Q3 2023 PagSeguro Digital Ltd Earnings Call

Good evening My name is Caroline and all the ear conference operator for today.

Welcome to <unk> digital earnings call for the third quarter 2023 at this time all lines have been placed on mute to prevent any background noise.

Should any participant need assistance during this call. These fast start zero to reach the operator.

This event is also being broadcast live via webcast and may be accessed through poverty go to <unk> website at investors Bank Dot com.

Participants may view the slides in any order. They wish today's conference is being recorded and will be available. After the event is concluded I would now like to turn the call over to your host Eric Motivator head of IR. Please go ahead.

Hello, everyone. Thanks for joining our third quarter 2023 earnings call.

After the Speakers' remarks, there will be a question answer session.

Before proceeding let me mention that any forward looking statements included in the presentation or mention on this conference call are based on currently available information and bags to grow digital student assumptions expectations and projections about future events.

While parts of good digital believes that the assumptions expectations and projections are reasonable in view of currently available information.

You are cautioned not to place undue reliance on these forward looking statements.

Actual results may differ materially from those included in parks, who confused those earnings presentation or.

Or discussed on this conference call for a variety of reasons, including those described in the forward looking statements and risk factors of <unk>. Most recent annual report on form 20-F, and other filings with the Securities Exchange Commission, which are available on bikes conditional.

<unk> Investor Relations website at investors Stockpiled Bank Dot com.

Finally, I'd like to remind you that during this conference call. The company May discuss some non-GAAP measures include those disclosed in the presentation.

We present non-GAAP measures when we believe that the additional information is useful and meaningful to investors.

The presentation of this non-GAAP financial information, which is not prepare under any comprehensive set of accounting rules or response.

It's not intended to be considered separately from whereas a suggested for our financial information prepared and presented in accordance with I FRS as issued by the Aes.

For more details the foregoing non-GAAP measures and the reconciliation of these non-GAAP financial measures to the most directly comparable.

<unk> measures are presented in the last page of this webcast presentation and earnings release.

With that let me turn the call over to Ricardo.

Thank you.

Hello, everyone and thanks for joining our third quarter 2023 earnings call.

Once again I have the company, Alex our Seo and our to our CFO.

Which is a three.

I'm happy to announce in Q3 2023, we have reached the largest net income both GAAP and non-GAAP in the history of the company.

In the past years, we have successfully managed the impacts related to the higher interest rates for a longer period, while reshaping our funding structure beckoned by deposits.

More recently, we have been seeing better operating trends and our volumes combined the two Brazilian interest rate decrease which should positively contribute to our funding stretches to keep delivering growth with profitability.

Our non-GAAP net income reached 440 million reais growing 7% year over year.

Despite our increasing footprint motions the largest the long tail.

<unk> to gross profit besides lower take rates or margins continued to improve resulting in 894 million Reais EBITDA.

Reaching the highest margin since Q3 2021.

Yeah.

Total revenue was flattish year over year and grew 5% quarter over quarter, reaching 4 billion Reais.

Disciplined capex deployment resulted in $10 6 billion Reais net cash balance in the end of the quarter.

17% higher than previous year, driven by 36% growth in cash sureness versus Q3 2022.

Going to the financial services session. We have continued our credit underwriting journey closer to improving our risk management models.

We have been exploring new addressable markets by offering collateralize it products and despite the interchange caps impact in our revenues from financial services Division revenues posted a quarter over quarter growth in EBITDA was positive again, reaching 2 million reais.

Peggy Banca Sheen was 56 billion reais driving up deposits to the all time high level, reaching $21 6 billion Reais reinforcing the closed loop advantage beckoned by a comprehensive set of payments beyond cards acceptance, while lowering company's cost of funding.

In payments, we keep growing in a profitable way in our CTV reach it almost 100 billion reais, a 11% year over year growth.

Turning to slide four.

Or a focus on new technologies and product development continued in 2023.

In this slide we shared the main milestones of our company.

In October our comfort executed its first transaction using drugs, the Brazilian destock or is it through the block chain platform embracing dd's joash its resolution.

This month, we just announced in the facial authentication feature for our clients aiming to use our payment link option reinforce our securities proceeds, while improving user experience and confidence.

Yeah.

On payments, we announced the Doe or tap on phone solution fully embedded in peg events that.

Are appropriate our ERP software with more than 1 million users.

We also launched at our collection platform a comprehensive set of payment solutions Korean card acceptance picks QR code and bullet issuance empowering motions to accept all payment options.

On financial services. In addition to product launches for our consumers such as investment options debit cards and so on.

We also launched products focus on Smbs and larger merchants.

This year, we have launched our payroll solution allow intrapreneur estimators the employees they checks in a seamless way.

And we also launched a piggy bank business account.

Allows directly deposits from third party acquirers into Piggy Bank accounts.

Now.

My Best award over to Alex for the commentaries on the third quarter 2023 operational highlights.

Thank you Ricardo Hello, everyone.

We show on slide five that our merchant acquiring business remains solid and through the combination of our superior value proposition and the broad reach of our sales channel, we have been able to accelerate to PV growth faster than the industry driven by our merchant segment.

PPV, Richard almost 100 billion reais growing 11% year over year.

We continue to observe a better to PV growth through the first weeks of the fourth quarter.

M S N b PPV posted 15% growth versus third quarter 2022, primarily driven by Smbs followed by micro merchant.

As Ricardo mentioned earlier, we also noted a rebound to PV growth from large accounts, which is composed by merchants with two PV above 500000 reais per month.

Moving on to slide six being spent on prepaid product.

Which combines payment service financial service through Bank, a bank account has promoted an increasing footprint larger merchants, resulting in 22% year over year growth in <unk> per merchant.

Our strategy to focus on disciplined capex deployment do not interfere.

Pos sales upfront.

In August we presented a record sales level since January 2022, with the highest P. O S activation breakthrough since mid 'twenty or 'twenty one.

Consequently, we reach at $6 7 million active merchants at first glance. The mass merchants loss has been raising concerns about our ability to grow our business and revenues. However, when we consider active merchants with at least one transaction in the past 30 days, excluding dental merchants.

