DLocal Limited (DLO) Earnings Call Transcript & Summary

Thanks, and good morning to all of you. It's a pleasure to welcome you to dLocal's earnings call for the first quarter of 2022. Joining me on today's call are Sebastian Kanovich, who serves as our Chief Executive Officer; Sumita Pandit, our Chief Operating Officer; and Diego Cabrera Canay, our Chief Financial Officer. Accompanying our prepared remarks, we're offering a slide presentation. This event is going out live through webcast, and you can reach both the webcast and the presentation on dLocal's website at investor.dlocal.com. A replay will be made accessible soon after the event wraps up. Prior to moving ahead, I want to note that any forward statements contained in the presentation or brought up during this conference call rest on information currently available, along with dLocal's present assumptions, expectations and projections regarding future events. Although the company considers our assumptions, expectations and projections reasonable given the information currently available, you should be cautioned against placing undue reliance on those forward-looking statements. Actual results could differ materially from those contained in dLocal's presentation or addressed during this conference call for numerous reasons, including those outlined in the forward-looking statements and Risk Factors sections of dLocal's filings with the Securities and Exchange Commission, which can be found on dLocal's Investor Relations website; at this point I'll hand the conference over to Seba.

Hi, everybody, and thank you for being here. It's great to report that 2022 has begun very well for us, with Q1 setting new records. Strong upward momentum is still evident across our operations, and we're sticking to our plan, serving both Existing and New Merchants in all the markets where we operate. Factors affecting the world economy — like logistics difficulties in certain regions, the Russia-Ukraine conflict, shifting consumption patterns as people go back to the office, elevated inflation in certain developed countries, and a climate of higher interest rates — have not shaken our business. During our annual 2021 results, we noted that we gain from natural diversification spanning geographies, sectors, and products, while carrying zero exposure to Russia or Ukraine. So even with tough macroeconomic conditions worldwide, our total processed volume crossed the $2 billion mark for the very first time. TPV rose by 127% versus the same period last year, more than doubling. Revenue has now climbed by triple digits for a fifth quarter in a row, hitting $87 million, which represents a 117% rise compared with Q1 2021. Client retention remains solid, with NRR of 190% in Q1 2022, since we expanded wallet share among Existing Merchants while experiencing very little churn. Adjusted EBITDA came in at $33 million for the quarter, up 84% year-over-year, producing a robust adjusted EBITDA margin of 38%, matching the margin levels we saw during 2021's second half. We accomplished this even as we kept making measured investments in infrastructure and personnel to fuel our long-term expansion strategy. Results like these confirm our powerful growth trajectory, and we anticipate further growth ahead, driven by Existing and New Merchants who use our platforms. Turning to Slide 4, disciplined, profitable growth has always been our guiding philosophy. Adjusted EBITDA for Q1 2022 was $33 million, an 84% year-over-year gain. Looking at adjusted EBITDA across the trailing 12 months of 2022, it exceeded double what it was during the trailing 12 months of 2021, arriving at $114 million. That works out to a 118% increase. Thanks to such strong profitability over recent quarters, we've kept reinforcing our cash position and balance sheet. We think this preserves our flexibility to pursue our long-term growth strategy. Now to Slide 5. As I noted earlier in the first quarter of the year, TPV has more than doubled compared with a year ago. Rapid expansion among our global merchants has driven this substantial gain. Our business model doesn't hinge on how any one industry vertical performs or is expected to perform; merchants from over 10 distinct verticals work with us, and each vertical holds a balanced place in our portfolio. During Q1 2022, no individual vertical made up over 20% of our TPV. Even though the first quarter of 2022 was defined by a tough worldwide macro backdrop stemming from those particular elements I already outlined, the variety of our merchants—spanning industry verticals, geographies, products, and patterns of consumer behavior—keeps benefiting our business. Various verticals have moved through their own distinct cycles, yet on the whole we gain when some verticals deliver robust expansion while another might endure a brief downturn, offsetting one another. Thus, even if particular merchants carry idiosyncratic exposure to these elements, our total volume, when examined, stays fairly steady. On Slide 5, as you can observe on the right-hand portion of that slide, every one of our verticals demonstrates solid year-over-year expansion in Q1 2022, and consumption posted the largest gain, rising over 5x compared with a year earlier, propelled by both on-demand delivery and commerce. On-demand delivery saw substantial growth after we brought on board a top Latin America on-demand delivery platform during the prior year, and we likewise expanded existing customers by moving them into additional geographies. Turning to commerce, our merchants have rapidly scaled their volume, and we keep capturing more wallet share with these customers through the addition of fresh geographies and payment methods alongside them. Mobility climbed over 2x versus the same period last year, with a notably strong acceleration in pace across the globe. Entertainment and services likewise recorded significant expansion, up more than 1.5x year-over-year. I'll now pass things to Sumita so she can talk about our expansion strategy.

