DLocal Limited (NASDAQ:DLO) Q4 2023 Earnings Call Transcript

DLocal Limited (NASDAQ:DLO) Q4 2023 Earnings Call Transcript March 19, 2024

DLocal Limited isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the DLocal Fourth Quarter 2023 Results. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, today’s conference is being recorded. I would now like to hand the conference over to the company. Please go ahead.

Soledad Nager: Good morning, everyone, and thank you for joining the fourth 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 Pedro Arnt, Co-Chief Executive Officer; Sebastian Kanovich, Co-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 Investors Relations. A slide presentation has been provided to accompany the prepared remarks. This event has been broadcast via live webcast, and both the webcast and presentation may be accessed through DLocal’s website at investor.dlocal.com.

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 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 these forward-looking statements. Actual results may differ materially from those included in DLocal’s presentation or discussed in this conference call for a variety of reasons, including those described in the forward-looking statements and risk factor sections 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 DLocal. Thank you. [Video Presentation – Looking back on 2023, DLocal is celebrating remarkable achievements. Within a span of five years, our company experienced an extraordinary 14-fold expansion, achieving a record TPV of $18 billion, increasing by 67% year-over-year. This is a testament to the trust of our merchants among the most demanding and sophisticated companies in the world placed in our solution. Most of the growth has been fueled by our existing merchants as we continue to gain wallet share. The trust our merchants place in our solution is also evidenced in our stellar NRR of 150%. We are committed to unlocking the power of emerging markets. In 2023, we enabled 154 million people in emerging markets to access global products and services.

This is a 62% increase compared to 2022. In 2023, we proudly met the needs of over 600 merchants across 40 markets and consistently onboarded new merchants to our platform. Among the world’s leading technology companies by market cap, we served five out of the six major ones. Revenue witnessed significant growth in Brazil, 89%, and Mexico, 72%, our most mature and highly competitive markets. Africa and Asia delivered an impressive 114% year-over-year increase. We over-delivered on our revenue guidance, reaching $650 million, over 55% year-over-year. We remain focused on achieving gross profit growth, our key metric. Gross profit grew 37% year-over-year to $277 million. Our continued disciplined investment approach, coupled with a focus on sustainable growth, has delivered another outstanding year with a Rule of 40 at an impressive 110%.

Our adjusted EBITDA surpassed $200 million in line with our guidance. Furthermore, we’ve maintained a best-in-class adjusted EBITDA over gross profit margin of 73%, even amidst ongoing investments to support our long-term ambitions. How did we achieve these remarkable results? Of course, through our people and culture. We efficiently grew our global team from 726 to 901 people, located across 49 countries. Very importantly, by continuing to be obsessed about our merchants and having them in the center of everything we do. We delivered innovative solutions and products against highly demanding merchant needs. In 2023, our platform solution gained traction, especially in marketplaces, expanding into five key markets in just one year. We have onboarded more than 230,000 sellers on behalf of our merchants in our marketplaces with automated KYC capabilities and flexible settlements for complex platform configurations.

Last, and certainly not least, we are building upon our existing strengths by making investments in key capabilities, including growing our license portfolio, deepening our relationships with global banking partners and ramping up our operations and back-office effectiveness. In 2023 alone, we were granted licenses in strategic markets such as Brazil, Nigeria, Kenya and Rwanda, and registries in South Africa, Philippines, Chile, Costa Rica, Panama and Peru, and we are carrying this momentum forward. In 2024, we are relentlessly focusing on serving our customers and solidifying our position as a preferred infrastructure solution for global merchants across emerging markets. We are committed to making 2024 our most remarkable chapter yet. DLocal Built for Success in Emerging Markets.]

