DLocal Limited

Good day and welcome to the D-Local second quarter 2023 results.

Please begin. Good morning everyone and thank you for joining us for the D-Local second quarter 2023 earnings call today. If you have not seen the earnings release, a copy is posted in the financial section of the Investor Relations website. On the call today, you have Sebastian Canovic, Chief Executive Officer, Sergio Fogel, Co-President and Chief Strategy Officer, Diego Cabrera Canay, Chief Financial Officer, Maria Oldham, SVP of Corporate Development, Investor Relations, and Strategic Finance, and Soledad Nagar, Head of Investor Relations. A slide presentation has been provided to accompany the prepared remarks. This event is being broadcast live via webcast, and both the webcast and presentation may be accessed through dLocal's website at investor.dlocal.com. The recording will be made available shortly after the event has concluded. Before proceeding, let me mention that any forward-looking statements included in the presentation or mentioned in this conference call are based on currently available information and DLOCAL's current assumptions, expectations, and projections about future events. While the company believes that our assumptions, expectations, and projections are reasonable given currently available information, you are cautioned not to place undue reliance on those forward-looking statements. Actual results may differ materially from those included in D-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 D-Local's filings with the Securities and Exchange Commission, which are available on D-Local's Investor Relations website. Now, I will turn the conference over to Sebastian Canovic. Thank you.

Good morning everyone. Thanks for joining the call today. Before we start the call, let me thank all of you who joined the investor day back in June. For those who couldn't make it, the material is available on our investor relations website. Let me also add that we have in the call Pedro Arndt, who will be joining me as co-CEO. We are extremely excited to have Pedro joining the team. We are proud of the great talent that we have at the local and bringing Pedro is the ultimate example of this. Pedro will bring new energy and leadership and a highly complementary set of skills to the company, helping us to continue scaling the business at pace and to realize the enormous opportunity that we have ahead of us. I would now like to invite Pedro to introduce himself.

Thanks, Seba. And greetings, everyone. We thought it'd be useful for me to introduce myself today and share with you what's led me to join Seba, Sergio Jacobo, and the rest of the great team here at D-Local. They will then walk us through D-Local's strong business performance as they expertly do every quarter. Having worked in Latin American tech over the last 25 years, I've obviously been aware of D-Local since its inception merely seven years ago. However, upon being approached by the board and undertaking my diligence, what I found was a set of business success drivers even more remarkable than I had initially anticipated. I'd like to spell some of those out for you today. First of all, a vast, untapped, total addressable market of $1.4 trillion within the rapidly expanding markets that we currently serve. Second, an exceptional opportunity for growth alongside these markets, as well as the potential to extend our reach to numerous additional markets. And this allows us to increase our TAM by over 2.5 times over the next five years. Third, the product and technology stack is fantastic as it serves many of the world's leading and most demanding mega-cap tech companies. And fourth, this is an entirely customer-centric organization that's obsessively dedicated to our customers' success and continues to pile up client-win opportunities. over client win, growing clients by 41% CAGR and TPV by a phenomenal 126% CAGR over the past three years. And last, but certainly equally important, an extremely attractive financial model characterized by a revenue CAGR of 101%, adjusted EBITDA over gross profit surpassing 70%, and an annual conversion of free cash flow to net income exceeding 90%. So in essence, large TAM, great product and tech stack, a winning customer-focused organization, and a free cash flow machine. An investor's ideal vision realized, right? Absolutely. But... Like with any young successful company, there is always more work that can be done so as to further and fully realize the extraordinary value inherent in the exceptional business I've just described to you. That work is already underway and it's also where I hope to contribute the most in phase one of my journey here. I'm confident we will find ways to accelerate even further the pace at which we are rolling out additional processes, deploying more and even better systems, and adapting our organizational design to prepare D-Local for the future. I'm excited to see how all this will complement the extraordinary product and customer success work that's already being done on behalf of our clients to further build a formidable company at scale. And, as all this happens, I firmly believe that as we undertake these measures, we will propel D-Local's trajectory and further unlock returns for all stakeholders involved. I look forward to engaging with you as we carry out this journey. Let me now turn the floor over to Seba again to go deeper into the results of the quarter that already show the positive direction things are headed in.

