Yahoo Finance PagSeguro Digital Ltd. (PAGS) Q1 2019 Earnings Call Transcript
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PagSeguro Digital Ltd. (NYSE: PAGS)
Q1 2019 Earnings Call
May 14, 2019, 7:00 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Hello, everyone, and thank you for waiting. Welcome to a PagSeguro's First Quarter 2019 Results Conference Call. This event is being recorded and all participants will be in a listen-only mode during the conference presentation. After PagSeguro's remarks, there will be a question-and-answer session. At that time, further restrictions will be given (Operator Instructions). This event is also being broadcast live via webcast and maybe 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 post 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 in Risk Factors section 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 would turn the conference over to Mr. Ricardo Dutra, CEO. Mr. Dutra, you may begin your presentation.
Ricardo Dutra -- Chief Executive Officer
Hello, everyone, and welcome to our first quarter results conference call. Today, I have here with me Eduardo Alcaro, our CFO; and Andre Cazotto, our Head of Investor Relations.
Before we go through operational and financial metrics, I would like to say a few words about PAGS vision for the near future in this competitive market. Our primary focus is the payment business and we will keep investing to maintain our fast growth combined with profitability. We will now enter a new phase that we believe will be a landmark in PAGS history. Starting tonight, the company will offer digital payments and banking services in a massive way through the app to any Brazilian consumer in an on-boarding process that takes less than three minutes.
We are now launching a national advertising campaign to promote the services under the brand PagBank. PAGS already has a complete payment ecosystem, which is the core for digital account cashing (ph). We build our digital bank ecosystem with features such as wire transfers, P2P transfers, prepaid card, bill payments, mobile top up among others. In order to become the client's final money destination and to further increase our closed loop transactions. PAGS has already 4.4 million active merchants accounts in long-tail market. Although they are cash in as immersion they operate as a consumer when they cash out. With the launch of cash card and payroll portability, we are ready to fully serve Brazilian consumers doing the best to deploy our super app.
In the same way, we disrupted the payments business and promoted inclusions of millions of Brazilians before in their service. We believe now we will lead their inclusion into the banking system. There are lots of customers unsatisfied with their banks, but our focus will be the millions of under bank and Brazilians. It is the same scenario we had in the payments business six years ago. Millions of Brazilians in the service by incumbent banks most of them with smart phones and 3G connections eager to be included into the financial system.
We will focus on them as a reference in 2017 according to IBGE government source. Class C, D, and E, which are the low income places in Brazil spent BRL1.73 being 60% of that in cash. Banking is shifting toward a technology oriented business . And PAGS is a digital born in a tech DNA company. PAGS continues to be uniquely position or a top notch ecosystem now has a scale know how and processes in place to serves long-tail market including banking services. Stealing market share in the banking business for incumbents will not be our focus, like bank statements visas where 80% of new merchants did not accept cards before joining us, our focus will be on the underserviced population.
We will go for the Blue Ocean again, we are now entering a market that is 14 times bigger than the company's current market. It is an immense opportunity and now we are uniquely well-positioned to reach this market. Now let's shift to our presentation, we start our presentation highlighting the great achievements of the quarter. Our adjusted net revenue reached at BRL1.14 billion , up 59% year-over-year. Our non-GAAP net income reached BRL325 million, up 50% year-over-year and 1% quarter-over-quarter. Additional revenues from services like digital account, lending, prepaid cards, and reconciliation growing 125% year-over-year. Engagement is a key metric for the company given that almost 80% of our merchants never accepts the cards before joining us. We continue to observe a higher adoption of our ecosystem being translated in more transactions. We ended Q1 with more than 25% of our active merchants using services of our digital accounts, such as due payment, P2P transfers, cars, mobile top-up, among others. We launched four additional products including instant payments, payroll portability, cash and credit cards, they do have PAGS to expand its addressable market and start bargaining the consumer vertical.
Our average spending per merchant in Q1 2019 reached BRL5,700, up 70% year-over-year. We believe the adoption of additional functionalities through the digital account will be translated in higher stickiness and more transactions. Our goal is to be the merchants final money destination. Our TPV reached BRL24.4 billion , growing BRL11 billion or 70% year-over-year. And we also ended Q1 2018 with 4.4 million active merchants, adding 1.3 million new clients year-over-year. These figures reinforce we are in the right path with a broad ecosystem and also our execution capability.
Our 2015 and 2016 annual cohorts exceeded in average 115% TPV retention rate year-over-year after achieving a normalizing run rate, showing that our merchant base is growing at a very solid base and visible data to improve given the continued adoption curve in future cross-selling opportunities.
