DLocal Limited (DLO) Earnings Call Transcript & Summary

Hello, everyone. Welcome to dLocal's Second Quarter 2021 Results Conference Call. This event is being recorded. [Operator Instructions] I'm going to turn the call over to dLocal.

Thanks, operator. Welcome to our first quarterly earnings conference call after our IPO. As a reminder, this event is also being broadcast live via webcast and may be accessed through dLocal's website at investor.dlocal.com, where the presentation is also available. The replay will be available shortly after the event is concluded. Before proceeding, let me mention that any forward statements included in the presentation or mentioned in this conference call are based on currently available information and dLocal's current assumptions, expectations and projections about future events. While the company believes that their assumptions, expectations and projections are reasonable in view of currently available information, you are cautioned not to place undue reliance on those forward-looking statements. Actual results may differ materially from those included in dLocal's presentation or discussed in this conference call for a variety of reasons, including those described in the forward-looking statements and Risk Factors sections of dLocal's registration statements on Form F-1 and other filings with the Securities and Exchange Commission, which are available on dLocal's Investor Relations website. Now I will turn the conference over to Sebastian Kanovich, our Chief Executive Officer. Seba, you may begin your presentation.

Hello, everyone, and thanks for joining our second quarter results conference call. Today, I'm joined by Sumita Pandit, our Chief Operating Officer; and Diego Cabrera Canay, our Chief Financial Officer. This is our first earnings call after our IPO on June 3, 2021, and we are excited to present an update on our business, and we thank you for your interest in our company. Let's get right into it on Slide 3. We are aware that some of you are joining us to hear our story for the first time. So we are providing a recap of who we are, what are the problems we are addressing for our merchants and what we believe is our addressable market. We will then provide an update on our vectors of future growth, followed by a review of our financial performance. We will leave time for a Q&A session at the end. So who are we? dLocal enables global merchants to connect seamlessly with billions of emerging market consumers. Our platform, One dLocal presents a single API, single integration and single contract solution to our merchants. We are entirely B2B focused, and we are proud to count some of the largest global merchants as our customers, such as Microsoft, Rappi, Kuaishou, MailChimp, Wikimedia, inDriver and Wix. Today, our infrastructure supports our merchants across 30 emerging markets in Latin America, Africa and Asia. Now to the results. The second quarter has been our best quarter ever. Total process volume, TPV, grew 319% year-over-year when compared to the second quarter of 2020, reaching USD 1.5 billion, during the quarter. Our TPV this quarter represents a milestone for the company as it is the first time we have surpassed $1 billion in a single quarter. As you may remember, we grew our TPV 139% year-over-year in our first quarter of 2021. So our growth has continued to accelerate, both year-over-year as well as quarter-over-quarter. Our revenues in the second quarter of 2021 increased to $59 million, representing 186% year-over-year growth compared to the second quarter of 2020. Our business continues to benefit from cost discipline and efficiency as we continue to maintain our adjusted EBITDA margin along with high growth. Slide 4. Let us briefly compare our Q2 2021 performance vis-a-vis Q1 2021 as well as full year 2020. We have improved every financial metric we have discussed with you. Our second quarter revenue of $59 million is 46% quarter-over-quarter growth versus $40 million in Q1. Our Q2 2021 revenue growth of 186% compared to 124% in Q1 and 88% in full year 2020. We have previously highlighted the net retention rate metric as a key KPI we obsessively track. We achieved 196% net revenue retention in Q2 2021 versus an already impressive 186% in Q1 2021, and 159% in full year 2020. Our adjusted EBITDA margin in Q2 2021 remained stable at 44% in comparison with our adjusted EBITDA margin for the first quarter, higher than our Q2 2020 adjusted EBITDA margin of 40%. Merchants and consumers continue to evolve on their behaviors as the pandemic goes through its different stages in the multiple countries we operate in. We are seeing more digitalization, less cash and wider adoption of alternative payment methods. We believe these new consumer behaviors' changes are here to stay and will continue to have a positive effect on our business. During this quarter, we have seen continued growth in our business from both existing and new merchants using our platform. Our global employee base has continued to strive and will remain focused on serving our merchants. We have embraced a hybrid model of work, office or home as we continue to be flexible about where our employees choose to work from. This is not new for us as even pre-COVID, we had a flexible approach to physical locations, given our global roster of merchants and extensive emerging market network. For example, the 3 of us on this call today are based in different locations. I am calling from Israel, while Sumita is in California and Diego in Uruguay. We have