DLocal Limited

Hello, everyone. Welcome to D-Local's second quarter 2021 results conference call. This event is being recorded. At this time, all participants are in a listen-only mode. After the D-Local management team concludes their personal remarks, prepared remarks, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I'm going to turn the call over to D-Local.

Thanks, Operator. Welcome to our first quarterly earnings conference call after our IPO. As a reminder, this event is also being broadcast live via webcast and may be accessed through the LOCOS website at investor.thelocos.com, where the presentation is also available. The replay will be available shortly after the event is concluded. Before proceeding, let me mention that any forward statements included in the presentation or mentioned in this conference call are based on currently available information and the local's current assumptions, expectations, and projections about future events. While the company believes that their assumptions, expectations, and projections are reasonable in view of currently available information, you are cautioned not to place and do reliance on those forward-looking statements. Actual results may differ materially from those included in the local'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 the local's registration statements on Form F-1 and other filings with the Securities and Exchange Commission, which are available on the local's Investors Relations website. Now, I will turn the conference over to Sebastian Canavich, our Chief Executive Officer. Trevor, you may begin your presentation.

Hello, everyone, and thanks for joining our second quarter results conference call. Today, I'm joined by Sumita Pandit, our Chief Operating Officer, and Diego Cabrera Canay, our Chief Financial Officer. This is our first earnings call after our IPO on June 3rd, 2021, and we are excited to present an update on our business, and we thank you for your interest in our company. Let's get right into it on slide three. We are aware that some of you are joining us to hear our story for the first time, so we are providing a recap of who we are, what are the requirements we are addressing for our merchants, and what we believe is our addressable market. We will then provide an update on our vectors of future growth, followed by a review of our financial performance. We will leave time for a Q&A session at the end. So, who are we? The Local enables global merchants to connect seamlessly with billions of emerging market consumers. Our platform, 1D Local, presents a single API, single integration, and single contract solution to our merchants. We are entirely B2B focused, and we are proud to count some of the largest global merchants as our customers. such as Microsoft, Rappi, Kuaishou, Mailchimp, Wikimedia, Indriver, and Wix. Today, our infrastructure supports our merchants across 30 emerging markets in Latin America, Africa, and Asia. Now to the results. The second quarter has been our best quarter ever. Total process volume, TPV, grew 319% year-over-year when compared to the second quarter of 2020, reaching US dollars $1.5 billion during the quarter. Our TPV this quarter represents a milestone for the company, as it's the first time we have surpassed $1 billion in a single quarter. As you may remember, we grew our TPV 139% year-over-year in our first quarter of 2021, so our growth has continued to accelerate both year-over-year as well as quarter-over-quarter. Our revenues in the second quarter of 2021 increased to $59 million, representing 186% year-over-year growth compared to the second quarter of 2020. Our business continues to benefit from cost discipline and efficiency as we continue to maintain our adjusted EVDA margin along with high growth. Slide four, let us briefly compare our Q2 2021 performance vis-a-vis Q1 2021 as well as full year 2020. We have improved every financial metric we have discussed with you. Our second quarter revenue of 59 million is 46% quarter over quarter growth versus 40 million in Q1. Our Q2 2021 revenue growth of 186% compared to 124% in Q1 and 88% in full year 2020. We have previously highlighted the net retention rate metric as a key KPI we obsessively track. We achieved 196% net revenue retention in Q2 2021 versus an already impressive 186% in Q1 2021 and 159% in full year 2020. Our adjusted EVDA margin in Q2 2021 remains stable at 44% in comparison with our adjusted EVDA margin for the first quarter and higher than our Q2 2020 adjusted EVDA margin of 40%. Merchants and consumers continue to evolve on their behaviors as the pandemic goes through its different stages in the multiple countries we operate in. We are seeing more digitalization, less cash, and wider adoption of alternative payment methods. We believe these new consumer behavior changes are here to stay and will continue to have a positive effect on our business. During this quarter, we have seen continued growth in our business from both existing and new merchants using our platforms. Our global employee base has continued to thrive and will remain focused on serving our merchants. We have embraced a hybrid model of work, office or home, as we continue to be flexible about where our employees choose to work from. This is not new for us. As even pre-COVID, we had a flexible approach to physical locations, given our global roster of merchants and extensive emerging market network. For example, The three of us on this call today are based in different locations. I am calling from Israel while Sumita is in California and Diego is in Uruguay. We have continued our efforts on the expansion front, growing our presence in Africa and Southeast Asia. We have launched four new countries in the first half of this year. We have added 10 plus new merchants in the second quarter of 2021. We continue to benefit from the diversification of our business across verticals. Some verticals, such as retail, streaming, advertising, saw accelerated growth as businesses benefited from post-pandemic return to work and the gradual opening of economies. Our margins have remained stable in comparison with our previous quarter, even with continued investment in our infrastructure and people. We have continued to hire and strengthen our employee count in key functions, The headcount in the local grew 100% year over year. We see tremendous opportunity in the markets, merchants, and products that we serve, and we intend to continue to invest in our people, platform, and technology as we pursue a path of growth. Our disciplined approach to growth and profitability to date has provided us with a unique position. We intend to continue investing in growth, and therefore, our margins may decrease in the coming quarter. We will maintain our discipline to ensure that every new dollar we process will contribute to our market. Slide five. What are the problems we are addressing? There are three primary challenges that we are solving for our merchants. First, payment methods are local by nature and very diverse in the 30 countries we serve. On top of that, we are seeing a trend of continued fragmentation as consumers adopt newly available payment methods. Cash methods are getting replaced by digital payment methods, offering even more opportunities for consumers to participate in digital online commerce. Merchants are keen to access this rapidly growing end market without building the payment rails themselves. Second, achieving healthy conversion rates While keeping fraud under control, it's a challenge in emerging markets. We deliver high conversion rates and lower friction through automatic validation and dynamic routing of transactions to multiple acquirers and payment methods. And third, we make the complex simple for our merchants. For those of you who have traveled to any of the markets we serve, you will know that no two markets in these regions are the same. We enable our merchants to keep up with the changing regulatory and DAX frameworks in emerging markets. Slide six. As you may remember, we offer both paying and payout capabilities to our merchants. A typical fund flow for a paying transaction from an emerging market user to a global enterprise merchant requires smart routing, payments processing, withholding tax collection, FX management, and merchant fund settlement. A typical payoffs fund flow in the opposite direction from a global merchant to an emerging market user, imagine, if you will, a ride-hailing company driver or a food delivery worker, requires user payment disbursement, income tax management, FX management, payments processing, and merchant fund collections. Our platform enables all of this by leveraging our connectivity to 600-plus local payment methods, including cards, bankrolls, wallets, and alternative payment methods, as well as local acquirers, banks, and non-financial institutions. We are not an acquirer ourselves and instead connect to multiple acquirers in the local markets where we operate. We have recently launched issuing as a service to our global merchants. We have launched our first pilot with a merchant and expect this product to be highly complementary to our current product offering. Sumita, over to you.

