DLocal Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 18, 2023

There are 18 speakers on the call.

Operator

Good day, and welcome to the D Local First Quarter 2023 Results Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Instructions will be given at that time. As a reminder, this call may be recorded.

Operator

I would like to turn the call over to Soledad Nagar, Head of Investor Relations. You may begin.

Speaker 1

Thank you very much, operator. Good morning, everyone, and thank you for joining our Q3 2023 earnings call today. If you have not seen our earnings release, a copy is posted in the financial section of our Investor Relations website. On the call today, I'm joined by Sebastian Canovich, our Chief Executive Officer Jaco Bozinger, Our President and COO, Diego Cabrera Canai, our Chief Financial Officer and Maria Olman, Vice President of Corporate Development and Investor Relations. We are providing a slide presentation This event is being broadcast live via webcast, and both the webcast and presentation may be accessed through Dlocal website at investor.dlocal.com.

Speaker 1

The recording will be 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 the local current assumptions, expectations and projections about future events. While the company believes that our assumptions, expectations and projections are reasonable given currently available information, You are cautioned not to place undue reliance on those forward looking statements. Actual Thoughts may differ materially from those included in the local presentation or discussed in this conference call for a variety of reasons, including those described in the forward looking statements and risk factors section of VLOCAL filing with the Securities and Exchange Commission, which are available on the local Investor Relations website. Now, I will turn the conference over to Seba.

Speaker 1

Thank you.

Speaker 2

Good morning, everyone. Thanks for joining the call today. I'm pleased to share that we've had a very strong start to the year. Our TPB grew 70% year over year and 8% quarter over quarter, reaching $3,600,000,000 Our revenue grew 57% year over year and 16% quarter over quarter to $137,000,000 We continue to focus on growing our absolute gross profit and EBITDA dollars. We've added $7,000,000 gross profit And $5,000,000 EBITDA in the Q1 of 2023.

Speaker 2

Both figures increased double digit year over year and quarter over quarter. Gross profit grew by 42% year over year and 12% quarter over quarter to reach $62,000,000 and adjusted EBITDA Grew by 38% year over year and 13% quarter over quarter to reach $45,000,000 We have always been focused on delivering profitable growth while investing to achieve our long term ambition, Capitalizing on the huge opportunity ahead of us. We are proud to share that during the last 9 quarters, our ratio Of adjusted EBITDA, the gross profit has remained consistently above 70%. This is because Our disciplined investment approach is part of our DNA. We remain firmly focused on profitable growth at SKILL.

Speaker 2

We are still a young company in growth mode. Over the long term, there are clear opportunities to deliver operating leverage. Now Maria will discuss our operations and performance in Q1 2023.

Speaker 3

Thank you, Saba. Hi, everyone. During Q1 2023, we significantly grew our business with our top 10 merchants. In Q1 2023, Our revenue from our top 10 merchants reached $80,000,000 versus $45,000,000 a year ago. Our top 10 margins concentration actually increased in Q1 2023 because we delivered very rapid growth among our top 10 and with 2 merchants nearly entering the top ten list.

Speaker 3

We work extremely closely for our merchants. During Q1 2023, our top 10 merchants on average processed payments with us in 10 countries versus 8 a year ago, and all of them leverage the local products in at least one country in Africa and Asia. This is a testament to our successful cross selling strategy and to our merchants' trust in our solution. We are their partner of choice, both when they decide to go local in a country and also when they operate cross border. 8 out of 10 of our top 10 merchants processed with us both on a cross border and local to local basis.

Speaker 3

Moving to the next slide. During the quarter, we focused our efforts on deepening our presence In the countries in which we already operate, mostly in Africa and Asia, by establishing more direct connections with payment methods and acquirers and continuing to enhance our solution. In our last earnings call, Hako highlighted how Excited we are about the growth opportunity in Nigeria. Let me share a little bit more of our journey in this country. We opened this country back in 2019 because one of our merchants needed us to help them accept Local payment methods.

Speaker 3

As our roadmap is driven in great part by our merchant needs and the request was within emerging markets, We made the launch of Nigeria a priority. We were then able to offer this to our entire merchant base. And today, our solution in Nigeria is used by 6 out of our top 10 merchants. One great benefit of choosing our solution is the wide access to non traditional payment methods. According to Statista, in Nigeria, only 3% of the population have a credit card.

Speaker 3

So merchants rely on us To connect alternative payment methods and local card schemes such as Verb, the opportunity in Nigeria is massive as the country has a huge and young population. Also, from the perspective of our merchants, It is a market that is complex to operate in and they strongly benefit from our solution there. As we mentioned in previous quarter, gross take rate is significantly higher than average, while net take rate is largely in line with Gross profit margin is lower than the average, but we believe that over the medium to long term, As we go deeper into the region, developing more integrations and payment methods and gaining more efficiency in accessing the FX markets, The gross profit will expand. As we always emphasize, we focus on absolute dollar profit growth, Even with lower margin in the short term, maximizing absolute dollar profit will create the most valuable business in the long term. Now, I will pass on to Jaco to discuss our achievements in the different geographies.

Speaker 4

Thank you, Maria. Africa and Asia have been a key engine of growth for us. Our merchants continue to sign a strong demand for our solution in these geographies, And these markets also have attractive economics. The results of our push into these regions speak for themselves. Revenue in Africa and Asia in Q1 2023 grew by 2 97% year over year and 53% quarter over quarter, Reaching $39,000,000 with a large part of the acceleration driven by Nigeria.

