DLocal Limited

Good day and welcome to the D-Local first quarter 2023 results call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. Instructions will be given at that time. As a reminder, this call may be recorded. I would like to turn the call over to Soledad Nagger, Head of Investor Relations.

You may begin. Thank you very much, Operator.

Good morning, everyone, and thank you for joining our third quarter 2023 earnings call today. If you have not seen our earnings release, a copy is posted in the financial section of our investor relations website. On the call today, I'm joined by Sebastian Canovic, our Chief Executive Officer, Jacobo Singer, our President and COO, Diego Cabrera-Canay, our Chief Financial Officer, and Maria Olman, Vice President of Corporate Development and Investor Relations. We are providing a slide presentation to accompany our prepared remarks. This event is being broadcast live via webcast, and both the webcast and presentation may be accessed through the local website at investor.thelocal.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 the local current assumptions, expectations, and projections about future events. While the company believes that our assumptions, expectations, and projections are reasonable given currently available information, you are cautioned not to place undue reliance on those forward-looking statements. Actual results may differ materially from those included in the local presentation or discussed in this conference call for a variety of reasons. including those described in the forward-looking statement and risk factor section of the local filing with the Securities and Exchange Commission, which are available on the local investor relations website. Now, I will turn the conference over to Seba. Thank you.

Good morning, everyone. Thanks for joining the call today. I'm pleased to share that we've had a very strong start to the year. Our TPB grew 70% year-over-year and 8% quarter-over-quarter, reaching $3.6 billion. Our revenue grew 57% year-over-year and 16% quarter-over-quarter to $137 million. We continue to focus on growing our absolute gross profit and EVDA dollars. We've added $7 million gross profit and $5 million EVDA in the first quarter of 2023. Both figures increased double-digit year-over-year and quarter-over-quarter. Gross profit grew by 42% year-over-year and 12% quarter-over-quarter to reach $62 million, and adjusted EVBA grew by 38% year-over-year and 13% quarter-over-quarter to reach $45 million. We have always been focused on delivering profitable growth while investing to achieve our long-term ambition, capitalizing on the huge opportunity ahead of us. We are proud to share that during the last nine quarters, our ratio of adjusted EVDA to gross profit has remained consistently above 70%. This is because our disciplined investment approach is part of our DNA. We remain firmly focused on profitable growth at Skilled. We are still a young company in growth mode. Over the long term, there are clear opportunities to deliver operating leverage. Now, Maria will discuss our operations and performance in Q1 2023.

Thank you, Seba. Hi, everyone. During Q1 2023, we significantly grew our business with our top 10 merchants. In Q1 2023, our revenue from our top 10 merchants reached $80 million versus $45 million a year ago. Our top 10 merchants concentration actually increased in Q1 2023 because we delivered very rapid growth among our top 10 and with two merchants nearly entering the top 10 list. We work extremely closely for our merchants. During Q1 2023, our top 10 merchants on average processed payments with us in 10 countries versus 8 a year ago, and all of them leveraged the local products in at least one country in Africa and Asia. This is a testament to our successful cross-selling strategy and to our merchants' trust in our solutions. We are their partner of choice, both when they decide to go local in a country and also when they operate cross-border. Eight out of 10 of our top 10 merchants process with us both on a cross-border and local-to-local basis. Moving to the next slide, during the quarter, we focus our efforts on deepening our presence in the countries in which we already operate, mostly in Africa and Asia, by establishing more direct connections with payment methods and acquirers, and continuing to enhance our solution. In our last earnings call, Hakko highlighted how excited we are about the growth opportunity in Nigeria. Let me share a little bit more of our journey in this country. We opened this country back in 2019 because one of our merchants needed us to help them access local payment methods. As our roadmap is driven in great part by our merchant needs and the request was within emerging markets, we made the launch of Nigeria a priority. We were then able to offer this to our entire merchant base. And today, our solution in Nigeria is used by six out of our top 10 merchants. One great benefit of choosing our solution is the wide access to non-traditional payment methods. According to Statista, in Nigeria, only 3% of the population have a credit card. So merchants rely on us to connect alternative payment methods and local card schemes, such as Verve. The opportunity in Nigeria is massive, as the country has a huge and young population. Also, from the perspective of our merchants, it is a market that is complex to operate in, and they strongly benefit from our solution there. As we mentioned in previous quarter, gross take rate is significantly higher than average, while net take rate is largely in line with other markets in which the local operates. Gross profit margin is lower than the average, but we believe that over the medium to long term, As we go deeper into the region, developing more integrations and payment methods, and gaining more efficiency in accessing the FX markets, the gross profit will expand. As we always emphasize, we focus on absolute dollar profit growth, even with lower margin in the short term. Maximizing absolute dollar profit will create the most valuable business in the long term. Now, I will pass on to Hakko to discuss our achievements in the different geographies.

