DLocal Limited (DLO) Earnings Call Transcript & Summary

Hello, everyone, and thanks for being with us on today's call covering our third quarter 2023 results. Should you have missed the earnings release, you can find a copy posted within the Financial section of the Investor Relations website. Joining us on this call are Pedro Arnt, our Co-Chief Executive Officer; Sebastián Kanovich, also Co-Chief Executive Officer; Sergio Fogel, Co-President and Chief Strategy Officer; Diego Cabrera Canay, Chief Financial Officer; Maria Paulina Silva, SVP of Corporate Development, Investor Relations, and Strategic Finance; and Soledad Nager, Head of Investor Relations. We've provided a slide presentation to go along with the prepared remarks. This event is streaming live over webcast, and you can access both the webcast and the presentation via dLocal's website at investor.dlocal.com. A recording will be posted soon after the event wraps up. Before we go further, I want to note that any forward-looking statements contained in the presentation or shared on 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 in light of information currently available, we urge you not to rely excessively on those forward-looking statements. Actual results could differ materially from those contained in dLocal's presentation or talked about on this conference call for many reasons, including those outlined 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. With that, I'll hand the conference over to Pedro Arnt. Thank you.

Thank you for being here. To kick things off, I want to say that following my first quarter with dLocal, I feel very optimistic about what lies ahead and the strong possibilities this business offers. As we'll quickly touch on, where we stand now, what's coming in our pipeline, and the size of the market give us a rare chance to grow steadily across many years, powered by the major long-term shifts behind emerging markets embracing digital goods and services; we must stay committed to delivering on that chance while putting in place the basic building blocks of the company so we're able to scale at the speed our merchants and markets will require. Let me take us through a few of the Q3 2023 results highlights that back up those points. We turned in yet another quarter of strong performance. TPV rose 69% year over year, hitting $4.6 billion, underpinned by a merchant and geographic base that is well diversified. Revenue climbed 47% year over year, even with a sharp devaluation of the Nigerian Naira during the quarter. Leaving out Nigerian revenue, the increase was 58% year over year; gross profit growth stays our key metric and our focus, and during Q3 2023 we reached $75 million of GP, up 38% year over year and 5% quarter over quarter. We keep posting top-tier profitability. Our adjusted EBITDA to gross profit ratio was 75% in the quarter, and our Rule of Forty framework, which combines our gross profit growth with our adjusted EBITDA over gross profit margin, is still above 100%, landing at 113% for the quarter. Free cash flow, which you can reconcile in the presentation that accompanies this call, totaled $45 million, and our cash conversion ratio is still above 100%. Our investments stay carefully aimed at growing our global team and establishing the right processes, tools, and governance mechanisms so the business expands efficiently and scales properly. In Q3, our headcount rose by 155 FTEs versus the third quarter of 2022, or 22% year over year, to 867 employees. New hires were spread evenly throughout the company, since we have stepped up ongoing work to reinforce support functions and further improve internal processes and tools, all while keeping our earlier commitment to growing engineering and sales... We keep broadening ties with trusted financial partners, bringing on additional globally systemically important banks, plus pan-regional and national market-leading banks, for our processing, FX, and hedging activities. To give you some figures behind this, as also shown in our quarterly presentation, 84% of all our foreign exchange transactions in the quarter went through GSIBs and pan-regional or national banks. 7% went through authorized broker-dealers, 6% through our payment processing partners, 3% through authorized net settlement to fund flows, and 0.3% through alternative assets. Before I hand things back to Maria, I want to share some further news about important leadership changes at the company. First, our Chief Financial Officer, Diego Cabrera Canay, has chosen to leave his role in order to pursue new opportunities. During Diego's time with dLocal, he contributed greatly to the financial results we've achieved. He has agreed to remain with us until the first quarter of next year, which will help make sure the handover goes smoothly. While one executive is departing, we are simultaneously making our team stronger. Joining us as Senior Vice President of Strategic Partnerships and Government Relations will be Diana Beitler. Diana arrives from eight years spent at Microsoft and the Bill & Melinda Gates Foundation; in addition, we have named Ricardo Schnabel to serve as our Chief Accounting Officer. Ricardo came aboard following 12 years with Cielo, the largest publicly listed merchant acquirer in Brazil, where he was responsible for their accounting, treasury, and control operations. I'd like to extend a welcome to Diana and Ricardo, and I wish Diego all the best going forward. At this point, let me hand the call over to Maria, who will take a deeper look at how our business performed over the last quarter.