We also ended the quarter with the best rated app 4.8 stars on Google and Apple stores according to more than 300,000 reviews, reinforcing our commitment in delivering top class user experience. Talking about our brand recognition, PAGS has a stronger brand in Brazilian payment industry with 7.7 times more searches than second player according to Google Trends financial category. Being the first mover in mobile first with non-replicable online distribution through UOL that holds 84% of the Brazilian Internet deltas brings a natural advantage to PagSeguro.
We also acquired a minority stake with best to control with Netpos. And Netpos also provide that we enhance or valuable proposition to merchants by combining payments and software integration in our Smart POS. Netpos already has 30,000 active clients.
Finally, PagSeguro has proven that operating and winning the long-tail requires an online and mobile approach that is totally different from the traditional acquiring business model and new competitors that were attracted to the market after our IPO. We operate in a brand new market that we created and we still have a long way to go. Constantly putting into practice revision to disrupt and democratize financial and business services through technology and innovation.
Now I'd like to pass the word to our CFO, Eduardo Alcaro.
Eduardo Alcaro -- Chief Financial Officer
Thanks, Ricardo, and hello, everyone. Now before I discuss the net income slide. I'd like to mention that in the first quarter of 2019 we had a total of BRL15.7 million of non-GAAP items related to our stock based long-term incentive plan. For more details the foregoing non-GAAP measures and the reconciliation of these non-GAAP measures are presented in the last page of this webcast presentation.
On the top left of Slide 4. Our adjusted net revenue the sum of net revenues from transactions and financial income from instalments reached BRL1 billion , BRL100 million, and BRL43 million in the fourth quarter, up 59% year-over-year and 1% up quarter-on-quarter. Even considering a worse seasonality in Q1 than Q4 given the holiday season and Black Friday in Q4. We believe that these two operational revenue and income lines best represent our core business which grows at healthy and high double digit rates.
Important to highlight that we continue to promote discounts on hardware, promoting the increase of our base of active merchants. On the other hand, despite any mix effect our MDR prices are public, remain stable and have the benefits from additional services of our digital accounts, such as landing, prepaid cards, due payments, and reconciliation that like Ricardo said earlier grew 125% year-over-year.
Moving to the top right, we have our main revenue streams composed by transaction services or mainly now MDR collected from merchants, financially income from the instalment repayment in hardware sales. In the fourth quarter of 2019 transaction and services represented 59%, financially income 36% and hardware sales only 6% over total net revenues that continue to trend down as we expected. On the chart below, we present our non-GAAP total costs and expenses that decreased 0.6 percentage points year-over-year ending the fourth quarter at 3.2% over total TPV. Related to non-GAAP administrative expenses, our total TPV reached 0.3% flat when compared to one year ago.
On the next slide, we show our non-GAAP net income growth. In the first quarter, we reached BRL325 million, an increase of BRL112 million and up 52% all year-over-year. The non-GAAP net margin reached 26%, an increase of 0.6 percentage points year-over-year. The non-GAAP net income also increased 2% quarter-on-quarter and margin increased 0.5 percentage point.
Now moving to Slide 6. We have our number of active merchants. Just to explain the criteria we use internally, active merchants are those who made at least one single transaction in the last 12 months. We ended the first quarter with 4.4 million active merchants, adding more 1.3 million new merchants in one year, representing an increase of 43% year-over-year. Quarter-over-quarter, we added 283,000 new merchants.
In the next chart, we have the evolution of our average spending per merchant. That reached BRL5,700 in Q1, a growth of 17% year-over-year. This strong and continued growth is explained by the higher adoption curve of our solution in our merchant base, which is an expected trend. Higher engagement in our ecosystem being converted in more transactions and TPV.
Just reminding what we said in the initial remarks. Most of our merchants did not accept cards before joining PagSeguro. This is a Blue Ocean and a new market created by PagSeguro as we are not stealing clients from competition.
On the charts below, we see our TPV. Our total payment volume reached BRL24.4 billion in the first quarter, an increase of almost BRL11 billion and up 70% year-over-year and almost flat quarter-on-quarter due to seasonality when compared to Q4, which is the strongest quarter from the payment business in Brazil given the holiday season and the Black Friday. This growth is the result of a greater penetration of our ecosystem in the long-tail combined with the trend of cash to plastic conversion that is still at the beginning of our merchant base with lots of to grow in Brazil and with the upside of selling additional products and services to these clients. The net take rate, which is the blind and take rates net from transaction costs such as interchange, processing and card scheme fees reached 3.12% in Q1 2019 or 12 basis points up when compared to previous quarter. This is exactly what we expected and shared with you during the 2018 Q4 call. A higher net take rate compared to Q4 2018, but slightly down compared to Q3 2018.
