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PagSeguro Digital Ltd. (NYSE:PAGS)
Q3 2018 Earnings Conference Call
Nov. 29, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, everyone, and thank you for waiting. Welcome to PagSeguro's Third Quarter '18 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 anybody need assistance during the call, please press *0 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 this 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 this presentation or mentioned in 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 lieu 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 Factors sections of PagSeguro's registration statement on Form F-1 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'll turn the conference over to Mr. Ricardo Dutra, CEO of PagSeguro. Mr. Dutra, you may begin your presentation.

Ricardo Dutra -- Chief Executive Officer and Director

Hello, everyone, and welcome to our third quarter results conference call. Today, I have here with me Eduardo Alcaro, our CFO, and André Cazotto, our head of investor relations.

Before we go through the operational and financial metrics, we want to reiterate our confidence in our strategy. Being an independent company allows us to think exclusively on our clients' financial needs, delivering growth and profitability simultaneously by offering a unique ecosystem through our digital account. [Inaudible] in 2019 has increased [inaudible] to take our ecosystem to the next level. Before you ask, we cannot disclose the data at this point due to competition. They'll be systematically trying to copy us. However, we will provide it in our call in the 2019 quarterly calls. Being the first mover and mobile-first with a non-replicable online distribution through UOL brings a natural advantage to PagSeguro. We operate in a new and massive market with the ability to launch and cross-sell additional services through our digital accounts, which is a key piece of our long-term strategy.

PagSeguro proves that operating and winning in long-tail requires an online and mobile approach that is totally different from the traditional acquiring business model in other new competitors that we attracted to the market. We operate in a brand new market and we still have a long way to go, constantly putting into practice our vision to disrupt and democratize financial services through technology and innovation.

On Slide 3, we start with our total payment volume that reached R$20.3 billion in the third quarter, an increase of R$9.6 billion, up 90% year-over-year and R$3.4 billion, up 20% quarter-over-quarter, accelerating when compared to the R$2.5 billion or [inaudible] growth observed in Q2. This growth is the result of a greater penetration of our ecosystem in long-tail combined and with the trend of cash to plastic switch that is [inaudible] our merchant base [inaudible] and also, the innovative products and solutions offered to our clients. The gross take rate excluding sales of device ended the third quarter at 4.9%, representing a small contraction quarter-over-quarter mainly related to the higher penetration of debit transactions that went up 110 basis points and is likely our penetration of credit card transaction installments in the quarter.

It is important to highlight that although growth take rate went down a few basis points quarter-over-quarter, the net take rate, which is the take rate net from transactions costs, mainly interchange and card scheme fees reached 3.3% in Q3 2018, is stable throughout the year. The maintenance of our net take rate enables our net income margin extension, reaching 26% in the third quarter, and Eduardo Alcaro, our CFO, will give more details later.

On the chart below, we see the number of active merchants. Just to remember the criteria used internally, active merchants are those who made at least one single transaction in the last 12 months. We ended the third quarter with 3.8 million active merchants, adding almost 1.4 million new merchants in one year, representing an increase of 66% year-over-year. Quarter over quarter, we added 323,000 new merchants, beating the range that we provided in the last conference call.

Compared to Q2 2018, we had a decrease, mainly because Q2 was a very strong quarter where we had the launch of Minizinha Chip and [inaudible]. In addition, the third usually has a worse seasonality than the second quarter given the winter vacations in July. We are confident our growth will keep the same pace of more than 300,000 [inaudible] in the following quarters. For instance, in terms of sales of devices, November will be the best month of the year.

In the next chart, we have the evolution of our average spending per merchant that reached R$5.5 thousand in Q3, a growth of 70% year-over-year and eight percent quarter-over-quarter, also accelerating when compared to the growth observed in Q2. This is explained by the higher adoption curve of [inaudible] payments in our merchant base, which is an expected trend, a higher engagement in our ecosystem being converted in more transactions and total payment volume. Remember, the majority of our merchants have never accepted cards before joining PagSeguro.

Now, I'd like to pass over to our CFO, Eduardo Alcaro.

Eduardo Alcaro -- Chief Financial Officer

Thanks, Ricardo, and hello, everyone. Before I start, I'd like to mention that in the third quarter of 2018, we had a total of R$58.9 million non-GAAP items, mainly related to our stock-based long-term incentive plan.

Let me remind you of these items. First, stock-based compensation expense and related employer payroll taxes in the amount of R$115.5 million. From the R$115.5 million, R$33.7 million is the recurrent quarterly provision and R$81.8 million in non-recurrent. R$59.4 million of the non-recurrent amount of R$81.8 million is related to the vesting of a relevant shared grant in August 2018, and the recognition of the shares at market price versus the original grant price at the IPO in accordance with IFRS-2. At the IPO date, the share price was $21.5 and the exchange rate of the US dollar against the Brazilian real ended at 3.14.