continued our efforts on the expansion front, growing our presence in Africa and Southeast Asia. We have launched 4 new countries in the first half of this year. We have added 10-plus new merchants in the second quarter of 2021. We continue to benefit from the diversification of our business across verticals. Some verticals such as retail, streaming, advertising saw accelerated growth as business benefited from post-pandemic return to work and the gradual opening of economies. Our margins have remained stable in comparison with our previous quarter, even with continued investment in our infrastructure and people. We have continued to hire and strengthen our employee count in key functions. The head count in dLocal grew 100% year-over-year. We see tremendous opportunity in the markets, merchants and products that we serve. And we intend to continue to invest in our people, platform and technology as we pursue a path of growth. Our disciplined approach to growth and profitability till date has provided us with a unique position. We intend to continue investing in growth, and therefore, our margins may decrease in the coming quarters. We will maintain our discipline to ensure that every new dollar we process will contribute to our margin. Slide 5. What are the problems we are addressing? There are 3 primary challenges that we are solving for our merchants. First, payment methods are local by nature and very diverse in the 30 countries we serve. On top of that, we are seeing a trend of continued fragmentation as consumers adopt newly available payment methods. Cash methods are getting replaced by digital payment methods, offering even more opportunities for consumers to participate in digital online commerce. Merchants are keen to access this rapidly growing end market without building the payment rails themselves. Second, achieving healthy conversion rates while keeping fraud under control is a challenge in emerging markets. We deliver high conversion rates and lower friction through automatic validation and dynamic routing of transactions to multiple acquirers and payment methods. And third, we make the complex simple for our merchants. For those of you who have traveled to any of the markets we serve, you will know that no 2 markets in these regions are the same. We enable our merchants to keep up with the change in regulatory and tax frameworks in emerging markets. Slide 6. As you may remember, we offer both pay-in and payout capabilities to our merchants. A typical fund flow for a pay-in transaction from an emerging market user to a global enterprise merchant requires smart routing, payments processing, withholding tax collection, FX management and merchant fund settlement. Our typical pay-outs fund flow in the opposite direction from a global merchant to an emerging market user, imagine if you will, a ride-hailing company driver or a food delivery worker requires user payment disbursement, income tax management, FX management, payments processing and merchant fund collection. Our platform enables all of this by leveraging our connectivity to 600-plus local payment methods, including cards, bank deposits, wallets and alternative payment methods as well as local acquirers, banks and nonfinancial institutions. We are not on acquirer ourselves and instead connect to multiple acquirers in the local markets where we operate. We have recently launched issuing as a service to our global merchant. We have launched our first pilot with the merchant and expect this product to be highly complementary to our current product offering. Sumita, over to you.

Thanks, Seba. Slide 7. Our business benefits from strong industry tailwinds, such as the increasing globalization of online commerce the rise of the digital economy along with the rise of digital goods that move even more quickly across borders than physical goods, the aspirational middle class that is expanding and is keen to buy the products and services that users in the western developed economies have always had access to. Purchasing power continues to expand in these countries, and there is a trend towards equalization of purchasing power that is driving global consumption trends. Global merchants are meeting their own growth forecast they have promised their investors by going outside their domestic markets to pursue growth. As a result, traditional borders of commerce continue to blur. We, therefore, grow organically with our merchants. The complexity of the markets we serve meets our solution powerful. Slide 8. We commissioned a market study by AMI to measure our addressable market in the countries we serve. E-commerce volume in the countries we serve was estimated to be $1.2 trillion, of which $0.4 trillion is pay-ins and is expected to grow at a 27% annual growth rate, and $0.8 trillion is pay-outs. AMI expects the share of pay-outs to increase versus pay-ins, which implies an even higher percentage growth for pay-outs than 27%. This includes both cross-border and local to local e-commerce transactions. This does not include China e-commerce volume because we process minimal volume of payments in China. Also, not all of this volume is comprised of global merchants. However, our TPV at $1.5 billion for the quarter is a very small fraction of the opportunity ahead of us. We grew our TPV an impressive 319% year-over-year in our second quarter, we grew 139% year-over-year in our first quarter. In the first half of 2021, we achieved USD 2.4 billion in TPV, 15% more than what we processed on a 2020 full year basis.

