DLocal Limited (DLO) Earnings Call Transcript & Summary

Thanks. Afternoon, everyone, and welcome to dLocal's call covering third-quarter 2021 earnings. A slide deck goes along with our prepared comments; you can watch this live through webcast, and both the webcast and the slides can be reached on dLocal's site at investor.dlocal.com. A replay will be up soon once this wraps. Before we go further, I should note that any forward statements in the presentation or said on this call rest on information available now plus dLocal's present assumptions, expectations and projections regarding future events. Although the Company thinks those assumptions, expectations and projections make sense given what we know today, you shouldn't lean too heavily on such forward-looking statements. Actual results could wind up differing materially from what's in dLocal's presentation or talked about on this call, for many reasons, among them those laid out in the forward-looking statements and Risk Factors portion of dLocal's registration statements on Form F-1 and other filings with the Securities and Exchange Commission, all of which you can find on dLocal's Investor Relations website. With that, I'll hand the conference to Sebastián Kanovich, our Chief Executive Officer.

Hi everyone, and thank you for being with us today. Joining me on this call are Sumita Pandit, who serves as our Chief Operating Officer, and Diego Cabrera Canay, our Chief Financial Officer. We're glad to share an update about our business, and we appreciate your interest in our company. Moving to slide 3. dLocal helps merchants around the world link up smoothly with billions of consumers in emerging markets. Through our platform, One dLocal, merchants get one API, one integration, and one contract as a complete solution. Our focus is entirely B2B, and we're proud that some of the biggest global merchants count as our customers, including Microsoft, Rappi, Kuaishou, Mailchimp, Wikimedia, inDriver, and Wix. As of now, our infrastructure serves our merchants in 32 emerging markets spanning Latin America, Africa, and Asia. Now, on to the results. The third quarter was yet another exceptional one. Total process volume, or TPV, rose 217% year-over-year against the third quarter of 2020, hitting $1.8 billion for the quarter. Revenue came in at $69 million for the quarter, which is 123% growth year-over-year against the third quarter of 2020. Adjusted EBITDA for the third quarter of 2021 was up 110% year-over-year versus the third quarter of 2020. On slide 4. Let's take a quick look at how our Q3 2021 performance stacks up against Q2 2021 and also full year 2020. Our Q3 2021 revenue growth of 123% compares with 186% year-over-year in Q2 and 88% year-over-year growth for full year 2020. We've noted before that the net retention rate metric is a key KPI we use to manage our business; we hit 185% NRR in Q3 2021, against 196% in Q2 2021 and 159% for full year 2020. Our adjusted EBITDA margin in Q3 2021 stood at 38%, compared with 44% in Q2 2021 and 40% for the full year 2020, as we keep investing in our people, platform, and technology to follow a path of growth. We anticipate our full year 2021 adjusted EBITDA margin will be in line with our full year 2020 adjusted EBITDA margin. Through this quarter, we've seen ongoing growth in our business from both existing and new merchants using our product. We're observing more digitalization, less cash, and broader adoption of alternative payment methods. We've kept up our work on the expansion front, extending our presence in Africa and Southeast Asia. We launched two new countries in the last quarter, Thailand and El Salvador. For the year-to-date 2021, we've added six new countries to our network infrastructure. We've added 10-plus new merchants with material volumes in the third quarter of 2021. We keep benefiting from the diversification of our business across verticals. We've maintained our strong adjusted EBITDA margin even with continued investment in our infrastructure and people. We've kept hiring and strengthening our employee count in key functions. The headcount in dLocal grew 105% year-over-year in the third quarter 2021. On slide 5. There are 3 primary challenges that we are solving for our merchants. First, the ways people pay are inherently regional and quite varied across the 32 nations we operate in. As buyers take up newly introduced payment options, that fragmentation keeps intensifying. Sellers want to reach this fast-expanding end market without having to construct the payment infrastructure on their own. Second, in emerging markets it's difficult to secure solid conversion rates while also containing fraud; and third, we simplify complicated things for the merchants we serve by letting them stay current with evolving regulatory and tax rules across emerging markets. Moving to slide 6. The intricacy of the markets we cover is what gives our solution its strength. Slide 6 lays out how payment methods break down across Latin America, the Middle East and Africa, and Asia Pacific, illustrating the intricacy merchants encounter when operating in this market. Every market is developing along its own path. In Asia Pacific, for instance, digital mobile wallets account for a far larger share. In the Middle East and Africa region, bank transfers along with cash on delivery carry much greater weight. Within each continent, countries differ from one another as well. To match consumer preference, merchants want options and flexibility in this end market. Slide 7. A market study that AMI completed on the key markets we serve is now posted on our website. Our TPV for the third quarter 2021 came to $1.8 billion, which is 217% growth year-over-year. At $4.9 billion, our TPV for the last 12 months equaled 2.4x our TPV for full year 2020. Our TPV represents just a tiny fraction of our addressable market, which is anticipated to keep expanding at 27% CAGR over the next few years. Slide 8; on slide 8, we show a case study involving a representative merchant on our platform. As the slide indicates, ramping up volume usually takes us 3 to 6 quarters. With this particular merchant, we began with a local-to-local payment flow. We added payment methods, we added new countries, and after that we added cross-border flow for a few markets. For this particular merchant, we went from 18 to 109 payment methods. We've expanded to nine countries. Over roughly three years, the merchant has experienced 30x volume growth. Naturally, every merchant is different, and the example given represents how we expand as our merchants grow organically on our platform. I'll now pass things to Sumita to walk through our vectors of future growth.