On the other hand, when the shares were delivered in August 2018 to PagSeguro employees, the share price was close to $30.00, and the exchange rate of the US dollar against the Brazilian real was about 4.1. The same adjustment can be expected for August 2019 with a similar exchange rate and stock price. The remaining non-recurrent amount R$22.4 million is related to new hires in addition to the share-based program. No material, no recurrent adjustments related to the stock-based compensation are expected for Q4 2018. We exclude stock-based compensation expenses from our non-GAAP measures because they are non-cash expenses and they depend on our stock price and exchange rate from the US dollar into Brazilian reais at the time of divesting of the equity awards. The related employer payroll taxes depend on our stock price and the exchange rate from US dollars into Brazilian reais at the time of the exercise and divesting date of the equity awards, over which management has no control and does not believe these expenses correlate to the operation of our business.

Second, financial income in the total amount of R$14.3 million related to the impact of exchange rate variation on the conversion from U.S. dollars into Brazilian reais of the proceeds from our sale of new shares in our June 2018 follow-on offering. We exclude this foreign exchange variation from our non-GAAP measures, primarily because it is a non-recurrent income.

Third, tax related to the remittance of follow-on primary proceeds, IOF tax, to Brazil in the amount of R$4.1 million. We exclude this IOF tax from our non-GAAP measures because it is a one-time and non-recurring expense.

And the last one, income tax on the non-GAAP adjustments in the amount of R$46.5 million. 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, moving to Slide #4, our non-GAAP total net revenue reached R$1.12 billion in the third quarter, up 64% year-over-year. Moving to the top right, we have our main revenue streams composed by transaction services or mainly MDR collected from merchants, financial income from the prepayments, and hardware sales. In the third quarter of 2018, transaction and services represented 55%; financial income, 35%; and hardware sales, only 9% over total net revenues that continue to trend down, and in relative terms going forward, should reach low single-digits.

On the other hand, you can note that our revenues from transaction activities and other services grew five percentage points compared to Q3 2017. This demonstrates the strength of our 3.8 million active merchants' base delivering high double-digit net revenue growth rates.

On the two charts below, we present our total expense figures and the beauty of our lean cost structure allowing us to have a volume scalable business model. Our non-GAAP total costs and expenses decreased one percentage point, ending the second quarter at 3.4% over total TPV. Related to non-GAAP admin expenses over total TPV, which excludes stock-based compensation expenses, reached 0.3%, a decrease of 0.1 percentage point year-over-year.

Regarding our cash flow, you will note in the line, changes in receivables subject through early payments that we repaid with our IPO primary share proceeds in the first nine months of 2018, approximately R$1.6 billion in receivables, which we obtained early payment with the issuing banks as of December 31, 2017. We have only R$4 million left to repay in Q4 '18, and beginning in 2019, this line item will no longer impact our cash flow. Adding back the impact of the repayment of the note receivables for which we received early payment from issuing banks as of December 31, 2017, PAGS had R$472 million in negative operating cash flow driven by the working capital growth, partially offset by the PAGS cash generation.

I just wanted to remind you that this is not a cash burn, but an investment in working capital. PAGS ended the quarter with receivables from credit card issuers that are very liquid and no credit risk in the amount of R$7.5 billion and payables to merchants of R$3.7 billion, a net working capital of R$3.8 billion plus R$2.5 billion in cash.

On the next slide, we show our non-GAAP net income growth. In the third quarter, we reached R$219 million, an increase of R$143 million and up 97% year-over-year. The non-GAAP net margin reached 26%, an increase of 4.4 percentage points year-over-year. This shows the unique profile of PAGS delivering growth and profitability. In the quarter-over-quarter comparison, our non-GAAP net income grew 20%, accelerating when we compare to 14% growth in Q2, while the non-GAAP net margin expanded one percentage point.

Now, I'd like to hand over back to Ricardo, who will comment on new products recently launched.

Ricardo Dutra -- Chief Executive Officer and Director

Thank you, Eduardo. On the next slide, we introduce Moderninha Smart, our smart POS. Moderninha Smart offers a full integration of hardware, PagSeguro apps, and its fast and secure payment network by combining the by combining to Android operating system with all the high-end functionalities such as Wi-Fi, Bluetooth, and 4G connections, as well NFC QR Code acceptance. Moderninha Smart offers a robust managed payment experience to any kind of business.

This product was built for simplicity and ease of use. It requires no setup and it comes with features like product catalog, inventory management, installment calculator, bank slip issuance, and payment links. The integration of software and hardware helps merchants to be more productive, serve clients better, and manage their business. PagSeguro point-of-sale software also gives merchants the ability to run their business efficiently by managing their PagSeguro account, including bill payment, mobile top-up, balance transfer, among other functionalities available in our ecosystem. It costs 12 installments of R$69.90, around $19.00 per installment, or R$839.00 and it has a five-year warranty.