The positive trend is reveal it supported by our PPV growth rebound in all segments and they improve with Kashi earnings generation.

Maggie Bank clients grew 16% year over year, surpassing 30 million clients places us among the most relevant Brazilian financial institutions, adding more than 4 million new clients in the past 12 months as shown on slide seven.

Our active client base, reaching $16 7 million clients, leading to 56 billion Reais impact bank caching composite by peaks and P to P wire transfers inflows into bank bank accounts from other financial institutions.

Combine it to PV and baggy bank caching led deposits up 11% compared to the third quarter of 'twenty to 'twenty, two and 18% quarter over quarter, reaching a record of $21 6 billion Reais.

These deposit level was boosted by our AAA rating that treated by S&P global reach enhance that RCD distribution, among the institutional and retail investors on and off platform.

Checking accounts balance the cheapest funding source in our key performance indicators to measure client engagement grew 43% year over year driving down our annual percentage yields 293% of the CDI.

Slide nine shows that our credit portfolio reached 2.5 billion Reais due to our ongoing run off of the working capital loan portfolio combine it to the tax planning right off of nonperforming loans. He started in the last quarter.

Payroll loan and F. GTS, alright accounts for half of the portfolio expanding our offerings to consumers primarily through a seamless experience and a cheaper cost structure.

Our go to market strategy four secured loans is based on competitive Apu ours, and just do end to end onboarding risk assessment underwriting and collection.

This also includes our offering of credit cards banking by investments and savings.

The total credit portfolio sure composed by secure products reached 60%, resulting in the ongoing downtrend in NPL 90, plus to 10.7%.

Now I turn over to Arthur for the financial highlights of the third quarter at 23.

Arthur please.

Thanks, Alicia Hello, everyone and thank you for joining us and Nicole.

This quarter I am proud to announce all time high net income GAAP and non-GAAP.

Total revenue and income grew 5% due to TPG growth and gross profit grew 3% on quarterly basis also positively impacted by lower losses and higher level of deposits that reduce financial expenses.

Our commitment to efficiency led another decrease in operating expenses within 5% of EBITDA growth quarter over quarter with similar improvement in EBITDA from payments vertical why youre Zadar from financial services got back to the positive territory.

Despite the effects related to the cap on interchange of prepaid cards.

<unk>, our revenues since second quarter.

Net income on a non-GAAP basis, Richard 440 million, reais growing 6% quarter over quarter, and 7% year over year earnings per share Richard one Hell in 27 cents.

<unk> better than last quarter, and 10% higher than third quarter 2022.

Cash earnings amounted to 365 million is 40% higher than the second quarter of 2023, and 36% versus the same quarter of last year.

On slide 11 revenues from payments unit grew 5% quarter over quarter, while gross profit grew 4% in the same period.

P G growth and transaction cost savings to interchange cap impacted positively the current performance versus third quarter 2022.

Comparing quarter over quarter. The increase was due to lower take rates, partially led by client mix change towards larger merchants with a lower take rates, but incremental gross profit contribution.

Adjusted EBITDA on a on the payments Division, Richard 892 million Reais.

An increase of 5% quarter over quarter, and 7% year over year.

We'll go next July financial services verticals total revenues reached 260 million Reais in third quarter of 2023, 8% higher than the second quarter.

On the other hand gross profit decreased to 101 million here is down 9% on a quarterly basis, mainly led by an increase in provisions for losses due to a credit model update based on our first night.

Designs, the higher provision levels.

Adjusted EBITDA grew 64 million Harris from third quarter of 2000 and furniture back into the positive territory.

Moving to slide 13 financial expenses closer that 820 million Harris vessels 921 million here in the third acquire of 2022.

This decrease is mainly explained by our lower average cost of funding.

And by higher level of deposits in a quarterly basis financial expenses increased due to more two working days in third quarter of 2023 vessels last quarter.

Total losses decrease of 39% year over year accounting 165 million here is driven by lower provisions for expected credit losses healthier coverage ratio and.

And credit underwriting mostly unsecured projects.

On the other hand, the increase quarter over quarter is mainly due to higher provisions led by modeling a review for working capital and payroll loans.

Operating expenses reached 583 million here is down 5% year over year, and 1% quarter over quarter.

This amount represents 14, 5% of total revenue and income lower than the level of third quarter 2022.

Despite of lower revenue levels derived from the regulatory change and even with 5% of inflation in the last 12 months.

Our headcount resizing and marketing and infrastructure optimization labs to deleverage.

In the slide 14.

Our cash earnings continued to gain momentum driven by discipline in total costs and expenses.

Revenue growth stable, capex and higher margins, reaching a positive amount of 365 million on the ice up 36% versus same period of 2022.

Capex market 529 million here is up 5% year over year due to inflation and the upward trends in merchant gross adds that requires additional P. O S inventor levels.

But the lower quarter over quarter, driven by better merchant cohorts NPS activation, our discipline capital allocation and efficiencies in investments remain which.

Which we expect to result in a similar or lower capital expenditures disbursement Masters last year.

Depreciation and amortization, including P. O S write offs totaled 393 million Harris, representing close to 10% of total revenue and income.

Keeping the pace to coverage to capex levels in the coming quarters to unlock additional profitability in the future. We expect stabilization to happen in the second half of 2024 in line with the Capex.

On the final slide our net cash balance ended the third quarter at $10 6 billion Harris.

In the past 12 months, our cash generation amounted to $3 7 billion highs, which we invested $1 eight being on the ice and U S for Chase and technology developments and 330 million Reais in buyback shares in October.

When he holds more than 4% of total shares issued the company bought back one beat on the ice since 2021 that represents 81% of the total program are proven in 2018.

Our equity position continues to increase with 58% being composite by returning earnings reinforcing our commitment to shareholders on capital allocation and returns.

Now we have ended the presentation and we will start the Q&A session operator please.

Thank you, ladies and gentlemen, well now begin the question and answer session. If it has a question. Please press the star key followed by the one key on your Touchtone phone now.

If at any time, you would like to remove yourself from the question in queue. Please press Star then two.

