DLocal Limited (DLO) Earnings Call Transcript & Summary

Thanks. Morning, everyone, and thanks for joining dLocal's second quarter 2022 earnings call. Joining me today are Sebastián Kanovich, our Chief Executive Officer, Jacobo Singer, our President, and Diego Cabrera Canay, our Chief Financial Officer; a slide presentation is being provided to go along with our prepared remarks. This event is streaming live via webcast, and you can access both the webcast and the presentation on dLocal's website at investor.dlocal.com. A replay will be made available soon after the event ends. Before we continue, I want to note that any forward-looking statement contained in the presentation or mentioned on this conference call is based on information currently available and dLocal's current assumptions, expectations, and projections regarding future events. Although the company believes our assumptions, expectations, and projections are 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 discussed on this conference call for a variety of reasons, including those described in the forward-looking statement and risk factor section of dLocal's filing with the Securities and Exchange Commission, which can be found on dLocal's investor relations website; now, I'll hand the conference over to Seba. Thank you.

Hi, everyone, and thank you for being here today. Q2 2022 was our one-year mark since listing on the public markets. Over these 12 months, we've shown that the IPO was merely the start of a fresh phase for dLocal. We keep working to create the finest financial infrastructure that links emerging markets with the broader world, which means our services now reach 37 countries and include over 700 local payment methods. Merchants appreciate how convenient a one-stop shop is, and that hands us a huge chance to keep growing alongside our clients while raising how hard it is for rivals to enter. We've stayed modest and concentrated on delivering the most complete offering for our merchants in emerging markets. A huge thank you goes out to our worldwide team, our clients, and our investors for sticking with us. Turning to slide five and our Q2 2022 results, I'm glad to report that this was yet another quarter of impressive performance, with fresh records set in the period. Even with a tough global macro backdrop — higher interest rates and inflation included — our company demonstrated durability and ongoing expansion, aided by the mix of our merchants spanning industry verticals, geographies, and products. Our total payment volume hit $2.4 billion in Q2, and we crossed the $100 million revenue milestone within a quarter as we keep onboarding new merchants onto our platform and monetize the ones we already have; TPV and revenue both grew strongly, at 67% and 72% year-over-year, respectively, even against last year's high comparison base. TPV and revenue each sped up by 16% quarter-over-quarter. We keep holding onto our clients with a solid NRR of 157 in Q2 2022, as we expanded wallet share among existing merchants. Our guiding philosophy remains delivering disciplined, profitable growth. Adjusted EBITDA climbed 47% year-over-year and 16% quarter-over-quarter, reaching $38 million. For a fourth straight quarter, our adjusted EBITDA margin held steady at 38%. This quarter's robust performance brought us to a combined year-over-year revenue growth rate plus EBITDA margin of 109%; on slide six, we keep seeing additional merchants come onto our platform. The total count of merchants on our platform has risen past 500, and right now we actively handle roughly 200 key accounts. As new merchants join and existing ones expand, the portion of revenue coming from our top 10 merchants keeps shrinking, from 63% in Q2 2021 down to 51% this quarter. In Q2 2022, our top 10 merchants spanned a range of verticals, such as ride hailing, commerce, streaming, advertising, financial services, and on-demand delivery. On top of that, our top 10 merchants shift from one quarter to the next; for example, versus the second quarter of 2021, three merchants in the top 10 are different, which highlights the worth of our customer diversification and the power of our commercial teams. We've established trust with our merchants, effectively bringing them into new geographies. The graphic to your right illustrates how we keep succeeding at expanding where our ten biggest merchants can use us. By the second quarter of 2022, those ten largest merchants by revenue were, on average, handling payments through us across 9 countries — the highest count for a single merchant being 17, and the lowest being 4. Our services reach 37 countries, and we continue to enter additional geographies. There's a huge chance for us to keep growing with the customers we already have. Our attention stays fixed on generating revenue from the clients we already serve and increasing our share of wallet, which we think remains low among the customers who matter most to us. Now I'll pass things over to Jacobo.

