DLocal Limited (DLO) Earnings Call Transcript & Summary

Hello, everyone, and welcome to today's call covering our third quarter 2024 earnings. Should you have missed the earnings release, you can find a copy posted within the financial section on the Investor Relations website. Present with us on this call are Pedro Arnt, our Chief Executive Officer; Mark Ortiz, our Chief Financial Officer; Maria Oldham, SVP of Corporate Development, Strategy, and Investor Relations; plus Mirele Aragão, Head of Investor Relations. We've made a slide presentation available that goes along with the prepared remarks. This event is streaming live over webcast, and you can reach both the webcast and the presentation through dLocal's website at investor.dlocal.com. A recording should be accessible soon once the event wraps up. Before we go further, please note that any forward-looking statements contained in the presentation or brought up during this conference call rest on information currently available along with dLocal's present assumptions, expectations, and projections regarding future events. Although the company considers our assumptions, expectations, and projections reasonable 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 what appears in dLocal's presentation or gets discussed during this conference call for numerous reasons, among them those covered in the forward-looking statements and risk factors section of dLocal's filing with the Securities and Exchange Commission, which you can access on dLocal's Investor Relations website. At this point I'll hand the conference over to dLocal. Thank you.

Thanks, everybody, for being with us today. I want to start by giving you a brief look at the key wins we posted this quarter. We feel good about the way the business is shaping up. The first quarter was admittedly soft, but since then we've been building momentum steadily. Even though 2023 was a difficult comparison, due to exceptional gains in Argentina, we've come back to posting a quarter with record results for both TPV and gross profit. Throughout 2024, our margins, cash position, and cash conversion have each gotten better quarter after quarter. What began as a admittedly weak year has picked up positive momentum. Now let me get into more specifics, beginning with the top line; we keep delivering substantial growth, with total payment volume re-accelerating past 40% year-over-year, fueled by our ongoing capacity to grow our share of wallet among the global merchants we already serve, along with bringing on new merchants. Both of those things highlight our standing as a trusted partner for global companies looking to conduct business throughout emerging markets. During this quarter, we performed well across a wide range of verticals, countries, and products. In particular, we expanded operations into additional countries, added more payment methods, and grew share of wallet among key logos in the financial services, Software as a Service, on-demand delivery, advertising, ride-hailing, and commercial verticals. We grew payment volume in Argentina, Mexico, Egypt, and elsewhere in Latin America, primarily Colombia and Peru, plus other parts of Africa and Asia, with especially strong results in South Africa; we posted record volume in our cross-border business, which carries a higher take rate, exceeding the $3 billion quarterly threshold in cross-border flows for the very first time. Our pipeline is still robust, covering both growth possibilities with merchants we already have, as well as new merchants. Over the period, we brought on board major players successfully, among them MoneyGram, which ranks among the biggest global providers of money transfer and payment services, and other notable remittance companies, so we can serve them throughout Latin America, Africa, and Asia. We also kept scaling up volumes with one of the leading Asian commerce players, widening the regions where we serve them, and we have now launched in Brazil with one of the largest global fintech companies, which also comes out of Asia. Turning to profitability, the results for this quarter demonstrate how resilient our business model is. We hit record gross profit of $78 million, with net take rates holding steady at 1.2% since Q1 2024. That stems from our differentiated value proposition, our ongoing push for cost efficiencies, including renegotiating with processors, and the genuine value we create by resolving complexities across emerging markets for our global merchants, which gives us pricing power and sets us apart from the more commoditized payments offerings we observe in the developed world. We delivered those results even with weakness in most emerging market currencies. If we look at things through a currency lens, and hold constant currency growth rates steady across our primary markets — Brazil, Mexico, Argentina, Egypt, and Nigeria — then during the third quarter of 2024 our gross profit would have come in roughly 6% greater, which works out to more than 18% on a quarter-over-quarter basis, while TPV growth would have landed at 14% quarter-over-quarter. We brought in adjusted EBITDA of $52 million, even with the ongoing investments we've been making in our engineering team, our back office capabilities, and our license portfolio — all of which matter greatly to our success over the long haul. Even though adjusted EBITDA declined compared with the same period a year earlier, this marks the second quarter in a row where operational leverage has risen, with adjusted EBITDA as a share of gross profit now sitting at 67%. That figure shows just how much operational leverage is built into our business model, our overall philosophy of keeping expenses in check, and the disciplined way we invest to reach our long-term growth goals. Cash generation — another area where our financial model shines — was strong as well. Over the last three months, net cash from operating activities, once merchant funds are excluded, minus CapEx, came to $26 million, which amounts to cash conversion of essentially 100% relative to net income. Now I want to walk through a few technology and product development rollouts from the quarter that help clarify what our core offering actually is and how we set ourselves apart from rivals. Some background — it's worth keeping in mind that the environment we operate in is an emerging market landscape, where payments continue to be defined by three key traits. They're fragmented, they're costly, and they have lower performance. This quarter we rolled out our Smart Requests functionality, which lifted our transaction performance and, as a result, improved conversion rates by an average of 1.22 percentage points across the board. That might seem small, but it isn't. In concrete terms, it actually translates into 1.2% extra revenue for our merchants. Smart Requests draw on per-country machine learning models that optimize routing and chaining in order to maximize authorization rates for our merchants. We've also kept building increasingly sophisticated real-time cost calculation models aimed at optimizing processing costs, which likewise played a part in our gross profit result and our stable net take rate. A third innovation area has been the rollout of new and promising alternative payment methods. As part of our continued push to deepen our infrastructure across various countries and deliver more value to our merchants, we've successfully deployed integrations with Nupay in Brazil for global merchants. This widens our payment method footprint with this widely adopted and advanced feature set, APM. Last, we introduced a new product into our suite of offerings — a standalone payment orchestration option — which lets merchants keep our smart routing, fraud detection, and unified reporting while securing their own licenses and contracting directly with processors in each market. While this model might mean a lower take rate net of acquiring costs, it strengthens our capacity to capture share of wallet with relevant clients and keeps adding value to merchants through our single API connection and product functionalities. All while delivering optimized conversion and cost results. Every one of these platform upgrades, together with the rollout of fresh offerings, works to strengthen the competitive edge we hold across each market where we do business, make our products stickier with users, and open the door to possible new sources of revenue down the road. On top of that, our spending on broadening the license portfolio carries on, and we have secured an International Money Transfer Operators License in Nigeria, a Financial System Auxiliary Services License in Ecuador, and a Payment Service Provider and Payment System Operator License in Uganda. A portfolio that keeps expanding like this, spanning intricate and unstable emerging markets, remains, in our view, extremely valuable intellectual property, and enlarging it quarter after quarter only sharpens our competitive advantages further. To close, we are carrying out the plan we laid out for sequential performance following Q1. We keep posting record TPV, we are not letting take rate declines get worse, we turned in the strongest gross profit for any quarter so far, and our margins are getting better thanks to lower absolute dollar OpEx. Put simply, the trajectory looks favorable. Having said that, I will pass things to Maria, who will give you a more detailed look at our third quarter results, and after that to Mark, who will take us through the key financials.

