DLocal Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 22, 2023

There are 18 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the D Local's Third Quarter 2023 Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to the company for prepared remarks and video. Please go ahead.

Speaker 1

Good morning, everyone, and thank you for joining the Q3 2023 earnings call today. If you have not seen the earnings release, a copy is posted in the Financials section of the Investor Relations website. On the call today, you have Pedro Arndt, Co Chief Executive Officer Sebastian Canovich, Co Chief Executive Officer Sergio Focal, Co President and Chief Strategy Officer Diego Cabrera Canai, Chief Financial Officer Maria Oldham, SVP of Corporate Development, Investor Relations and Strategic Finance and Soledad Nager, Head of Investor Relations. A slide presentation has been provided to accompany the prepared remarks. This event is being broadcast live via webcast, And both the webcast and presentation may be accessed through D Local's website at investor.

Speaker 1

Dlocal.com. The recording will be made available shortly after the event is concluded. Before proceeding, let me mention that any forward looking statements included in the presentation or mentioned in this conference call are based on currently available information and D Local's Current assumptions, expectations and projections about future events. While the company believes that our assumptions, expectations and projections Actual results may differ materially from those included in D Local's presentation or discussed in this conference call for a variety of reasons, including those described in the forward looking statements and risk factors sections of D Locals' filings with the Securities and Exchange Commission, which are available on D'Locals' Investor Relations website. Now, I will turn the conference over to Pedro Arndt.

Speaker 1

Thank you.

Speaker 2

Thanks for joining us today. Let me start by saying that after my initial quarter at D Local, I'm enthusiastic about our future prospects and the promising opportunities that our business presents for us. As we'll cover briefly, Our current performance, our future pipeline and market opportunity present a unique opportunity for sustained growth Over a multiyear period, driven by the powerful secular trends behind emerging market adoption of digital products and services. We need to remain focused on executing behind that opportunity, while constructing the foundational blocks as a company To ensure we can scale at the pace our merchants and our markets will demand. Let me walk us through some of the highlights of our Q3 'twenty three results that are a testament to these statements.

Speaker 2

We delivered another quarter of solid performance. TPV grew 69% year on year, reaching $4,600,000,000 supported by our well diversified merchant And geographic base. Revenue grew 47% year on year despite a strong devaluation Of the Nigerian naira in the quarter, if we exclude Nigerian revenue, growth came in at 58% year on year. We remain focused on achieving gross profit growth as our key metric. And in 3Q 'twenty three, We attained CAD75 1,000,000 of GP increasing by 38% year on year and 5% sequentially.

Speaker 2

We're still delivering best in class profitability. Our ratio of adjusted EBITDA to gross profit Came in at 75% for the quarter and our Rule of 40 framework, which adds our gross profit growth and our adjusted EBITDA over gross profit Margin continues to exceed 100%, coming in at 113% during the quarter. Free cash flow, Which you can reconcile in the accompanying presentation was $45,000,000 with a cash conversion ratio That still remains above 100%. Our investments remain thoughtfully focused on expanding our global team And building the appropriate processes, tools and governance mechanisms to ensure our business grows efficiently and scales the right way. During Q3, our team grew by 155 FT feet feet

Speaker 3

feet feet feet feet feet feet feet feet feet feet

Speaker 2

feet feet feet feet Es compared to the Q3 of 2022 Or by 22% year over year to 867 employees. Hirings were evenly allocated across the company As we have intensified ongoing efforts to strengthen support areas and further upgrade internal processes and tools, While maintaining our prior commitment to growing our engineering and sales teams, we continue to expand relationships with trusted financial partners, Adding more globally systemically important banks, panregional and national market leading banks For our processing, FX and hedging activities. To place some data points behind this and as is included in our quarterly presentation, 84% of all our foreign exchange transactions during the quarter were carried out via GSIBs and Penn Regional or National Banks, 7% via authorized broker dealers, 6% via our payment processing partners, 3% via authorized Net settlement fund flows and 0.3% through alternative assets. Before I turn things back over to Maria, I'd like to share some additional news regarding key leadership changes within the company. Firstly, our Chief Financial Officer, Diego Cabrera Canai has decided to step down from his position to pursue new opportunities.

Speaker 2

Diego has played a significant role in our financial success During his period at D Local, he's agreed to stay on through Q1 of next year to help us ensure a smooth transition. As one exec leaves, we're also strengthening our team. Diana Beitler will be joining us As Senior Vice President of Strategic Partnerships and Government Relations, Diana comes to us after 8 years at Microsoft And the Bill and Melinda Gates Foundation. We've also appointed Ricardo Brakewell as our Chief Accounting Officer. Ricardo joined the team after 12 years at Cielo, Brazil's largest publicly listed merchant acquirer leading their accounting, Treasury and Control Operations.

Speaker 2

I want to welcome both Diana and Ricardo and wish Diego the best in his future endeavors. Let me now turn the call over to Maria to dive deeper into our business performance during the past quarter.

Speaker 4

Thank you, Pedro. Hi, everyone. During Q3, we continue to see strong growth across all verticals. We highlight As we continue to see strong traction through our platform solution for marketplaces, particularly In Brazil and Mexico, this growth was followed by ride hailing, up by 81%, streaming Up by 59% and SaaS, up by 54% year on year. This quarter, we observed A lower growth in Financial Services vertical, increasing 23% year on year, driven by customer churn At 2 of our Financial Services Merchants, in Q4, we anticipate sustained growth In the commerce vertical driven by the festive season.