Thank you, Pedro. And once again, welcome to the team. I am pleased to share that we've had another quarter of outstanding results. Our performance, once again, proves the instinctive strength of our business, which we continue to build, focused on long-term profitable growth. These strengths combine, one, superior technology that is driven by our commitment to make the complex simple for our merchants with our one API and one integration, what we call One D-Local. Two, a well-diversified business across verticals, products, and geographies with vast geographic coverage of over 40 countries. And three, relentless execution of our merchant growth and cross-sold strategy across products and geographies. Last but not least, our lean and disciplined culture. We deliver all the previous strengths with a lean team, continuously striving for excellence. Our culture is key to continue delivering on our long-term ambitions. These factors underpin our continued success in building the best payments ecosystem across emerging markets, based on our 1D local, navigating the complexity of payments in these markets on behalf of our merchants, so they can remain focused on their core business. We have a proven track record in leveraging these factors to deliver robust dollar growth of TPV, revenue, gross profit, adjusted EBITDA, and net income. Moving to our financial highlights of the quarter, this success was reflected across all metrics. TPV grew 80% year-over-year and a strong 22% quarter-over-quarter, surpassing for the first time the $4 billion mark. To put this in perspective, this quarterly TPV is more than double our TPV for the whole year of 2020, the year before we went public. We continue to focus on growing our business in absolute dollar terms. Revenue, gross profit and adjusted EVDA all increased at double digit rates both year over year and quarter over quarter. We recorded the highest contribution in gross profit and adjusted EVDA of the past eight quarters, increasing $9 million in gross profit and $7 million in adjusted EVDA quarter over quarter. We remain firmly committed to profitable growth at scale. In Q2 2023, our ratio of adjusted EVDA to gross profit remained stable quarter over quarter at 74%, which again is best in class. Moving to the next slide, we continue to invest thoughtfully in expanding our global team. We have hired new talent to pursue the opportunities we see in the market, also strengthening our foundations to face our long-term ambitions. We grew our team to 806 employees. This is an increase of 174 full-time employees compared to second quarter 2022, over 28% year over year. We continue to recruit talent globally, combining specific experience and skill sets, as well as on-the-ground knowledge. We reached 202 full-time employees in Africa and Asia by the end of Q2 2023. This now represents 25% of our workforce. We will continue to invest in talent in a disciplined way, staying lean and always ensuring that we onboard talent that has a strong cultural fit. We are proud of our team and believe it is stronger than ever. Now I will pass on to Maria to discuss our execution on our growth strategy.