Thanks, Pedro. Hello, everyone, and good afternoon. As Pedro pointed out, even with Brazil showing some weakness, our Q3 results reflect solid expansion and momentum. Our TPV came in at $6.5 billion, which is a 41% increase versus the same period last year and an 8% rise from the prior quarter. Looking at our business lines, cross-border flows were up 12% from the previous quarter and 35% compared to a year ago, hitting $3 billion in TPV, primarily fueled by commerce, financial service, on-demand delivery, and SaaS verticals. Local-to-local TPV rose 4% quarter-over-quarter and 47% year-over-year, with particularly strong results in Mexico and Argentina. We saw growth decelerate sequentially in Brazil, caused by losing share of wallet and credit card payments with a top commerce merchant, since they obtained a payment license and had to connect directly with acquirers to stay compliant; on a brighter note, we believe there's an opportunity to restart growth with that particular merchant via a pipeline that includes alternative payment methods and to onboard them onto our new standalone payment orchestration option that Pedro talked about earlier. If we exclude this merchant's impact, TPV in Brazil would have risen 8% quarter-over-quarter, led by advertising and commerce verticals. Our pay-ins business expanded 8% quarter-over-quarter and 35% year-over-year, with strong results in Mexico, Colombia, Argentina, South Africa, and Egypt across multiple verticals. Our payouts business was up 7% quarter-over-quarter and almost 60% year-over-year, propelled by financial services and remittances. Turning to revenue, we posted $186 million in Q3, a 13% increase year-over-year. This was primarily driven by Egypt, where volume grew more than 90% year-over-year, Mexico, with positive results in commerce and financial services, and other markets, especially Colombia and South Africa, with robust growth across commerce and the ride-haling verticals. These positive outcomes offset lower revenue in Nigeria, because of the Naira devaluation in February 2024, and in Brazil, as we discussed earlier. On a quarter-over-quarter basis, revenue tracked the TPV trend, rising 8%, fueled by performance in Argentina and Egypt, with volumes up more than 30% during the period, along with positive results in other LATAM and other Africa and Asia. Now, let's look at gross profit dynamics. In the quarter, gross profit hit a record $78 million, a 5% increase year-over-year, despite the tough comparison with Q3 2023. Beginning with LATAM, gross profit was $56 million, a 6% decrease year-over-year, due to Argentina, because of lower FX spreads after the currency devaluation in December 2023, and Brazil, given the repricing for our largest merchant, which happened in Q1 2024, and share losses in credit card payments. This was partly offset by Mexico, where gross profit rose more than 60% year-over-year, thanks to volume growth and lower processing costs from renegotiation with processors in Q1 2024. In Africa and Asia, gross profit was also outstanding, with nearly 50% growth year-over-year, mainly driven by our overall TPV growth in Egypt, as discussed earlier, and TPV ramp-up of our commerce merchant, combined with cost optimization in South Africa; on a quarter-over-quarter basis, gross profit rose by 12%. Turning to LATAM: our gross profit rose 4% versus the prior quarter, powered by Mexico along with other markets in that region, where we saw 2 million of expansion stemming from wider FX spreads, which could ultimately disappear should currency devaluation occur; those favorable elements were partly counterbalanced by Brazil, because of share losses tied to credit card payments from a top merchant, and by Argentina, where expatriation costs came in higher. Over in Africa and Asia, gross profit climbed 39% from the previous quarter, reflecting the identical drivers covered earlier when comparing year-over-year. These results show that Q3 kept extending the momentum from Q2 and produced record gross profit even with Brazil's softness, which illustrates greater diversification across geographies and merchants. As our business keeps scaling, we anticipate less volatility in both our top and bottom line. Also, keep in mind that we offer detailed country-by-country disclosure so you can more clearly grasp what drives our results. With that said, I want to stress that, in the end, our business is shaped by the volume of our merchants' interest to us and by the distinct dynamics found in every market; we urge you to look at our performance holistically, since that lens captures best the quality and resilience of our business overall. I'll now pass things to Mark so he can keep walking through our financials.