Speaker 4

In terms of product, during Q3 2023, Paints increased by 68% year on year. Compared to Q2 2023, most of the growth came from pains, which increased 8% Our payout volume remained stable quarter on quarter as we saw lower growth from our financial services vertical. Year on year growth was a very solid 73%. In terms of service mix, our cross border and local to local volumes Showed strong growth year on year with the latter doubling year on year. Sequentially, we continue to see higher growth with our local to local volume, Increasing by 10% quarter on quarter, while cross border volume increased 2%.

Speaker 4

As a consequence, the share of local to local increased, Reaching 51% in Q3 2023. In terms of geography, in Latin America, which is our largest region, We continue to experience sustained strong revenue momentum in Brazil and Mexico as we continue to grow with our existing customers And gain share of wallet. Growth in both countries has been driven mostly by margins from commerce, On demand delivery, streaming and travel verticals. We saw lower revenues in Chile, mainly driven by The slowdown in the financial services vertical as explained earlier. In Argentina, we saw higher revenue driven by the widening Spread between the official and the parallel exchange rate, while gross profits remained fairly flat despite the devaluation in the quarter.

Speaker 3

We continue

Speaker 4

to see strong growth in other countries in Latin America, including Dominican Republic, Colombia and Guatemala. Our business in Africa and Asia continues to perform very well. In Q3, revenues in Africa and Asia increased 14% Year on year despite being negatively affected by the devaluation of the naira. Excluding Nigeria, This region grew 79% year on year, mainly driven by Egypt, Kenya, Vietnam, South Africa, Philippines and Saudi Arabia. In Q3 2023, Nigeria revenues decreased by 39% year on year And 59% quarter on quarter.

Speaker 4

Continued strong growth of our diverse merchant base across multiple emerging markets Translates into solid NRR, which was 141% in Q3 2023. We have built Strong merchant relationships and we have a tremendous opportunity to continue capturing more volume as our wallet share with our largest margins It's still low double digits. Diego will now review the financial highlights.

Speaker 5

Thank you, Maria, and hello, everyone. As Pedro mentioned, I have decided to step down as Chief Financial Officer of De Locale to pursue new challenges. This is decision that I have been discussing with the Board and I believe now is the right time. It has been an honor to serve as the company's CFO for the past 3 years, Working with such talented individuals, and I'm very thankful for the trust and support of the Board and the senior management of Vlocal. During the forthcoming 4 months, I will remain fully engaged and committed to facilitating a smooth handover process.

Speaker 5

I am confident in the company's prospects I firmly believe that under the continued guidance of the Board leadership, delocal will persist in its trajectory of growth and success. With that, let's get into the quarterly results. Revenues reached a record high of $164,000,000 in Q3 2023, growing forty 7% year over year, while quarterly growth remained positive at 2% quarter over quarter, even after a particularly strong Q2. We remain focused on growing absolute gross profit dollars. Our gross profit reached $75,000,000 in Q3, Up 38% year over year and 5% quarter over quarter.

Speaker 5

Gross profit margin increased from 44% in Q2 to 45% in Q3, Positively impacted by a higher share from Africa and Asia, driven by countries with higher than average gross margin and lower exploration cost in Nigeria. Net take rate remains stable at 1.6%, showing our pricing power continues to hold steady despite continued TPV growth. Compared to Q2, we saw a positive contribution from the higher share of pay ins and from certain countries in Africa and Asia with higher than average net take rate. This was offset by the higher share of local to local volume. Profitable growth remains a top priority.

Speaker 5

During the quarter, were able to grow our adjusted EBITDA to $56,000,000 up 34% year over year and 7% quarter over quarter. Adjusted EBITDA margin increased by 2 percentage points quarter over quarter to 34% in Q3. Our adjusted EBITDA over gross profit increased to 75% quarter over quarter. Net income totaled $40,000,000 during the quarter, Growing by 25% year over year. Sequentially, it decreased by 10% quarter over quarter.

Speaker 5

As detailed in the accompanying presentation, Quarterly net income was negatively affected by the impact of Argentine devaluation on intercompany loans denominated in U. S. Dollars, Inflation adjustment under IFRS and stock based compensation. This was partially offset by gains from hedge bonds acquired to protect from that devaluation. We also observe an increase in our effective income tax rate from 16% in Q2 to 18% in Q3.

Speaker 5

As a result of the country mix, we hired local to local share of pretax income and the non deductibility of IFRS inflation adjustment. Moving to cash flow. During the quarter, we observed strong cash flow generation of our own funds, mainly driven by our net income and also by the recovery of $20,000,000 Of the restricted cash we held as warranty for standby letters of credits, decreasing the amount of other assets to $28,000,000 in Q3. We used part of our own funds to acquire an additional $54,000,000 in Argentine dollar linked treasury bonds as the final part of our investment plan for Argentina. Merchant funds decreased quarter over quarter, mainly driven by a decrease in net trade payables, particularly due to a reduction in the settlement periods To certain merchants, as Pedro mentioned earlier, our net income to free cash flow conversion continued to be about 100% With $45,000,000 of free cash flow generated during the quarter, we believe that our strong cash position remains a competitive advantage as it allow us To continue investing in

Speaker 2

the business, Pedro, the floor is yours. Thanks, Diego. Everyone here at D local is proud of the Strong set of results we've delivered year to date. We are reaffirming our outlook for fiscal year 2023 And expect to end the year in the upper range of the revenue guidance between $620,000,000 $640,000,000 and in the mid range of the adjusted EBITDA guidance Of CAD200 1,000,000 to CAD220 1,000,000 We continue to be incredibly constructive about the growth potential that the company has. There's plenty of more growth to come and opportunities to unlock across emerging markets.