Thank you, Seba. It's a pleasure to be here with everyone today, speaking from Cape Town, and to tell you more about how we intend to expand. Expanding outside of Latin America continues to be a core strategic focus for us, which is why, several months back, I chose to base myself in South Africa for the foreseeable future; our view is that broadening our geographic reach further down the road will make our business stronger, since merchants want one API and one integration that lets them reach several emerging markets, among them the rapidly growing large markets of Africa and Asia. On top of that, we think the infrastructure we're putting in place across different geographies turns us into a key partner for merchants pursuing their own growth targets. Our aim is to grow alongside our merchants as they expand organically. Right now, 22 of the 37 countries where our service is available sit outside Latin America, up from 16 one year ago, and we expect to launch in additional countries across these regions before long. We began with a single African country, Turkey, back in 2016, then brought in Morocco 2 years later, and at present we're present in 13 African countries; in Asia we've taken a comparable path, and we now operate in nine countries there. Our footprint in these markets already matters, since three countries across Asia and Africa rank among our top 10 by TPV and revenue. Not only have we managed to add countries, we've also gone deeper in the ones where we already operate, onboarding new merchants and cross-selling to those we already serve. To illustrate, nine of our top 10 merchants by TPV already process with us in these regions, and we see considerable room to keep scaling. Over the past quarter, we kept strengthening our infrastructure and network, bringing in over 10 additional payment methods across Africa and Asia. Bringing on new countries and setting up numerous local connections is complicated, and merchants appreciate the infrastructure and network we're building. That, in turn, deepens our moat. We keep looking at select inorganic opportunities to boost our scale, network, and products in key markets. Turning to slide eight, we're still seeing robust revenue growth in every geography. Dollar revenues in LATAM rose 63% year-over-year to $88 million. Our expansion push outside Latin America keeps delivering solid results, as our revenues in Africa and Asia again grew faster than those in LATAM, rising by triple digits at 155% year-over-year, or a strong 38% quarter-over-quarter. Revenues from Africa and Asia came to $14 million in the quarter, bringing the total to $23 million over the first six months of the year. By comparison, for the full year 2021, revenues from Africa and Asia totaled $21 million, and we're happy with our Q2 run rate revenues for the Africa and Asia business of roughly $60 million. Revenue from Africa and Asia now makes up 13% of the total, and we anticipate that figure will climb steadily as we keep cross-selling to merchants who first came aboard with us in Latin America. On top of that, we still see merchants beginning their relationship with us via markets in Africa and Asia and afterward moving into Latin America. We keep putting money into growing our worldwide team to meet the added opportunities in front of us. When Q2 2022 closed, our employee count stood at 632, which is a rise of 48%, or 205 FTEs, compared with the same period a year earlier. Our workforce has grown considerably beyond the Americas, since we emphasize local hiring to expand more quickly, hitting 118 FTEs outside the Americas by the close of June 2022 — a 2.1x jump versus a year ago. Across the year, every area of ours expanded, with especially heavy emphasis on tech and product, sales and marketing, plus our operations and expansion team. Positions tied to tech, counting those sitting outside the tech and product team, still account for roughly 40% of our FTEs. Diego is going to walk through our financial highlights now.

