PagSeguro Digital(PAGS) - 2022 Q4 - Annual Report

Key Information Selected Financial and Operating Data The company's financial data for 2020-2022 shows significant growth in revenue, TPV, and net income Statement of Operations Data (in millions of R$, except per share amounts) | Indicator | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total revenue and income | 15,334.9 | 10,448.7 | 6,814.7 | | Operating profit before Income Taxes | 1,759.3 | 1,488.0 | 1,774.7 | | Net Income for the Year | 1,504.8 | 1,166.3 | 1,292.3 | | Basic earnings per share (R$) | 4.6002 | 3.5303 | 3.9225 | | Diluted earnings per share (R$) | 4.5705 | 3.5105 | 3.9163 | Operating Data | Operating Statistics | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Active merchants at year-end (in millions) | 7.1 | 7.7 | 7.0 | | TPV (in billions R$) | 731.4 | 456.1 | 231.5 | | PagBank active users (in millions) | 16.2 | 13.1 | 7.9 | Balance Sheet Data (in millions of R$) | Indicator | At Dec 31, 2022 | At Dec 31, 2021 | At Dec 31, 2020 | | :--- | :--- | :--- | :--- | | Total Current Assets | 39,767.1 | 26,719.3 | 19,247.1 | | TOTAL ASSETS | 45,329.3 | 31,075.8 | 22,324.3 | | Total Current Liabilities | 29,740.4 | 19,002.9 | 11,574.5 | | TOTAL LIABILITIES | 33,487.2 | 20,573.6 | 12,996.9 | | TOTAL EQUITY | 11,842.1 | 10,502.2 | 9,327.5 | - The company provides a reconciliation of GAAP to Non-GAAP financial measures, with Non-GAAP net income for 2022 at R$1,597.3 million, a 12.1% increase from 2021[52] Risk Factors The company faces significant risks related to its business, the Brazilian economy, and its dual-class share structure Risks Relating to our Business and Industry - The company operates in a market with rapid technological changes, and failure to innovate could lead to a decline in the use of its products[59] - The company faces intense competition from existing and new players, which could lead to pricing pressures and harm its business[63][64][65] - The business is vulnerable to cyberattacks and security breaches, which could lead to data loss, reputational harm, and significant financial exposure[69][70][72] - The business is subject to extensive government regulation, and non-compliance with laws like the LGPD could result in substantial fines[87][74] - Changes in tax laws or the loss of tax incentives could adversely affect results of operations[94][95] - The business has significant working capital requirements driven by the early payment of receivables to merchants, and a lack of capital could limit growth[100] Risks Relating to Brazil - The Brazilian government exercises significant influence over the economy through policy changes that could harm the company's business[176] - Political instability may adversely affect the Brazilian economy, market confidence, and the company's results[180][182][184] - Brazil has a history of high inflation and interest rates, with the SELIC rate reaching 13.75% p.a. in 2022, which can restrict economic growth[189][190] - The Brazilian real has been historically volatile, and a devaluation could create inflationary pressures and reduce the U.S. dollar value of results[192][193] - Brazil's sovereign credit rating is below investment grade, and further downgrades could heighten investors' perception of risk[200][201][202] Risks Relating to Our Class A Common Shares - The largest shareholder, UOL, holds 85.51% of the total voting power, limiting the ability of Class A shareholders to influence corporate matters[207] - The dual-class capital structure makes the company's shares ineligible for inclusion in certain major stock indices, which could adversely affect the stock price[215] - As a Cayman Islands exempted company, the rights of shareholders may differ from those in U.S. jurisdictions, posing difficulties in protecting their interests[217][220] - As a foreign private issuer, the company is exempt from certain SEC disclosure requirements, which may result in less frequent public information[230][232] Information on the Company Overview The company is a Brazilian financial technology provider offering an end-to-end digital ecosystem for consumers and merchants - The business model integrates payment solutions, business management tools, and digital banking services through its free PagBank account[242][245] Key Financial and Operating Metrics (2020-2022) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Active Merchants (millions) | 7.1 | 7.7 | 7.0 | | TPV (R$ billions) | 731.4 | 456.1 | 231.5 | | Total Revenue and Income (R$ millions) | 15,334.9 | 10,448.7 | 6,814.7 | | Net Income (R$ millions) | 1,504.8 | 1,166.3 | 1,292.3 | | PagBank Active Users (millions) | 16.2 | 13.1 | 7.9 | - The company targets a large addressable market of 37.2 million formal and informal businesses in Brazil[250] - Capital expenditures totaled R$2,136.4 million in 2022, primarily for technology and software development[259] Our Products and Services The company offers a comprehensive suite of products and services built around its free PagBank digital account - The core of the ecosystem is the free PagBank digital account, which centralizes all functionalities and eliminates the need for a traditional bank account[270][271] - The company provides a range of affordable POS devices that merchants can purchase instead of rent, a key differentiator from incumbents[284][285][286] - A key service is the early payment of installment receivables, which provides crucial working capital for SMEs and generates significant financial income[290][303] - The company offers advanced built-in