Pedro Arnt: Hi, everyone. As the video illustrates, we’ve just delivered an incredibly strong year that is finished on a high note with regards to increases in both TPV and revenue. As a growth company, these two metrics are really important to us since they reflect our merchants’ choices. Remember, our TPV is their revenue and is the best indicator of our ability to capture and retain share of wallet. We think in terms of decades, not quarters, and over the long run, which as I’ve just said is what we’re focused on, consistent growth in these two metrics drive operational leverage, which in turn drives increased profitability and cash flow, which is ultimately what generates shareholder value creation. Now, let me walk you through a more short-term view, reviewing our fourth quarter of 2023 results.

We delivered what we consider stellar TPV growth of 55% year-over-year and an 11% quarter-on-quarter growth, surpassing $5 billion to $5.1 billion. This is another quarterly record proving our solution’s strong competitive position. The strong TPV performance we deliver translated into revenue growth of 59% year-on-year and 15% quarter-over-quarter, reaching a record $188 million. Growth was driven by a very strong performance in our most competitive markets, Brazil, where revenues doubled year-over-year and grew 12% Q-on-Q, and Mexico, which was up 59% year-on-year and 18% quarter-on-quarter. Additionally, Nigerian revenues doubled year-over-year and increased 3x quarter-on-quarter, driven by widening spread between the official and the market exchange rates, which conversely also resulted in a significant increase in expatriation costs.

This strength in our biggest markets, combined with continued growth across other markets, was offset by a negative 26% year-on-year and negative 56% quarter-on-quarter contraction in Argentina. The weakness in Argentina was driven by two factors. First, a Q-on-Q decline in our higher take-rate cross-border business as a consequence of tighter capital controls leading up to the year-end transition in government, which resulted in what we believe to be a temporary shift towards more local-to-local settlement by our merchants. Second, the country’s currency devalued significantly towards the end of the quarter, further affecting our performance in dollars, not unlike the impact felt by most other companies with a relevant exposure to the Argentine market.

I’d like to remind you that despite these short-term headwinds, we continue with a long-term view that Argentina is a relevant market for us, and more importantly, for our merchants. In complexity, we thrive and we will continue to serve global merchants and consumers in that market. This impact that I’ve just narrated carried over to our gross profit line, resulting in a quarterly decrease in total gross profit to $70 million. That’s down 6% Q-on-Q. However, if we exclude the Argentine segment, gross profit grew by 7% Q-on-Q. When we go to a year-on-year basis, gross profit grew by a still sound 27% year-on-year or a very strong 48% when we exclude Argentina. Our net take rate decreased during the quarter by 20.5 basis points Q-on-Q to 1.4%.

This has been as a result of shifts in business mix, with a lower share of pay-ins and cross-border volumes. We believe that these results indicate that although downward pressure on take rates continues, as we’ve repeatedly signaled, it is happening at a slow pace. And more importantly, driven primarily by mix shift, as we still continue to see limited pricing pressure that’s derived from competitive dynamics. Let’s move on to our OpEx structure for the quarter. During Q4, we continued to invest further in building out our team and establishing processes and systems to support our long-term growth ambitions. As a consequence of these investments, overall OpEx increased to $29 million in the quarter. Main areas of expense increases were; one, tech-related expenses, including engineers, software licenses and other IT and security expenses; second, non-IT salaries and wages, as we continue to strengthen our team, including important leadership positions; and third, office expenses, as we’ve grown our global footprint.

Overall OpEx represented 41% of gross profit, compared to 31% the prior quarter. For a more detailed view, please refer to slide 18 from the accompanying earnings material. I’d like to stress that we are convinced that these investments in technology, product and people are very relevant to continue building a sustainable, high-growth business. As we continue to gain scale, we expect to see operating leverage in the mid-term. As I go down the P&L, all this resulted in adjusted EBITDA of $49 million, up 22% year-on-year, but down 11% Q-on-Q. Adjusted EBITDA margin contracted quarterly to 26%, primarily driven by the previously noted gross profit margin compression. Despite the slowdown in adjusted EBITDA, we continue to deliver best-in-class profitability.

