DLocal Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 16, 2023

There are 19 speakers on the call.

Operator

Good day,

Speaker 1

and welcome to the D Local Second Quarter 2023 Results. Please begin.

Speaker 2

Good morning, everyone, and thank you for joining us for the D Local Q2 2023 earnings call today. If you have not seen the earnings release, a copy is posted in the financial section of the Investor Relations website. On the call today, you have Sebastian Kanovich, 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 Locals' website at investor.

Speaker 2

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 Locals' 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.

Speaker 2

Actual results may differ materially from those included in D Locals' 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 Sebastian Kanovich. Thank you.

Speaker 3

Good morning, everyone. Thanks for joining the call today. Before we start the call, let me thank all of you who joined the Investor Day back in June. For those who couldn't make it, the material is available on our Investor Relations website. Let me also add that we have in the call Pedro Arndt, who will be joining me as Co CEO.

Speaker 3

We are extremely excited to have Pedro joining the team. We are proud of the great talent that we have at D Locals, And bringing Pedro is the ultimate example of this. Pedro will bring new energy and leadership and a highly complementary set of skills to the company, helping us to continue scaling the business at pace and to realize the enormous opportunity that we have ahead of us.

Speaker 4

I would now like to invite Pedro to introduce himself. Thanks, Seba, and greetings, everyone. We thought it'd be useful for me to introduce myself today and share with you what's led me to join Seva, Sergio Jacobo and the rest of the great team Here at D Local. They will then walk us through D Local's strong business performance as they expertly do every quarter. Having worked in Latin American tech over the last 25 years, I've obviously been aware of D Locals since its inception, merely 7 years ago.

Speaker 4

However, upon being approached by the Board and undertaking my diligence, what I found was a set of business success drivers even more remarkable than I had initially anticipated. I'd like to spell some of those out for you today. First of all, a vast untapped total addressable market of $1,400,000,000,000 within the rapidly expanding markets that we currently serve. Second, an exceptional opportunity for growth alongside these markets as well as the potential to extend our reach to numerous additional markets. And this allows us to increase our TAM by over 2.5 times over the next 5 years.

Speaker 4

3rd, the product and technology stack is fantastic as it serves many of the world's leading and most demanding mega cap tech companies. And 4th, this is an entirely customer centric organization that's obsessively dedicated to our customer success and continues to pile up client win over client win, growing clients by 41% CAGR and TPV by a phenomenal 126 percent CAGR over the past 3 years. And last, but certainly equally important, an extremely attractive financial model characterized by a revenue CAGR of 101%, adjusted EBITDA over gross profit surpassing 70% and an annual conversion of free cash flow to net income exceeding 90%. So in essence, large TAM, great product and tech stack, A winning customer focused organization and a free cash flow machine, an investor's ideal vision realized, Right? Absolutely.

Speaker 4

But like with any young successful company, there is always more work that can be done so as to further and fully realize the extraordinary value inherent in the exceptional business I've just described to you. That work is already underway, and it's also where I hope to contribute the most in Phase 1 of my journey here. I'm confident we will find ways to accelerate even further The pace at which we are rolling out additional processes, deploying more and even better systems, and adapting our organizational design to prepare D Locals for the future. I'm excited to see how all this will complement the extraordinary product and customer success work that's already being done on behalf of our clients to further build a formidable company at scale. And as all this happens, I firmly believe that as we undertake these measures, we will propel D locals' trajectory and further unlock returns for all stakeholders involved.

Speaker 4

I look forward to engaging with you as we carry out this journey. Let me now turn the floor over to Seba again to go deeper into the results of the quarter that already show the positive direction things are headed in.

Speaker 3

Thank you, Pedro, and once again, welcome to the team. I am pleased to share that we've had another quarter of outstanding results. Our performance once again proves the distinctive strength of our business, Which we continue to build focus on long term profitable growth. These trends combine: 1, superior technology that is driven by our commitment to make the complex simple for our merchants with our one API and one integration, what we call 1 D Local. 2, a well diversified business across verticals, products and geographies with vast geographic coverage of over 40 countries and 3, relentless execution of our merchants' growth and cross sell strategy across products and geographies.

Speaker 3

Last but not least, our lean and disciplined culture. We delivered all the previous strengths with a lean team, continuously striving for excellence. Our culture, It's key to continue delivering on our long term ambitions. These factors underpin our continued success in building the best payments ecosystem across emerging markets. Based on our 1 D Local, navigating the complexity of payments in these markets on behalf of our merchants So they can remain focused on their core business.

Speaker 3

We have a proven track record in leveraging these factors to deliver robust dollar growth of TPB, revenue, gross profit, adjusted EBITDA and net income. Moving to our financial highlights of the quarter, This success was reflected across all metrics. TPB grew 80% year over year and a strong 22% quarter over quarter, surpassing for the first time the $4,000,000,000 mark. To put this in perspective, this quarterly TPV is more than double our TPV for the whole year of 2020, the year before we went public. We continue to focus on growing our business in absolute dollar terms.

Speaker 3

Revenue, gross profit and adjusted EBITDA all increased at double digit rates, both year over year and quarter over quarter. We recorded the highest contribution in gross profit and adjusted EBITDA of the past 8 quarters, increasing $9,000,000 in gross profit and $7,000,000 in adjusted EBITDA quarter over quarter. We remain firmly committed to profitable growth at scale. In Q2 2023, our ratio of adjusted EBITDA to gross profit remained stable quarter over quarter at 74%, Which again is best in class. Moving to the next slide, we continue to invest thoughtfully in expanding our global team.

