Q3 2021 PagSeguro Digital Ltd Earnings Call
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Good evening.
My name is Greg and I'll be your conference operator for today.
At this time I would like to welcome everyone to Park Bank Bugsy Gurus webcast results for the third quarter 2021.
This event is being recorded and all participants will be in listen only mode. During the company's presentation.
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Before proceeding let me mention that any forward statements included in the presentation or mentioned on this conference call are based on currently available information in fact bank proxy groups current assumptions expectations and projections about future events.
While pack bankruptcy grew believes that their assumptions expectations and projections are reasonable in view of currently available information.
You are cautioned not to place undue reliance on these forward looking statements.
Actual results may differ materially from those included in Peg Bank bags girls 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 packed bankruptcy groups registers.
<unk> statement on form 20-F larger filings with the Securities and Exchange Exchange Commission, which are available on pack bankruptcy Gurus 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'll turn the conference over to Ricardo Dutra, Chief Executive Officer.
Mr. Dutra you may begin.
Presentation.
Yeah.
Good evening for example every one.
And thanks for joining our third quarter results Conference call Tonight I have here with me are two shrunk our chief financial Officer.
And as shown in Miami, our Chief operations Officer and Erik.
Eric Oliveira, our head of Investor Relations.
Let me start by giving you the highlights of this quarter.
Recordkeeping win both acquiring and banking.
Record revenues and EBITDA in the second best non-GAAP net income.
Only behind Q4 of last year.
We will see more detail throughout the presentation.
We could debate about COVID-19 in Brazil.
Why open them because not fully behind US we have we started to see signs of the economy reopening in the back of the vaccination in Brazil.
You have been seen a higher acceptance of vaccines in comparison to other countries.
There is also campaign to give extra shots to reinforce the immunity of the elderly and people with high risk disease or medical conditions.
However, as a consequence of this almost two years of COVID-19.
Brazilian macroeconomic scenario changed very rapidly.
Inflation rate went up above 10%.
The unemployment rate continues to be above double digit.
In the interest rates are increasing faster than the market expects.
Regardless of these macroeconomic challenges.
Our track record gives us confidence, we can navigate very well during the crisis and grow our businesses.
Our quarterly results one more time consolidate our winning strategy to continue to invest in technology to make Brian's lives simpler.
While guaranteeing as safe ecosystem, driving a profitable growth.
And increasing revenue and profit diversification with cross sell and upsell of gigabit products.
Our revenues have accelerated driven by our new growth initiatives, mainly in serving larger merchants and long tail and cross selling Piggy bank offers for merchants and consumers, while we attract a mortgage were shot fired client profile.
This quarter, we launched the automatic payment called debit Automagical, Portuguese DDA and several new partnerships targeting the gaming community.
On top of that several milestones were achieved in our bag invest initiatives.
We now offer seven investment funds and several cities to foster our deposits.
We also have a Brazilian treasury bond trading platform in our home broke trading platform for equities is started to rollout. This week and we expect it to be a bill for all clients and to the end of November.
On the Higgs Rotary front, we continue to see new regulator, fostering competition, which could create opportunities for bags.
Therefore.
Our investment thesis remains the same we will continue to combine the best balance between growth and profitability, among Brazilian payments and Fintech space while.
While we prepare our company for long term, where we expect to have a larger and more profitable company.
It's only the beginning.
We also know credit zone of the key drivers to achieve larger revenues and profits in the future and.
And we are one of the few players in Latin America that has been building gradually and consistently a very diversified credit portfolio with a healthy asset quality.
We have a seasoned team exclusive data and the right credit policies.
There is no need to rush or our main goal is to build up a solid credit business.
One more time authorized reinforce and I'm very encouraged by the recovery trajectory and pleased with the momentum in both businesses actually grew and Peggy Bank.
Finally.
Nothing of this would have happened without the confidence of our shareholders.
A commitment of our suppliers and the best and most committed team working hard everyday to promote or emission being part of the financial life cycle of every Brazilian citizen promoting mass massive financial inclusion neuro country. Thank you very much vagabonds possibility.
That said, our tool and I will present, some slides and who have Q&A session again.
So turning to slide three.
We highlight the achievements of the third quarter.
Our record total revenue of $2 8 billion Reais up 56%.
In the blocks below we can see bank bank revenues, reaching almost 240 million reais in acquiring revenues, reaching $2 5 billion reais.
All time high consolidated to PV off 126 billion Reais.
86% with peg at banks to PV, reaching an impressive 59 billion reais growing 158% versus Q3 2020.
Our quality PV grew 58%, excluding Corona voucher, reaching six 7 billion reais with hubs TPB growing very rapidly and reaching around 15% of the year to date acquiring PPV.
Adjusted EBITDA of 742 million up 40%.
With acquiring adjusted EBITDA, reaching $818 million and begged bank adjusted EBITDA, reducing losses as a percentage I can make revenue and increasing its margin gaining traction to reach to be accretive in the coming quarters.
Non-GAAP net income of 419 million Reais up 20.
27% year over year.
Capex per sales went down from 32% in Q3, 2020% to 15% in Q3 2021.
Moving to Piggy bank in September our active clients surpass it $12 million driven by a 1 million net additions in the quarter, while active motions totaled $7 7 million.