Thanks, Pedro. Hello, everyone. In Q3, we kept seeing robust expansion across every vertical. We want to point out triple-digit year-over-year growth in our commerce platform, which has become our biggest vertical since the prior quarter, since we keep experiencing strong momentum via our platform offering for marketplaces, especially in Brazil and Mexico; ride-hailing came next, rising 81%, then streaming, which climbed 59%, and SaaS, which was up 54% versus a year earlier. During this quarter, we saw slower growth in the financial services vertical, which rose 23% year-over-year, caused by customer churn at two of our financial services merchants. Looking at Q4, we expect continued expansion in the commerce vertical, fueled by the holiday period. On the product side, in Q3 2023, payments grew 68% year-over-year. Relative to Q2 2023, the bulk of that expansion came from payments, which rose 8% quarter-over-quarter. Our payouts volume held steady quarter-over-quarter, since we saw weaker growth from our financial services vertical. Year-over-year growth came in at a very solid 73%. Regarding service mix, our cross-border and local-to-local volumes both posted strong year-over-year growth, with the latter doubling compared with a year ago. On a sequential basis, we keep seeing stronger growth in our local-to-local volume, which rose 10% quarter-over-quarter, whereas cross-border volume went up 2%. Because of this, the local-to-local share grew, hitting 51% in Q3 2023. On the geographic side, in Latin America, our biggest region, we keep enjoying sustained strong revenue momentum in Brazil and Mexico as we keep growing with our current customers and capture more share of wallet. Expansion in both nations has been fueled mostly by merchants from commerce, on-demand delivery, streaming, and travel verticals. We recorded lower revenues in Chile, chiefly caused by the slowdown in the financial services vertical, as discussed earlier. In Argentina, we posted higher revenue thanks to the widening spread between the official and the parallel exchange rate, while gross profit stayed fairly flat even with the devaluation during the quarter. We keep seeing strong growth in other Latin American countries, among them Dominican Republic, Colombia, and Guatemala. Our business in Africa and Asia keeps performing very well; in Q3, revenues in Africa and Asia rose 14% year-over-year, even though the devaluation of the Naira hurt results. If we exclude Nigeria, this region grew 79% year-over-year, mostly fueled by Egypt, Kenya, Vietnam, South Africa, Philippines, and Saudi Arabia. In Q3 2023, Nigeria revenues fell by 39% year-over-year and 59% quarter-over-quarter. The ongoing strong expansion of our varied merchant base across numerous emerging markets produces solid NRR, which came to 141% in Q3 2023. We have established strong merchant relationships, and we have a tremendous opportunity to keep capturing more volume since our wallet share with our biggest merchants remains in the low double digits. Diego will now go over the financial highlights.