Thank you, Maria. Africa and Asia have been a key engine of growth for us. Our merchants continue to sign a strong demand for our solution in these geographies, and these markets also have attractive economics. The results of our push into these regions speak for themselves. Revenue in Africa and Asia in Q1 2023 grew by 297% year over year and 53% quarter over quarter, reaching $39 million with a large part of the acceleration driven by Nigeria. Asia and Africa already represent a relevant portion of our business at 28% of our revenue in Q1 2023. In Q1 2023, we saw strong growth in Nigeria, with revenues increasing by 16 times year-over-year and 91% quarter-over-quarter. Nigeria accounted for 20% of our revenues in Q1 versus 2% a year ago. We are also very proud of the progress we have achieved in several other markets, such as Egypt, Morocco, Indonesia, and Malaysia, all of them growing triple digits year-over-year and becoming more relevant to our business. It is still early days for us in these regions, and we are very excited about what we believe to be a significant opportunity ahead. Moving on to Latin America, we continue to see solid growth across the region in Q1 2023, with revenue growing by 27% year-over-year and 6% quarter-over-quarter to $98 million. Q1 2023 marked Argentina's return to positive revenue growth, increasing by 41% quarter-over-quarter, albeit still at slightly lower levels than a year ago. LATAM, excluding Argentina, showed strong revenue growth of 38% year-over-year and was stable quarter-over-quarter. On a quarter-to-quarter basis, you might see revenue growth with geo-vary, for example, in the past quarter. Mexico outperformed other markets. We look at 12-month view to see a normalized view in order to assess the development of a region. In the last 12 months to Q1 2023, each of the main countries individually showed significant revenue growth, greater than 20% year-over-year and 62% growth on the aggregate. It is important to highlight that the revenue distribution by market is a result of our merchant strategy. Our commercial teams are internally organized for merchants and we do not optimize for targets by geography. We have global agreements with our merchants and we offer them access to all of the emerging markets in which we operate, supporting them in the markets in which they wish to grow. We continue to invest thoughtfully in expanding our global team. We have hired new talent, particularly in the areas of sales and marketing, tech and product and operations, to pursue the opportunities we see in the markets and to drive towards our long-term objectives. Tech-related roles now account for around 41% of our FPEs, supporting our rapid innovation of new products. In Q1 2023, we grew our team by 201 FTEs or by 36% year-over-year to 763 employees. We continue to recruit talent outside of the Americas as we focus on hiring locally to leverage on-the-ground knowledge and develop deep understanding of local market idiosyncrasies. We reached 173 FTEs in Africa and Asia by the end of Q1 2023, representing 23% of our workforce. We will continue to invest in talent in a disciplined way, 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 as strong as ever. Diego will now review our financial highlights.

