PagSeguro Digital Ltd. (PAGS) Earnings

Management highlights

- Strategic Ecosystem Evolution * PagBank has evolved from a payment-led platform to a full comprehensive financial services ecosystem serving individuals and MSMEs, offering payments, banking, credit, investments, insurance, and digital solutions. * Over the last 12 months, the company returned BRL 2 billion to shareholders via dividends and share buybacks, representing a 13.4% 12-month trailing total yield. Adjusted Basel ratio reached 22.5% at quarter-end, down from 24.1% Q1 2026 and 29.6% Q2 2025, moving closer to the 18-22% target range while retaining growth flexibility. * A new COO, Enrique Fragata, has been appointed to strengthen execution, efficiency, and operational excellence as the ecosystem expands. - Product Innovation * Launched and advanced new products this quarter: Minizinha Voz (AI-powered sales terminal), IOF cashback for international credit card transactions, zero-fee investments, private pension plans, collections management tools, and new insurance products. Upcoming rollouts include private payroll loans and PIX Finance (installment PIX solution). * New products expand client relationships beyond payments, enable cross-selling, and increase engagement and lifetime value, with higher product usage correlated with higher transaction volumes and monetization. - Banking Performance * Excluding acquiring-related inflows, cash-in volumes reached nearly BRL 100 billion in Q2, up 23% year-over-year and 19% quarter-over-quarter. Cash-in per active banking client hit BRL 5,700, up 27% year-over-year. Bill payment and PIX transaction volumes increased 12% year-over-year. - Credit Strategy and Risk Management * Credit remains a core growth lever, with growth driven primarily by working capital and credit cards aligned with long-term 2029 strategic targets. Working capital origination slowed in Q2 as management rolled out a new underwriting model and tested initial cohorts, but July origination rose to a BRL 80 million monthly run rate above prior quarter averages. * Prudent risk management is maintained: 90-day non-performing loan ratio (NPL90) stands at 3.4%, well below the Brazilian market average of 6.2%, reflecting strong underwriting, analytics, and ecosystem client proximity. Unsecured products are gradually increasing as a share of the total portfolio in line with strategy, with no material asset quality deterioration observed. - Funding and Cost Efficiency * On-platform deposit growth and liability optimization have delivered nine consecutive quarters of reduced funding cost as a percentage of CDI, creating a low-cost, scalable foundation for credit expansion. Financial costs declined 5% quarter-over-quarter in Q2 driven by funding optimization. * Operating expenses represented 25.9% of total revenue (excluding interchange fees) in Q2. Operating expenses as a share of revenue improved year-to-date, despite one-time Q2 costs for World Cup broadcast sponsorship and annual collective bargaining agreements. Management continues to pursue additional efficiency gains, including AI automation for back-office and customer care operations.

Guidance

- Management maintains all full-year 2026 guidance ranges, with year-to-date performance broadly aligned with strategic expectations despite a more challenging macroeconomic environment than initially anticipated. No upward or downward revisions to targets were announced. - Total credit portfolio growth of ~31% year-over-year through the first half is within the full-year expected range, with new product rollouts (private payroll loans, PIX Finance) expected to sustain growth through the second half. - Gross profit guidance of 6-9% year-over-year growth is maintained. Management expects gross profit growth to accelerate in the second half, and projects hitting the lower end of the guided range given ongoing macro headwinds from elevated Selic rates. - Diluted non-GAAP EPS guidance of 9-13% year-over-year growth is maintained, with first half growth of 11% already in line with the range. The guidance does not include additional share buybacks in 2026, following completion of the third authorized repurchase program. - Full-year capital expenditure guidance is maintained, with BRL 1.1 billion invested in the first half aligned with disciplined investment plans. - 2026 total cash dividends are expected to reach approximately BRL 1.4 billion (subject to approvals, market conditions, and financial position), with a third tranche of BRL 0.28 per common share scheduled for September 30 payout.