Thanks, Maria. Hello, everyone. As we’ve talked about in earlier quarters, we keep putting money into our capabilities and innovations so we can drive efficiencies in different parts of the business. We’ve kept up investments in the key areas that matter for future growth while offsetting other spending in light of our top-line trajectory; because of that, in Q3, total operating expenses came to $37 million, which is a 6% drop from the prior quarter and a 61% rise compared with a year ago. The bulk of OpEx growth is still going mostly toward product development and IT capabilities, and those expenses climbed 88% versus a year ago, while sales and marketing plus G&A combined rose 35%. In his opening comments, Pedro pointed to some of the projects our tech and product teams have been working on over the last few months. We expect that tilt in allocation toward product and IT to keep going in the future. That 6% sequential decline reflects how we continue to take a disciplined approach to managing expenses after a first semester that came in weaker than expected. Thanks to renewed growth and cost management, we generated an operating profit of $41 million in the quarter, which is up 36% from the previous quarter, and adjusted EBITDA of $52 million, which is up 23% from the previous quarter, equal to an adjusted EBITDA margin of 28%; that makes it the second quarter in a row of rising adjusted EBITDA and adjusted EBITDA margin. The relationship between adjusted EBITDA and gross profit moved in a similar way, hitting 67% in the quarter, which is up 6 percentage points from the prior quarter. Now to net income: net income was $27 million in the quarter, down 42% from the prior quarter and down 34% from a year earlier. The earnings presentation gives detail on how net income changed quarter-over-quarter, which was affected mostly by lower finance results. To be more specific, the positive $23 million non-cash mark-to-market effect tied to the Argentine bond investments in Q2 '24, which we mentioned last quarter, and higher finance costs this quarter, largely due to exchange differences and higher cost of hedges. Adjusted net income, which strips out the impact of the Argentine bonds and intercompany loan, was $43 million in the quarter, down 5% from the prior quarter. Our effective income tax rate fell to 8% from 18% in the last quarter, mainly because of lower pre-tax income in Argentina. On a year-to-date basis, our effective tax rate is 18%. Now to cash flow in the quarter: net cash from operating activities, excluding merchant funds, less CapEx, came to $26 million, up from $19 million in Q2 '24, which is a 37% increase. With that, we still have a strong liquidity position of $320 million, including $208 million of available cash for general corporate purposes and $112 million of short-term investments, even after the $100 million share buyback we carried out this year. With that, let me turn it back to Pedro for closing remarks.