Thank you, Jaco. Turning to slide 10, we're still seeing robust TPV expansion this quarter. During Q2 2022, TPV came in at $2.4 billion, which is up 67% versus a year ago and 16% higher than the first quarter of 2022. As Seba pointed out, ours is a business that grows quickly and remains resilient, and it keeps gaining from diversification. Looking at the pie chart to your right, you'll note that our model doesn't hinge on how any one industry vertical performs or is expected to perform; we serve merchants across over 10 distinct verticals, and each one holds a balanced place in our portfolio, with none representing over 20% of TPV in Q2 2022. This TPV increase stems from how our merchants performed and kept expanding across the majority of verticals, especially commerce, on-demand delivery, travel, software as a service, and advertising. I'd also point out that during the quarter we saw expansion in both Payins and Payouts. On the Payins side, TPV has risen consistently quarter after quarter. To be specific, Payins doubled year-over-year in Q2 2022. Our Payouts volumes keep improving, with double-digit growth quarter-over-quarter. Versus a year ago, Payouts saw mid-single digit growth. Just like in the second quarter of last year, volume ran above average thanks to certain merchants that ran large marketing campaigns during that stretch. When it comes to our cross-border and local-to-local volumes, the relative contribution stayed steady across the past three quarters, with both posting solid growth year-over-year and quarter-over-quarter. Slide 11. Revenue hit another record as well, crossing the $100 million mark in a quarter for the first time, after growing 72% year-over-year and 16% over the first quarter of 2022. Our revenues over TPV, or take rate, was 4.2% for the quarter, flat quarter-over-quarter, and a touch above the 4.1% recorded in the second quarter of 2021, largely due to a shift in business mix as Payins raised its relative contribution year-over-year. Looking more closely at revenues, we keep delivering strong revenue growth from both our existing merchants and our new ones. Revenue from existing merchants means those revenues generated by merchants already processing with us during the same period of last year, while revenues from new merchants means those revenues generated by merchants that began operating with us after that same period of last year. In the second quarter of 2022, out of the 72% year-over-year revenue growth, 57%, or $33 million, came from existing merchants. Our revenue from existing merchants keeps rising quarter to quarter, hitting $92 million in Q2 2022, more than double the $40 million we achieved in the same period of last year. Net revenue retention for the second quarter of 2022 was 157%. We compute net revenue retention as the revenue from existing merchants divided by the total revenue of the same period of last year. During our earlier earnings presentation, we mentioned that Q2 2021 set a record for both revenue and TPV growth, so this quarter we're up against a much harder comparison to last year. For the whole of 2022, our expectation remains a net revenue retention rate above 150%. The other 15% of year-over-year revenue growth, amounting to $9 million, was generated by new merchants; that's versus $11 million in Q1 2022 and $19 million during the equivalent period in 2021. Since merchants usually need three to six quarters to ramp up, we see revenue from new merchants as merely an early signal of what our new customers can ultimately deliver. Turning to slide 12, we managed to scale gross profit to $50 million in Q2 2022, a 47% rise year-over-year, and posted our biggest sequential expansion across the last four quarters, up a solid 14%, or $6 million, from Q1 2022. Gross margin landed at 49%, essentially consistent with where margins have sat since the latter half of 2021 and Q1 2022. Cost of processing for the quarter was 2% of TPV, flat sequentially, versus 1.6% a year earlier. That increase relative to Q2 2021 largely stemmed from a shift in business mix, since Payins carry a higher processing cost and grew their relative share. Turning to adjusted EBITDA, it reached $38 million in Q2 2022. It tracked the same pattern as gross profit, rising 47% year-over-year and delivering the strongest sequential gain across the last four quarters, up a robust 16%, or $5 million, from Q1 2022. Adjusted EBITDA margin stood at 38%, matching our margin in the second half of 2021 and in Q1 2022. For the whole of 2022, our expectation remains an adjusted EBITDA margin above 35%. Looking at operating expenses for the quarter, stripping out one-time and non-cash items, they rose 36% year-over-year as we grew the team and brought in more senior people. That aligns with our strategy of continuing to invest in building infrastructure and reaping long-term sustainable growth. On top of that, we spent more on travel and in-person marketing events as conditions normalized, and we also spent more on third-party professional services as part of becoming a public company. Before I hand the call back to Seba for closing remarks, let me note that our cash generation and balance sheet are stronger than at any point before. We've consistently produced positive free cash flow, generating $168 million over the last twelve months versus $99 million for the full year of 2021, excluding the PrimeiroPay acquisition, and $85 million in 2020, with solid cash conversion of 168% for the trailing twelve-month period, or 103% once funds from merchants are excluded. So because of that, by the end of June 30, 2022, our cash situation was strong, sitting at $554 million. That breaks down into $270 million that's our own money and $184 million tied to merchant funds. Seba, over to you.