Speaker 4

Asia and Africa already represent Airellion portion of our business at 28% of our revenue in Q1 2023. In Q1 2023, We saw strong growth in Nigeria with revenues increasing by 16 times year over year and 91% quarter over quarter. Nigeria accounted for 20% of our revenues in Q1 versus 2% a year ago. We are also very proud Of the progress we have achieved in several other markets such as Egypt, Morocco, Indonesia and Malaysia, all of them growing triple digits Year over year and becoming more relevant to our business. It is still early days for us in these regions and we are very excited about what we believe To be a significant opportunity ahead.

Speaker 4

Moving on to Latin America, we continued to see solid growth Across the region in Q1 2023 with revenue growing by 27% year over year and 6% quarter over quarter to 98 $1,000,000 Q1 2023 market Argentina's return to positive revenue growth, increasing by 41% quarter over quarter, Alvest still at slightly lower levels than a year ago. LATAM, excluding Argentina, showed Strong revenue growth of 38% year over year and was stable quarter over quarter. On a quarter to quarter basis, you might see revenue growth With GeoBerry, for example, in the past quarter, Mexico outperformed other markets. We look at 12 month view to see a normalized view In order to assess the development of our region, in the last 12 months to Q1 2023, each of the main countries individually Showed significant revenue growth greater than 20% year over year, a 62% growth on the aggregate. It is important to highlight that the revenue distribution by market is a result of our merchant strategy.

Speaker 4

Our commercial teams I'm internally organized for merchants and we do not optimize for targets by geography. We have global agreements with our merchants and we offer them access To all of the emerging markets in which we operate, supporting them in the markets in which they wish to grow. We continue to invest thoughtfully in expanding our global team. We have hired new talent, particularly in the areas of sales and marketing, tech and product and operations To pursue the opportunities we see in the markets and to drive towards our long term objectives. Tech related roles now account for around 41% of our FTEs supporting our rapid innovation of new products.

Speaker 4

In Q1 2023, We grew our team by 201 FTEs or by 36% year over year to 7 63 employees. We continue to recruit talent outside of the Americas as we focus on hiring locally to leverage on the ground knowledge and develop deep understanding of local market We reached 173 FT feet feet feet feet feet feet feet feet feet feet feet feet feet Es in Africa and Asia by the end of Q1 2023, representing 23% of our workforce. We will continue to invest in talent in a disciplined way, Thank you, and always ensuring that we onboard talent that has a strong cultural fit. We are proud of our team and believe it is as strong as ever. Diego will now review our financial highlights.

Speaker 5

Thank you, Jaco, and hi, everyone. We have seen a steady increase in pay ins and pay outs TPV quarter after quarter. During Q1 2023, pay ins increased by 52% year over year and by 7% quarter over quarter. Payouts increased by 133 percent year over year and 11% quarter over quarter. The product share remains relatively unchanged Quarter over quarter with pay ins accounting for 70% of our TPV and payouts for the remaining 30%.

Speaker 5

The contribution from payout has increased year over year as we have been successful in providing the last mile payment service in emerging markets To global public payment companies and we continue to position ourselves as the payment service provider of choice in emerging markets For Global Payroll, Rahealing and On Demand Delivery companies, we are product agnostic. All our products bring incremental profit. And when we combine them, they bring synergies both for our merchants and for us. Depending on which customers we onboard and their strategy in the quarter, The share of pay ins versus pay outs may vary. We see product diversification as one of the strength of our business.

Speaker 5

Going forward, we are very positive about the continued growth of our products. Our cross border and local to local volumes showed solid Both year over year and quarter over quarter. With cross border volume growing quarter over quarter by 12%, increasing its share contribution from 53% in Q4 to 55% in Q1 2023. As Maria mentioned earlier in the call, we have seen That large margins tend to have a combined strategy, and we expect fluctuation between services to continue from quarter to quarter. Revenues also reached a record high of $137,000,000 in Q1 2023, growing 57% year over year and 16% We continue delivering strong revenue growth both from our existing and from our new customers.

Speaker 5

During Q1 2023, of the 57% year over year revenue growth, 47 percentage points or $41,000,000 came from existing merchants and 10 percentage points or $9,000,000 came from new merchants. Our revenues over TPV or gross take rate was 3.8 during the quarter compared to 3.6% in Q4 2022. Fluctuations from quarter to quarter are mainly driven from changes in business mix, As Nigeria and Argentina with higher than average gross take rate were the main drivers of the quarter over quarter revenue and gross take growth. We continue to deliver a strong net revenue retention of 147% for the quarter. This is driven by very low churn, less than 1% year over year, the organic growth of our merchants in emerging markets and our ability to continue bringing them to new countries, products, Payment methods and increased share of wallet.

Speaker 5

Moving on to Slide 16, we remain focused on growing absolute gross profit dollars. During Q1, our gross profit reached $62,000,000 up 42% year over year and 12% quarter over quarter, With a net take rate stable quarter over quarter at 1.7%. During the quarter, we Gross profit from 1.8% in Q4 2022 to 2% in Q1 2023, which is in line with increasing gross take rate from 3.6% to 3.8%. These increases are mainly attributable to the increase in TPV in Nigeria, which has higher fees and higher exportation costs. From a gross profit margin perspective, margins dropped to 45% compared to 47% in Q4 2022 and 50% in Q1 2022.

Speaker 5

The waterfall chart on the right shows the main changes in our gross profit margin. Product, service mix and cost optimization contributed favorably to the margin as we had a higher share of cross border and payouts quarter over quarter. In contrast, the country mix reduced the margin as we experienced strong growth in Nigeria, which brings positive gross profit dollars with net take rate largely in line with other markets, but a lower than average gross profit margin. Excluding Nigeria, Gross profit margin would have been above 50% in the previous quarters, reaching 54% in Q1 2023, Increasing from 51% in Q4 2022, also excluding Nigeria. We also remain focused on growing our EBITDA.