Our credit portfolio reached one 6 billion Reais in September with NPL 90 under control with new cohorts. Those after August 2020 operating at single digits.
Total NPL 90 is running at low double digits.
Turning to slide four we present banks he grows highlights our acquiring business.
Our according to PV grew 58%, excluding Corona voucher.
Or even by our successful execution to serve not only long tail merchants with excellence, but also smbs through our hubs, increasing our market share that Richard between nine five and 19, 7% as we can see right below the chart.
Chart on the top right, we can see our a quantity PV growth is accelerating versus previous years and growing 63% year to date, a hand of 45% guidance, we gave last quarter.
The positive trends remain and we are happy to announce that in October we reached a new all time high daily to PV for the third consecutive quarter processing more than 1 billion reais in payment in one single day.
In Q3 erected motions reached $7 7 million.
As the chart on the bottom right shows our gross additions remain healthy in comparison to previous years.
However, the net adds were impacted by a higher mortality relates to lock down a higher churn related to wildcard news flow during the second and third quarter of 2020.
Besides that is worth to remember that there is no impact on acquiring TPB trend as for active motions, we consider at least one transaction in the last 12 months.
Moving to slide five.
Acquiring revenues grew 52% in comparison to the same period last year or 35% on a two year CAGR basis the.
The growth was due to the growth of our motion base in our successful execution to serve smbs throw hubs.
Despite our smbs motions and have lower take rates. There tpb's are five times larger than long tail and that's why our net debt rates maintain a flattish trend in comparison to the previous quarters.
Bottom left.
As the client mix is changing towards larger emotions combine it with a larger share of wallet. We can see the growth of TPP promotion, increasing 18% versus same period last year.
Our adjusted EBITDA reached at 818 million Reais, a 35% growth year over year.
Despite the higher investments to rollout of our hubs and continuous improvements in our payment services to our emotions, we were able to gain market share consolidate our position and increase EBITDA.
Moving to next slide taking.
<unk> taken the opportunity to explore in the previous slide I want to share the results of our hubs evolution in slide six.
Hubs deep UV continues to deliver a strong growth and represents approximately 15% of year to date, apparently PV outpace.
Outpacing the best estimate for a modest due to the economy reopening and a strong execution to serve larger merchants combine it is a powerful competitive advantage, which is Peggy bank.
I'm also happy to say that in October we reached more than 300 hubs fully operating.
At the same time, we're also observing hubs breakeven between three to four quarters and pay bags between four to five quarters.
Our software solution reach its one 3 million subscribers or 17% of stags active motions.
Last quarter, we announced an conceals acquisition one of the most disruptive impact in 2021. According to Daily Finance magazine, which is speeding up our constellation product roadmap.
This will also help us to expand our constellation software.
Offering to Smbs along to clients, which were not served by our previous solutions or the tech.
Moving to slide seven.
Value Bank revenues continues to present healthy trends, reaching almost 240 million reais up almost 80% year over year with better trends in the adjust EBITDA losses, which had a negative margin of 58% in 2020 versus a negative margin of 32% in Q3 2021.
<unk>.
We had net addition of 1 million new <unk> clients in Q3 2021, surpassing the Mark of 12 medium Peggy Bank active users being 46% of this client's composite Michael Suez.
Broad square user remained stable versus the same period last year, despite the healthy growth in number of new clients.
Top right.
<unk> gross take rate improvement of 31 basis points compared to previous quarter, reaching one point, 93%.
This is a result of the increase of monetizing multi BV as we shown sharp bottom right increased 52% year over year.
Moving to slide eight quick update regarding initiatives to improve client convenience and experience.
During this quarter, we closed a partnership with big brands that are now available at our <unk> shopping suggests booking dot com.
Aliexpress and recognize and gaming company suggests Xbox Playstation entity.
Finally.
Maggie invest assets under custody and deposits, surpassing 6 billion reais.
88% year over year, driven by our increasing number of clients and new products available.
In September investors active clients were 391000, and we are offering more than 70 investment funds and our platform expecting to reach 100 funds by year end.
We also have financed by bank Cds in two of them with credit card offers using CD balances of collateral.
In September we launched the treasury bonds trading platform and this week, we launched our homegrown trading Vodafone for equities combined with free financial education content to explain the basics of investments for all our clients now I would like to turn the conference over to our CFO, who will talk about.
Our credit portfolio and our financial results for this quarter are two please go ahead.
Thanks, Ricardo and good evening everyone.
Following our presentation in the slide nine September ended with a total credit portfolio, reaching one 6 billion of Harris being 57% of working capital Lawrence 39% of credit cards and four per sample order credit products. The performance is improving day after day.
Bayesian on efficient credit models experiences team and several learnings from the results of past cohorts.
All our credit products grew very fast in the last 12 months, mainly due to low credit origination from April to August 2020.
Always been carefully with asset quality.
Our delinquency rates continued to be under control and trending down due to the phase out of the FX related to the Lockdowns and the new graduate models adoption in August 2020 onwards.
The cohorts on the new credit model are presenting a single digit NPL 90 days ratio month.
Maintaining our asset quality, while we expand our credit products. The total NPL 90 days are running at a low double digit this quarter, we launched the overdraft to Laurence.
Offering one more product to our best merchants. It is important to have a broad portfolio to offer the right product for the client needs.