Speaker 2

We have a massive long term opportunity ahead of us And we will continue to execute on it. Let me remind everyone, D local is only getting started. One last thought, I want to send a big thank you To our entire global team for the work done, to our customers and our investors for their continued support and trust in us. And with that, let me hand things back over to the operator to open up for your Q and A, which Seba and Sergio will also be joining us to take. Thank you.

Operator

Thank you. One moment for our first question. Our first question comes from the line of Jorge Quirre with Morgan Stanley. Your line is open.

Speaker 6

Hi, everyone. Good morning and congrats on the numbers. And Diego, best of luck I wanted to ask about the devaluation of the currency in Nigeria and the impact of higher revenue. I just want to make sure it's clear how the FX impact is. I was of the understanding that The vast majority of your cross border transactions, you were charging commissions based on the dollars Appropriate or move back to your merchant home base.

Speaker 6

And Ken, As they continue to charge a certain amount in dollars to the customer, the commissions will be affected by the evaluation, which It seems to be the case. And we were not really exposed to any FX movements on the cross border transactions. And I believe that's kind of The way you portray the business, especially when people ask about Argentina. And then in the local to local portion, I also have the understanding that We had hedges in place to make sure that your revenues were protected. And so I wanted to understand what exactly happened in Why are your revenues down 60%.

Speaker 6

And I guess it's an important question also because We're probably a few days, maybe a week from getting a big deal in Argentina, given the changing government. And so I also wanted to get your view on how that's going to play out or what the potential impact of your businesses. Thank you.

Speaker 7

Hi, Corte. How are you? This is Diego. So on Nigeria, overall, The impact of the conversion FX rate, as you remember in May, I think it was basically the parallel FX rate and the Official extension of Nigeria Converse. That was substantially neutral on our gross profit dollars in Nigeria.

Speaker 7

The only impact is on our gross revenues. As the difference between the two exchanges reduces, we have lower repatriation costs For taking those dollars out of Nigeria to our operating companies, and therefore, we charge lower revenues to our merchants. But on a gross profit level, that tends to be neutral. Just to give you an idea, the impact on gross revenues is approximately Compared to Q2, it's $10,000,000 more of revenues if the FX difference in Nigeria We have been the same as in Q2. But again, this is in gross revenues.

Speaker 7

On a gross profit level, it's neutral. Our local to local business in Nigeria is very small and that didn't have any meaningful impact. Argentina is a quite different economy. We have, as you know, everything hedged in Argentina. And we don't have these levels of most of our business in Argentina has always been an official race.

Speaker 7

So we don't have these levels of difference between the official and the unofficial in Argentina.

Speaker 8

Dio, if I may complement. Jorge, hi, Polari. It's Sebas here. Thanks for your question. Our business in Nigeria today, it's better than last quarter.

Speaker 8

At a gross profit level, this has been neutral. What you see is a smaller Amount of revenue that we are booking, there are also a smaller amount of costs that we are booking and at a gross profit level, which is what we are keeping track of. This is Dintro. Why do we keep track of gross profit? Because that's a metric that indicates how much profit we are making from our merchant transaction.

Speaker 8

The other stuff we don't control. We are fully hedged. So the decline in revenue is not a part of us taking a loss by no means. What's happened is that the gap between the market rates and the official rates shrunk. Therefore, the revenues we book are smaller.

Speaker 8

Also the cost we booked are smaller and at a gross profit level, this is neutral to positive. The reason why I say we have a better business in Nigeria today than we did before Because these market conditions are healthier and easier for our merchants and advocates. We need or we are a better business when there is market certainty. We believe that the steps that Nigeria have taken are positive. When we have merchant discussions, they welcome what It's now easier to understand how the market operates.

Speaker 8

By the way, the same applies to Argentina. We are very optimistic on what's to come in Argentina. This is not a political statement by no means, but this is a view of our markets having a clear set of rules, still allow our merchants to invest more. If you look at our business, we continue to be indexed to the growth of our DISC Global Merchant. So whenever there's more clarity, our merchants our business tends to benefit.

Speaker 6

Thank you for that. And if I may just add a quick follow-up. Could you remind us On the financial services vertical, what are the main companies, if you can, that you're operating for?

Speaker 8

Sure, Jose. The ones that we are able to mention are Typically, public companies, within the U. S. Companies like World Bank, Pioneer, Flywire, where they essentially utilize our last mile To finalize transactions in emerging markets where they operate. These are typically customers that give us distribution to merchant segments that we're going to be going after.