Thank you, Jaco. And hi, everyone. We have seen a steady increase in pay-ins and pay-outs TPD quarter after quarter. During Q1 2023, pay-ins increased by 52% year over year and by 7% quarter over quarter. Pay-outs increased by 133% year over year and 11% quarter over quarter. The product share remains relatively unchanged quarter over quarter with pay-ins accounting for 70% of our TPV and payouts for the remaining 30%. The contribution from payouts has increased year over year as we have been successful in providing the last mile payment service in emerging markets to global public payment companies and we continue to position ourselves as the payment service provider of choice in emerging markets for global payroll, ride-hailing and on-demand delivery companies. We are product agnostic. All our products bring incremental profit, and when we combine them, they bring synergies both for our merchants and for us. Depending on which customers we onboard and their strategy in the quarter, the share of pay-ins versus pay-outs may vary. We see product diversification as one of the strengths of our business. Going forward, we are very positive about the continued growth of our products. Our cross-border and local-to-local volume shows solid growth year-over-year and quarter-over-quarter, with cross-border volume growing quarter-over-quarter by 12%, increasing its share contribution from 53% in Q4 to 55% in Q1 2023. As Maria mentioned earlier in the call, we have seen that large merchants tend to have a combined strategy, and we expect fluctuation between services to continue from quarter to quarter. Revenues also reached a record high of $137 million in Q1 2023, growing 57% year-over-year and 16% quarter-over-quarter. We continued delivering strong revenue growth, both from our existing and from our new customers. During Q1 2023, of the 57% year-over-year revenue growth, 47 percentage points, or $41 million, came from existing merchants, and 10 percentage points, or $9 million, came from new merchants. Our revenue-sovereign TPV, or gross take rate, was 3.8% during the quarter, compared to 3.6% in Q4 2022. Fluctuations from quarter to quarter are mainly driven from changes in business mix. As Nigeria and Argentina, with higher than average gross take rate, were the main drivers of the quarter-over-quarter revenue and gross take growth. We continue to deliver a strong net revenue retention of 147% for the quarter. This is driven by very low churn, less than 1% year-over-year, the organic growth of our mergers in emerging markets, and our ability to continue bringing them to new countries, products, payment methods, and to increase share of wallet. Moving on to slide 16, we remain focused on growing absolute gross profit dollars. During Q1, our gross profit reached $62 million, up 42% year-over-year and 12% quarter-over-quarter, with a net take-rage stable quarter-over-quarter at 1.7%. During the quarter, we registered an increase in processing costs from 1.8% in Q4 2022 to 2% in Q1 2023, which is in line with increasing gross take rate from 3.6% to 3.8%. These increases are mainly attributable to the increase in TPV in Nigeria, which has higher fees and higher expectation costs. From a gross profit margin perspective, margins dropped to 45% compared to 47% in Q4 2022 and 50% in Q1 2022. The waterfall chart on the right shows the main changes in a gross profit margin. Product, service mix, and cost optimization contributed favorably to the margin as we had a higher share of cross-border and payouts quarter-over-quarter. In contrast, the country mix reduced the margin as we experienced strong growth in Nigeria, which brings positive gross profit dollars with net take rate largely in line with other markets, but a lower than average gross profit margin. Excluding Nigeria, gross profit margin would have been about 50% in the previous quarters, reaching 54% in Q1, 2023, increasing from 51% in Q4, 2022, also excluding Nigeria. We also remain focused on growing our EBITDA. During the quarter, we were able to grow our adjusted EBITDA to $45 million, up 38% year-over-year, and 13% quarter-over-quarter. Adjusted EBITDA margin was 33% in Q1. The year-over-year and quarter-over-quarter decrease is driven by the gross margin decrease. Particularly in Q1 2023, the main driver of that decrease was the high growth in Nigeria with lower than average gross margin. Net income totaled $35 million in the quarter, growing by 35% year-over-year. Sequentially, it increased by 83%, as in Q4 2022, we incurred non-recurring expenses of $8 million. Before handing the call back to Seba for the closing remarks, I will touch on liquidity. In Q1 2023, we observed strong net cash generation of $50 million, even considering that we acquired $37 million of our own shares as part of the $100 million buyback program. The two main drivers of our cash flow generation were our profits and a sequential normalization of funds advanced or held in escrow as warranties for merchants and partners, and the main use of cash was the buyback. During our last earning call, we shared with you that we have taken extraordinary short-term measures in the form of warranties and advancements of funds to bring additional comfort to our merchants and partners using our own funds. We also mentioned that we expected the situation to normalize over the next quarters. In Q1, we have already collected $10 million out of the $13 million in advances we gave to some of our merchants, and we recovered $4 million of the restricted cash we held as a warranty for standby letters of credits, decreasing the amount of other assets from $57 million to $43 million. Finally, we observed a sequential normalization of the settlement periods of our merchants that were in a few cases reduced in Q4, and we continued generating cash as we grew our TPD, all together generating an inflow of $32 million from the variation of the net trade receivables and payables. We ended March 31st, 2022 with a consolidated cash position of $518 million with $233 million of own funds and $285 million of merchant funds. We believe our strong cash position remains a competitive advantage. Seba, the floor is yours.

Thanks, Diego. We are very proud of our strong start to 2023 and continue to be excited with the runway ahead of us. Our performance shows the distinctive strength of our business, which we continue to build, focused on long-term profitable growth. Combining our robust dollar growth on a TPV, revenue, gross profit, adjusted EVDA, and net income basis, From a strategic standpoint, a proven track record in executing our merchant cross-sell strategy and outstanding geographic expansion, capitalizing on the huge opportunity ahead of us. This is all underpinned by our tech DNA and merchant-centric approach. Last and most importantly, our lean and disciplined culture. We deliver all this with a lean team, continuously striving for excellence. Our culture is key to continue delivering our long-term ambitions. We reaffirm our outlook for the rest of the year. Revenue between $620 and $640 million, with an implied NRR between 140 and 150%, and adjusted EVDA in the range of $200 million to $220 million. We remain humble and focused on providing the best and most comprehensive solution for our merchants in emerging markets. I am thrilled to share more about our business and our trajectory in our first ever investor day on June 8th. We will be celebrating two years as a public company. A lot has changed since the IPO, and we are excited to see you again and share an update on the next chapter of our story. Big thank you to our global team, our customers, and our investors for their continued support. I'll now hand back to the operator to open up for questions.

If you would like to ask a question, please press star 1-1.

If your question has been answered and you'd like to remove yourself from the queue, please press star 1-1 again. Our first question comes from George Curry with Morgan Stanley. Your line is open.

Hello? Can you hear me?

Hi, Jorge. We hear you.

