PagSeguro Digital Ltd. — 2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. Financial statements are audited and prepared under IFRS, with the Brazilian real (R$) as the reporting currency. Unless otherwise noted, figures below are in R$ millions.
Business context
PagSeguro provides digital payment processing, point-of-sale (POS) devices, digital accounts, prepaid cards and merchant receivables advances, primarily to micro-merchants and small and medium-sized businesses in Brazil. Its controlling shareholder, UOL, held all Class B shares, representing approximately 91.1% of voting power.
Financial and operating performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue and income | R$4,334.7 | R$2,523.4 | +71.8% |
| Net revenue from transaction activities and services | R$2,267.1 | R$1,224.3 | +85.2% |
| Net revenue from POS/device sales | R$374.6 | R$471.9 | -20.6% |
| Financial income, principally merchant receivables advances | R$1,414.5 | R$818.6 | +72.8% |
| Profit before income taxes | R$1,217.6 | R$683.5 | +78.1% |
| Net income | R$910.4 | R$478.8 | +90.1% |
| Net income margin on total revenue and income | 21.0% | 19.0% | +2.0 percentage points |
| Basic earnings per share | R$2.8625 | R$1.8254 | +56.8% |
| Total payment volume (TPV) | R$76.1 billion | R$38.5 billion | +97.9% |
| Active merchants at year-end | 4.1 million | 2.8 million | +48.2% |
Cost of sales and services was R$2,144.7 million, selling expenses R$351.4 million, and administrative expenses R$581.7 million. Administrative costs rose sharply, chiefly due to R$419.3 million of LTIP share-based compensation and related expenses; management’s non-GAAP reconciliation excluded the R$419.3 million LTIP charge, R$18.0 million of IPO-related IOF tax, and R$131.3 million of IPO/follow-on foreign-exchange gains. IFRS net income was R$910.4 million; the company reported non-GAAP net income of R$1,067.7 million.
Transaction revenue grew with merchant and TPV expansion, but more debit-card volume and fewer installment credit-card transactions tempered revenue growth relative to TPV. Device sales revenue declined amid lower prices and promotions. The company attributed improved financial expenses to lower external financing needs following equity offerings.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents at year-end were R$2,763.1 million, versus R$66.8 million in 2017. The increase was largely funded by the January IPO and June follow-on offering.
- Operating cash flow was negative R$1,763.2 million, versus positive R$453.6 million in 2017. The main driver was growth in note receivables, including receivables associated with early merchant payments and higher TPV.
- Investing cash outflow was R$44.3 million; capital expenditures, including purchases and development of intangibles, totaled R$253.6 million.
- Financing cash inflow was R$4,503.8 million, including share-offering proceeds. The company repurchased R$39.5 million of shares in 2018 under a program authorizing up to US$250 million.
- Total assets were R$11,417.3 million, total liabilities R$4,842.9 million and equity R$6,574.4 million. Current assets were R$11,042.1 million and current liabilities R$4,710.8 million; assets included R$8,104.7 million of note receivables, while current liabilities included R$4,324.2 million payable to merchants and other third parties.
- The company reported no third-party borrowings at year-end 2018 or 2017. It used cash and receivables-related financing to support working capital and merchant advances; the FIDC also funds receivables purchases.
Outlook, commentary, risks and unusual items
- Management expected demand and transaction volumes to benefit from low digital-payment penetration in Brazil, merchant growth, card adoption and new products. It anticipated continued investment in product development and expansion; no specific numerical earnings or revenue guidance was provided.
- Management said expenses could rise in the short term as the business invests for growth, while expenses as a share of revenue could decline over the medium term. It also noted that receivables-advance income may become a smaller share of total income as the merchant mix shifts toward larger businesses.
- Key exposures include Brazil’s economic and political conditions, real depreciation, interest rates and consumer spending; intense competition and pricing pressure; fraud, chargebacks, cybersecurity and service interruptions; regulatory uncertainty around early payment of receivables and data privacy; and reliance on payment networks, suppliers and UOL-affiliated service providers.
- Brazil’s General Data Protection Act was scheduled to take effect in August 2020; the company stated that preparations were underway. Central Bank authorization for its digital account, prepaid-card issuance and acquiring activities was approved in October 2018; post-paid card authorization was approved in March 2019.
- At year-end, the company had approximately 3,500 consumer-related proceedings and about 30 labor proceedings. It recorded R$7.0 million of provisions for probable losses and disclosed R$47.2 million of tax lawsuits classified as possible losses for which no provision was recorded. Tax-related judicial deposits included substantial PIS/COFINS, ISS and ICMS amounts.
- Unusual items included the R$131.3 million foreign-exchange gain on offering proceeds, the R$18.0 million IPO-related remittance tax, and substantial LTIP compensation expense. The company paid no dividends in 2018 and had no adopted dividend policy.
- After year-end, PagSeguro acquired Bancoseguro in January 2019 for approximately R$58.8 million; the filing described the acquisition as supporting expansion of its financial-services offering. PwC’s audit opinion on the financial statements was unqualified; EY was appointed as auditor effective with the filing.
Most important facts for investors to verify
- How much of revenue and profit growth is recurring transaction economics versus receivables-advance income and offering-related foreign-exchange effects?
- Whether the large increase in note receivables and negative operating cash flow remain manageable as TPV expands, and how receivables are funded.
- Whether reported profitability and margins are sustainable after LTIP compensation, device promotions, taxes and other excluded non-GAAP adjustments.
- The status and potential financial impact of tax proceedings, ISS/PIS/COFINS disputes, and regulatory interpretation of merchant receivables advances.
- How competition, card-payment mix, Brazilian macroeconomic conditions and currency movements affect pricing, margins and growth.
- Whether cybersecurity, fraud controls, service continuity and reliance on UOL-affiliated infrastructure and a concentrated POS supply chain are adequately managed.