Speaker 5

During the quarter, we were able to grow our adjusted EBITDA to $45,000,000 up 38% year over year 13% quarter over quarter. Adjusted EBITDA margin was 33% in Q1. The year over year and quarter over quarter decrease is driven by the gross margin decrease. Particularly in Q1 2023, The main driver of that decrease was the high growth in Nigeria with lower than average gross margin. Net income totaled $35,000,000 in the quarter, Growing by 35% year over year.

Speaker 5

Sequentially, it increased by 83% as in Q4 2022, We incurred nonrecurring expenses of $8,000,000 Before handing the call back to Seba for the closing remarks, I will touch on liquidity. In Q1 2023, we observed strong net cash generation of $50,000,000 even considering that we acquired $37,000,000 of our own shares The two main drivers of our cash flow generation were our profits and a sequential normalization of Funds advance or held in escrow as warranties for merchants and partners and the main use of cash was the buyback. During our last earnings call, we shared with you that we have taken extraordinary short term measures in the form of warranties and advancements of funds The situation to normalize over the next quarters. In Q1, we have already collected $10,000,000 Out of the $13,000,000 in advances we gave to some of our merchants and we recovered $4,000,000 of the restricted cash we held as warranty Or standby letters of credit, decreasing the amount of other assets from $57,000,000 to $43,000,000 Finally, we observed a sequential amortization of the settlement periods of our merchants that were in a few cases reduced in Q4, And we continue generating cash as we grew our TPV, altogether generating an inflow of $32,000,000 We ended March 31, 2022, With a consolidated cash position of $518,000,000 with $233,000,000 of own funds and $285,000,000 of merchant funds.

Speaker 5

We believe our strong cash position remains a competitive advantage. Seba, the floor is yours.

Speaker 2

Thanks, Diego. We are very proud of our strong start to 2023 and continue to be excited with the runway ahead of us. Our performance shows the distinctive strength of our business, which we continue to build focus on long term profitable growth, combining Our robust dollar growth on a TPV revenue, gross profit, adjusted EBITDA and net income basis From a strategic standpoint, a proven track record in executing our merchant cross sell strategy and outstanding geographic expansion, Capitalizing on the huge opportunity ahead of us. This is all underpinned by our tech DNA and merchant centric approach. Last and most importantly, our lean and disciplined culture.

Speaker 2

We deliver all this with a lean team, Continuously striving for excellence. Our culture is key to continue delivering our long term ambitions. We reaffirm our outlook for the rest of the year. Revenue between $620,000,000 $640,000,000 with an implied NRR between 140% 150% And adjusted EBITDA in the range of $200,000,000 to $220,000,000 We remain humble and focused on providing the best a most comprehensive solution for our merchants in emerging markets. I am thrilled to share more about our business and our trajectory in our first Ever Investor Day on June 8, we will be celebrating 2 years as a public company.

Speaker 2

A lot has changed Since the IPO, we are excited to see you again and share an update on the next chapter of our story. Big thank you to our global team, Our customers and our investors for their continued support. I'll now hand back to the operator to open up for questions.

Operator

Our first question comes from George Curry with Morgan Stanley. Your line is open.

Speaker 6

Hello?

Speaker 7

Can you hear me?

Speaker 6

Hi, Jorge. We hear you.

Speaker 8

Hi. Sorry. Thank you. Thanks. And congrats on the numbers Thanks.

Speaker 8

The additional disclosure, much appreciated. I wanted to see if you can double click on The Nigeria business evidently has grown to be your biggest geography. And there's a lot of questions out there in the market about How do you operate in that market that has very high capital controls and restrictions? Can you maybe walk us through what percentage of that business is cross border versus local to local? And the part that is Cross border, how does it operate from an FX perspective?

Speaker 8

Can you access all of your needs in the official FX market? Is there any restrictions for you to repatriate Currency, is there a parallel market that you're accessing? I think it will be beneficial for everyone to understand exactly The limitations on how you deal with them as you grow that business. And then my second question is on Argentina. There was a really nice uptick in revenues in Argentina in the Q1.

Speaker 8

And so just wanted to see if this is the first of several similar Step ups that we're going to see as that operation normalizes or was this sort of like a one off and you continue to expect the business to be a little bit under pressure because of the difficulties there? Thank

Speaker 6

you. Jorge, thank you very much. Thank you very much for the questions. I apologize in advance. I'm under the flu.

Speaker 6

So I apologize for my voice. Nigeria, so we are extremely excited about our results in Nigeria. We think it's very, very positive news. That's part of the beauty of the company and part of the beauty of our value proposition. We started in the GEA in 2019.

Speaker 6

So this is not an overnight success. It's taken us over 4 years to get to this point and we are extremely proud of it. Just to give you a sense, today, 6 out of our top 10 merchants are using us in Nigeria, both cross border and local to local. Nigeria has a market dynamic where there's very, very few international credit cards. There's a credit card called VERV, And as you said, sorry, I apologize, there's very limited there's very strict capital controls.

Speaker 6

What happens in Nigeria is that there's a market rate, there's an official rate and there's a market rate. We are accessing today the market rate, we are licensed to do so. And that's why you see our gross margins be lower than our net take rate sorry, that our gross margins be lower Than they are in average. Our net take rate is accretive. It's very much in line with other markets.

Speaker 6

In other words, we make money in Nigeria. We create value for our merchants, but the margins are lower. This is part of the expectations we have going forward. As we normalize access to the FX markets, As we gain scale in both pay ins, pay outs, cross border, local to local, we expect our margin to potentially increase. Hako, feel free to compliment please.

