PagSeguro Digital Ltd. (PAGS) Earnings Call Transcript

Good evening. My name is Sophia, and I will be your conference operator today. Welcome to PagSeguro Digital Earnings Call for the Second Quarter of 2026. The slide presentation for today's webcast is available on PagSeguro Digital's Investor Relations website at investors.pagbank.com. Please refer to the forward-looking statements and reconciliation disclosure in this presentation and in the company's earnings release appendix. [Operator Instructions] Today's conference is being recorded and will be available on the company's IR website after the event is concluded. Now I will turn the call over to Daniel Spencer Pioner, Head of Investor Relations.

Good evening, everyone, and thank you for joining PagBank's Second Quarter 2026 Earnings Conference Call. We appreciate your time and interest in our company. Joining me tonight are Ricardo Dutra, our Principal Executive Officer; Carlos Mauad, our CEO; and Gustavo Sechin, our CFO. [Operator Instructions] I now turn the call over to Ricardo Dutra for this quarter's highlights and key accomplishments. Dutra, please go ahead.

Good evening, everyone, and thank you for joining our earnings call. Let's start on Slide 4 with some key figures. Q2 was another solid quarter for our company. We continue to increase client engagement while expanding our multiproduct ecosystem across payments, banking and credit, driving resilient profitability and reinforcing the strength of our business model. Total payment volume reached BRL 133 billion, up 3% year-over-year, reinforcing the gradual reacceleration trend we have seen over the past quarters. Our expanded credit portfolio reached BRL 52 billion, while total loans increased impressive 31% year-over-year, driven mainly by the expansion of working capital and credit cards offering. Total deposits continue to grow, reaching BRL 43 billion, up 15% year-over-year and provide an important foundation to support future credit growth. On the financial side, net revenue, excluding interchange fees, reached BRL 3.4 billion, growing 2% year-over-year, mainly driven by acquiring volumes reacceleration in our credit portfolio. Recurring net income, non-GAAP also grew 2%, reaching BRL 576 million, while diluted non-GAAP EPS increased 10%, supported by earnings resilience and capital optimization initiatives and within our guidance range for the year. Overall, we're seeing the strategy play out as expected, stronger engagement, broader monetization and resilient profitability despite a challenging macro environment. Going to Slide 5. Before moving into the business highlights, it is worth stepping back and looking at the broader value creation journey. Over the last 12 months, PagBank returned approximately BRL 2 billion to shareholders through dividends and share buybacks, represent a last 12 months total yield of around 13.4%. Since our IPO, we have significantly expanded the platform. We started as a payment-led ecosystem and have gradually built a much broader financial service platform around our clients' needs, combining payments, banking, credit, investments, insurance and new digital solutions. This evolution has increased the recurrence of our results, expanded our addressable market and strengthened our ability to monetize client relationships across different products and use cases. With that, I'll now turn the call over to Carlos Mauad.

