DLocal Limited (DLO) Earnings Call Transcript & Summary

Hello, everyone, and thanks for being with us on today's call about DLocal's Q2 2023 results. Should you not have reviewed the earnings release, you can find a copy in the financial section of the Investor Relations website. Joining us on this call are Sebastián Kanovich, our Chief Executive Officer; Sergio Fogel, Co-President and Chief Strategy Officer; Diego Cabrera Canay, Chief Financial Officer; Maria Oldham, SVP of Corporate Development, Investor Relations, and Strategic Finance; and Soledad Nager, Head of Investor Relations. We have also made available a slide presentation that goes along with the prepared remarks. This event is streaming live over webcast, and you can reach both the webcast and the presentation on DLocal's website at investor.dlocal.com. A recording will be accessible soon after the event finishes. Before we go further, I want to note that any forward-looking statements contained in the presentation or brought up on this conference call rest on information currently available as well as DLocal's present assumptions, expectations, and projections regarding future events. Although the company considers our assumptions, expectations, and projections reasonable in light of information currently available, you should be careful not to rely excessively on those forward-looking statements. Actual results could differ materially from those contained in DLocal's presentation or addressed on this conference call for many reasons, including those laid out in the forward-looking statements and risk factors sections of DLocal's filings with the Securities and Exchange Commission, which you can find on DLocal's investor relations website. I will now hand the conference over to Sebastián Kanovich. Thank you.

Hello, everyone, and good morning. I appreciate you all being on today's call. Prior to getting started, I want to express my gratitude to each person who attended our Investor Day in June. If you were unable to attend, you can find the materials posted on our Investor Relations site. I'd also like to mention that Pedro Arnt is with us on this call, and he is going to become co-CEO alongside me. Having Pedro come aboard makes us incredibly thrilled. At DLocal, we take pride in the outstanding talent on our team. Pedro's arrival represents the finest illustration of that. He will contribute fresh vitality and guidance, along with a skill set that complements ours exceptionally well, which will help us keep expanding the business rapidly and capture the massive opportunity in front of us. At this point, I'd like to ask Pedro to say a few words about himself.

Thank you, Seba, and hello to all of you. I figured it would make sense for me to take a moment today to tell you who I am and to explain the path that brought me to team up with Seba, Sergio, Jacobo, and the talented group of colleagues at DLocal. As they do so skillfully each quarter, they'll take us through how well DLocal's business has performed. My career in Latin American technology spans the past 25 years, so naturally I've followed DLocal from the moment it was founded just 7 years back. When the board reached out to me and I went through my due diligence, I discovered a collection of business success drivers that turned out to be even more striking than what I'd expected going in. Let me lay a few of them out for you now. To start, there's a huge, largely untapped total addressable market worth $1.4 trillion across the fast-growing markets we serve at present. Next, there's a remarkable chance to grow in step with those markets, plus the possibility of reaching many more markets besides; that lets us expand our TAM by more than 2.5 times across the coming 5 years. Third, the product and technology stack is outstanding, since it supports many of the leading and most exacting mega-cap tech companies around the globe. Fourth, this organization puts customers at the center of everything, dedicating itself obsessively to their success and stacking up win after win, with clients rising at a 41% CAGR and TPV climbing at an incredible 126% CAGR across the last 3 years. Finally, and just as significantly, there's a highly appealing financial model defined by a revenue CAGR of 101%, adjusted EBITDA over gross profit above 70%, and yearly conversion of free cash flow to net income beyond 90%. Put simply: a big TAM, excellent product and tech stack, a winning customer-focused organization, and a free cash flow machine. It's the perfect picture an investor dreams of, isn't it? Without a doubt. As with any young, thriving company, there's always additional work to be done in order to advance and completely capture the exceptional value embedded in the remarkable business I've just outlined. That effort is already in motion, and it's also where I aim to add the most during phase 1 of my time here. I'm certain we'll uncover ways to speed up even more the rate at which we're introducing further processes, putting in place more and improved systems, and reshaping our organizational design to get DLocal ready for what lies ahead. I can't wait to see how this will enhance the remarkable product and customer success efforts already being carried out for our clients, helping to build an even more formidable company at scale. While all of that unfolds, I strongly believe that by taking these steps, we'll boost dLocal's trajectory and unlock additional returns for every stakeholder. I'm eager to stay engaged with you throughout this journey. Now I'll hand things back to Seba, so he can dig further into the quarter's results, which already reveal the positive direction we're moving in.