Speaker 6

Perfect. So So, Jorge, thank you very much for your time and thank you for the question.

Speaker 9

It's important to also mention as you asked As of today, we are able to fulfill 100% of our needs in the market and to operate at scale and to serve all of our merchants With a full suite of product, it's important to mention that Also in Nigeria, we managed to be super successful in Nigeria because for global merchants we want to grow and scale within the market. It's a must to go local Under the same API, they are integrated to us. They managed to offer all the local payment methods which are as of example verb And operate and grow and go for scale in the market.

Speaker 6

Jorge, on your question on Argentina, the best way to look at our business is Not by country by country basis and not on a quarter by quarter basis, but across regions. So your question your point is fair. We've had a great quarter in Argentina. We are seeing fundamentally good trends coming back to this market after a crisis that impacted us during Q3 and Q4. So you saw some of the normalization that we were mentioning.

Speaker 6

Obviously, Argentina is a complex market and it has its volatility. But I think the key point in Argentina is how reliant the merchants are on our service. This applies also to Nigeria. We are solving for very complex environments. We are solving countries like Argentina or Nigeria for merchants, including Facebook, Netflix, Spotify.

Speaker 6

So these are very relevant country and merchants on the ground and for the country. And we expect for them to be able to continue to navigate. We've operated successfully in Argentina since 2016 across every macroeconomic environment, and we don't expect that to change in the near future.

Speaker 8

Thanks, Seba and Jaco, and congrats again.

Operator

Thank you. Our next question comes from Tito LaBarada with Goldman Sachs. Your line is open.

Speaker 10

Hi, good morning, Seva Jacobo And everyone, thank you for the call for taking my questions. A couple of questions. 1, I guess, first a follow-up on Argentina. Just Some concerns about a potential currency devaluation. I know you've had a lot of issues in Argentina the last few quarters, which seem to be correcting.

Speaker 10

But if there is a devaluation of the currency, how could that impact your business, if at all? Just And then my second question, I mean, I guess around Latin America, but more Specific in Brazil, the growth in Latin America has somewhat slowed. And if you look at Brazil last four Quarters revenues have been kind of flattish. And I know you say, don't look at any one country in particular. But just to understand if there's anything going on, specifically In Brazil, why the revenues have been kind of flattish?

Speaker 10

Any color you can give on the outlook there would be helpful. Thank you.

Speaker 6

Tito, thank you very much for the question. So in terms of devaluation, we've been operating in Argentina for all these years and there's been constant devaluation And our business hasn't suffered from it. Keep in mind that we have global merchants that think of their products in dollars. So typically when there's a devaluation, they reprice. The evaluation doesn't affect at all our ability to expatriate or repatriate funds.

Speaker 6

It's just a different price at which we buy our stock currency. So we don't expect any impact On the evaluation of the currency, we don't have excess exposure to Argentina. Our revenues are in dollars, USD accounts. So The valuation of the peso wouldn't affect us the same way that it hasn't affected us in the past. In terms of Brazil, Your question is fair.

Speaker 6

We've grown Brazil last 12 months growth, it's been 30%. Latameter is 38%, Mexico, just to give you a sense, was 93%. The reason why I chose these metrics is because those are meant to be the most mature markets. We are seeing very positive trends already in Q2 in Brazil. Brazil, it's a market that has slightly more exposure in our end on retail.

Speaker 6

Retail, obviously, it's a little bit more seasonal in Q4 than in Q1. So we expect growth in Q2 to come from multiple different markets, including Brazil And Mexico, so if you will, we expect more of a normalization in that sense. We don't grow in step. We typically grow in step function. So you don't see linear growth and that's why I've seen it Annually, it's typically an easier thing to

Speaker 10

do. Okay. That's helpful. Thanks, Cielo.

Operator

Thank you. Our next question comes from Dom Falavino with JPMorgan. Your line is open.

Speaker 6

Good morning, everyone. Thanks for taking the question. So, a couple of questions here. The first one, Seba, just to understand, when you Provide services to your clients in Argentina. Are you able to provide the official FX Today about 230 or the market effects about 460?

Speaker 6

And then I ask the second one. Tom, hi. How are you? Thanks for the question. Both.

Speaker 6

There's a set of merchants that access what's called MULK, which is what you call the official rate. And there's another set of merchants that access The market rate. We've operated with both models. We spoke about this in our Q3 and Q4 calls where that access has been limited. What we've seen is that merchants do business in the country independently of the FX rate.

Speaker 6

The reality is that they are here to stay. Our merchants are very consolidated in this country. And the FX number or the price of the currency, it's just a given point. Keep in mind when you have our official rate, you also have a set of taxes that apply. So We operate in both models.

Speaker 6

We also have payouts, which act as a hedge and the opposite flow. So both dynamics are important. Hako, feel free to complement. Let me just ask, just to make sure and how about for yourself? Are you able to expatriate the official, The market or both also.

Speaker 6

Cargo? Marco, I think you are muted.

Speaker 9

Sorry. So Dom, Let me hear about one point. Our revenues and profits are dollar denominated also in Argentina. We call it revenues in dollars And our revenues are deducted prior to settlement, which are dollar denominated. Dollar tax has a rule in all of the markets including Argentina.

Speaker 6

Yes. But let me be get to the part where I want to understand. You're recognizing $20,000,000 approximately in revenues in Argentina. Those, if I understand accounting rules, they have to be converted by FX. We have other companies recovering there that are the same.

Speaker 6

But that other case, they don't really expatriate or they don't take out the money. So In reality, like if they were to exchange that in market rate, in your case, it would be like you're actually not earning $20,000,000 you're earning market rate $10,000,000 in Argentina. So the point I'm trying to get here is like when you convert, can you get the 230,000,000? And the same in Nigeria, because I understand you also are doing both Or we are looking at an accounting statement that has an official rate, but that money is either part or converted And how exactly does that flow into income statement?