Speaker 3

We have hired new talent to pursue the opportunities we see in the market, also strengthening our foundations to face our long term ambitions. We grew our team to 8 0 6 employees. This is an increase of 174 full time employees compared to Q2 2022, over 28% year over year. We continue to recruit talent globally, combining specific experience and skill sets as well on on the ground knowledge. We reached 202 full time employees in Africa and Asia by the end of Q2 2023.

Speaker 3

This now represents 25% of our workforce. We will continue to invest in talent in a disciplined way, staying lean and always ensuring that we onboard talent that has a strong cultural fit. We are proud of our team and believe it is stronger than ever. Now I will pass on to Maria to discuss our execution on our growth strategy.

Speaker 5

Thank you, Saba. Hi, everyone. Let me remind you how we view our growth engine. We have 3 axes of growth: 1 product 2 merchants and 3 geographies. On product, during this quarter, we continued to focus our efforts on deepening our presence in the countries in which we operate, with a particular focus on Africa and Asia by establishing more direct connections with payment methods and acquirers and also continuing to enhance our solution.

Speaker 5

During the Q2 of 2023, we saw strong traction on our platform solution, in particular from Commerce Marketplaces. On merchants, we delivered strong revenue growth both from existing and new customers. Net retention rate continues to be best in class at 148% in Q2 2023. New merchants revenue reached $11,000,000 in Q2 2023. We have very close relationships with our merchants, which enables us to grow together with them.

Speaker 5

Our top 10 merchants continue to show very high growth, totaling $94,000,000 revenue in the quarter. Our three axes of growth compound to deliver rapid growth. All of our merchants, products, payment methods and markets are linked to one API. This means that merchants can access all of our products and payment methods without any additional work, generating high value to our customers while growing our business. Now, let's deep dive into one of the dimensions, geographies.

Speaker 5

In Latin America, where we have our largest SKU. We continued to experience strong growth across the region in Q2 2023. This proves that we still have ample room for growth in LATAM, both with existing and new merchants. In the last 12 months to Q2 2023, Revenues in Mexico increased by 85% year on year and in Brazil by 50% year on year. Growth in both countries has been driven mostly by merchants from commerce, advertising, streaming and ride hailing verticals.

Speaker 5

We have been operating in both countries since 2016. So, these sustained growth rates are a true indicator of the hyper growth potential that we still have in Latin America, even in our most mature markets. As you know, Brazil is where we started 7 years ago. It is also a highly developed market in terms of digital payments penetration and technology. But this market is far from mature from a growth opportunity standpoint.

Speaker 5

This high growth in our large and competitive geographies such as Brazil underscores the quality of our solution as we continue to gain share in the market. We continue to see strong growth opportunities in Brazil going forward. In Q2 2023, TPV and revenue in Brazil doubled year over year and increased by around 80% quarter on quarter. Recent growth has been mainly led by merchants in the commerce, advertising and streaming verticals. In Brazil, we also proved the success and robustness of our local to local solution.

Speaker 5

Brazil is a market with higher local to local share, and we have seen favorable trends in both cross border and local to local flows. Moving on to Africa and Asia. Our merchants continue to signal strong demand for our solution in the region. Egypt, Morocco, Indonesia and Philippines are growing triple digit year on year and have the potential to become a significant part of our business. Our business in Africa and Asia continues to grow very fast.

Speaker 5

In the last 12 months to Q2 2023, revenues in Africa and Asia increased more than 3 times year on year. Excluding Nigeria, this region grew seventy 8% year on year in the last 12 months to Q2 2023. In Q2 2023, Nigeria revenues increased by more than 4 times year on year. The quarter on quarter deceleration was driven by the NARE devaluation segmentation in the last 15 days of the quarter. Nevertheless, Nigeria continues to present similar net take rates as other markets, and it is a key geography for D Locals.

Speaker 5

We continue to see great growth opportunities in the market. Excluding this effect, Revenues would have been in line with Q1 2023. Sergio shed more light on the recent market change later on in the presentation. Moving to the next slide. This case study illustrates the powerful combination of our 3 axis of growth.

Speaker 5

We onboarded this merchant, a global e commerce platform prior to Q2 2021. We started processing volume for this merchant outside Latin America, in one country and only one product and service. Over the last few years, we have been able to successfully cross sell new geographies, products and services. The outcome speaks for itself. TPV has grown by more than 100 times since Q2 2021, driven by a combination of: 1, organic growth of our merchant 2, increased share of wallet and 3, additional payment methods, solutions and geographies.

Speaker 5

We now process volume for this merchant in 7 countries across Africa and Latin America. On top of processing payments and payouts, These merchants use as our platform solution in some of these geographies. We have seen strong growth coming from the platform solution as we develop tailor made solutions at scale, including: 1, a white label seller onboarding KYC and 2, a split payment solution to ensure full flow compliance throughout the process and best user experience. This example is a testament to the fact that our business is built on the great relationship and customer service we have with our global merchants, who continue to choose our solution and grow together with us. Serge will now discuss our emerging markets focus in more depth and share a few updates on some of our key markets.

Speaker 6

Thank you, Maria. Good morning, everyone. As you know, I have co founded the company and I have been serving as a Board member. Since June this year, I have been part of the executive team. I am delighted to join this earnings call today and look forward to continuing meeting many of you.

Speaker 6

D Locals has been fully devoted to emerging markets since its inception. Where others see complexities, we see underserved markets with high growth potential. Buyers and sellers Cannot transact due to the lack of infrastructure and the magnitude of lost opportunities is overwhelming. We are going after a very large market. And after 7 years of strong growth, we are still only scratching the surface of this opportunity.

