PagSeguro Digital : 2Q20 Results Webcast Transcript

2Q20 RESULTS

WEBCAST TRANSCRIPT

OPERATOR

Hello everyone and thank you for waiting. Welcome to PagSeguro's second quarter 2020 results conference call. This event is being recorded and all participants will be in listen-only mode during the company's presentation.

After PagSeguro's remarks there will be a question-and-answer session. At that time further instructions will be given. Should any participant need assistance during the call please press star zero to reach the operator.

This event is also being broadcast live via webcast and may be accessed through PagSeguro's website at investors.pagseguro.com, where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via webcast may pose their questions on PagSeguro's website.

Before proceeding, let me mention that any forward-statements included in the presentation or mentioned on this conference call are based on currently available information and PagSeguro's current assumptions, expectations and projections about future events. While PagSeguro believes that their 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 PagSeguro's presentation or discussed on this conference call, for a variety of reasons, including those described in the forward-looking statements and risk factor sections of PagSeguro's Registration Statement on Form 20F and other filings with the Securities and Exchange Commission, which are available on PagSeguro's investor relations website.

Finally, I would like to remind you that during this conference call the company may discuss some non-GAAP measures. For more details, the foregoing non-GAAP measures and the reconciliation of these non-gaap financial measures to the most directly comparable GAAP measures are presented in the last page of this webcast presentation.

Now, I will turn the conference over to Mr. Ricardo Dutra, CEO. Mr. Dutra, you may begin your presentation.

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RICARDO DUTRA | CHIEF EXECUTIVE OFFICER

Good evening everyone and thanks for joining our second quarter results conference call. Tonight, I have here with me Eduardo Alcaro, our Chief Financial Officer, and André Cazotto, our Head of Investor Relations. We hope you and your families are well and safe. Everybody knows the past few months has been challenging and we remain focused on supporting our clients, our business partners, the society, and our employees. By the way, I would like to thank you again all PagBank PagSeguro team who have been supporting our businesses from their homes in the last months. Thank you very much PagBank PagSeguro team! As we will see in the next slides, even with all impacts generated by Covid-19, our results show our business is exceptionally resilient. Certainly, there were numbers that declined in the quarter, however, the most important operational KPIs such as total payment volumes, net adds, PagBank users and so on have been improving each month throughout the quarter and are growing year over year.

Finally, important to mention we have developed features and products and acquired companies to build a complete and unique ecosystem to address the needs of our clients. Regardless of the current moment, we are confident in our strategy and the opportunities ahead of us. We keep investing to grow the company and, at the same time, keep our profitability levels. That said, Eduardo Alcaro and I will present some slides and we will have Q&A session at the end.

SLIDE 3

Financial and Operating Performance

On slide 3, we highlight the achievements of the second quarter, a challenging quarter driven by volumes rebounding, accelerated growth and stable margins amidst social distancing measures and economic slowdown.

We saw strong financial and operational performance, a lot of traction in PagBank, and also online TPV and software services growth. Important to mention micro merchants proved to be more resilient and faster adopters of new payment channels and we continue to gain scale in payments and banking backed by our unique online distribution in an untapped and underserved existing long-tail market in Brazil.

TPV reached close to 30 billion reais, growing 11% year over year. In July and August, we saw an acceleration of growth year over year, marking 47% and 51%, respectively. When compared with the first half of March, which is pre-Covid-19 in Brazil, the first half of July is 21% above and first half of August is 29% above.

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Take Rate ended the quarter at 2.72%, down 59 basis points quarter over quarter, mainly due to a temporary impact of mix, meaning more debit card transactions and less credit installments, directly impacting our prepayment revenues. However, our take rate continues to be way above the listed peers.

Our net adds in the quarter were close to 300 thousand, up 32% versus first quarter 2020 and 1% higher than second quarter 2019. Active Merchants reached 5.8 million, with a historical record level of gross adds in June and July, given the higher demand for new devices.

Transaction Activities and other services Revenues grew 4% during the quarter, reaching a pre-Tax Margin of 31.6%. Non-GAAP Net Income of 307 million reais, with a Net Margin of 22.6%.

PagBank (Banking Services)

Moving to PagBank, our non-Acquiring TPV through banking, digital account and wallet services reached 10.6 billion reais, growing 168% year over year, another triple digit growth. PagBank Revenue grew 52% year over year.

In the first half, PagBank revenue reached 7% of Total Revenue and Income, with a growth of 105% in comparison to the same period of 2019.

We added another record of 1.2 million new PagBank users during the second quarter of 2020 and reached 4.9 million users in Q2. We are also proud to surpass more than one million pure PagBank consumers, with the average number of products usages growing 36% year over year, showing the success of our go-to-market strategy to reach clients other than acquiring.