Speaker 8

Otherwise, LiveWire onboards universities and hospitals, which are the type of merchant we typically go after. And that's why we like those questions. All of this is the partnership we have with Visa Airports, which essentially sells to global banks. We made long ago, we made that that's not the type of customer we want to pursue directly, and that's why we have those partnerships in play.

Speaker 6

Great. Thank you very much.

Operator

Thank you. One moment for our next question please. Our next question comes from the line of Tito Labarta with Goldman Sachs. Your line is now open.

Speaker 9

Hi, good morning. Thank you for the call and taking my question. A couple of questions actually, if I can. 1, I guess, A little bit of a follow-up to Jorge, but more, I guess, on Argentina. Just I think helpful just to go through the mechanics a little With devaluation Argentina, I mean, revenues have actually come up this year a bit in Argentina.

Speaker 9

How should the devaluation impact Revenues specifically in Argentina and I think there was also some impact related to inflation accounting. How should we take that into account Going forward. And then my second question, I think Pedro, when we met a few months ago, you mentioned you were kind of reviewing the business, We'd see if there were any additional investments that are needed. Notice you kept your mid term guidance unchanged, although there were some management changes with Diego And some other people that were hired. Just any update on sort of that review?

Speaker 9

Could there be future changes to the guidance? Do you think everything is in place that you need to continue to grow and scale the business from here? Thank you.

Speaker 10

Sure, Tito. So let me start with Argentina, given that it's topical. First of all, as we've stated throughout, We've always taken a long term view on Argentina, and this is a market that we've remained committed to throughout. We actually think that the removal of uncertainty after the election, and I think potential for a more Stable economy bodes well for our merchants in Argentina going forward. If you look at some of the slowdown in the business, although it has continued to grow Through the tough macro and the devaluations potentially gets reversed if we see that economy rebounding.

Speaker 10

So when we look mid term, we see more positives than negatives to emerge out of Argentina. From a devaluation perspective, Really the impact will depend on how fast our merchants reprice. So you could see a growth in TPV To adjust to a new level of peso to dollar, we remind you that most of our merchants are global merchants that have an underlying dollarized cost to what they offer in Argentina. And equally important, as Diego mentioned earlier, from a financial perspective, Our exposure to the Argentine Peso is fully hedged. So All in all, when we look at Argentina going forward, despite shorter term dislocations that might occur If there is a strong devaluation, the more important trends are mid term.

Speaker 10

We think it bodes well for that market. Our merchants have the ability to reprice over time and our Argentine Peso exposure is almost entirely hedged. On guidance and cost, as mentioned in the prepared remarks, We continue to invest behind strengthening the foundational pieces of our business. There's a lot of work that's going on now that was already going on and there's also additional work of scoping where else we can strengthen. We mentioned our increased partnerships with globally Significant banks, with National Banks, I think the more appropriate time to Finally conclude on whether we need to change guidance or not is not now.

Speaker 10

For now, we've reiterated our midterm guidance And our underlying belief is that with the incremental gross profit that can flow through the P and L from our continuous growth of the business And the way we're seeing things trend towards the end of the year will suffice to reinvest back into the business where necessary. But once we reiterate annual guidance for next year, we'll have even more detail on that front.

Speaker 9

Okay. That's great. Thank you, Pedro. It's helpful color. Maybe just one quick follow-up on back on Argentina.

Speaker 9

Just to understand the impact of the inflation accounting, Just to understand, is that something is that related to the operations of the business? Or was that related more to the bond that you guys bought? Just as how would that impact The results going forward.

Speaker 7

So, hi, Tito. Inflation adjustment is required by IFRS for Hyperinflationary Campis, which is the case of Argentina, is a non cash adjustment, if you want. Basically, you need to restate Revenues, costs and everything based on current prices and then divide them by the new exchange rates that appear From time to time. This particular quarter, we have, as you probably remember, the evaluation of the official exchange right after the primary elections. And that was the main driver of that loss that you see in the P and L.

Speaker 7

That will continue or not depending on Our prices in Argentina and the Guarulhos occur. What is important to know that it is a non cash

Speaker 10

adjustment. And picking up on that, let me just compliment more on the actual financial exposure and instruments, and you will see Significant disclosure in the accompanying presentation. What happened in the Q3 is the following. The U. S.

Speaker 10

Dollars that we invested in Argentina generate an intercompany loan That sits on the Argentine balance sheet in U. S. Dollars. That actual position is fully hedged. So at maturity, there is a derivative instrument that entirely protects that investment.

Speaker 10

In the interim period before maturity, The bond, which has the derivative, actually trades at mark to market. And during the Q2, there was Some dislocation between the mark to market value of the bond and the actual derivative. That is the loss that you will see and the gain that you will see disclosed in the package. So the U. S.

Speaker 10

Dollar liability generates an exchange impact on the P and L and the value of the bond almost entirely offsets That loss, but it wasn't a perfect hedge from an accounting perspective because it's mark to market. What's really important to say is that At maturity, the bond is a perfect hedge to the investments made in Argentina and the outcome of the election actually generates Greater certainty that those hedges and those bonds will be honored.

Speaker 9

Okay, great. Thanks, Pedro and Diego and best of luck, Diego, on your new role on your future endeavors.

Operator

Thank you. One moment for our next question please. This question comes from the line of Jason Kupferberg with Bank of America. Your line is now open. Jason, your line is now open.