Speaker 9

Thank you, Dom, and thank you for following up. We We'll reinforce this as it's very important. To be clear, we expatriate all the funds. We expatriate the funds at official rate. We get the dollar amount of everything we have expatriated and prior selling to the merchants, we deduct our fees in dollar amount.

Speaker 9

What that means that at the time we deduct revenues on fees, the funds are already in dollars in our operating entities In the EU or the U.

Speaker 6

S? There is no money parked in Argentina or anything like that We're not an accounting company. No. Dom, I want to add to this point. It's Nigeria.

Speaker 6

Yes. Our profits are in dollars, In U. S. And European Union accounts, it's not FX neutral, it's dollar accounts in global markets. We don't hold our profits in local currency in local Super clear.

Speaker 6

Thank you very much guys and congrats on the print.

Operator

Thank you. Our next Question comes from Jason Kupferberg with Bank of America. Your line is open.

Speaker 11

Thank you, guys. Good morning. I wanted to come back Tina sorry, on Nigeria, I should say, I know you've been there since 2019, but pretty remarkable growth just in the last 12 months. You've gone from 2% of total revenue to 20%. Can you just call out what some of the most significant drivers of that have been?

Speaker 11

Is it a handful of large merchants that have really scaled operations there? And then can you just go a little bit deeper into why the gross margin is lower? Is it pay in, pay out mix? Is it cross border, local to local mix? Is it just What processing costs are in the country for some of the alternative payment methods?

Speaker 11

Thanks.

Speaker 6

Jason, thank you very much for the question. So what has happened in Nigeria is that our product has gotten better incrementally. It's not easy to gain the trust of your merchants going to a new region. That's not something that happens overnight. Today, 6 out of our top 10 customers operate with us in Nigeria, and we are extremely, extremely proud Also from a competitive dynamic, you see that the reality on the ground is that there are not many alternatives to the service we offer, Particularly not when dealing with global public companies.

Speaker 6

I think we've been able to differentiate on that. And again, our product gets better over time. And We have a much deeper understanding, a much deeper product line in this country. And there are things that there is a clear understanding by global merchants that Nigeria is a I mean, by global merchants that Nigeria, it's a massive opportunity. You're looking at one of the biggest countries from From a population standpoint on the world, it's one of the countries where there's the most expectation for growth.

Speaker 6

At the same time, it's an extremely complex country to navigate. And when you add all those ingredients together, it's a perfect mix for us. The other thing I'd say It's not only Nigeria. I know Nigeria has been extremely positive and great growth, and we're very proud of that. But you see many of the same dynamics in our business, In Egypt, in Morocco, Indonesia, in Malaysia, some of that takes time, but over time and that's why we continue to insist on investing on this opportunity.

Speaker 6

We believe those things compound and allow us to differentiate. We are extremely, extremely bullish about the opportunity in Nigeria, not only because of Nigeria because But also because when merchants use us in Argua, we are a better company. We become more entrenched. We have much more significant competitive advantage and we differentiate from every other player In terms of margin, Maria, feel free to compliment. We have a much higher than average gross take rate.

Speaker 6

We have a very much in line net take rate, and that's a function of our cost of processing payments and exfiltration, and that's what's driving. I would insist on this point of the 40 countries. I know Nigeria calls out everyone's attention and we are very proud of it. But there's many levers And that's why we care so much about having these levers. You're going to have quarters where one country is going to grow faster.

Speaker 6

This case was Nigeria. There's going to be other quarters. It's going to be Brazil. This was going to be We think that's perfectly self sufficient.

Speaker 12

Thank you, Jason. Just complementing on the gross Profit margin, it's very important to notice that Nigeria is one of our expansion markets. And then as we go deeper in the market, building more connections with Akara And gaining volume scale, we have opportunities to improve our processing costs and expand our gross margin.

Speaker 11

Right, right. Okay. That makes sense. Just as a follow-up, I wanted to ask about your own cash Balance, I know you had the $37,000,000 of buybacks in the quarter. So we did see a quarter over quarter decline in your own cash.

Speaker 11

Just as we think about directionally for the For the Q2, how should we be looking at that figure? Do you think your own cash will go up or down Quarter over quarter in Q2.

Speaker 6

Dio, do you want to take it? Sure.

Speaker 7

Thanks you for the question. I'm starting to say, we had a very strong cash generation during the quarter. Our total cash increased by $50,000,000 Even after investing $37,000,000 in In

Speaker 6

the share buyback

Speaker 7

program, this would have been $87,000,000 increase in the quarter without that. €18,000,000 of this comes from an inflow from release of a portion of the warranties and advances we provided to the merchants and partners. And we also recorded net income of $35,000,000 that converts to cash and the inflow we generate with the growth of the TPV. And we expect this trend to continue going forward. With regards to our own funds, you have to whenever you analyze your own cash, you need to analyze Both what is in the own bank accounts and the profits that we still have pending to be transferred from the other accounts.

Speaker 7

If you consider those 2 together, you see that our own cash increased by $20,000,000 even after again buying $37,000,000 of the share buyback program. So excluding that, the increase in non cash is $57,000,000 We have a higher amount of profit spending to be transferred bank accounts compared to Q4 and that is because we released our financial statements in April. So we basically had the amounts we had in Q4 plus the profits of the quarter. We expect this to sequentially reduce in the following quarter.

Speaker 11

That's great color. Thank you, guys.

Operator

Thank you. Our next question comes from Ashwin Shirvaikar with Citi. Your line is open.