4.6 million PagBank app downloads in the second quarter, accumulating close to 22 million app downloads in July, being one of the leaders on digital banks adoption.

Online TPV and Software Services

Moving to online TPV and Software services, last week we announced we reached an agreement to acquire Wirecard MOIP in Brazil, the most complete online payments platform in the market, which will help us leverage our omnichannel offer. We will talk more about that in a few minutes.

We also announced the acquisition of Zygo, a multisided loyalty and CRM platform.

Online TPV grew 121% year over year in July, backed by the structural transformation in sales channel and payments solutions and stronger growth of cross border transactions.

Software's subscribers reached 311 thousand, up 267% vs. 2Q19.

Link of payments transactions grew 69% in the quarter, while cross border payments volumes increased 2.5 times year over year.

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SLIDE 4

On slide 4, we show the main KPIs I mentioned previously.

SLIDE 5

Moving to slide 5, we want to recap the achievements of the first half of 2020. Despite an unexpected first semester, PAGS continues to be a leading company, maintaining the long-term strategy focused on the unique existing opportunity to provide best-in-class payments and financial products and services to the Brazilian population.

Financial and Operating Performance

TPV reached close to 62 billion reais, growing 20% year over year.

Total Revenue and Income grew 11% when comparted to 2Q19, marking 2.9 billion reais.

Active Merchants were 5.8 million by the end of June; we added 526 thousand new merchants during the first six months of 2020.

Take rate was 3.04%. Adjusted pre-Tax Margin of 31.9%, with Non-GAAP Net Income reaching 674 million reais in the first six months of 2020, 1% up vs. first half 2019, with Non-GAAP Net Margin reaching 22.9% in the same period.

PagBank (Banking Services)

On PagBank services, Non-Acquiring TPV through banking, digital account and wallet services reached 19.3 billion reais, growing 178% year over year, due to the accelerate pace of new financial and digital wallet products launched to serve both merchants and consumers.

Active users were 4.9 million, meaning we added 2.2 million new users during the first half of 2020, with pure PagBank consumers accounting for more than 1 million active users.

SLIDE 6

Slide 6, we show the main first half 2020 metrics I mentioned before.

SLIDE 7

Moving to slide 7, we would like to reinforce our focus in growing with profitability. In the first half, PAGS Net Income was 60% higher than Brazilian listed peers combined, reaching close to 600 million reais of GAAP Net Income, down only 6% in comparison to the first half of 2019. Important to mention PAGS results excludes the provision reversal we had in the second quarter 2020, which impacted positively our bottom-line.

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SLIDE 8

On next slide and closing the initial remarks, as we said in our last conference call and in other interactions with investor´s community, we are observing a sharp recovery of our TPV, since the second half of April. Year over year, our TPV in May grew 11%, in June grew 25%, year over year. Our TPV in Q2 grew 11% when compared with Q2 2019.

In July, we observed a better recovery and our TPV grew 47% year over year, and we continue to see a strong pace in August, growing 51% year over year. This trend shows the accelerated migration from cash to electronic transactions caused by the pandemic, the resilience of our diversified merchant base, constituted by micro, small and medium merchants and individual entrepreneurs all over the country, the faster adoption of online, card-not-present and contactless transactions and also a larger spending backed by the government subsidies.

Important to mention all these volumes are related only to payments transactions. Due to Covid-19, Brazilian government disbursed a relief, we can call coronavoucher, to ~1/3 of the Brazilian population, and some of the beneficiaries decided to top up and transfer their balances to some banks, including PagBank. However, these top up volumes are not included in our TPV figures.

In the chart below, we can see healthy TPV trends when compared to the first half of March, which is pre-Covid-19 in Brazil. TPV has been improving, and in the first half of July we reached 121% of the TPV of the first half of March, and 129% in the first half of August. Right now, most of the states in Brazil are reducing the social isolation, some important cities are re-opening such as São Paulo and Rio de Janeiro and retail volumes are improving.

On the right side of the slide, until August 20th, we see we already added more than 250 thousand new merchants surpassing more than 6.0 million active merchants, backed by another incredible consecutive historical record of gross adds for a unique month in July, which corroborates our view that the addressable market is increasing and accelerating after the pandemic.

According to IBGE, since the beginning of the pandemic in late March, the number of new individual professionals increased by 20% year over year, and in parallel, close to 9 million Brazilians lost their formal jobs, meaning that millions of people became individual entrepreneurs for need or opportunity.