Thanks, Seba. We're moving on to slide 9 now, which covers our future growth vectors. There are three main avenues for growth: commercial efforts, product expansion, and geographic expansion. When it comes to commercial efforts, we concentrate on a land-and-expand approach. The growth we see comes from merchants growing organically, our capacity to cross-sell via account management, and our ability to bring in new clients. For the third quarter, our NRR, or net retention rate, stood at an impressive 185%, compared with 159% in 2020. To figure out NRR, we look at dollar revenues earned from existing merchants who were on our platform, comparing them year over year. So, $100 of revenues in Q3 2020 from that same group of merchants turned into $185 in Q3 2021. New client revenues hit $12 million in the third quarter of 2021, versus $9 million for all of 2020 and $3 million in Q3 2020; we keep improving our product portfolio by enhancing features for pay-ins and pay-outs, along with creating and rolling out new product lines like Issuing-as-a-Service. On the geographic expansion front, we're always strengthening our footprint in the countries where we already have operations and bringing in new ones; during the third quarter, we added Thailand and El Salvador to our platform. Our revenue growth combined with EBITDA margin, or the Rule of 40, came to 161% in Q3 2021, compared with 129% for the full year 2020. We think the robust cash flow our business generates can back an inorganic strategy that speeds up our time to market. We intend to chase inorganic chances to boost any of those three growth vectors. Slide 10. Our growth is fueled by existing clients. The account management team is entirely dedicated to cultivating relationships with clients we already have. They collaborate closely with clients to address current needs and cross-sell additional payment methods, new countries, and new product use cases. At any moment, we have more than 50 pricing proposals out to existing clients, around 30-plus being tested, and roughly 20-plus ready to launch. On slide 11. New clients keep supplying our industry-agnostic sales funnels. The swift growth and scaling of online merchants, the rise of the theater economy, the focus on merchant place and digital marketing that often lacks geographic limits. Viral user growth at some of our fastest-growing merchant experiences has kept widening our sales funnel; we anticipate this will persist as new companies pop up and dominate online far more rapidly now than just a few years ago. Today's new-age company operates globally and expands beyond national and regional borders, and we help them reach consumers anywhere on earth. As slide 11 shows, at any point, we have around 175-plus merchants in the early phases of our funnel and more than 75-plus awaiting launch. After going live, it generally takes us 3 to 6 quarters to build up volume with a merchant. During this quarter, we brought on more than 10 new merchants. On Slide 12, you'll find our comprehensive and differentiated solution suite. Optimization of our features and solutions is something our product team works on continuously. A snapshot of our platform is shown on Slide 12. On the back end, we support our merchants when it comes to regulation, compliance, tax collection, fraud and security, smart routing and settlement. On the front end, our merchant consumers get support for refunds, reminders for alternative payment methods, subscriptions, installments for mobile or desktop support at checkout. Turning to Slide 13; so far this year, six countries have been added to our network. Our expansion strategy is both merchant-led, meaning we go where our merchants ask us for the solution, and dLocal-led. We have a pipeline of merchants working to launch in the new markets we have expanded into more recently. Our performance does not depend on any single country. Additionally, we don't forecast our performance by country. Slide 14. Strong growth is visible across verticals, with 217% year-over-year TPV growth, as our business benefits from diversification. The performance and outlook of any single industry vertical does not determine our business model. We are also exploring additional opportunities with merchants, including to provide payment solutions in connection with cryptocurrencies. We will continue to evaluate the risk framework around cryptocurrency to provide our merchants with the appropriate solution.

Turning to Slide 15. As I said when this call began, we keep putting money into our operations. Our team members represent the greatest edge we hold over rivals. When Q3 wrapped up, our workforce totaled 532 people drawn from more than 30 nationalities. Headcount at dLocal expanded 105% compared with the same period a year earlier in the third quarter of 2021. Now on Slide 16, Diego is going to walk through our financial highlights.