Speaker 11

Sorry about that. I wanted to ask about Brazil, triple digit growth there This quarter, it's really accelerated significantly over the past couple of quarters. So wanted to see how you feel about the potential sustainability These elevated growth rates, I know you got the new payment license back in July, and it sounds like the platform business is doing well there, but wanted to get a sense on your visibility of these very strong trends in Brazil revenue growth perhaps continuing here over the next 2 or 3 quarters? Yes.

Speaker 10

So we see extremely strong performance in our 2 largest markets, Brazil and Mexico, Which is a great indication of the strength of our business and our merchant satisfaction with what we're offering. We're seeing that strength as you can see in the vertical breakout across most verticals. But interestingly enough, It's most marked in our largest vertical, which is commerce. A significant portion of that growth is a consequence of our platform product That we launched last year and is really solving complex payments flows for very large global marketplaces across And so everything seems to point to the direction of high levels of merchant satisfaction That we're solving complex problems for them across these markets. And therefore, we are still positive About those markets despite the fact that they are our largest markets and are quite stable markets.

Speaker 11

Right, right. Okay. And then just a 2 part question as a follow-up. The first part of it is just revenue from new merchants It was down a bit quarter over quarter. So just curious how that came in versus your expectations.

Speaker 11

And then Pedro, if you could just comment a little bit more about I think you made some comments Around hiring more for internal processes. I know you're bringing on the new Chief Accounting Officer. What have you seen kind of And the back office operations as you've dived in to

Speaker 8

D local the last few months.

Speaker 10

Great. So, I think if you look at concentration from larger merchants, You do see that growth was driven more in the past quarter by The expansion within merchants we had previously landed, that's just the way this quarter played out. Again, that's positive in that It shows that our ability to gain new merchants and then increase our share of wallet and grow their businesses is still very strong. During the quarter, new merchants was somewhat less of a driver of growth, but still growing. The pipeline looks very healthy when we look at more constant terms and the more current period.

Speaker 10

So I wouldn't look Too much into that for any negative signal. Again, the pipeline remains very healthy.

Speaker 6

Yes. And if

Speaker 8

I may complement on that Point on the pipeline and the new growth. So there's a natural lag in terms of that metric. So one thing is when we onboard those customers, Then there's a relative delay on how fast those customers ramp up. Particularly during this quarter, we've onboarded the biggest company in the world, And we are yet to see those results. So we are very optimistic about our ability to continue to land new customers And then kicking within NRR and not doing retention, which is, again, our R and R and D metric.

Speaker 11

And just on the back office, Pedro, just your yes, thanks.

Speaker 10

Again, I want to stress this and be very clear. Ordinary course of business, this is a company that's growing top line at nearly 70% across For the emerging markets, it's expected that we have to continue to invest behind all of our back office operations To ensure that they are as robust as our merchants require, remember that a big part of our value proposition is that we are dealing With a payments layer, but also a compliance and regulatory layer on behalf of our merchants. And so that should always be an focus and investment for us, but just ordinary course of business. Also remind you that when you look at our value chain and hence The disclosures on who we operate with in terms of financial institutions, We move money around primarily through global banks, national and regional banks. And that also generates, I think, a second layer of solidity To the operations that perhaps in the past we hadn't been as clear about.

Speaker 11

Thank you for the comments.

Operator

Thank you. One moment for our next question please. Our next question comes from the line of Jamie Friedman with Susquehanna International Group, your line is now open.

Speaker 10

Hi. Good morning, guys. Thanks for taking the questions. So One for you, Pedro, and then one for you, Sara. Pedro, in your prepared remarks and even in your Prior answer, you're talking about the fabric of these global banks.

Speaker 10

That's a message that I was less familiar with coming from D Local. I'm wondering why you're prioritizing that in the message. I just wanted to try and understand why that's Important. That's the first one. And then, Seba, I just have to ask, I think you said in your answer to the previous one, Something about boarding the world's largest.

Speaker 10

What was is that in context of the Logos that you had referred to in the Q2 that you had won, I realize you may not be able to say who that is, but if you could at least say what, I don't know, vertical, it might be or because I think you said that in the previous answer. Thank you both. Jenny, so thanks for the question on banks. And I think that's simply one of the feedback we got from investors is that perhaps we hadn't educated The Street enough On how it is that we actually carry out repatriation of money and there was a perceived Notion of potentially more usage of alternative assets or smaller broker dealers and that's simply not the case. The vast majority of our fund flows, ForEx derivatives are carried out either Through globally, sustainably, systemically important banks or national Market leading banks or regional market leading banks.

Speaker 10

And I think it's just an idea to give increased disclosure On not just what we do, but how it is that we do it.

Speaker 8

Thank you, Pedro. Jamie, on the question on the commercial front, we cannot disclose the name, but we've onboarded the A multi vertical global leader, which is one of the top 5 biggest companies in the world. When you look at our merchant base, We've been able to disclose some of those numbers. We continue to work with others to be able to name them during this call. But we've also been very open about the fact that we want to onboard top 500 companies on the Internet, I make sure that they are customers of ours.

Speaker 8

In investor discussions, I've been very open about the fact that there are some of We're missing and we knew who they were and we wanted to make sure that they were our customers. Today, we are proud to say that 1 more logo has become a customer of Fox.