Thanks, Maria, and hi, everyone. ...As Pedro said, I've made the choice to resign from my role as dLocal's Chief Financial Officer in order to take on new opportunities. This is a personal choice that I've been talking over with the board, and I feel the moment is right. Serving as the company's CFO over these last 3 years has been an honor, collaborating with such gifted people, and I'm extremely grateful for the board's and dLocal's senior management's confidence and backing. Over the next 4 months, I'll stay completely involved and dedicated to helping ensure a seamless transition. I have faith in what lies ahead for the company and strongly believe that, with the board leadership continuing to guide us, dLocal will keep moving along its path of expansion and achievement. With that said, let's turn to the quarterly results. Revenue hit a record $164 million in Q3 2023, an increase of 47% year-over-year, and quarterly growth stayed positive at 2% quarter-over-quarter, even following a notably robust Q2. Our attention remains on expanding absolute gross profit dollars. Gross profit came to $75 million in Q3, rising 38% year-over-year and 5% quarter-over-quarter. Gross profit margin climbed to 45% in Q3 from 44% in Q2, helped by a larger contribution from Africa and Asia, led by nations whose gross margin exceeds the average and by reduced expatriation costs in Nigeria. Net take rate holds steady at 1.6%, demonstrating that our pricing power is still stable even as TPV keeps expanding. Versus Q2, we benefited from a bigger share of pay-ins and from specific African and Asian countries with above-average net take rates; that benefit was counterbalanced by a larger portion of local-to-local volume. Profitable growth stays our number one priority. In the quarter, we lifted Adjusted EBITDA to $56 million, a 34% year-over-year rise and 7% quarter-over-quarter rise. Adjusted EBITDA margin went up 2 percentage points quarter-over-quarter, reaching 34% in Q3. Our Adjusted EBITDA as a proportion of gross profit rose to 75% quarter-over-quarter. Net income came to $40 million in the quarter, up 25% year-over-year. On a sequential basis, it fell 10% quarter-over-quarter. As laid out in the presentation that accompanies this call, quarterly net income took a hit from the effect of Argentine devaluation on intercompany loans denominated in U.S. dollars, IFRS inflation adjustment, and stock-based compensation. Gains from hedged bonds bought to guard against that devaluation partly made up for this. We also saw our effective income tax rate rise to 18% in Q3 from 16% in Q2, driven by country mix, a greater local-to-local proportion of pretax income, and the inability to deduct IFRS inflation adjustment. Turning to cash flow, in the quarter we saw robust generation of cash from our own funds, largely propelled by our net income and also by recovering $20 million of the restricted cash held as warranty for standby letters of credit, bringing other assets down to $28 million in Q3. We put some of our own capital to work buying an extra $54 million of Argentine dollar-linked treasury bonds, which wraps up what we had planned to invest in Argentina. On a quarter-over-quarter basis, merchant funds went down, largely because net trade payables fell, and that was mostly the result of shorter settlement periods for some merchants. As Pedro said before, converting net income into free cash flow stayed above 100%, and we produced $45 million of free cash flow in the quarter. Our solid cash position, we think, is still a competitive edge since it lets us keep putting money into the business. Pedro, over to you.

Appreciate that, Diego. The entire team at dLocal takes pride in the impressive results we've posted so far this year. Our fiscal year 2023 outlook stands as previously stated, and we anticipate closing out the year at the top end of the revenue guidance, which sits between $620 million and $640 million, while landing in the middle of the adjusted EBITDA guidance ranging from $200 million to $220 million. Our confidence in this company's capacity for expansion remains extraordinarily high. There's a great deal more growth on the horizon, along with opportunities waiting to be seized throughout emerging markets. A tremendous long-term prospect lies in front of us, and we'll keep delivering on it. Allow me to remind everybody that dLocal has barely begun. One final remark. I'd like to express enormous gratitude to our whole worldwide team for what they've accomplished, and to our customers and investors for their ongoing backing and faith in us. With that said, I'll turn it back to the operator so we can begin your Q&A, which Seba and Sergio will be joining us for as well. Thank you.

Hello, everybody. Morning to you all, and congratulations on those results. Diego, I wish you the very best in whatever comes next for you. I'd like to ask about the Nigerian currency's devaluation and how that affected revenues. I simply want to be certain the FX effect is clear. My understanding was that for the great bulk of your cross-border transactions, you charged commissions in dollars... bring that back or return it to the merchant's home base. And since they keep billing their customers a set dollar amount, devaluation hits their commissions, which appears to be what happened. So on cross-border transactions, you truly had no FX exposure. That's more or less how you've described the business, particularly when questions come up about Argentina. And regarding the local-to-local segment, my understanding was that hedges were in place so your revenues stayed protected. So I'd like to know precisely what took place in Nigeria, and why revenues there fell 60%. I think this matters also because we are likely just days, perhaps a week, away from a significant devaluation in Argentina, given the change in government; so I'd also like your perspective on how that will unfold or what it could mean for your business. Thank you.