Speaker 6

Our markets enjoy structural tailwinds, A young growing population, an urban connected middle class eager to consume and merchants that are only starting to customize their products for their needs and tastes. Emerging markets are complex. Our mission is to solve payments complexities for our merchants, including technological, operational and regulatory complexities. Our ability to adapt to changes in circumstances is one of our key operational strengths and underlies our value proposition of taking the complex and making it simple. Now I'd like to update you on recent developments in 3 specific markets.

Speaker 6

One such change in parking conditions occurred in Argentina, as we stated in the filing in late April. The government and the Central Bank established new procedures to obtain foreign currency for the settlement of certain services. We have been operating in Argentina for many years now, and we have seen many, many changes in regulations. This is only the latest change and will probably not be the last. We will adapt to the new rules just as we have adapted to the previous ones.

Speaker 6

Our ability to do so is a competitive differentiator and an example of the value we add to our merchants. Given the magnitude of our business in Argentina, as we announced in a press release in June, we committed to show additional economic substance in the country. On June 14, we acquired with our own funds $48,000,000 worth of Argentine dollar linked treasury bonds. We acquired an additional €49,000,000 by the end of July. We plan to use these funds in the following years to fund our local operations and investment opportunities in the market.

Speaker 6

We continue to collaborate with local authorities in Argentina to ensure that Despite the macroeconomic situation, Argentinian customers are able to access international services. Moving to Nigeria. In mid June, the Central Bank implemented a free floating policy of the Nara, leading to the devaluation of the local currency, as Maria mentioned. I would like to highlight that we see the unification of the exchange rates as a positive for the country and for our business, as it promotes transparency and efficiency and it increases liquidity. This removes a lot of the friction that some of our customers C when expanding to Nigeria.

Speaker 6

We continue to operate normally in the country where we serve some of the world's largest technology merchants. We do not expect the depreciation of Denaira to have an impact on our gross profit. The negative impact on gross revenues will be offset by lower expatriation costs. We continue to have a bullish outlook on the operations in Nigeria for the long run and continue to onboard and grow with merchants in the country. Last but not least, Brazil.

Speaker 6

Shortly after the end of Q2, we reached another milestone in a revolution. At our Investor Day, we shared that we applied for a payments institution license in Brazil. I am thrilled to share that we were granted this license in July. We can now offer more payment methods and solutions in Brazil and participate directly in Brazil's payment systems. We expect this to increase the efficiency of our operations in the country.

Speaker 6

Becoming a payments institution, Caro suited A higher level of scrutiny by Brazil Central Bank. We welcome such scrutiny in Brazil and in other countries as it helps boost the level of confidence of global merchants doing business in emerging markets and also increases our competitive advantage. This is a clear example of our ongoing efforts to further strengthen our compliance infrastructure across emerging markets. Being well diversified in over 40 emerging markets allows us to continue benefiting from very high growth regardless of the specific circumstances in any given geography. This is a key strength of our business.

Speaker 6

Diego will now review our financial highlights.

Speaker 7

Thank you, Sergio, and hi, everyone. We had another quarter of strong growth across our products and services. In terms of products, during Q2 2023, pays increased by 70% year over year and by 27% quarter over quarter, and payouts increased by 114% year over year and 10% quarter over quarter. The contribution from payouts has increased year over year as we have been successful in providing last mile payment services to financial services companies in emerging markets. Moreover, We continue to position ourselves as the payment service providers of choice in emerging markets for global payroll, social media, ride hailing and on demand delivery companies.

Speaker 7

During this quarter, we also saw strong traction both in pay ins and payouts through our platform solution for marketplaces, particularly in e commerce in Brazil and Mexico. In terms of services, Our cross border and local to local volumes show solid growth year over year and quarter over quarter. In Q2 2023, we increased by 33 percent our local to local volume quarter over quarter, mainly driven by merchants from commerce, advertising and ride hailing verticals. This resulted in growth in our local to local share, reaching 49% in Q2 2023. We are product and vertical agnostic.

Speaker 7

All our products and services bring incremental profit, and when we combine them, they bring synergies both for our merchants and for us. Depending on which merchants we onboard in a given quarter, as well as the relative growth rates of each merchant, There are many fluctuations in the share of pay ins versus pay outs and cross border versus local to local. Overall, we see a positive growth outlook across All our products and services and see this diversification as a key strength. Revenues also reached a record high of $161,000,000 in Q2 quarter, we saw strong quarter over quarter revenue growth, particularly in online commerce, ride hailing and on demand delivery. And from a geographical standpoint, revenue grew quarter over quarter mainly from processing payments in Brazil, Mexico, South Africa, Egypt, Colombia, Peru and Costa Rica.

Speaker 7

We remain focused on growing absolute gross profit dollars, which is the key success metric of our business. Our gross profit reached $71,000,000 in Q2, up 43% year over year and 14% quarter over quarter, with net take rate at 1.6%. Processing cost over TPB remained stable at 2% quarter over quarter. Gross profit margin and net take rate remain almost unchanged quarter over quarter, even with a high increase in the share of local to local volume. The waterfall chart on the left shows the main changes in our gross profit margin quarter over quarter.

Speaker 7

Gross profit margin was positively impacted by changes in merchant mix, particularly in Brazil. This was offset by the higher share of pay ins and local to local volume and lower share of revenues in Argentina. Moving to the right hand of the slide, the slight decrease in the net take rate from 1.7% in Q1 2023 to 1.6% in Q2 2023 was driven by similar factors, particularly by a higher share of local to local volume and by country mix, with higher share of revenues in Brazil and Mexico and lower in Argentina. Profitability remains a top priority. During the quarter, we were able to grow our adjusted EBITDA to $52,000,000 up 36% year over year and 14% quarter over quarter.