We have 3 primary vectors of growth: Commercial efforts, product expansion and geographic expansion. On the commercial effort side, we are focused on 3 levers: Organic growth of our merchants; our ability to cross-sell through account management; and our ability to add new clients. On the product front, we continue to enhance our product portfolio with improvement in our features for pay-ins and pay-outs, together with the development and launch of new product lines. On the geographic expansion vector, we are constantly deepening our presence in the countries where we currently operate, together with significant efforts to expand our offering into new countries. As an example of the latter, we have added Vietnam, Malaysia and Guatemala to our platform in Q2. Our financial results are a reflection of the power of our platform, the operating leverage of our business and the stickiness of our merchant relationships. Our revenue growth plus EBITDA margin, the Rule of 40, as some of you may call this metric, was 129% in 2020, 168% in Q1 2021, and 230% in Q2 2021. We believe that the strong cash flow generation of our business also supports an inorganic strategy that will accelerate our time to market. We plan to pursue inorganic opportunities to accelerate any of our 3 growth vectors, including commercial efforts, product or geographic expansion.

Let's double click on these 3 growth vectors. Slide 10, commercial vector. We saw expansion in our relationships with existing and new merchants. We are actively targeting merchants globally, including in China that are looking to expand outside their local market and expand into Latin America, Africa and Asia. Our net retention rate, as shown on this slide, is a function of organic growth of our merchants, our increase in share of wallet of our merchants, increase in products per merchant, increase in countries per merchant and increase in payment methods per merchant. We continued to improve our net retention rate, 196% in Q2 2021 by improving our commercial efforts with our existing merchants. We calculate NRR by measuring the dollar revenues we earn from existing merchants we had on our platform on a year-over-year basis. Therefore, $100 of revenues in Q2 2020 from the same set of merchants became $196 in Q2 2021. This is a key KPI we obsessively measure as it indicates the strength and predictability of our merchant relationships. We've onboarded 10-plus new merchants this quarter, including a merchant that is a U.S. content provider that launched in 13 countries with us, change.org, a global short video sharing app and a social network platform that develops a lip-syncing video that launched in 4 countries with us. Revenues from new clients was $19 million in Q2 2021 versus $1 million in Q2 2020. Revenues coming from merchants onboarded in the last 12 months are considered under new clients for this KPI. This is a rolling measure for a year-over-year comparison. Slide 11, product sector. Our product innovation journey is never static. Emerging markets are always changing, and we believe we need to remain agile as it is our biggest competitive advantage. In this quarter, we continued to bring enhancements to our pay-ins solution with new features such as the FlexibleScheduler, enabling dynamic fund transfer, we improved our TaxManager to allow tax handling by payment methods, both debit or credit, we added new integrations to add redundancy in our card processing in existing markets, and we added new payment methods. We also enhanced our pay-out solution, expanding our instant pay-outs in more countries. We added direct connections with new partners and banks and we went live with fixed mobile app in Brazil through our own APK. We improved our fraud and data capabilities with new machine learning models tailored for retail and gaming verticals. We added profiling and fingerprinting tools and went live with device ID among other KYC improvements. Our issuance-as-a-service solution enables merchants to create new lines of revenue and easily issue prepaid cards in local currencies to reach millions of consumers in emerging markets. Slide 12, geography vector. We've added 4 countries to our network in the first half of 2021. Our strategy is not to innovate in a vacuum. And to the extent possible, have a merchant in meeting when we open a new country. This is an example of our disciplined growth strategy. Our expansion strategy is both merchant-led. That is we go where our merchants ask us for a solution as well as dLocal led. That is markets where we know that there will be demand. We are not dependent on any single country for our performance. We also don't forecast our performance by country. We are solely focused on measuring our performance by our merchants. Slide 13. We see strong growth across verticals with a 319% year-over-year TPV growth as our business benefits from diversification. Our business model is not dependent on the performance and outlook of any single industry vertical. We see continued growth in verticals such as ride hailing and travel that started seeing strong return in volumes in the first quarter of 2021. We are also seeing accelerated growth in multiple verticals such as streaming, retail, advertising and financial services. I'm now going to hand it over to Diego to review our financial highlights.