Hello, Jorge. How are you doing? Diego here. So regarding Nigeria, on the whole, the effect of the conversion FX rates, as you recall in, in May, I believe that was when it happened, essentially the parallel FX rate and Nigeria's official exchange rate came together. That was largely neutral for our gross profit dollars in Nigeria. The sole effect lands on our gross revenues. When the gap between those two exchange rates narrows, our expatriation costs for moving those dollars out of Nigeria to our operating company go down, and as a result, we charge our merchants lower revenues. Yet at the gross profit level, that usually comes out neutral. To give you a sense, the effect on gross revenues is roughly, you know, versus Q2, $10 million more of revenues had the FX difference in Nigeria stayed the same as in Q2. But once more, that's on gross revenues. At the gross profit level, it's neutral. Our local-to-local business in Nigeria is very small, and no meaningful impact came from it. Argentina is a fairly different economy. As you're aware, we have everything hedged in Argentina. And, you know, we, we don't have these levels of... The bulk of our business in Argentina has always used an official rate, so we don't see these levels of difference between the official and the unofficial in Argentina.

Diego, if I could add something. Jorge, hello, how are you doing? This is Sebas. I appreciate your question. Our operations in Nigeria right now are in better shape than they were last quarter. At the gross profit line, this has stayed neutral. What you're seeing is a reduced amount of revenue that we're recording. There are likewise fewer costs that we're recording, and at the gross profit level, which is the thing we monitor, this remains neutral. Why do we monitor gross profit? Since that's a measure that shows how much profit we generate from a merchant transaction. The other elements are outside our control, we're completely hedged, so the drop in revenue is by no means a case of us incurring a loss. What took place is that the spread between the market rates and the official rates narrowed, so the revenues we record are lower. The costs we record are lower too, and at a gross profit level, this is neutral to positive. The reason I say we have a stronger business in Nigeria now than previously is that these market conditions are healthier and simpler for our merchants to navigate. We're a stronger business when there's macro certainty, and we think the steps that Nigeria has taken are positive. When we talk with merchants, they welcome what has happened in Nigeria. It's simpler now to understand how the market functions. Incidentally, the same holds for Argentina. We're very optimistic about what's ahead in Argentina. This isn't a political statement, by any means, but it's a view that a market having a clear set of rules ought to let our merchants invest more. And if you look at our business, we remain indexed to the growth of our, these global merchants. So whenever there's greater clarity, our merchants, our — sorry, our business tends to, to benefit.

Thanks for that. Let me just tack on one quick follow-up, if I can. On the financial services vertical, could you refresh our memory about which main companies you're serving — the ones you're able to name?

Of course, Jorge. The names we can share tend to be publicly traded firms with U.S. listings — Worldpay, Payoneer, Flywire, for example — and basically they lean on our last mile to complete transactions across emerging markets where their operations sit. Usually these are clients that hand us reach into merchant segments we'd never chase on our own. Take Flywire: it brings universities and hospitals aboard, and those aren't the kind of merchant we'd normally target, which is exactly why we value such partnerships. This all falls under our partnership with Visa Earthport, which in essence sells to global banks. We struck that deal long, long ago — that sort of customer isn't one we wish to go after directly, and that's the reason we keep those partnerships in place.

All right, thanks a lot.

Hello there, good morning. I appreciate you taking the time for the call and for my question. Actually, I have a couple of things to ask, if that's okay. First, I suppose this partly follows up on what Jorge raised, though I'd say it leans more toward Argentina. It would be, I believe, useful to walk through how this works a bit. ... given the devaluation over in Argentina, I mean, revenues there have in fact risen somewhat during this year. In what way is the devaluation supposed to affect revenues, particularly within Argentina? And I believe there was some effect too tied to inflation accounting. Going forward, how are we meant to factor that in? Then for my second one, Pedro, I think it was a few months back when we got together, and you said you were sort of looking over the business, to determine whether any extra investments might be required. I saw that your midterm guidance stayed the same, even though there were management changes, you know, with Diego leaving and other folks being brought on. So is there any news on that review? Might there be changes to the guidance down the road? Do you feel that everything you need is now in place to keep growing and scaling the business from this point? Thanks.