Additionally, we continue to accelerate the pace of net adds for PagBank, already reaching more than 900 thousand new users, until August 20th and surpassing more 5.8 million active users, expanding our addressable market beyond merchants.

Finally, on the bottom right side of the slide, we can see some other Q3 trends:

Record of POS Sales in July and daily TPV record in August; Acceleration of Non-Acquiring TPV and growing above 200% year over year, backed by the coronavoucher top up through our virtual cards and Net Revenues growing high teens in a year over year basis.

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Because of Covid-19, we continue to see higher participation mix of debit transactions, reaching levels higher than those observed in the fourth quarters. Consequently, we will have a lower mix of credit and installments transactions, which will continue to, temporarily, impact negatively our take rates and margins.

Now, I will pass the word to Eduardo Alcaro, our CFO, who continues to manage our costs and expenses very close so that we can navigate through this unique time together.

Thank you! Eduardo, please go ahead.

EDUARDO ALCARO | CHIEF FINANCIAL OFFICER

Thanks Ricardo, and hello everyone!

SLIDE 9

On the next slide, we present our operating figures.

Total Payment Volume reached close to 30 billion reais, growing 3 billion reais or 11% when compared to the same period of last year. Our diversified merchant base, no geographic concentration, resilience of the micro merchant segment and adoption of online and card-not-present transactions, supported this strong rebound that continues in July and August.

In the next graph, we breakdown our mix. Like Ricardo said earlier, our take rates are being temporarily negatively impacted by this mix effect. The acceleration on TPV is coming mainly through debit cards, supported by the government subsidies, known as coronavouchers, a 600 reais paycheck for the most vulnerable families. In addition, as a consequence of the pandemic, lower consumer confidence and higher unemployment rates are impacting personal credit card leverage and driving financial institutions to reduce credit limits. This impacts the regular and credit card transactions in installments which is the main driver of our financial income. Additionally, economy sectors where credit installments are more relevant, such as general merchandise retailers, clothing stores, among others, were more impacted during the partial shutdowns in Brazil. Debit mix reached an unprecedent level of penetration, surpassing 50% of our overall TPV in some weeks of Q2, even higher when compared to the highest seasonality observed in Q4. Again, we expect this mix effect to be temporary and it should normalize after the Covid-19 pandemic, and the good news is that we continue to gain market share and increase volumes on a year over year basis.

On the chart below, our Net Take Rate, which is the blended Take Rate Net from Transactions Costs such as Interchange, Processing and Cards Scheme Fees, reached 2.72%, down 59 bps quarter over quarter and 25 bps down in comparison to Q4 2019.

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On the next graph, we breakdown the take rate composition quarter over quarter, highlighting the most relevant impacts which are temporary, as consequence of the Covid-19 pandemic:

• First, the most relevant is the mix effect, impacting 36 basis points, with 23 basis points explained by the product mix due to lower installments transactions and 13 basis points as temporary promotional discounts to support our clients during the pandemic
• Second 13 basis points on Transaction costs. Remember that in Q1 we had a positive impact coming from a card scheme rebate.
• Last, 11 basis points related to Others, mainly due to our temporary decision to reduce our credit exposure during the crisis.

As discussed earlier, the largest negative impacts are temporary and should recover as the economy and the consumer confidence improves, driving more credit instead of debit card spending.

SLIDE 10

On the next slide, we show our Total Net Revenue and Income that reached almost 1.4 billion reais, down 2% year over year. Operating Revenue and Income remained flattish, down 0.6%. Transaction Activities and Other Services grew almost 4% year over year, while Financial Income decreased 8% in the same period, due to lower installment transactions.

Bottom right, GAAP Net Income reached 296 million reais, a decrease of 8% year over year. Non-GAAP Net Income in the second quarter reached 307 million reais, down 10% year over year. In this quarter, we had a positive impact of 56 million reais after tax due to a tax provision reversal.

Thank you all and now I am passing the word to Ricardo, who will comment on the latest business developments.

RICARDO DUTRA | CHIEF EXECUTIVE OFFICER

SLIDE 11

Thanks Eduardo!

Moving to slide 11, I want to share some figures about our online volumes.

PagSeguro was born online in 2006, starting as an e-wallet (PayPal like model) for millions of Brazilians to pay online in a safe and easy way. On the left side of the slide, we can see our online ecosystem. Over time, we built new services and became a very complete online payments platform, including features such as: different check outs, cross border transactions, online QR codes, link of

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payments, split payments, and also logistic support to our merchants through third parties partnerships. More recently, we also launched our own food delivery app.