Thanks, Sumita. Let's start with Slide 15. Since we started our operations 5 years ago, we have on average, almost doubled our TPV year after year. We see an acceleration in our TPV growth with 319% in the second quarter of 2021 compared to 60% in the fiscal year 2020. This growth benefits from specific verticals such as ride hailing and travel that were affected in Q2 2020. We are also seeing tremendous growth in all the other verticals, such as streaming, retail, advertising and financial services. Let me highlight that even in Q2 2020, during the heart of the pandemic, we have still grown 17% year-over-year. While we expect to see continued strength in our business in the remainder of the year, the percentage growth mainly normalized as the comparable quarters in the second half of 2020 had already seen significant growth. Let's move to Slide 16. Our revenues in the second quarter 2021 reached USD 59 million, 186% year-over-year growth from Q2 2020, and 46% quarter-over-quarter growth from Q1 2021. Our revenue over TPV ratio or take rate was 4.1% in Q2 2021 versus 4.3% in Q1 2021. This is equal to the take rate we had in 2019. This ratio changes based on the underlying business mix. In 2020, pay-ins have swung to a larger portion of our overall business, resulting in a higher revenue over TPV ratio of 5%. This ratio also increases as the volumes with some of our largest merchants increase, given that we set pricing tiers by volumes in our merchant agreements. Higher volumes with our largest merchants, typically decreases the ratio, but it's great for our business as we bring incremental EBITDA. Let's switch to Slide 17. We are very pleased with our continued improvement in adjusted EBITDA. In Q2 2021, our adjusted EBITDA grew to $25.9 million, 213% year-over-year growth and 45% quarter-over-quarter growth. Our adjusted EBITDA margin remained stable at 44% in last quarter and improved 384 basis points year-over-year. We have achieved this while we have continued to invest in our people, platform and technology. We intend to continue investing in growth, and therefore, our margin may decrease in the coming quarters, maintaining our discipline to drive profitable growth with every additional dollar that we process. Cost of services dropped from 2.6% of TPV in the second quarter 2020 to 1.7% of TPV in the second quarter of 2021, mainly as a result of business mix. Operating expenses grew $11.2 million year-over-year, mainly driven by expenses related to the secondary portion of the initial public offering for $3 million, stock-based compensation for $2.1 million, and salaries and wages, that was $3.7 million as we double our headcount and brought key talent on board. Let's continue with Slide 18. Of the 186% year-over-year revenue growth in Q2 2001, $20 million came from existing merchants and $19 million came from new merchants. The comparable numbers of Q1 2021 were $15 million and $7 million, respectively. Revenues from existing merchants are those revenues that are driven by merchants that we're already processing in the same quarter of last year. And revenues from new merchants are those revenues that are driven by merchants that started operating with us after the second quarter of last year. As mentioned, our net revenue retention rate continues to improve with 196% in the second quarter of 2021 compared to an already outstanding 106% in the first quarter. Switching to Slide 19. When we look at our KPI per merchant, we see that they have sequentially continued to improve. The average number of countries per merchant in the second quarter of 2021, reached 7% compared to 6% in the first quarter. Given that we have already built our payments network in 30 countries, very significant capability to continue to bring our merchants to new geographies. And the same applies to the payment methods per merchant. We reached 62% compared to 63% in the first quarter, while we offer more than 600 payment methods in the countries that we operate. With that, I will turn it back to Seba to conclude.

Thanks, Diego. On Slide 20. In conclusion, our 5 strengths are as follows: First, we have a large and expanding addressable emerging market ecosystem; second, we have a direct integration with some of the largest online merchants in the world; third, our scalable single API technology infrastructure makes the complex simple for our merchants; fourth, we are diversified across verticals and clients; and fifth, our rapid growth is combined with our disciplined profitability. And this is just the beginning. We continue to remain focused, humble and agile as we enable our global merchants to connect with billions of emerging market users and execute on our growth strategy. Thank you for joining us today. I will now request the operator to open it up for questions.