Our ratio of adjusted EBITDA to gross profit came in at 71% for the quarter, notwithstanding the investments undertaken I’ve just walked you through. Net income totaled $28 million during the quarter, growing by 47% year-on-year. Sequentially, that was a decrease of 29%. As we detail in the accompanying presentation, the quarterly evolution of net income was negatively affected by lower EBITDA, inflation adjustments under IFRS, which are accounting impacts and increased stock-based compensation. Consequently, we’ve also observed an increase in our effective income tax rate from 18% the prior quarter to 21% in Q4 and that’s a result of higher local-to-local share of pre-tax income and the fact that the IFRS inflation adjustments are non-deductible.

Moving on to cash flow, during the quarter we generated $36 million of free cash flow, that’s our own fund generation and $166 million during the year. Our net income to free cash flow conversion continued to be above 100%. Strong own funds cash flow generation was mainly driven by the net income profile of our financial model and also by the recovery of $13 million of restricted cash that we had held as guarantees for standby letters of credit. During Q4, we also used part of our own funds to acquire an additional $16 million in Argentine dollar-linked treasury bonds in order to successfully hedge against FX exposure in that market. Consequently, we ended the year with a robust liquidity position of $326 million, including $223 million of available cash for general corporate purposes and $103 million of short-term investments.

We remain committed to evaluating opportunities to take advantage of our differentiated financial profile that combines profitable growth with very strong cash generation, which allows us to explore inorganic growth, possible buybacks and instituting a dividend policy. Overall, we’re very proud of what we achieved in 2023 and we’re also excited about our outlook for 2024 and even beyond. As I said before, I came to DLocal with the strong belief this is an outstanding business with significant opportunities ahead. That conviction has done nothing but increase in my time here. As a team, we remain focused on capturing the huge market opportunity ahead of us by continuing to execute our land-and-expand strategy with our merchants, maximizing opportunities and gaining share of wallet from them.

We will also continue investing behind and tightening the foundations for future growth because we trust there will be a lot of future growth. First of all, we will further strengthen the DLocal team, investing in human capital with a particular emphasis on the engineering pool; second, we will further upgrade our back-office capabilities; and third, we want to continue investing behind our licensed portfolio throughout emerging markets, which we are convinced can become a unique asset in the coming years. On this last point, it’s worth pointing out that we were granted incremental licensees and registries across 10 markets during 2023, as the intro video showed. These three factors will contribute to further widening our competitive position over the long run.

I’d like to now hand it over to Maria, who will walk you through how everything I’ve just outlined for you translates in terms of our financial outlook for 2024.

Maria Oldham: Thank you, Pedro. Good morning, everyone. I’d like to share our expectations for the full year 2024. We are adding TPV expectations this year, as we believe this is the most relevant operational metric for our company. It is the cleanest indicator of market share. As we mentioned earlier, ultimately our merchants choose us by routing more and more volumes through our systems than other alternatives they may have. We are guiding for TPV growth of 40% to 50%, surpassing $26 billion of TPV at the midpoint. As we currently see things, incremental volume growth will be back-ended in the year, starting off at a similar level to how we exited 2023, and picking up pace as the year progresses, given our growth in the highly seasonal e-commerce vertical and how we currently see our late-stage pipeline panning out.

This strong TPV growth will be driven mainly by increased share of wallet from existing merchants and continued scaling of tier zero merchants. We continue to benefit from structured tailwinds associated with digital economy and the growth of the middle class in emerging markets. Africa and Asia are expected to grow at a faster pace, signaling the long-term potential for global growth. Verticals with most expected growth are e-commerce, advertising and ride-hailing. As we always emphasize, our main financial focus is on maximizing absolute dollar gross profit growth. Thus, we decided to guide for gross profit instead of revenue, as we believe this metric better reflects how we run our business. We see gross profit for 2024 between $320 million and $360 million.