Thanks, Seba. Slide seven. Our business benefits from strong industry tailwinds, such as the increasing globalization of online commerce, the rise of the digital economy, along with the rise of digital goods that move even more quickly across borders than physical goods, The aspirational middle class that is expanding and is keen to buy the products and services that users in the Western developed economies have always had access to. Purchasing power continues to expand in these countries, and there is a trend towards equalization of purchasing power that is driving global consumption trends. Global merchants are meeting their own growth forecast. They have promised their investors by going outside their domestic markets to pursue growth. As a result, traditional borders of commerce continue to blur. We therefore grow organically with our merchants. The complexity of the markets we serve makes our solution powerful. Slide eight. We commissioned a market study by AMI to measure our addressable market in the countries we serve. E-commerce volume in the countries we serve was estimated to be $1.2 trillion, of which $0.4 trillion is pay-ins and is expected to grow at a 27% annual growth rate, and $0.8 trillion is payouts. AMI expects the share of payouts to increase versus pay-ins, which implies an even higher percentage growth for payouts than 27%. This includes both cross-border and local-to-local e-commerce transactions. This does not include China e-commerce volume because we process minimal volume of payments in China. Also, not all of this volume is comprised of global merchants. However, RTPV at $1.5 billion for the quarter is a very small fraction of the opportunity ahead of us. We grew our TPV an impressive 319% year-over-year in our second quarter. We grew 139% year-over-year in our first quarter. In the first half of 2021, we achieved US dollars $2.4 billion in TPV, 15% more than what we processed on a 2020 full-year basis.