Please hold while we collect your question.

The first question comes from Mario <unk> with Bank of America. Please go ahead.

Hey, guys. Good afternoon, congratulations on the quarter, let me ask you two questions. Please first one is on the take rate right. We saw that it declined quarter over quarter from 4.06% to 397% you talked about a change in client mix too.

Two the two large accounts it seems like it but I was wondering if that's all of the impact just from changing mix. How are you seeing the pricing environment, how you're seeing the competitive environment.

And how do you think you'll take rate behaves going forward and then the second question is related to do you know.

You talked about having 10.6 billion reais in cash.

You have this buyback program opened since 2021 that you executed 80% of the program so far but I was wondering like how do you see.

Future distribution of excess capital either in buyback or dividends.

You.

Hi, Mario this is Eric Thanks for the question when we think about the take rates trajectory you always have to remind that the breakdown take rates are based on the merchant mix like you said duration mix and also.

Promotional prices that we also make for a certain period of time.

If you remind we started doing the promotional prices for our online sales channel in the beginning of the year.

This is Shirley as we continued to see uptrend.

Beads and uptrend in grass S. Naturally most of this drug that comes from micro merchants, which have access to the promotional prices for the first months transaction.

Promotional prices for a certain period of time merchant mix and also duration mix, we understand that the take rate trajectories in the short term should be is likely down, especially in Q4 for seasonality reasons cease debit cards tends to increase the penetration in comparison to overall <unk>.

But moving forward as our footprint in larger merchants to stabilize take rates combined to the financial services revenues should also stabilize over 'twenty 'twenty four so I think it's reasonable to expect take rates in a consolidated view.

Stabilize in 2024.

But naturally always considered merchants mix duration mix and promotional prices.

Let me pass the word to Arthur.

Yeah, Marty it's Arthur speaking. Thank you for your question good to talk to you.

Hey garden to buyback program and the $10 6 billion in the eyes of net.

Net cash balance that we have the $10 6 billion, it's important to mention that as a comparison of assets and liabilities operational assets and operational liabilities.

At this point, we do not we do not have the intention to distribute dividends.

We have been buying back shares every quarter.

We're expecting to continue doing that.

Due to the current attractive valuation of the company.

The buyback program launches in 2018, we executed 81%. There is 200 million here is available at this point.

And there is a new buyback program under discussion in a company and as soon as possible and as soon as we decide to.

Two two allowance this new one or even from the markets.

And so this is the things that we are thinking about that.

Share buyback.

Great. Thank you let me follow up then on what Eric talked about the promotions that you started promotions right for online at the beginning of the year. So is it fair to assume that there's promotions have been going on since the beginning of the year or have you stopped the promotions.

Yes, since the beginning of the year, but when we look at the cohorts the evolution in.

And the timeline, we see the decisions them took 636 months ago boasting.

Benefits, especially in the process.

Six months later, so the decisions that we took in the beginning of the year are reflecting embedded grabbed that trends are necessarily this share of promotional prices for a certain period of time much more now than the first half 'twenty three.

Okay, and how have you seen the competitors behaving Eric.

Hi, Mario this is Ricardo.

We don't see competitors being irrational.

Of course, there are some competitors that are trying to get some market share for a while but once they realize that.

It's hard to make money they gave up the step back so we don't see.

Anyone being irrational.

If you look at what happened in Q3 looking.

Looking at the trends more recently.

We were the company that grew more quarter over quarter than all of the market, we grew like 8% quarter over quarter in the market grew 4%.

So I mean, we've been executing executing well as Erik said, we also have this promotions that we are getting some results at this point.

But going back to request, so we don't see anyone being irrational and we think we have a.

Good pricing point.

As of now to keep growing and as you could see nowhere results we had the high.

Net income in <unk>.

Both GAAP and non-GAAP. So I mean, we think we are in the right level in terms of pricing growth.

Yeah.

Thank you very much.

Thank you.

The next question comes from Josh <unk> with Morgan Stanley. Please go ahead.

Hi, everyone and congrats on the numbers.

I wanted to ask you about your credit portfolio I'm looking at.

Slide eight of your presentation.

We continue to see the total loan book coming down quarter on quarter.

Hum.

I'm I'm wondering where is your risk appetite.

You know at what point do you think this can start and reflecting.

Some of the.

Smaller more fintech driven lenders.

Like bank upon my going in there.

No one.

Our showing significantly more growth.

Why do you need either internally or externally to start to see the portfolio of credit really taking off and you know, making best use of your capital and your deposit. Thank you.

Yes.

Hey, Jorge Sartorius speaking.

Our credit portfolio is growing when you consider where we have foreclosed on paper.

Payroll loan F GTS and credit.

Credit card Becker by cities. So the portfolio is growing but at this quarter. We also had some write offs for the working capital Lawrence.

They are running off operation.

Regarding to when we can back warfarin credits at this point, we consider focus on credit unsecured right.

We still see difficulties in the market when we compare to other players and the banks, reducing the the limits for credit cards.

We are waiting the conditions in the market improves to back to offer maybe in a different way.

<unk>.

But at this point and in the coming quarters, we will focus 100% in the secure portfolio and the security of nations.

<unk> focus on payroll loan F GTS and credit card beckoned by.

Any investment that we received from the clients.

We continue working in the models and all the I'll say infrastructure to offer credit.

And they're at the right moment, we were back in the future.

<unk> talked in a different way about credits.

Got it thank you very much.

Thank you.

The next question comes from and got the algorithm with Citi. Please go ahead.

Good evening mayor.

A follow up on his question about the credit portfolio can you talk about your appetite specifically to the SMB segment I understand of course in their first attempt there was.

Mix of.

Micros on Smbs and all you'll continue to see the growth in Smbs outpacing micros is that something that you.

We should continue seeing that we will ship bags more active in the SMB space.

And my second question is about Capex received at stubbornly high.

Despite.

You're reducing.

Your exposure to micro merchants, <unk> tomorrow, and Smbs, so I'd like to hear your thoughts on that thank you.

Yeah.

Hi, Gabriela this is ricardo.