Thank you, Mark. As we bring our presentation to a close, I want to note that following our Q3 2024 results and everything observed during Q4, our guidance has not changed. Still, I should stress one point: Q4 outcomes depend disproportionately on the coming three to four weeks, because of the anticipated seasonal increase in commerce volumes along with Black Friday. So, as I finish up this earnings call, let me highlight our confidence over the long term, which comes from the durability and strength of our business model. dLocal is a youthful, energetic firm — under eight years of age — and even so, across that span it has produced remarkable growth. We've grown our list of sophisticated enterprise merchants, deepened our share of wallet among them, and established operations throughout the most significant emerging markets worldwide, introducing products, additional alternative payment methods, and licenses along the way. Such expansion highlights how well we serve and assist these highly demanding digital merchants, offering tailored solutions that address their changing requirements. We handle the extremely intricate and shifting payments landscape along with regulatory conditions throughout EM, supported by one of the most comprehensive emerging market processing ecosystems available. Our top-tier orchestration layer, competitive Forex liquidity and rates, strong fallback and redundancy capabilities, effective fraud prevention engines, and KYC regulatory and compliance layers are all designed to fit every market we operate in. Because our One dLocal solution is so comprehensive, merchants can introduce new markets and payment methods at a minimal incremental implementation cost, which delivers cost-efficient and rapid geographic go-to-market strategies. That value underpins our business resilience, even while we operate within the volatile global south. The quarter just completed illustrates both the volatility I referenced and, even more significantly, our business's growing resilience. Even with softness in our biggest market, we achieved record TPV and gross profit levels. Having recovered from weakness in 1Q, we've now posted two straight quarters of steady growth across metrics and in adjusted EBITDA as well. Sequential growth of this kind, once compounded across numerous quarters, reveals dLocal's remarkable potential. Secular trends likewise work in our favor. A vast and expanding TAM supports us, driven by moves toward payment digitalization, the rising significance of emerging and frontier markets, and soaring demand for cross-border and instant payment methods. Industry forecasts indicate the cross-border payment market could hit $65 trillion by 2030, and we consider ourselves well-positioned to capture a sensible share of that expansion within this enormous opportunity. Our capacity to innovate and seize these trends, together with our financial model — defined by operational leverage and solid cash conversion — will drive long-term value creation for our shareholders and merchants alike. We are only starting to grasp the compounding character of all this, and we stay unwavering in our mission to fulfill this promise, across all the relevant geographies our merchants require us to serve. My thanks go to everyone who has offered ongoing support and confidence, and I look forward to sharing updates on our progress in the quarters ahead. Having said all that, we're ready to move on to the Q&A portion.

Let me start with the gross profit loss over in Brazil. In the presentation you showed — and I believe Maria hinted at this during the prepared remarks — a loss of share of wallet at one top merchant in Brazil. Could you give us a bit more detail on that? Do you think other merchants will do the same thing, and what exactly took place there? Then my second question relates to the drop in G&A this quarter, correct? It was down 16% quarter over quarter, and I believe Mark said this comes from extra cost controls, but Pedro said you still plan to keep investing in your engineering team, back office capabilities, and so on. So I'm just wondering whether that expense line, whether that level still makes sense moving forward, given your investment plans — how should we think about expenses going forward? Does it go up from here, and particularly as we move into next year as well? Thank you.

Thank you. A bit of context before I get into the details on Brazil. It matters that we not lose sight of the fact that this company is run around merchants and contracts with those merchants that are increasingly global and diversified. Where our merchants will ask us for support, which markets to open, or which specific countries will see volumes rise or fall — those aren't really our decisions to make. Our confidence is that, broadly speaking, merchant relationships will keep growing steadily because of the quality of service we provide. And looking at the second quarter, something that makes me proudest is how, even with weakness in a market as significant as Brazil, we still managed to deliver record gross profit. That supports what we've been saying all along: as the business scales and diversifies, the swings that come with emerging markets will get easier to handle thanks to diversification. Q3 is clearly a case in point where, once again, even with weakness across a few key markets, strength across a growing number of relevant markets let us deliver record gross profit anyway. And this matters a great deal, very much so, when we consider the dLocal opportunity and the investment thesis ahead. On Brazil specifically, Brazil has a highly particular regulatory environment. This specific merchant was granted a payment institution license, and under the regulatory environment in Brazil, a sub-acquirer or a payment institution is not permitted to process through another sub-acquirer, which meant they had to go direct to acquirers. That's simply how it played out. You really shouldn't extrapolate that to other markets, and I wouldn't extrapolate it to other merchants either. This is somewhat of a particular situation, I think. More importantly, the orchestration product we launched has both an offensive nature and a defensive nature. What makes this setup defensive is that it lets us handle precisely this kind of scenario — one where a merchant is now able to operate under its own licenses and hold a direct contract of its own with acquirers, while still relying on One dLocal and getting the advantages of our tech stack. That particular merchant has already been moved onto the orchestration offering. Q4 has gotten off to a solid beginning for us, as we start recovering volumes and start growing, once more, our share of wallet on credit cards, and our hope is that we can keep executing, performing, and winning back as much of that volume as possible, perhaps even all of it, as we move ahead. I'll hand it to Mark for the question about costs.