We have three primary vectors of growth, commercial efforts, product expansion, and geographic expansion. On the commercial effort side, we are focused on three levers. Organic growth of our merchants, our ability to cross-sell through account management, and our ability to add new clients. On the product front, we continue to enhance our product portfolio with improvements in our features for paying and payouts, together with the development and launch of new product lines. On the geographic expansion vector, we are constantly deepening our presence in the countries where we currently operate, together with significant efforts to expand our offering into new countries. As an example of the latter, we have added Vietnam, Malaysia, and Guatemala to our platform in Q2. Our financial results are a reflection of the power of our platform, the operating leverage of our business, and the stickiness of our merchant relationships. Our revenue growth plus EVDA margin, the rule of 40, as some of you may call this metric, was 129% in 2020, 168% in Q1 2021, and 230% in Q2 2021. We believe that the strong cash flow generation of our business also supports an inorganic strategy that will accelerate our time to market. We plan to pursue inorganic opportunities to accelerate any of our three growth vectors, including commercial efforts, products, or geographic expansion.

Let's double-click on these three growth vectors. Slide 10, commercial vector. We saw expansion in our relationships with existing and new merchants. We are actively targeting merchants globally, including in China, that are looking to expand outside their local market and expand into Latin America, Africa, and Asia. Our net retention rate, as shown on this slide, is a function of organic growth of our merchants, our increase in share of wallet of our merchants, increase in products per merchant, increase in countries per merchant, and increase in payment methods per merchant. We continued to improve our net retention rate, 196% in Q2 2021, by improving our commercial efforts with our existing merchants. We calculate NRR by measuring the dollar revenues we earn from existing merchants we had on our platform on a year-over-year basis. Therefore, $100 of revenues in Q2 2020 from the same set of merchants became $196 in Q2 2021. This is a key KPI we obsessively measure as it indicates the strength and predictability of our merchant relationship. We've onboarded 10 plus new merchants this quarter, including a merchant that is a US content provider that launched in 13 countries with us, change.org, a global short video sharing app, and a social network platform that develops a lip-syncing video that launched in four countries with us. Revenues from new clients was $19 million in Q2 2021 versus $1 million in Q2 2020. Revenues coming from merchants onboarded in the last 12 months are considered under new clients for this KPI. This is a rolling measure for a year over year comparison. Slide 11, product sector. Our product innovation journey is never static. Emerging markets are always changing, and we believe we need to remain agile, as it is our biggest competitive advantage. In this quarter, we continued to bring enhancements to our pay-in solution with new features. such as the flexible scheduler enabling dynamic fund transfer. We improved our tax manager to allow tax handling by payment methods, both debit or credit. We added new integrations to add redundancy in our card processing in existing markets. And we added new payment methods. We also enhanced our payout solution, expanding our instant payouts in more countries. We added direct connections with new partners and banks, and we went live with PIX mobile app in Brazil through our own APK. We improved our fraud and data capabilities with new machine learning models tailored for retail and gaming verticals. We added profiling and fingerprinting tools, and went live with device ID among other KYC improvements. Our issuance as a service solution enables merchants to create new lines of revenue and easily issue prepaid cards in local currencies to reach millions of consumers in emerging markets. Slide 12, geography vector. We've added four countries to our network in the first half of 2021. Our strategy is not to innovate in a vacuum, and to the extent possible, have a merchant in waiting when we open a new country. This is an example of our disciplined growth strategy. Our expansion strategy is both merchant-led, that is, we go where our merchants ask us for a solution, as well as the local-led, that is, markets where we know that there will be demand. We are not dependent on any single country for our performance. We also don't forecast our performance by country. We are solely focused on measuring our performance by our merchants. Slide 13. We see strong growth across verticals with a 319% year-over-year TPV growth as our business benefits from diversification. Our business model is not dependent on the performance and outlook of any single industry vertical. We see continued growth in verticals such as ride hailing and travel that started seeing strong return in volumes in the first quarter of 2021. We are also seeing accelerated growth in multiple verticals such as streaming, retail, advertising, and financial services. I'm now going to hand it over to Diego to review our financial highlights.