Sure, Tito. Since Argentina is the hot topic, let me begin there. To start, as we've said all along, our approach to Argentina has always been a long-term one, and we've stayed dedicated to this market the whole time. In fact, we believe that once the election passed and that uncertainty was removed, along with the possibility of an economy that's more stable, that's a good sign for our merchants in Argentina moving ahead. Consider some of the deceleration in the business — even though it kept expanding amid the difficult macro conditions and the devaluations — that could potentially turn around should we see that economy bounce back. So over the midterm, what we expect to come out of Argentina is more good than bad. As far as devaluation goes, honestly, how quickly our merchants reprice is what will determine the effect. That means you might see TPV growth that adjusts to a fresh peso-to-dollar level. Keep in mind that the bulk of our merchants are global ones, whose underlying cost for what they sell in Argentina is dollarized. And just as crucial, as Diego said before, on the financial side our Argentine peso exposure is completely hedged. So overall, looking at Argentina ahead, even with shorter term disruptions that could arise should a sharp devaluation happen, the trends that matter more are midterm ones. We believe that market looks promising. Over time our merchants can reprice, and our exposure to the Argentine peso is essentially all hedged. Regarding guidance and cost, like we said in the prepared remarks, we're still investing to reinforce the foundational parts of our business. Plenty of work is underway right now that was already underway before, plus there's further work of scoping out where else we might reinforce. We brought up our expanded partnerships with globally significant banks, with national banks. The better moment to reach a final conclusion on whether guidance needs changing is now, not now. At this point, we've restated our midterm guidance, and our basic conviction is that the additional gross profit able to move through the P&L from our ongoing business growth, together with how we see things heading as the year closes, will be enough to put back into the business wherever it's needed. But after we restate annual guidance for next year, we'll have even more specifics on that.

All right, that's excellent. Thanks, Pedro; that's useful detail. Perhaps only a single brief additional question regarding Argentina once more. Simply to grasp how inflation accounting affects things. Just to grasp, does that stem from — does it tie to how the business operates, or did it tie more to the bond that your team purchased? Just in what way would that shape results moving forward?

Hello there, Tito. IFRS mandates inflation adjustment for hyperinflationary nations, and Argentina falls into that category. It's a non-cash adjustment, so to speak. Essentially, revenues, costs, and all items must be restated according to current prices, after which you divide those by the fresh exchange rates showing up periodically. During this specific quarter, as you likely recall, the official exchange rate underwent a devaluation following the primary elections, and that served as the primary factor behind the loss visible in the P&L. Whether that persists or not depends on how prices in Argentina and devaluations unfold. The key point to remember is that this constitutes a non-cash adjustment.

To build on what was just said, I want to add a bit more detail regarding the real financial risk and the instruments involved, and you'll find quite a bit of disclosure on this in the deck that accompanies these remarks. Here's what took place during Q3: when we put U.S. dollars into Argentina, those funds create an intercompany loan that is carried on the Argentine balance sheet denominated in U.S. dollars. That underlying exposure is completely hedged. Consequently, when it reaches maturity, a derivative exists that fully shields that investment. In the time between now and maturity, the bond that carries the derivative is in fact marked to market. In Q2, some divergence emerged between the mark-to-market valuation of the bond and the derivative itself. That accounts for the loss and the gain you'll see reported in the package; therefore the U.S. dollar obligation produces an FX effect on the P&L, and the bond's value offsets nearly all of that loss, though from an accounting standpoint it wasn't a flawless hedge, since it is marked to market. The key point to make is that when maturity arrives, the bond serves as a flawless hedge against the investments we've made in Argentina, and the election result in fact creates more certainty that those hedges and those bonds are going to be honored.

All right, that's great. No, thank you, Pedro and Diego, and Diego, I wish you the best in your new position and with whatever comes next for you.

My apologies for that. I'd like to ask about Brazil, where growth reached triple digits this quarter; it has truly sped up a lot across the last couple of quarters; so I was hoping to hear how you view whether these higher growth rates can hold up. I'm aware you received the new payment license in July, and it sounds like the platform business is performing well there, but I just wanted to understand how much visibility you have into these very strong trends in Brazil revenue growth, maybe carrying on over the coming two or three quarters.