Speaker 10

Got it. Thank you both. I'll jump back in the queue.

Operator

Thank you. We ask that you limit yourself to one question until all have had a chance to ask your questions and after which we'll answer any additional questions as time permits. Please stand by for our next question. Our next question comes from the line of Neha Agrawala with HSBC, your line is now open.

Speaker 12

Hi, thank you everyone and congratulations on the results. My question is more on the tax rate. We've continued to see an increase quarter over quarter on the effective tax rate. Could you explain, I saw the reasoning in the earnings release, but could you talk a bit more about why the effective tax rate is going up? And more importantly, should we expect this trend to continue?

Speaker 12

And is this inbuilt in the guidance that you have provided? It's not on the bottom line, but should we continue to expect this to go up in 2020 4 as well and what is a good rate to expect in the coming years. And also the concentration in your Top margins continue to increase, which likely means a pressure on take rate. So is there a way that you can diversify a bit more? Is that a goal that you're looking

Speaker 7

Hello, Nika. On taxes, the income tax rate that we have is the result Both the country and product mix that we have and as you know, we don't solve for that. Particularly, we have been seeing in the past few quarters a sequential increase in our local Local business and that is basically tax on local tax rates, which are higher than average. So that is the main driver to that. Also, we discussed What about the inflation adjustment that has a loss that is nondeductible for tax basis and that also affects the tax rate?

Speaker 7

And we don't guide to a particular tax rate. Again, we say that Ceteris Paribas will continue the same line that it is now, but it will continue to change based on the different trends that we have in our country mix

Speaker 10

Hi, Micha. On concentration, we don't manage our business to that metric. I think the increase in concentration you've seen is a testament to how much share of wallet we've continued to gain From some of the largest global retailers and that's good news. Having said that, if we think over longer periods of time, Seba was mentioning, We aspire to have the 500 largest companies, digital companies in the world going through the platform. And so the longer term tendency, yes, We believe we will diversify, add new logos and that over longer periods of time, we should see Diminishing dependence on any 1 or 10 single merchants.

Speaker 10

Also remember that that top 10 is not always the Same top 10 as you had in the prior quarter. This quarter, 3 of those are actually new top 10. So there is increased diversification going on even when the concentration in The 10 in any given quarter might have gone up, driven by the stellar performance in Mexico and Brazil Of our platform's product.

Operator

Thank you. One moment for our next question please. Our next question comes from the line of John Coffey with Barclays. Your line is now open.

Speaker 13

Great. Thank you very much for taking my question. I just had 2 short ones. I saw that the revenues in Chile looked like they went down about 9%. And seems like Chile had always been a fairly good grower.

Speaker 13

I wasn't sure if there's any one particular driver there. So just to care a little bit more about Chile. And the second question is, it looks like sales and marketing, those expenses stepped up in Q3. Perhaps that ties to Pedro's earlier comments that you're investing in your sales channel. But How should we expect your thoughts about investing in the sales and marketing going forward through the rest of this year and onward to next year?

Speaker 10

Let me take Chile, Diego can take the expense question. So Chile is driven by the financial services vertical. Seba had explained previously that Financial services vertical in many instances is us being used as distribution for certain segments of merchants that we don't or financial institutions that we don't access directly. 1 of our financial services partners for Chile Lost a client that explains that decline. On the flip side of that, We have gained direct access to that client.

Speaker 10

We're still ramping up. So potentially longer term that could be positive news. Short term, the Chile decline is driven by a client loss from one of our financial services partners.

Speaker 7

Sorry. And regarding sales and marketing expenses, if you compare to Q2, you will see an increase from $3,000,000 to 4 $400,000 Actually, the number that was a little bit affected in Q2, which was affected by a recovery of stock based compensation. If you look at the longer sequence like the previous quarters, you see for reason that Q1 was $4,900,000 Q4 of last year was roughly $4,000,000 So the trends continue to be the same. The outlier was particularly in Q2 that had a recovery of basically of stock based compensation for features.

Speaker 14

All right. Thank you.

Operator

Thank you. One moment for our next question please. Our next question comes from the line of Matt Code with Autonomous Research. Your line is now open.

Speaker 15

I just wanted to ask one more on Argentina. And I know it's kind of uncertain, a little bit of a black box But wanted to ask about dollarization and the impact on your business, if that ultimately occurs.

Speaker 16

Hi, this is Sergio. Thank you for your question. As you know, there's a lot of uncertainty about that. The elected President said that he's planning to build a rise, but lately, It seems to be a bit more remote, so it will take some time. And If it were to come, what we envision in general terms, what we envision is that the more Certainty that there is around Argentina, the more our customers are going to be best in the country.

Speaker 16

Argentina, By the type of this economy and by our previous experience, it should be one of our top three countries in terms of volume. So we are the more certainty that there is around the country, the more bullish and the

Speaker 8

more positive impact it should have Just to complement on that, I think Well, it's very early to say what's going to happen in Argentina. We welcome normalization. But at the same time, Argentina is still a country that is full of friction. Even in the context Full diarization, many of our merchants won't operate locally. There's still going to be cross border settlement fees.

Speaker 8

So we expect our business to thrive even in that scenario.