Regarding the Smbs as Arturo said to Jorge we are looking at this point the real focus on securing.

Products secured credit products, which means that GTS favorable O&M credit card back in <unk>. It doesn't matter. If you are a consumer issue or an SNB reserves. That's the those are the products that we were going to focus and we're going to keep accelerating in the following quarters.

At some point of course, if one of you being to go to have unsecured products, but we just don't think that's the right time to do so when you look at the market, we see even the incumbent banks struggling with some npls and delinquency rates.

It seems that is getting better the scenario, but at this point, we don't think it's worth to take the risk we are growing a healthy way in this secret products into keeping vessels on that so.

Your question was related to unsecured products to Smbs.

We do not expect to do that in short term if something changes, we'll let you know, but we don't expect to have this type of floods in the in the short term, we'll keep working on secured products.

Yeah, and opacity rewards towards robots Capex he was on it.

<unk> speaking.

Thanks for the question and good to talk to you.

Two regarding to Capex, we remain disciplined on this on these investments that we are doing it.

It's important to mention that the.

The Capex is not only related to Pos, but also related to technology developments and we see many opportunities to develop new features and also improve the features that we have.

Today to getting better the the offer to our clients.

Most as possible or we are expecting to have a capex user years likely lower than 2000 kind of true that means the level of capex today is reasonable for us and is a good lever to maintain the company running and attract new clients increasing the gross the gross margins for the company.

In 2024.

We probably we will have the similar capex of 2023.

And it's important to mention that in the second half of 2024 onwards, our capex levels tends to be similar to our DNA Bliss B O S write offs. So.

In the past years.

The expenses related to DNA and write off increased it a lot and put pressure on our bottom line.

And we are seeing that in the second half we have a better way to see the.

The bottom line for the company.

Yeah.

Perfect. Thank you.

Thank you.

The next question comes from John Coffey with Barclays. Please go ahead.

Great. Thank you very much for taking my question Alex I had one question for you on some of your prepared remarks, I think you said that you can Sidney you continue to see a better keep EV growth through the first weeks of the fourth quarter should I interpret that as meaning that you are seeing growth around 11% more than 11%.

So just be interested in your thoughts on that and then for my second question. It was really on the financing expenses that you have and I'm, just I think going over to slide 13 in your deck, where I think one of the drivers for having the lower financing expenses year over year had been your deposits should.

Should we take this just mean that you are becoming more and more insulated from the impacts of the silly create that perhaps as a sleek declines it makes it less of a difference on your financing expenses, because you're almost funding most of the book or a lot of the book from your deposits. So that those are my two thanks.

Okay John.

Solid thought we went through the first Boston Park.

Question.

Actually we are growing higher than 11% in the first weeks.

Of the fourth quarter.

We see.

Very good trend.

In terms of growth moving forward.

As a result of these new growth cycle, we just starting the beginning of the second semester of this year first semester.

We did a lot of optimization and adjustments in our operation and we still foresee in terms of GDP growth.

And now we are regaining these growth.

Four main tool.

Sure.

Doing better in the fourth quarter.

During the third quarter.

And John This is Ricardo was starting to answer the second question regarding the dependence on the linkage with the league.

Youre right when you look at the <unk>.

<unk>, we are more and more using deposits for funding and for all operations that he have meaning prepayments and also the credits that we offer for our clients.

We.

At the end of the day Silly goes down is good news, because we're going to have lower cost.

And even if you have deposits they are linkage with sleek.

If we look at the slide eight.

We see that our deposits were paying a blended 93% of sleep. So at <unk> now we're going to take advantage.

No.

As deposits grow more and more we don't need to rely on third parties for the funding and who have a lower cost as a percentage of silly considering the deposit so.

So we're in a different way easily goes dollar that I've taken advantage because at the end of the day the cost that he had four four financial expenses are linked to cynic and deposits have a lower cost than third parties.

Operations that it might have any market.

Complementing the answer why don't we talk about deposits specially why.

Why do we see the pause on our platform, it's most cheaper than the deposits.

Recipients from the <unk> out of our platform and third party platforms. So we have.

<unk> total debt considers deposits on cap, though that is basically on return net earnings.

There is no impact in the.

In the P&L and the cost of the P&L.

And remix with other funding sources.

That also helped us to run the business going forward, we are expecting to have or to continuing to have this good performance in furniture expenses, because we are most efficient.

Every time.

So this was the.

The first time, when we compare year over year that we are reducing nominal terms. So it's good for the company. Obviously part of that is related to select down I would say don't trend because we are expecting to have a more one cut in December.

But also because we are more efficient in the fundings total debt to be developed for the moment.

Great. Thank you.

Thank you.

The next question comes from you referred lunches with Jpmorgan. Please go ahead.

Hey, everybody I have a question here on peaks pitch Wham.

I would like to know if you can share anything with us how relevant is it becoming a some competitors are starting to disclose that information suggest checking.

You can help us to understand a little bit the inks.

And then I will ask a second question. Thank you.

Ironwood is Ricardo Thank you for the question well first of all it is important to say that our take rates we consider fixed.

<unk> record revenues and you also consider peak volumes in the denominator.

Although some other players in the market they may differ but we used it depicts our revenues <unk>.

And we also use <unk> at a minimum.

Later.

We don't disclose exactly number or the volumes of books that you have but they are similar to what <unk> seen the market with other players.

Yeah, so as a percentage of TBC is very similar to what is seen other players in the market.

No that's a Brooklyn it helps a lot.

And on deposits already discussed in the previous question, but it was very good rates 20, 20% quarter over quarter. This is not a seasonal quarter right. It seems you are doing something differently.

What are the drivers where it is real Hawaii was deposited to stable for I don't know if required there and now we are seeing mineral deposits.

Right, what what are you doing to bring the deposits on the pardon me. Thank you.

Interpreter speaking related to deposits, it's not a silver bullet that we are doing many things differently. The management is 100% focused on that because we know that it's important to us increases the number of deposits. We are working to provide better service to the clients.

The Triple way rating that we received from S&P Global is also helping us too.

To bring this money to the company and the cheapest way.

TPG volume growing help earth, because part of these deposits come from merchants. So it's several things that we are doing.

