PagSeguro: A Champion?
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Hello Benchmarkers!
Happy to have you on board! Today, we provide you with an easy briefing on an under-hyped and high-growth company.
👉 Want insights only? Jump to “The Bottom Line”
PagSeguro Digital LTD (NYSE:PAGS)
🔦 THE INTRO 🔦
Founded back in September 2006 by Universo Online (UOL) and headquartered in Sao Paulo, PagSeguro has grown to become one of Brazil’s largest provider of financial services.
As of June 2019, PagSeguro had over 107 million unique visitors on its website, equivalent to 88% of Brazil’s total number of internet users
These clients have access to 37 different cash-in methods and can leverage the tech that PagSeguro offers to both pay and receive money
💸 FINANCIAL TOOLS 💸
PagSeguro offers affordable financial tools and solutions targeting both merchants and consumers. The PagSeguro ecosystem is broken down as follows:
Payments and Banking
It offers mobile Point of Sales (mPOS) and Point of Sales (POS) services, e-commerce tools, credit and lending solutions, QR code payments, peer-to-peer (P2P) transfers, digital wallets and instant payments.
Software
PagSeguro has two main software offerings for merchants, namely Reconciliation R2Tech and Sales App 2.0 NET POS. These help merchants with card reconciliation and enterprise resource planning.
Banking
The company enables its users to open digital accounts, make digital payments and investments, use prepaid, debit and credit cards, conduct mobile top-up, instant wires and access payroll solutions.
Software
Tilix is intended to offer consumers an easy way to manage and monitor their monthly bills.
🔥 COMPETING AGRESIVELY 🔥
PagSeguro is know for its aggressive sales tactics, which include subsidised offers with 0% fees for retailers. These have pressured margins for established players and enabled PagSeguro to grow from $ 327m in sales in 2016 to over $ 1.4B in 2019. Today, it competes mainly with:
Cielo
Regarded as Brazil’s most prominent player in the payments segment, it was founded in 1995 as a joint venture between Bradesco, Banco do Brasil, Banco Nacional, Santander and Visa. It boasted a 42.5% share of the market by the start of 2020, down from 50.2% in 2018.
“Cielo ended 3Q19 with 2.8bn reais in revenues, down 5.5% year-on-year, which the company attributed to a pricing adjustment necessary in face of the growing competition.” by BNAmericas
Rede
Rede was founded in 1996 and is controlled by Itaú Unibanco, Brazil’s largest private bank. It boasted of a 29.4% market share by the start of 2020, down from 31% a year earlier.
Stone
Stone is one of Brazil’s fastest growing financial technology player and was founded in 2012. By 2017, the company had 3.8% of the market. A number that grew to 8% by the end of the 2019.
“One of Brazil's unicorns[…] Stone is considered one of the most innovative payment companies in Brazil and a trailblazer in the segment.” by BNAmericas
NuBank
On the banking side, PagSeguro is competiting with NuBank. It was launched in 2013 and is now valued at over $ 25B. The digital bank counts 34m customers and is also present in Mexico and Argentina.
“Less than ten years later, the fintech company has survived a recession and a pandemic, emerging with over 34 million customers across Brazil, Colombia, and Mexico, and a valuation higher than Chime, Robinhood, or SoFi.” by CNBC
🥇 CUSTOMERS’ DELIGHT 🥇
PagSeguro manages to steal customers from legacy players by providing its users with modern payment features and functionalities in a secure environment.