On Slide 7, we have netted our portfolio functionalities already available to our merchants. PagSeguro has been building a unique and world-class payment ecosystem focusing to deliver a frictionless online and physical payment experience. Recently, we launched our [inaudible] product, PAGS Capital. We just started and are still testing our modem with a very small pool of clients [inaudible] such as account history, TPV, payment frequency, and so on. On average, PAGS charged rates almost three times lower than banks. We are still in steps, and for now, this product is marginal to our financial results and we expect it to increase stickiness and the loyalty of our merchants. In November, we also complemented our cash-in and cash-out process through the digital account allowing instant transfers from and for any bank.

On Slide 8, we show you the evolution of our bill payment transactions, which grew 288% quarter-over-quarter. We believe engagement is key to the success of our ecosystem. As we promote higher stickiness through the adoption of additional products and features, more transactions and growth are expected.

On the next slide, we can see the strength of our brand. PagSeguro is the first mover in this market and in fact, it can access UOL audience, the third-largest online audience in Brazil, only behind Google and Facebook with more than 75% internet reach to promote our products and solutions in the [inaudible] market to help PagSeguro to reach a unique brand recognition. In 2018, according to Google Trends, we have four times more searches than the second player. PagSeguro reached a level of brand awareness where the business has a word-of-mouth effect, and consequently, we have a lower acquisition cost than our competitors.

Finally, on the last slide, it is important to highlight the size of our total addressable markets and the huge opportunity that PagSeguro has ahead. Considering our last 12-month total payment volume, which is R$65 billion, we have only four percent of our addressable market, and we still have a long way to go.

We have been facing sustainable TPV growth in our platform. For instance, we had our historical total payment volume peak last August, one day before Father's Day in Brazil. In September, we surpassed this record, then had a new TPV record in October, and again, the historical new record in November. Also, we'll just say that from Q1 to Q3 2017, our total payment volume was R$24.8 billion, and in Q3 2018, our TPV was 51.5 billion. We more than doubled our TPV year-over-year, which means we added R$26.6 billion this year.

Being the first mover, having a fully vertical and a low-cost ecosystem with 3.8 million active merchants, mobile-first, strong brand, focus on user experience, the best rated financial services app on Google and Apple stores, and non-replicable online distribution through UOL brings a natural advantage [inaudible] market.

In Q4, we continue to see a higher adoption of our ecosystem translating in healthy TPV growth. Net additions are growing at the same pace as observed in the average of the past quarters while take rates, despite possible [inaudible] effects, remained at the same previously levels, as well. We are confident our business will continue to deliver long-term shareholder value.

Now, we finished our presentation. We may start the Q&A session. Operator, please.

Questions and Answers:

Operator

Ladies and gentleman, we'll now begin the question and answer session. If you have a question, please press the * key followed by the 1 key on your touchtone phone now. If at any time you would like to remove yourself from the questioning queue, press *2. Our first question comes from Bryan Keane, Deutsche Bank.

Bryan Keane -- Deutsche Bank -- Analyst

Hi, guys. Two questions. I guess, on the net new merchant adds, it was toward, a little bit, the lower end of your guidance that you gave. Anything material you're seeing out of competition? It did seem like you had record sales in the month of November, so I'm just trying to reconcile that. Then, my second question is on the governments push for instant payments and QR Codes. What would be an impact to your model if you saw more adoption toward instant payments in Brazil? Thanks.

Ricardo Dutra -- Chief Executive Officer and Director

Hi, Bryan, this is Ricardo. Thank you very much for the question. As we said during the call, the Q3 has the worse [inaudible] when compared with Q2. Q2 was a very strong quarter. We are not seeing a huge [inaudible] to our business. It's the opposite. We are seeing this is growing, so it is within the range that we gave before the 323. Regarding the government pushback and the push regarding QR Code instant payments, it is too early to forecast any potential impact. The discussion is still in the early stages with the market participants. From our side, regardless of regulation, we are developing our own QR Code solution. We are in favor of new payment methods believing that it will complement our portfolio. At the end of the day, it's still the very beginning of the discussion and there is nothing definite, but we are developing our own QR Code solution meanwhile.

Eduardo Alcaro -- Chief Financial Officer

Bryan, since we're speaking, if you just allow me one specific comment here, it's very important to mention that we're in favor of new payment methods. We do believe that it could help in terms of migrating more cash transactions [inaudible] payments in the Brazil system. That's exactly what PagSeguro's intending to do, to be more disruptive, and help to bring more cash transactions [inaudible] payment, and QR Code is a good way to do it.

Ricardo Dutra -- Chief Executive Officer and Director

Okay, thank you.

Operator

The next question comes from Carlos Macedo, Goldman Sachs.