Our online results are encouraging: Year over year, the number of online transactions doubled in the Q2 20, and online TPV grew more than 70%; transactions of link of payments, a solution easily shared through any social network such as WhatsApp, Facebook Messenger and also through email or SMS, grew 69%; and our cross-border TPV increased 2.5x Below in the chart, we see that in July 2020, our online TPV grew more than 120% year over year

Important to say we have very low exposure to sub acquiring companies, meaning that almost 100% of our online transactions refer to our own merchants using our payments solutions. The pandemic is driving a faster adoption of online, card-not-present, and contactless transactions.

According to a Visa Global Study, 67% of the SMB´s are moving to a digital first mindset, having Brazil as one of the leader's country.

We are investing to promote the best omnichannel experience to millions of micro, small and medium businesses, many of them selling online for the first time.

SLIDE 12

On slide 12, we present some highlights in terms of online distribution, Google searches and our App rating.

Starting with Google searches for digital banks, PagBank remains at the top, with 66% of the total shares over digital banks, a consequence of our marketing efforts and product roll out.

PagBank app also continues to be the top rated app among digital banks, maintaining at 4.8 stars in iOS and 4.7 stars in Android, being the most reviewed app among digital banks and payment peers, also a consequence of our best-in-class product development and user experience-oriented culture.

Since its launch, PagBank app reached 22 million downloads. In terms of revenues, we observe an increase of 50% in revenues from merchants that, in addition to acquiring, use three PagBank products. If the merchant uses 5 products, its revenues 108% more.

Finally, some UOL figures. In June, UOL reached 113 million unique users, or 92% of the Brazilian internet audience.

As we can see in the chart below, UOL has the third largest audience in the country, just behind Google and Facebook, and all this reach and brand awareness helps PagSeguro and PagBank distribution.

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SLIDE 13

On slide 13, we show some relevant engagement trends in our PagBank ecosystem. We believe engagement is a relevant metric to follow at this stage, once it will help the company to increase the switching cost of our clients, and increase their stickiness and loyalty, which will enable future monetization and revenue diversification.

In terms of PagBank Users, we reached close to 5 million PagBank Active Users, adding 1.2 million new active users during the quarter, driven by merchants conversion into PagBank users and the acceleration of net adds of Consumers, surpassing more than 1 million PagBank Active consumers, showing our ability to expand our banking and digital wallet addressable market through the launch of new products and services combined with marketing and online distribution.

Non-Acquiring TPV reached 10.6 billion, up 168% year over year. Our Total Credit Portfolio, combining loans and credit cards, reached 465 million reais, down 6% quarter over quarter. Since the beginning of pandemic, we decided to block new credit disbursements in order to limit our credit exposure in this period.

In Q2 our focus was to support and renegotiate our portfolio in a case by case with our merchants. For part of our merchants, we offered a 90 days grace period for repayment. Both measures helped us to control NPLs levels. Despite the current environment heavily impacted by the pandemic mainly in late March and April, the majority of the merchants, operating with PAGS Capital, continued to sell and are recovering volumes.

In July, we started gradually to make new credit offers to our best merchants.

Credit is an important tool to create higher engagement with our merchant base and will continue to generate additional revenues for the company in the future.

On financial services, we reached 2.4 billion reais in PagBank Deposits, 41% higher when compared to the same period of 2019, mainly driven by a larger inflow of boletos or bank slips and wire transfers. QR Code transactions grew 40 times when compared to 2Q19, driven higher usage of alternative payment methods and NFC transactions grew almost +450% year over year, boosted by the pandemic.

On the top right, in the first half of 2020, PagBank Revenues increased +105% year over year, already representing 7% of Total Revenue and Income, on track to reach 30% of the Total Revenue and Income in 5 years

Lastly, we are expanding our investments products through the issuance of new Certificates of Deposits by PagBank, with daily liquidity and higher interest rates. For clients holding investments on PagBank CDs, we offer a free PagBank Credit Card with credit limit linked to their investments.

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SLIDE 14

On slide 14, we highlight our roadmap of products already delivered in the past two years. Being tech and independent, allow us to think exclusively on our clients' financial needs, and consequently, combine growth with profitability. Since May 2018, we have delivered almost 50 new products, including hardware, software, banking, and services in our Super App.

In June, we launched Bilhete Único top up feature. PagBank clients can top up their public transportation ticket in PagBank app using the balance of the digital account. This new feature brings more convenience and helps to reduce lines in ticket counters of buses, subways, and train stations. We also launched Caixa Virtual Card, the option to our user top up and transfer the coronavoucher paid by Caixa Econômica Federal. Finally, we signed a new partnership with Roldão Atacadista, fostering the usage of QR Code, offering a 10% cash back capped on 30 reais per Social Security number.