Hi, sorry, thank you. Thanks and congrats on the numbers and the additional disclosure, much appreciated. I wanted to see if you can double click on the Nigeria business evidently has grown to be your biggest geography and there's a lot of questions out there in the market about how do you operate in that market that has very high capital controls and restrictions. Can you maybe walk us through what percentage of that business is cross-border versus local to local? And the part that is cross-border, how does it operate from an FX perspective? Can you access all of your needs in the official FX market? Is there any restrictions for you to repatriate a currency? Is there a parallel market that you're accessing? I think it would be beneficial for everyone to understand exactly the limitations and how you deal with them as you grow that business. And then my second question is on Argentina. There was a really nice uptick in revenues in Argentina in the first quarter. So I just wanted to see if this is the first of several similar step-ups that we're going to see as that operation normalizes, or was this sort of like a one-off and you continue to expect the business to be a little bit under pressure because of the difficulties there. Thank you.

Jorge, thank you very much. Thank you very much for the questions. I apologize in advance. I'm under the flu, so I apologize for my voice. Nigeria. So we are extremely excited about our results in Nigeria. We think it's very, very positive news. That's part of the beauty of the company and part of the beauty of our value proposition. We started in Nigeria in 2019. So this is not an overnight success. It's taken us over four years to get to this point. And we are extremely proud of it. Just to give you a sense, today six out of our top 10 merchants are using us in Nigeria, both cross-border and local to local. Nigeria has a market dynamic where there's very, very few international credit cards. There's a credit card called Verve, which is very prevalent. And as you said, sorry, I apologize. There's very limited, there's very strict capital controls. What happens in Nigeria is that there's a market rate. There's an official rate and there's a market rate. We are accessing today the market rate. We are licensed to do so. And that's why you see our margins, our gross margins be lower than our net take rate. Sorry, that our gross margins be lower than they are in average. Our net take rate, it's a creative, it's very much in line. with other markets. In other words, we make money in Nigeria, we create value for our merchants, but the margins are lower. This is part of the expectations we have going forward. As we normalize access to the FX markets, as we gain scale in both pay-ins, pay-outs, cross-border, local to local, we expect our margin to potentially increase.

Hako, feel free to complement, please. Jorge, thank you very much for your time and thank you for the question.

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

Jorge Oño.

Sorry, on your question on Argentina, the best way to look at our business is not by country by country basis and not on a quarter by quarter basis, but across regions. So your question, your point is fair. We've had a great quarter in Argentina. We are seeing fundamentally good trends coming back to this market after a crisis that impacted us during Q3 and Q4. So you saw some of the normalization that we were mentioning. Obviously, Argentina is a complex market and it has its volatility. But I think the key point in Argentina is how reliant the merchants are on our service. This applies also to Nigeria. We are solving for very complex environments. We are solving countries like Argentina or Nigeria for merchants, including Facebook, Netflix, Spotify. So these are very relevant countries and merchants on the ground and for the country. And we expect for them to be able to continue to navigate. We've operated successfully in Argentina since 2016 across every macroeconomic environment. We don't expect that to change in the near future.

Thanks, Seba and Jacobo, and congrats again.

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

Hi. Good morning, Seba, Jacobo, and everyone. Thank you for the call, taking my questions. A couple questions. One, I guess, first, a follow-up on Argentina. Just some concerns about a potential currency devaluation. I know you've had a lot of issues in Argentina the last few quarters, which seems to be correcting. But if there is a devaluation of the currency, how could that impact your business, if at all? Just help us think about potential risk related to that. And then my second question, I mean, I guess around Latin America, but more specific in Brazil, you know, the growth in Latin America has somewhat slowed. And if you look at Brazil, you know, the last four quarters, revenues have been kind of flattish. And I know you say, you know, don't look at any one country in particular, but just to understand if there's anything going on specifically in Brazil, why the revenues have been kind of flattish, any color you can give on the outlook there would be helpful. Thank you.

Tito, thank you very much for the question. So in terms of devaluation, we've been operating in Argentina for all these years and there's been constant devaluation and our business hasn't suffered from it. Keep in mind, we have global merchants that think of their products in dollars. So typically when there's a devaluation, they reprice. Devaluation doesn't affect at all our ability to expatriate or repatriate funds. It's just a different price at which we buy or sell currency. So we don't expect any impact on devaluation of the currency. We don't have exact exposure to Argentina. our revenues are in dollars, in USD accounts. So the valuation of the peso wouldn't affect us the same way that it hasn't affected us in the past. In terms of Brazil, your question is fair. We've grown, Brazil last 12 months growth, it's been 30%, Latam it's been 38%, Mexico, just to give you a sense, was 93%. The reason why I chose these metrics is because those are meant to be the most mature markets. We are seeing very positive trends already in Q2 in Brazil. Brazil is a market that has slightly more exposure in our end on retail. And retail, obviously, is a little bit more seasonal in Q4 than in Q1. So we expect growth in Q2 to come from multiple different markets, including Brazil and Mexico. So if you will, we expect more of a normalization in that sense. We don't grow in step. We typically grow in step functions. So you don't see linear growth. And that's why seeing it annually, it's typically an easier thing to do.

