it. This time it's different because of the BRL 50 billion being provided to people every month. So, it’s a normal pattern. If you have people with more cash, they will obviously spend more on debits. We see overall credit compression in Brazil right now as well. So, we do not see this as a permanent change. We have BRL 50 billion being injected into the Brazilian economy every month, and although many sectors and segments were hit, we’re noting a recovery in our primary merchants—driving people to get that. We’re also seeing the number of new individual professionals rising, so we expect opportunities for growth ahead.

Mario Pierry, Analyst

Good evening, everyone. Thank you for the presentation. Let me ask two questions then, as well. Again, you talked a lot about the growth in online transactions. Can you give us a breakdown of how much online transactions represent of your total transactions today? And how do you see this changing over time, especially given your strategy here to grow more online transactions? Secondly, can you provide insight into the competitive landscape—how do you see competition in the market evolving over the past few months? Thank you.

Ricardo Dutra, CEO

Hi Mario. Thanks for your questions. I appreciate it. On your first inquiry about online transactions, we don’t provide specific figures about the proportions; however, we can tell you that we’re becoming increasingly digital, driven by the pandemic. You mentioned competition—the long-tail market remains significant, and we continue to increase our position and maintain growth despite headwinds. Part of the reason competitors exited means a lot of these merchants didn’t have options. Our business model captures new customers and drives the success of our brands and ecosystem.

Neha Agarwala, Analyst

Hi. Congratulations on the strong results and thank you for taking my questions. First, on TPV: I believe some of the TPV includes the volumes generated from the corona vouchers. Would you be able to segregate that and give us some sense of how much the TPV would be if we exclude these volumes? You showed the TPV evolution as quite strong; however, what would this number look like if we exclude the corona voucher volumes? My second question pertains to PAGS. I understand some of your revenues are also generated from the issuance of letters and through transfers; these could be at risk if P2P takes off with the PIX implementation. How much of your revenue is generated from these sources? Thank you.

Eduardo Alcaro, CFO

Hi, Neha. Thank you for the question. Regarding your first question, we are not considering the top-up of coronavouchers in our TPV. We are only considering payments that happen in our system. We find it hard to ascertain any particular figures, as we’ll never know exactly how the top up impacts TPV. However, we're seeing significant growth and taking market share from the industry. On your second point about PIX— it allows us a new payment method where we could drive take rates for our merchants and A QR code collection is a game changer for our platform's expansion.

Neha Agarwala, Analyst

Okay, thank you so much. If I can ask one last question. In terms of competition, we’ve heard that in the past few months, some competitors like MercadoPago have been quite aggressive in terms of acquiring new clients and distributing their POS machines. Could you tell us a little bit about how you see competition in the past few months evolving in your segment?

Ricardo Dutra, CEO

Well, Neha, as we pointed out in previous calls, the long tail market in Brazil is still mostly untapped. I can’t say how much competition is changing in pace, but we are pleased with the addition of 250,000 new merchants in only 50 days in Q3. We’ve had record sales in June and July, pace of growth has been robust and we are not feeling competitive pressure. We conduct regular research among our merchants, and many have expressed they aren’t leaving us to go to a competitor.

Thomas Tenyi, Analyst

Hi, everyone. Thanks for taking my questions. I have two. The first is on net adds in the merchant business. Before the crisis, you signaled a similar number of net adds this year as last year; but with 300,000 net adds until mid-August, this indicates a much stronger trend. I wanted to get your view on whether you have new expectations for net adds in Q3 and Q4, given that this strong pace is likely to continue in the following quarters. Secondly, if you could share how many of the net adds were clients utilizing payment links, that would be helpful, giving us a sense of the merchants you already have without using a POS machine. Finally, has there been any change in churn dynamics in Q2 and more recently in July and August?

Ricardo Dutra, CEO

Thank you, Thomas. Yes, you are correct. The trend has surpassed expectations with net adds, and it stems from both our investment and the expanding market. Our brand retains consumer trust and attracts new users, many of whom didn’t accept cards prior to joining. Currently, we can project over 300,000 net adds for Q3, as we’ve already hit 250,000 in just under two months. As per your second question about payment links, the majority of these new merchants are utilizing POS devices, although they can also use links for transactions. Lastly, we have not seen any significant spikes in churn during the pandemic, and we are witnessing improvements as the economy reopens and businesses begin to bounce back.

Jeff Cantwell, Analyst

Hi, thanks for taking my questions. I just wanted to circle back on PagBank, can you talk a little more about growth in your user base? You now have over a million consumers using PagBank and you're talking about another 900,000 net adds through August. So it sounds like you're on track for another record third quarter. What’s driving that growth, and do you think those consumers are using PagBank as their primary account? I want to get a feel for how ingrained that user base is. Second, it's really interesting to see your strategy on partnerships with PagBank. Do you think the TikTok partnership can grow into something meaningful, and can it help accelerate the number of customers utilizing PagBank?

Ricardo Dutra, CEO

Hi, Jeff. Thanks for the question. You're right; we are poised for a new record in PagBank net adds for Q3. In Q2, we added over one million PagBank consumers. In our research, we’ve seen that a significant number of these users view us as their primary bank—though we are not disclosing specific figures. Factors contributing to this include our consistent rollout of new products and features since our launch in 2019, as well as market shifts towards digital banking during the pandemic. As for TikTok, it’s still early to gauge significant returns, but establishing our brand amongst millennials, who are heavy users of TikTok, aligns with our strategy to capture a younger demographic, so we expect it will be mutually beneficial.

Operator, Operator

Thank you for your questions. We appreciate your participation. We’ll now proceed to our closing statements. Please go ahead, Mr. Dutra.

Ricardo Dutra, CEO

Hi everyone. Thank you for your time today. We hope all of you and your families are safe and healthy. We look forward to seeing all of you in person as soon as possible. Thank you very much for your time.

Operator, Operator

Thank you. PagSeguro's conference call is concluded. Thank you very much for your participation. Have a nice evening.