This is explained by two reasons. First, a higher share of debit in our payment mix in Q4 due to seasonality. As in the Q4 damage is stronger in Brazil with the 13 salary payments. And second, compared to Q3 2018, a trend of higher penetration in debits transactions. Important to highlight that this take rate is the result of all payment methods and may change according to payment mix. As we discussed in previous quarters, we are not facing any type of MDR pricing pressuring the long-tail market, where our merchants are little sensitive to MDR prices.
With our prices being public and transparent, you can easily check online and verify that we are not taking MDR prices down. The reason behind this is likely decreased in the net take rates compared to 2018 is due to a higher mix of debit versus credit, which is not a concern for us.
Now, we'd like to hand it to Ricardo, that will talk about engagement metrics and new products.
Ricardo Dutra -- Chief Executive Officer
Thanks, Eduardo. On Slide 7, we show some of the most relevant engagement trends in our ecosystem. We believe engagement is a relevant metric to follow, also to help the company to increase the transaction cost, add more transactions into TPV and we'll enable future monetization revenue diversification. On the top of the chart, we have the number of active prepaid cards that increased 280% in Q1 2019 when compared with Q1 2017.
According to card monitor, PAGS is the largest prepaid card issuer in Brazil. Additionally, we also have the volume of prepaid cards we launched that increased 360% when compared with the Q1 2017.
In chart below, we see the number of due payment transactions that increased 335% since it's large back in the second quarter of 2018 or a mobile top-up feature is also ramping up growing more than 1.2000% when compared to Q3 2018 when we were launching. And 162% growth quarter-over-quarter become one of the most used features in the digital account.
The next slide we have the evolution of our P2P transfer that is started to get traction and already grew 315% quarter-over-quarter and also the customer average balance that increased 52% year-over-year showing that through new products and features more and more our merchants are perceiving our destock out as their final money destination.
On the chart below, we can see the evolution of our new transaction methods like NFC in QR code. Our TPV through near field communication or contact-less increased more than 1000% year-over-year and more than 50% quarter-over -quarter. Additionally our TPV from QR code transactions increased almost 3000% year-over-year and 75% quarter-over-quarter. We believe that offering NFC in QR code accepts in our terminals and in our wallets increase the value proposition to our customers.
On slide 9 we present our cohort metrics, our TPV retention rate from our 2015 and 2016 vintage on average exceeded 115% year-over-year to be viewed the integrated is provided one year after the cohort has achieved a normalized run rate, this consistent cohort us to a strong revenue visibility and show that our merchant base is growing at a very solid base and its potential to improve given the continued adoption curve in future cross-selling opportunities.
On next slide we can see this transfer for our brand, PagSeguro is the first mover in this market. In fact you can access your orders (ph), is third largest online orders in Brazil only behind Google and Facebook with more than 85% Internet reach as of October 2018. To promote our products and solutions look their markets help PagSeguro to reach a unique brand recognition.
The best of most according to Google Trends filtering by financials category, we have on average approximately 7.7 times more searches in the second player. PagSeguro reached a level of brand awareness where the business has a word of mouth effect and consequently we have lower acquisition costs than our competitors.
On slide 11, we highlight our roadmap of products already delivering this year. Being an independent company allow us to think exclusively in our client's financial needs by delivering growth and profitability simultaneously in offering a unique ecosystem to our digital accounts with cash and credit cards and payroll portability. We expect to diversify our addressable market and start gaining penetration with the consumer vertical, besides our high engagement on the merchant segment. Worth to say, we will be very cautious in the credit offer. As you know, it is important to understand credit behavior, so that it can manage the delinquency accordingly.
On the next slide, we have mapped the current functionality of our unique inward classical system broken by payments, software and banking features. We can see there are four new features we launched after our first quarter call and I will give you more detail about them in next slides.
On a superior block, there are all features oriented to merchant available to our 4.4 million merchants. Instant payments and sales at in software column are the new ones. In the chart below, we can see our robust banking ecosystem. Credits and cash cards as well payroll portability are the new features launched. As I said at beginning of this call, we believe this banking features will enable us to attract and monetize consumers, help us improve our merchant's loyalty and stickiness, creating more and more engagement and it will be crucial for closed loop transactions, where it can have a better profitability and at the same time, offer benefits for both parties, consumer and merchants. We believe the addressable market of banking and credit is 14 times larger than the merchant acquiring business and PAGS is well-positioned to reach this market.