Thanks, Seba. Moving to Slide 6, you'll see that our merchants are diversified not just across a wide range of verticals, but geographically as well. A key strategic priority for us is to keep expanding our business beyond Latin America. Over the long term, we think this will make our business even stronger, since merchants are looking for one API and one integration to reach multiple emerging markets, including those in Africa and Asia. We've kept growing our footprint outside Latin America, and in Q1 2022 we added Ivory Coast and Rwanda to our infrastructure network, which brings the total count of countries where we make our services available to 37. We keep adding new countries based on where our merchants want us to serve them, along with our own internal assessment of the opportunity a new country presents across our merchant base and the broader industry. Usually, when we add a new country, we already have a merchant waiting, and that lets us generate a high ROI on our expansion into that new country. We think the infrastructure we're building across geographies makes us an important partner for our merchants as they pursue their own growth goals. Our focus is on growing alongside our merchants as they grow organically. Adding new countries and setting up multiple local connections is complex, and merchants value the infrastructure network we're creating. Slide 7. Our focus on building a global footprint keeps producing results. We continue to see strong revenue growth across all geographies. Dollar revenues in LatAm rose triple digits, up 116% year-over-year, to USD 78 million. Dollar revenues in Africa and Asia also rose triple digits, up 127% year-over-year, and accounted for 11% of our total revenues this quarter. Our revenues from Asia and Africa came to USD 10 million in the quarter. For comparison, in the full year 2021, our revenues from Africa and Asia totaled $21 million. We're pleased with our run rate expectations for our business in Asia and Africa; we expect our share of Asia and Africa revenue to gradually rise over time as we keep cross-selling to merchants that originally began their relationship with us in Latin America into countries such as Nigeria, South Africa, India and Indonesia. We're also increasingly seeing merchants start their relationship with us through markets in Asia and Africa and then expand into Latin America. Slide 8; we keep investing in our business, responding to the incremental opportunities we face. We are fully committed to further diversifying our geographic footprint, especially in Africa and Asia. To accelerate this growth, Jacobo Singer, President of dLocal, is making South Africa his base for the near future to build the team, develop the dLocal culture and enhance our infrastructure and network, setting the foundations for our long-term growth in the region; in early 2022, we also moved senior leaders to become general managers of our business in Asia and Africa. Over the past several months, they relocated to Nigeria and Singapore, each to one of those places. Putting top executives in these additional markets also supports our efforts to reinforce and keep our dLocal culture strong. When the first quarter of 2022 wrapped up, our workforce totaled 562 people, which was up 54%, a gain of 197 FTEs compared with a year earlier. Throughout that quarter, we expanded considerably across every function, with technology and product as well as sales and marketing getting especially heavy attention. Our staffing levels have grown a great deal beyond the Americas, since we prioritized local hiring to speed up growth, and by the close of March 2022 we had reached roughly 100 FTEs located outside the Americas, a 104% rise versus the prior year. We're also pleased to report that over the course of the quarter, we brought on more than 50-plus additional payment methods across Asia and Africa; we keep assessing chosen M&A possibilities to speed up expansion in those markets. Now turning to Slide 9. Over the quarter, we kept bringing aboard New Merchants that show strong potential. We brought in 10-plus notable new merchants into our portfolio, and of those, 5 began processing with us in Africa or Asia. Not only have we managed to enter new countries, we've also strengthened our footprint in nations where we already run operations, through introducing New Merchants plus upselling and cross-selling to our Existing Merchants. A handful of illustrations from EMEA and Asia are included to demonstrate how well our land-and-expand approach works. Growth in the overall merchant count across India, Indonesia, Nigeria and South Africa reflects our ongoing achievement in expanding the business into new geographies. In India, for instance, we launched operations back in 2018. Over that initial year, we served 5-plus merchants. As of today, we are handling payments for 55-plus merchants there. Our activities in Indonesia, Nigeria and South Africa began more recently, yet the merchant count across these 3 nations has more than doubled since we launched in those markets. Because of our wide-ranging proposition when it comes to products, payment methods and geographies, merchants appreciate the ease of dealing with a single provider. That hands us a huge chance to keep growing our customer base and to raise the obstacles that competitors must overcome to enter. We stay intensely concentrated on turning our current client base into revenue and capturing a larger share of wallet. Diego is going to walk you through our financial highlights now.