Thank you, Seba. Let's turn to slide 17. Once again we've posted a record TPV, hitting $1.8 billion, along with record revenues of $69 million. During the third quarter of 2021, TPV rose 217% compared with a year earlier and 24% versus the prior quarter. We keep gaining from long-term shifts toward e-commerce and digital payments as conditions normalize, and also from how our merchants are performing and from our achievement in expanding them into additional countries and payment methods. This expansion reflects the results of our merchants within particular verticals, including ride hailing, streaming and advertising, plus the sequential rebound in travel. On a year-over-year basis, revenues were up 123%, and they increased 16% from the prior quarter. Both of those numbers closely resemble what we reported in the first quarter of 2021. The ratio of revenue to TPV — our take rate — was 3.8%, versus 4.1% in Q2 2021. Shifts in the mix of business across products, countries and payment methods cause that ratio to move. Specifically, this quarter saw significant expansion among certain large, high-potential merchants whose take rate is below average, or who have qualified for more favorable pricing tiers. When our biggest merchants generate greater volume, the take rate typically declines, but that's very good for our business because it brings in additional EBITDA. Another point I want to highlight is that the share of our revenue coming from our 10 biggest merchants continues to shrink — it was 62% in Q2 2021 and dropped to 57% in Q3 2021. Moving to Slide 18. In Q3 2021, adjusted EBITDA came in at $26 million, which equals 38.3% of revenues, compared with 40.6% in Q3 2020. The reason this margin narrowed is twofold: we remain dedicated to funding the groundwork for growth over the long term, and we are also seeing the effects of excellent results with major merchants that have strong potential but come with a lower take rate. During Q3 2020, our cost of services represented 2.4% of TPV. Turning to services costs, in Q3 of this year they came in at 1.9%. That rise versus a year ago reflects efficiencies as well as shifts in our business mix. Now looking at operating expenses — stripping out one-time and noncash items, which matches how we figure adjusted EBITDA — those are up 92% compared with last year, which is roughly consistent with the 105% growth in our headcount. Our plan is to keep putting money into growth, so margins could keep coming down over the next several quarters, even as we stay disciplined about making every extra dollar we process contribute to profitable growth. Moving to Slide 19. We're still seeing robust revenue growth, coming from both our current customers and new ones. When we talk about revenue from existing merchants, we mean money generated by businesses we were already handling payments for during the equivalent quarter a year earlier. Revenue from new merchants, on the other hand, refers to money brought in by businesses that began working with us after that same quarter last year. Because it typically takes between 3 and 6 quarters for our merchants to ramp up, we view the revenue coming from new merchants as merely an initial indication of what our customers might eventually achieve. During Q3, revenue from existing merchants hit $57 million, more than double the $28 million posted in the same period of 2020. New merchants brought in $12 million, which is 4 times the $3 million from the same period of 2020. Because certain fast-growing merchants that came on board in Q3 2020 shifted into the existing merchants bucket during this quarter, they helped drive a sustained high net revenue retention of 185% for the quarter, while also lowering the quarter-over-quarter contribution of the new merchants bucket, which had hit an all-time high in the prior quarter. Over the medium term, we anticipate net revenue retention landing in the 150% to 160% range. Slide 20. Out of the 123% year-over-year revenue growth in Q3 2021, 85%, or $26 million, was generated by existing merchants, while 38%, or $12 million, came from new merchants. We're continuing to see net revenue retention at an exceptional 185%, which is far above the long-term norm we've recorded and also exceeds the 159% figure we posted in 2020. On top of that, new merchant revenue remained ahead of what we brought in during the prior year. To sum up, several factors drive our net revenue retention: churn held at very low levels, under 1%; growth among our merchants, with certain e-commerce leaders in emerging markets typically scaling 20% to 30% each year; and our ability to capture more of their wallet share within existing payment methods while also bringing them into new countries, products and payment methods. With that, I'll pass things to Seba for the closing remarks.

Appreciate that, Diego; turning to Slide 20. There's a lot of excitement on our end about what lies ahead. Our attention stays fixed on the sizable and growing TAM, the direct connections we've built with merchants, infrastructure that scales, the diverse set of verticals we're exposed to, and keeping both growth and profitability in our sights. To our merchants, employees and investors: thank you for sticking with us. I'd ask the operator to open the line for questions.