On Slide 13, we show our instant payment feature for debit and credit card transactions, regular and instalments for all merchants. PagSeguro announced in April the launch of its new settlement feature. This feature is available for transactions beginning on May 1 and allow all PagSeguro merchants and individuals to receive payments from their regular credit card, credit instalments and debit card transaction at about the same time of the sale, even through weekends and holidays at the same cost of the one day settlement. Although the change for due on to instant payment seems to be minor for a small entrepreneur, they do not have access to working capital can make a big difference.
On the next slide, Slide 14, we introduced net POS. PagSeguro acquired a minority stake with best to control at this company that provides ERP software to retail and food service segment. Built for front and back office with sales and management tools like inventory control, detail reports, cash manage and invoice. It will be fully integrated with PAGS and POS and Smart POS devices, as well in our PAGS sales app. Net POS has more than 30,000 clients.
On Slide 15, we show our software solutions. Through M&A transactions, we now have TILIX an automated application that innovates the customer experiencing plain (ph) views. For attributable to tax views, TILIX offers a simple and user friendly interface to manage bill payments and will be fully integrated in our digital accounts in the following months. We also have R2TECH, a company acquired in 2017, that offers a streamlined process of credit card transactions reconciliation. And finally, net POS that I've just described in the previous slides. PagSeguro continue to monitor possible M&A activities that can speed up the building of a more complete ecosystem.
Now, I'll give more details about our banking features. On the next slide, we give more details about Digital Account App Onboarding. Now, anyone merchants and consumers can sign up for a digital account directly to the app for free in less than three minutes and manage all the products and services. Additionally, tonight we will start our massive national advertising campaign to promote Pagbank, the digital account and banking services targeting the consumers. The campaign we'll be running on UOL, broadcast TV, PayTV, online, radio, newspapers, magazines and out of homes.
On the next slide, we show our payroll portability feature, which allows anyone to receive their salary on Pag Digital Account without any cost. With this new inefficient cash in method our customers can be bills, make purchase, mobile top-up, to answers P2P without cash and we load prepaid cards. These new products, we will have our access to consumers willing to have banks as their banking services provider.
On Slide 18, we present our cash card launched in March, Pagseguro and Visa are promoting financial inclusion in offering the accounts card to all our merchants and now consumers. The cash card is we can directly with the balance of the digital account, bringing more convenience and a better experience to our merchants and consumers. The cash card is also NFC enabled.
On the next slide, we introduce our new credit card product, launched in early May issuing pilot mode, initially it'll be target to our merchant base with no annual or membership fees. Our Visa credit card is offset that no merchants all over Brazil and abroad, and can be stored in PagSeguro Digital Account to enable contactless into our core transactions.
Finally on slide 20, we believe PagSeguro is our position and with a robust like system that combines payment, landing, banking and software products to serve were more than 4.4 million active merchants and to reach consumers market. By upselling new products like credit, banking and software and extend our approach to consumers, we will move to prior our addressable market. Considered, the new initiatives is already available for merchants and consumer, we estimate the revenue grew almost 14 times bigger than merchant accounting services. Being the first mover having a robust in low cost ecosystem with 4.4 million active digital accounts. Mobile first, strong brand, focus and user experience, the best rated financial services app on Google, and Apple store and only proof of all online distribution to you as well, brings a natural advantage and they're shipping in long-tail market. Now we finished our presentation. We will start the Q&A session. Operator please ?
Questions and Answers:
Operator
(Operator Instructions). Our first question comes from Craig Maurer with Autonomous Research.
Craig Maurer -- Autonomous Research -- Analyst
Yeah, hi, thanks for taking the questions. Two questions from me. First on the new credit card launch, are you taking the credit risk on that credit card for consumers? And secondly unrelated question, stop thinking about the market that you guys are addressing acquiring, you know, we look -- when we look at Cielos performance with Stelo it was extremely disappointing. They restated their prior numbers, the current quarter numbers were unimpressive. So are you just finding that the competition is just not finding traction in the market regardless of what they do with hardware promotions or so on and so forth? Thanks.
Eduardo Alcaro -- Chief Financial Officer
Hi Craig, this is Eduardo, thank you for the question. First regarding credit card as I said in the speech, we are in pilot mode and we will offer credit card only for merchants that you already had some relationship, we know the behavior, we have TPV and so on.
Craig Maurer -- Autonomous Research -- Analyst
It's a little hard to hear you.
Eduardo Alcaro -- Chief Financial Officer
I'm sorry Craig, is it better or still?
