DLocal Limited (NASDAQ:DLO) Q2 2023 Earnings Call Transcript

DLocal Limited (NASDAQ:DLO) Q2 2023 Earnings Call Transcript August 16, 2023

Operator: Good day, and welcome to the DLocal Second Quarter 2023 Results. Please begin.

Soledad Nager: Good morning, everyone, and thank you for joining us for the DLocal second quarter 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 Fogel, Co-President and Chief Strategy Officer; Diego Cabrera Canay, 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 DLocal’s website at investor.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 DLocal’s 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 results may differ materially from those included in the DLocal’s 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 DLocal’s filings with the Securities and Exchange Commission, which are available on DLocal’s Investor Relations website.

Now, I will turn the conference over to Sebastian Kanovich. Thank you.

Sebastian Kanovich: 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, it’s available on our Investor Relations website. Let me also add that we have in the call, Pedro Arnt, who will be joining me as Co-CEO. We are extremely excited to have Pedro joining the team. We are proud of the great talent that we have at DLocal, 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. I would now like to invite Pedro to introduce himself.

Pedro Arnt: 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 Seba, Sergio, Jacobo, and the rest of the great team here at DLocal. They will then walk us through DLocal’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 DLocal since its inception merely seven years ago. 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 $1.4 trillion 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 five years. Third, the product and technology stack is fantastic as it serves many of the world’s leading and most demanding mega-cap tech companies. And fourth, 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% CAGR over the past three 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. 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 DLocal 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 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 the DLocal’s trajectory and further unlock returns for all stakeholders involved. 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.

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Sebastian Kanovich: 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 instinctive strength of our business, which we continue to build focused on long-term profitable growth. These trends combine, one, 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 One DLocal. Two, a well-diversified business across verticals products and geographies, with vast geographic coverage of over 40 countries. And three, relentless execution of our merchants growth and cross sell strategy across products and geographies. Last but not least, our lean and disciplined culture.

We deliver all the previous strengths with a lean team, continuously striving for excellence. Our culture is 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 One DLocal, navigating the complexity of payments in these markets on behalf of our merchants, so they can remain focused on their core business. We have a proven track record in leveraging these factors to deliver robust dollar growth of TPV, revenue, gross profit, adjusted EBITDA and net income. Moving to our financial highlights of the quarter. This success was reflected across all metrics. TPV grew 80% year-over-year, and a strong 22% quarter-over-quarter, surpassing for the first time the $4 billion 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. 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 eight quarters, increasing $9 million in gross profit and $7 million 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.

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 806 employees. This is an increase of 174 full time employees compared to second quarter 2022 or by 28% year-over-year. We continue to recruit talent globally, combining specific experience and skillsets as well an on-the-ground knowledge. We reached 202 full time employees in Africa and Asia by the end of Q2 2023. 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.

Maria Oldham: Thank you, Seba. Hi, everyone. Let me remind you how we view our growth engine. We have three axis of growth, one, product, two, merchants, and three, geographies. On product, during this quarter, we continue to focus our efforts on deepening our presence in the countries in which we operate, with a particular focus on African and Asia, by establishing more direct connections with payment methods and acquirers and also continuing to enhance our solution. During the second quarter 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 a 148% in Q2 2023.

New merchants revenue reached $11 million in Q2 2023. We have very close relationships with our merchants, which enables us to grow together with them. Our top 10 merchants continue to show very high growth, totaling $94 million revenue in the quarter. Our three axis 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. In Latin America, where we have our largest scale, 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 through 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. We have been operating in both countries since 2016. So the sustained growth rates are true indicator of the hyper-growth potential that it will still have in Latin America, even in our most mature markets. As you know, Brazil is where we started seven years ago. It is also highly developed markets in terms of digital payments penetration and technology, but this market is far from mature from a growth opportunity standpoint.

This high growth in a large and competitive geography, 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. 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. In the last 12 months to Q2 2023, revenues in Africa and Asia increased more than three times year on year. Excluding Nigeria, this region grew 78% year-on-year in the last 12 months through Q2 2023. In Q2 2023, Nigeria revenues increased by more than four times year-on-year. The quarter-on-quarter deceleration was driven by the naira devaluation 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 DLocal. We continue to see great growth opportunities in the market.

Excluding this effect, revenues would have been in line with Q1 2023. Sergio will shed more light on the recent market changes later on in the presentation. Moving to the next slide. This case study trades the powerful combination of our three axis of growth. We onboarded this merchant, our 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, one, organic growth of our merchants, two, increased share of wallet, and three, additional payment methods, solutions and geographies.