Our gross profit range assumes, first, increased mix coming from tier zero merchants as we continue to ramp up those global relationships, driving incremental TPV and wallet share from the world’s leading tech companies, but at lower take rates. Second, sustained growth in our local-to-local business. We see this is a validation of our orchestration approach to payments and proves that we are competitive versus local acquirers. Third, normalization or tightening of FX spreads in certain dual-currency rate markets, such as Argentina and Egypt, that generated windfall benefits in 2023. Despite the tightening of FX spreads being a headwind for our plan in 2024, it also represents a more sustainable and lower-risk gross profit profile. And fourth, mix of growth shifting to less mature markets where we haven’t scaled yet.

Final guidance is on adjusted EBITDA. We are committed to running a financial model that combines robust mid-term gross profit growth with EBITDA margin that is among the best in our comp set. This is our model of highly profitable growth. As such, we are reaffirming our mid-term guidance of 25% to 35% gross profit growth, 75% adjusted EBITDA to gross profit margin. The trajectory towards that mid-term guidance comes in for 2024 at around 70% adjusted EBITDA to gross profit. This is an adjusted EBITDA of $220 million to $260 million. We foresee OpEx increasing around 45% year-on-year. When compared to Q4 run rate, OpEx growth will be around 25%, despite a 2x growth rate expected for TPV in 2024. Confirming the operational leverage existing in our business model and indicating that much of the incremental OpEx spend necessary for the long-term growth has already been incurred during H2 2023.

This growth in year-on-year OpEx will be driven primarily by tech investments, as we aim to grow our talent pool by around 50%. Other main areas of OpEx growth will include sales and operations. As our short-term guidance indicates, we are investing with discipline so as not to deviate significantly from our mid-term margin guidance. And by reiterating our mid-term outlook, as we look beyond 2024, we are signaling that once we conclude our short-term investment cycle in tools, processes and people to secure our ability to scale the company for the long-term growth, we believe we will start to see the operational leverage inherent to our business model kicking in even more clearly. As mentioned in the opening remarks, that kind of scaling is what generates the cash flows that drive shareholder value creation over time.

The clear potential of DLocal becomes obvious if one compounds our growth in line with our mid-term targets over a multiyear period. Let me now hand it over to Seba.

Sebastian Kanovich: In a carefully planned transition that unfolded since August, Pedro is set to take on the role of soul CEO. My commitment to DLocal remains strong and I will actively lead the newly established Commercial and M&A Committee as part of the company’s Board of Directors. Over the past few months, Pedro and I have not only worked together but learned from each other, capitalizing on our complementary skills to enhance the company’s performance, especially in navigating intricate situations. As we progress to the next phase of our transition plan, emphasizing efficiency in daily decision-making, we are confident that Pedro is the ideal person to oversee DLocal’s day-to-day operations. His instrumental role in scaling one of the most successful emerging market technology companies speaks volumes about his capabilities.

Pedro’s focus will be on the ongoing mission of company building, while my attention turns towards identifying pivotal growth opportunities for DLocal in the future. Now I’ll hand it back to Sergio to unveil further details about upcoming management changes.

Sergio Fogel: Hi, everyone. Thank you, Seba, for sharing this news with us. On behalf of DLocal’s Board of Directors and the shareholders, I want to express our deep gratitude for your significant contributions to our company since inception. Working with you has been and will continue to be, an absolute pleasure. Witnessing your journey steering DLocal from its humble beginnings to a thriving startup in Latin America and now to a global powerhouse fills me with pride. As we move forward, we anticipate a shift in the leadership style needed by the company, according to the various stages in its evolution. The challenges of 2023 prompted a defensive approach, leading to operational consolidation. With these changes now on track, we are transitioning to an offensive strategy.