Craig Maurer -- Autonomous Research -- Analyst
(inaudible)
Eduardo Alcaro -- Chief Financial Officer
Can you hear me?
Craig Maurer -- Autonomous Research -- Analyst
Yes.
Eduardo Alcaro -- Chief Financial Officer
Okay. So Craig, again I thank you for the question regarding credit card. As I said in the speech we will offer credit cards only for merchants at this point and very cautious in volume promotions because we already have some relationship with them. We know the TPV history, we know the behavior, so really pilot this credit card offer for merchants and workers (ph) would not take the credit risk. Regarding the Stelo as you said in the previous calls, the beauty of our TPV is not only to -- because of the part of the devices, if we hold consistent, the way we distribute online, leveraging to our audience, offering free credit card and so on. Some companies says that decreasing the price is really to get the rental market. But we are here to prove that you need much more than that and that's why we keep investing in our ecosystem, because that's what makes the difference.
Craig Maurer -- Autonomous Research -- Analyst
Thank you.
Operator
Next question from Mario Pierry, Bank of America.
Mario Pierry -- Bank of America -- Analyst
Thank you for taking my questions. I have two questions and congratulations on your results. First one is the outlook for your take rate. As you showed, right, your take rate right now is depending very much on your mix and you mentioned that you're in the arse for the long-tail segment has been unchanged. But I was wondering what has been your strategy to get into the SMB market? Are you having also the reduced prices there like we see some of the incumbents doing? So if you could discuss a little bit then the outlook for for the take rates outside of the micro merchant segments? Second question is related also to, you know, you provided your addressable revenue markets, credit BRL282 billion . Here it's not clear, how you plan on approaching this? Are you going to be opening up your platform for third-parties or you are going to be taking the credit risk? Or you are doing the landing? How you plan on funding this segment? Thank you.
Eduardo Alcaro -- Chief Financial Officer
Hi, Mario, this is Eduardo Alcaro speaking. Let me take the first question. About the take rates, when we see -- when you see the recovery in Q1 compared to Q4, most of the recovery is related to product mix as we anticipated in the last call. In Q4, due to seasonality with the 13th salary and consumer behavior, you know, that there is an increase in that card transaction volume and lack transactions and instalments in relative terms. Take rate is not a concern for us and we expect a slightly decrease in 2019 compared to 2018, as a result of more added transaction. But when you look, the outlook for take rate from what we're seeing now comparing Q2 compared to Q1, we see take rate is stable.
Ricardo Dutra -- Chief Executive Officer
Regarding the -- this is Ricardo, Mario. Thank you for question. Regarding the credit that we are asking, first I'm planning to open the platform for 35 each to offer loan or something like that. Remember that it's reference, how big is this market because as I said in the speech, our main focus after payment is going to be to reach the number one in the year. So this is a reference how big is this market. We are in pilot with some consumers to see how we are going to perform with very cautious, very limited, we are going to have some experience by offering credit card for merchants. Till now little bit easier, so we already know how to deal them with pilot mode with the consumers.
Eduardo Alcaro -- Chief Financial Officer
Just one additional commentary here Mario, Eduardo speaking. Our main focus remained engagement in our ecosystem, OK? I think that, let's say, cross-selling additional financial problems for sure just like Ricardo mentioned. We're going to be able to create more stickiness in our ecosystem and for sure capture more TPV, more transactions. That's the main focus. Okay.
Ricardo Dutra -- Chief Executive Officer
Just as a last comment Mario on the landing products. We're actually still picking our clients to lie to both of these products, so clients that on account history with -- we are finding thing, but rather we are getting the right model to make the difference. And before we accelerate, what we are doing here, we are learning, learning and learning. And we did not have any rush to do it, because we won't take the credit risk. So we really want to play it safe and it's quiet camp that it's one of the benchmark for us. So for now we have plenty of transactions with our own balance sheet. Next question please.
Operator
Next question comes from Bryan Keane, Deutsche Bank.
Bryan Keane -- Deutsche Bank -- Analyst
Yes, hi guys. Two questions. First, just on net new merchant adds, another typically, seasonally softness in 1Q and then seasonally strong in 2Q, the 1Q number was a little bit better 283,000 was higher than we expected, just trying to figure out, should we still expect 2Q for new merchant ads to be seasonally strong? And then, there's the BRL1 million for the full-year still hold? And then the second question on net income guidance that we provided on last call, should we still expect you guys to be in that range. I think you guys feel comfortable more toward the high end of the range toward the billion time? Thanks.