Thanks, Pedro, and again, it's great to have you with us. I'm happy to report that we've delivered yet another quarter of excellent results. What we achieved once more demonstrates the unique power of our business, which we keep developing with an eye on profitable growth over the long term; these strengths work together: 1, best-in-class technology, powered by our dedication to simplifying complexity for our merchants, through a single API and a single integration, which we refer to as One dLocal. 2, a business that is well diversified across verticals, products, and geographies, with extensive geographic reach spanning more than 40 countries. 3, consistent execution of our strategy to grow and cross-sell with our merchants across products and geographies. Finally, our lean and disciplined culture; we achieve all the strengths just mentioned with a lean team, always pursuing excellence. Our culture matters greatly if we are to keep meeting our long-term ambitions; these elements form the foundation of our ongoing success in creating the finest payments ecosystem throughout emerging markets, built on One dLocal, handling the intricacies of payments in those markets for our merchants, so they can stay concentrated on their core business; we have demonstrated a proven ability to use these elements to generate solid dollar growth in TPV, revenue, gross profit, adjusted EBITDA, and net income. Turning to our financial highlights for the quarter, this success showed up in every metric. TPV rose 80% year-over-year and a robust 22% quarter-over-quarter, exceeding the $4 billion threshold for the first time. For context, this quarterly TPV is over twice what we recorded for the entire year of 2020, the year prior to our going public; we remain focused on expanding our business in absolute dollar terms. Revenue, gross profit, and adjusted EBITDA each rose at double-digit rates, both year-over-year and quarter-over-quarter. We posted the largest contribution in gross profit and adjusted EBITDA of the last 8 quarters, with gross profit up $9 million and Adjusted EBITDA up $7 million quarter-over-quarter; we stay strongly dedicated to profitable growth at scale. In Q2 2023, our ratio of Adjusted EBITDA to gross profit held steady quarter-over-quarter at 74%, which, again, leads the industry. On the next slide, we keep investing carefully in growing our global team; we've brought in new talent to chase the opportunities we identify in the market, while also reinforcing our foundations for our long-term ambitions. Our team grew to 806 employees. That's 174 more full-time employees than in Q2 2022, or 28% year-over-year; we keep hiring talent around the world, blending specific experience and skill sets, as well, with local knowledge. By the close of Q2 2023, we had 202 full-time employees in Africa and Asia. That's now 25% of our workforce; we will keep investing in talent in a disciplined manner, remaining lean and always making sure we bring on people who fit our culture well. We take pride in our team and believe it has never been stronger. At this point, I'll turn things over to Maria so she can walk us through how we're carrying out our growth strategy.