Our focus is on re-accelerating our long-term growth prospects through a combination of innovation with new product launches, expanded coverage in high potential verticals and growing our commercial team to ensure it is fit for purpose, and when the right opportunities arise, inorganic growth through M&A. Sebastian’s pivotal role in leading the newly constituted Commercial, Business Development, and M&A Committee will be instrumental in executing this more assertive strategy, geared towards long-term value creation for our shareholders. In my capacity as founder, principal shareholder and active manager, it is immensely gratifying to observe Pedro, Seba and the Board collaborating to navigate this transition seamlessly. Our unwavering objective remains to preserve the core values and the capabilities that fueled our growth, while embracing new opportunities as we scale into a much larger organization that can best serve our merchants throughout emerging markets.

We firmly believe in this strategy. As proof of this, during 2023, as the main shareholders of the company, we have bought back $160 million worth of DLocal shares, showing our confidence in the long-term success of the business. In many ways, I see myself as the custodian of our company’s legacy and culture, steering the course to maintain continuity, while also bridging the path towards essential changes that will secure our future success. With this, let me hand it over back to Pedro.

Pedro Arnt: Thanks, Sergio. As we reconfigure these leadership structures, I am also very pleased to announce the newest addition to the team. Mark Ortiz will be joining the company as Chief Financial Officer, starting his role in April. As we continue our upward trajectory, we sought a robust financial leader capable of guiding us through the next phase of our growth. Mark brings a wealth of experience in that sense, boasting over 30 years of senior financial leadership primarily at GE Capital, where he held roles as Global FP&A Leader and Global Controller across multiple departments. Mark’s extensive background includes not only key financial expertise that’s fit to our current requirements, but also working assignments across over 20 markets, making him well-suited for the global complexity that our company presents.

I trust Mark is the optimal CFO choice to propel us to the next level of growth and reinforce our standing as our frontrunner in payment solutions for emerging markets. I hope everyone has a chance to meet Mark over the coming years and share the same enthusiasm we have with his arrival. I also want to make sure we all extend our gratitude to Diego Cabrera Canay for his invaluable contributions to DLocal. Diego played a pivotal role in establishing numerous finance functions at the company, prepped it for substantial international expansion and growth, and guided the company through its public listing process. Over the last three and a half years, Diego has been a steward of a business that has grown 10x in TPV, opened over 20 country operations and multiplied its market cap by 4x.

We wish Diego the best. In summary, I’d like to thank our global team, our valued customers and our investors for all their continued support. And before we head back to your questions, I’d like to wrap up today’s prepared remarks with one last thought. 2023 was a watershed year for DLocal. Despite facing significant market tests and macro challenges, we believe we’ve demonstrated the resilience of both our value proposition to our merchants and also of our business model, persistently growing and thriving through turbulent times. We believe we emerged strengthened and focused on tapping into the immense business opportunity ahead of us. We’re committed to realizing the long-term company purpose of unlocking the potential of emerging markets.

What we mean by this is building a bridge between the growing base of billions of consumers in the Global South and the products and services they demand, but that until very recently were exclusive to the minority of consumers who had access to payment mechanisms from developed markets. And as we accomplish this mission of closing the digital divide for emerging market consumers, we’re also tapping into an incredibly attractive long-term market opportunity that is the one that underlies the investment thesis in DLocal. I look forward to giving you updates on our progress along this journey as the quarters evolve. And with that, we can take your questions.

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

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Q&A Session

Tito Labarta: Hi. Good morning, everyone. Thank you for the call and taking my questions. A couple of questions, I guess, if I can. Maybe to start just on Argentina, just given all the moving parts there. Just to clarify some of the comments, and Pedro, you mentioned that there was more local-to-local transactions. Now, does that mean that your existing merchants, are they getting like local subsidiaries and then are able to interact locally or are they just staying as they are and not being able to do cross-border keeping money in the country? Just to understand some of the mechanics, given the issues there. And then would you expect this to sort of normalize in 1Q already or would it take longer to normalize? And somewhat related to that, just on the gross profit guidance of $320 million to $360 million, what does that imply for Argentina?