Thanks, Sumita. Let's begin on Slide 10. During the quarter, we saw robust TPV growth. Our TPV crossed the $2 billion mark in Q1 2022, up 127% versus a year earlier and 13% against the fourth quarter of 2021. As noted on Slide 4, this expansion reflects how our merchants performed and kept growing across the majority of verticals, especially on-demand delivery, travel commerce, advertising, and software as a service. I'd also point out that we saw gains in both pay-ins and payouts this quarter. On the pay-ins side, TPV has risen steadily each quarter. In Q1 2022 specifically, pay-ins tripled compared with a year earlier. As we said on our prior earnings presentation, payouts TPV went through short-term swings in Q4 2021; we're now beginning to observe payouts volume improving, with year-over-year growth in the double digits and quarter-over-quarter growth in the mid-single digits. Revenues also hit a fresh record of $87 million in Q1 2022, up 117% year-over-year and 15% versus the fourth quarter of 2021. As we add New Merchants and grow the ones we already have, the portion of revenue coming from our top 10 merchants keeps falling, from 62% in Q1 2021 to 52% this quarter. Our revenues over TPV, or take rate, came to 4.2% this quarter, a touch above the 4.1% take rate from the fourth quarter of 2021 and roughly consistent with the 4.3% level from Q1 2021. This quarter, the local-to-local portion of TPV rose slightly relative to Q1 2021. The local-to-local and cross-border mix this quarter matched what we processed in Q4 2021. Let's go to Slide 11. Looking more closely at revenues, we keep delivering solid revenue growth from both our current and our new customers. Revenues from Existing Merchants are those generated by merchants we were already processing in the same period a year ago, while revenues from New Merchants are those generated by merchants that began working with us after that same period a year ago. Because our merchants usually need a 3 to 6 quarters ramp-up period, we view revenues from New Merchants as merely a signal of what our new customers could become. In Q1 2022, out of the 117% year-over-year revenue growth, 90%, or $36 million, came from Existing Merchants. Our revenue from Existing Merchants keeps rising quarter after quarter, reaching $77 million in Q1 2022, more than double the $33 million we posted in the same period a year ago. Our net revenue retention for the first quarter of 2022 was a robust 190%. We compute net revenue retention as revenues from Existing Merchants divided by total revenues from the same period a year ago. As we said in earlier earnings presentations, we don't anticipate sustaining the same net revenue retention levels in 2022. 2021 was an all-time high for revenue and TPV growth. So because of that, we anticipate the year-over-year comparison becoming more difficult beginning in Q2 of 2022. We restate the guidance we gave on our prior earnings call in March 2022: we anticipate keeping net revenue retention at a healthy level above 150% for the entirety of 2022. The other 27% of year-over-year revenue growth, which equals $11 million, was generated by New Merchants. That's against the $7 million posted during the equivalent period in 2021 and $8 million during Q4 of 2021 — a rise of 61% versus a year earlier and 43% versus the prior quarter. Turning to Slide 12. We keep growing both gross profit and EBITDA. Let's begin with gross profit. As we've said before, our commercial priority is raising gross profit dollars generated per merchant. Consequently, our gross profit keeps expanding at a solid pace; we managed to scale gross profit to $44 million during Q1 2022, which is 87% higher year-over-year and 12% higher quarter-over-quarter. Gross margin landed at 50%, matching the margin levels observed across the second half of 2021. Our processing cost for the quarter amounted to 2% of our TPV, versus 1.9% in Q4 of 2021 and 1.7% in Q1 of 2021. Those rises stemmed primarily from a shift in business mix. Pay-ins, which carry higher processing costs, grew their relative contribution, especially on a year-over-year basis. Now on to adjusted EBITDA. It reached $33 million in the first quarter of 2022, up 84% year-over-year and 13% quarter-over-quarter. We're happy that our adjusted EBITDA margin stood at 38%, matching our margin across the second half of 2021. Looking at 2022, we confirm the guidance given on our most recent earnings call: we anticipate our EBITDA margin staying above 35%. When we examine operating expenses for the quarter, stripping out onetime and noncash items, we find they rose 95% year-over-year as we grew our team and brought in additional senior members. Beyond that, we ramped up travel and in-person marketing events as conditions returned to normal, and we also boosted third-party professional services as part of the process of becoming a public company. With that, I'll hand the call back to Seba for closing remarks.