Speaker 13

Thank you. Hey, guys. So I want to stay on the cash Question because as I look at Page 19 of your presentation, You're kind of talking about releasing restricted cash to your own funds, the $10,000,000 decrease in merchant advancements and the decrease in guarantees to merchants and credit processors. Could you provide some of the rationale behind this? Is this sort of a structural development that continues to benefit you in the future?

Speaker 13

Or is this sort of a one off thing you did and maybe some background on Why this is?

Speaker 6

Maria, do you want to take it?

Speaker 12

Sure. Thank you, Saba. Thank you for your question. First of all, As we mentioned in Q4, we took extraordinary measures to provide comfort to our merchants. And this is the reason why you see that other assets increasing.

Speaker 12

As As we mentioned in Q4, we expect that to reduce over time. And this reduction of $14,000,000 is the trend that we have highlighted.

Speaker 1

We expect that to continue reducing.

Speaker 13

So in other words, this is sort of a Structural development or in terms of how you, transact with your clients and write your contracts and so on

Speaker 6

Ashwin, this is a normalization of the previous trends. So we were under attack in Q4. We told you this would normalize in Q1 and that has normalized already and it's going to continue to normalize over Q2 and Q3. So there's no structural difference in our business. We don't require balance sheet to grow.

Speaker 6

Our TPV actually generates cash, and that's why you see In this current quarter, our cash balance increasing. So there was no fundamental distinction or difference in our business dynamics In this Q1, there was a normalization from what was happening before the short set of reports.

Speaker 13

Understood. Is that clear? Yes, it is clear. Thank you for that. The other question I had was with regards to so as I look at sort of Your TPV growth, your revenue growth, your gross profit growth and adjusted EBITDA growth.

Speaker 13

Of course, the fastest one is TPV and the slowest growth is adjusted EBITDA. So and I do see the explanation, Growth in Nigeria is a primary driver of why gross profit growth is slower. Investments you're making as a driver of for why adjusted EBITDA growth is even slower than that. My question is more of normalization over time, as because you know, entering into new countries It's part of your business model. You continue to do this.

Speaker 13

You already mentioned That Nigeria is still relatively early stage for you. So in terms of financial metrics, what is a good Normalized gross profit margin level, what is a normalized EBITDA margin level All work

Speaker 6

time. Maria, I'll start and Diego, Maria, feel free to compliment. Ashwin, I appreciate the question. So I think it's good to get one step back and see where we are currently standing. When you heard that we're at GDA UVP of the host, which is the way that some of our competitors report.

Speaker 6

We are best in class. We've had a 74% margin this quarter. It's been Consistently over 70%, and we think we're in a very healthy position. We're not in a stage to take what we want to over for the price short We think that will be a very big mistake for us and for our shareholders. We want to keep the independence of investing.

Speaker 6

We have the benefit of already having a very profitable business. We do so in a very disciplined approach. So that we advise you already any numbers for this year. That's what we can say for now. There's no Fundamental reason why we will change that at this point.

Speaker 6

You mentioned geographic expansion. Yes, it's going to continue to come. At the same time, there's no other 100 markets we want to go after. We already have 40. I believe that's a great and so We are not optimizing.

Speaker 6

We don't have any particular targets that we are optimizing for. We want to keep the independence and the ability to continue to invest, which we believe is the right thing to do. Again,

Speaker 13

Understood. Thank you.

Operator

Thank you. Our next question comes from Neha Agwala With HSBC, your line is open.

Speaker 14

Hi. Thank you so much for taking my question. Congratulations on the quarter. A few clarifications. 1st, on Nigeria, with the number you provided, I think I calculated a gross profit margin of about 9% for Nigeria.

Speaker 14

You mentioned that the piece is higher, repatriation costs are higher in Nigeria, but when can we expect to normalize and at what level? I think it is currently quite dilutive to your overall gross profit margin. And even in terms of dollar amount, it's 3%, 4% of total gross profit Dollars. My second question is on the cash balance. Last quarter, you mentioned that You consumed $72,000,000 in owned funds in providing advances to select merchants.

Speaker 14

Is it right to assume that of the $72,000,000 you were able to release $80,000,000 this quarter? And my third question is on the TPV growth. Can you give us some sense of how the pipeline For 2Q and 3Q are evolving since you have very good visibility on how your merchants are behaving, that would be very helpful color. Thank you so much.

Speaker 6

Sure. Thank you, Nika, for the questions. I'll start with the Nigeria one. Our net take rate in Nigeria is higher than average. It means That it brings gross profit dollars to our business.

Speaker 6

That's what we want and that's what we're optimizing for. Yes, Nigeria is dilutive to our margins. Tomorrow, if we switch off Nigeria, our margins will go to 54%. We don't think that's the right thing to do. We don't think that's the smart thing to do.

Speaker 6

We don't think that creates value for the long How fast are going to those margins going to normalize? We don't know. We expect that over time to normalize in the mid to long term. It's also a function of how The market develops, how our customers develop and how our product develops. But even today, at the current scenario, we would have continued to do this business.

Speaker 6

We think this is a great business for our company. And again, we are not optimizing for the margin structure. We don't think that's the right thing for our business to do. Nigeria contributes our profits At a very similar level than every other market. The dynamics behind revenue are different and that's why you see it, the margin being slower.

Speaker 6

And I insist tomorrow morning we switch off Nigeria, our margin jumps to 54%, but we are much, much worse company. That's the first question. In terms of cash, Maria Dibas, I'll let you take it.

Speaker 7

Hi, Nikka. So yes, our own cash, if you include the profit that we still haven't transferred to Our own bank accounts grew $20,000,000 and that is after the $37,000,000 we invested in the share buyback. We have at the end of the quarter $74,000,000 of cash that we haven't transferred. That is basically what we had at December. That was About $38,000,000 plus the estimated profits of the quarter.

