PagSeguro Digital Ltd. - 3Q18 Financial Summary
Business Context and Reporting Period
PagSeguro Digital Ltd. (NYSE: PAGS) reported its third-quarter financial results for the period ended September 30, 2018. The company is a Brazilian financial technology provider focused on micro-merchants and small-to-medium enterprises, offering payment solutions, POS devices, digital accounts, and prepaid cards. Financial statements are presented in Brazilian Reais (R$) in accordance with IFRS.
Key Financial Metrics
| Metric | 3Q18 (GAAP) | 3Q17 (GAAP) | Change |
|---|---|---|---|
| Total Payment Volume (TPV) | R$ 20.3 billion | R$ 10.7 billion | +89.9% |
| Total Net Revenue | R$ 1,137.3 million | R$ 686.6 million | +65.6% |
| Net Income | R$ 231.6 million | R$ 147.4 million | +57.1% |
| Net Margin | 20.4% | 21.5% | -1.1 pp |
| Basic EPS | R$ 0.74 | R$ 0.56 | +31.7% |
| Cash and Equivalents (End of Period) | R$ 2,470.1 million | R$ 66.8 million | Significant Increase |
Non-GAAP Highlights: Non-GAAP Net Income was R$ 290.4 million (+97.0% YoY) with a Non-GAAP Net Margin of 25.9%. Active merchants reached 3.8 million (+55.8% YoY).
Material Changes vs. Prior Period
- Revenue Growth: Driven by a near-doubling of TPV and a 55.8% increase in active merchants. Financial income (discount fees) grew 72.7% to R$ 387.3 million.
- Expense Increases: Total expenses rose 73.1% to R$ 816.8 million. This was heavily influenced by R$ 115.5 million in stock-based compensation (LTIP) and a one-time R$ 4.1 million IOF tax on follow-on offering proceeds.
- Margin Compression: GAAP Net Margin decreased 1.1 percentage points due to the aforementioned non-recurring expenses and a shift in payment mix (higher debit card volume, lower installment credit volume) which reduced transaction revenue growth relative to TPV growth.
- Liquidity: Cash and cash equivalents surged from R$ 66.8 million to R$ 2.47 billion, primarily due to R$ 4.7 billion in proceeds from the IPO and a follow-on offering in June 2018.
Outlook, Risks, and Unusual Items
- Unusual Items: The filing excludes a R$ 14.3 million foreign exchange gain on follow-on offering proceeds from Non-GAAP measures. It also excludes R$ 115.5 million in LTIP expenses (R$ 81.8 million of which was non-recurrent due to share vesting adjustments) and R$ 4.1 million in IOF tax.
- Product Launch: In October 2018, the company launched "Moderninha Smart," an Android-based POS device with integrated hardware and software features.
- Tax Contingency: The company is judicially depositing full tax rates regarding sales in São Paulo due to a contested repeal of a law charging ISS based on the municipality where the POS device is used.
- Cash Flow: Operating cash flow was negative R$ 2.2 billion for the nine months ended September 30, 2018, largely due to a R$ 4.3 billion increase in note receivables driven by TPV growth and the repayment of prior bank financing using IPO proceeds.
Investor Verification Checklist
- Verify the sustainability of the 89.9% TPV growth rate and its impact on future revenue mix (debit vs. credit installments).
- Confirm the recurrence of the R$ 115.5 million LTIP expense; management notes R$ 81.8 million was non-recurrent, but R$ 33.7 million is a recurrent quarterly provision.
- Monitor the resolution of the ISS tax dispute in São Paulo and its potential impact on net revenue from transaction activities.
- Assess the deployment of the R$ 2.47 billion cash balance and the company's strategy for managing the significant increase in note receivables.
- Review the adoption rate and revenue contribution of the newly launched Moderninha Smart device.