Carlos Macedo -- Goldman Sachs -- Analyst

Hey, Dutra, Alcado, good evening. A couple of questions here. First, I want to talk a little about the equipment sales that you guys have. I've been monitoring the prices and obviously, there's been a lot of competition and the Minizinha now is going for R$5.00 per month as competition has pushed it down. Cielo with Stelo now is at R$2.00 per month. I'm not sure if you're gonna match or not, but looking at the numbers that you reported, on a gross margin basis, it's already -53 million in the third quarter for equipment sales, and I know equipment sales aren't the core business, it's just a way to get there, but that number is up from 37 in the second quarter. I'm just wondering if you believe that with competition going strongly still on that level that number can increase as you sell more terminals at a bigger loss going forward.

The second question, on the marketing side, marketing expenses came down. What's the thinking here? Obviously, competition is very strong as you mentioned before and you count on word-of-mouth to get your brand out there. Is this just a one-quarter thing or should we be factoring probably weaker or lower advertising going forward? Thanks.

Ricardo Dutra -- Chief Executive Officer and Director

Hi, Carlos, this is Ricardo. Thank you for the question. Let's go to the first part regarding the sales of the equipment. We are the leader in the long-tail market. We are not leading the prices down. We are evaluating competition pretty close. As we have the largest base, we have today the lowest acquisition cost, so it is important for us to win the merchants because when we win the merchants, we're gonna bring the base to offer additional services, and so on. We are looking for lifetime value. If we need to, let's say, subsidize part of the equipment, we'll do it. We know that the competition is doing, as you said [inaudible] of almost $R2.00. I don't know if they're gonna keep it, but we'll try to keep making our calculations not to make anything very, let's say, aggressive to hurt our P&L. In the Q4, I would say that you will not see a higher number in terms of subsidies, although we are selling a lot.

At the end of the day, what I'm trying to say is we will keep evaluating the competition pretty close. For us, the acquisition cost is much than to them, but we are not leading the prices down in terms of equipment. We are just looking at the competition. As they go down, we can evaluate if we're gonna match it or not.

Eduardo Alcaro -- Chief Financial Officer

Carlos, this is Alcaro speaking. I think one point that we need to factor in is the fact that our net income margin had an expansion in Q3 compared to Q2. Even with this higher investment in the subsidies to the devices, we're able to expand our margins and grow our net income margin by a little bit more than one percent quarter-over-quarter, so our lean structure model in terms of expenses allows us to take those price subsidies and did not hit our margins as you can see in our numbers in Q3.

Ricardo Dutra -- Chief Executive Officer and Director

Just one additional comment here, Carlos, Dutra speaking. It's very important to mention that, in the long-tail market, our merchants were sensitive to fixed cost, so the price of hardware matters more. As you can see, the company has been able to keep the take rate stable despite any kind of mix effect like we had in the quarter with more debit card transactions, and we know that, combined with all the strengths that we had in the business like the strong brand and UOL distribution, the POS is a good way to capture these clients and bring to our ecosystem thinking about the long value of forward merchant going forward.

Eduardo Alcaro -- Chief Financial Officer

To the second part of your question regarding marketing, we are evaluating marketing every month. What happened in Q3, this small decrease, it doesn't mean that we're gonna decrease forever, but we are just evaluating to have the best mix in terms of marketing, online, offline, and equipment subsidies. At the end of the day, we are looking for the acquisition costs. If we see there is an opportunity to increase the marketing, we always think we should keep it the same level, we do it the same, so it's part of -- it's very dynamic, but there is no plan for the future to go down with the marketing investment.

Carlos Macedo -- Goldman Sachs -- Analyst

Okay, so just to follow up then, I'm not asking for guidance, just a rule of thumb or some kind of direction. It's likely that marketing expenses will move together with TPV to some degree. Is that a good way to look at it?

Eduardo Alcaro -- Chief Financial Officer

I don't think so, Carlos. I guess the marketing -- compared to TPV, marketing is going down. I guess, off of the top of my head, it's like, 0.46%, so TPV is going faster than the marketing investment. I guess that's the answer to your question.

Carlos Macedo -- Goldman Sachs -- Analyst

Okay, thank you.

Eduardo Alcaro -- Chief Financial Officer

Thank you.

Operator

The next question comes from Alexandre Spada, Itaú.

Alexandre Spada -- Itau -- Analyst

Hi, gentlemen. Good evening. Thanks for the opportunity to make questions I have one actually. Can you comment on the implications that the reduction in debit interchange will you have on PagSeguro from Q4 onward? Are you passing through the benefit to the merchants or will their prices be kept unchanged starting October or were kept unchanged starting October?

Ricardo Dutra -- Chief Executive Officer and Director

Alexandre, this is Ricardo. Thank you for your question. As you know, the cap for interchange in debit transactions start on October 1st. We started a promotion in September only for new merchants for the MDR for debit. For these merchants, we are passing through, but for all the base that we have, we are keeping the same [inaudible]. We're gonna have a positive impact in our P&L in Q4 because the largest part of our base is still paying the same rate, same MDR that we charged them before. For the new merchants, we made this promotion. So, part of that -- answer the question, a small part of that, we are passing through, but the largest part is we kept [inaudible] so we're gonna have a positive impact in P&L.