Moving to slide 10, we present, the cost and expenses analysis, our non-GAAP total costs and expenses totaled $2 2 billion Harris up 66% year over year.
As a resection of volumes growth and investments to develop and launch new products and services to merchants and consumers and expenses to expand sales channels to serve every size of business in Brazil.
On cost of sales and services there was an increase of 42% compared to Q3, 'twenty 'twenty, mainly related to higher transactional costs, reflecting strong acquiring TPG growth with more credit card mix and higher G&A due to investments in R&D.
Technology, and Pos devices, selling expenses presented an increase of 95% year over year, driven by higher personnel expenses for the expansion of our hubs salesforce and for biobank teams and higher marketing expenses to consolidate boggy bank.
Our awareness.
The most relevant increase in expenses was on financial expenses line due to higher working capital needs to fund a similar rate of growth of prepayment to PV and higher base interest rate debt grew from below 2% per year to more than 6% per year.
Comparing to Q3 training the positive working capital needs due to Lockdowns and acquire otp remix towards to debit with lower duration of credit transactions help it to reduce financial expenses last year. It is important to mention that for air.
300 basis points of increase in the Brazilian interest rate. The net income is impacted by approximately 17 need on Harris and.
And financial expenses increased 90 to 110 million both in annual basis.
Moving to slide 11, despite of the challenging environment for financial expenses due to higher base interest rates. Our team delivered once again, a solid quarterly result in.
In the top left our consolidated net take rate, reaching two point, 44% slightly better than Q2, 2021 and 90 basis points higher than Q3, 2020, driven by better TPG mix with more credit transactions with them.
Lower share of debit transactions and help you buy a larger boggy bank revenue.
In the bottom left chart. The adjusted EBITDA achieved 741 million Harris on third quarter with a growth of 18% versus last quarter.
Adjusted EBITDA margin humans flattish at 26, 7%, excluding the change in card scheme fees, our adjusted EBITDA margin was 41, 4%.
In the top right graphic we share our strong cash position with a positive balance of $8 7 billion of Harris reinforce it by the issuance of Piggy Bank Cds to fund the credit disbursements.
This positive position increase its $500 million in comparison to last quarter due to a rise of accounts receivables from issuers.
Finally in the bottom right.
We share our capital allocation during the third quarter of <unk>, we invested almost 426 million of Harris being 52% in P. O S acquisitions, and 48% in R&D to develop new products features and services as a percentage of Rev.
<unk> Capex decrease at 18 percentage points, reaching 15% versus 33% in the third quarter of 2020.
Moving to the last slide of this conference call as Dutra said in his initial remarks, the positive trends of this year led us to review, our acquiring TPG growth guidance from 40% to above 45% last conference call as we continue.
To observe a very positive trend, we are increasing the bar to between 50% and 53% in 2021, we project a reduction of capital expenditures.
Dominion he is setting a new level of $1 7 billion Reais forges year, optimizing our cash flow generation finally, as likely update on D&A levels expected to end the year between 800 to 900 million has.
After we move to the Q&A session I would like to turn to Alexander <unk>, Our new Chief operating officer to say some words.
Thanks for color.
Hello, everyone and thanks for joining our quarterly results call. It's a great pleasure to talk to you and let you know a little more about me.
I've been working in the payments industry for 28 years start to my career at credit card and Britta car.
<unk> had different roles on sales planning product <unk>.
Right after that I spent a 15 year tenure at Mastercard, where one of my main accomplishment was the implementation of an old financial institution license.
Graham to foment the development of new issuers across Latin America markets, among retailers prepaid program managers and Fintech.
In January 2015, I have joined it bugs are good with the mission of building the acquire and <unk> businesses.
It has been an exciting journey since then transforming their card acceptance landscape in Brazil by including millions of underserved that businesses and in your view does in the electronic payment system and providing them simple ends Mark financial services.
I have no doubt after almost seven years with impact bankruptcy water that we have developed the most dynamic fintech in the market, which is capable to generate more value for all the stakeholders in a faster way.
We are very proud of our capacity to innovate execute and deliver strong results I'm very excited about my new role as CEO and we will keep our focus on growing profitably consolidate bank developing new capabilities to simplify our customers' lives.
During all of that in a safe and seamless way and most importantly, with the passion and excitement of our team.
Thank you.
We went out of presentation and we can start the Q&A session.
Operator please.
Ladies and gentlemen, we will now begin the Q&A session.
Do you have a question please press star one.
If at any point to your question is answered and you would like to remove yourself from the questioning queue.
Please press star two.
Our first question comes from module P. A with bank of America.
Good evening, everybody congratulations on the quarter and thank you for taking my questions I have two questions.
First one is on the prepayment business right as you showed.
Net financial expenses now represented 22% of your of your revenues and this was like 3% one year ago.
So I was wondering about your ability to pass on these higher costs into your final prices or your desire to do so.
So that's question number one question number two is with regards to your hubs strategy. You showed right. There youre typically via hubs is already 15% of total PPV you were guiding for 6% to 11%.
So, it's clearly going better than expected.
You can you give us some color on why this is going better than expected.
Said Ryan is because part of this is because of Baidu bank you offering the banking solution combined.
You also talked about that you opened 300 hubs.