Eduardo Alcaro -- Chief Financial Officer
Hi Brian, this is Eduardo Alcaro speaking. So again we will be able to reach 1 million net adds at the end of 2019 with 5.1 even active clients. And this is exactly the number that we should with this outside analysts during the IPO for 2019. As far as your second question about the guidance. I think it's too early to make any updates on the guidance. What I can tell you that management is committed with the top-up end of the guidance. Our annual bonus is tied to the top-up -- the top-up of the guidance and that's our commitment. The bottom of guidance is really what we committed when we did the IPO and without that revenue but was number to draw a line in the sand and say that that's the minimum number that we we are going to achieve. And with the high -- with the top-up of the guidance we are talking about a number that is 40% higher than what we delivered in 2018. And 30% higher than the lower end of the guidance which is the number that we provided you when we did the IPO.
Bryan Keane -- Deutsche Bank -- Analyst
Okay. Thanks so much.
Eduardo Alcaro -- Chief Financial Officer
Thank you.
Operator
Next question comes from Thiago Kapulskis, BTG Pactual.
Thiago Kapulskis -- BTG Pactual -- Analyst
Hello everyone, thanks for the opportunities to make questions. I also have two questions. The first one related to your Pagbank initiative, which looks a pretty interesting one. I mean we'd seen yesterday actually file releases in each year as well in a number of players kind of moving, you know, this way of forwards, you know, digital banks. I just want to get a sense of how you guys see, you know, this platform, are you targeting, you know, the 4.4 million clients that you have on the long tail? Can you move in to I would say, you know, into, you know, the top of the pyramid with this, I mean how are your plans related to this initiative? And my second question is related to costs, I mean, especially cost of sales, I mean, even though you had a better trend in the SG&A the cogs actually came a little bit above what we were expecting just want to get a sense of your sales if it's improving or not then how do you see that on the margins? Thank you.
Ricardo Dutra -- Chief Executive Officer
Hi Thiago, this is Ricardo. Thank you for the question. Talking about Pagbank, we have -- as I said earlier the ecosystem for a few weeks and then we realized that by launching to come with products, or some additional products you could also lead to the consumer mapping the view. We can focus on the bank, right, because we already have bill payments, mobile top-up, live transfer, P2P and so on. So the -- with the launch of the payroll portability and also the cash card that is likely linked with the digital account. We believe we can reach the consumer market and bring people into the system. We can try to rescue market share from traditional banks. We are here for the variation bringing people into the system.
So the focus on the merchants that we have in our boards has been approaching in the (inaudible) using our digital bank. If you look at pyramid, we will then see that we should be there because this part of merchant is quite different services from banks, but even hard and (inaudible). So when we are looking for us to bringing the consumers to the system, focusing on the bank, keep (inaudible) higher bank accounts and that's been the big real focus for the PagBank.
Regarding your question about other players launching from initial place. I can tell you about ours. We have the smallest, but we are already focusing QR code, NFC. And now we are going to the consumer. We believe actually that by launching this new products where people can make digital, can move to codes, can change 10,000 in wallets, they are growth initiatives for us because more people moved credit cards into the form of debit cards as a whole. As a -- and acquire or as a company that is a good consumer. So really focus on the more consumers building people into the system, just like we did six years ago with the POS devices.
Regarding the cost of sales, I'll ask and hand it over to Eduardo.
Eduardo Alcaro -- Chief Financial Officer
It's more of the seasonality that we see in Q1 compared to Q4, basically we expect lower device sales and in terms of discount, we chapped the same pricing that we were practising in December in Q4. So there is no material difference there. And as I said before me, you can go online and check our price and verify, our prices are public, are transparent and they're very easy to track and very easy for you to verify that we have the same level of pricing and discounting that we were doing in Q4.
Thiago Kapulskis -- BTG Pactual -- Analyst
Perfect. Thank you for the answers.
Ricardo Dutra -- Chief Executive Officer
Thank you.
Operator
Next question from Felipe Salomao with Citibank.
Felipe Salomao -- Citibank -- Analyst
Hi, good (inaudible) thanks for the opportunity to ask questions, I have two questions. First one very straightforward, I would like to know if all the new products and services related to Pagbank that you announced today were included in the guidance for 2019 net income or if they were not ? And my second question is related to two recent things. So yes it has launched of its instant payment products each year and the central banks texting campaign infrastructure to go live in the next six months, which should allow payment betweeen, a wallet of different providers. Do you believe that these new payment to represent a threat for public review of business model especially because of the company's exposure to the unbanked raise part of the population and given that they rates for eastern things are lower or do you believe the instant payment infrastructure should be seen more as an opportunity given that PagSeguro has roughly 4.5 million customers using its wallet, so these are my questions? Thank you very much.