Thanks, Sumita. Let's start with slide 15. Since we started our operations five years ago, we have on average almost double our TPV year after year. We see an acceleration in our TPV growth with 319% in the second quarter of 2021 compared to 60% in the fiscal year 2020. This growth benefits from specific verticals, such as ride-hailing and travel, that were affected in Q2 2020. We are also seeing tremendous growth in all the other verticals, such as streaming, retail, advertising, and financial services. Let me highlight that even in Q2 2020, during the heart of the pandemic, we have still grown 17% year over year. While we expect to see continued strength in our business in the remainder of the year, The percentage growth may be normalized as the comparable quarters in the second half of 2020 had already seen significant growth. Let's move to slide 16. Our revenues in the second quarter of 2021 reached US dollars 59 million, 186% year-over-year growth from Q2 2020, and 46% quarter-over-quarter growth from Q1 2021. our revenue over TPV ratio, or take rate, was 4.1% in Q2 2021 versus 4.3% in Q1 2021. This is equal to the take rate we had in 2019. This ratio changes based on the underlying business mix. In 2020, pay-ins had shrunk to a larger portion of our overall business, resulting in a higher revenue over TPV ratio of 5%. This ratio also decreases as the volumes with some of our largest merchants increase, given that we set pricing tiers by volumes in our merchant agreements. Higher volumes with our largest merchants typically decreases the ratio, but it's great for our business as we bring incremental EBITDA. Let's switch to slide 17. We are very pleased with our continued improvement in adjusted EBITDA. In Q2 2021, our adjusted EBITDA grew to 25.9 million, 213% year-over-year growth, and 45% quarter-over-quarter growth. Our adjusted EBITDA margin remained stable at 44% since last quarter and improved 384 basis points year-over-year. We have achieved this while we have continued to invest in our people, platform, and technology. We intend to continue investing in growth, and therefore our margin may decrease in the coming quarters, maintaining our discipline to drive profitable growth with every additional dollar that we process. Cost of services dropped from 2.6% of TPD in the second quarter of 2020 to 1.7% of TPD in the second quarter of 2021, mainly as a result of business mix. Operating expenses grew $11.2 million year over year, mainly driven by expenses related to a secondary portion of the initial public offering for $3 million, stock-based compensation for $2.1 million, and salaries and wages that grew $3.7 million as we doubled our health fund and brought key talent on board. Let's continue with slide 18. Of the 186% year-over-year revenue growth in Q2 2021, $20 million came from existing merchants and 19 million came from new merchants. The comparable numbers for Q1 2021 were 15 and 7 million respectively. Revenues from existing merchants are those revenues that are driven by merchants that were already processing in the same quarter of last year. And revenues from new merchants are those revenues that are driven by merchants that started operating with us after the same quarter of last year. As mentioned, Our net revenue retention rate continues to improve with 196% in the second quarter of 2021 compared to an already outstanding 196% in the first quarter. Switching to slide 19. When we look at our KPI per merchant, we see that they have sequentially continued to improve. The average number of countries per merchant in the second quarter of 2021 reached seven compared to six in the first quarter. Given that we have already built our payments network in 30 countries, there is significant capability to continue to bring our merchants to new geographies. And the same applies to the payment methods per merchant. We reached 62 compared to 63 in the first quarter, while we offer more than 600 payment methods in the countries that we operate. With that, I will turn it back to Seba to conclude.

Thanks, Diego. On slide 20. In conclusion, our five strengths are as follows. First, we have a large and expanding addressable emerging market ecosystem. Second, we have a direct integration with some of the largest online merchants in the world. Third, our scalable single API technology infrastructure makes a complex simple for our merchants. Fourth, we are diversified across verticals and clients. And fifth, Our rapid growth is combined with our disciplined profitability. And this is just the beginning. We continue to remain focused, humble, and agile as we enable our global merchants to connect with billions of emerging market users and execute on our growth strategy. Thank you for joining us today. I will now request the operator to open it up for questions.

Thank you. As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by. We'll compile the Q&A roster. Our first question comes from Jorge Curry with Morgan Stanley. You may proceed with your question.

Hi. Good afternoon, everyone, and congrats on the numbers. I have two questions, if I may. The first one is on Your new merchant growth of 19 million was pretty spectacular, more than 2x what you did in the previous quarter. Can you give us a little bit of a sense of who those new merchants are? How big can they be? Could any of them potentially be one of your top 10 merchants? That's evidently a very large uptake in new merchant growth. I'm assuming there's some really large clients there. And then the second question is on your net revenue retention rate of 196 is evidently well ahead of what you did last year, well ahead of the soft guidance you had provided of around 150, 160. How do you see this number trending in the second half of this year? Thanks.