Thank you, Serba. Hi, everyone. Let me remind you how we view our growth engine. We have three axes of growth, one product, two merchants and three geographies. On product, during this quarter, we continue to focus our efforts on deepening our presence in the countries in which we operate, with a particular focus on Africa and Asia by establishing more direct connections with payment methods and acquirers, and also continuing to enhance our solution. During the second quarter of 2023, We saw strong traction on our platform solution, in particular from commerce marketplaces. On merchants, we delivered strong revenue growth, both from existing and new customers. Net retention rate continues to be best in class, at 148% in Q2 2023. New merchants' revenue reached $11 million in Q2 2023. We have very close relationships with our merchants, which enables us to grow together with them. Our top 10 merchants continue to show very high growth, totaling $94 million revenue in the quarter. Our three axes of growth compound to deliver rapid growth. All of our merchants, products, payment methods, and markets are linked to one API. This means that merchants can access all of our products and payment methods without any additional work, generating high value to our customers while growing our business. Now, let's deep dive into one of the dimensions, geographies. In Latin America, where we have our largest scale, we continued to experience strong growth across the region in Q2 2023. This proves that we still have ample room for growth in LATAM, both with existing and new merchants. In the last 12 months to Q2 2023, revenues in Mexico increased by 85% year-on-year and in Brazil by 50% year-on-year. Growth in both countries has been driven mostly by merchants from commerce, advertising, streaming and ride-hailing verticals. We have been operating in both countries since 2016. So, the sustained growth rates are a true indicator of the hyper-growth potential that we still have in Latin America. even in our most mature markets. As you know, Brazil is where we started, seven years ago. It is also a highly developed market in terms of digital payments penetration and technology. But this market is far from mature from a growth opportunity standpoint. This high growth in a large and competitive geography such as Brazil underscores the quality of our solution as we continue to gain share in the market. We continue to see strong growth opportunities in Brazil going forward. In Q2 2023, TPV and revenue in Brazil doubled year-over-year and increased by around 80% quarter-on-quarter. Recent growth has been mainly led by merchants in the commerce, advertising and streaming verticals. In Brazil, we also proved the success and robustness of our local-to-local solution. Brazil is a market with higher local-to-local share and we have seen favorable trends in both cross-border and local-to-local flows. Moving on to Africa and Asia, our merchants continue to signal strong demand for our solution in the region. Egypt, Morocco, Indonesia and Philippines are growing triple-digit year on year and have the potential to become a significant part of our business. Our business in Africa and Asia continues to grow very fast. In the last 12 months to Q2 2023, revenues in Africa and Asia increased more than three times year-on-year. Excluding Nigeria, this region grew 78% year-on-year in the last 12 months to Q2 2023. In Q2 2023, Nigeria revenues increased by more than four times year-on-year. The quarter-on-quarter deceleration was driven by the NYRA devaluation in the last 15 days of the quarter. Nevertheless, Nigeria continues to present similar net take rates as other markets, and it is a key geography for the local. We continue to see great growth opportunities in the market. Excluding this effect, revenues would have been in line with Q1 2023. Sergio shed more light on the recent market changes later on in the presentation. Moving to the next slide, this case study illustrates the powerful combination of our three axes of growth. We onboarded this merchant, a global e-commerce platform, prior to Q2 2021. We started processing volume for this merchant outside Latin America, in one country and only one product and service. Over the last few years, we have been able to successfully cross-sell new geographies, products and services. The outcome speaks for itself. TPV has grown by more than 100 times since Q2 2021, driven by a combination of 1. Organic growth of our margin. two, increased share of wallets, and three, additional payment methods, solutions, and geographies. We now process volume for this merchant in seven countries across Africa and Latin America. On top of processing pay-ins and pay-outs, this merchant uses our platform solution in some of these geographies. We have seen strong growth coming from the platform solution as we develop tailor-made solutions at scale, including one, a white label seller onboarding KYC, and two, a split payment solution to ensure full flow compliance throughout the process and best user experience. This example is a testament to the fact that our business is built on the great relationship and customer service we have with our global merchants. who continue to choose our solution and grow together with us. Sergio will now discuss our margin market focus in more depth and share a few updates on some of our key markets.

Thank you, Maria. Good morning, everyone. As you know, I have co-founded the company and I have been serving as a board member. Since June this year, I have been part of the executive team. I am delighted to join this earnings call today and look forward to continuing meeting many of you. dLocal has been fully devoted to emerging markets since its inception. Where others see complexities, we see underserved markets with high growth potential. Buyers and sellers cannot transact due to the lack of infrastructure, and the magnitude of lost opportunities is overwhelming. We are going after a very large market, and after seven years of strong growth, we are still only scratching the surface of this opportunity. Our markets enjoy structural tailwinds. a young growing population, an urban connected middle class eager to consume, and merchants that are only starting to customize their products for their needs and tastes. Emerging markets are complex. Our mission is to solve payments complexities for our merchants, including technological, operational, and regulatory complexities. Our ability to adapt to changes in circumstances is one of our key operational strengths and underlies our value proposition of taking the complex and making it simple. Now, I'd like to update you on recent developments in three specific markets. One such change in parking conditions occurred in Argentina, as we stated in the filing in late April. The government and the central bank established new procedures to obtain foreign currency for the settlement of certain services. We have been operating in Argentina for many years now, and we have seen many, many changes in regulations. This is only the latest change and will probably not be the last. We will adapt to the new rules, just as we have adapted to the previous ones. Our ability to do so is a competitive differentiator and an example of the value we add to our merchants. Given the magnitude of our business in Argentina, as we announced in a press release in June, we committed to show additional economic substance in the country. On June 14, we acquired, with our own funds, $48 million worth of Argentine dollar-linked treasury bonds. We acquired an additional 49 million by the end of July. We plan to use these funds in the following years to fund our local operations and investment opportunities in the market. We continue to collaborate with local authorities in Argentina to ensure that, despite the macroeconomic situation, Argentinian customers are able to access international services. Moving to Nigeria, in mid-June, the central bank implemented a free-floating policy of the NARA, leading to the devaluation of the local currency, as Maria mentioned. I would like to highlight that we see the unification of the exchange rates as a positive for the country and for our business, as it promotes transparency and efficiency and it increases liquidity. This removes a lot of the friction that some of our customers see when expanding to Nigeria. We continue to operate normally in the country where we serve some of the world's largest technology merchants. We do not expect the depreciation of Denaira to have an impact on our gross profit. The negative impact on gross revenues will be offset by lower expatriation costs. We continue to have a bullish outlook on the operations in Nigeria for the long run and continue to onboard and grow with merchants in the country. Last but not least, Brazil. Shortly after the end of Q2, we reached another milestone in our evolution. At our investor day, we shared that we applied for a payments institution license in Brazil. I am thrilled to share that we were granted this license in July. We can now offer more payment methods and solutions in Brazil and participate directly in Brazil's payment systems. We expect this to increase the efficiency of our operations in the country. Becoming a payments institution carries with it a higher level of scrutiny by Brazil's central bank. We welcome such scrutiny in Brazil and in other countries as it helps boost the level of confidence of global merchants doing business in emerging markets and also increases our competitive advantage. This is a clear example of our ongoing efforts to further strengthen our compliance infrastructure across emerging markets. Being well diversified in over 40 emerging markets allows us to continue benefiting from very high growth regardless of the specific circumstances in any given geography. This is a key strength of our business. Diego will now review our financial highlights.