Segment performance

PagBank reports consolidated performance across its integrated ecosystem of payments, banking, and credit: - Total Payment Volume (TPV): BRL 133 billion, up 3% year-over-year. - Expanded total credit portfolio (including merchant prepayment): BRL 52.4 billion, up 9% year-over-year and 3% quarter-over-quarter. Core outstanding credit reached BRL 5.1 billion, up 31% year-over-year, with the following breakdown: working capital BRL 0.6 billion (+204% YoY), credit cards BRL 1.1 billion (+35% YoY), payroll/other credit BRL 3.4 billion (+18% YoY). - Total deposits: BRL 43 billion, up 15% year-over-year; 90%+ of deposits are generated on-platform. Total funding reached BRL 47 billion, up 10% year-over-year. - Net revenue (excluding interchange fees): BRL 3.4 billion, up 2% year-over-year and 1% quarter-over-quarter. - Gross profit: ~BRL 2 billion, up 3% year-over-year and 6% quarter-over-quarter. - Non-GAAP recurring net income: BRL 576 million, up 2% year-over-year. Non-GAAP diluted EPS: BRL 2.06, up 10% year-over-year. - Annualized non-GAAP ROE: 15.6%, up 30 basis points year-over-year. Product penetration as a share of the active client base: investments 28% (up from 23% YoY), insurance 16% (up from 11% YoY), non-payroll credit products 6% (up from 4% YoY, a 43% expansion YoY).

Risks & headwinds

- Macroeconomic uncertainty persists, with Brazilian Selic policy rates remaining higher than initially expected at the start of the year, creating ongoing pressure on financial performance and funding costs. - Elevated industry delinquency levels and broader credit cycle risk could pressure future credit growth and asset quality. - Potential regulatory changes to Brazil's credit market, particularly for collateralized credit products, could alter the operating landscape. - Global chip shortages create modest upward pressure on point-of-sale (POS) terminal costs, offset partially by favorable FX movements and POS recovery/recycling initiatives. - Slower-than-expected Selic rate cuts could limit expected improvements in financial costs in the second half of 2026.

Analyst Q&A

• Q: Given rising industry delinquency, does management plan to slow credit growth or revise long-term 2029 credit goals? /

  A: Management reaffirmed it will not change credit growth plans or 2029 targets, noting the Q2 31% YoY credit growth is a strong performance. The company's NPL ratio of 3.4% is well below the industry average of 6.2%, giving management comfort to continue growing the portfolio sustainably through different macro cycles. Management also noted potential regulatory changes to Brazil's credit market will be addressed with new product adjustments, rather than slowing expansion.

• Q: Why has TPV grown faster than net revenue this quarter, and will gross profit meet the 2026 guidance range in the second half? /

  A: Minor net revenue dilution relative to TPV reflects one-time Q2 World Cup mix impacts and tough year-over-year comparables from the large 2025 Q2 repricing to account for Selic hikes. Management expects gross profit to reach the lower end of the 6-9% guided range in 2026, supported by accelerating credit origination, easier year-over-year comparables for financial costs, and rising payment activity after the second half of 2025 downturn.

• Q: What explains lower-than-expected POS write-offs, and are you seeing higher POS input costs? /

  A: Lower write-offs stem from new logistics and recovery initiatives that collect unused POS terminals from churned merchants for redeployment, which management expects to continue generating non-linear efficiency gains going forward. While global chip shortages create modest price pressure, this is offset by favorable FX movements and recovery efficiencies, so no material unit cost impact has been felt.

• Q: Why does management prefer dividends over share buybacks for capital return now, given current share price levels? /

  A: Dividends provide a more regular, predictable capital return stream for investors that aligns with the company's target 18-22% Basel capital ratio range. Buybacks were used in prior periods but lack the same predictability as regular dividends. This preference does not rule out future buybacks, but dividends are the priority for capital optimization today. The 2026 EPS guidance does not include additional buybacks this year.