Thanks, Jorge. Thanks very much for joining us. So on your first question, I think an important clarification to make is that this is a trailing metric. So we are taking into account every customer. as new merchants that weren't there a year ago. So you'll see that that number continues to evolve. Having said that, yes, this was a very strong quarter. Sumita touched on her remarks on some of the merchants we've been able to win, including a social network, a U.S. content provider, a short video sharing app. And for us, Jorge, what we believe is more important is the trajectory rather than the starting point. Yes, we are extremely excited of these customers we've been able to onboard, but having the ability of onboarding them, it's day one. Then it's where we need to make sure we are continuing adding value into new geographies, new products, and that's where our network retention starts to trigger and starts to compound. So we are definitely excited with the current ones we've been able to onboard, but hopefully we'll be able to see their growth in the next many quarters to come. And on your second question around net revenue retention, Sumita, do you want to take it?

Yeah, sure. Yeah, happy to sub out. So I think, Jorge, the question, I want to make sure that we understand the methodology carefully here. So when we say revenues from new clients, And that number was $19 million in second quarter 2021. That number used to be $1 million in second quarter 2020. And the reason you see that increase is that's the revenue from any new clients in the last 12 months. And so it could be a client that we added in Q3 of last year or Q4 of last year or Q1 of this year. All of that aggregates into that 19 million number. And that's why, in comparison to Q2, that number looks that big, 19 million versus 1 million. On your question on the guidance, what I would say is that this has been a fantastic quarter for us. If you look at the year-over-year growth rate numbers, the reason also the percentages are so high is that Q2 2020 was right in the middle of the pandemic and we're getting the benefit of a slightly lower base last year in the second quarter. I think as we look out over the next two quarters, We expect our dollar numbers to look good, but I would not predict a percentage growth rate that are similar to what we've been able to achieve in the second quarter because Q3 and Q4 of last year were stronger quarters than Q2 of last year.

Thanks. Sorry to push back, but So again, my first question stands. So what type of merchants are you adding that they're ramping up their revenue so rapidly and they are bringing such a large amount of new revenues? And whether or not this could be much bigger, sort of like top 10 revenues? We're trying to understand how can your revenues ramp up from here? And I think it'll be really helpful if you can help us understand who are these clients, what they do, how big they are. Even the names would be very useful to try to get a better sense of how revenues can go up from here. Thank you.

Sure.

Okay, so first of all, I think it's worth conceptually discussing who we focus on. We are serving some of the largest companies in the world, And many of those names you get to see on our website. Obviously, we try to make sure we disclose together with them. And those are the names that we've been able to disclose out there. But these are companies that have ambitions to operate in more than one country that are some of the world leaders in their respective areas. And we've announced some of those partnerships during not only the last quarter, but during the year. So a lot of those customers are out there. And we obviously have expectations for them to become much, much bigger. Sumita was touching on the time point. While we believe our numbers to be very impressive and we are extremely proud of them, we are clearly still dropping the ocean of the opportunity we have ahead. And we are of the idea that those volumes in emerging markets are going to be driven by the type of merchants we serve, which are the largest companies in the world. So that's our – I would love to give you the name, but that's, I hope, some further clarification of who those merchants are.

Thanks. That's fine. Congrats again. Great numbers. So all the best. Thank you. Thanks, Jorge.

Thank you. Our next question comes from Tito Labarta with Goldman Sachs. You may proceed with your question.

Hi, good afternoon. Also, congratulations on the very strong results. Two questions, kind of piggybacking a little bit on Jorge's questions a bit, but first on the growth of new merchants, given the strong growth at the IPO, you had mentioned most of the growth you expected to be coming from the existing merchants. So are there more new merchants going forward from here on out that you can boost that growth from new merchants more than you initially expected? I guess maybe to rephrase it, post-IPO, has something changed where you think you can maybe capture more new merchants than before, which should boost that growth? And then the second question, also on the net revenue retention rate, I guess following up on Jorge's question, right, you had guided for that 150 to 160, and, you know, you're well above that. I mean, is... Looking back, do you think that 150 to 160 was too conservative? Can you accelerate even from here, that 196? I understand you have soft comps last year, but just to get a sense, 196, well above that 150, it looks like there should be upside to that 150 to 160 guidance that you had given at the IPO. Is that fair to assume? Thank you. Thank you.

