PagSeguro Digital Ltd. - Q2 2018 Financial Summary
Business Context and Reporting Period
PagSeguro Digital Ltd. (NYSE: PAGS) reported its second-quarter financial results for the period ended June 30, 2018. The company is a Brazilian financial technology provider focused on micro-merchants and small-to-medium enterprises, offering payment solutions, digital accounts, and POS devices. Financial statements are presented in Brazilian Reais (R$) in accordance with IFRS.
Key Financial Metrics
| Metric | Q2 2018 | Q2 2017 | YoY Change |
|---|---|---|---|
| Total Payment Volume (TPV) | R$ 16.9 billion | R$ 8.1 billion | +106.8% |
| Active Merchants (12-month) | 3.5 million | 2.1 million | +68.7% |
| Total Net Revenue | R$ 1,001.8 million | R$ 557.2 million | +79.8% |
| Net Income (GAAP) | R$ 227.6 million | R$ 82.2 million | +176.8% |
| Net Income (Non-GAAP) | R$ 242.1 million | N/A | N/A |
| Net Margin (GAAP) | 22.7% | 14.8% | +7.9 pp |
| Net Margin (Non-GAAP) | 24.8% | N/A | N/A |
| Cash and Cash Equivalents (End of Period) | R$ 2,913.5 million | R$ 66.8 million (Start of H1) | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total net revenue increased 79.8% year-over-year, driven by a 106.8% surge in Total Payment Volume (TPV) and a 68.7% increase in active merchants.
- Profitability Expansion: Net income more than doubled (up 176.8%), with net margins expanding by 7.9 percentage points due to operating leverage.
- Revenue Mix Shifts:
- Transaction Activities: Net revenue grew 100.9% to R$ 515.2 million.
- Sales: Net revenue from hardware sales declined 28.8% to R$ 89.4 million due to price reductions and product mix changes.
- Financial Income: Grew 92.7% to R$ 332.6 million, driven by TPV growth and early payment features.
- Expense Management: Total expenses rose 56.3% to R$ 689.1 million. However, as a percentage of revenue, expenses decreased by 10.3 percentage points. Non-GAAP expenses were 64.2% of Non-GAAP revenue.
- Cash Position: Cash and cash equivalents increased significantly to R$ 2.9 billion, primarily due to R$ 4.7 billion in proceeds from the IPO and a follow-on offering in June 2018.
Guidance, Outlook, and Unusual Items
Unusual Items and Non-GAAP Adjustments:
- Foreign Exchange Gain: Excluded R$ 27.3 million in gains from the conversion of follow-on offering proceeds (USD to BRL).
- Stock-Based Compensation: Excluded R$ 62.3 million in LTIP expenses, deemed non-cash and dependent on stock price/exchange rates.
- IOF Tax: Excluded R$ 0.7 million in currency remittance taxes related to the follow-on offering.
Operational Updates:
- Launched a free bill payment solution and a new POS terminal (Moderninha Plus) with NFC capabilities.
- Introduced Mobile top-up and inApp boleto billing to increase customer engagement and stickiness.
- Expanded P2P (peer-to-peer) solutions for B2B and B2C segments.
Risks and Contingencies:
- Tax Litigation: The company is judicially depositing full tax rates regarding sales in São Paulo while contesting the repeal of a law charging ISS based on the municipality of POS device usage.
- Chargebacks: R$ 28.1 million in chargebacks were recorded in the first half of 2018, representing amounts recorded as revenue but not received due to fraud.
Outlook: Management highlighted continued growth in active merchants and TPV as primary drivers for future performance, with a focus on leveraging costs and expanding the digital ecosystem.
Investor Verification Checklist
- Verify the sustainability of the 106.8% TPV growth rate and its impact on future revenue recognition.
- Review the reconciliation of Non-GAAP measures to ensure clarity on the R$ 62.3 million stock-based compensation exclusion.
- Assess the impact of the ongoing tax litigation regarding ISS on future net revenue from transaction activities.
- Monitor the cash burn rate from operating activities (R$ 1.86 billion used in H1 2018) against the R$ 2.9 billion cash balance.
- Confirm the trajectory of hardware sales revenue, which declined 28.8% YoY, and its effect on overall margin mix.