Thanks, Seba. Hello, everyone. I'd like to restate how we think about our growth engine. There are 3 growth axes for us: 1, products; 2, merchants; and 3, geographies. When it comes to product, this quarter we kept concentrating our efforts on strengthening our footprint in the nations where we do business, with special attention on Africa and Asia, through building additional direct connections with payment methods and acquires, while also further improving our solution. In Q2 of 2023, we witnessed strong traction on our platform solution, especially from commerce marketplaces. Turning to merchants, we achieved strong revenue growth, coming from both current and new customers. Net retention rate remains best in class, at 148% in Q2 2023. Revenue from new merchants hit $11 million in Q2 2023. Our relationships with merchants are very close, which lets us grow alongside them. Our top 10 merchants keep demonstrating very high growth, reaching $94 million in revenue for the quarter. Our three growth axes compound to produce rapid growth. Every one of our merchants, products, payment methods, and markets is connected to one API... This means merchants are able to reach all our products and payment methods with no extra work, creating high value for our customers while expanding our business; now let's take a deep dive into one dimension: geographies. In Latin America, where our scale is largest, we kept seeing strong growth throughout the region in Q2 2023. This shows we still have plenty of room to grow in LatAm, both with current and new merchants. Over the last 12 months to Q2 2023, revenues in Mexico rose by 85% year-on-year, and in Brazil by 50% year-on-year. Growth in both nations has mainly come from merchants in commerce, advertising, streaming, and ride-hailing verticals. We've operated in both countries since 2016, so these sustained growth rates truly indicate the hyper-growth potential that remains for us in Latin America, even in our most mature markets. As you're aware, Brazil is where we began seven years ago. It's also a highly developed market when it comes to digital payments penetration and technology, yet from a growth opportunity standpoint this market is far from mature. Such high growth in a large and competitive geography like Brazil highlights the quality of our solution as we keep gaining share in the market. We continue to see strong growth opportunities in Brazil ahead. In Q2 2023, TPV and revenue in Brazil doubled year-over-year and rose by around 80% quarter-on-quarter. Recent growth has primarily been led by merchants in the commerce, advertising, and streaming verticals; in Brazil, we also demonstrated the success and robustness of our local-to-local solution. Brazil is a market with higher local-to-local share, and we've seen favorable trends in both cross-border and local-to-local flows. Moving on to Africa and Asia, our merchants keep signaling strong demand for our solution in the region. Egypt, Morocco, Indonesia, and Philippines are experiencing triple-digit growth compared with a year earlier and could become a meaningful portion of our operations. Our activity across Africa and Asia keeps expanding at a very rapid pace. During the 12 months ending in Q2 2023, revenue from Africa and Asia rose by over three times versus the same period a year prior. If you set Nigeria aside, that region posted 78% year-on-year growth over those same 12 months ending in Q2 2023. During Q2 2023, revenue from Nigeria climbed by over 4 times compared with a year earlier. The sequential slowdown stemmed from the naira devaluation across the final 15 days of that quarter. Even so, Nigeria still shows net take rates comparable to those of other markets, and it remains a crucial geography for DLocal. We keep seeing excellent opportunities for expansion there. Absent that currency effect, revenue would have matched Q1 2023. Later in the presentation, Sergio will explain more about what has recently shifted in that market. Turning to the following slide, this case study demonstrates how strongly our three axes of growth work together. We brought this merchant aboard — a worldwide e-commerce platform — before Q2 2021. At the outset, we processed volume for this merchant beyond Latin America in 1 nation and with just 1 product and service. Across recent years, we have managed to successfully cross-sell into new geographies, products, and services. The results make the point on their own. TPV has expanded by over 100 times since Q2 2021, fueled by a mix of, 1, our merchant's organic growth; 2, a greater share of wallet; and 3, extra payment methods, solutions, and geographies. Today we process volume for this merchant across 7 nations spanning Africa and Latin America; beyond handling payments and payouts, this merchant relies on our platform solution in certain of those geographies; we have recorded robust growth from the platform solution as we build tailor-made solutions at scale, which include, 1, a white-label seller onboarding KYC, and 2, a split payment solution that guarantees full flow compliance through the entire process along with the best user experience; this example proves that our business rests on the strong relationship and customer service we maintain with our global merchants, who keep selecting our solution and growing alongside us. Sergio will now go deeper into our emerging market focus and provide a few updates regarding some of our key markets.