Speaker 7

Adjusted EBITDA margin was 32% in Q2. Our adjusted EBITDA over gross profit remained stable quarter over quarter at 74% as we continued investing in our people, both in terms of compensation and expanding the team. Net income totaled $45,000,000 during the quarter, growing by 46% year over year. Sequentially, it increased by 26% quarter over quarter. Net income for the quarter includes $7,500,000 of net financial gains.

Speaker 7

These results were driven by our funds held in interest bearing accounts and money markets, partially offset by the financial cost of hedges across the market. We also observed an increase in our effective income tax rate from 11% in Q1 to 16% in Q2, driven by a higher share of profits in local markets as a result of higher local to local PPV and financial gains. Let's move to cash generation. During the 1st 6 months of the year, we observed strong cash flow generation. The main drivers of our cash increase where our net income, we substantially convert to cash, and an increase in net trade payables, particularly as a result of the growth of our business with negative working capital and a higher average settlement period to our merchants.

Speaker 7

This resulted in an increase of $141,000,000 We invested $61,000,000 in completing our share repurchase program and $48,000,000 in Argentine dollar linked treasury bonds as part of our commitment to increase our economic substance in the country. We believe our strong cash position remains a competitive advantage as this allow us to continue investing in the business. Seba, the floor is yours.

Speaker 3

Thanks, Diego. We are very proud of the strong set of results we delivered during the first half of the year, And we are even more excited about the runway ahead of us. We see continuous growth of our business in the second half of the year. Given the outstanding 1st 6 months performance, we would be on track to over deliver on our guidance of revenue, while being in line on EBITDA. However, due to the currency depreciation in Nigeria, which will reduce revenues with neutral impact on gross profit, In other words, it won't affect our gross profit dollar amount.

Speaker 3

We expect to end the year in line with guidance in terms of both revenue and EBITDA. Revenues between $620,000,000 $640,000,000 and adjusted EBITDA in the range of $200,000,000 to $220,000,000 We have a truly diversified business that can deliver on our goals under changing specific circumstances in certain markets, And we are very, very pleased to be in such a position. We remain dedicated to building the best financial infrastructure for global merchants in emerging markets. The value proposition of our 1 D local platform is clear to help our merchants navigate local complexities Receiving and sending payments in emerging markets. Everything that we do is focused on further improving this value proposition.

Speaker 3

I want to send a 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 the Q and A,

Speaker 1

Thank you. Our first question comes from Tito Laberato with Goldman Sachs. Your line is open.

Speaker 8

Hi, good morning. Thank you for the call. I'm taking my questions. Congratulations on

Speaker 9

the strong results and a strong hire

Speaker 8

A couple of questions, if I may. Maybe, Pedro, If I could start with you, thanks for some of the color you gave on the opportunity to see in joining D Local. But, Bryan, several questions and we'd love to hear from you. Coming from that, we're very well respected company. Just to understand a little bit just sort of Your reasoning to come over to D Local.

Speaker 8

I mean, you talked a little bit about the opportunity, coming here as co CEO role. But, we just love to hear a little bit more From a personal perspective, what excited you so much to make that switch? So we'd love to hear from you on that. And then second question, On the revenues, very strong performance on revenues. Deb, as you mentioned, you're maintaining the guidance there.

Speaker 8

Let me get a little bit more color. You think Brazil can continue to grow the way we saw it growing This quarter and is that coming from like one particular merchant? Is it several merchants that are giving a lot of local to local volumes there? And do you expect some headwinds because of the depreciation in Argentina next quarter as well? Just to understand a little bit some of the revenue dynamics and how it's going to evolve on a quarterly basis from here.

Speaker 8

Thank you.

Speaker 9

Hi, Tito. Hi, everyone. Great to be here. Thanks for the question. So I think I laid it out in the prepared remarks.

Speaker 9

This is a phenomenal business with a large expanding TAM, great technology and product, the right customer focus and a winning sales organization and a super attractive financial model. So D Locals is a gem. What I've done and what I've seen over the last 24 years is how to build scale. And I think I've seen scale in Latin American tech like few others have had because I've had the privilege to work at the largest Latin American tech company from nearly 0 to where it is today. And I've seen how the way you generate value in technology is by building scale and compounding results over the long term.

Speaker 9

And I think D Locals is the ideal landing spot for the next channel next leg in my professional career to be able to generate scale and compound results over long time with a business that operates in a growing TAM and has a phenomenal financial model. So this is a decision that makes extreme sense for me, and I think I can add a lot of value to the great work that's being done here at D Locals.

Speaker 10

Tito, thanks, Pedro. And Tito, thanks for your question. So there's a lot to unpack there. Please let me know if we are covering everything. On the guidance question I'm sorry, on the guidance question.

Speaker 10

So we are very proud of the first half results. We are clearly trading towards the higher end of that guidance in terms of revenue, but are clearly preferring to take a conservative approach given the macro environment. Specific changes of circumstances, such as the devaluation of Nigeria affect our revenue number, but not our gross profit. We would like to see one more quarter before we update our yearly guidance out of abundance of caution. Tito, you know this, we have constantly over delivered on all metrics to which we have guidance since we went public over 2 years ago.

Speaker 10

And the other thing I'll say is that the guidance, the yearly guidance we provided accounts for close to 50% year on year growth at best in class margin. This is a great outcome for our 2023 and a testament again of the resilience and the well diversified that our business is. The other thing we'll say is that we do reiterate our mid term guidance of 35% CAGR at a gross profit level and a gross profit EBITDA margin at 75%, which again are best in class. Giving it a little bit more qualitative comment, Tito. Brazil was great news.