Thank you, Sergio. And hi, everyone. We had another quarter of strong growth across our products and services. In terms of products, during Q2 2023, pay-ins increased by 70% year-over-year and by 27% quarter-over-quarter. And payouts increased by 114% year-over-year and 10% quarter-over-quarter. The contribution from payouts has increased year-over-year, as we have been successful in providing last-mile payment services to financial services companies in emerging markets. Moreover, we continue to position ourselves as the payment service providers of choice in emerging markets for global payroll, social media, ride-hailing, and on-demand delivery companies. During this quarter, we also saw strong traction both in pay-ins and pay-outs through our platform solution for marketplaces, particularly in e-commerce in Brazil and Mexico. In terms of services, our cross-border and local-to-local volumes show solid growth year-over-year and quarter-over-quarter. In Q2 2023, we increased by 33% our local-to-local volume quarter over quarter, mainly driven by merchants from commerce, advertising, and ride-hailing verticals. This resulted in growth in our local-to-local share, reaching 49% in Q2 2023. We are product and vertical agnostic. All our products and services bring incremental profit, and when we combine them, they bring synergies both for our merchants and for us. Depending on which merchants we onboard in a given quarter, as well as the relative growth rates of each merchant, there may be fluctuations in the share of pay-ins versus pay-outs, and cross-border versus local to local. Overall, we see a positive growth outlook across all our products and services and see this diversification as a key strength. Revenues also reached a record high of $161 million in Q2 2023, growing 59% year-over-year and 17% quarter-over-quarter. During this quarter, we saw strong quarter-over-quarter revenue growth, particularly in online commerce, ride-hailing, and on-demand delivery. And from a geographical standpoint, revenue grew quarter-over-quarter mainly from processing payments in Brazil, Mexico, South Africa, Egypt, Colombia, Peru, and Costa Rica. We remain focused on growing absolute gross profit dollars, which is the key success metric of our business. Our gross profits reached $71 million in Q2, up 43% year-over-year, and 14% quarter-over-quarter, with net take rate at 1.6%. Processing cost over TPV remains stable at 2% quarter-over-quarter. Gross profit margin and net take rate remain almost unchanged quarter-over-quarter, even with a high increase in the share of local-to-local volume. The waterfall chart on the left shows the main changes in our gross profit margin quarter-over-quarter. Gross profit margin was positively impacted by changes in merchant mix, particularly in Brazil. This was offset by the higher share of pay-ins and local to local volume and lower share of revenues in Argentina. Moving to the right hand of the slide, the slight decrease in the net take rate from 1.7% in Q1 2023 to 1.6% in Q2 2023 was driven by similar factors, particularly by the higher share of local to local volume and by country mix, with higher share of revenues in Brazil and Mexico and lower in Argentina. Profitability remains a top priority. During the quarter, we were able to grow our adjusted EBITDA to $52 million, up 36% year-over-year and 14% quarter-over-quarter. Our adjusted EBITDA margin was 32% in Q2. Our adjusted EBITDA over gross profit remained stable quarter-over-quarter at 74% as we continued investing in our people, both in terms of compensation and expanding the team. Net income totaled $45 million during the quarter, growing by 46% year-over-year. Sequentially, it increased by 26% quarter-over-quarter. Net income for the quarter includes $7.5 million of net financial gains. These results were driven by our funds held in interest-bearing accounts and money markets, partially offset by the financial costs of hedges across the market. We also observe an increase in our effective income tax rate, from 11% in Q1 to 16% in Q2, driven by a higher share of profits in local markets as a result of higher local-to-local TPV and financial gains. Let's move to cash generation. During the first six months of the year, we observed strong cash flow generation. The main drivers of our cash increase were our net income, which substantially converts to cash, and an increase in net trade payables, particularly as a result of the growth of our business with negative working capital and a higher average settlement period to our merchants. This resulted in an increase of $141 million. We invested $61 million in completing our share repurchase program and $48 million in Argentine dollar-linked treasury bonds as part of our commitment to increase our economic substance in the country. We believe our strong cash position remains a competitive advantage as it allows us to continue investing in the business. Seba, the floor is yours.