Thanks, Maria. Morning, everybody. You're aware that I'm one of the co-founders of this company. I've held a seat on the board. Starting in June of this year, I've been working as a member of the executive team. It's a pleasure to be on this earnings call with you today, and I'm eager to keep getting to know many of you going forward. From the day it started, DLocal has focused entirely on emerging markets. In places where other people notice complications, what we notice are markets that are underserved and that have strong potential for growth. Because infrastructure is missing, buyers and sellers are unable to complete transactions. The scale of what's being lost is enormous. The market we're pursuing is extremely big. Even after 7 years of robust expansion, we've barely begun to tap what's possible here. Structural tailwinds favor our markets: a young population that keeps growing, an urban and connected middle class that's eager to spend, and merchants who are just beginning to tailor their offerings to fit those people's requirements and preferences. Emerging markets are complicated. Our mission is to resolve payment complications for our merchants, whether technological, operational, or regulatory. Being able to adjust when conditions shift ranks among our core operational strengths, and it's the foundation of the value we promise: taking what's complicated and turning it into something simple. Now let me bring you up to speed on what's happened recently in 3 particular markets. One shift in market conditions took place in Argentina, which we discussed in our filing in late April. To get foreign currency for settling particular services, the government along with the central bank set up new procedures. We've now been operating in Argentina for a great many years. We've witnessed a great many regulatory changes. This one is merely the most recent, and in all likelihood it won't be the final one. We'll adjust to these new rules, the same way we adjusted to earlier ones. Being able to do that sets us apart from competitors and demonstrates the value we bring to our merchants. Because of how big our business is in Argentina, and as we said in a press release in June, we made a commitment to demonstrate more economic substance within the country. On June 14, using our own funds, we bought $48 million in Argentine dollar-linked treasury bonds. By the end of July, we'd purchased another $49 million. Over the coming years, we intend to deploy this money to finance our local operations and investment opportunities in that market. We're still working together with authorities in Argentina to make sure that, notwithstanding the macroeconomic conditions, customers in Argentina can reach international services. Turning to Nigeria, in mid-June the central bank put a free-floating policy for the naira into effect, which caused the local currency to be devalued, as Maria noted. I want to point out that we view the unification of exchange rates as beneficial both for the country and for our business, since it encourages transparency and efficiency while boosting liquidity. It eliminates a great deal of the friction that a number of our customers encounter when they expand into Nigeria. Our operations in that country remain unaffected, and we cater to several of the biggest technology retailers worldwide. A drop in the value of the naira is not something we anticipate affecting our gross profit. Lower expatriation expenses will counterbalance the adverse effect on gross revenues. Our view on Nigerian operations stays optimistic over the long term, and we keep bringing on and expanding alongside merchants there. Finally, Brazil. Not long after Q2 closed, we hit yet another milestone in our journey. During our Investor Day, we mentioned that we had filed for a payment institution license in Brazil. I am delighted to report that this license was awarded to us in July; we are now able to provide additional payment methods and solutions in Brazil and take part directly in the country's payment systems; we anticipate this will make our operations there more efficient. Gaining payments institution status brings with it greater scrutiny from Brazil's central bank. We embrace that scrutiny in Brazil as well as elsewhere, since it assists in raising the confidence level of global merchants operating in emerging markets and likewise strengthens our competitive edge. This clearly illustrates our continuous work to further reinforce our compliance infrastructure throughout emerging markets. Our broad diversification across more than 40 emerging markets lets us keep gaining from extremely high growth, no matter the particular conditions in any single geography; that is a fundamental strength of our business. Diego will now go over our financial highlights.