So maybe you can help us understand if this 300 hubs was better than what you expected what are the targets and number of hubs and why not change the guidance for for the hubs PPV.
From six to 11 through something closer to the 15% level that youre already seeing thank you.
Hi, Mario this is Ricardo Thank you for the question good to Hugh I'll start to answer here.
The first question and then I can go to the second one.
Or bedroom, let's make it better I will start backwards I'll start from the hubs and then I'll go to prepayment because artwork and can also help me here.
Well in terms of hubs as you said, we are doing better than we expected we expect it to reach 11% and the best scenario now we already had 15%.
Part of success is because we cross sell.
Acquiring with <unk> bank.
The other reason is also because we we took advantage of the pandemic and we focus to accelerate and we expect it to have 200 hubs by the end of the year and we could anticipate that so we have more people in the streets.
And also because when they made this is assumptions about the hubs kpis.
We thought they would be much more difficult to get clients from competition than what we see.
In the streets the NYSE in reality. So we we as you can imagine all clients from hubs. They are ready to accept cards. So we we don't go there and make the inclusion of disclaims different then why do you have a long tail. So we should go there we need to take clients strong competition.
We thought they would be harder.
But when we went out there we see.
That there are many many motions very unsatisfied with their current providers.
And that's why we are being more successful than what I thought and we always say that we are very very very focused on execution and hubs is.
Sensually that she'll have people on the streets, making the right route salt into the right motion is the right offer and following the productivity of all of the sales Force Genius Award. So that's why we're doing better in the hubs.
In terms of repayment.
I know that when you alluded to just before we move to prepayment then if I can just ask a follow up follow up on behalf of <unk>.
Sorry about that.
Can you talk about your pricing been since you're taking this.
Client trunk computation Aida prices similar to the competition.
It's very similar in some cases, even a little bit higher.
Because as I said.
Many motions are not satisfied with their current providers.
And also we bring back bank together so.
That's what we are not we know that is not the best way to compete in prices to have this price war because at the end of the day, everyone is going to lose because of our decrease the price competition will decrease next week and then you can imagine what what's gonna began of that so.
The sales force team has some.
Offers they can be they can offer to the motion.
Buddy control that very much to avoid this price war.
I'm not saying that in some cases, we could be aggressive, but that's not the majority the majority of the cases, we try not to competing prices.
Okay. Thank you thank.
Thank you in terms of prepayments artem.
Artem can complement here, but just when you look at the numbers the 3% versus the 22% I guess, it's kind of.
I would say I'm biased here because last year in Q3.
We had a strong position of cash in the company because of the COVID-19.
So when he had a deceleration of PPV last year.
We started generating cash so because the prepayment decrease it.
So we started generating cash we had a strong position of cash that's why we look at is only 3% and now it's 22% because I guess the two percentage is a outlier from from last year.
The other reason that is increasing as you can imagine is because of debates interest rate of the economy in Brazil.
And also because we are going to PV and we need to anticipate so those are let's say the main highlight here, but I can give you more color Michael.
Good to talk to you in it such as banking and just to complement what Dutra said.
In 2020 before.
Just in the beginning of the Covid, we we had a movement a year or two advanced receivables with a bang.
Issuers and we have prepared all of our cash flow to two followed the next two.
Amongst them in the Covid, because it was difficult to predict what would happen with the word on the time and so we had a good cash flow until Q3, 'twenty and also the mix of transactions move into debits that help with those in the in.
In the case of our cash flow.
The duration of credit to reduce it.
And also when we take a look in Q3, it's only one part of the financial expenses that we have is related to the volumes of our TPG that grew very fast.
And based on the model that we have here.
Also.
The prepayment volumes that we had that requires more working capital and so on.
The cost increases.
Okay.
What I'm trying to get at it seems to me that the profitability of the prepayment products is lower than what it used to be.
Just because your funding costs are going up with the higher selic rate.
No.
Are you willing them to continue to operate the prepayment business with a lower profitability or would you be inclined of increasing the prices of your prepayment product to compensate for the for the higher financial expenses.
Good day, and I forgot to mention Mario we.
First of all we are we will be rational here, we tends to increase the prices because at the end of the day the basic interest rate as the raw material for us and for our competitors. So.
We intend to increase the prices of course, we also followed the market what's going on with the market. We see some of our our competitors Delaware had a prepayment lowered than ours come into the same level that we have.
We are following that very close, but we have the ability to increase and to be sincere I think theres going to be an avoidable not.
Not increase because.
We are going into 17, we you have right now is 775%. Some people are saying that next meeting of coupon December you increase.
200 basis points. So we are reaching close to 10% 975 so.
It's gonna be unavoidable to increase we have the ability to do so and we also imagine or expect that competition will follow this price so.
We we have today, a lower profitability designation, but do you have the ability to increase the price and pass through.
The motions.
No that's very clear.
Just to be clear then when you said on your on your remarks that 100 basis points increase in interest rates will have a negative impact of $70 million on your net income is assuming nothing else changes rate but.
At the end of the day, there's impact could be lower.
Yes.
Yep.
Okay.
Thank you.
Our next question comes from Peter La Barter with Goldman Sachs.
Hi, good evening, thanks for the presentation and taking my question also.
Quick questions as well, one I guess a bit of a follow up on the financial expenses just more of if I look at your on your balance sheet.