Thanks, Diego. We are very proud of the strong set of results we delivered during the first half of the year and we are even more excited about the runway ahead of us. We see continuous growth of our business in the second half of the year. Given the outstanding first six months performance, we would be on track to over deliver on our guidance or revenue while being in line on EVTA. However, due to the currency depreciation in Nigeria, which will reduce revenues with neutral impact on gross profit, in other words, it won't affect our gross profit dollar amount, we expect to end the year in line with guidance in terms of both revenue and EBDA, revenues between $620 and $640 million, and adjusted EBDA in the range of $200 million to $220 million. We have a truly diversified business that can deliver on our goals under changing specific circumstances in certain markets and we are very, very pleased to be in such a position. we remain dedicated to building the best financial infrastructure for global merchants in emerging markets. The value proposition of our 1D local platform is clear, to help our merchants navigate local complexities in receiving and sending payments in emerging markets. Everything that we do is focused on further improving this value proposition. I want to send a big thank you to our global team, our customers and our investors for their continued support. I'll now hand back to the operator to open up for the Q&A, which Pedro will also be joining.

If you would like to ask a question, please press star 1 1. If your question hasn't answered and you'd like to remove yourself from the queue, please press star 1 1 again. Thank you. Our first question comes from Tito Labarato with Goldman Sachs. Your line is open.

Hi, good morning. Thank you for the call. I'm taking my questions. Congratulations on the strong results and the strong hire from Pedro. Congratulations, Pedro, on the new role. A couple questions, if I may. Maybe, Pedro, if I could start with you, you know, thanks for, you know, some of the calls that you gave on the opportunities you see in joining DLocal. But, you know, we've gotten several questions, and we'd love to hear from you. You know, coming from a very well-respected company, you know, just to understand a little bit just sort of your reasoning to come over to be local and talk a little bit about the opportunity. You know, you're coming here as co-CEO role, but we'd just love to hear a little bit more from a personal perspective. You know, what excited you so much to make that switch? So we'd love to hear from you on that. And then second question, on the revenues, you know, very strong performance on revenues, as you mentioned, you're maintaining the guidance there. But let's get a little bit more color. You think Brazil can continue to grow the way we saw it growing this quarter? And is that coming from like one particular merchant? Is it several merchants that are giving a lot of local to local volumes there? And do you expect some headwinds because of the depreciation in Argentina next quarter as well? Just to understand a little bit some of the revenue dynamics and how it could evolve on a quarterly basis from here. Thank you.