functionalities, including a proprietary antifraud platform and business management tools like the PagVendas app[307][308][310] - The company offers multiple cash-out solutions, including PagSeguro-branded Visa and Mastercard cards, allowing users to spend their digital account balance[335][339] Regulation The company's operations are subject to a complex and evolving regulatory framework governed by the Central Bank of Brazil - PagSeguro Brazil and MOIP are licensed by the Central Bank as payment institutions, authorized as issuers of electronic currency and acquirers[87][473][474] - The company's participation in the Pix instant payment system is mandatory, and it is also a participant in Brazil's Open Finance initiative[428][429][435] - New prudential regulations for payment institutions are being implemented, classifying the company's group as a Type 3 conglomerate subject to increased capital requirements[153][449][452] - The company is subject to various other regulations, including anti-money laundering rules, the General Data Protection Law (LGPD), and the Consumer Protection Code[494][511][513] Operating and Financial Review and Prospects Principal Factors Affecting Our Financial Condition and Results of Operations Performance is driven by digital payment adoption, new product cross-selling, and macroeconomic factors like interest rates - Growth is heavily dependent on the adoption of digital payment services by micro-merchants and SMEs and the use of the early payment of receivables feature[557][559] - The expansion of digital payments is a key tailwind, with card payments accounting for 54% of household consumption in Q4 2022[560][562] - Brazilian macroeconomic conditions directly affect operations, with the SELIC interest rate increasing to 13.75% p.a. by year-end 2022[574][585] - The revenue mix is influenced by the proportion of credit vs. debit card transactions, with credit cards typically having higher margins[576][581] Results of Operations In 2022, total revenue grew 46.8% and net income rose 29.0%, though financial expenses surged due to higher interest rates Results of Operations (in millions of R$) | Line Item | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Total revenue and income | 15,334.9 | 10,448.7 | 46.8% | | Revenue from transaction activities and other services | 8,906.4 | 6,784.8 | 31.3% | | Financial income | 6,252.7 | 3,514.4 | 77.9% | | Total Expenses | (13,575.6) | (8,960.7) | 51.5% | | Cost of sales and services | (7,470.9) | (5,775.9) | 29.3% | | Financial expenses | (3,151.6) | (790.6) | 298.6% | | Profit before income taxes | 1,759.3 | 1,488.0 | 18.2% | | Net Income for the Year | 1,504.8 | 1,166.3 | 29.0% | - The 31.3% increase in transaction revenue was mainly due to a 58.9% rise in TPV, though offset by an increase in free PagBank transactions[643][644] - Financial income grew 77.9%, driven by higher TPV and repricing for the early payment of receivables feature[647] - Financial expenses surged 298.6% due to increased working capital needs, higher interest rates (SELIC), and more interest-bearing accounts[654] - Administrative expenses decreased by 23.8% to R$668.7 million, primarily due to a reduction in payroll-related expenses[653] Liquidity and Capital Resources The company's principal liquidity need is for early payment of receivables, with net cash from operations increasing significantly in 2022 Summary of Cash Flows (in millions of R$) | Cash Flow Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 3,549.0 | 898.0 | 2,152.7 | | Net cash used in investing activities | (2,184.5) | (1,470.9) | (1,861.5) | | Net cash provided by (used in) financing activities | (1,329.7) | 727.2 | (55.1) | | Cash and cash equivalents at end of year | 1,829.1 | 1,794.4 | 1,640.1 | - Net cash from operating activities increased substantially in 2022, driven by higher profit and a significant increase in deposits[671][672] - Investing activities in 2022 primarily consisted of R$1,040.3 million for intangible assets and R$1,096.1 million for property and equipment[673] - Financing activities in 2022 included the repayment of borrowings totaling R$1,020.1 million and R$291.4 million spent on share repurchases[675] Directors, Senior Management and Employees Directors and Senior Management The company is managed by a six-member Board of Directors and a team of executive officers, reflecting its controlled company status - The Board of Directors consists of six members, including three independent directors who also form the audit committee[700][702] - Key executive officers include Ricardo Dutra da Silva (Principal Executive Officer) and Alexandre Magnani (Chief Executive Officer)[717] - The Audit Committee is composed of the three independent directors, with Maria Carolina Ferreira Lacerda serving as the financial expert[712] Compensation Management compensation includes fixed salaries, cash bonuses, and long-term incentives through share-based plans - The aggregate compensation paid to the executive officers of PagSeguro Brazil in 2022 was R$21.4 million[724] - The company has a Long-Term Incentive Plan - Goals (LTIP-Goals) where beneficiaries are granted awards based on performance[725][729] - The previous Long-Term Incentive Plan (LTIP) was replaced in 2018, under which a total of 5,513,266 Class A shares had been delivered[733][735] Our Team As of year-end 2022, the company's team consisted of 8,778 people, with a strong focus on technology and engineering talent Employee Breakdown by Category | Category | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Products and