Thank you, Dutra, and good evening, everyone. Before going into the business update, I would like to start on Slide 7 with the key messages that frame our performance this quarter and our long-term ambition. Q2 reinforces the consistency of our strategy. We continue to evolve our ecosystem with broader monetization across payments, banking and credit, while deepening our relationship with our active client base. This evolution is reflected in our operational performance with acceleration in all business from TPV to credit portfolio and most importantly, with increasing penetration of our banking products across our active client base. At the same time, execution and discipline are central to how we manage the business. demonstrating the resilience of our business model. On the second quarter of this year, we protected profitability supported by financial cost efficiency, operating leverage and disciplined capital allocation. Finally, as we move forward, our focus remains on strengthening our competitive position, capturing the opportunities ahead and consistently executing against both our 2026 commitments and our long-term strategic ambition. With that context, let me move to the business overview and the opportunity ahead of us. Starting with the marketing opportunity, we continue to see significant room for growth across our core verticals. PagBank has built an integrated platform across payments, banking and credit, serving individuals and micro, small and medium-sized business in markets where penetration remains low and growth potential is still meaningful. Our ecosystem give us several avenues for growth. We have opportunities to increase share in PIX, deposits, expanded credit and other financial service. In several of these markets, our current share remains below 1%, which reinforce how much room we have to expand. Moving to Slide 9. Product innovation continues to support engagement and monetization across the ecosystem. During the quarter, we advanced several initiatives designed to make PagBank more useful in our clients' daily lives. These includes Minizinha Voz, the first terminal in Brazil featuring an AI-powered sales assistant launched in January of this year; IOF cashback on international credit card transactions; private payroll loans; and PIX Finance, an integrated PIX installment solution, both products launched earlier this year and to be rolled out in the next months; zero fee investments; private pensions plans; collections management tools and new insurance products. What is important here is that these products expand our relationship beyond payments. They strengthen our banking and financial service offering, create additional cross-sell opportunities and support our long-term ambition of building a more complete financial platform for both merchants and individuals. As we have discussed before, the more products the clients use, the more engaged they become with the platform. That drives transaction activity and creates additional monetization opportunities over time. Turning to banking on Slide 10. Engagement continues to translate into higher transactionality and broader product adoption. Cash-in volumes, excluding acquiring-related inflows reached almost BRL 100 billion in the quarter, increasing 23% year-over-year and 19% quarter-over-quarter. Cash-in per active banking client reached BRL 5,700, up 27% year-over-year. We also continue to see stronger usage of our daily banking features, including bill payments and PIX transactions with increase of 12% year-over-year. In parallel, product penetration expanded across the active client base. Investment penetration increased from 23% to 28%, while insurance penetration increased from 11% to 16% year-over-year. Credit products penetration, excluding payroll clients also increased from 4% to 6%, a strong 43% expansion that shows not only our capacity to perform, but most important, the growth potential in this avenue. What we are seeing is simple. Clients are bringing more activity into PagBank and using a broader mix of products. This deeper relationship is central to our strategy, and it supports higher engagement, broader monetization and stronger lifetime value. Moving to Slide 11. Credit remains one of the key growth levers. It deepens client relationships and gives us additional opportunities to monetize the ecosystem. Our total credit portfolio reached BRL 5.1 billion, increasing 31% year-over-year. Growth was mainly driven by working capital and credit cards, both of which are important in the long-term strategy and to the 2029 ambition we have shared with the market. Working capital reached BRL 0.6 billion in credit outstanding, growing 204% year-over-year, while credit cards reached BRL 1.1 billion, up 35% year-over-year. Payroll loans and other credit products totaled BRL 3.4 billion, increasing 18% year-over-year. This is also worth highlighting the origination trend. While working capital origination was lower on average in Q2 compared to Q1, July already shows a stronger run rate at approximately BRL 80 million in credit production. This is above Q2 average and also above the average levels seen in the prior quarters, which gives us confidence in the continued momentum and scalability of the product. When we include financial operations linked to merchants prepayment, the expanded credit portfolio reached BRL 52.4 billion, up 9% year-over-year and 3% quarter-over-quarter. Just as important, we are growing the portfolio while maintaining the prudent risk profile. NPL90 stood at 3.4%, remaining well below the Brazilian market average of 6.2%. This reflects the strength of our underwriting, enhanced analytics, risk governance and the proximity we have with our clients through the ecosystem. As expected, the portfolio mix continues to evolve gradually with unsecured products increasing as a share of the total portfolio. This is consistent with our strategy and remains supported by prudent risk management across cycles. Let me move to funding on Slide 12, which remains one of our key competitive advantage. Total deposits reached almost BRL 43 billion, growing 15% year-over-year, while total funding reached BRL 47 billion, up 10% year-over-year. More than 90% of our total deposits are generated on platform, which reinforce the strength of our ecosystem and the relevance of our digital channels. The growth of our deposit base, combined with a high on-platform concentration and lower funding cost provides a scalable and efficient foundation to support credit expansion. During the quarter, we continued to optimize the cost of funding. The company has now delivered nine consecutive quarters of funding cost reduction as a percentage of the CDI, reflecting a disciplined liability management and improvements in product pricing and remuneration conditions. This funding structure gives us flexibility to continue to grow credit while maintaining a healthy balance sheet and strengthening client relationship. Now I will hand it over to Gustavo to cover how these business trends translated into financial performance. Gustavo, please.

