April 23, 2019 / 10:24 PM / a year ago

UPDATE 1-Brazil card processor Cielo reports drop in profit as competition heats up

(Adds margin, number of merchants and context)

By Carolina Mandl

SAO PAULO, April 23 (Reuters) - Brazilian card processor Cielo SA on Tuesday posted a steeper-than-expected 45 percent drop in quarterly profit, with expenses surging by more than a fifth after it boosted promotional spending amid rising competition.

Cielo reported net income of 549 million reais ($140 million) in the first quarter, down from the same period a year earlier and below a Refinitiv analyst consensus of 571 million reais.

The company has been trying to fight back against competitors such as PagSeguro Digital Ltd and StoneCo Ltd by lowering prices and spending more on marketing and other promotional expenses.

Cielo said its number of card reader machines had increased by 8 percent from the previous quarter as it added new micro entrepreneurs like street vendors as clients. It lifted its number of active merchants to 1.21 million at the end of March, up 2 percent from the last quarter.

But the company's earnings before interest, taxes, depreciation and amortization (EBITDA) margin slid 15 percentage points from the previous quarter to 29.6 percent.

Cielo's expenses surged 22.4 percent from the same period a year earlier to 2.189 billion reais.

As the market becomes crowded, companies are innovating with new incentives to lure customers.

Last week, Itaú Unibanco Holding SA's card processor Rede said it would stop charging interest rates and repay merchants in two days, compared to the usual 30-day period.

Meanwhile, PagSeguro launched an instant payment feature for card transactions. ($1 = 3.9208 reais) (Reporting by Carolina Mandl; Editing by Christian Plumb and Rosalba O'Brien)

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