I mean, clearly you've got a big increase in deposits right.
$7 billion in deposits and I think.
On average across the Pago was about maybe 50% of the week because I think you were paying maybe 200% with some clients.
One.
Are you, reducing what youre paying on deposits because I mean can you get to pay 200% its a week at 2% or so we get alright, eight percent's a week it becomes harder.
I hope I think a little bit about the cost of deposits.
Also what else on the liability side could you have bought 11 billion in payables.
Part of the working capital that Youre, saying that as interest rates increase but you have to pay on those payables, increasing just to understand the balance.
The balance sheet perspective, and how that's impacting your financial expenses and then my second question.
Do you think about I guess, the profitability and the margins so a little bit of improving EBITDA margins kind of consistent with what you said last quarter.
How should we think about that maybe for next year I pack bank, becoming more profitable you said the hubs.
Three to four months to kind of breakeven I think five months they start generating profits.
Any color you can provide on the evolution of the margins from here given the rising rate and the investments we continue to make thank you.
Hi, Tito. Thank you. Thank you for the question regarding the $6 2 billion Reais in deposits as I said close to 7 billion here we.
We do pay some percent of CDI for some of the positives.
We also are following that very close we don't have the plan, let's say to decrease right now because it helped us to get new bagging and clients.
We know it is important for us to make bags bank as the main bank for our clients.
And at the end of the day the $6 2 billion is not that expensive when we compare with <unk>, we need to anticipate in the <unk>.
<unk>, let's say your acquisition cost perspective today is something that we we can keep doing it for a while but of course, we're going to follow that if reached 10% or 975 is information we need to make the calculations here again, but that's something that we can also adjust at anytime.
In terms of balance sheet, if I got your question right.
If we if we need to anticipate more of the receivables that you have is that right or are you will you will you ask a different thing just for me to be clear on the answer here.
Yes, I think it's along those lines right just to understand.
We're on the balance sheet, and we see sort of the impact of higher interest rates is it your payables are going up and you have been paying more on those payables you have about $11 billion in payables.
In this quarter.
That balance of what quality is part of the other part of what's causing those financial expenses to rise.
So related to to to the payables, yes, we expect that the payables will increase.
Because we are considering there.
Deposits that we have for the company and so the motions.
The morale in our biomarker called his book up there and so our expectation for the future years is growing those numbers.
To help us to have got better.
So we're funding okay. Just one thing that is important here.
This went when Selic was 2%.
And we anticipated from the banks.
Some banks charged us like 2% plus a few basis points.
Or some banks chartered as a presenter of CDI.
When Selic goes to let's say this 8% that it has today, it's very common that the as a percentage of sonic.
Do you anticipate when did the prepayment is lowered because at the end of the day. There is theyre looking more for in spreads and for the nominal basis point. So what I'm trying to say here is that 120% of two <unk>.
I sent a sleek, it's 40 basis points, 110% of 8% silica 0.8 basis points. So when the base interest rate of the economy goes up we can also negotiate better with banks to decrease as a percent of all CDI because at the end of the day, they're looking much more nominal spread than the <unk>.
<unk> itself. So that's something just to be to bear in mind here.
And you asked about margins as yet.
Related to margin I want to reinforce that as as we mentioned in the last conference call Q3 will be better than cure to true and with it.
The expectation for Q4 is is the same that we disclose are there and we are we.
We believe that we can have a bed a slightly better margin. So we can compensate their financial expenses definitely hiring in Q4.
Thank you I'm looking in 2022, we are more focused on nominal growth.
And you know that margin for next year will depend on pricing and market conditions.
Core operating business if conditions improve it it's possible have a slightly better margin for next year.
You know that the macroeconomic conditions in the countries. It's tough right now and we probably will continue in 'twenty or 'twenty two.
Of that we have we will have a hard electron process next year that will create more volatility and stability in the market.
But what do we expect at the end of the day to do is to have.
Better margins than what we're seeing right now I'm, not saying, there's going to be much much better but why do you have in mind is to have a slightly better margins of course, depending on the all the variables that Arturo just mentioned just like elections.
And unemployment and inflation is coming up.
The basic interest rates ended and stuff but.
Why do you have in mind is to get a better margin is something that we saw in Q3 versus Q2. This year and we'll probably see in Q4 versus Q3 as well.
Great. Thank you that's helpful. Maybe if I could just one follow up I guess a bit on tag Bank and.
Do you still expect to breakeven next year and I'd say that in the context.
Next question about capping.
The interchange on prepaid.
Big revenue driver of that I mean does that change anything at all about when you expect tag bank to become profitable.
Because of that.
Keto it didn't change our plan the idea is to be breakeven by the end of next year.
The public hearing is says the name is clear here as a public hearing theres nothing define it.
We can update this.
Date of breakeven as we have more information, but you didn't change anything and remember that regardless of the results of the public hearing for the company as a whole.
The impact is negligible because we have the two sided ecosystem. We have the two sides business. So to say, we have the acquiring business and the issuance the card issuance. So if you have a.
Slightly better conditions in one side is going to be worse than the other side and vice versa. So for the company as a whole is going to be negligible, but let's wait for the public hearing and then we can give more information, but it didn't change that plan to be breakeven by the end of 2022 and Tito just let me remember you that we have been diversifying.