Engineering | 2,187 | 2,080 | 1,556 | | Commercial, Marketing and Operations | 4,639 | 4,304 | 2,820 | | Administrative | 397 | 367 | 235 | | Total | 7,223 | 6,751 | 4,611 | - As of December 31, 2022, the total team comprised 8,778 people, with 30.3% specialized in products and engineering[741] Major Shareholders and Related Party Transactions Major Shareholders Universo Online S.A. (UOL) is the controlling shareholder, holding 85.59% of the total voting power as of year-end 2022 Beneficial Ownership as of December 31, 2022 | Name | Class A Shares (%) | Class B Shares (%) | % of Total Voting Power | | :--- | :--- | :--- | :--- | | Universo Online S.A. (UOL) | 0.38% | 100% | 85.59% | | Capital World Investors | 11.73% | - | 1.74% | | FMR LLC | 9.66% | - | 1.43% | | Sylebra Capital Limited | 6.14% | - | 0.91% | Related Party Transactions The company engages in significant transactions with its parent, UOL, for shared services like advertising, IT, and back-office support - In 2022, PagSeguro incurred R$395.6 million in costs for services provided by UOL and affiliates, representing 2.9% of its total expenses[760] - Key agreements with UOL include cost-sharing for corporate services and platform licensing for software development[766][768][769] - The company has entered into indemnification agreements with its directors and officers[763] Financial Information Legal Proceedings The company is involved in various legal proceedings, with provisions recorded for probable losses and disclosures for possible losses - As of December 31, 2022, the company had accrued R$60.6 million for legal proceedings where loss is probable[783][785][788] - The company is party to tax proceedings with an aggregate amount of R$630.5 million, which are classified as possible losses with no provision recorded[791] - A significant tax proceeding involves a R$267.0 million assessment regarding the non-collection of financial transaction tax (IOF)[792] Additional Information Memorandum and Articles of Association The company's governance is defined by its Articles of Association, featuring a dual-class share structure that concentrates control - The company has a dual-class share structure, with Class A shares having one vote and Class B shares having ten votes per share[807] - Class B shares are convertible into Class A shares and will automatically convert if their collective voting power falls below 10%[811] - The Board of Directors has the authority to issue new shares without shareholder approval, which acts as an anti-takeover provision[804][863] - The company has a share repurchase program authorized for up to US$250 million of its outstanding Class A common shares[838] Taxation As a Cayman Islands entity, the company is not subject to local taxes and faces a potential PFIC classification risk for U.S. investors - The Cayman Islands does not levy taxes on profits, and the company has received a 20-year undertaking against the future imposition of such taxes[909][911] - For U.S. Holders, dividends may be eligible for reduced tax rates, provided the company is not classified as a PFIC[920][921] - There is a risk that the company could be classified as a Passive Foreign Investment Company (PFIC), which would subject U.S. Holders to adverse tax rules[925][928] Quantitative and Qualitative Disclosures About Market Risk Market Risk Management The company is exposed to financial risks including foreign exchange, interest rate, credit, and liquidity risk - Foreign exchange risk is mainly related to POS device purchases and the operations of international subsidiaries[951][952] - Interest rate risk primarily arises from financial investments and deposits, with prepayment business margins being particularly sensitive to rate fluctuations[953][954] - Credit risk is managed by assessing card issuers and through a rating process for its own loan and credit portfolio[958][959] - Liquidity risk is managed by maintaining cash reserves and continuously monitoring cash flows to meet obligations[961] Controls and Procedures Internal Controls Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of year-end 2022 - As of December 31, 2022, management concluded that the company's disclosure controls and procedures were effective[972] - Management assessed the effectiveness of internal control over financial reporting based on the COSO framework and concluded it was effective[976] - The independent registered public accounting firm audited and issued an unqualified opinion on the effectiveness of the company's internal controls[977][978] Corporate Governance and Other Disclosures Principal Accountant Fees and Services The company paid its independent auditor total audit fees of R$5,994.6 thousand in 2022 Audit Fees (in thousands of R$) | Year | Audit Fees | | :--- | :--- | | 2022 | 5,994.6 | | 2021 | 5,201.8 | Purchases of Equity Securities The company repurchased 4,280,627 Class A common shares in 2022 under its share repurchase program Share Repurchases in 2022 | Month | Total Shares Purchased | Approximate Value Remaining (US$ millions) | | :--- | :--- | :--- | | January 2022 | 670,477 | 163.6 | | July 2022 | 1,707,350 | 145.5 | | November 2022 | 1,671,240 | 128.9 | | December 2022 | 231,560 | 126.6 | Corporate Governance As a foreign private issuer, the company follows home country governance practices in lieu of certain NYSE listing standards - The company is not required to have a majority of independent directors on its board[996] - The company is not required to have a compensation committee composed entirely of independent directors[997]