And also I can tell you that we increase the.

The level of the features that we are offering to the clients so much better.

In the past and so many things that we're doing it's not only one thing that brings this brings does Brazil to us.

No perfect Super clear Denker congrats.

Okay. Thank you.

The next question comes from Kyle path, though with UBS. Please go ahead.

Hello, everyone and good evening. Thank you first brokerage to ask questions I have two on my side. Please.

First on your reported losses this quarter. So we saw that they expected credit losses increased during the quarter and you mentioned that it was related to some change regarding the I guess first nine so just would like to have more details here. What was the change is lost and then one off effect or no.

And also she won't office issue could better explain the drivers behind the sequential increase in chargeback, which surpassed the level of CTV growth. So just like to understand the drivers behind that and if this is related to the prepayments product with eastern settlement or not if.

You are offering is nowadays are no.

And then the second question is related to the expectations for 2024. If you can provide some details and if you expect to provide any type of guidance for the year I don't know.

That's it thank you.

Higher charter speaking.

Talk to you.

Regarding tool.

Expected credit losses. This quarter, we had the impact of the payroll loan and working capital loan Fas nine review.

That increase of provisions. This is the explanation why increase the the provisions at this point.

On a yearly basis, we use it to review the models to ensure we have the right level of provisions.

To cover expected losses of future expected losses.

But the most important point is the new graduate originations are secured which relies on a lower level of provisions.

Going forward, because we are increasing this deal.

Yes.

These origination related to secure products.

That will represent a lower provisions going forward.

Regarding to <unk>.

Charge backs.

We pulled their operational losses, we include other things related to issuing cards and charge backs from online.

M Pos charge backs.

We compare the amount okay, it's higher but when we compare in terms of basis points is lower than the last year that is most important to us because we are seeing that our fraud prevention easing is increasing.

Regarding 2024.

Stu maybe skewed a little bit early to give some.

Some color about 2004, but I would say you that.

As Alex said in the speech.

We are seeing very good growth in terms of volumes CPC growth in Q4.

We also expect the interest rate of the countries due to have another could maybe 25 or 50 bps at the beginning of December. So we are optimistic with Q4.

To be a very good one usually Q4, we have more volumes because of the holiday season with Black Friday increasingly into one so we're very optimistic with Q4 and from there we can.

I'll give more color about 2024.

We are we're confident it's going to be every quarter as far as we had the previous numbers were in half of the quarter at this point.

So we are optimistic about it.

Okay. Thank you very much.

Thank you.

Next question comes from James Friedman with Susquehanna. Please go ahead.

Hi, Thank you for taking my question in the queue.

So actually just in response to the prior answer.

Cause I I FRS issue came up with one of your competitors as well.

Though it may have been for a different reason, but do you mind just elaborating on what you just said in the prior response.

The impact of the working capital.

And as you answer that are there any other changes in I R. F. I ask that you are anticipating that we should also be aware of it before they happen.

Hey, Jeremy it's Artur Thank you for the question.

So.

The most relevant impact is related to the runoff operation of working capital.

So we increased a little bit the provisions at this point, it's I would say that's like a onetime.

Impact in this quarter, we are not expecting any other change in the coming quarters.

Okay clear and then.

Just a kind of <unk>.

Higher level question, but I realize for a while now you have.

At this time.

<unk> emphasized there seven b to.

Deemphasize the less structured long tail, but.

I'm just wondering if you're anticipating any additional consequences of that whether it's how you see like the take rates evolving longer term are the additional opportunities that that will create just as you transition the company that way for and I know, it's a very.

Open ended and Big picture question, but as you move the company in that direction, how do you anticipate.

Financial results are going to evolve thank you very much.

Hi, James This is Ricardo.

Just to be clear.

We are not deemphasizing the long tail, we're just saying that we were.

We see a big opportunity in Smbs as you can see it.

One of our slides here, we are growing like smbs, 18% and long tail growing 9%.

Importantly, as light number.

Five five.

So we were growing even if you consider long tail, we are growing 9%, which is the same growth of the industry and remember.

Some of our along with their clients they become Smbs as time passes by they keep working with us at some point their businesses grow and then they become an SMB. So if you look at the composite of these two parts, both ifs and below <unk>, we're growing 15%, which is like 60% more than what's been disappointing suite. So.

It doesn't mean that you are deemphasizing, but we're seeing very good opportunities and bids as well.

Not only acquiring but also on the banking side, we have a very strong very powerful value proposition for these type of clients that includes instant settlement banking high yield Cds conciliation softer. So that's why we see opportunities coming there in terms of coming from there in terms of financial results.

As we try to fix.

As explained before.

Our take rates might go down as a percentage, but in absolute terms makes total sense because smbs has much.

Much more volume when compared to long tail, sometimes 10 times bigger.

So as a percentage in the net take rate is lower but as.

So term it makes the absolute dollars makes total sense. So that's why we keep growing thats why in Q3, we had the highest net income of the company ever and.

And we don't see that is going to change I mean take rates might go down as we said before of me, maybe stabilize or slightly go down but in absolute terms, we expect to keep growing so that's the overall picture, we still see opportunities long tail and we also see opportunity and consumers as well we keep growing in Q3 this year.

If you look at net adds and <unk> Bank was the best quarter of the year. So I mean, we still see some avenues of opportunity to explore going forward.

Great. Thank you Ricardo.

So I would just like to complement.

Starting this quarter.

We had a record of U S sales since January 2022.

And with the highest <unk> activation since mid 2021.

Thank you both.

You.

Our next question comes from the Heart I got Waller with HSBC. Please go ahead.

Hi, congratulations on the results and thank you for taking my question.

A few observations from your comments so far.

It seems like on glad that you are not even testing piloting the unsecured loan product at the moment because you have really concentrated on the secured lending side.

First is that right.

Is something different in that it's not understand correctly, because when we talk to most of the other players in the market.

Why is he had been restricting origination so phi even the larger banks and now talking about the potential acceleration in growth. So just wanted to understand that you know if you're not testing you cannot open to landing in the antique yard market then.