Eduardo Alcaro -- Chief Financial Officer
Thank you, Felipe, it's Eduardo speaking. About your first question, you know, the one thing you don't have is that the company committed to deliver the year on procedure payments, OK like we said earlier we are starting to enter with additional financial problem targeting consumers, but we are still very focusing engagement and increasing our addressable market. The 1.5 again it's just considering the payment business that we have and we're still not trying to let face porting metrics about additional revenue lines that we have for your problems were much more than sequencing traded in creating more engagement in our consumers and merchants, OK.
Ricardo Dutra -- Chief Executive Officer
Hi Felipe, this is Ricardo Dutra, Regarding your question about instant payment, we think from central banking from the vertically to in the past year, we have gained they fought to competition, they try to do environment for companies to approach the market in competitive. So by saying that, I'm trying to say that, by having the infrastructure simultaneous, if you see that, there is an opportunity because we had an certain forms of merchants. We have had some numbers of consumers, it's still too early to comment about the economics of that because some of the transactions might have consequence, some of these transactions -- so it's hard to say how its going to work, how it's going to do the economic and then so that instant payment that is related to electronic payment, you see as an opportunity, everything is depended on cash, it's business for us.
Felipe Salomao -- Citibank -- Analyst
Okay, thank you very much.
Ricardo Dutra -- Chief Executive Officer
Thank you, Felipe.
Operator
Next question from Josh Beck, KeyBanc.
Josh Beck -- KeyBanc -- Analyst
Thank you for taking the question. The push into consumer banking seems very interesting to me. I'm just wondering how long until this could be a material contributor to revenue say 5% of revenue, is this five years down the road, a couple of years down the road anyway to help us think through that?
Ricardo Dutra -- Chief Executive Officer
Hi Josh. Right now, we have -- what we are committed here is not with a revenue number but with engagement with our client base. So, whatever we want with the new product feature with all of digital accounts, later first reach the consumer market. But, first we are basically on the merchant side, some of our merchants were also interviewed in a separate here but they're launching this product, what we really want to accomplish here is to increase the reaching costs of ecosystem and create a higher engagement in our ecosystem and also attract the consumer side that we did not have before. So that's the main focus. We're not doing anything to commit to a fixed number, right now what we want to do here is to create a new product line that brings EPS accretion. I think that's the most important thing. Even when we are talking about additional merchants, additional TPV, our main purpose here is always EPS accretion.
Josh Beck -- KeyBanc -- Analyst
That makes sense. The other thing that I wanted to ask is as you do have a larger consumer offering, does this mean you need to spend more on sales and marketing to reach more true consumers or does it not really change your plans much regarding sales and marketing spend?
Eduardo Alcaro -- Chief Financial Officer
Josh, Eduardo speaking. Let's say that for sure we're investing more in marketing and sales in the coming quarters. Do it for the campaign, but we are promoting tonight, starting tonight that's in line to our expectations in line with our budget, in line with our commitment to deliver the top up the guidance, OK.
Josh Beck -- KeyBanc -- Analyst
Okay. Thank you. Thank you, both.
Eduardo Alcaro -- Chief Financial Officer
Thank you.
Operator
Next question comes from (inaudible) Credit Suisse.
Analyst
Hi, thanks for taking my question. I have only one question regarding the churn rates, we have seen increasing subsidies on the sales of the US terminal, so the gross margin is now at lower than it was in the previous quarter, so do you see any impact on churn regarding that? Do you see merchants since they have a lower risk by buying the POS, do you see churn rates increasing because of that? Thank you.
Eduardo Alcaro -- Chief Financial Officer
Hi, its Eduardo, we are seeing churn really, really stable no matter of difference from what we have seen last year. And just to mention here that we -- as we don't feel clients from from large incumbents in the market. And we create a new market in the world with all our features with our ecosystem. We also do not lose clients to the competition, so our churn is really related to business mortality. And that has been pretty much stable from what we have seen last year.
Ricardo Dutra -- Chief Executive Officer
just one additional commentary, here it's Ricardo Dutra. Let's say that even promoting itself, we're still bringing the same type of merchant. We haven't seen any type of change in the profile of the merchant that is working with PAGS, OK, few merchants are in our alert detail, cohort the same lifetime value. So it's either cost and it's about promoting our discounts and continue to bring a very good quality of merchant.
Analyst
Very clear, thank you.
Operator
Next question comes from Neha Agarwal (ph), HSBC.