Appreciate that, Diego. Ahead of opening things up for Q&A on today's earnings call, I want to share that we're thrilled by the possibilities we see through the remainder of 2022 for keeping our payments infrastructure growing throughout emerging markets. We stay dedicated to making decisions quickly and delivering customized offerings to our merchants, helping them hit their growth targets in the emerging markets where we do business. As the presentation illustrated, our company genuinely gains from having a varied mix of merchants, geographies and consumer behavior patterns. So with that, we restate our projection that our net retention rate will reach the 150-plus percent mark during 2022, and given the pipeline we currently see, we anticipate healthy new client revenue in spite of global and macro uncertainty. Running our business with discipline will remain our guiding principle. Our emphasis is on ensuring each merchant dollar is accretive. Thanks to how well we performed this quarter, our combined revenue growth rate plus EBITDA margin came in at 115%. For the full year 2022, we still anticipate an EBITDA margin above 35%, and over the medium term we still expect operating leverage and, as a result, the capacity to grow our margins. Our company has never been in a stronger position, yet our ambitions are bigger still. We've only just begun. We thank our merchants, employees and investors for sticking with us. With that, I'll hand things back to the operator so we can take questions. Many thanks.

Can you hear me?

Yes, Jorge.

I've got two fast ones for you. To start, can you give us any detail on how the TPV mix shifted during this quarter? I realize guidance isn't something you offer, but in this region TPV hasn't tracked e-commerce volumes at all. So how should we frame TPV growth looking ahead? Then my second one concerns EBITDA margins along with tech spending. You mentioned reaffirming the outlook of above 35% for this year, and even 38% for this quarter. Does that mean we should anticipate thinner margins over the next several quarters plus a meaningful step-up in technology costs down the road? My reason for asking is that $1.4 million of technology expenses strikes me as rather modest given the size of the growth opportunity and the scaling costs needed to go after it. And with you beginning to ramp other offerings such as issuance as a service and dLocal Go, shouldn't tech expenses be climbing?

Jorge, many thanks for that. I should mention that Jacobo, our President, has joined us for the Q&A as well. On the TPV mix, I'll hand it to Diego to walk through the growth dynamics. Essentially, though, both products are growing very strongly. During Q4 we laid out the split and how those two products have evolved. The truth is we don't see the risk in that light. Our lens is always the merchant's, and sometimes they'll favor payouts over pay-ins. We're quite optimistic about both, and we view them as strongly complementary. As for your tech expense question, that's a valid observation. We keep investing very aggressively in tech. If anything, that's the area where our headcount has grown the most. Bear in mind that a lot of our recruiting — in fact, all of it on the tech side — happens in emerging markets. That's likely why our cost structure looks a bit different from what you'd see at other firms recruiting in the U.S. or even Europe. We aren't holding back on tech spend at all. Our aim is to keep compounding our growth, and the way we do that is by adding more geographies and more products while making our infrastructure more valuable. Diego, perhaps you'd like to chime in on the TPV mix.