Okay, that's helpful. Thanks, Seba.

Thank you. Our next question comes from Dom Falavina with JP Morgan. Your line is open.

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

And then I ask the second one. Dom, hi, how are you? Thanks for the question. Both. There's a set of merchants that access what's called MULC, which is what you call the official rate. And there's another set of merchants that access the market rate. We've operated with both models. We spoke about this in our Q3 and Q4 calls where that access has been limited. What we've seen is that merchants do business in the country independently of the FX rates. The reality is that they are here to stay. Our merchants are very consolidated in this country. And the FX number or the price of the currency, it's just a given point. Keep in mind, when you have an official rate, you also have a set of taxes that apply. So we operate in both models. We also have payouts, which act as a hedge, and the opposite flow. So both dynamics are important. How can I feel free to compliment you?

Let me just make sure. And how about for yourself? Are you able to expatriate the official, the market, or both also?

Grego? Grego, I think you're muted. Sorry.

So don't... Let me be clear about one point. Our revenues and profits are dollar-denominated also in Argentina. We collect revenues in dollars, and our revenues are deducted prior to settlement, which are dollar-denominated. That acts as a rule in all of the markets, including Argentina.

Yeah, but let me get to the part where I want to understand. You're recognizing $20 million approximately in revenues in Argentina. Those, if I understand accounting rules, they have to be converted by effects. We have other companies we cover in there that are the same. But that other case, they don't really expatriate or they don't take out the money. So in reality, like if they were to exchange that in market rate, in your case, it would be like you're actually not earning 20 million, you're earning market rate $10 million in Argentina. So the point I'm trying to get here is like, when you convert, can you get the 230? And the same in Nigeria, because I understand you also are doing both, or we're looking at an accounting statement that has an official rate, but that money is either part or converted at a different rate, and how exactly does that flow in your income statement?

Thank you, Dom, and thank you for following up. We'll reinforce this as it's very important. To be clear, we expatriate all the funds. We expatriate the funds at the official rate. We get the dollar amount of everything we have expatriated. And prior to settling to a merchant, we deduct our fees in dollar amount. What that means is that at the time we deduct revenues and fees, the funds are already in dollars in our operating entities in the EU or the US.

Tom, there is no money parked in Argentina or anything like that where, you know, there's an accounting. Okay. Tom, I want to say at this point.

Yes, our profits are in dollars, in U.S. and European Union accounts. It's not FX mutual. It's dollar accounts in global markets. We don't hold our profits in local currency, in local markets.

Super clear. Thank you very much, guys, and congrats on the press.

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

Thank you, guys. Good morning. I wanted to come back on Nigeria. I know you've been there since 2019, but pretty remarkable growth. Just in the last 12 months, you've gone from 2% of total revenue to 20%. Can you just call out what some of the most significant drivers of that have been? Is it a handful of large merchants that have really scaled operations there? And then can you just go a little bit deeper into why the gross margin is lower? Is it pay-in, pay-out mix? Is it cross-border, local-to-local mix? Is it just what processing costs are in the country for some of the alternative payment methods? Thanks.

Jason, thank you very much for the question. So what has happened in Nigeria is that our product has gotten better incrementally. It's not easy to gain the trust of your merchants going to a new region. That's not something that happens overnight. Today, six out of our top 10 customers operate with us in Nigeria and we are extremely, extremely proud of that. Also from a competitive dynamic, you see that the reality on the ground is that there are not many alternatives to the service we offer, particularly not when dealing with global public companies. I think we've been able to differentiate on that. And again, our product gets better over time and we have a much deeper understanding a much deeper product line in this country. And the other thing is that there's a clear understanding by global merchants that Nigeria is a massive opportunity. You're looking at one of the biggest countries from a population standpoint on the world. It's one of the countries where there's the most expectation for growth. And at the same time, it's an extremely complex country to navigate. And when you add all those ingredients together, it's a perfect mix for us. The other thing I'll say is that it's not only Nigeria. I know Nigeria has been extremely positive and great growth, and we're very proud of that. But you see many of the same dynamics in our business, in Egypt, in Morocco, in Indonesia, in Malaysia. Some of that takes time. But over time, and that's why we continue to insist on investing on this opportunity, we believe those things. compound and allow us to differentiate. We are extremely, extremely bullish about the opportunity in Nigeria, not only because of Nigeria, but also because when merchants use us in Nigeria, we are a better company. We become more entrenched. We have a much more significant competitive advantage. And we differentiate from every other player out there. In terms of margin, Maria, Diego, feel free to compliment. We have a much higher than average gross take rate. We have a very much aligned net take rate. and that's a function of our cost of processing payments and expatriation, and that's what's driving it. I want to insist on this point of the 40 countries. I know Nigeria calls out everyone's attention, and we are very proud of it, but there's many levers, and that's why we care so much about having these levers. You're going to have quarters where one country is going to grow faster. This case was Nigeria. There's going to be other quarters. There's going to be Brazil. Others are going to be Indonesia. We think that's a perfectly healthy thing.