We now process volume for this merchant in seven countries across Africa and Latin America on top of processing pay-ins and pay-outs this merchants uses 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, one, a white label seller onboarding KYC, and two, 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. Sergio will now discuss our emerging markets focusing more depth and share a few updates on some of our key markets.

Sergio Fogel: Thank you, Maria. Good morning, everyone. As you know, I have co-founded the company, and 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. DLocal 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 seven years of strong growth, we are still only scratching the surface of this opportunity. 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 change in circumstances is one of our key operational strengths and underlines our value proposition of taking the complex and making it simple. Now, I’d like to update you on recent developments in three specific markets. One such change in market 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. 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 our press release in June, we committed to show additional economic substance in the country. On June 14, we acquired with our own funds $48 million worth of Argentine dollar linked treasury bonds. We acquired an additional $49 million 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. 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 naira, 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 see when expanding to Nigeria. 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 the naira 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. Shortly after the end of Q2, we reached another milestone in our evolution. At our Investor Day, we shared that we applied for a Payment 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. Becoming a Payments Institution carries with it 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. Diego will now review our financial highlights.

Diego Cabrera Canay: 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, pay-ins increased by 70% year-over-year and by 27% quarter-over-quarter and pay-outs increased by 114% year-over-year and 10% quarter-over-quarter. The contribution from pay-outs 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 provider of choice in emerging markets for global payroll, social media, ride hailing, and on-demand delivery companies. During this quarter, we also saw strong traction both in pay-ins and pay-outs 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% 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. 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 the diversification as a key strength. Revenues also reached a record high of $161 million in Q2 2023, growing 59% year-over-year and 17% quarter-over-quarter. During this 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. We remain focused on growing absolute gross profit dollars which is the key success metric of our business. Our gross profits reached $71 million in Q2, up 43% year-over-year and 14% quarter-over-quarter, with net take rate at 1.6%.

Processing cost over TPV remains stable at 2% quarter-over-quarter. Gross profit margin and net take rate remained 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. 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 million, up 36% year-over-year and 14% quarter-over-quarter. 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 million during the quarter, growing by 46% year-over-year. Sequentially, it increased by 26% quarter-over-quarter. Net income for the quarter includes $7.5 million of net financial gains. 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 saw 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 TPV, and financial gains. Let’s move to cash generation. During the first six months of the year, we observed strong cash flow generation. The main drivers of our cash increase were our net income, we substantially converted 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. This resulted in an increase of $141 million. We invested $61 million in completing our share repurchase program and $48 million 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 allows us to continue investing in the business. Seba, the floor is yours.

Sebastian Kanovich: 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 first six 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, we expect to end the year in line with guidance in terms of both revenue and EBITDA. Revenues between $620 million and $640 million, and adjusted EBITDA in the range of $200 million to $220 million.

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 One DLocal platform is clear to help our merchants navigate local complexities in receiving and sending payments in emerging markets. Everything that we do is focused on further improving this value proposition. 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&A, which Pedro will also be joining.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Tito Labarta with Goldman Sachs. Your line is open.

Tito Labarta: Hi, good morning. Thank you for the call and taking my questions. Congratulations on the strong results and strong hire from — Pedro, congratulations on new role. A couple of questions, if I may. Maybe Pedro, if I could start with you, thanks for some of the comments you gave on the opportunities you see in joining DLocal but we’ve gotten several questions and we’d love to hear from you — coming from MELI, very well-respected company. Just to understand a little bit the sort of reasoning to come over to DLocal? I mean you talked a little bit about the opportunity coming here at Co-CEO role, but would just love to hear a little bit more from a personal perspective. What excited you so much to make that switch?

So would love to hear from you on that. And then second question on the revenues, very strong performance on revenues, Seb, as you mentioned, you’re maintaining the guidance there. But like to get a little bit more color. Do 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 full-year basis from here? Thank you.

Pedro Arnt: Hi, Tito. Hi, everyone. It’s great to be here. Thanks for the question. I think I laid it out in the prepared remarks. 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 DLocal 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 zero 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.

And I think DLocal 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 a 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 DLocal.

Tito Labarta: Thanks. Pedro.

Sebastian Kanovich: 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, in the guidance question, 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 customers. Tito, you know this, we have constantly overdelivered on all metrics to which we have guided since we went public over two years ago.