Hi, Tito. Hi, everyone. Great to be here. Thanks for the question. So I think I laid it out in the prepared remarks. This is a phenomenal business with a large expanding TAM, great technology and product, the right customer focus and a winning sales organization and a super attractive financial model. So D-Local is a gem. What I've done and what I've seen over the last 24 years is how to build scale. And I think I've seen scale in Latin American tech like few others have had because I've had the privilege to work at the largest Latin American tech company from nearly zero to where it is today. And I've seen how the way you generate value in technology is by building scale and compounding results over the long term. And I think DLocal is the ideal landing spot for the next channel, next leg in my professional career to be able to generate scale and compound results over long time with a business that operates in a growing time and has a phenomenal financial model. So this is a decision that makes extreme sense for me, and I think I can add a lot of value to the great work that's being done here at D-Local.

Thanks, Pedro.

Tito, thanks, Pedro. And Tito, thanks for your question. So there's a lot to unpack there. Please let me know if we are covering everything. On the guidance question. I'm sorry, on the guidance question. So we are very proud of the first half results. We are clearly trading towards the higher end of that guidance in terms of revenue, but are clearly preferring to take a conservative approach given the macro environment. Specific changes of circumstances, such as the devaluation of Nigeria, affect our revenue number, but not our gross profit. We would like to see one more quarter before we update our yearly guidance out of abundance of caution. Tito, you know this, we have constantly over-delivered on all metrics to which we have guidance since we went public over two years ago. And the other thing I'll say is that the yearly guidance we provided accounts for close to 50% year-on-year growth at best-in-class margin. And this is a great outcome for our 2023 and a testament, again, of the resilience and the well-diversified that our business is. The other thing we'll say is that we do reiterate our midterm guidance of 35% CAGR at a gross profit level and a gross profit to EVDA margin at 75%, which again are best in class. Giving it a little bit more of a qualitative comment, Tito, Brazil was great news. We grew over 100% year over year, 80% quarter over quarter. But also Mexico grew at close to 80% year over year. And I call those two geographies out because they are some of our most mature. And I think the underlying message here is that our geographies continue to compound and they continue to differentiate and they continue to drive growth for our merchants. We're going to have quarters where one market is going to grow faster than others. And that's perfectly expectable. Keep in mind, our growth is depending on our merchants' growth. And some of them will decide to ramp up faster in one country versus the other. And that's not something we control, nor something we want to control. What we do want to see is that we have multiple levers of growth working at the same time. And in that sense, this quarter was a good testament for that. There are several merchants driving that growth. We are not relying on any particular merchant across any particular geography. So in that sense, a great, great quarter for us. You had a question on Argentina and devaluation. Sergio, I know you have some remarks on this that are probably worth commenting on. But the only thing I'll say, Tito, on this is that we serve global merchants, and global merchants think in dollar amounts. So typically what we've seen over the years is whenever there's a devaluation, our merchants tend to reprice pretty fast. In other words, a big streaming service doesn't think of their product being worth 10 pesos. They think of their product being worth a certain amount of dollars. And if there's devaluation, they typically reprice really fast.

Thank you. Our next question comes from Guilherme Gressman with JP Morgan. Your line is open.

Operator, I'm not sure if it's me, but I'm not listening.

I think it's all of us. Yes, Pedro.

You don't hear any? Yes, I'm here.

Can we move to the next question, please?

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

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

Hi, Jason. Sure. Pedro, feel free to compliment this. So, Jason, first of all, Pedro and me have extremely complimentary backgrounds, obviously. Ours is an opportunity that has plenty, plenty of challenges that we need to tackle. Whenever you have the ability of finding a talent like Pedro and getting him to join, it's an absolute no-brainer for us. We are still in the workings of the exact task that each one of us is going to be undertaking, but fundamentally, from a strength perspective, we are very, very complementary, and this couldn't be better news for us. Okay. Okay.

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

I know, Pedro, you had some remarks that you were making and they were short. I don't know if you want to go for that.

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

Jason, on your question on guidance, again, we are known to be a very conservative company in this front. We are taking an extremely conservative approach given the macro environment. We are clearly trading towards the higher end of that revenue guidance that we provided. We don't provide shorter-term guidance. I want to emphasize that we're building this for the long run. We believe a 50%, over 50% year-on-year growth. And again, the mid-term guidance of 35% CAGR, it's best in class. And that's what we're focusing on. We want to retain flexibility to continue to invest in the opportunity we have. This is a time for us to differentiate. The emerging markets opportunity is bigger than ever. And we want to retain the flexibility to invest as much as we see fit while maintaining the disciplined approach we've always had.