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

Right, right. Okay, that makes sense. Just as a follow-up, I wanted to ask about your own cash balance. I know you had the 37 million of buybacks in the quarter, so we did see a quarter-over-quarter decline in your own cash. Just as we think about directionally for the second quarter, how should we be looking at that figure? Do you think your own cash will go up or down quarter-over-quarter in Q2?

Do you want to take it?

Sure. Thank you for the question. And first thing to say, we had a very strong cash generation during the quarter. Our total cash increased by $50 million. Even after investing $37 million in our share buyback program, this would have been $87 million increase in the quarter without that. $18 million of this comes from an inflow from release of a portion of the warranties and advancements we provided to the merchants and partners. And we also recorded an income of $35 million that converts to cash and the inflow we generate with the growth of the TPV. And we expect this trend to continue going forward. With regards to our own funds, you know, you have to, whenever you analyze our own cash, you need to analyze both what is in the own bank accounts and the profits that we still have pending to be transferred from the other accounts. If you consider those two together, you see that our own cash increased by $20 million, even after again, buying $37 million of the Shared Buyback Program. So excluding that, the increasing in own cash is $57 million. We have a higher amount of profit spending to be transferred to our own bank accounts compared to Q4. And that is because we released our financial statements in April. So we basically had the amounts we had in Q4 plus the profits of the quarter. We expect this to sequentially reduce in the following quarter.

That's great, Collar. Thank you, guys.

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

Thank you. Hey, guys. So I want to stay on the cash question because as I look at the page, 19 of your presentation, you know, you're kind of talking about releasing restricted cash to your own funds, the 10 million decrease in merchant advancements and the decrease in guarantees to merchants and credit processors. Could you provide some of the rationale behind this? Is this sort of a structural development that continues to benefit you in the future? Or is this sort of a one-off thing you did and maybe some background on why this is?

Maria, do you want to take it? Sure. Thank you, Seba.

Thank you for your question. First of all, as we mentioned in Q4, we took extraordinary measures to provide comfort to our merchants. And this is the reason why you see that other assets increasing. As we mentioned in Q4, we expect that to reduce over time. And this reduction of 14 million is the trend that we have highlighted. We expect that to continue reducing.

So in other words, this is sort of a structural development in terms of how you uh, transact with your clients and, and, and write your contracts and so on and so forth just to, just to conform.

Assuring this is a normalization of the previous trends. So we were under attack in Q4. We told you this would normalize in Q1 and that has normalized already. And it's going to continue to normalize over Q2 and Q3. So there's no structural difference in our business. We don't require balance sheet to grow. Our TPV actually generates cash, and that's why you see in this current quarter, our cash pile increasing. So there was no fundamental distinction or difference in our business dynamics in this Q1. There was a normalization from what was happening before the short-term report.

Understood. Is that clear? Yes, it is clear. Thank you for that. The other question I had was with regards to, so as I look at sort of your TPV growth, your revenue growth, your gross profit growth and adjusted EBITDA growth, of course, the fastest one is TPV and the slowest growth is adjusted EBITDA. And I do see the explanation, you know, growth in Nigeria as a primary driver of why gross profit growth is slower. investments you're making as a driver for why adjusted EBITDA growth is even slower than that. My question is more of normalization over time because entering into new countries is part of your business model. You continue to do this. You already mentioned that Nigeria is still relatively early stage for you. So in terms of financial metrics, what is a good normalized gross profit margin level?

What is a normalized EBITDA margin level over time? Maria, I'll start. I'm Diego. Maria, feel free to compliment.

Ashwin, I appreciate the question. So I think it's good to get one step back and see where we are currently standing. Which is the way that some of our competitors report. We are best in class. We've had a 74% margin this quarter. It's been consistently over 70%. And we think we're in a very healthy position. We think that would be a very big mistake for us and for our shareholders. We want to keep the independence of investing. We have the benefit of already having a very profitable business. We do so in a very disciplined approach. So that we've tied you for any numbers for this year. That's what we can say for now. There's no fundamental reason why we would change that at this point. You mentioned a geographic expansion. Yes, it's going to continue to come. At the same time, there's no other hundred markets we want to go after. We already have 40. So, We are not optimizing. We don't have any particular targets that we are optimizing for. We want to keep the independence and the ability to continue to invest, which we believe it's the right thing to do. Again, taking into account that our class today.

Understood. Thank you. Thank you.

Our next question comes from Neha Aguwala with HSBC. Your line is open.