Speaker 7

We follow a very prudent approach before transferring profits to our own bank accounts. So we make sure that we have all the information. Keep in mind that we file our audited financial statements by April after we close the Q1. So both the Q4 and the Q1 numbers were audited after the quarter. During Q2, we expect to transfer those funds or a substantial part of those funds to our bank accounts and we will still have always the profits that we generate in the quarter Pending to be transferred as results are being audited.

Speaker 6

Michal, on your last point on TPV, We are seeing very healthy pipeline. I mentioned before, we are seeing so far in the quarter very healthy trends across multiple geographies. Again, I've said this in the past, We've never been a better company from a product standpoint and from a geographic footprint standpoint. When you look at our merchant base, it's the best it's ever been. So we are very optimistic about our Q2 numbers and our Q3 going forward.

Speaker 6

And as you said, yes, we do have a good sense of visibility. So far, everything we've seen, it's very positive across multiple different geographies.

Speaker 14

Thank you. Can I just follow-up with Diego on the cash part? It's not very clear to me. So $72,000,000 was used up in 4Q. Of that, 18,000,000 was released this quarter, and you still have 54,000,000 tied up with some merchants, Which is going to be released in the coming quarters.

Speaker 14

Is that right?

Speaker 7

I'm not sure if I follow the numbers you are Calculating, Nihal. But basically, if you are talking about the restricted cash, that's a different question.

Speaker 14

I'm not talking about restricted cash. Okay. In Q4, you mentioned that you used 72,000,000 of owned funds because you wanted to give guarantees or Advance receivables to some of your select merchants to give them comfort. Right? The 72,000,000 is fine.

Speaker 1

Both $73,000,000

Speaker 7

Yes. Probably that $72,000,000 includes also reductions in settlement periods and some other measures that we had in Q4 But we're already in Q1.

Speaker 6

Okay. Neha, and that's the point we were raising. All of those trends are normalizing. So they normalize in Q1 and we expect them to continue to normalize in Q2, Q3 and Q4.

Speaker 7

If you look at our cash flow, you will see that we have also an inflow of $32,000,000 of the net increase in trade payables and receivables, and that is also part of that normalization All that improvement as settlement periods of the merchants went back to normal, but also as we grew our TPV, we also grow our cash.

Speaker 6

Micha, I want to emphasize one last point. Sorry, I think this is important. Our business doesn't require balance sheet for us to grow. So growth, it's accretive. We have negative working capital.

Speaker 6

We before received the funds and then we settled and that remains the case. That's why you see our cash going up consistently.

Speaker 14

Has the settlement period reduced after the Q4? So you still have 7 to 14 days

Speaker 1

No. No. The settlement period improved after the Q4.

Speaker 6

Yes. Thanks, Mikhail.

Speaker 12

We have a longer settlement period

Speaker 7

The $32,000,000 cash increase you have in net trade receivables and payables is a better result of TPV increase, but also of the normalization of Most of the settlement periods were reduced in Q4.

Speaker 14

But why has the settlement period increased?

Speaker 6

We have settlement period increasing. It's a good thing. It means that we pay

Speaker 14

merchants later. It's a good thing. It's a good thing. It definitely shows that your merchants are more confident leaving their cash with you. But I'm just curious as to why has it increased.

Speaker 14

Is this because, Nigeria has a higher settlement period and that's why your average settlement period has gone up? Just trying to understand why you are going to

Speaker 6

No, because you have seen a decrease in certain periods and now you are seeing a normalization back to previous level.

Speaker 14

Okay, okay. So after 4th quarters had Decreased and then now they're going back to normal. Yes.

Speaker 6

You see all the trends trending in a positive direction. Yes.

Speaker 14

Okay. Okay. Thank you so much. Congrats again.

Speaker 6

I appreciate it. Thanks for the question.

Operator

Thank you. Our next question comes from Matthew Code with Autonomous Research.

Speaker 15

Hey, guys. Thanks for taking the question. Another one on Nigeria for me. Curious, how you're thinking about sequential growth from here, right? Revenues were up 93% quarter over quarter and we were doing some rough math.

Speaker 15

So like assuming a 5% gross take rate, and if you annualize that volume, that points to say like $2,000,000,000 of annualized volume from Nigeria, That would be about 1% of total consumer spending there and say like 25% of total e commerce activity in Nigeria. So Seems like you're pretty far penetrated in that market. So I was just hoping that you could kind of like provide some additional color on like how you see growth from there.

Speaker 6

Hi, Matthew, and thanks very much for your question. So obviously, I've said it before about other markets, you don't grow in step function. So our growth is And typically, you see a quarter where you go a little bit faster. You've seen it in the past and the normalization and then growth again. I hope to disagree with you in terms of penetration.

Speaker 6

Please share those stats. From what we've seen, we are only scratching the surface even with the merchant base That we have today. So 6 out of 10 operate with us in Nigeria, out of the top 10. There's only there 4 more For us to capture, and our business is still relatively small from a typical standpoint in this year. So we believe that there's significant growth to come Over the years, we are not saying it's going to come next quarter, but that's not what we're optimizing for.

Speaker 6

And we're optimizing for growth In the long term in Nigeria compounding with all the other markets where we operate. And in that sense, we are extremely, extremely confident.

Speaker 15

That's super helpful. Thank you, Ben. And then just my second question, the payout volume growth continues to be really robust. I was hoping you could opine on that a little bit more in terms of kind of like vertical mix and geography mix as well.