Alexandre Spada -- Itau -- Analyst

Okay, and a quick follow up. Is that promotion temporary or is that actually not a promotion, it's just a new pricing scheme?

Ricardo Dutra -- Chief Executive Officer and Director

We have this promotion -- it is temporary because it's for the first year.

Alexandre Spada -- Itau -- Analyst

Okay.

Ricardo Dutra -- Chief Executive Officer and Director

[Inaudible] right? So, one year from now they are gonna start paying me the full MDR.

Alexandre Spada -- Itau -- Analyst

Okay, so if that's the case, there will be no pass through at the end of the day?

Ricardo Dutra -- Chief Executive Officer and Director

That's what we expect, but let's see. What happens overseas is that, in the medium-term, this gap between the MDRs before and MDRs after the cap were passing through the merchants. We don't know how fast it's gonna happen in Brazil, but in the medium-term, it's gonna happen at some point.

Alexandre Spada -- Itau -- Analyst

Understood. Thank you very much.

Ricardo Dutra -- Chief Executive Officer and Director

Thank you.

Operator

Our next question comes from Josh Beck, KeyBanc.

Josh Beck -- KeyBanc -- Analyst

Hi there, thank you. I wanted to ask about the other side of acquisition costs and is there any color you could provide on how long it takes you to recover those customer acquisition products because I do think the economics that you have are quite favorable? Is there any color you could provide in that area?

Ricardo Dutra -- Chief Executive Officer and Director

Hello, Josh. Thank you for the question. It's hard to make this calculation because it depends on the device he acquires, depends on the device that has a better payback, depending on the device who has a worse payback, depending on the subsidies that we do, it depends on many factors, but the payback, if you do the average, is not that long. I guess you can make the math using our P&L numbers. You can have a better proxy of what is our payback, because it has our TPV promotion, the take rate, and the net MDR, so you can make this math, but overall, the average, you can do it through the P&L, but it depends on the device that you are selling for the merchant. I can assure you that we are doing these calculations very often, and then we are looking for lifetime value. As I said before, we have in mind to win the merchants because once you have the base, there are many other services that we can offer to them and then we can monetize in the future.

Josh Beck -- KeyBanc -- Analyst

Okay, very helpful, and I also wanted to ask, have you seen any changes in the churn of your install dates, so that's one part. And then, secondarily, the margin expansion when you look at the pre-tax margins, has been quite positive, is that something that you expect to continue?

Ricardo Dutra -- Chief Executive Officer and Director

In fact, our churn is going down. I know the base is -- once the base -- the number of merchants to go up, you have a larger space to, let's say, to dilute the churn, but when you compare the churn that we have, let's say, this year with previous year, it is coming down, so we are having a very healthy base of merchants, very healthy TPV.

There are some merchants that decided not to use our service and then they came back, but at the end of the day, if you look at the churn this year, it's smaller than last year, for instance, and in terms of margins, I mean, it's hard to predict this every quarter we're gonna have this kind of margin expansion, but what you need to factor in is, we operate in a volume-driven business. As we bring more TPV, obviously, we dilute admin costs, fix-it cost, things like that, but you can see, for example, in this quarter, we had to invest more for example in the -- in the price of the devices, and even investing more, we had a margin expansion, so it's hard -- something that is very hard to predict going forward, but we don't see margin contractions, for example.

Josh Beck -- KeyBanc -- Analyst

Okay, thank you, very helpful.

Operator

The next question comes from Rafael Frade, Bradesco.

Rafael Frade -- Bradesco -- Analyst

Hi, good afternoon, everyone. I have two questions. The first one is this related to the POS price, the follow up from a fellow question. A few weeks ago, you are making some promotions related to the Black Friday, but you are keeping those promotions, so I would like to understand if it's something that we should come see the previous price in coming weeks, or it's something that probably it would be more permanent, those new levels of pricing to us.

The second question is related to your financial expense and getting in some hard times to ripple through here. You had a strong growth in TPV, and consequently on the receivables, but I would expect your financial expenses to increase to funding prepayment of receivables, but it all seems to be the case, so if you could help me to understand, how we expect this line to evolve? Thank you.

Eduardo Alcaro -- Chief Financial Officer

Rafael, just to understand, you're talking about financial income or financial expense?

Rafael Frade -- Bradesco -- Analyst

Financial expense.

Eduardo Alcaro -- Chief Financial Officer

Financial expense should trend to zero because we are using the IPO proceeds to fund the prepayment business. If you look at the financial expenses line, it's trending to zero compared to last year, and I'll let Ricardo answer the first question.