If I may, if you look at gross margin and net take rate in the second quarter, it was very similar to the first quarter, 1% decrease in gross margin from 45 to 24%. and 0.1% decrease in net taker. That was part of your question. It's basically the result of this SMIC. As you see in this quarter, we have higher share of local to local. We have different country mix, particularly some countries we contributed to higher share of gross margin. We don't solve for that. As we already mentioned, our margin decides when and how to grow. So the behavior of those metrics in the second half will be basically the result of how our margin grows and which countries and which countries.

Okay, thank you for the comments.

Thank you. Our next question comes from Galaire Mae Gresson with J.P. Morgan. Your line is open.

Hello, can you hear me?

Yes.

Yes, thank you, Seba and the team, for the presentation. Two questions on my side. The first one is related to Nigeria. You mentioned that you expect some impact from the deval, I think it was 40% to 50%. devalue on the FX, and we already see it hitting the revenues, decline the share of Nigeria on total top line. But it was interesting to hear that you do not expect any impact into gross profits. So I'm trying to reconcile those two statements. The only way I can think of is that your gross profit margin in Nigeria is close to zero. And I do want to confirm, if you operate in the country with very little margins, And the second one is related to financial income. It was very large contribution from gross financial income in the quarter. I imagine this is related to Argentinian bonds. If you can recap how much those bonds are paying, and if we had any non-recurring financial gains, meaning depreciation of the bond in the quarter, or if it is level of 19 million gross income per quarter, should be the new recurring level, given how you're invested in those bonds.

Thank you. Guilherme, thank you very much for the question. So we've spoken about Nigeria in the past. Actually, in our Q1 call, we called this out, how Nigeria had a much higher than average growth stake rate and much, much worse margin structure, given the gap between the market rate and the official rates. That was a drag on our margin structure, and that's why you saw it eroding. We broke that down in previous quarters. What has happened is that the Nigerian government has unified those two markets, and therefore the gap that was existing before between market rates and official rates doesn't exist anymore. We never process payments in any country at zero margin. That's not the business we are in. Every dollar we process contributes our profits. And what we said is that at a gross profit level, which is the key metric we keep track of internally, this will be neutral, if not positive. Let me explain why. The gap in the FX in Nigeria made it very hard for merchants to understand why there was an official market rate and there was the market rate and why they had to navigate out of that complexity. Some of that complexity is now solved. So for a global merchant, it's now easier to navigate this country. And we expect that to be, one, neutral to positive from a gross profit standpoint but two obviously accretive to our margin structure we spoke about our margin being punished before given our nigeria business now we probably get some upside from it maria diego feel free to complement on this point please yeah the only thing i would add is that not only it's not zero it's actually uh

profitable, higher than average net margin rates in the country.

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

So, sure. We had in the quarter roughly $7.4 million of financial profits. That is basically the result of having higher amounts of cash in local markets, countries like Brazil or Argentina, as you mentioned. Part is the bond, as you mentioned, like roughly two, three million dollars is results of the bond, but mostly it's money markets and inter-embrane accounts that we have in those countries that generate cash. we use part of those profits to invest in hedges to be fully covered, and that is the financial cost that you see in the P&L. The net of those two has been very positive in the quarter. Over the medium term, that should sequentially go back to a lower number, but particularly this quarter, we have these situations where we have significant amounts of cash invested, also at the operating company level with higher interest rates.

Just a follow-up, if I may, how much those bonds, Argentinian bonds, are paying?

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

Guilherme, I would like to compliment on the Nigeria question, just to make sure this is clear. When there's an evaluation, two things happen. Our gross take rate goes down, but our cost of processing goes down. So that's why you see this being neutral at the gross profit level. Our cost of expatriation will decline significantly heavily in the same amount as our gross revenue will decline, because those are a function of the spread between the official market rate and the market risk. So that's why you see this being neutral. I hope that's clear. I know it's complex, but I want to make sure this is properly understood.

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

I appreciate it.

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

Hi, can you hear me? Yes, hello, can you? Yeah, OK.