Thanks, Sergio, and hello, everyone. Once again, we delivered a quarter of robust expansion throughout our offerings and solutions. On the product side, in Q2 2023, payments rose 70% compared with the same period a year earlier and 27% versus the prior quarter, while payouts climbed 114% year-over-year and 10% quarter-over-quarter. Payouts' contribution has risen year-over-year, since we have succeeded in delivering last-mile payment services to financial services firms in emerging markets. On top of that, we keep establishing ourselves as the preferred payment service providers in emerging markets for global payroll, social media, ride-hailing, and on-demand delivery companies. This quarter, we also experienced strong momentum, in both pay-ins and payouts, via our platform solution for marketplaces, especially in e-commerce in Brazil and Mexico. On the services side, our cross-border and local-to-local volumes demonstrate solid growth year-over-year and quarter-over-quarter; in Q2 2023, our local-to-local volume rose 33% quarter-over-quarter, largely fueled by merchants from commerce, advertising, and ride-hailing verticals. That produced an increase in our local-to-local share, which hit 49% in Q2 2023. We are agnostic when it comes to product and vertical. Every one of our products and services generates incremental profit, and combining them creates synergies for our merchants and for us alike. Based on which merchants we onboard in any given quarter, along with each merchant's relative growth rates, fluctuations may occur in the share of pay-ins versus payouts and cross-border versus local-to-local. On the whole, we foresee a positive growth outlook across all our offerings and solutions and regard this diversification as a key strength. Revenues likewise hit a record high, reaching $161 million in Q2 2023, up 59% year-over-year and 17% quarter-over-quarter. This quarter, we recorded strong quarter-over-quarter revenue growth, especially in online commerce, ride hailing, and on-demand delivery. Geographically speaking, revenue rose quarter-over-quarter, chiefly from processing payments in Brazil, Mexico, South Africa, Egypt, Colombia, Peru, and Costa Rica. We stay focused on growing absolute gross profit dollars, the key success metric for our business. Our gross profits hit $71 million in Q2, up 43% year-over-year and 14% quarter-over-quarter, with net take rate at 1.6%. Processing cost over TPV held steady at 2% quarter-over-quarter. Gross profit margin and net take rate stayed almost unchanged quarter-over-quarter, despite a large increase in the share of local-to-local volume. The waterfall chart on the left illustrates the primary shifts in our gross profit margin quarter-over-quarter. Gross profit margin benefited from changes in merchant mix, particularly in Brazil. That was offset by the larger share of pay-ins and local-to-local volume and the smaller share of revenues in Argentina. Turning to the right hand of the slide, the modest decline in the net take rate, from 1.7% in Q1 2023 to 1.6% in Q2 2023, stemmed from similar factors, especially the greater share of local-to-local volume and by country mix, with a bigger share of revenues in Brazil and Mexico and a smaller one in Argentina. Profitability continues to be a top priority. For the quarter, we managed to increase adjusted EBITDA to $52 million — that's a 36% rise versus the same period last year and 14% higher than the prior quarter. In Q2, the adjusted EBITDA margin came in at 32%. Our adjusted EBITDA over gross profit held steady compared with the previous quarter, at 74%, since we kept putting money into our people, covering both pay and growing the team. Net income came to $45 million for the quarter, which is 46% growth year-over-year. On a sequential basis, it went up 26% quarter-over-quarter. Included in this quarter's net income is $7.5 million in net financial gains; those came primarily from our funds sitting in interest-bearing accounts and money markets, partly offset by hedge-related financial costs throughout the market. We also saw our effective income tax rate climb, from 11% in Q1 to 16% in Q2, which was caused by a bigger portion of profits coming from local markets thanks to greater local-to-local TPV and those financial gains. Now let's turn to cash generation. Through the first 6 months of the year, cash flow generation was robust. The primary reasons our cash went up were our net income, which we converted to cash to a substantial degree, plus a rise in net trade payables, mainly stemming from growth in our business with negative working capital and a longer average settlement period with our merchants. Altogether, that added $141 million. We put $61 million toward finishing our share repurchase program and $48 million into Argentine dollar-linked treasury bonds, reflecting our pledge to boost our economic substance in that country; in our view, a strong cash position continues to be a competitive advantage, since it lets us keep investing in the business. Seba, over to you.

Thanks, Diego. We're extremely proud of the impressive results we posted in the first half of this year, and we're even more enthusiastic about what lies ahead. We're seeing our business keep expanding through the second half. Because of that remarkable performance across the first six months, we'd be positioned to exceed our revenue guidance while landing on target for EBITDA; that said, thanks to currency depreciation in Nigeria, which will lower revenues with a neutral effect on gross profit — put another way, it won't change our gross profit dollar amount — we now anticipate finishing the year aligned with guidance on both revenue and EBITDA. Revenue of between $620 million and $640 million, plus adjusted EBITDA within the range of $200 million-$220 million. Ours is a genuinely diversified business capable of hitting our targets as specific conditions shift in particular markets, and we're very, very happy to occupy such a position. We stay committed to creating the finest financial infrastructure for global merchants in emerging markets. Our One dLocal platform's value proposition is obvious: assisting our merchants in navigating local complications when receiving and sending payments across emerging markets. All of our efforts are aimed at further enhancing that value proposition. I'd like to express a big thank you to our global team, our customers, and our investors for their ongoing support. I'll now turn things back to the operator to begin the Q&A, and Pedro will be joining as well.