Yeah, we're really pleased that, like we said back in Q4, payouts are already starting to climb. As we noted in the script, during this period both pay-ins and payouts increased quarter-over-quarter: for pay-ins, mid-single digits; for payouts — sorry, for pay-ins, mid-teens; and for payouts, mid-single digits; and on both sides we see enormous opportunities. I mean, when it comes to take rate, as Seba said, our main focus is on growing revenue, and TPV is more of an output. In principle, TPV usually rises roughly in step with revenues or a bit more, but we don't provide guidance specifically on TPV.

And Jorge, to add to what you were saying, we're not guiding to 35%. It's 35% or higher when it comes to EBITDA.

Starting off, regarding the net revenue retention rate, you remain significantly higher than the guidance at 190%. Your guidance is for 150% or more. Diego, I believe you said that it ought to decline, especially given the harder comparisons in the upcoming quarter. So is that correct — we should be far nearer to that 150% during Q2? And additionally, to add to that, I think we've observed e-commerce broadly around the world struggling somewhat. Certain streaming services saw subscriber numbers drop, but you keep performing well. Could you provide some insight into the condition of your merchants, especially given what's occurring worldwide? And how might that affect growth along with the net revenue retention rate?

Absolutely. Tito, I'll handle the second portion of the question, and Sumita will address the first portion. We're extremely proud of the quarter we've just reported. It was our strongest quarter to date; and I believe it stems from our business being highly diversified across products, geographies and, most crucially, vertical. No individual vertical made up over 20% of our revenues during the previous quarter; so we do anticipate seeing various verticals experience peaks and valleys; we've witnessed this repeatedly throughout our history. We saw it a year ago with COVID. Yet even amid crises such as those, we succeeded in growing. And the truth is that possessing a highly varied business with zero concentration, we think functions as a very robust safeguard. Another point is that emerging markets remain a priority for the companies we serve. A lot of our merchants are finding it tougher to achieve growth in their home markets, and they keep increasing their focus on the emerging markets where we function. So true diversification, ensuring we support them with additional products spanning more geographies, we think will be an excellent indicator of our growth going forward, and that's our main priority. Sumita, I'll have you address the NRR aspect.

Appreciate that, Seba. Tito, something else I'd want to underline here is that we've now posted triple-digit growth for a fifth quarter in a row. As you noticed, where revenue is concerned, we were up 117% compared with a year earlier, and I'd say the credit goes to both our Existing and New Merchants. When it comes to Existing Merchants, our view on where NRR will settle has stayed fairly steady. Our consistent message has been that it lands somewhere in the 150% plus NRR territory. Last quarter, as you observed, NRR came in at 198%. This quarter, the figure is 190%. For the whole year, what we expect is 150% plus. Over the coming few quarters, I'd say there will be some movement from one quarter to the next. Also remember that the second quarter of last year, the prior year, set a very high bar — in other words, our performance then was excellent. So for the next few quarters, you should expect NRR to mirror that. Even so, we remain very bullish, and our belief is that we will hold to that 150% plus NRR expectation across the full year.

Great. Then a second thing — just following up about the EBITDA margin and margins more broadly. You remained above that 35% or greater level. And you're directing that costs will increase somewhat under revenues. Regarding how that might shift across the year — I believe earlier you said possibly the first half, you're seeing somewhat more strain on margins. I'm not sure how you adapt investments during the year, whether a seasonality impact will appear regarding the margin view. And additionally, specifically regarding gross margin, which came in somewhat lower this quarter. Could you discuss the various dynamics or various margins between, I believe, pay-ins and payouts — which one carries superior gross margins, or which products affected margins in particular?