Our bag bank products, which has been reflected into our bag bank revenues breakdown, okay with crop products, such as credit underwriting gaining more traction with our health asset quality deliver.
Delivering very good results and revenue diversification, so it's going to be negligible for us for 2020 June if the public hearings approved without any change.
Great. Thank you for that and I appreciate it.
Yeah.
The next question comes from Bryan Keane with Deutsche Bank.
Hi, guys wanted to ask about.
The merchant count obviously, the merchant count was lower due to some churn in.
So mortality of some of the merchants.
Just talk about what you expect going forward does that.
Change much it doesn't seem to be impacting volume growth volume growth still really healthy.
Just curious on how we should model out for net merchant adds and then secondly on the financial expenses and the higher rate historically at some point does that usually get passed on to the client and it's just a timing issue.
I think the market's a little bit confused of how much you will have to permanently at these higher rates going forward versus I think historically, you've always just passed them on eventually to clients and so that a lot of that expense will go to a to the merchants.
Yeah.
Hi, Brian good to hear thank you for the question.
We've already near I'll start backwards here, so the financial expenses.
It is a matter of timing for us to increase the price.
As I said, we are following that very close.
But.
To me and we are in the discussion here is going to be unavoidable two zone through the to the motions. So I know the market is confusing because we don't want to give more details what's going to be the trigger or when we're going to do that but.
We have this ability to pass through declines.
It's going to be an available to do that in my opinion.
Regarding the net adds.
Youre right. We had a net adds that is lower than what we used to have an inquest quarters.
There are two main variables here.
One is related to the mortality of businesses I guess.
That's a behavior that is happening not only in Brazil, but also around the world. There are many many small businesses closed their doors.
And of course, we're going to see is.
Mortality coming to our base in terms of gross ads. We are doing well we are doing same day I'm used to doing the best.
In terms of gross adds so we keep selling devices sing level, but of course, we had these mortality from from the past that it would impact our churn. That's the first variable in the second one is that remember we bought a wildcard in July 2000, and plenty and because of regulatory.
Process says when you only codes.
Get the company to start managing the company in November.
So there was all this negative news flow about the wildcard in Germany, with these accounting and stuff and so on and of course, there are some clients from wildcard I decided to work with another provider and we are seeing this churn right now and we will probably see this churn in Q4 as well from a wildcard.
That's not something in my opinion is structural because we are having the same gross adds I would use to have in the past.
If something more.
Youre going to see for let's say a few quarters, maybe Q4 and Q1 less next year, let's see.
But the volumes are coming because at the end of the day, we are measuring the active motions looking for 12 months and when we are having this call. We are looking for PPV only for the quarter. So they're just disconnection what I can say you is that when you look at the 90 days active merchants it is growing quarter after.
Quarter. So of course, we would like to have debated as big as possible but.
We have this disconnection did 12 months versus the quarter and also the mortality from Covid and from wildcard Whitestone last year Q4, we're going to have the same.
Impact from wild card as well.
Just anticipating here net adds in Q4 is going to have the same levels. We are we are having here probably.
Okay, great. Thanks for taking the questions.
Thank you Ryan.
The next question comes from George <unk> with Morgan Stanley.
Hi, Jorge.
Congrats on the quarter.
Got it.
Two questions if I may.
The first one is on.
On top I think which has.
Have an impressive amount of clients.
Congrats on Bob.
And I wanted to see if there's any way that you can help us understand.
Similar to say, Sean profile of the client base and how the different cohorts.
Improving over time and I know.
About cohorts that business that maybe two years old is probably not the best way to think about it but if you could just help us understand purely client versus today clients.
Our cross selling metrics that ARPA per client the garage offer great profit per client.
Help us understand the velocity at which this business is becoming.
Revenue profit generator.
Help us just understand how quickly that will really add to the overall business because I think that.
Many of our clients.
I thought about it a year ago, you were probably seeing that.
Maybe further out into the future and so congrats on that.
And the second question was on.
And this whole issue about the higher prices.
So I'm I'm hearing that ratable increase.
Increased prices every double wall.
Just wondering.
You know what what are the triggers for that half of it right. So why is it that you're increasing prices today or why is it that you haven't decided not to increase prices. So you kind of like.
In between.
Between a and B.
There is no clarity and so wanted to see if you can help us understand what would be the things you need to see from here in order to be surgical about increasing prices or the other way around what are the things that you want.
You do need to see northern Virginia lottery grease prices because it doesn't seem that there is.
The harder decision made yet or.
And maybe it's because you don't think rates are going to be high forever.
Could also be the case, whereas you know Rachel Levine single digits anytime soon until then.
Many more years old glass or many more months Oreo.
Overall, lower margins and so help us understand how to think about it.
And at what point do you move one of the things you need to see to more thank you.
Hi, Jorge Nunez Ricardo thank.
Thank you for the question and good to hear you we regarding Piggy bank.
We have many imagine because I assume as you mentioned during your question.
We measure the products per user that we're giving disclosure for for U. Two eight per per user we followed the cross sell with follow the the first product that users use here, we follow how many of the new clients order hards activate using <unk>.
One.
But going straight through to the end here.
You look at the <unk>.
The monetization per client the Europe in the quarter.