Hello, good morning. Thanks for hosting this call. I'll go ahead with my questions. Congrats on the impressive performance and on bringing Pedro aboard. Pedro, congratulations on your new position. A few things I'd like to ask, if that's alright. Pedro, perhaps I'll begin with you. Thanks for the details you provided regarding the possibilities you foresee in becoming part of DLocal. That said, there are a few things we're curious about, and we'd like to hear your thoughts, given that you're joining from Mercado Libre, a company that's highly regarded. Just to get a sense, could you explain your thinking behind moving to DLocal, and share a bit about this chance you're getting as co-CEO? We're interested in hearing more about your personal view — what made you so enthusiastic about making this change? We'd really like to hear that from you. Now for my second question... Regarding revenues, the performance there was really impressive. Deb, like you said, you're keeping the guidance as is. Let's dig a bit deeper. Do you believe Brazil can keep expanding at the pace we witnessed this quarter? Is that growth driven by a single merchant, or is it multiple merchants contributing significant local-to-local volumes? Do you anticipate any challenges from the Argentine depreciation in the upcoming quarter too? Just wanting to get a clearer picture of the revenue dynamics and how they'll develop quarter by quarter going forward. Thank you.

Hello, Tito. Hello, everyone. Happy to be here. I appreciate the question. I believe I covered this in my prepared remarks. This is an outstanding business with a big and growing TAM, excellent technology and products, the right emphasis on customers, a successful sales team, and a highly appealing financial model. DLocal is truly something special. What I've accomplished and observed throughout the past 24 years is how to achieve scale. I've witnessed scale in Latin American tech in a way that very few others have, since I've been fortunate enough to be part of the biggest Latin American tech firm as it went from close to nothing to its current position. I've learned that the method for creating value in technology involves achieving scale and compounding outcomes over the long run. I believe DLocal is the perfect place for the next phase, the next step in my career, where I can help achieve scale and compound outcomes over a long period with a company operating in an expanding TAM that possesses an outstanding financial model. This choice makes a great deal of sense for me, and I believe I can contribute significantly to the excellent work being done at DLocal.

Tito, thank you. Appreciate it, Pedro.

Thanks for asking, Tito. That's quite a bit to go through. Let me know if anything's left out. Regarding the guidance — sorry, on the guidance topic — we feel a lot of pride in how the first half turned out. Revenue-wise, we're obviously tracking toward the upper end of that guidance, yet we're clearly choosing a cautious stance because of the macro backdrop. Certain shifts in circumstances, like Nigeria's devaluation, hit our revenue figure, though not our gross profit. Out of an abundance of caution, we'd prefer to see another quarter go by before revising our annual guidance. Tito, as you're aware, we've consistently exceeded every metric we've ever guided on since becoming public, more than 2 years back. Another point: the annual guidance we gave assumes roughly 50% year-on-year growth at a best-in-class margin. That's a strong result for our 2023 and further proof of how resilient and well-diversified our business is. We also want to reaffirm our midterm guidance: 35% CAGR at the gross profit level, with a gross profit to EBITDA margin of 75%, which once more is best in class. Adding a bit more color, Tito, Brazil was fantastic news. We expanded over 100% year-over-year and 80% quarter-over-quarter, while Mexico also grew close to 80% year-over-year. I'm highlighting those two geographies since they're among our most mature. The underlying takeaway, I think, is that our geographies keep compounding, keep standing apart, and keep fueling growth for our merchants. Some quarters, one market will outgrow the others, and that's entirely normal. Remember, our growth rides on our merchants' growth, and some will choose to accelerate faster in one country rather than another — that's neither in our control nor something we'd want to control. What we do want to convey is that several growth levers are firing simultaneously, and in that regard, this quarter proved a solid example. Multiple merchants are fueling that expansion. We don't depend on any single merchant in any single geography. In that sense, a truly excellent quarter for us. You raised a question about Argentina and the valuation. Sergio, I know you have some points here that are probably worth sharing, but the one thing I'll add, Tito, is that we cater to global merchants, and global merchants think in terms of dollars. Usually, what we've observed across the years is that whenever a devaluation happens, our merchants reprice quite quickly; put differently, a major streaming service doesn't view its product as worth 10 ARS. They have a price in mind for their product. When a currency loses value, they usually adjust prices very quickly.