Speaker 6

Sure. So Again, we don't optimize for one product over the other. You've seen in this quarter cross border mix going up. Last quarter, it was going down. So and we are not prouder from 1 or the other.

Speaker 6

We are agnostic in that sense. Ridesharing, it's a strong Payouts, vertical for us, education payments sorry, payroll payments are strong, payouts vertical for us. But fundamentally, it's many of the same merchant. It's more of a commercial dynamic of what customers kick in at what speed. Growth in payout is spread across the board.

Speaker 6

So it's not there's no significant dynamics difference in one country versus the other from a product mix standpoint. So We really like the Payouts product because it's highly complementary with our pay ins, the same way cross border local to local are complementary. But there's not much more color we can add in this.

Speaker 15

All right. Helpful. Thank you.

Speaker 6

Thanks,

Speaker 16

Hi. Can you hear me okay?

Speaker 6

Yes, we do.

Speaker 16

Sorry, sorry, it went blank. Just a couple for me, please. One, just a question on the hedges. I think there's a reference in In the press release to lower hedging activity and we see that in a better financial result for the quarter, just wondered Given there's more exposure to kind of higher inflation economies, why would that be the case? If you could help explain that.

Speaker 16

That's the first question, please. I'll come back with the second one.

Speaker 6

Sure. Sorry, Jose.

Speaker 16

Sorry, this is Sumit, Sumit, New Street Research.

Speaker 6

Sure. I appreciate it. Diego, Maria, do you want to take it?

Speaker 7

Sure. Yes. During the quarter, we reduced our exposure, particularly In Argentina, we told you that in the second half of the year, we sequentially normalized the situation there. So basically, you keep in mind that we have a practice For hedging every open positions in local currencies and what happened during Q1 is that we reduced we have much lower positions, very low positions in So we reduced the cost of hedges. We keep any dollar that we have available investments.

Speaker 7

So you will see that in financial results during the quarter, We turned around the numbers and we came to positive financial results because of that.

Speaker 16

Okay, clear. And then a quick follow-up please, again, just back to Nigeria. Just kind of trying to move away From the margin or the gross margin discussion, which obviously relates to the higher gross take rate. But to keep things simple, As your processing costs and FX costs hopefully come down over time, do you keep that Profit, would you pass that on to the merchant?

Speaker 6

Thanks for the question. So the way we price, it's typically We first understand the cost and then we price, and that's why we always say we optimize for gross profit. So should cost go down, Some of that we'll share with the merchant, other part of that, a significant part of that will be our own efficiency. The more we can Get closer to the banking system, understanding, getting better access to liquidity, getting better terms. Our Merchant contracts are not, for the most part, tied to our costs.

Speaker 6

So that would be an upside to us.

Speaker 16

Okay. And so presumably, your net take rate will go

Speaker 6

It has the potential to go up significantly. Yes.

Speaker 16

Okay, great. Very clear. Thanks.

Operator

Thank you. Our next question comes from John Coffey with Barclays. Your line is open.

Speaker 17

Great. Thank you very much for taking my call. I have yet another question On Nigeria, and really my question pertains to the verticals in which you're starting to see some of these volumes. Last quarter, you gave a really helpful slide, I think Page 11, where you showed that I think 20% of your TPV was in financial services, 2nd biggest bucket was Commerce. Is there any kind of color you could give on where Nigeria slots into the different verticals?

Speaker 17

Is it one of those? Is it really Completely spread out across all verticals?

Speaker 6

Thank you for the question. It's very well diversified, very similar dynamics than our overall business. So that's why the 6 out of 10 merchant is a good signal for this. Our top 10 are very well diversified, The same applies to Nigeria. So no particular vertical has more prevalence than us.

Speaker 17

Great. Thank you. And just one quick follow on. I think you've said Nigeria and Argentina as markets that are And that really seems to be your sweet spot for adding value. When we look beyond those two markets, would you say, and I think you may have mentioned this before, Are Egypt, Morocco and Indonesia in that same kind of category where they're particularly complex versus more sort of more developed markets There's more efficiencies and does that do you view those as the next real big opportunities?

Speaker 6

Sure. So we operate across 40 emerging markets They're all complex realistically. That's our specialty. That's where we exist. I love to think that people now I love to see that people now think of Brazil as a developed market.

Speaker 6

It wasn't the case where we launched. So we see the complexity across the course. There's plenty of friction. We are in the business of solving friction and obstructing it for our merchants. And whether we like it or not, there's plenty of friction today and to come in emerging markets.

Speaker 6

So that's what we are calling for. And Indonesia, Malaysia, Morocco, Egypt, South Africa, yes, Just to name a few, but the same could be said around Mexico and the same could be said around Pakistan. So there's plenty of friction for us to solve. As we solve it, we typically manage to add a lot of value to our customers and at the same time capture some of that value for our company.

Speaker 17

All right. Thank you.

Operator

Thank you. That's all the time we have for questions. I'd like to turn the call back over to CEO, Sebastian Kanovich,

Speaker 6

Sure. Thanks very much. Thanks everyone for listening to today's call. I hope that this was helpful. It was a pleasure being here today.

Speaker 6

I just want to make sure that I got more fun. The company is in our intent to be lovely, but in an effective focus on the short term. I would like to reemphasize to everyone that we continue to build this business focused on making decisions for the long term. That's why you see us investing in geographic and product growth. We are extremely excited about the opportunity we have to go after such a huge market and build a multibillion revenue business I want to thank you all for your questions and comments.

Speaker 6

And we are very much looking forward to seeing you all on our Investor Day on the 8th June. Thanks for your time and enjoy the rest of your day.

Operator

Thank you for your participation. This does conclude the program. You may now disconnect.

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Earnings Conference Call
DLocal Q1 2023
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