Tito, I'll handle the second portion, and I'll have Sumita address the first portion. Regarding gross margin, we take enormous pride in having added $5 million in gross margin quarter-over-quarter. We consider that an exceptionally strong metric, and it results from our NRR arriving at the levels it has; we never optimize for a gross margin percentage. We — I believe we covered this previously; we will always generate a reduced gross margin percentage in exchange for a greater dollar amount; that's our optimization approach — that's how we operate our business. When we instruct our commercial teams and how we motivate them, it is entirely based on gross profit dollars to ensure we're adding more dollars to our — pardon me, to our P&L. Every one of those dollars is highly accretive, and we ensure each dollar entering our platform adds to that margin. Various businesses and various products will carry various margin profiles, and that stems from how large those partnerships are and which geography we operate in; and it's quite difficult for us to forecast precisely where that will end up in percentage terms. We believe the situation is quite stable at present. Yet again, I want to stress that we are completely concentrated on the dollar amount we optimize for, and that's how we motivate our team. Sumita, I'll have you handle the first portion of the question.

Appreciate it. So, when you take a look at gross margin, our gross profit actually rose 87% versus a year ago, and it was up 12% from the prior quarter, reaching $44 million in this quarter. And gross margin isn't just a function of pricing and cost structure — product mix matters too, along with how fast each cohort grows relative to the others. So, if you consider cost of services as a share of TPV in Q1, that figure comes to roughly 2.1%, versus approximately 2% a quarter earlier. And what's mainly driving that bump is a shift in business mix. Pay-ins carry somewhat higher processing costs, and their relative contribution did grow this quarter; but again, bear in mind, when we're out selling, when our salespeople are in the field, persuading a merchant to hand us additional volume, we're pretty indifferent as between pay-ins and payouts. That mix isn't what we're optimizing for. What we optimize for is wallet share, and we always optimize for gross profit dollars. That said, yes, pay-ins did see their relative contribution tick up somewhat, and for the payment methods that grew this quarter, pay-ins come with a higher processing cost.

All right. Thanks; and apologies, I also wanted to ask, in that first portion, about whether there's any seasonal pattern when it comes to the EBITDA margin, plus your recruiting and other spending.

Happy to address that, Seba. My view is that the kind of seasonality you'd see elsewhere isn't something we experience. Much of how quickly we grow our expense structure, particularly on the recruiting side, is up to our own judgment. What I'd stress is that a market such as the current one suits our business extremely well. Everything you observe on the outside, in my view, leaves us in a stronger position. As you're aware, we're profitable, and in a market like the one today that hands us an enormous strategic edge, since we're able to bring in truly strong talent to join the company; so really, this is a fantastic opportunity for us.

Hi everyone, I’d like to ask something that builds on what we discussed about NRR. I realize the full-year guidance is being kept as is. Clearly, the beginning of the year was extremely strong. What I’m wondering is how the $190 million figure in Q1 compared with what you had anticipated. And now that we’ve seen such a solid start, do you feel more confident about possible upside to the 150 plus percent target for the year?

I appreciate the question. So — apologies, please continue.

Please, Sumita, go ahead.

Thank you for asking. Regarding NRR, like I mentioned, our continued emphasis is that it's going to be at least 150%. Our outlook isn't being revised at this point, in my view. That was what we expected when the year started, and those figures have the full backing of the management team. Once again, we've just had a strong quarter, and our sentiment is bullish. As I noted, over the coming few quarters, there will be some shifts from one quarter to the next, since last year's comparable periods were extremely high. For the entire year, though, our focus remains squarely on hitting 150%-plus NRR.

All right. It seems you're simply choosing to err on the side of caution, which of course makes sense. I was also wondering about top line metrics broadly — what kind of path have they followed across the opening half of Q2; and are there any seasonal factors you'd like us to factor in when building models, whether that concerns volume growth or revenue growth?

Jason, the underlying trends we're seeing remain robust. Naturally, what we're here to talk about is Q1 results, and Q2 has only just begun. In essence, this business has never been stronger, and that is the thing we in management are working to optimize. We need to ensure we have additional points of contact with our merchants. That translates into additional products and additional tools our salespeople can take into the field. NRR keeps fueling a great deal of our growth. So as things stand right now, nothing meaningful has shifted. Our outlook on all the opportunities ahead remains very bullish.