Operator, maybe this is on my end, but I can't hear anything. I believe it's happening for everyone, right, Pedro? You're not picking up anything either? Yeah, that's what I'm getting too.

Can we move to the next question, please?

Morning, and thanks for taking my question. I'd like to begin with the new management setup — perhaps both Seba and Pedro could say a few words about how you expect to divide the everyday responsibilities from here, particularly once Pedro gets the chance to get up to speed on the business?

Hello, Jason. Of course. Pedro, please jump in if you'd like to add anything. Jason, to begin with, Pedro's background and mine fit together extremely well. This is a chance that comes with a great many difficulties we have to address. When you can locate someone with Pedro's abilities and persuade him to come aboard, for us that's a completely obvious decision. We're still figuring out precisely which duties each of us will take on, but at the core, when you look at our strengths, the two of us match up very, very well, and for us this is the best possible news.

All right. For my follow-up, I wanted to ask about that useful slide you showed, the one with the gross margin bridge. When you look ahead to the back half, and given that mix can obviously be hard to predict, what kind of baseline working assumption are you fellas using for gross margins in that period, especially since you're clearly reaffirming the adjusted EBITDA guidance for the full year? Thank you.

Pedro, I believe you were in the middle of some comments and got interrupted. Would you like to take that one?

No, no, I was just repeating myself. I believe we'll work out the governance. During my process, I've clearly conducted diligence, and the chemistry we've established, not just with Seba but with the whole team, gives me confidence that there's a great deal of work to be done here, and our complementarity, I think, will make that even simpler. I'm not worried about that in the slightest.

Jason, regarding what you asked about guidance, once again, everyone knows we tend to be extremely careful on this particular matter. With the current market conditions, our stance is exceptionally cautious. It's clear we're, sorry, leaning toward the upper portion of the revenue guidance we gave. We don't offer any shorter-term guidance, and I'd like to stress that we're constructing this with the long term in mind. Our belief is 50%, more than 50% growth compared with last year, and again, the midterm guidance of 35% CAGR, that's best in class, and that's where our attention is. We want to keep the flexibility to keep putting money into the opportunity before us. Right now is the moment for us to stand apart. The emerging markets opportunity has never been larger, and we want to hold onto the flexibility to invest as much as we consider appropriate while keeping the disciplined approach that has always been ours.

If I may-

Okay.

When you take a look at gross margin and net take rate for Q2, they came in quite close to what we saw in Q1. Gross margin slipped 1%, moving from 45% down to 44%, while net take rate declined 0.1%. That, I believe, addresses part of what you were asking. Essentially, this stems from our business mix. As you can observe this quarter, local-to-local makes up a larger portion, and our country mix differs, especially since certain countries added a bigger share of gross margin. We don't try to engineer that. Like Raul said, it's up to our merchant to determine when and how they expand. How those metrics move in the second half will largely depend on the way our merchant grows, along with which countries and which channels are involved.

All right, I appreciate the remarks.

Hi there, is my voice coming through?

Yes, I can hear you.

We do.