Appreciate that, Pedro. When it comes to cost, one thing worth pointing out is that our future and our people remain areas where we keep putting money. What's notable is that G&A declined, and that really stemmed from something we did following Q1. That quarter was somewhat soft for us. So we chose to act, trimming certain expenses tied to third parties plus a few other spots where we felt it made sense to be careful over the near term. Our product team and IT staff still get continued funding from us. On a sequential basis, spending on IT and product rose roughly 8%. A 6% decrease occurred in the other cost category, which feeds into why G&A also went lower. As we look ahead, we anticipate a modest increase in that cost. Once more, our infrastructure will keep receiving investment. Our IT will keep receiving investment too; those expenses are ticking up somewhat, yet we will stay disciplined about evaluating every one of those costs along with those future investments.

I appreciate the presentation and want to congratulate you on these results — genuinely strong operational performance. Turning to how the business breaks down by country, Pedro, we observed particularly robust gross profit expansion, especially across the other geographies. I'm not sure it's fair to label those non-core, since as you noted, you operate globally, but they do sit outside the names usually listed in the gross profit breakdown. Other Latin and other Africa both performed very well. I just want to confirm: are there any new geographies ramping up especially quickly, and what kind of business is it there — is it more cross-border or more local-to-local in those markets? Thank you.

Thank you. That's a great question. One more area where we did really well this quarter, in my view, was cross-border. Maria mentioned it, and for the first time in any quarter, TPV went past $3 billion. A chunk of that momentum comes from the fact that we keep spreading into more and more markets. So yes, a lot of these markets we've entered more recently do involve cross-border activity. In some instances they're what you'd call frontier-ish markets, where the payments infrastructure isn't as built out, and merchants would rather not take on the expense of establishing local operations and handling local payments. Since these businesses already plug into our One dLocal setup, expanding into additional markets is a simple step for them — and that happens to be a real strength of ours. We spelled out particular markets that excite us most and where performance has been notably robust. That mix spans LATAM along with Africa and Asia. Beyond the ongoing momentum in Mexico, a key market for us, and Egypt, where we've held a solid position for some time, a genuinely powerful franchise has started taking shape in South Africa. Both Colombia and Peru delivered outstanding results during this quarter. We're seeing more and more nations post impressive TPV and gross profit figures, which is quite noteworthy. That kind of worldwide spread is precisely what fuels what we see as chances for sustained growth over a very long horizon, while also giving us broader diversification so we can handle the swings that emerging markets naturally bring.

Hi, this is Jamie Freedman. I'd like to know whether it's reasonable to view the Q4 guidance as a run rate for 2025. I understand that you aren't providing guidance for next year at this point, but any insight into how we should think about the connection between Q4 and 2025 would be useful.

Hey, Jamie. Thanks. That's a tough question. So to begin with, let me attempt to break that down a bit; this remains a high-growth company. Looking at our pipeline, we see substantial opportunities that, as we convert them, ought to produce a consistently expanding book of business into 2025 and beyond. Part of that achievement also comes from ongoing strength in the commerce category, which additionally means we'll face greater seasonality since e-commerce, as everybody knows, is far more backloaded, especially during Q4. So the trade-off between how strong seasonality is and the inherent sustained long-term growth of the book beyond that seasonal impact is something I believe it's probably too early for us to state publicly. Once we revise mid-term guidance, which happens annually for us, we'll be in a position to provide you with greater clarity regarding what 2025 looks like. I think the main takeaway here is, we're optimistic about the pipeline. We're witnessing consistent improvement quarter-on-quarter since the start of the year. So certainly, we feel as though we're exiting the year at a very different cadence than how we entered it, which is, for us, very positive as we begin looking into 2025.

All right, thank you. That makes sense. I had a question regarding remittances. The growth figure you put in front of me showed some genuinely impressive momentum, though roughly 80% of it came from memory. So when you approach companies like MoneyGram or other players that frame themselves around remittances, how does that discussion go, and where do you see your edge when it comes to your remittance product?