Thank you, Diego. To wrap things up, I want to express how enthusiastic we are about what lies ahead for the remainder of 2022 as we keep broadening our financial infrastructure throughout emerging markets and delivering customized offerings to our merchants so they can reach their expansion objectives. As I mentioned earlier, our company has demonstrated durability and ongoing expansion, underpinned by the variety within our operations. We've managed to sustain strong growth while remaining profitable, boosting our TPV and revenue by 91% and 90% year-over-year, respectively, during the first half of 2022, alongside a robust NRR of 177% and an adjusted EBITDA margin of 38%. Our outstanding execution abilities, paired with our robust cash generation, leave us confident that we are ideally positioned to strengthen our leadership role as the preferred online payment solution across emerging markets, even as the global landscape remains difficult and unpredictable. We don't foresee any adjustment to our projections for our world business in 2022. Therefore, we reaffirm our outlook for a net retention rate at a 150+ level in 2022, and we anticipate our EBITDA margin for the full year 2022 will exceed 35%; we'll keep executing with rigor toward the enormous opportunity that lies before us. We reaffirm that we are only at the beginning. I'll now hand things back to the operator so we can begin the Q&A. Thank you everyone for tuning in; it was a pleasure to be with you today.

Thank you, everyone. Morning to you all. I was hoping to follow up regarding a few of those remarks about guidance tied to NRR as well as adjusted EBITDA margins. Clearly, when it comes to those two metrics, you're running well above your target for the entire year across the opening six months. I'm just curious whether we ought to anticipate a fair amount of softening in both NRR and margin during the back half, and if that's the case, what would be behind it? Or is it simply a matter of prudence on your part because of certain macroeconomic uncertainty that exists? Thanks so much.

Jason, good morning. Appreciate the question. Diego begins, and it's his to address. Since the start of the year, we've remained extremely consistent regarding this subject. We hold firm to our expectation of 150% for the full year and 35% + on EBITDA margin. In our view, that's the appropriate approach; we're extremely optimistic about what our business has shown us. The quarter we've just reported makes us very proud. Staying consistent and carrying on with the expectations we've communicated previously strikes us as the appropriate approach.

All right. There's nothing clear-cut that you'd flag as something to watch out for in the back half of the year?

Right now we're walking through our Q2, and it's a quarter we feel a great deal of pride in, and we're glad to talk about it. As a company, we've never been in a stronger position than we are at this point, and we have no hesitation saying so. Our product lineup has never been broader. Our geographic reach has never been wider; our customer roster has never been stronger; and everything we're putting together is meant to last. Staying very steady when it comes to expectations and what we tell you involves having room to build for the long term, and that's exactly what we intend to do. In our view, what lies in front of us is enormous. No near-term bump that could come along down the road is going to alter that; we stay very steady and we intend to keep it that way. The quarter we've just reported makes us enormously proud. The company we're assembling makes us enormously proud. What lies in front of us, in our view, is enormous.

Understood. To build on that regarding total payment volume this quarter, it looked as though momentum was fairly evenly spread across several of your verticals, and clearly diversification keeps working in your favor. I was curious whether you could address which areas of the business might have trailed somewhat during the period when it comes to TPV expansion. Specifically, I have in mind perhaps certain portions of your financial services vertical, as an example.

Diego, please jump in if you'd like to add anything. Jason, as we've mentioned previously, we represent a highly balanced mix of varied sectors within the internet economy; we've observed categories such as streaming expanding at a slower pace than previously. I believe that isn't surprising and it's data you could likely find across the broader market. Because we're so diversified, there will always be those doing well and those doing poorly; we've cycled through similar periods before. The ones coming out ahead are exactly who you'd anticipate — on demand delivery, travel, ads, and SaaS. Among those expanding more slowly are the streaming-related ones. Once more, our strong diversification keeps serving as protection. As we've noted before, we remain micro within a macro setting. We continue to hold the view that how much we can grow depends heavily on how well we deliver value to our customers and introduce them to additional geographies and products.

All right, and thanks for providing those details.

Thanks, Jason.

Hello, Seba and everyone. Thanks for answering my question. Could you expand a little on the EBITDA margin? Your full-year guidance sits above 35%, yet during the first half you stayed quite steady at 38%. Is it fair to anticipate heavier investments in the back half of the year, possibly pushing the EBITDA margin down? And more precisely, where would those investments be directed? If you could clarify that, it would help.