Yes. Seba and the team, thanks for the presentation. I have two questions. The first one has to do with Nigeria. You said you anticipate some effect from the devaluation. As I recall, it was a 40%-50% devaluation on the FX, and we can already observe it affecting revenues decline, Nigeria's share of total top line. It was interesting to hear that you do not expect any impact into gross profits. I'm trying to reconcile those two statements. The only way I can think of is that your gross profit margin in Nigeria is close to zero. First, I'd like to verify whether you actually have operations in that nation where margins are extremely thin. My second point concerns financial income. During the quarter, gross financial income made a very substantial contribution. My assumption is that Argentinian bonds are behind this. Could you go over how much those bonds are yielding, and whether we saw any one-time financial gains — that is, the bond appreciating during the quarter — or whether that $19 million in gross income each quarter ought to be treated as the new recurring baseline, now that you hold positions in those bonds. Thank you.

Guilherme, many thanks for your question. Nigeria came up before — on the Q1 call, in fact, we flagged it — because its gross take rate ran well above average while its margin structure was far weaker, thanks to the spread between the market rate and the official rate. That weighed on our margin structure, which explains the erosion you observed. We laid out the details in earlier quarters. Since then, the Nigerian government has merged those two markets, so the spread that used to sit between market rates and official rates is gone. Nowhere do we handle payments at a zero margin; that isn't the business we're in. Each dollar we process adds to our profits. Here's what we told you: when you look at gross profit — something we monitor closely as an internal benchmark — the effect should be flat at worst, and possibly a gain. Here's the reasoning. Because of the currency discrepancy in Nigeria, merchants found it very confusing that two rates existed side by side — an official one and a market one — and they were forced to work around that tangled situation. That tangle has been partly cleared up now; a global merchant can operate in that country with far less difficulty, and our expectation is that this helps us in two ways: first, gross profit comes out either unchanged or better, and second, it clearly strengthens our margin profile. We've mentioned previously how our margins took a hit because of the Nigeria operation. At this point, we likely stand to gain something from that. Maria, Diego, Sergio, please jump in and add your thoughts on this if you'd like.

Right. All I'd say on top of that is it isn't merely nonzero — this is a nation where we're turning a profit, and the net margin rate there beats the typical level.

Guilherme, regarding your second question — the one about the financial profile — Maria, Diego, would either of you like to handle that?

Alright. During this quarter, we recorded about $7.4 million in financial gains. That largely comes from holding larger cash balances in local markets, in countries such as Brazil or Argentina, which you brought up. A portion is from the bond, as you noted — around $2 million-$3 million comes from the bond — but for the most part, it's money markets and temporary accounts we hold in those countries that produce cash. We allocate some of those gains toward hedges so we're fully covered, and that shows up as the cost, the financial expense you see in the PNL. The net effect of those two has been quite favorable this quarter. Looking at the medium term, this should gradually return to a smaller figure. Specifically in this quarter, we encountered these situations where we have considerable sums of cash invested, also at the operating company level, with elevated interest rates.

If I could, one more question. What sort of yield are those Argentine bonds generating? I'm just curious.

They're carried at mark-to-market. The coupon on the bond is tiny — the stated interest rate on it comes to just 0.4% — since these are dollar-linked instruments, so the mark-to-market movement on the bond is really what drives things. Once more, looking at this quarter's financial income, the bond accounts for only a modest slice of it. The bulk of that financial income comes from cash sitting in money markets or interest-bearing accounts, I'd say in Brazil, Argentina, and at the operating company level.

Guilherme, let me add something here, let me add something regarding that Nigeria topic, just so it's completely clear. Whenever a devaluation occurs, a pair of things take place. Our gross take rate falls, yet what we pay to process transactions also falls; that is the reason this comes out neutral when you look at gross profit. What we spend on expatriation is going to drop substantially by the very same amount that our gross revenue drops, since both of those depend on the gap between the official market rate and the market rate. That is the reason you see neutrality here. I hope that's clear. I realize it's complex, but, but I want to be sure this is properly understood.

Yes, absolutely. That came through clearly. Thanks for providing those responses.

I'm glad to hear that.