Speaker 15

That's super helpful guys. And then just one quick follow-up that I had. Just on the financial services vertical, you guys have mentioned churn a couple of times. So I just wanted to make sure that we understand that properly. Is it Churn that your financial services partners are experiencing?

Speaker 15

Or is it churn in terms of you lost some financial services partners? And then I just wanted to make sure, did we experience that full impact of any churn in 3Q? Or is there some impact to come in 4Q as well?

Speaker 8

Matt, thank you very much for the question. Super important to clarify. We've had no churn whatsoever in our merchant base. So all of our financial service partners continues to be customers of ours. Some 1 or 2 of them have lost customers of theirs And therefore, we've been exposed to that.

Speaker 8

As Pedro mentioned before, with one of those key customers, we managed to build a direct integration, which hasn't ramped up Yes. So we've taken the hit, but you haven't seen the upside yet.

Speaker 3

Awesome. Thanks guys.

Operator

Thank you. One moment for our next question please. Our next question It comes from the line of Guilherme Grismann with JPMorgan. Your line is now open.

Speaker 14

Hi, good morning everyone. Thank you for the presentation. Just one question on G and A on our side. We saw a meaningful drop Quarter over quarter 17%. Just want to make sure there is nothing here less recurring this quarter.

Speaker 14

And how should we think about G and A going forward? And if I may, just a clarification, Esteban Argentina, just want to make sure I got the message. If there is a big depreciation of the FX, You guys are saying that from an accounting standpoint, we should not expect meaningful impact to earnings. Is that right? Thank you.

Speaker 10

Let me start with Argentina quickly. And we're not trying to avoid the answer. The reality is that there are multiple factors That will boil into whether we have an accounting impact or not from Argentina. So let me try to recap again. We have hedges on our Argentine positions That at maturity will fully cover us financially from any devaluation.

Speaker 10

Prior to maturity, Those instruments are mark to market. And if for some reason the performance of the instruments Mark to market doesn't entirely follow the underlying hedge, which is what happened in the Q3 And you can look at the disclosures for breakouts, then you could have an accounting impact. Furthermore, as Diego walked you through, IFRS inflation adjustments could also generate accounting impacts from a devaluation. The third portion of this is how fast our merchants reprice under a devalued scenario To protect the dollar value of the digital services that they are offering. So all in all, financially hedged And then what the impact of the deval is shorter term will depend on those variables and it's not that easy to predict beforehand.

Speaker 14

Okay, super clear. And on the G and A?

Speaker 7

So overall, we see G and A expenses stable quarter over quarter. I don't know if you refer to specific line item, maybe we can G and A, we see very stable quarter over quarter.

Speaker 8

Guillermo, if I can complement on the previous question and the remark that Pedro made. I know Argentina, it's top news. We've all seen the elections. We operate across 40 markets. Argentina represents less than 15% of our revenues.

Speaker 8

And we believe that the worst It's behind us in Argentina. So if anything, there's upside to be had from that country. But at the same time, the beauty of our business is that You can have Brazil technique at all at very fast speed, Mexico, Egypt, Vietnam, Indonesia, Saudi, Kenya. So the reason why we built a business that operates across 40 countries is exactly to have natural hedges in our business and have multiple growth levers. Some of those levers are going to be faster in given quarters and others are going to be slower.

Speaker 8

But fundamentally, we have built this business to be reliant To be resistant to any particular crisis across any particular market, and I think you've seen that effect. We've gone through Many crises across many geographies and our business continues to operate at scale and continues to be able to grow. So I don't want to lose sight of that fact, which I think is

Speaker 6

Okay. Thank you.

Operator

Thank you. One moment for our next question please. Our next question comes from the line of Kyle Di Prado with UBS. Your line is now open.

Speaker 3

Hello, everyone. Thank you for taking my question. Two quick on my side, please. First, in our presentation, you mentioned that e commerce has become their main vertical and Pedro also just mentioned about the launch of The platform solutions last year that is supporting this level of growth. So just would like to better understand here what This growth after the launch of this feature, if there is any competitive advantage in this platform solution, what are you doing differently from your competitors in the business?

Speaker 3

And also if you can share after the launch, how was the evolution of the share of wallet of your main e commerce peers? And that's my second one is in terms of your cash position. This quarter, we saw a reduction in cash Due to lower settlement period again for Central Merchants and you also mentioned the repatriation of outstanding loans. So Just would like to know if you could share a little bit more details on both the reasons behind that, Actually, on the reduction of the settlement period for certain merchants, why did that happen this quarter? If this was a one off or if it indeed changed

Speaker 10

Let me take the Commerce one. So yes, the platform solution, which is not only for Commerce by the way, right, But was part of the story behind the stellar growth in the commerce category. It's not the only explanation. We have many commerce merchants that grew very well in the quarter. I would say that there are competitive advantages to our solution And that our solution has been tailor built for the markets where we are offering it.

Speaker 10

And that has been one of the reasons why we have seen Very large global marketplaces either increase share of wallet through our platform solution or in some cases Fully migrate away from competitor solutions onto our solutions, driven by a very strong

Speaker 7

adaptation of the platform to their

Speaker 10

needs and to the local realities, both in Brazil, to their needs and to the local realities both in Brazil and Mexico. Specific numbers on share of wallet, we don't know. But like I said, we do know that in one instance, there was churn away from a competitor. And in others, given the growth in volume, We are receiving an overwhelming portion of their platform volumes in those markets.