Neha Agarwal -- HSBC -- Analyst
Hi, thank you for taking my question and congratulations on the good results. I have two questions. First, you have a very detailed slide on the products that you have to offer for both merchants as well as individual customers. How are you promoting your product for individual consumers to enable -- to allow them to use your app? Would you be giving some kind of discounts for them to have a Pagbank account or is this any other offer that you have in mind that you would be advertising? Second is it appears like you gradually want to move upmarket you are building yourself that profiles as well. Would your strategy be somewhat different versus what you have currently for a micro marketing segment? How do you view this growing slightly up the market from where you are? Thank you.
Eduardo Alcaro -- Chief Financial Officer
Thanks for your question, enjoy speaking again. We're still targeting like the same products, we are offering our free digital account strategy. Remember that the profile of the consumer that we are targeting remains the under blanket. In Brazil, we've had probably 30% of the society without a bank account. That's our focus probably more than 60 million Brazilians in the country, OK, offering the free digital account and basic functionalities like you payment, mobile top up, prepaid card, the cash card that we just launched it, just like Ricardo said, at least for now let's say that landing and credit card that there's two policy that we're going to target our own merchants where we have the transactions, where we have the track records, where we have the, let's say, the PTV history to be more comfortable to offer it, OK. So the strategy is going to be more targeted now with other campaigns.
Let's say that at the end of the day, many of our merchants are already consumers, remember that. We have the debt worker, the personal trainer, the heater teacher. So it's a matter of let's say targeting with the new campaigns with marketing and for sure improving the products and the services that we offer. The cash card is a good opportunity, it's a new product that we are launching that could be easily adopted by the consumer. And also there is a new ports and cash method that is the possibility of the savagery. So I believe that these two products who are ready to start capturing more consumers to our banks, but there is not additional cost. There is no different project, that feedback, we have a private ready for merchants and consumers and remembering the name of the merchant that we operate today, they have these hybrid like say mix, where they are both merchants and consumers.
Operator
Next question comes from James Friedman, Susquehanna.
James Friedman -- Susquehanna -- Analyst
Hi, thank you and congratulations on the strong results, It's Jamie, it's Susquehanna. I want to ask about prepayment and settlement related fees. It's obviously been quite topical. Are you seeing any change in behavior and do you see the need to adjust yours or do you think you're just at a different end of the market?
Ricardo Dutra -- Chief Executive Officer
No we're not seeing anything different from what we have seen before. If you look at the long tail market even though they are incumbents they're offering to the people of one and now with that advantage of offering the Ethan payment that is a great functionality to our customer base without charging anything, anything in addition to what we charge for the report one, its really, it's pretty much a no market has been pretty much the same. You can see by our volume, by our net take rate, by the average of standing for a promotion.
James Friedman -- Susquehanna -- Analyst
Okay. And then if I could just follow up, you know, we're halfway through almost the second quarter or tomorrow we'll be halfway through the second quarter, other payment companies have commented about the second quarter maybe not there but here. So Visa had observations, MasterCard had observation said they accumulated (ph) including some about Brazil actually. I was just wondering do you have any call outs you had on the second quarter anything that, you know, that we should be aware of or trends to date that would be helpful in getting oriented to where we are now? Thank you.
Ricardo Dutra -- Chief Executive Officer
James, there is nothing different in ours -- on what's happening compared to what we have in our business plan. I mean, we continue to see our plan for the year being achieved. So anything different from what we had seen in Q1.
James Friedman -- Susquehanna -- Analyst
Okay. Great. Thank you, guys.
Operator
This concludes today's question-and-answer session. I would like to invite Mr. Ricardo Dutra to proceed with his closing remark.
Ricardo Dutra -- Chief Executive Officer
I would like to say thank you very much for your time, (inaudible) attending this call. I'll see you in the next quarter. Thank you very much. Have a great night. Take care.
Operator
This concludes PagSeguro's audio conference for today. Thank you very much.
Duration: 58 minutes
Call participants:
Ricardo Dutra -- Chief Executive Officer
Eduardo Alcaro -- Chief Financial Officer
Craig Maurer -- Autonomous Research -- Analyst
Mario Pierry -- Bank of America -- Analyst
Bryan Keane -- Deutsche Bank -- Analyst
Thiago Kapulskis -- BTG Pactual -- Analyst
Felipe Salomao -- Citibank -- Analyst
Josh Beck -- KeyBanc -- Analyst
Analyst
Neha Agarwal -- HSBC -- Analyst
James Friedman -- Susquehanna -- Analyst
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