Yeah competitors, because we had a view that the market conditions improve so what are your thoughts on that and did I understand correctly that are lending to the SMB and guaranteed yard space is not your priority because that would assume that the smbs I broadly.

And that's at a ski than the lung data when it comes to unsecured lending product.

So classification, then and this goes to my next question just on the great great Great debates isn't coming down given the changing mix and next day you can be more stable in terms of it makes a big mistake basically at night worried about getting five things.

Do you see take rates continue to come down due to competition or do you think new products like banking okay.

To offset any pressure on take rates and competition.

Hey.

Sure.

So some clarification on the 10th it. Thank you so much.

Hi, <unk>. This is Ricardo I'll try to address a question that is not clear, let me know but.

We are testing unsecured credit for is more volumes for some clients.

And four we have some credit pilots we are doing is more test for different Chris.

Clusters of clients. So we do have processes in place as we have the models we have the billing.

Process in place and so on so we are testing that but the point is.

Even when you look at the credit cycle as I said before it seems is getting better doesn't mean it is already the time to jump in.

But it seems is getting better many many big banks or the incumbent banks in Brazil. They had this further with mpls and previous quarters now in Q3.

It's getting a little bit better for some of them, but it doesn't mean that it's time to jump in we are ready to to do that when do you think is the right time, where you think the risk return makes sense.

But.

To be honest, we found a way with secret problems that we are happy with that and we will accelerate that as much as we can he doesn't mean that we cannot make unsecured products in the near future just say that's not the focus but we do we are testing just to answer your first question.

In terms of Smbs.

We see that we have a strong value proposition that doesn't require us to offer credit for these clients that we are getting our base of course, there could be some smbs out there that they just want to have a an acquiring company. If there is any lower nor lending offer.

And so on but.

We don't see that as a as a block for us to keep growing as I said before in slide five we are going like 18% double of the industry and smbs year over year is still lots of room to grow in Smes, we see that there is bad service out there and who can get displays with the value proposition that imation eastern sets.

Men digital free banking and so on.

But we don't think that we are we don't have the plan to keep offering laws for the SMB is at this point.

Regarding take rates, we as he said in 2024 is likely downward stable in 2075 to <unk> 36, it's hard to give you some visibility, but remember that as we grow our financial services business unit.

We also are going to have.

A tailwind.

Our take rate because they're going to have more revenues with the same client. So it's hard to say to you Hudson it'd be genetically 2005 2006.

But.

Truthfully, saying why do we see at this point is TPC that we're seeing Q4 is growing.

Interest rates seems to go down not only Brazil, but over to ward.

So all the headwinds that you had like two years ago. We are seeing that they are these opinion or getting better as we look in the future. So I cannot give you what is going to be $2 25000, new seats, but it seems like Q4 is going to be a good quarter expect to have a good 2024 as well.

Thank you so much.

Okay.

Thank you Neil.

The next question comes from Josh <unk> with Cantor Fitzgerald. Please go ahead.

Yeah, Hi, good evening, Thanks for taking my question nice print today.

First of all I was wondering if you could comment on how youre thinking about the longer term capital allocation on the business given the cash generation you have going.

Well, Josh it's hard from speaking thank you for the question.

Regarding to long term capital allocation, what I can tell you is we.

We are.

100% focus and continue to delivering the results that we are delivering growing wherever required and using part of these results.

To reinvest in the company.

In the <unk>.

Reduce the dependency on on order finish institutions to fund part of the operation.

We have a very good margins on.

Adversity receivables promotions and we will continue doing that.

On top of that we have this buyback program that we expect to approve a new program in the coming in the coming months and then we will.

For them to the market that we have a new program and the rules of this program.

At this point, we are not discussing dividends so.

We just our focus on continued.

Delivering results invest and part of this money to buy back shares investing part of this money in the operation.

Great that's helpful.

Wanted to dive a little bit deeper into the Twain playing for potential stabilization of take rate can you give us some more kpis that will be integral to the thing that take rate really starts to stabilize.

Hi, John This is Eric Hi, Josh This is Eric I'm sorry.

Well when we see again take rates, we're not stopped moving up market only to post higher take rates because by the end of the day I think we have been showing quarter after quarter.

As the company keeps moving your strategy to extend the services.

And long tail.

These business looks accretive to EPS, what are the drivers for that primarily better spreads given the deposit base by lowering our cost of funding structurally.

And also the financial services up trend in terms of revenues that can contribute positively to the take rate evolution meaningful.

Naturally we expect some points.

Much more stabilized TP, the meeks breaking down by merging sites than we have in our base doesn't necessarily should bring a more stable take rates moving forward, but again, we're not looking to take rates. We are looking merchants grow.

And how they contribute to the bottom line, if we look only take rates.

Losing the focus here, which is necessarily grow with profitability by delivering EPS growth quarter over quarter and year over year.

Okay.

Very helpful. Eric Thank you and congrats again on the quarter.

Thank you.

The next question comes from Sumit Datta with New Street Research. Please go ahead.

Yeah.

Hi, guys, thanks very much.

Yeah, great great numbers.

Just just on that point.

It seems like the momentum in the business in Q3, and then in early Q4 is really strong.

You talked about.

First half of the year really coming through.

Just to dig into that in a bit more detail you talked about some promotional pricing being part of that maybe just help us understand what else you've done and what else is happening to continue that TPP momentum would be helpful. Thank you and then I had a quick follow up please.

Hi, Thank you for the question good to hear.

Is it Ricardo the promotions that we have we always had promotions all the time depending on seasonality.

The seasonality if it's the holidays as black Friday, we always have a promotional prices but at.

At the end of the day. The idea is to have a driver to get new clients that are looking for specific promotions and specific features specific I don't know pricing structure.

But to.

To be honest disproportions doesn't move the needle because they are very small in <unk>.

Terms of the PPV that they have today. So we have a 100 billion rising TPG in Q3, so imagine that.

We are at.

Getting new clients, but they are a small portion of the total so.

I don't think that.

To be honest these promotions will move the needle in terms of take rates going down dramatically and so on because it's like.

Very small when compared to the whole.