Sure. Neha, thanks for the question. Diego, do you wanna take it?

Hello there, Neha. How's everything going? From what you observed over the last four quarters, our adjusted EBITDA margin has stayed close to 38%, holding very steady throughout. In fact, there's a quarter-over-quarter bump of 10 basis points. We've set our full-year guidance at 35%+, and no major shift in trends appears likely, though we do like keeping room to put money into the business and support expansion when that's the right call. For the entire year, the guidance remains 35%+. Still, if you'd like, we aren't seeing anything meaningful change in trends ahead.

For the entire year, you could potentially land at roughly 38% on an adjusted basis; somewhere in the 37% to 38% range is plausible. Is it absolutely required that it decline?

My apologies, Neha. Our guidance sits at 35% or higher, and we'd like to keep that room to maneuver. You know, trends haven't shifted in any meaningful way, yet we aren't guiding to 38% or to anything other than 35%+.

Alright. Nothing particular on the investment side needs our attention during the back half, and that ought to mean margins will have to come down.

There isn't anything that varies from our existing approach. Our attention is squarely on growing, on the people working in technology, and on the people in sales. Those areas are where our investment efforts are concentrated. There's no real change from what we've been carrying out over the last several months.

All right. I also wanted to ask about what we're spending on services. That figure has been creeping upward little by little. What I mean is, it came in slightly elevated at this point — roughly 51% of gross revenues — which is a touch above our projections. Can you shed some light on what caused that increase once more during this quarter? Was there perhaps a shift in mix that drove the services cost upward?

The quarter-over-quarter shift is just 3 basis points, and in our view that's quite small. Keep in mind that percentages aren't our focus—absolute dollars are; our teams are incentivized on absolute dollars. If you look at the gross profit increase from one quarter to the next, it came to $6 million, versus $4.5 million across each of the prior two quarters. We're quite happy that, in absolute terms, gross profit growth came in above any other growth seen during the last 4 quarters. As you know, movements such as 3 basis points in a single quarter are the kind of thing that occurs now and then; we operate in 47 countries, with 450 or more merchants. Any shift in those merchants' or countries' processes might nudge gross profit or cost slightly up or down; also bear in mind that we launch a lot of countries. Typically, when we launch the smaller countries, we don't begin at an optimal gross profit level. Once launched, we keep iterating to reach that optimization. Those minor items might alter gross profit or cost just a little. Again, what we're discussing is only 3 basis points for the quarter. In absolute terms, it's the largest growth we've had over the past year.

Alright. A gross profit margin of 50% seems sensible, and it ought to land near that level. There's no cause for it to swing much.

Neha, this is Seba. We still aren’t aiming for a particular percentage take rate, and I believe it’s genuinely important to lay out why that is. Our business is being built over many years around dollar amounts. We’ll gladly accept a lower take rate in exchange for a higher dollar amount. That’s what we want on both fronts; we think the opportunity in front of us is enormous, and we shouldn’t constrain ourselves to some specified margin threshold. In our view, that isn’t the correct approach to building the company over the long term. These objectives have been communicated to the team. We tell them, “Bring us more customers who will use our infrastructure, and do it at a profitable level.” Each dollar on our platform adds to our margins, and that has always been true. The margin figures you referenced have been comparatively steady historically, but we aren’t optimizing for them, and they aren’t an internal target for us. We want to build a larger business measured by gross profit dollars, since we believe that is the right way to build it over the long run.

Got it, Seba. Thanks. The final item I wanted to ask about is that matter in Chile — the litigation that surfaced. Is there anything new on that front?

Neha, regarding Visa and Mastercard, there isn't anything major to report. To bring everybody current, we consider both Visa and Mastercard valuable partners. Transparency matters to all of us, and so does contributing to the ecosystem. As things stand, Chile remains at status quo, and a final resolution has not yet appeared; we're quite at ease that Visa and Mastercard are both excellent partners for us. We have served as a sound component of their ecosystem, and our intention is for that to remain true going forward.

Thank you, Seba, Diego, and everyone.

Thanks, Neha.

Hi, this is Tito. Can you hear me?

Yes, Tito.