[Operator Instructions] Our first question comes from Jorge Kuri with Morgan Stanley.

Congrats on the numbers. I have 2 questions, if I may. The first one is on your new merchant growth of $19 million, was pretty spectacular, more than 2x what you did in the previous quarter. Can you give us a little bit of a sense of who those new merchants are? How big can they be? Could any of them potentially be 1 of your top 10 merchants? That's evidently a very large uptick in new merchant growth. I'm assuming there's some really large clients there. And then the second question is on your net revenue retention rate of $196 million is evidently well ahead of what you did last year, well ahead of the soft guidance you had provided of around $150 million, $160 million. How do you see this number trending in the second half of this year?

Jorge, so the -- on your first question, I think the -- an important clarification to make is that this is a trailing metric. So we are taking into account every customer as new merchants that weren't there a year ago. So you'll see that, that number continues to evolve. Having said that, yes, this was a very strong quarter. Sumita touched on her remarks on some of the merchants we've been able to win, including a social network, a U.S. content provider, a short video sharing app. And for us, Jorge, the -- what we believe is more important is the trajectory rather than the starting point. Yes, we are extremely excited of these customers we've been able to onboard. But having the ability of onboarding them is -- they won. Then it's where we need to make sure we are continuing adding value into new geographies, new products. And that's where our net revenue retention starts to trigger and starts to compound. So we are definitely excited with the current ones we've been able to onboard, but hopefully, we'll be able to see their growth in the next many quarters to come. And on your second question around net revenue retention. Sumita, do you want to take it?

Yes. Surely. Happy to step out. So I think, Jorge, the question. I want to make sure that we understand the methodology carefully here. So when we say revenues from new clients and that number was $19 million in second quarter 2021, that number used to be $1 million in second quarter 2020. And the reason you see that increase is that's revenue from any new clients in the last 12 months. And so it could be a client that we added in Q3 of last year or Q4 of last year or Q1 of this year. All of that aggregates into that $19 million number. And that's why in comparison to Q2, that number looks that big, $19 million versus $1 million. On your question on the guidance, what I would say is that this has been a fantastic quarter for us. If you look at the year-over-year growth rate numbers, the reason also the percentages are so high is that Q2 2020 was right in the middle of the pandemic, and we are getting the benefit of a slightly lower base last year in the second quarter. I think as we look out over the next 2 quarters, we expect our dollar numbers to look good, but I would not predict our percentage growth rates that are similar to what we've been able to achieve in the second quarter because Q3 and Q4 of last year were stronger quarters than Q2 of last year.

Sorry to push back. But -- so again -- my first question stands. So what type of merchants are you adding that the ramping of the revenues rapidly and there are bringing such a large amount of new revenues? And whether or not this could be much bigger sort of like top 10 revenues. We're trying to understand how can your revenues ramp up from here? And I think it will be really helpful if you can help us understand what -- who are these clients? What are -- sort of what they do? How big they are? Even the names would be very useful to try to get a better sense of how revenues can go up from here?

Sure. So first of all, I think it's worth conceptually discussing who we focused on. We are serving some of the largest companies in the world. And many of those names you can -- you get to see on our website. Obviously, we try to stay -- we try to make sure we disclose together with them, and those are the names that we've been able to disclose out there. But these are companies that have ambitions to operate in more than 1 country, that are some of the world leaders in their respective areas. We've announced some of those partnerships during not only the last quarter, but during the year. So a lot of those customers are out there. And we, obviously, have expectations for them to become much, much bigger. Sumita was touching on the thumb point. Well, we believe our numbers to be very impressive, and we are extremely proud of them, we are clearly still a drop in the ocean of the opportunity we have ahead. And we are of the idea that those volumes in emerging markets are going to be driven by the type of merchants we serve, which are the largest companies in the world. So that's our -- I would like to give you a name but that's -- I hope some further clarification on who those merchants are.

Our next question comes from Tito Labarta with Goldman Sachs.