Volumes.

Why do we do have is like when you go to.

Mix of clients shifting towards Smbs, because again, they have much more volume than long tail, although they have a lower take rate.

This.

Makes sense for us to go for these clients because they use not only the acquiring but we are getting more penetration of digital banking describes an S time versus buy we can cross sell more products to them. So.

Going back to your question, we do have promotions all the time, depending on the type of clients depend of some period that they have a limited sometimes limited to volume sometimes the promotions on in their beds. Other times in crowded. So we always have promotions and we sometimes it may have more than one promotion at the same time, it's very complex. So.

It's not an issue and is not something new what it seemed that you are getting more.

More clients more SMB as theyre getting mature.

Some of them may be using other acquired is now they are using those more and more because they have decent the sentiments of one so but as you said in your question. We are we are having a good momentum in our view and growing more than the market quarter over quarter and a strong TPG growth in Q4 as well.

Okay.

Thanks, and then quick follow up if possible. Please again, just referring back to slide five where there's a bit of granularity on the different.

Segment.

Can you just maybe help us understand how much of the volume is F&B today and can you remind us of.

What the cultural fit with what the definition of <unk>.

SMB versus long tail is and then just finally.

The charts on the right hand side, showing the relative growth rates.

Not precisely, but he's not broadly how you would expect to see.

The kind of relative segments growth going forward that relative difference between with great. Thank you.

Okay.

Hi.

Right.

We do expect Smbs to grow more in TPP, because again they have more.

Absolute TPG than other than the other clients that you have the long tail.

We are seeing good momentum in these smbs.

And as I've said before similar to all of their clients.

They became SMB. So that's why it was there is some level of PPV. They go to the SMB.

Nish cluster sort to say here. So that's why Smbs may take advantage of clients that are growing within our base.

But yes, we do expect smbs to grow more than loan payoff. The notes are going to be same difference that you have in your slide number five and if you expect SMB CPP to grow more than in long tail versus copper.

The inventory.

No.

Yeah.

Anything else.

If I answered fully your question.

I just wanted to did you have did you have to cut off the TPB differences between SMB and long tail in.

Enterprise would be helpful.

How soon do we don't disclose exactly the <unk>.

The level of each one.

You may expect that long tail as more clients and Smbs you have as more businesses with fewer employees and so on so.

We don't have to exactly exactly number here don't disclose that but it is similar to what some other players in the market the.

They disclose unusually the PPV from Smbs are five to 10 times larger than long tail.

Okay. That's helpful. Thank you.

Thank you.

The next question comes from Pedro Leduc with its old DBA. Please go ahead.

Good evening everybody. Thank you for taking the question congrats on the quarter and good disclosure.

A question quickly on the selling expenses that had been quite controlled year to date, but they seem to have moved up into the queue I'm looking at almost 20% Q on Q jump wondering if its related to that heavy activation of classes that you mentioned more recently, where she has to do with the greater SMB profile again essentially.

Oh gosh shared the pace of your total costs and expenses, but this one in particular everything else was quite controlled this one called a retention just wondering if there's any specifics here you want to share with us. Thank you.

Yeah.

Well.

Thank you for your question exactly speaking.

It's.

Mix of things in this in this line and moving up moving down.

We have a little bit of a sales force.

Chris.

The last 12 months of the quarter.

That is pushing a little bit this line up but also we increased the level of charge backs.

Provisions for credit and so the most relevant impact is coming from total losses exactly because by the end of the day, even though.

<unk> as a percentage of total payments has decreased one basis point in comparison to Q3 'twenty two.

Naturally it growth rate with TPC, but also the higher level of expected credit losses, given the credit model update accordingly to the Ifr asked nine that made those two additionally.

<unk> our provisions in the short term.

We had also.

An increase in <unk>.

Sales force reinforcing some geographies operation I slightly increase sold necessarily when we combine all of these.

Deployments necessarily we had these kind of trends in Q3.

Super Super clear, because indeed personnel expenses. It doesn't look like to have gone up that line, specifically I know about selling that.

Welcome to the Gulf.

Eric Thank you.

Thank you.

Yeah.

The next question comes from Alex Mark Graf with Keybanc. Please go ahead.

Okay.

Hi, everyone. Thanks for taking my question just one for me I was wondering if you all could comment on.

A metric that you disclosed in the past the clients using pack bank as their primary bank.

Thank you shared it for a couple of quarters just wanted to get your observations around that metric both for consumers and merchants.

Hi, Alex this is Ricardo.

You're right, we don't have the information here, but.

We use it to have a like 60% using that in the consumers and 60% in the motions that didn't change too much it.

It might grow a little bit of mountain and so on but it's you can I don't have the numbers on top of my mind here, but you can consider that as the same level, 60% for merchants for consumers and 50% for promotions using bank bank of their primary bank.

Okay and is that true as well for some of the newer cohorts that have on boarded.

Yes, it is true for the new cohorts.

To be honest for thinking about then is even higher but you can consider that is similar to what we have.

Sure. Thank you.

<unk>.

The next question comes from Shrinks Tomorrow with Evercore.

As I. Please go ahead.

Hey, Thanks, a lot for for taking my question.

It's nice to see the trajectory on the margins just wanted to get a sense as to you know how should we think about for next year.

Comes off the margin.

Tragic triage to how focused his bags on driving margin expansion and also on the operating expense side also like B saw a nice decline as a percentage of our top line to like 14, 5% I mean, I know you kind of also answer to that but is that like a target on that as to what's the baseline.

I wish we could see for 'twenty 'twenty, four and even for the fourth quarter as well. Thank you.

How should we think you for the question.

Oh OLED toward four or two.

Minutes for him to complement but.

In terms of margins. It is also worth to say and to remember everyone that we are the.

The most profitable company in this market if you consider <unk> for every <unk> every dollar that you have in volumes transaction in our POS devices. Our online solutions, we are the one with that.

Translate that in profits and your bottom line.

More than any other player so relative.

To our competitors we have the we are the most profitable company in this market.

No.

Margins as a consequence of what Youre doing and what we are growing in terms of clients and as he said as we have this mix shifting from.