Does that mean if Argentina sort of remains as it is, you’re sort of at the midpoint of that guidance? Do you expect Argentina to improve to deliver either at the higher end and does it imply maybe Argentina gets worse at the lower end? And then my second question, I guess, is more on Nigeria and Egypt, because we’ve also seen big devaluations there in the first quarter of this year, and we did see a big growth in both Nigeria and other Asia and Africa. If you can help us understand what the potential impact of those devaluations should be, I guess, in 1Q and how that may have been reflected in the guidance? Thank you.

Pedro Arnt: Thanks, Tito. So, lots of moving pieces. Let me walk down the questions. So, the increase in local-to-local settlement in Argentina is not a change in how our merchants are set up, but rather as volatility increased, and more importantly, capital controls tightened even further leading into the election, many merchants started to opt for local settlement. We don’t necessarily think that’s a structural change. We see that eventually as capital controls are lifted, there is an opportunity to regain those flows into cross-border. But that will take continued normalization in Argentina, which we believe will happen mid-term, not happen in short-term. Our guidance for the year, when we compare it to the 2023 comps, does assume Argentina structurally, although potentially has an opening of capital controls, will also have tighter spreads on FX as the government has signaled an intent to move towards a single exchange rate.

So, we do build into our 2024 guidance lower gross profit from Argentina when compared to 2023 on a margin perspective. What we need to see is does macro improve enough so that towards the end of the year, volumes pick up significantly or is that more of a mid-term trend? We do believe that long-term that market continues to be an important and attractive market for us. Egypt, I would say, has similar dynamics. Egypt, as we’ve seen in Q1, the devaluation, that’s made for tighter spreads on repatriation and cross-border flows. Potentially, it starts signaling greater liquidity in the market for FX, but at a lower margin profile than what we had up until now. Just to give you an order of magnitude, Egypt full year represented roughly less than 10% of our business, but growing towards the back half of the year.

Given that spreads were widening and now with the tightening of spreads on FX for 2024, we also assume that Egypt becomes a bit of a headwind short-term for us, so into 2024. Nigeria is somewhat of a different situation. I think as we’ve said consistently, the revenue fluctuations in Nigeria don’t really flow through gross profit as much. So, gross profit in Nigeria for the quarter was roughly in line with what it was for Q3. Very, very slightly down, despite the big increase in revenues. And so, the guidance for Nigeria is that in terms of trajectory, we hope to continue to see TPV growth there, generally at similar margin levels than what we had in 2023.

Tito Labarta: Great. That’s helpful. Very clear, Pedro. Maybe just a follow-up, if I can. On — back on Argentina, just to make sure I understood correctly, so you said that the merchants are opting for local settlement. So, that means, I guess, they’re basically keeping money in Argentina, and I guess, they’re not bringing that, I’m just trying to think how that necessarily impacts their business, but I guess, the assumption would be as things normalize, they would eventually expatriate that money back to their home country and then, could you get some additional revenues as that happens, just to make sure I understood that correctly?

Pedro Arnt: That’s correct. So, we have two flavors of settlement. We can settle locally, and therefore, we don’t have an FX component to our fee or the core of our business, roughly half of the volume. We can settle for merchants internationally and then there’s an additional fee for the repatriation service. What we’ve seen in Q4 and you see that in the disclosures, is that the mix has shifted more towards local-to-local and that’s been particularly the case in Argentina as capital controls tighten towards the end of the year.

Tito Labarta: Okay. That’s clear. Thanks a lot, Pedro. I appreciate that response.

Operator: One moment for our next question. Our next question comes from Jason Kupferberg with Bank of America. Your line is open.

Melissa Chen: Hey. This is Melissa Chen on for Jason. In your prepared remarks, you mentioned making investments in hiring and upgrading back office capabilities in 2023. Can you give us an idea of the cadence of these investments throughout the year? Will they be sort of like spread evenly, more front or back end loaded? Any details there would be helpful.