Speaker 10

We grew over 100% year over year, 80% quarter over quarter, But also Mexico grew up close to 80% year over year. And I called those 2 geographies out because they are some of our most mature. And I think the underlying message here is that our geographies continue to compound and they continue to differentiate and they continue to drive growth for our merchants. We're going to have quarters when one market is going to grow faster than others, and that's perfectly expectable. Keep in mind, our growth is depending on our merchant growth.

Speaker 10

Some of them will decide to ramp up faster in one country versus the other, and that's not something we control nor something we want to control. What we do want to see is that we have multiple levers of growth working at the same time. And in that sense, this quarter was a good testament for that. There are several merchants driving that growth. We are not relying on any particular merchant across any particular geography.

Speaker 10

So in that sense, a great, great quarter for us. You had a question Argentina and the evaluation. Sergio, I know you have Some remarks on this that are probably worth commenting on. But the only thing I'll say, Tito, on this is that we serve global merchants, and global merchants think in dollar amounts. So typically, what we've seen over the years is whenever there's a devaluation, our merchants tend to reprice pretty fast.

Speaker 10

In other words, A big screening services doesn't think of their product being worth MXN 10. They think of their product being worth a certain amount of dollars. And if there's devaluation, they typically reprice really fast.

Speaker 1

Thank you. Our next question comes from Guilherme Gresham with JPMorgan. Your line is open.

Speaker 11

Can we move to the next question,

Speaker 1

please? Our next question Comes from Jason Kupferberg with Bank of America. Your line is open. Jason Kupferberg, your line is open.

Speaker 12

Hi, good morning. Thank you for taking the question. I just wanted to start on the So the new management arrangement, just maybe if both Seb and Pedro maybe just want to comment a little bit on how do you foresee kind of splitting day to day duties going forward, especially once Pedro has the opportunity to ramp up on the business.

Speaker 10

Hi, Jason. Sure. Pedro, feel free to compliment, please. So, Jason, first of all, Pedro and me have extremely complementary backgrounds. Ours is an opportunity that has plenty, plenty of challenges that we need to tackle.

Speaker 10

And whenever you have the ability of Finding a talent like Pedro and getting him to join, it's an absolute no brainer for us. We are still in the workings of the exact task that each one of us is going to be undertaking. But fundamentally, from a strength perspective, we are very, very complementary, and this couldn't be better news for us.

Speaker 12

Segment. Okay. And then my second question was just on, you had that helpful slide showing the bridge on the gross margins. Just as you think about the second half and recognizing there's obviously stability from a mix perspective. I mean, what's sort of a kind of a base case working assumption that you guys are thinking about for second half gross margins just in the context of the fact that you're obviously reiterating the guide on adjusted EBITDA for the year.

Speaker 12

Thanks.

Speaker 10

I know, Pedro, you had some remarks that you were making and they were quite short.

Speaker 13

I don't know if you want to go for that.

Speaker 9

No, no. I was just reiterating. I think we'll figure out the governance. Throughout my process, I've obviously done diligence and the chemistry we've built, not only with CEBA, but with the entire team gives me confidence that there's plenty of work to be done here. And our complementarity, I think, will make that even easier.

Speaker 9

So I'm not concerned at all about that.

Speaker 10

Jason, on your question on guidance, again, we are known to be a very conservative company in this front. We are taking an extremely conservative approach given the macro environment. We are clearly trading towards the higher end of that revenue guidance that we provided. We don't provide shorter term guidance. I want to emphasize that we're building this for the long run.

Speaker 10

We believe 50% over 50% year on year growth. And again, the mid term guidance of 35% CAGR, it's best in class. And that's what we're focusing on. We want to retain flexibility to continue to invest in the opportunity we have. This is a time for us to differentiate.

Speaker 10

The emerging markets opportunity is bigger than ever, and we want to retain the flexibility to invest as much as we see fit, while maintaining the disciplined approach we've always had.

Speaker 13

If I may, if you look at gross margin and take rate in the second quarter, it was very similar to the first quarter, 1% decrease in gross margin from 45% to 24%, and 0.1% decrease in net take, that was part of your question.

Speaker 11

It's basically the result of business mix.

Speaker 13

As you see in this quarter, we got higher share of local to local. We got different country mix, particularly some countries we continue to higher share of gross margin. We don't solve for that. As we have mentioned, our merchant decides when and how to grow.

Speaker 8

Okay. Thank you for the comments.

Speaker 1

Thank you. Our next question comes from Guilherme Grestin with JPMorgan. Your line is open.

Speaker 14

Hello. Can you hear me?

Speaker 10

Yes. We do.

Speaker 14

Yes. Thank you, Seba and the team for the presentation. Two questions on my side. The first one is related to Nigeria. You mentioned that you expect some impact from the Dival, I think it was 40% to 50% devalue on the FX and we already see it hitting the revenues decline the share of Nigeria on total top line.

Speaker 14

But it was interesting to hear that you did not expect any impact into gross profits. So I'm trying to reconcile Those two statements, the only way I can think of is that your gross profit margin in Nigeria is close to 0. And I do want to confirm if you operate in And the second one is related to financial income. It was very large contribution on gross financial income in the quarter. I imagine this is related to Argentinean bonds.

Speaker 14

If you can recap how much those bonds are paying And if we had any nonrecurring financial gains, meaning the appreciation of the bond in the quarter Or if this level of EUR 19,000,000 gross income per quarter should be the new recurring level given how you're invested in those bonds? Thank you.

Speaker 10

Thank you, Jeremy. Thank you very much for the question. So we've spoken about Nigeria in the past. Actually, in our Q1 call, we How Jain Chia had a higher than average a much higher than average gross take rate and much, much worse margin structure given the gap between the market rate and the official rate. That was a drag on our margin structure, and that's why you saw it eroding.