Ricardo Dutra -- Chief Executive Officer and Director

Yes, regarding POS prices, as I said, we are looking at the market pretty closely. We started this promotion in November. We are looking for the demand. We are evaluating investing in marketing and all of these variables to see what the acquisition costs to a merchant. If we keep thinking that it's reasonable to keep these prices, we'll do it. Our plan was to come back for the regional price and that's what we're evaluating, but it's hard to give you a final answer like we will increase the price or keep the same because we are evaluating, and as you know, it's very dynamic, this price for POS in Brazil at this point.

Rafael Frade -- Bradesco -- Analyst

Right, perfect, and just a follow up on the financial expense, just to understand, maybe I am doing something wrong here, but there's a gap between the receivables and payables of more or less four billion. You have around 2.5 billion in cash, so I understand that you fund part of this with this, but still you had a little more than one billion in mismatch between the receivables and payables. I understand that this would be prepaid with banks, but maybe you have another working capital here that I'm not seeing, just to understand.

Eduardo Alcaro -- Chief Financial Officer

We are doing now all the prepayment with our cash. If you look at the growth in our receivables being in Q2 compared to Q3, we had a little bit over -- in the first nine months of the year, we had R$2.4 billion in receivables and we repaid about 1.7 billion from receivables that we had discounted last year. At the end of the day, it's the combination of both. We are not discounting receivables with issuing banks anymore, so that's why you don't see the financial expenses line hitting our P&L anymore.

Rafael Frade -- Bradesco -- Analyst

Okay, that's perfect. Thank you.

Eduardo Alcaro -- Chief Financial Officer

Thank you.

Operator

The next question comes from James Friedman, SIG

James Friedman -- SIG -- Analyst

Hi, good evening. It's Jamie at the Susquehanna. A couple of questions, I wanted to ask about your Q4 expectation. I realize you don't give the explicit guidance, but you had the 13th-month phenomenon in the Q4. My understanding is that that came after Black Friday and Cyber Monday. Is there any reason to think that the sequential growth in the Q4 relative to the Q3 would be different in 2018, say, than it was in 2017?

Ricardo Dutra -- Chief Executive Officer and Director

Hi, James. Thank you for the question. We are gonna talk about guidance later on in this call. Regarding Q4 and Q3, I don't have here at the top of my mind what it would be, this change. I know in 2017 we had a very strong Q4 when compared with the Q3, but as I said before in the call, we are having the total payment volume records month after month. We grew 20% in Q3 compared to Q2. We've seen a very strong Q4 quarter, but I don't have here in the top of my mind to say if it's gonna be stronger or the same level of 2017. I'll say it was a very healthy TPV. We are not seeing changes in the variables that could hurt our P&L.

James Friedman -- SIG -- Analyst

Okay, thank you, Ricardo. I also wanted to ask you about this Slide 7. It's the one about the digital ecosystem. Over time, do you have any objective or any commentary about how many products per merchant you anticipate, or even if you have something now, how many products -- if you look at this Slide 7, this digital ecosystem, this is the one with the prepaid and the P2P, and the e-commerce and the wallet, how many, typically, of these, are your merchants purchasing?

Ricardo Dutra -- Chief Executive Officer and Director

James, we do not disclose the exact number, but I'll say there are some products that are having a more good relation, as we showed you in the presentation, like bill payments. That's something that we knew that our merchants were waiting for because we have a lot of people in Brazil that are underserviced in terms of financial services. Thousands of our merchants didn't have bank accounts and they need to pay bills, they need to top-up mobile phones, so those are the services that have more engagement, but we are trying and we are testing all these products. I would say lending, as I've said before, we are in baby steps, but there is also a lot of demand because people are underserved in Brazil and the banks charge very high rates, but we, unfortunately, do not disclose the exact number because of competition and all the dynamics that you have in this market right now.

James Friedman -- SIG -- Analyst

Okay, and if I could just ask one more about your previous answer on interchange, I just want to make sure we get the facts right. I apologize if this is wrong, but my understanding is interchange was reduced by policy by the Central Bank in October, is that right? Debit interchange and then the follow up to that is, how much -- remind us, how much of your TPV is debit? I think you disclosed that in the S1, but if you have that, that would be helpful. Thank you.

Ricardo Dutra -- Chief Executive Officer and Director

Well, I'll give you the -- what he had in Brazil, that interchange on average before October 1st was around 80 base points, eight-zero, right? The central bank decided to make this new regulation where the goal is to bring this average down to 50 base points. There is 30 basis points gap between that interchange before October 1st when compared to what Central Bank is trying to achieve. Our TPV, although we have only five percent of the market share in Brazil, our TPV reflects the industry as a whole. The industry as a whole has around 40% of the TPV debit and we have the same level, so you can use 40%.

James Friedman -- SIG -- Analyst

Got it, thank you very much.

Ricardo Dutra -- Chief Executive Officer and Director

Thank you.

Operator

Our next question comes from Jason Kupferberg, Bank of America Merrill Lynch.