I can start with the second question, Tito, which is on your question on net retention rate. And then let's come back to the new merchant question. On the net retention rate, if we look at our cohorts over a period of time, the reason, you know, we've spoken about the 150 to 160%. By the way, that was also our net retention rate number for our full year 2020, as you may remember. When we look at cohorts over a slightly longer period of time and we look at the trends, we see that the 160 number is actually quite stable. So I think in the medium term, we still think that that is the right net retention rate to consider as those cohorts mature. In the initial years, when we add a merchant, our NRR could be really, really high, but it stabilizes, as we've discussed with you in the past. So we think that the 150% to 160% is still the right medium-term net retention rate, and therefore it's still what we've modeled. In terms of your first part of the question, which was related to your new merchant's We actually think that that number will actually come down because we've added some very large merchants in the last 12 months. As I mentioned, it's a rolling measure. So keep in mind, these are not new merchants we've added only in this quarter. These are any merchants that were not in our book of business in Q2 of 2020. So it's a rolling measure of any new merchants in the last 12 months. And so we've added some merchants in the last 12 months that are contributing to that new client number. We expect that number to come down in the next two quarters as that rolling measure changes.

Great. Tito, and just to complement on that, sorry, the other driver for new merchant growth is having the ability of having new products, both, sorry, new product and new geography. So You had a question around, are there more customers to be won? What we expect is that through additional geographies, through additional products, through additional capabilities, on the medium to long term, we'll be able to continue adding merchants. Not necessarily at the pace we did this quarter, but yes, we do believe there's plenty of opportunity ahead in terms of new logos to bring into the platform.

Great. Thanks, Seba and Sumita. That's helpful. Maybe one follow-up then on the net revenue retention rate again. I understand in the midterm, yeah, it should trend lower to that 150, 160. But I guess in the shorter term, it looks like that should be running higher, right? So midterm... maybe I guess to quantify the midterm, is that like in two, three years? And in the shorter term, there seems to be some upside, or is the midterm next year? Just to try to quantify the midterm a little bit. Thank you.

Yeah, I think that it's about two years from the start of when a merchant comes on board. So it's a cohort-based measure, Tito, and I think we discussed this with you during the IPO as to how those cohorts trend out. We've added some pretty large merchants in the last 12 months. We expect them to stabilize in about 24 months from the beginning of when they come on our platform. So I would say it's in the next 12 to 18 months is where we see the 150 to 160% to be a stable place.

Perfect. That's very helpful. Thank you, Sumita.

Thank you. Our next question comes from Neha Darwala with HSBC. You may proceed with your question.

Hi, congratulations on the earnings, very strong results. I had a clarification, mostly on the revenues and TPV. Does that also include the impact of the Premier Pay acquisition that you closed in April of this year? I believe some of the new merchant revenues might be driven from the acquisition of Premier Pay. Is that right to assume?

Yes, this includes Premier Pay.

Could you tell us what would the TPV and the revenues look like without inclusion of prepayment of primary pay this quarter?

I don't think we are disclosing that information, Neha, but I would say that it's not significant enough to make as much of a difference to the numbers, but we are not disclosing the primary pay numbers separately because it was an asset deal, as you know. We acquired the assets of primary pay. We will not be breaking out those numbers, but it's not significant enough to be broken out either.

Okay, perfect. And then, again, on the operating expenses, this quarter was a bit high because of some extraordinaries. But going forward, should we expect costs to be a bit elevated? As you mentioned, you expect some pressure. You could see some pressure on margins. What are the expectations in terms of costs? given that revenues are already coming very, very strong so far. So should we see a pickup in the costs? Do you plan to have stronger geographical expansion in the coming quarters? Any color on that?

Hi, Nita. This is Diego. So if you look at Q2 2021, the main one-off expenses that we had were the IPO expenses for roughly $3 million. and some M&A expenses may be related to Primero Pay for around $300,000. So everything else is organic and expect to continue as the equation increases going forward as we continue to grow. So you should exclude those numbers, and the rest is a trend that should continue going forward.

Okay. And lastly, on the issuer as a service program, you launched a pilot program How has the response been so far, and when do you think you can formally launch this new service for your clients?

Hi, and thanks very much for the question. So we've launched a pilot. The product is readily available to our customers who wish to use it. Obviously, we have enterprise merchants, so the sales cycles, as you were aware, are long. So we see this product the same way as we've seen payouts back in the day, paying as highly complementary one with each other. We, going forward, don't intend to break down revenue by product because, again, we're always driven by this idea of having more products and more solutions to offer our merchants. The product is readily available for merchants who want to be onboarded. Having said that, we expect the proper ramp-up to take time.