Speaker 10

We broke that down in previous quarters. What has happened is that the Nigerian government has unified those two markets, and therefore, the gap that was existing before between market rates and official rates doesn't exist anymore. We never process payments in any country at 0 margin. That's not the business Every dollar we process contributes to our profit. And what we said is that at a gross profit level, which is the key metric we keep track of Internally, this will be neutral, if not positive.

Speaker 10

Let me explain why. The gap in the FX in Nigeria made it very hard for merchants to understand why There was an official market rate and there was the market rate and why they had to navigate out of that complexity. Some of that complexity is now solved. So for our global merchant, it's now easier to navigate this country, and we expect that to be, 1, neutral to positive from a gross profit standpoint, but too obviously accretive to our margin structure. We spoke about our margin being punished before given our Nigeria business.

Speaker 10

Now we probably get some upside from it. Maria, Diego, feel free to complement on this point, please.

Speaker 11

Yes. The only thing I would add is that It's not 0, it's actually a profitable higher than average net margin rate in the country.

Speaker 10

Guilherme, on your second question on the financial profile, Maria, do you want to take it?

Speaker 13

So sure. We had in the quarter roughly $7,400,000 of financial profits. That is basically the result of higher or having higher amounts of cash in local markets, countries like Brazil or Argentina, as you mentioned. Part of the bond. As you mentioned, roughly $2,000,000 $3,000,000 is results of the bond, but mostly it's money markets and interim bank account that we have in those countries that generate cash.

Speaker 13

We use part of those profits to invest in hedges to be fully covered and that is the cost the financial cost that you see in the P and L. The net of those 2 has been very positive in the quarter. Over the medium term that should sequentially go back to a lower number, but particularly this quarter we had these situations where we have a significant amount of cash invested also at the operating company level with higher interest rates.

Speaker 14

Just a follow-up, if I may. How much those bonds, Argentinian bonds are paying, the pre asset?

Speaker 13

So we are mark to market. The interest rate, the The nominal interest rate of the bond is minimal, it's 0.4 because they are all linked, but it's mainly the result of the mark to market of that bond. But again, out of the financial income of the quarter, only a small portion of that is the bond. Most of the financial income is a result of cash heavy money markets are interest bearing accounts, I would say in Brazil, Argentina and at the operating company level.

Speaker 10

Guilherme, I would like to complement on the Nigeria question just to make sure this is clear. When there's a devaluation, 2 things happen. Our gross take rate goes down, but our cost of processing goes down. So that's why you see this being neutral at a gross profit level. Our cost of exfiltration will decline heavily in the same amount as our gross revenue will decline Because those are a function of the spread between the official market rate and the market rate.

Speaker 10

So that's why you see this being neutral. I hope that's clear. I know it's complex, but I want to make sure this is properly understood.

Speaker 14

Yes, sure. It was clear. Thank you for the answers.

Speaker 10

I appreciate it.

Speaker 1

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

Operator

Hi. Can you hear me?

Speaker 10

Yes.

Operator

Hello? Can you hear me? Yes. Okay. Good to hear from you all perhaps.

Operator

Maybe I can also start with There has never really been growth, which you mentioned what one of the key reasons you're coming growth in TAM opportunity. I feel like the issue, as you had mentioned, Scalability over time, scalability of technology where you can bring your expertise, governance and a few other things. So maybe you can talk a little bit more about the challenges That you feel like they need to be overcome. And if in your early view, Based on just the diligence you did, if you feel like the investments that need to be made Might be an impact on the longer term margin structure. I know it's very, very early Days, but just based on the diligence that you've done so far.

Speaker 9

Thank you. That's a fantastic question. So conceptually, 1st of all, and I think this is important. Like any company that's grown as much and as fast As D Local has, there are growing pains in scaling up. I think that's evident, and I agree with your diagnostic.

Speaker 9

There's already prior to my arrival, a lot of focus as with any company that's growing and work being done To strengthen whatever is needed to strengthen and to prepare for scale. But that is a big part of what I've liked about the challenges. I feel that that's what I've done and what I like doing and what I know how to do. So we really need to set this up so that this company can grow 5x, 10x, 50x once the opportunity arises. It's a bit early.

Speaker 9

I think I will get back to you guys with a better diagnostic. I am not a big believer in throwing money at these kinds of problems. I think we throw A passion for problem solving and systems at these problems, but I still need to complete my diagnostic. This is literally day 2 for me. So stay tuned and I think we'll come back to you guys with clarity on whether this is a matter of simply continuing to build everything that's being built or if there might be a ramp up in investments needed.

Speaker 9

Give me a little more time, give Ceva Jago and myself some time to take a look at this.

Operator

I truly appreciate that answer. Seba, maybe something we have discussed before Sort of on an in country basis, the objective perhaps of achieving reasonable balance between pains and payouts. As you look at your forward opportunity, the next 5, 6 countries that you feel should ramp up, How do you feel you're situated as far as that in country balance is concerned?

Speaker 9

Sorry, just one thing I wanted to add that is relevant. If the challenge to scale is investing a little margin, and I'm not saying that's the case. We've reiterated our mid term guidance. But if that's the challenge, then this is a company with best in class margin structure and there's room to do so. So I really think it's a double positive here.

Speaker 10

Thank you, Pedro. Ashwin, on your question on pay ins and pay outs. So we like both products that are extremely complementary, but we never have an internal target for 1 versus the other. It's not us that decide what product we are selling. It's our customers that decide what products they want to buy from us.

Speaker 10

We always built our operations on a completely stand alone basis. And let me explain it. We never subsidize payments with payouts. We never do every dollar in our platform, its process at a profit independently of it being paying or payout. So we do see significant traction for both products, but that's never an internal objective.