Security: PagSeguro is lauded for its sophisticated architecture that guarantees customer data security and PCI compliance. Additionally, there is a dedicated PagSeguro payment server that handles all transactions, thereby adding another layer of protection to the entire system
Integration: Particularly for merchants, it has made it easy for them to integrate the PagSeguro extension API that enables safe and efficient online payments both in the form of direct and lightbox
Functionality: PagSeguro’s system offers provisions for easy and efficient management of online payments. Everything from a PCI level 1-compliant system to a lightbox support functionality allow for a pleasant user experience and peace of mind for the merchants
Support: All customers and merchants can be assured of 24-hr support, module updates and bug fixes at no extra cost. Additionally, merchants can request, review and discuss additional feature requests and have them integrated into their systems, which adds another level of professionalism for the brand
🌐 THE MARKET 🌐
The global financial technology industry is set to grow by a CAGR of 10% between 2019 and 2030, fuelled by high investments in tech-based solutions by banks and other financial institutions, coupled with the growing volume of infrastructure-based APIs and technology that are changing the face of financial services
According to Acuity Knowledge Partners, the global fintech industry market size is projected to be valued at $ 325.3B in 2030
Representing a CAGR of 10.3% from 2019 to 2030
The growth will be attributed to increased digital payments, increasing investment in blockchain technology along with the COVID-19 impact on the development of e-commerce
“There has been a major shift away from cash due to the sharp decline in face-to-face interactions and transactions, as well as the potential to transmit the virus between banknotes and coins. Fintech firms specializing in cashless transactions are seeing the benefit of this through increased use of their services.” Dr. Francesc Rodriguez Tous, Lecturer at Cass Business School
According to the International Trade Administration, Brazil ranks as the largest fintech market in Latin America
It comes in fifth in the world with around 700 fintech startup companies and over $1.6 billion in investments in 2019
It is projected that by 2025, this industry will have over 143.6 million users, up from 107.2 million in 2020
This growth will be attributed to fintech startups taking financial services to customers whom traditional banks did not serve, making the services more accessible and improving the narrative on products involving credit cards
“[…] the opportunity was obvious: the financial ecosystem in Brazil was inefficient and inaccessible, with five banks controlling over 80% of the country’s assets, annual credit card interest rates running up to 300%, and a third of the population unbanked.” by CNBC
According to MarketWatch, the global fintech investment market size will reach $153 billion in 2025
Representing a CAGR of 18.4% over the 2018 to 2025 period
The growth will be attributed to significant banks’ investment into the sector and their willingness to partner with fintech companies to offer financial services mainly to low-income individuals
“A large number of our clients are taking aggressive action to determine how they can use these technologies within their ecosystems. They’re acting as venture capitalists and investing in their internal projects to see what specific problems these technologies can solve.” Krishna, CTO, Deloitte Risk & Financial Advisory
🥇 EXPERIENCED MANAGEMENT 🥇
PagSeguro is led by Luiz Frias. He holds a Bachelor’s Degree in Economics from the University of Sao Paulo. Before starting UOL in 1996, he served as Principal Executive Officer at Grupo Folha.
Founder of UOL, PagSeguro’s parent company, Principal Executive Officer at PagSeguro and the chairman of PagSeguro’s Board of Directors
Has previously served as Principal Executive Officer at Grupo Folha where he oversaw the company’s expansion into various industries and markets, including e-commerce logistics and commercial printing
Holds a Bachelor’s Degree in Economics from the University of Sao Paulo
Chief Financial and Investor Relations Officer and Chief Accounting Officer at PagSeguro
Previously served as the Chief Financial and Mergers & Acquisitions Officer at the UOL Group and Executive Officer of the Folha Group since 2011. Has also served as Finance Vice President at Walmart Brazil, Financial Planning and Investors Relations Directors at Walmart USA and Senior Auditor at PricewaterhouseCoopers
Holds a Bachelor’s Degree in Business Administration from the Getulio Vargas Foundation in Sao Paulo
Executive Officer and member of the Board of Directors at PagSeguro
Previously held various management positions at UOL group in operations, sales and marketing. Also served as a management consultant at Bain & Company
Holds a Bachelor’s Degree in Electrical/Industrial Engineering from the Industrial Engineering University and holds an MBA from Darden Graduate School of Business Administration at the University of Virginia
✋ TAKE A BREATH ✋
So… This is a lot of information. Let’s summarise:
Founded back in September 2006 by parent company Universo Online (UOL) and headquartered in Sao Paulo, PagSeguro has grown to become Brazil’s leading disruptive provider of financial tech solutions
PagSeguro offers affordable financial tools and solutions targeting both merchants and consumers
It is know for its aggressive sales tactics, which include subsidised offers with 0% fees for retailers. These have pressured margins for established players and enabled PagSeguro to grow from $ 327m in sales in 2016 to over $ 1.4B in 2019
The global financial technology industry is set to grow by a CAGR of 10% between 2019 and 2030, fuelled by high investments in tech-based solutions by banks and other financial institution
💸 FINANCIAL CHECK 💸
For the last quarter of 2020, PagSeguro posted total revenues of $ 397.4m, a 32.6% growth from the same period the previous year
Full-year total revenue stood at $ 1.3B, a 19.4% increase from the year 2019
Profit before taxes in 2020 stood at $ 337.7m, a 7.2% drop from the previous year
Net income for the 2020 financial year stood at $ 245.9m, a 5.5% drop from the previous year, 2019
Net cash provided by operating activities stood at$ 409.6m in 2020, up from $ 91.251m in 2019
⚡️ THE BOTTOM LINE ⚡️
The Good
PagSeguro is a fast-growing financial technology player that provides payment solutions to merchants and (digital) banking services to consumers
The company is building a two-sided platform. Enabling it to cross-sell its products to merchants and consumers
The market is still at a low stage of maturity as a large share of the population is underbanked. Leaving plenty of headroom for growth
The Bad
PagSeguro is focussed Brazilian market, which might encounter adverse currency risks driven by broader (geo)political events
Competition from Stone and NuBank is fierce
Sources and credits
Investor presentation
Company website
Forbes
McKinsey & Company
LABS News
BNAmericas
CNBC
Pronko Consulting
MarketWatch
Acuity Knowledge Partners
International Trade Administration
Reuters
Disclaimer
Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.