Yes. So we're seeing exceptionally strong results in our two biggest markets, Brazil and Mexico, which says a lot about the health of our business and how satisfied our merchants are with what we provide. That strength shows up, as you can tell from the vertical breakout, in most verticals, but what's interesting is that it's most pronounced in commerce, our biggest vertical. A large share of that expansion comes from our platform product, which we launched last year and which is genuinely addressing complicated payment flows for very big global marketplaces in those markets. So all signs suggest high levels of merchant satisfaction, that we're tackling complex problems for them in these markets, and because of that, we remain optimistic about those markets, even though they happen to be our biggest ones and are fairly stable markets.

Right, right, got it. Then, as a follow-up, I have a question with two parts. Regarding the first part, I believe revenue from new merchants declined somewhat on a quarter-over-quarter basis. So I'm just wondering how that result compared with what you had anticipated. After that, Pedro, could you expand a bit more on something? I think you mentioned bringing on additional staff for internal processes, and I'm aware you're adding a new chief accounting officer. What have you observed regarding back office operations since you've been digging into dLocal over these last few months?

Great. Well, when you examine the concentration metric we report for larger merchants, it's clear that expansion among merchants we'd already brought on board accounted for more of the growth during the past quarter. That's simply how things unfolded this quarter. Once again, that's a good sign, since it demonstrates our capacity to secure new merchants, then boost our share of wallet and help their businesses expand remains quite robust. New merchants served as somewhat less of a growth driver throughout the quarter, though they were still expanding. When we consider things on more constant terms, and for the more recent period, the pipeline appears very healthy. So I wouldn't read too much into that as any kind of negative indicator. Once again, the pipeline remains very healthy.

Sure, and let me add something there regarding the pipeline and new sales; there's an inherent delay with that metric. One factor is that once we bring those customers aboard, there's a corresponding lag in how quickly they scale up. Especially in this quarter, we've brought on board the largest company globally, and we haven't yet seen those outcomes. So we're quite confident in our capacity to keep acquiring new customers, and then driving an NRR, meaning net revenue retention, which again is our primary metric.

And then just on the back office,

Yeah

...Pedro, just your— Yep, thanks.

Once more, I'd like to emphasize this and make it extremely plain. This is business as usual. Across 40 emerging markets, this company's top line is expanding at close to 70%. It stands to reason that we must keep putting money into every one of our back office operations so they're as sturdy as our merchants need them to be. Keep in mind that a major portion of what we offer is not only a payments layer but a compliance and regulatory layer provided on our merchants' behalf, so that area should always be something we focus on and invest in — but it's simply business as usual. I'd also remind you that if you examine our value chain, and therefore the disclosures about which parties we work with on the financial institution side, the way we move money around is mainly via global banks plus national and regional banks. And I believe that creates a second layer of solidity for the operations that maybe we weren't previously as transparent about.

Appreciate the comments.

Hello. Morning, everyone. Thanks for fielding the questions; so, one is for you, Pedro, and then another is for you, Seba. Pedro, during your prepared remarks, and also in your earlier response, you mentioned the fabric of these global banks; that's a message I wasn't as familiar with hearing from dLocal. I'm curious why you're giving that priority in the message. I just want to try and grasp why that matters. That's the first one. And then, Seba, I just have to ask, I believe you said in your response to the last one, something about onboarding the world's largest... What was that regarding the logos you had mentioned in the Q2 that you had secured? I understand you might not be able to name who that is, but if you could at least indicate what, I don't know, vertical it could be or... Because I think you mentioned that in the earlier response. Thank you both.

Jamie, so thanks for the question about banks, and I think that's simply one of the feedback items we received from investors, which is that perhaps we hadn't educated the street sufficiently on how it is that we actually perform repatriation of money. And there was a perceived notion of potentially greater usage of alternative assets or smaller broker-dealers, and that's simply not true. The vast majority of our fund flows, forex, derivatives, are executed either via globally systemically important banks or national market-leading banks or regional market-leading banks. And I think it's just an idea to provide increased disclosure on not only what we do, but how it is that we do it.