And you separately monetize that. It's not included as the full package. That is a service that merchants can take up on a separate basis, and you can monetize that service.

Exactly. So exactly the same way as pay-ins and payouts work, where there's a fee for a pay-ins transaction, there's a fee for a payouts transaction, there'll be a fee for our issuing product. So, yes, it's going to be a new revenue line if you will, from an industry. You'll see it bundled, but it will be a new source of revenue for our business.

Perfect. That's very clear. Thank you so much, Seba, and Sudeikta, and Diego.

Thank you. Thank you. Our next question comes from Ashwin Srivarkar with Citi. You may proceed with your question.

Thank you, and congratulations from me as well. Good quarter. You had mentioned the benefit of ride hailing and travel as your clients recover from the impact of the pandemic. Could you maybe emphasize this or maybe indicate how much more benefit you might get if you just get back to, say, 2019 levels from purely economic recovery?

Sure. Ashwin, hi, and thank you very much for the question. Obviously, we are a very different business than what we were back in 2019, so that normalization wouldn't make much of a change. We are not dependent on any particular vertical or industry. We are really well diversified. So, yes, we've seen some recovery on the ride-hailing and travel space, but we are not counting on any sort of pre-pandemic numbers. We don't forecast that way. We are not counting on that to happen. If it happens, it will be good news for us. But at the end of the day, we like to believe we've been COVID agnostic. Yes, there's been interests that have accelerated. There have been others that have been losers. But we believe in the long run, we are in a very sustainable trajectory, which will have some losers that are going to lag. And therefore, our performance is going to lag together with them. But we are not counting on any bounce back of any of those industries to move the needle for us.

Understood. And then a separate question as you, you know, ramp many of these new clients that you're signing, including perhaps transition over some of the PrimeroPay clients. What should we expect with regards to a margin impact from that? Is that what you're indicating when you say that margins may be a bit softer in the nearer term quarters?

Yeah, I think, Ashwin, thanks for the question. I think on the margin question, as you can see, our margins have stayed stable between Q1 and Q2. And we think that we will really look to invest over the next few quarters. And we think that there could be some margin compression from the 44% levels in the coming quarters. And the reason for that is really driven by our expansion plans, our product plans, and I think our commercial efforts. The other thing to also keep in mind is that one of the reasons, I think Diego mentioned this in his prepared remarks, where he walked you through what the revenue over TPV number is and It's at 4.1% in this quarter, what 4.3% in 2021. The reason we think that there could be some margin compression is we continue to see tremendous volume growth from our large merchants. And I think we've mentioned this to you, we have volume fears in our contract. So as the dollar volume goes up, and the tiers go up, the pricing comes down, which is actually good for our business. We actually like it because that means that we're going to get more volume. But I think given those two factors, we think that while on a dollar basis, we will continue to grow, from a margin perspective, we expect to see some compression in the next three quarters.

Would you be able to size the level to which, I mean, I'm still talking low 40s, so not lower than that.

Yeah, I think we are talking low 40s. If you think about the 2020 year numbers, both for net retention and margin, we think that that's a good place for us to plan for.

Great. Very helpful. Thank you. Thank you all.

Thank you, Ashwin.

Thank you. And as a reminder, to ask a question, you'll need to press star 1 on your cell phone. Our next question comes from Sumit Ipa with New Street Research. You may proceed with your question.

Hi, guys. Thanks very much, and congratulations on very good numbers. Just two or three quick ones for me, please. First of all, just on pay-in and pay-out, which I guess is shaping your take rate to a degree, are we kind of broadly back to if you like, the historic ratios we've seen between paying and payout. And so can we think about this level as kind of being a little bit more normalised, or do you still think post-COVID there's a bit of a reset likely to take place? Secondly, just on competition, which hasn't been mentioned, are we seeing anything by way of response from either the incumbents or banks of e-banks or agen, anything kind of happening on a competitive front, which is worth flagging. And then just a final one, please, maybe just looking forward, you talked a little bit about card issuance as a service, which sounds really interesting. One other thing I was interested in was prepayment income, which is such a source of revenue and profit across Latin America in particular. Any thoughts on whether that is a a revenue you could try and pursue going forward. Thanks very much.