In July, we announced the acquisition of Zygo, a multisided customer engagement and loyalty platform. Lastly, we launched more options of our proprietary CDs, with different durations and interest rates that ranges from 100% to 150% over Brazilian Interbank Rate.

Despite the current health crisis, we decided to keep investing in product development, and keep committed with our roadmap agenda. The constant development of our ecosystem is key, and we will continue to deploy new products and services on payments, banking, and software fronts.

SLIDE 15

On the next slide, we would like to share some thoughts about the acquisition of Wirecard MOIP. As we remain confident about our long-term growth opportunity, we took the advantage to move forward and strength our online payments' solutions.

Wirecard MOIP is an independent institution regulated by the Brazilian Central Bank, providing an end-to-end payment processing solution for e-commerce and marketplaces. With the closing of the deal, PAGS will combine its best in class offline business model with the most relevant online platform for millions of merchants, strengthening its omnichannel strategy and accelerating our growth in online sales. Online sales in Brazil is still in early stages, with only 4% penetration of the total retail sales, however it is expected to keep growing as a consequence of the pandemic.

Wirecard MOIP has 200 thousand clients and is expected to reach close to 5 billion reais in TPV in 2020, a CAGR of almost 40% in the last 5 years; its revenues will reach close to 120 million reais, a CAGR of almost 30% in the same period. Important to say Wirecard MOIP has positive EBITDA.

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SLIDE 16

On the next slide, we show our software initiatives.

We have several initiatives to help merchants to manage and grow their businesses. In June, we reached 311 thousand software subscribers, up 267% year over year.

In July, we announced the acquisition of Zygo, a multisided loyalty platform that enables micro, small and medium sized merchants to acquire, engage and grow their customer base by offering customized marketing and loyalty programs and providing consumers insights and analytics.

We believe software offering is one of the key value-added services to keep adding, engaging, and monetizing our clients.

SLIDE 17

On the next slide, we show some of the new products, services, and partnerships.

Some of them already described before, such as Bilhete Único, Roldão Atacadista and coronavoucher virtual card.

Additionally, we included new merchants on Pede Facil, including Bráz Pizzaria, a famous one in Brazil. Pede Facil has been supporting thousands of clients to sell online, by providing payments, software, online menu, and orders and even supporting with the logistic through partnerships with third party companies.

Finally, we are happy to announce we signed a partnership with TikTok. TikTok is the most popular video-sharing social networking service, surpassing 2 billion app downloads around the World.

TikTok influencers and content developers may generate revenues by developing short videos, product promotions, etc. With this partnership, PagBank PagSeguro offers a very simple and fast cash out bottom, so that users can transfers their TikTok balances directly to a PagBank account in up to 1 day, and use all the banking and wallet services that we provide. This partnership will help us to scale our PagBank account with millennials, heavy users of TikTok who are starting their financial lives.

SLIDE 18

Finally, moving to slide 18, I would like to comment about the existing opportunities in Brazil and how PIX could unlock massive financial volumes to be captured and incorporated into financial system, consequently, boosting the usage of PagBank.

PIX presents the opportunity to boost electronic transactions and leverage financial services to millions of unbanked and underserved Brazilians.

Additionally we believe that the P2P, boleto and wire transfers are the most impacted by PIX, due to the nature of the fast payments transactions, the inefficiency of those products in terms of pricing,

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user experience, settlement period and also because of the size of its market, which is 5x larger than the cards market in Brazil.

We believe PIX will be complementary to card payments, mainly because of the maturity of card payments in Brazil, already stablished in our consumption culture, with roughly two debit cards and one credit card per adult , representing 41% over total PCE (Private consumption expenditure).

PagBank and PagSeguro are positioned to capture PIX opportunities as a payment and banking provider for both merchant and consumers, offering an integrated end-to-end and flexible platform ready to integrate with several stakeholders through our API´s and leverage our services.

In conclusion, we are prepared to increase and consolidate our leadership in the long tail market, which is still huge, due to the large number of micro merchants and informal employees and will grow due to acceleration of the shift from cash to electronic transactions and increase our addressable market into the consumer vertical through PagBank.

Although we are pragmatic in understanding and managing short-term impacts of Covid-19, we are confident about the strong fundamentals of our businesses, the strength of our brand and the PagBank PagSeguro ecosystem we have built so far. We will keep investing in our long-term strategy, in people, products, services and growth. We believe PAGS is leaving this crisis uniquely positioned to lead the digital transformation of payments and financial services in Brazil for both merchants and consumers.

Having said that, we finish our presentation and we will start the Q&A session.

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