Hi, thank you so much for taking my question. Congratulations on the quarter. A few clarifications. First, on Nigeria, with the number you provided, I think I calculated a gross profit margin of about 9% for Nigeria. You mentioned that the fees are higher, repatriation costs are higher in Nigeria, but when can we expect to normalize and at what level? I think it is currently quite dilutive to your overall gross profit margin. And even in terms of dollar amount, it's 3%, 4% of total gross profit dollars. My second question is on the cash balance. Last quarter, you mentioned that you consumed $72 million in owned funds in providing advances to select merchants. Is it right to assume that of the $72 million, you were able to release $80 million this quarter? And my third question is on the TPV growth. Can you give us some sense of how the pipeline for 2Q and 3Q are evolving since you have very good visibility on how your merchants are behaving? That would be a very helpful cutoff. Thank you so much.

Sure. Thank you, Neha, for the questions. I'll start with an IGA one. Our net take rate in IGA is higher than average. It means that it brings gross profit dollars to our business. That's what we want, and that's what we're optimizing for. Yes, Nigeria is diluted to our margins. Tomorrow, if we switch off Nigeria, our margins will go to 54%. We don't think that's the right thing to do. We don't think that's the smart thing to do. We don't think that creates value for the long run. How fast are those margins going to normalize? We don't know. We expect that over time to normalize in the mid to long term. It's also a function of how the market develops, how our customers develop, and how our product develops. But even today, at the current scenario, We want to continue to do this business. We think this is a great business for our company. And again, we are not optimizing for the margin structure. We don't think that's the right thing for our business to do. Nigeria contributes our profits at a very similar level that every other market. The dynamics behind revenue are different, and that's why you see the margin being slower. And I insist, tomorrow morning, we switch off Nigeria. Our margin jumps to 54%, but we are a much, much worse company.

That's the first question. In terms of cash, Maria, I'll let you take it.

Hi, Neha. So, yes, our own cash, if you include the profits that we still haven't transferred to our own bank accounts, grew $20 million, and that is after the $37 million we invested in the share buyback. We had, at the end of the quarter, $74 million of cash that we haven't transferred. That is basically what we had at December. That was about $38 million plus the estimated profits of the quarter. We follow a very prudent approach before transferring profits to our own bank accounts. So we make sure that we have audited information. Keep in mind that we file our audited financial statements by April after we close the first quarter. So both the Q4 and the Q1 numbers were audited after the quarter. During Q2, we expect to transfer those funds or a substantial part of those funds to our bank accounts. And we will still have always the profits that we generate in the quarter, pending to be transferred as results are being audited.

Nico, on your last point on TPV, we are seeing very healthy pipeline. I mentioned before, we are seeing so far in the quarter, very healthy trends across multiple geographies. Again, I've said this in the past, We've never been a better company from a product standpoint and a geographic footprint standpoint. And when you look at our merchant base, it's the best it's ever been. So we are very optimistic about our Q2 numbers and our Q3 going forward. And as you said, yes, we do have a good sense of visibility. And so far, everything we've seen is very positive across multiple different geographies.

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

I'm not sure if I follow the numbers you are calculating, Neha, but basically if you are talking about The restricted cash, that's a different question.

I'm not talking about restricted cash. Okay. In fourth quarter, you mentioned that you used 72 million of own funds because you wanted to give guarantees or advance receivables to some of your select merchants to give them comfort, right? The 72 million is fine.

It's actually 53 million. Yeah, probably that 72 includes also reductions in settlement periods and some other measures that we had in Q4 that were already reversed in Q1.

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

If you look at our cash flow, you will see that we have also a new flow of $32 million of the net increase in trade payables and receivables. And that is also part of that normalization or that improvement as settlement periods of the merchants went back to normal. But also as we grew our TPV, we also grow our cash.

And Mija, I want to emphasize one last point. Sorry, I think this is important. Our business doesn't require balance sheet for us to grow. growth, it's accretive, we have negative working capital. We before received the funds and then we settled and that remains the case. That's why you see our cash going up consistently.

Has the settlement period reduced after the fourth quarter? No. So you still have seven to 14 days settlement period?

No, no. The settlement period improved after the fifth quarter. Yes sir, exactly. we have a longer settlement period, to be clear.

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

But why has the settlement period increased?

Nihal, settlement period increasing, it's a good thing. It means that we pay merchants later.

It's a good thing. It definitely shows that your merchants are more confident leaving their cash with you. But I'm just curious as to why has it increased. Is this because, Nigeria has a higher settlement period and that's why your average settlement period has gone up?

No, because you had seen a decrease in settlement periods and now you're seeing a normalization back to previous level.

Okay, so after fourth quarter it had decreased and then now it is going back to normal.

Yes, you see all the trends trending in the positive direction.

Okay, thank you so much.

I appreciate it. Thanks for the question.

Thank you. Our next question comes from Matthew Cote with Autonomous.