If I'm Lucky here and the math is something like 80, 283, Reais versus 70 677 in Q3. So we are doing the best combination here, which is grow the base.
And grow the revenue per user.
We know that as we mentioned before that the monetization of sample bank clients takes a while to start.
Because they come here they start.
Using the account the only send money from one side to the other and we don't make.
Any revenues in this type of activity. So it takes a while for them to test their balance sheets works demos.
The majority of the clients, we are bringing they already have Omega colt with another player. So the the kind of testers before.
Users more often or used bike bank as the main bank. So that's why the amortization it takes a while but we can look at the airport that is growing quarter after quarter and the number of users is growing as well.
Regarding the price.
We did that in the past already we increased the prices in the best.
As I said before to me, it's going to be an avoidable to increase the prices are just waiting for let's say right moment. We are discussing here was going to be the new price and there are management discussions here.
And following the basic interested of the economy. We just don't want to let's say give more details I was going to be the new price when youre going to do it of course because of competition is strategic.
Seasons here, but we do have the ability to do that.
We always say that mainly Dillon database is not price sensitive.
They just want to sell as fast as possible and as I said, there's going to be.
Avoidable to two two which includes the prices we are in the discussions here.
And once you have more decisions, we can give more color on that.
Okay.
Alright, Thanks Niccolo.
Thank you Holly.
Our next question comes from Neil <unk> with HSBC.
Okay.
Hi, Thank you for the presentation and for taking my question.
Really two quick questions first on the hat business should.
Should we expect that the investments that are good at adding hubs both in government.
Personnel and opening up new hubs.
Are we done with that already by blood QUADRA or should we expect COVID-19 is on that front in the fourth quarter.
And the second question is on credit.
We saw some.
Have a good pick up in the in the credit book this quarter, but what kind of growth should we expect in the coming quarter Robin remarked score on my math.
That more than likely soft macro environment that you're seeing or the club.
There's an alignment where you are comfortable running and we can see good growth in the coming.
Coming here.
We are not as much.
Although the shape that you have related to couldn't hear Mike How're you.
Monetizing you couldn't hear Mike on your platform.
Thank you so much.
Thank you for the question you had with <unk> as well.
This is Ricardo I'm going to answer the first and the third question and then <unk> can talk about the credits.
Well talking about the hubs, we launched already 300 hubs up and running.
With these hubs we are too.
Uh huh.
We have more than 80% of the coverage in the Brazilian GDP.
There will be new hubs here and there, but I would say the that's going to be marginal the majority of the hubs we already opened.
We are in the main capitals domain Cds, the largest cities of the country.
In places with more.
Demographics, I'd say it makes sense for us with more people.
But there could be some hubs here and theyre, probably smaller hubs to serve some clients in specific cities.
I would say the majority of the investment is already done.
In terms of consumers, we we keep using the same drivers that he used to to generate those revenues, which is the main one is the interchange of the cards.
The other one is the transaction of their car when they use their cards, we make some revenues depending on the activity. They do and also for some clients. We have the the credit with the invest in RCD, we'd give them credit card. So that we receive interchange and other fees from from credit card.
We're also launching.
This week the.
The home broker for acreages, so theres going to be some promotion some of the orders that are going to be free and after if I'm not wrong. The second order, we're going to charge. So that could help also the revenues is not going to be transformational, but it could help and also we are launching we already launch actually but it's in the kind of pilot we are not.
He didn't make advertise it yet, but we will do it the multiple cart.
Today or cards are more related or is a cash card.
Or a credit card and the credit card, we limit for for the consumers only for divesting LCD now we are launching a multiple card with debit and credit.
For the consumer's credit is going to be zero at the beginning and then if we decided to give credit to Dan is going to be much more easily or we don't need to send a new plastic to them just.
Make the credit limit available that's something that I also believe it could help.
Also we launched we launched some insurance products and theres going to be more insurance products engineer future.
That could also help.
Monetize the consumers those are the what do you have in mind in terms of product roadmap for consumers in terms of credit book against our token can help me here.
I'd like to say.
Yeah.
I would like to say that there is a huge opportunity in the market as you know 70% of credit.
He's held by the top five banks in Brazil.
And based on the exclusions that we have in our clients. We know that there is a big opportunity to to grow the credit book, but we are not in a rush. We are doing all things in credit step by step learning a lot.
The npls.
Other than than we had before the new cohorts are performing a single digit.
NPL the whole book is in a low double digit.
And if you're in 90 days.
Also.
Based on that we are very confident that we cannot accelerate and.
And the conditions allow us to do that but we are not in a rush. We are doing everything step by step, but the opportunity is too high I would like now to set to you a lever off of our portfolio.
There is a.
A lot of room to grow in terms of credit here and also for our consumers we are not offering.
Credit.
Just just credit with a credit card with a collateral.
So in the end of the year or in the beginning of next year, we will start so some offers to consumers.
Okay.
If I can just quickly follow up you mentioned in terms of monetizing a customized you already talk them into gene can you I didn't make money on that is that mostly from the prepaid.
Please go to the customer and to the consumer.
Yes. It is the what do you say he was cash card is the prepaid card yes.
Got it.
And I'm, sorry that is prepaid credit Chicago.
There is a prepaid prepaid prepaid card yes.
Okay.