Thank you, Mauad. Hello everyone, and thank you for joining us today. I will now cover our consolidated financial performance for the quarter. This slide shows the contribution of business execution and funding efficiency to revenue and gross profit. Total revenue and net income, excluding interchange fee, reached BRL 3.4 billion in the quarter, increasing 2% year-over-year and 1% quarter-over-quarter. Gross profit reached approximately BRL 2 billion, growing 3% year-over-year and 6% over-quarter. This performance reflects business execution, continued contribution from banking and credit, and a sequential improvement in financial costs. At the same time, it's important to note that interest rates remain high for the year, and the rate cuts have not come in the magnitude initially expected. So we continue to manage pricing, funding and capital allocation with discipline. The banking business is an important driver of our results. Higher transactionality, credit expansion and broader product penetration are contributing to a more diversified gross profit base and reinforcing the value of our integrated ecosystem. Now on Slide 15, we provide more details on the cost and efficiency drivers behind the quarter. Financial costs declined 5% quarter-over-quarter, primarily reflecting management initiatives to optimize the company's funding cost despite still elevated Selic levels. Total losses increased 9% year-over-year, mainly reflecting the expansion and mix evolution of the credit portfolio. This is consistent with our strategy to scale credit in a disciplined way while maintaining strong asset quality indicators. Operating expenses represented 25.9% of our total revenue and income, excluding interchange fees in the quarter. On a year-to-date basis, operating expenses improved as a percentage of revenues, reinforcing again our focus on operating leverage, even considering second quarter effects related to the World Cup broadcast sponsorship in Brazil and the annual collective bargain agreement. D&A plus POS write-off also improved as a percentage of revenues in the first quarter of the year, reflecting better allocation and POS management. Looking ahead, we still see room for additional efficiency gains and remain an important part of our value creation. Next slide, we summarize how these dynamics translate into bottom line performance and returns. Non-GAAP net income reached BRL 576 million, up 2% year-over-year. Diluted non-GAAP EPS reached BRL 2.06, increasing 10% year-over-year, supported by earnings resilience and the reduction in average shares outstanding following the execution of our share buyback program. Annualized non-GAAP ROE reached 15.6%, increasing 30 basis points year-over-year and remaining in line with our solid capital structure and disciplined approach to our profitability. These results shows that we continue to protect profitability while we invest in technology, product innovation and long-term growth of the business. Moving to the next slide. I would like to reinforce the strength of our capital position and our commitment to discipline shareholder returns. We have continued to advance our capital optimization agenda, pursuing a Basel ratio with our target range of 18% to 22% over time. At the end of this quarter, our adjusted Basel ratio stood at 22.5% compared to 24.1% in the first quarter and 29.6% in the second quarter of a year ago. This movement brings us closer to our target range while preserving all the flexibility and capabilities to support the company growth. Over the last 12 months, PagBank returned BRL 2 billion to shareholders through dividends and share buybacks. In this first half of 2026, we completed our third repurchase program, authorized for up to $200 million with more than BRL 370 million repurchased during this period. In addition, the second tranche of our 2026 dividend was paid in June and a third tranche of BRL 0.28 per common share will be paid on September 30 with a record date on September 16. We continue to expect total cash dividends paid in 2026 to reach approximately BRL 1.4 billion subject to the relevant approvals, as always, we say, market conditions and the company's financial position. As we said before, we always manage to use dividends and buybacks, and dividends remain the most effective way to optimize capital while continue to support the business growth. Moving to the next slide, we show where we stand against our 2026 commitment after the first half of the year. At this point, we are maintaining our targets for the year, recognize that year-to-date performance reasonably in line with our strategy. We have been observing a much more challenger year than we were expecting with risks coming both internally and externally. The macroeconomic environment remains clearly uncertain, and it's very important to recognize that current Selic rate levels create additional pressure for the performance of the business. At the same time, we have been focusing on running the business with efficiency and discipline, looking for different initiatives to boost our profitability. For that reason, we continue to expect to deliver a full year performance in line with the guidance range. Now starting with credit, total credit portfolio growth reached 31% year-over-year in the first half within our expected range for the full year. We expect to keep this growth within the expected range for the year as we further evolve our credit offering with the rollout of new products in the next quarters, such as private payroll and PIX finance. Gross profit grew 2% year-over-year in the first half, highlighted by the positive contribution coming from financial cost efficiency. Again, we managed the business to reduce our financial costs. Diluted non-GAAP EPS increased 11% year-over-year in the first half with the guidance range for 2026. This reflects resilient profitability and the positive effect of capital optimization initiatives. Finally, CapEx reached BRL 1.1 billion in the first half of this year, and we continue to manage investments with discipline aligned with our full year commitment. With that, I will turn the call back to Mauad for his final announcement.