Last one loan to a more to Smes.

We see that the metic rate is lower but in absolute terms is higher so.

Absolute dollars is higher so.

We don't look to margins as the main driver for the company because at the end of the day, what do we want to do is to have EPS accretion.

And this quarter, we had 7% EPS accretion quarter over quarter, and 10% EPS accretion year over year.

So that's the main driver that we look forward to.

To generate value to our shareholders EPS accretion.

Margins at kind of the consequence, but to be honest <unk> focus and you can see that the margins are very stable in the past quarters.

Even this quarter as mud wrong. It grew like 10 bps.

So that's the domain a view, how we see margins without who can give you more color to you. Thank you.

As to the <unk>.

What I was saying we are keep growing our business in payments in financial services are all of the segments are contributing to the bottom line. We had the all time high net income GAAP and non-GAAP this quarter that we're proud of them and announce that.

We are not putting a lot of focus on margins, but in nominal growth. Yes, we are focused on that.

And it showed that going forward lower interest rates and better performance in financial service can help us to increase margins.

We are not providing any guidance for the future, but it showed that those two things and the focus on reducing expenses and continue to growing both business can help us to deliver that.

Alright. Thank you so much that's it for me thank.

Thank you.

The next question comes from Tito <unk> with Goldman Sachs. Please go ahead.

Hi, Good evening, Thank you for the call and taking my question.

Just a follow up on the slide five yeah. Thanks for the disclosure on the growth by the different segments that I don't know you mentioned that mix of F&B, probably still grows faster, but should we expect some type of conversion between SMB and long tail just in the sense of if we could take rate to stabilize they probably have to.

Begin to stabilize so there could be some deceleration in F&B and maybe some acceleration.

And long tail.

And maybe.

<unk> got a completely fair question, but you know one of your competitors gave some long term guidance.

13%.

CAGR and SMB PPV growth, if youre going to 15%, but how do you think about the sustainability of.

The micro and F&B PPV overtime.

You think you should be able to gain share growing above the market is like a mid teens type PPD growth sustainable.

In the coming years. Thank you.

Hi, Tito this is Ricardo I'll start backwards and then a required who can talk about take rate.

We always say that we try to grow more than the industry in a profitable way and we tried to keep doing that in following years.

So we kind of decelerate a little bit dirty BB in Q1, this year or a little bit in Q2, but in Q3. We saw this rebound again Q4, we have.

Further numbers in the first 45 days.

And we will try to keep growing more than the industry new profitable way in the niches that they decide to grow which is.

Msnb's lung data analysis <unk> of.

Of course, if you look TPB, we have a relatively more penetration in lumpier than smb's related to the market. So that's why smbs TP will grow more wind.

When compared to the <unk>, we keep working on these two different.

Niche so to say.

But we have lower exposure to SMB is at this point and that's why you are growing and we don't see a <unk>.

Good service out there that we need to grow there and decreased prices and see what we can go there with our value proposition, we try not to compete with price.

And looking forward, we do long term view here is to keep growing more than the industry initiatives that he decided to play.

If there is a huge growth in large accounts and we don't growing this type of a client that's fine we will play an smb's.

We cannot comment in someone other companies CAGR and we don't know what is the assumptions behind that but.

But our view is to keep growing more than the industry and these two niche SMB.

And one of the things to put the if the CAGR is a reality I think this is.

The positive news, especially for new players like us because by the end of the day when we look the small and medium businesses. Despite we see much more companies talking about this existing opportunity we have the merchant acquiring and digital baked fully integrated.

We have been growing almost 20% year over a year. So there is still further room to keep growing on that and necessarily if it's feasible.

It is in place to say that the economic outlook and the industry trend should continue to improve as we saw in Q3 in comparison to Q2. This also imply that the card penetration.

Should increase and necessarily our market share gains in all segments and overall market share. So I think it's a good message when we hear that the outlook for the next few years is compelling because the opportunity we will primarily.

Will be for the new players like us and secondly, we have the advantage of having the lower average cost of funds similar to bank acquirers.

And we have a value proposition.

<unk> or better than the new players. So we have this basket Indonesia. So this is why again, we are not looking for take rates because when we look at the total addressable market is huge right. We only have 10% to 11% market share. So we are aiming to explore this market share.

And when we look at the take rates trajectory again, it will depend on mix right now we have seen better momentum.

On all of the segments.

If we grow faster in large accounts necessarily there'll be update rate trajectory differences right.

If it's accretive to Bottomline, that's amazing right. So this is what we are looking for and this is what we are working for you. So thank you so much.

Great. Thanks for that color that's helpful. Appreciate it.

Just one follow up kind of on the first point, but is it fair to say that or the take rate to stabilize you do need a little bit of a convergence between the F&B and a long tail on the growth just given the different dynamics there.

Hum.

The conversion.

Okay.

It depends on how the both segments work.

Early to say anything about conversion right now.

Yeah, No I think.

My question is more for the take rate to stabilize you would need to see the growth be closer between the two segments right because otherwise if you keep growing faster in F&B just by nature, They take rate will come down so.

The take rate stabilization that you pointed to it they would be growing a little bit more on a quarterly basis, just what I'm trying to understand.

So we are not concerned about take rates, we are concerned about profits grow necessarily as the convergence of smbs micro merchants and overall market share breaking down in large accounts smbs and long tail.

This is Jeremy if business stabilize phase III to stabilized. So it's we don't have right now any commentary on the convergence of take rates of vessel disease and long tail, but why do we can say is for the long sales and necessarily keep growing their businesses.

They can have better offerings.

Makes sense, but we always evaluate the cross selling opportunities and how to create a win win relationship on <unk>.

Acquiring take rates and financial services revenues and what are the gross profits.

Transactions that we have here.

Okay.

I can follow up.

But more specific thank you.

Thank you Tito.

Thank you all very much. This concludes our Q&A section of the call.

Like to turn the conference over back to the management for your closing remarks. Please go ahead.

Thank you very much for participation in the call. Thank you for investing time talk to next call. Thank you very much.

This concludes today's conference. Thank you for attending today's presentation you may now disconnect.

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