I would take advantage of that no. If we're if our let's say worry about the public hearing, but again I just want to take advantage here that everyone is listening to us.
The Dean Pact of the public hearing 89, which is a discussion about this gap.
He is negligible for the company as a whole.
Because the volumes that we have any spending for the prepaid cards.
He is very similar than what he have India acquiring you when we're capturing these prepaid cards using our acquiring because when you're acquiring we received.
We kept your prepaid cards from all the banks in Brazil. So the volumes are very similar.
So any change that you had one side, there's going to be an off site in offset in the other side. So that's why I mean, I just want to take advantage here to make it clear and if it's not clear I can we can say it again just stick adventure for your question.
Thank you so much that's very clear. Thank you so much for the clarification so that.
Jim as I, I am assuming that youre not in Nevada.
And maybe you would think about it in the second half walk ready to I may be off though.
To give credit for our consumers.
Yes credit for our consumers our intention is launch and it starts with credit card in the end of this year or the beginning of Q1 'twenty two.
But remember that we are already offering pay.
Payroll loans for consumers, which is a very low project risk.
It helps to engage clients from consumer our consumer profile into <unk> bank Okay.
<unk> was talking about credit cards, the case, but we already have credit products with low risk for consumers.
Great. Thank you so much everyone. Thank you very much anyhow.
Yes.
The next question comes from Carlo Plateau with UBS.
Hello, everyone.
Congrats on the Arizona and thank you for asking questions. So I have two questions. Please the first is about the SMB strategy again, just to understand better what the profile of these smbs. Today, you mentioned that you are taking share from competition and one of the reasons. It is the combination of a quiet.
In banking, but just to understand before you reach the merchants I believe it's already had a bank relationship before you right. If so are you, saying that they are entirely replacing the previous banking accounts to yours.
And if so what's the reason for dish and issue already originated grudge for them and the second is a follow up on the question about they kept on prepaid cards I understood. What you said about the potential impact, but I would like to better understand your general view up I'll just public hearing.
If you believe it just makes sense and if there is any change any chance of it is not betting and also if you could share. Your first what's the percentage today of bank bank revenues coming from the interchange if it is around 60% and finally introduced actually imposed by the Central Bank. If it does that change your guidance.
After reaching 30% of total revenues coming from bank to bank until 2024. Thank you.
Thank you for the question.
Talking about Smbs.
When you have 300 hubs, we have everything right. We have a everything is going on well you have different type of clients different type of merchants.
But I would say that the ducommun behavior is that why they do have already a banking relationship youre right.
Why the date, we'll see their bag of bank is an advantage and why they come to us because many of them.
We pay fees for the banks in some cases, they don't have good service in some cases, they don't have good products. So that's why they come to users.
Again, that's the average client if they come straight to us.
Probably not.
They start using us they started testing the accounts, they're going to receive the card in a few days and then once they get the confidence that the confidence that the account is okay. The app is working they can withdraw the money and so on they start sending now let's say more money it was and I'm not sure if they cancel D D.
A bank account.
Right after that but probably if they are paying fees. They do cancel and start working with us already negotiated the banks or things like that but you know there in Brazil that even banks that today charge for basic activities.
If you want to make a wire transfer prices. They charge. Some people will say there is peaks, but because there are some limits and so sometimes you need to make this wire transfers and so on so there are many many.
Fees that banks charge for Smbs, and that's why some of them come to us.
Also we have.
Some of them ask it is to have just multiple car that we didn't have and we launch it.
Last week. So that's another thing that we can advertise more and be more close to the smbs.
Regarding on the cap of the prepaid.
Again, it's a public hearing.
Uh huh.
And regardless of the outcome the impact for the company as a whole is negligible because there's been the offset.
Should we change the and also ask you about the 60% revenue swung from interchange of the cards today is lower than that is less than 60%.
Does that change the public here and changed our guide is for 30% of revenues 2024, No you Didnt changed at this point again as a public hearing we are looking for 2024. There are many variables main assumptions in our business plan here to reach this 30% <unk>.
Some of the sanctions we are more conservative some of their some of them are aggressive, but it's a very dynamic.
The situation here and said so we don't need to change that at this point, we don't think it's feasible to change that we are part of the public hearing.
The Central Bank.
What are you seeing central bank. This past years is that they are fostering competition. They try to make the financial system more competitive which is good for us because we are a flexible and agile company Tech DNA as a one so.
We don't see the central banks changing their behavior in terms of fostering competition, which is very very good news for us. So.
It's too early to say the public hearing is going to be over in November 21st.
And we don't know the outcome it could be that outcome is going to be keep saying everything is the same as it is today.
Because central bank is going to look at the impact and so on so it's too early to too.
Uh huh.
The probable outcome, but again the impact for us is negligible.
To me the most important message.
Yeah.
Okay, great. Thank you very much thank you.
This does conclude our Q&A session for today.
I would like to turn the floor back over to Mr. Ricardo Dutra for his closing remarks.
Hi, everyone. Thank you very much for investing the time to listen to us. Thank you very much for the question.
Look forward to talk to you next Thursday in our first bags day.
Have everyone a great night and have a good night and talk to you next week. Thank you very much.
The audio conference for our private bank banks your girls results for the third quarter of 2021 is over thank you very much for your participation and have a good evening.