Speaker 10

What we'll see over time in the New York countries is that sometimes one product runs up faster than the other and then over time things balance out. But we never set a restriction in terms of how much growth. In other words, if we can grow extremely fast our payments product And our payout product will be a little bit lower. That's perfectly okay for us. Over time, we know those things do balance out.

Speaker 10

But even if they don't, we are still okay in the long run.

Operator

Understood. Thanks.

Speaker 1

Thank you. Our next question comes from Jitendra Singh with HSBC. Your line is open. Santra Singh with HSBC. Your line is open.

Speaker 15

Hi. This is Neha Gharwal with HSBC. I guess I used the wrong link. Firstly, I'd like to welcome Pedro. Very nice to have you here at D Locals.

Speaker 15

My question regarding this quarter is related to the revenues in Brazil, which saw a big jump quarter on quarter. I believe this is driven by stronger volumes in Brazil, which led to stronger revenue. So if you could just elaborate on that and give any color what drove that. Also, the TPV growth quarter was over 22% quarter on quarter, which is significantly higher than an average of about 10%, 12% that we've seen in the previous quarters. So I believe we should expect this to normalize in the coming quarters and see more normal level of sequential TBV evolution.

Speaker 15

Thank you so much.

Speaker 10

Hi, Nisha. How are you? Good morning. Thanks for the question. So yes, our TPV grew in Brazil.

Speaker 10

Therefore, our revenues grew. What I'll say is that we spoke about this in the past. We have a great solution in Brazil. The Brazilian market is massive. There's a huge stamp for us to go after.

Speaker 10

This quarter was just a testament of those trends that we were expecting in that we spoke about in previous quarters. I think this should be also be a lesson for from what is how is it that our business works. We offer 4 geographies. Those geographies compound and help us win in different places at constant times. So the fact that we won in Brazil during this last quarter, It's not just a testament of our Brazil solution.

Speaker 10

It's a testament of the overall platform. This wasn't a Brazil win. This was a D Locals win that Manish has stated during this quarter in Brazil and in Mexico. Last quarter, it was in Nigeria. So we expect growth to continue in this market.

Speaker 10

What grades again, we reiterated our guidance on how we see growth going forward. But I want to emphasize the point that our business is better understood at the global level, at the macro level and not at the geography by geography basis. Geography by geography basis are merchant based decisions that we'll always be happy to accommodate for. What we are keeping track of is how do we make sure we land and expand with our customers? How do we make sure we

Speaker 15

And regarding the sequential growth in TPV.

Speaker 10

We're seeing our business firing at all cylinders. We spoke in the past about our pipeline been healthier than ever. I continue we continue to see a very, very strong pipeline. Anecdotally, During this quarter, we during this quarter without an impact yet in the current results, we were able to sign 2 of the top 10 global merchants. There's plenty of growth to come.

Speaker 10

Again, we don't always control the sequence at what that growth happens. That's why I focus on the mid- to long term. It's due in our business. But we continue to see great logo wins. We continue to see and a great pipeline and a great opportunity generation.

Speaker 10

We need to continue to build the product and make sure we are best in class across all the 4 emerging markets we are.

Speaker 15

Great. Thank you so much, Saba, and thank you so much, entire D Local team. Congratulations.

Speaker 1

Thank you. Our next question comes from Jamie Friedman with Equity Research. Your line is open.

Speaker 16

Hi, good morning, and let me echo the congratulations, Pedro. So my first one is for Pedro. I was just wondering, and it may be early, but a question that investors ask a lot Is with regard to D Locals compliance. And I was wondering, since you incubated a great payments company as well and MercadoPago. What's your perspective on the compliance infrastructure at DLO.

Speaker 16

That's one question. I'll just ask my second one as well. Sergio, we appreciated your comments about Argentina, and this is part of a continuum. But I was wondering, At a very high level, is this the same, worse, Better in terms of the regulatory scrutiny, out of Argentina now than what you have seen in the past. So the first one for Pedro, second one for Sergio.

Speaker 16

Thank you.

Speaker 9

Hi, Jamie, and thanks. Neha, thanks also before I hadn't answered you. So again, guys, this is day 1, but obviously that's an area that I've done as much diligence as was throughout our conversations. And I think what's important to understand is that the reason we add so much value to our customers Is that we tackle complex markets, markets that operate very differently. I think my running joke yesterday with the press was if All of emerging markets were Switzerland, then we wouldn't generate the kind of margins, take rates and value that we add.

Speaker 9

And so I see a compliance team and a compliance organization that is compliant. This is a publicly traded company in the U. S. And as such needs to be compliant. We will face local challenges regardless of how much infrastructure, processes and systems we continue to build.

Speaker 9

So, that's part of our value. I don't think it's something that concerns me and it's something that and I want to stress here, we'll continue to be built out. The impression here should not be that this hasn't been built out, this hasn't been done. There's a great team here led by great people and my job is to continue to make sure that we invest and we strengthen across all of our internal functions.

Speaker 11

I will take the Second question, well, the situation in Argentina right now, it's, as you may know from the news, it's extremely volatile. And there have been changes in the last actually in the last couple of days, Almost every day, there is a change in regulation. We are big believers in the country in the long term. Right now, all we as the rest of the market is in a wait and see mode to see how this is going to evolve and what's going to happen with the election.

Speaker 14

All I can

Speaker 11

say is that we have been in the country for a long time now. We are particularly flexible. We know the market very well. We are segment relations apply to us to the rest of the market. And we believe that we have the best knowledge and flexibility

Operator

Thank you, both.

Speaker 1

Thank you. Our next question comes from Matt Code with Autonomous Research. Your line is open.