Brent Avon -- Bank of America Merrill Lynch -- Analyst

Hi, this is actually Brent Avon on for Jason. Thanks for taking the question. Yeah, it was encouraging to hear you guys say that you think you could add at least 300,000 new merchants sequentially in 4Q, but, as we sort of look ahead, the environment's getting more competitive, but you guys have suggested you have that first-movers advantage and still an underpenetrated market. I mean, is there any reason why we couldn't see that pace of merchant addition continue beyond just fourth quarter and into 2019?

Ricardo Dutra -- Chief Executive Officer and Director

Jason, our plan and our expectation, and according to our business plan, is to keep the same pace. Q4 is gonna be strong. You are right to say there is more competition, but we have the first-mover advantage. We are focused on the long-tail market. Although some of the incumbents say they are competing with us, they are serving merchants that have a higher TPV or are larger than our long-tail merchants. Our merchants are very concerned about fixed cost. We know how to do with them. We know how to deal with them. We know what works, what doesn't work, so we don't see any reason for deceleration in short term.

Brent Avon -- Bank of America -- Analyst

Great, no, that's really helpful and just shifting over to in capital allocation, you guys kind of discussed a lot of these new products you're rolling out, which are really interesting and helpful, and you've talked about earlier in the year, about wanting to ramp up investment spending, but you've also recently announced a share repurchase authorization. I'm just curious where we are today, where your priorities are from a capital allocation standpoint. Thanks.

Eduardo Alcaro -- Chief Financial Officer

Talking about the share repurchase, you may remember that we announced just a few days that we were blacked out. We did not have time to do large share repurchases. We did some, but very few. It's still very small. In terms of capital allocation, our capital allocation continues to have the trend of growth, so when you look, the rate that we did in our follow-on was to further develop our digital ecosystem and that's how we are focused. I mean, we are putting growth as our first priority here.

Brent Avon -- Bank of America -- Analyst

Great, thank you.

Operator

Our next question comes from Domingos Falavigna, JPMorgan.

Domingos Falavigna -- JPMorgan -- Analyst

Thank you, good night, gentlemen, and thanks for taking the question. As we progress, we would expect some slow down on net addition, and I'm just thinking that volumes can be very strong and in spite, I should even say, of slower net additions, which is indicative of good trends in same-store sales, so I think it might be helpful to us to understand, when we look at your volume growth of 20% Q-on-Q or however you want to put it, or 90% year-on-year, could you provide some idea on half of it or more than half is coming from the existing clients, 70%, like a ballpark number, and how much is coming from net addition, because as those net additions, they shrink, we just wanna be comfortable that the existing base will continue to grow, and then I'll ask my second question?

Ricardo Dutra -- Chief Executive Officer and Director

Hi, Domingos. I would say it's hard to make this calculation because what is seen with our merchant base is that they usually start small and they keep growing. As we are adding new merchants to the base, it's hard to stop the base and take this [inaudible] that you are saying, say the new merchants are having this behavior and the vast base are having a different behavior because -- what I'm trying to say here is that, as we are growing pretty fast and the merchants grow, as well, because you have this trend of cash to plastic in Brazil, I don't have this picture to give you right now, but I would say, sure, its very under control.

When you look at the cohorts, they are growing, although there is some churn of course because of the mortality of the merchants or whatever the reason, if you look at the cohorts and you compare the same TPV or the cohorts TPV one year after they started, we see a very healthy growth. That's -- I guess, this is the best that I can give you.

Domingos Falavigna -- JPMorgan -- Analyst

The second question, the long-term incentive plan you explained, share prices were super high at 30 and FX also didn't help, and that sort of put some pressure on that, but then you broke down 33 million as what you consider recurring, and basically the remaining portion, 80-something million, has been nonrecurring. I'm just curious to understand, what criteria was used to consider to break this down as recurring and nonrecurring. The point I'm trying to get is, next quarter, should we expect something, 30-something or why exactly did you separate those?

Eduardo Alcaro -- Chief Financial Officer

The non-recurring, there are two different types of non-recurring. In this quarter, we classified the nonrecurring the new adds to the program and new hires that we did that was about R$20 million, and the largest portion was this IFRS-2 effect that we had to recognize the market value of the shares. For example, when we did our IPO, our IPO was at 21.5 and the FX rate was roughly 3.14. When we deliver the share to the employees right now, the stock price is close to 30 and the FX was about 4.1. We had to recognize this R$59 in million nonrecurring. For Q4, we should expect [inaudible] recurrence of 35, and we are not seeing any items in terms of nonrecurrent items.

Domingos Falavigna -- JPMorgan -- Analyst

Okay, just to be clear here, is it accurate if I say, basically, if share price had not moved, nor FX, and you did not hire anyone, we would have been seeing something around 30-35 million in this quarter?

Eduardo Alcaro -- Chief Financial Officer

35 million every quarter.