Speaker 7

Regarding cash flow and settlement periods, so during the quarter, we had some negotiations of terms with a few merchants, large merchants, particularly in Brazil. They had higher than average settlement period and much higher than our collection period. So part of the transition of the term was a reduction of Those days that we pay, we were paying roughly 30 days and we're paying approximately 15 days to those merchants. That has a one off The

Speaker 3

effect that you see in

Speaker 7

the cash flow of around $60,000,000 it doesn't continue going forward. And it's important to point a couple of things. Once, we keep Our negative working capital for merchant funds, both on a total level, but also on a merchant by merchant level. And we have an excellent quarter in terms of generation of own cash. If you see the cash flow, we basically generated $45,000,000 of free cash flow.

Speaker 7

And if you add to that the $20,000,000 recovery of the restricted cash we had with certain banks that $65,000,000 generations of own cash. Part of that, as you also see there, was invested around $50,000,000 in the bonds that we have in Argentina.

Operator

Our next question comes from the line of Ashwin Shirvaikar with Citi. Your line is now open.

Speaker 17

Thanks. I had a question I guess my first question is on the The TPV evolution charts that you provided on Page 12, as I sort of look at the quarter over quarter growth, When I look at the relative growth of cross border TTV evolution versus local to local, Are there specific things you're doing to promote the local to local, if you could talk about that? Is it a trend that we should You continue. And then the flat growth on payouts versus the pretty good sequential growth on pay ins, What is the underlying factor that's driving that?

Speaker 10

Look, we are primarily focused on merchants That operate in 3 or more geographies that are large and global. And so purely local merchants are not merchants that we pursue. The local to local component you see growing very well is simply because our merchants appreciate our solution and our technology Sufficiently to also use us for local processing, which I think is very relevant Because at times that came into question whether we were competitive as merchants matured and markets matured And they had a growing portion of local to local business to complement with their cross border business that they did with us. And if you look at the data, we are consistently being chosen for both local to local and cross border. But this is not any sort of concerted effort To pursue local merchants, our merchant focus and segmentation remains multi geography merchants That will have a component of cross border and of local transactions.

Speaker 10

It's just testament to the strength of our solution. In terms of pay ins, We do see a very large opportunity sorry, in terms of payouts you had asked. We do see a very large opportunity And Seba mentioned this earlier. To help global remittance companies With Last Mile into the markets where we operate. And so there is an increasing focus on our part in that vertical.

Speaker 10

And we see the strength there when we look at the year over year evolution of that business. On a quarterly basis, that was somewhat Impacted by the financial service churn, we mentioned previously where one of our financial services partners That had payouts as part of their TD PPD lost one of their customers. But we still see significant strength and opportunity there And obviously, a strong payout business in markets where net settlement is possible also improves Our margins on the cross border component of our business.

Speaker 17

Got it. Got it. And then one question for Pedro. As you've looked at sort of the business and the evolution of the business over the last as you come in over the last That you sort of implement that can benefit a couple of points. And these points are, as I sort of look at TPV dollar growth versus revenue dollar growth, gross profit dollar, adjusted EBITDA dollar, there's always been a higher There are often been a higher growth rate for TPV versus revenue versus gross profit versus EBITDA, Which is kind of the opposite of what one might generally expect in a payments company with operating leverage.

Speaker 17

And the other thing, growth is often driven by 1 or 2 countries in spurts, Nigeria, Argentina and then the company gets into some sort of You know, idiosyncratic factors affect you in those countries. Are there is there a way to avoid these sorts of things Just from how you look at the future growth, I know it's a broad question, but that's what I had asked.

Speaker 10

Sure. So I think in terms of the financial model, which you allude to in the first question, In large part, this is a consequence of a growing Relationship with large merchants, so there is downward pressure on take rates. If you look at a year on year evolution, I think if you look at this quarterly, you see that pricing power has actually remained fairly Strong Q on Q, which is a good sign. But I don't necessarily think that over the shorter period, We will see a dramatic reversion in the fact that our TPV is growing faster than our gross profit. From a margin perspective, if you look at our adjusted EBITDA to gross profit, we have extremely high margins.

Speaker 10

And I don't think we are in a phase over the next multiple quarters where we should be focusing on significant margin expansion. I think that will come over the long run and the midterm as we grow out our overall size and scale. But right now, we need to make sure we continue to invest in a very disciplined fashion within the construct of our midterm guidance, But making sure that we continue to invest behind the opportunity we have, which is huge. So we do not have a design principle for this period Of delivering significant margin growth or GP growth above TPV. I think that's not the phase we're in.

Speaker 10

We're in a phase where we have an extremely attractive margin profile. We generate an extremely healthy Net income to cash conversion and what we need to focus is on sustaining growth and then the operational leverage will kick in more aggressively Over the midterm once we have a larger and more diversified business.

Speaker 17

Very helpful. Yes, Thank you.

Operator

Thank you. Thank you for your questions. This concludes today's conference call. Thank you for your participation. You may now disconnect.

Operator

Everyone have a wonderful day.

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Earnings Conference Call
DLocal Q3 2023
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