Thank you, Gustavo. Before we move to Q&A, I would like to share a recent leadership update. We are pleased to welcome Enrique Fragata as PagBank's new COO. Enrique brings a strong experience in the financial sector and his arrival strengthens our focus on execution, efficiency and operational excellence. Enrique comes at an important stage as we continue to expand our ecosystem and advance our long-term strategy. With that, I thank you all for joining us today. We appreciate your continued trust and partnership.

Thank you all for the presentation. We will now begin the Q&A session for investors and analysts. Our first question comes from Arnon Shirazi with Citi.

My question is related to credit and the 2029 goals. Remember that the expectation was to accelerate the credit portfolio, especially in '27. But for '26, you are testing the product. From the current scenario that we are seeing today with every day surprisingly negative news on the delinquency levels, do you see any change in plans reducing the growth pace or revising the 2029 goals?

This is Mauad. Thank you for your question. No, we are still quite confident on everything that we are doing here. In fact, we see the 31% increase on the credit outstanding as a very good number in terms of volume and performance. There is a long way to go before 2029. Of course, there is going to be different macro cycles that we're going to have to face it. There's going to be regulatory milestones that can change the credit landscape in Brazil, especially on the collateral products. But again, it is our mission here to find out the workarounds, find out the new products and to scale up the credit strategy of the company. So, so far, despite the fact that the macro is tougher than we thought on the beginning of the year, we're still quite confident on everything that we are doing and confident on the long-term guidance that we published last year.

Just to complement, Arnon, just part of the answer here is to remember that looking at Slide 11, we have very low NPLs that give us the comfort to keep growing the credit portfolio in a sustainable way. We are still far below the industry, 3.4% compared to 6.2%. So we do have the comfort to keep growing in a sustainable way, same way we've been doing so far.

Great. If I may, a follow-up on credit. Regarding the private payroll loans, remember that the company was testing internally. How is this advancing and the rollout to other companies have started yet?

Yes, we already start to produce credit outside of the group, the economic group that we have here. We already produced the first few millions in terms of credit outstanding, and we're going to keep pushing up these volumes as we get confident on everything related to the operational risks on the product. We are confident on the first signs that we saw that everything that we designed and implemented, it is solid. But of course, there are some part of the credit cycle that we need to still test. But again, answering straightforward your question, we are already creating credit production outside of the group on the payroll loans.

And how is the quality so far? Sorry for the follow-up.

So far, it's been perfect. But of course, we started with the top tiers in terms of credit quality, so it's coming on what -- on the levels of -- in terms of delinquency on the levels that we expected.

Our next question comes from Daniel Vaz with Safra.

Maybe two questions on my side. I'm looking at your TPV, it improved sequentially, but we didn't see the revenues being budged at the same pace, right? So you have a beat on TPV and miss on revenues, maybe on consensus and also my side. This can mean your take rate that the margin is compressing. Can you give some comments on if that has to do with pricing, maybe a seasonal World Cup volumes with more bet at your mix or more PIX while card are struggling, client mix? So that's my question number one. And the question number two, trying to look at your gross profit guidance for 2026, you're currently at 2% and your guidance is unchanged at between 6% and I guess, it's 11%, 6% and 9%. Any expectations of pickup in the gross profit for the second half of the year to meet guidance?