Domingos Falavigna -- JPMorgan -- Analyst

Perfect, thank you so much.

Operator

Your next question comes from Felipe Salomao, Citibank.

Felipe Salomao -- Citibank -- Analyst

Hi, everyone, goodnight. Thanks for continuing to answer questions. I have two questions, actually. The first one is about competition. We continue to see the correlation between discount rates and net-adds or are you noticing that clients have become more sensitive to prices? The reason I'm asking this is that two of your competitors have felt prices significantly down in credit card [inaudible] so I'm just wondering what do you guys think about it, and then I'll ask my second question. Thank you.

Ricardo Dutra -- Chief Executive Officer and Director

Hi, Felipe. As I said before, our merchants, the long-tail merchants are more concerned about fixed costs, so that's why we follow the competition pretty close in terms of device prices. In terms of take rates, we don't see that pressure. That's why I say that the fact that we are born online, we built this ecosystem thinking about long-tail. We are creating these new features like bill payments, mobile top-up, prepaid card, lending now. We just launched the distant payments this week. We have a more complete ecosystem for these small merchants. We have a strong brand. As we showed in the presentation, four times more google searches than the second player, so we don't think that if we keep decreasing the price, we're gonna sell that much more, so to say.

We are following the competition to the close. We are trying to find the optimal price in terms of devices, in terms of take rates. The fact that, as I said before, we were born online, we distribute online, easy onboard, and so one -- that's what makes us different, that's why we can monetize, and again, just remember, in terms of acquisition cost, we have a strong brand, we have a lower acquisition cost when compared with our other players in the market. Summarizing, we're offering this optimal price between device prices and MDRs

Felipe Salomao -- Citibank -- Analyst

Okay, that was clear, thank you. My second question is actually a follow up on Domingos' question about stock option expenses. I understand the accounting back of the market of the FX and the stock price, and I understand that 4Q, I think, should not bring any nonrecurring, non-expected stock option expense [inaudible] and then I'm just curious about, what should we expect in terms of non-recurring stock option expenses for, let's say, next year when probably another trench of stock options are going to be exercised, and probably you guys would need to do the same market-to-market on those stock option expenses, right? I just want to confirm if you continue to see the guidance of [inaudible] rise stock on option expenses [inaudible] as a good one or if we should also consider that some quarters are going to bring these nonrecurring stock option expenses. That's my second question.

Eduardo Alcaro -- Chief Financial Officer

Okay, if we -- you should consider R$35 million pre-tax per quarter without any nonrecurring items. If next year, for example, in August next year, the FX, for example, is again at 4.1 and the stock price is close to 30, you should expect an additional R$59-60 million that we posted this quarter.

Felipe Salomao -- Citibank -- Analyst

Okay, thank you.

Operator

This concludes today's question-and-answer session. I would like to invite Mr. Ricardo Dutra to proceed with his closing statements. Please go ahead, sir.

Ricardo Dutra -- Chief Executive Officer and Director

Before closing this call, I will provide net income guidance for 2018 and 2019. For 2018, we expect GAAP net income through Q4 in the range of R$280-290 million, and in the fiscal year in the range of R$888-898 million, estimated non-GAAP net income in Q4 2018 in the range of R$305-315 million, and in the fiscal year 2018, in the range of R$1.05-1.06 billion. For 2019 we expect GAAP net income in the fiscal year in the range of R$1.182-1.36 billion, estimated non-GAAP net income in the fiscal year 2019 in the range of R$1.32-1.5 billion reais. It's important to say, the bottom of the guidance number 1.322 billion for our non-GAAP net income for 2019 is exactly the same number that we shared with research analysts before the IPO. We feel it's possible, 13% upside in this figure, reaching R$1.5 billion.

In our review, delivering a 2019 full year net income higher than the number presented as the IPO not only shows our confidence in PagSeguro's business model, but also the company's ability to operate in a competitive market. We'd like to thank you all for the time spent with our management team. We'd like to reinforce our commitment and focus on deliverance of the results. See you all in our next conference call. Thank you very much.

Operator

That does conclude the PagSeguro audio conference for today. Thank you very much for your participation. Have a good afternoon and thank you for using ChorusCall.

Duration: 59 minutes

Call participants:

Ricardo Dutra -- Chief Executive Officer and Director

Eduardo Alcaro -- Chief Financial Officer

Bryan Keane -- Deutsche Bank -- Analyst

Carlos Macedo -- Goldman Sachs -- Analyst

Alexandre Spada -- Itau -- Analyst

Josh Beck -- KeyBanc -- Analyst

Rafael Frade -- Bradesco -- Analyst

James Friedman -- SIG -- Analyst

Brent Avon -- Bank of America -- Analyst

Domingos Falavigna -- JPMorgan -- Analyst

Felipe Salomao -- Citibank -- Analyst

 More PAGS analysis

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