Hello, and good evening to all of you. Trust everybody's doing well. Nice work on those results. Two things from me. My first one concerns your gross profit take rate, which in my view is the proper lens for assessing profitability relative to revenue. This quarter it came in at 1.9%, a drop of 40 basis points from 2.3% in the quarter before. That fall was quite sharp compared with the revenue yield, which declined by about half as much. So I was curious about this — and I understand your point that the revenue yield moved because you're serving — your volumes from very large clients increased, and that requires offering lower prices. Understood; but can't you likewise secure more favorable transaction costs from the acquirers as you push through greater volumes? After all, your volumes rose 217% year-on-year; so shouldn't some of those benefits flow to you too, and ideally keep the link between the revenue yield and the gross profit yield roughly flat? Clearly it's getting worse. So that's my first question. If you could help us grasp why this is taking place and how you expect it to look across the coming few quarters? Then my second question relates to what you said about lower EBITDA margins. What precisely does that mean? I mean, it would be extremely useful for us to grasp the — to size up that remark, the scale, how long that decline lasts. When do you expect it to turn back upward? Any detail at all would help us frame it correctly and avoid overreacting in either direction. Thank you.

Hello, Jorge. Many thanks for your questions. This is Seba. So, regarding the first portion of your question about gross profit, there are two aspects. First, there's the matter of business mix. Our business keeps evolving. And bear in mind, we provide multiple products across multiple geographies, and each will carry different take rates; that's why we keep stressing that we don't optimize for a take rate, since we know that figure will fluctuate. I agree with you about us obtaining better rates from acquirers and payment methods. You can observe that our transaction costs have steadily come down. But once more, you may see them rise because that could also stem from us processing payments in countries or in payment methods that cost more. So, we keep optimizing for NRR, ensuring that we bring in more additional dollars that arrive at a profit. And yes, absolutely, we are always securing better rates from acquirers, from payment methods, from banks. But that's something we optimize for. We want to ensure more dollars are coming through and they always add to our margins. That's our way of thinking about it. Sumita, I'd like you to handle the portion of that question dealing with EBITDA margin.

Yes. Jorge, thank you for asking that. So, Jorge, as we said on our call about the second quarter results, when you look at how our margins did this quarter, that's really in line with how they did in the same quarter a year ago. What we're aiming for, I believe, is a full year 2021 margin that sits inside the range we had for the whole of 2020. That guidance is unchanged. It's a soft guidance we're providing on what we as a management team are aiming for. We expect the margin to come in around that level. That said, I think we aren't locking ourselves into a particular figure. It's a range, since we do believe we need to keep putting money into the business.

To piggyback on that final point, Sumita — I suppose 2021 has already wrapped up, correct? At this stage, whatever the fourth quarter margin turns out to be doesn't really matter much, I'd say; my focus is more on 2022. So when you mention that margins will come in lower, do you mean for the whole of 2022? And if you could also clarify — you brought up what that reduced level might look like. What's going through your mind there? By how much is it lower? Just how low does lower go?

Right. I don't think it'll stray very far from the figures we posted in 2020; so our near-term view of where margin will stay is essentially that 2020 margin. What I'd rather not claim is that it will absolutely land at 40%. It should fall within that band. It shouldn't differ much from the performance you watched us deliver in 2020.

Great, thanks a lot. That's really useful.

The chance in front of us, we believe, is enormous. We need to be sure there's sufficient room to put money into what we judge to be worthwhile; therefore, we're not looking to lock ourselves in a way that stops us from chasing those chances. Our history, I'd say, shows we can be profitable while operating at scale; so this is something we treat — allocating our capital is something we treat very seriously, yet we still want the capacity to keep investing going forward. That's the reason we'd rather not provide a specific figure.

Thanks, everyone. Good afternoon. The top line momentum here is really impressive. In Q3, you achieved revenue growth in the mid-teens compared to the previous quarter, even with a very difficult comparison. So I'd like to know, given your outlook for growth among both new and existing merchants, whether we might see another quarter-over-quarter increase in the double digits during Q4?

I'll begin. Diego and Seba, feel free to add your perspectives. Jason, I appreciate the question. Our emphasis is on year-over-year figures; our goal is to keep growing the business over the long term. We tend not to put much weight on how one quarter compares to the one right before it, since that kind of comparison can give a distorted picture of where our business is headed over the long term. Take the quarter we're in right now: our TPV rose 217% during it. And looking back at Q3 2020 — it's useful to recall the position we were in a year ago — our growth compared with the prior year stood at 65%. So that 65% figure climbed to 217% in the current quarter. As we move into the coming quarter, our attention stays on how that metric stacks up against Q4 of last year. It's worth remembering that Q4 of last year was a fairly robust quarter. Much of COVID's effect had dissipated by then, and the fourth quarter was shaping up quite well already. Compared with our Q4 2020 figures, we'll record growth in dollars, though the gain might not match the positive bump we saw when Q3 was measured against the prior year's Q3.

All right. Yeah, I understand that. What I mean is, the comparison for TPV becomes more difficult. Revenue comps are roughly the same, though clearly you have that big-merchant mix in there. That means the take rate for Q4 ’21 will come in below what we saw in Q4 ’20. So perhaps asking for double-digit growth from one quarter to the next is a bit much. Understood. Fine. Year-over-year growth is still strong. And then just...