This is Mauad. I'm going to answer your first question, and then I hand over to Gustavo to give you some light on the gross profit question. So in terms of the TPV, there is a small dilution when we saw the growth of the net revenue and the TPV itself. There is an impact in terms of product mix driven by the World Cup, as you mentioned there, but that is nothing that really worries us. Of course, we are keep pushing TPV. We are being very careful about pricing, and that is, as probably you remember, there is also a base, let's say, a tough comp when you look at the second quarter of last year, where we have a massive repricing of the entire customer base that we have here due to the hike of Selic. So if you take a look at the evolution of the net revenues from the first quarter of last year to the second quarter, it is quite strong. So we created this step and a little bit harder to push up the net revenue growth on the second quarter. But again, there is a price to be paid on the churn that we had to manage later last year. And here, we are much more confident on this balance that we are creating here between growth and defending the profitability of the company. I will pass the floor here to Gustavo so he can answer your second question.

Daniel, it's Gustavo here. So talking about the guidance, especially the gross profit guidance, we know that we have a lot of moving parts, and we have a lot of headwinds coming from the macro scenario, which give us some level of uncertainty. But at the same point, as we have been talking, we always say that the second part of the year, the second half of the year should be the most important in terms of the guidance achievement. And talking about the gross profit, we can say that we considered some contribution coming from the credit origination, the credit acceleration as we post in this presentation. Also, as Mauad said, related to the TPV, remember that we have been said that the third quarter -- between the third and fourth quarter of last year were the worst part of the cycle for us. And gradually, we have been posting an increase in terms of the payment activity. Also in terms of financial costs, despite the headwinds of this higher Selic when compared to what we were expecting, we have maybe easy comps in the second half of the year. And I can say that we are always looking for different initiatives that could give us the ability to deliver the guidance. But again, probably not by the top of the range, but probably reaching the bottom of the gross profit guidance as we post.

[Operator Instructions] Our next question comes from Kaio Prato with UBS.

I have one question on costs, please. This quarter -- actually, in the last two quarters, we noted, I would say, better-than-expected POS write-offs. I think those were lower than expected in the first Q, and now I think we had a reversal in the second quarter. Can you give us any color around that? Anything that's happening different than expected on the POS write-offs? And what can we expect going forward as well? And still on this topic, if you are seeing anything related to costs related to POS? We note that some players are claiming about higher costs related to POS. Just wondering if you have anything on your side as well.

Okay. Gustavo here to talk to you. So talking about the write-off of POS or the POS in general, we have implemented a series of different initiatives to organize our logistics and also how we can deploy different initiatives in terms of how we can get the POS that we had in the street and our merchants are not using it anymore and how we can deliver a different approach, a different solution on that, so that's the main reason that you are seeing. So considering going forward, probably we are going to seek for continuous improving that line. I would say that probably it's not going to be something linear, but the idea is to continuously improve our POS database, and we are looking for -- generate some kind of initiatives. And talking about efficiency or other lines in terms of expense in general, as we said, we are managing the business into getting some operational leverage, so we have implemented some initiatives in terms of how we can redesign some process, how we can implement some automations. We have used the AI to help us not only in the back office, but also in the customer care, in the customer assistance. So we have been deploying different kind of initiatives to give us the opportunity to continue to generate operational leverage, so that's the idea. We are managing the company, trying to seek for different opportunities to improve our profitability through the efficiency gains.

Okay. Anything on the cost related to POS?

This is Mauad. There is nothing major. We do have like a memory shortage on the global market, so that kind of pressure determine those prices a little bit. But in the other hand, FX is helping a little bit. The efficiency that we are building, as Gustavo mentioned, on how to recover the POS that are on the churning customers' hands. So everything that we are putting together here, we are not feeling this impact on the unit perspective. So, so far, so good here on our side when we talk about the POS cost.

Our next question comes from Marcelo Mizrahi.

I have two questions. So the first question is regarding the take rate, so the financial revenues. And looking forward, with this dynamic of -- to have a lower impact of credit cards, so having more peaks, is it possible to see this dynamic going maintained, so stable going forward? This is the first question. And the second question is regarding the expenses side. We saw some expenses related to the World Cup, so it's possible to see a better profitability or even a reduction of the operational expenses on the third quarter looking forward?