Hey, guys. Thanks for taking the question. Another one on Nigeria for me. Curious how you're thinking about sequential growth from here, right? Revenues were up 93% quarter to quarter. And we were doing some rough math. So like assuming a 5% gross take rate, And if you annualize that volume, that points to say like $2 billion of annualized volume from Nigeria, that would be about 1% of total consumer spending there and say like 25% of total e-commerce activity in Nigeria. So it seems like you're pretty far penetrated in that market. So I was just hoping that you could kind of like provide some additional color on like how you see growth from there.

Hi, Matthew, and thanks very much for your question. Obviously, I've said it before about other markets, you don't grow in step function. So our growth, it's not linear. And typically you see a quarter where you grow a little bit faster. You've seen it in the past and the normalization and growth again. I have to disagree with you in terms of penetration. Please share those stats from what we've seen. We are only scratching the surface, even with the merchant base that we have today. So six out of 10 operate with us in Nigeria, out of the top 10. There's only there four more for us to capture today. And our business is still relatively small from a TPV standpoint in Nigeria. So we believe that there's significant growth to come over the years. We are not saying it's going to come next quarter, but that's not what they're optimizing for. And we are optimizing for growth in the long term in Nigeria, compounding with all the other markets where we operate. And in that sense, we are extremely, extremely confident.

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

Sure. So again, we don't optimize for one product over the other. You've seen in this quarter cross-border mix going up. Last quarter it was going down. And we are not prouder from one or the other. We are agnostic in that sense. Right sharing, it's a strong payout vertical for us. Payroll payments are a strong payout vertical for us. But fundamentally, it's many of the same merchants. It's more of a commercial dynamic of what customers kick in at what speed. Growth in payouts is spread across the board, so there's no significant dynamics difference in one country versus the other from a product mix standpoint. We really like the payouts product because it's highly complementary with our pay-ins, the same way cross-border and local-to-local are complementary.

But there's not much more color we can add in this. All right. Helpful. Thank you. Thanks very much.

Hi, can you hear me okay?

Yes, we do.

Sorry, it went blank. Just a couple for me, please. One, just a question on the hedges. I think there's a reference in the press release to lower hedging activity, and we see that in a better financial result for the quarter. Just wondered You know, given there's more exposure to kind of higher inflation economies, why would that be the case? If you could help explain that. That's the first question, please. I'll come back with a second one. Sure.

Sorry, who's this?

Sorry, this is Sumit at New Street Research.

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

Sure, yes. During the quarter, we reduced our exposure, particularly in Argentina. We told you that in the second half of the year, we sequentially normalized the situation there. So basically, you keep in mind that we have a practice of for hedging every open positions in local currencies. And what happened during Q1 is that we reduced, we had much lower positions, very low positions in Argentina, so we reduced the cost of hedges. we keep any dollar that we have available investment. So you will see that in financial results during the quarter, we turned around the numbers and we came to positive financial results because of that.

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

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

Okay. And so presumably your net take rate will go up then?

It has the potential to go up significantly.

Yeah. Okay. Great. Very clear. Thanks.

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

Great. Thank you very much for taking my call. I have yet another question on Nigeria. And really, my question pertains to the verticals in which you're starting to see some of these volumes. Last quarter, you gave a really helpful slide, I think page 11, where you showed that I think 20% of your TPV was in financial services. The second biggest bucket was commerce. Is there any kind of color you could give on where Nigeria slots into the different verticals? Is it one of those? Is it really completely spread out across all verticals?

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

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

Sure. So we operate across 40 emerging markets and they're all complex realistically. That's our specialty. That's where we exist. I love to think that people now, I love to see that people now think of Brazil as a developed market. It wasn't the case where we launched. So we see the complexity across. There's plenty of friction. We are in the business of solving friction and abstracting it for our merchants. And whether we like it or not, there's plenty of friction today and to come in emerging markets. So that's what we are solving for. And Indonesia, Malaysia, Morocco, Egypt, South Africa, yes, that's just to name a few. But the same could be said around Mexico. And the same could be said around Pakistan. So there's plenty of friction for us to solve. As we solve it, we typically manage to add a lot of value to our customers and at the same time capture some of that value for our company.

All right. Thank you.

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

Sure. Thanks very much. Thanks, everyone, for listening to today's call. I hope that this was helpful. It was a pleasure being here today. I just want to make sure I have more fun. You know, we tend to be a little bit excessive focused on the short term. We would like to reemphasize to everyone that we continue to build this business focused on making decisions for the long term. That's why you see us investing in geographic and product growth. We are extremely excited about the opportunity. We have to go after such a huge market and build a multi-billion revenue business over the coming years. I want to thank you all for your questions and comments. And we are very much looking forward to seeing you all on our investor day on the 8th of June. Thanks for your time and enjoy the rest of your day.

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