Speaker 17

Hey, guys. Thanks for taking the question. I wanted to just ask a couple more on Argentina. Based on the press release and your opening statement, it seems like the investigation there is going well. Just hoping you could double click on that.

Speaker 17

And then, Interested in how the incremental hiring in Argentina could impact your margins over the long term? And then last one, and this kind of might be a similar answer To the one you guys just gave, but if we do see dollarization ultimately in Argentina, how does that impact your business?

Speaker 11

Okay. I will take it. So about the investigation we shared all the points share on the We will do that if there is any material information. About the hiring, We are growing our payroll. We just decided that the growth is going to come more from Argentina than before.

Speaker 11

It is a place where we find very good talent, and we have complete priorities that are starting to figure out over other countries. Right now, we have over 150 FTEs. And again, as you know, Hiring takes time until you find the right talent and onboarding, etcetera. But we are on track to increasing our workforce there. We don't see it impacting the P and L.

Speaker 11

Again, you can find very good talent in the short term. It's a bit cheaper than other parts of the world. But in the mid to long term, we expect it to convert to international or to emerging markets

Speaker 10

prices.

Speaker 11

And regarding dollarization, I don't know if it's going to happen. It's very hard to speculate on that. If it were to happen, of course, it would Make our life much easier in terms of processing cross border payments. So we would welcome

Speaker 17

Thank you. Super helpful. And then I just had like one quick follow-up. The tax rate was a bit higher this quarter at 16%, 11% last quarter. And you noted like the mix to local to local and more financial income driving that.

Speaker 17

Could you provide any guidance for like how we should think about modeling the tax rate going forward?

Speaker 13

So again, it would be the result of the mix of profits we have in the different countries that we operate. There are very different tax rates within the different jurisdictions. And as We currently have operations in 40 countries, another 5 countries that are holding and operating company levels. It's really complex to write a specific number. As long as we continue having a higher local to local profit as we did this quarter and we also have a financial income, particularly in countries like In Argentina, that would trigger higher income tax rate because those countries did carry have a tax rate of 30 plus percent.

Speaker 13

So as long as that situation continues, we remain we expect to have similar tax rate as what you have seen in Q2. But again, we don't guide for that because it will be basically the outcome of the changes in mix by country and the different type of transactions that we eventually have.

Speaker 17

Awesome. Thanks, guys.

Speaker 1

Thank you. Our next question comes from Caio Prado with UBS. Your line is open. Caio Prado with UBS. Your line is open.

Speaker 18

Hey, hello, everyone. Hi, Cielbas and team. Thank you very much for the opportunity, and welcome, Pedro. I have two quick questions on my side, please. The first is following the management change.

Speaker 18

Just would like to have your view about the strategy going forward, if there will be any change given the recent movements Or if there is any other initiatives beyond payments and your current projects that you could pursue in the medium term? And if so, if you can give us an example, would be really helpful, please. And the second one, if I may, is just another quick follow-up in Argentina. Not sure if I completely understood, but I think in one of your answers, you mentioned that you do not expect any impact from the additional devalue In the peso, as you reprice your clients, otherwise, you will have a negative impact. Is that right?

Speaker 18

Just would like to confirm. And if so, Have you already repriced your coin this week after the devaluation or not? That's it. Thank you.

Speaker 10

Pedro, I'll take the second part and let you take the first one, which is the fastest. It's not that we reprice Caio, it's not our merchants reprice. So they reprice our services and therefore we are indexed to their dollar amounts and as such our own revenues repricing. It's not that we increase our take rate. It's that our merchants have higher amounts or charge higher amounts, and therefore, we are de facto repricing our service.

Speaker 9

So I learned a long time ago, you don't fix something that isn't broken. Look at the first half that we've just delivered. Our Brazilian business, so our largest business grew revenues nearly doubled year on year. Our newer markets, which are a huge opportunity, Africa and Asia, I think grew over 2 times, nearly 2.5 times. We've had some one offs.

Speaker 9

We had a devaluation in Nigeria and the currencies in Argentina. But if I look at the long term prospects

Operator

for this business, and

Speaker 9

that's a big reason why I'm here, for this business. And that's a big reason why I'm here. This does not need a change in strategy at all.

Speaker 18

Okay. Thank you. But just wondering if you could pursue any other

Speaker 9

The addressable market, the global reach This company presents significant opportunities for us. So, again, reiterate, D local strategy is clear, the vision is clear, it's incredibly compelling. And what we need to do is execute on behalf of our global merchants behind their needs in FinTech and Emerging Markets.

Speaker 18

Okay. Thank you very much, Pedro and Siva.

Speaker 1

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

Speaker 10

Pedro, I think closing remarks are yours today.

Speaker 9

Yes. Thanks for that, Tewa. So, first of all, thank you, everyone, just to reiterate how excited I am to be here and the opportunity. And I do want to leave everyone with a final thought. Companies tend to get lost if they start placing excessive focus on the short term.

Speaker 9

And so we want to continue to reiterate and reemphasize to everyone that we're building this business for the long term and that's where we're making our decisions. I'm convinced that that is how value is created in technology, as I said earlier. When you compound the kind of results we're delivering over longer periods of time. So our job as leaders of this organization is to find the best way For D Local to be able to compound those results over a long period of time. That's why you see us investing in geographies, in product and systems.

Speaker 9

We're super, super excited about this opportunity. We have a huge market to attack globally to turn this into a multi $1,000,000,000 revenue business over the coming years, and that's where our focus is. I look forward to updating everyone on our progress on that journey over the course of the next few quarters. And thank you very much.

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Earnings Conference Call
DLocal Q2 2023
00:00 / 00:00