Also congratulations on the very strong results. Two questions. I'm kind of piggybacking a little bit on Jorge's questions a bit. But yes, first on the growth of new merchants, more -- given the strong growth at IPO, you had mentioned you didn't expect -- most of the growth you expected to be coming from the existing merchants. So are there more new merchants that going forward from here on out, that you can boost that growth from new merchants more than you initially expected? I guess, maybe to rephrase it, post-IPO, has something changed where you think you can maybe capture more new merchants than before, which should boost that growth? And then second question also on the net revenue retention rate. I guess following up on Jorge's question, right, you had guided for that 150% to 160%. You're well above that. I mean, is -- looking back, do you think that 150% to 160% was too conservative? Can you accelerate even from here in that 196%? I understand you have soft comps last year. But just to get a sense, right, 196%, well above that 150%, it looks like there should be upside to that 150% to 160% guidance that you had given at the IPO. Is that fair to assume?

I can start with the second question, Tito, which is on your question on net retention rate. And then let's come back to the new merchant question. On the net retention rate, if we look at our cohorts over a period of time, the reason we've spoken about the 150% to 160% -- by the way, that was also our net retention rate number for our full year 2020, as you may remember. When we look at cohorts over a slightly longer period of time and we look at the trends, we see that the 160% number is actually quite stable. So I think in the medium term, we still think that, that is the right net retention rate to consider as those cohorts mature. In the initial years, when we add a merchant, our NRR could be really, really high, but it stabilizes as we've discussed with you in the past. So we think that the 150% to 160% is still the right medium-term net retention rate. And therefore, it's still what we've modeled. In terms of your first part of the question, which was related to your new merchants, we actually think that, that number will actually come down because we've added some very large merchants in the last 12 months. As I mentioned, it's a rolling measure. So keep in mind, these are not new merchants we added only in this quarter. These are any merchants that were not in our book of business in Q2 of 2020. So it's a rolling measure of any new merchants in the last 12 months. And so we've added some merchants in the last 12 months that are contributing to that new client number. We expect that number to come down in the next 2 quarters as that rolling measure changes.

Great, Sumita. And just to complement on that, sorry. The other driver for new merchant growth is having the ability of having new products, both -- sorry, new product and new geographies. So you had a question around are there more customers to be won? And what we expect is that through additional geographies, through additional products through additional capabilities, on the mid- to long term, we'll be able to continue adding merchants, not necessarily at the pace we did this quarter. But yes, we do believe there's plenty of opportunity ahead in terms of new logos to bring into the platform.

Great, Seba and Sumita, that's helpful. Maybe one follow-up then on the net revenue retention rate again. I understand in the midterm, yes, it should trend lower to that 150%, 160%. But I guess in the shorter term, it looks like that should be running higher, right? So midterm, maybe, I guess, to quantify the midterm, is that like in 2, 3 years? And in the shorter term, there seems to be some upside? Or is the midterm next year, just to try to quantify that in the midterm a little bit?

Yes. I think that it's about 2 years from the start of when a merchant comes on board. So it's a cohort-based measure, Tito, and I think we discussed this with you during the IPO as to how those cohorts trend out. We've added some pretty large merchants in the last 12 months. We expect them to stabilize in about 24 months from the beginning of when they come on our platform. So I would say it's in the next 12 to 18 months is where we see the 150% to 160% to be a stable place.

Our next question comes from Neha Agarwala with HSBC.

Congratulations on the earnings, very strong results. I have a clarification, mostly on the revenues and TPV. Does that also include the impact of the PrimeiroPay acquisition that you closed in April of this year? I believe some of the new merger revenues might be driven from the acquisition of PrimeiroPay. Is that right to assume?

Yes, this includes PrimeiroPay.

Could you tell us what would the TPV and the revenues look like without PrimeiroPay -- without the inclusion of PrimeiroPay this quarter?

I don't think they're disclosing that information, Neha, but I would say that it's not significant enough to make as much of a difference to the numbers, but we are not disclosing the PrimeiroPay numbers separately. Because it was an asset deal, as you know, we acquired the assets of PrimeiroPay. We will not be breaking out those numbers, but it's not significant enough to be broken out either.