Thank you, Sumit. So on the question around the split between pay-ins and pay-outs, we've seen those two evolve along the years, and we believe it's going to continue to evolve. We are still a micro and a macro world. So depending on which customers we are able to onboard and at what speed, you'll see pay-ins, pay-outs, gaining a different share. So I don't think we can point you to any mature stage split between those two. Depending on who the merchants are and how strongly they use our platform, you'll see that that split continues to evolve. On the competition question, we've lived for many years in a very competitive space. We believe there's many great companies many great payments companies worldwide, some of them are public, but we also are of the idea that this opportunity in emerging markets is huge, and we also believe we are very well positioned to capture, hopefully, a lot of that opportunity. Some of the competitive advantage that we're building, the idea of having the direct connections, the idea of the technology, having the deep cultural understanding of the markets where we operate, we believe are sustainable advantages. So to answer your question, we are counting on competition to be aggressive, but at the same time, we are confident of the efforts and the advantages built into our platform. The third question is on prepayment. I'll start to submit a free compliment. As of now, we don't make revenues from prepayments the way you would see for other companies, particularly in Brazil. Is that an opportunity? Probably yes. It's not included in any of our internal forecasts. We are more focused today on continuing with our geographic roadmap, continuing with our product roadmap, and if anything, that would be a quick or an easy win to pursue further down the line.

Okay, thanks. Thank you. Our next question comes from Domingos Salavino with JP Morgan. You may proceed with your question.

Thank you. Hi, good evening, everyone. At the sound of being repetitive here, congratulations as well, amazing figures. You know, I'm adding a little bit, I think, to Jorge's first question. You guys brought in a lot of new clients, and I remember you guys had kind of a funnel that, you know, the sales process is long, like you said. So if you could give either quantitative or qualitative comments on, you know, kind of how this pipeline looks, like an example you had in the last, you know, stage of this funnel, like 30 companies, you converted 10 of them, Maybe you're moving an additional five to this funnel. We just want to kind of grasp or understand a little bit how this pipeline of new clients, how mature it is, how it's evolving.

Hi, Dom, and thanks for the question. So we've onboarded 10 new merchants in the last quarter, but that probably doesn't tell much of the story. Part of the reason why we've decided to become public was we wanted to raise awareness in the market of our existence to our merchants, and we believe we managed to do so to a certain extent, but that by no means has an impact on our current quarter. If anything, that will help us drive more leads into that funnel that we were discussing. The other thing is that that funnel is fed by opportunities that are based on geographies and products. So the more geographies we have, the more products we have, the more we are able to have a conversation with any customer and tell them we have a service to offer you. So we see a pipeline that is extremely healthy, that it's full of opportunities across all different stages. But also, if you remember what we discussed at IPO, there's two key funnels for us. It's a new sales funnel where we are going after the new merchants, But at the same time, there's an account management funnel, which is the one that drives the net revenue retention. And that's the one we focus the most, making sure there's more opportunities with each one of these customers that are onboarded and it's never been healthier.

Very clear. And in the new company funnel, like in this last stage, did it grow or did it shrink? So basically, did you absorb most of the opportunities or are you basically stable as far as the things that you're expecting, let's say, in the next six months?

It's very much in line with what we were expecting. Again, enterprise merchants by nature are cyclical. There's going to be times where we're going to have higher new merchants. There's going to be times where we're going to be slower. That's why we care so much about the account management funds. Having a customer in our world doing that $1 we do means not much. What we want to know is that those customers continue to grow with us, continue to drive more business, and that's where we are the most focused, making sure we have enough opportunity with our current merchants in our platform Because we know new merchants will come, but we also know that our success is going to be tied with us delivering value to them and being able to grow with them as they grow. Thank you, guys.

Sorry, one other point. I would say a big opportunity for us is merchants that want to grow outside their home countries. I think we mentioned that in our prepared remarks. We see that there is tremendous pent-up demand from merchants looking to go outside their home countries, including from China. So as we keep highlighting, we don't actually process significant payment volume in China, but we do work with Chinese merchants outside China, and that's also been beneficial to us.

Thank you again, and congrats.

Thank you. I would now like to turn the call back over to Sebastian for any further remarks.

Thanks, everyone, for joining today. We are glad, and thanks for your questions. We are happy to stay in touch in the future.

Thank you very much.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.