Good to hear from your reps. Maybe I can also start with. You know, congratulations to Pedro and also questions question for you. You know, the locals issue has never really been growth, which you you you mentioned. You know what? One of the key reasons you're coming is the growth in TAM opportunity. I feel like the issue, as you had mentioned, is scalability over time, scalability of technology where you can bring your expertise, governance, and a few other things. So maybe, you know, you can talk a little bit more about the challenges that that you feel like they need to be overcome, and if in your early view, you know, based on just the diligence you did, if you feel like the investments that need to be made might be an impact on the longer-term margin structure. I know it's very, very early days, but just based on the diligence that you've done so far.

Thank you. That's a fantastic question. So conceptually, first of all, and I think this is important, like any company that's grown as much and as fast as D-Local has, there are growing pains in scaling up. I think that's evident, and I agree with your diagnostic. There's already, prior to my arrival, a lot of focus, as with any company that's growing, and work being done to strengthen whatever is needed to strengthen and to prepare for scale. But that is a big part of what I've liked about the challenge is I feel that that's what I've done and what I like doing and what I know how to do. So we really need to set this up so that this company can grow 5x, 10x, 50x once the opportunity arises. It's a bit early. I think I will get back to you guys with a better diagnostic soon. I am not a big believer in throwing money at these kinds of problems. I think we throw a passion for problem solving and systems at these problems, but I still need to complete my diagnostic. This is literally day two for me. So stay tuned. And I think we'll come back to you guys with clarity on whether this is a matter of simply continuing to build everything that's being built, or if there might be a ramp up in investments needed. Give me a little more time. Give Seba, Haku, and myself some time to take a look at this.

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

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

Thank you, Pedro. Ashwin, on your question on pay-ins and pay-outs. So we like both products that are extremely complementary, but we never have an internal target for one versus the other. It's not us that decide what product we are selling. It's our customers that decide what products they want to buy from us. we always built our operations on a completely standalone basis. And let me explain this. We never subsidize pay-ins with payouts. We never do every dollar in our platform, it's processed at a profit, independently of it being pay-in or pay-out. So we do see significant traction for both products, but that's never an internal objective. What we'll see over time in the newer countries is that sometimes one product runs faster than the other, and then over time things balance out. but we never set a restriction in terms of how much growth. In other words, if we can grow extremely fast, our pay-ins product and our pay-outs product will be a little bit lower, that's perfectly okay for us. Over time, we know those things do balance out, but even if they don't, we are still okay in the long run.

Understood. Thank you. Sure. Yeah, understood. Thanks.

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

Hi, this is Neha Garwal with HSBC. I guess I used the wrong link. Firstly, I would like to welcome Pedro. Very nice to have you here at DLOCAL. My question regarding this quarter is related to the revenues in Brazil, which saw a big jump quarter on quarter. I believe this was driven by stronger volumes in Brazil, which led to stronger revenues. So if you could just elaborate on that and give any color what drove that. Also, the TPV growth this quarter was almost 22% quarter on quarter, which is significantly higher than an average of about 10-12% that we've seen in the previous quarters. So I believe we should expect this to normalize. in the coming quarters and see more normal level of sequential TPV evolution? Thank you so much.

Hi, Neha. How are you? Good morning. Thanks for the question. So, yes, our TPV grew in Brazil. Therefore, our revenues grew. What I'll say is that we spoke about this in the past. We have a great solution in Brazil. The Brazilian market is massive. There's a huge stamp for us to go after. This quarter was just a testament of those trends that we spoke about in previous quarters. I think this should also be a lesson from how is it that our business works. We offer 40 geographies. Those geographies compound and help us win in different places at constant times. So the fact that we won in Brazil during this last quarter, it's not just a testament of our Brazil solution. It's a testament of the overall platform. This wasn't our Brazil win. This was the local win. that manifested during this quarter in Brazil and in Mexico. Last quarter, it was in Nigeria. So we expect growth to continue in this market. What rates? Again, we reiterated our guidance on how we see growth going forward. But I want to emphasize the point that our business is better understood at the global level, at the macro level, and not at the geography by geography basis. Geography by geography basis are merchant-based decisions that we'll always be happy to accommodate for. What we are keeping track of is how do we make sure we land and expand with our customers? How do we make sure we solve more pain points? How do we make sure we are offering more products? Because that's where the real value is.

And regarding the sequential growth in TPV?

We are seeing our business firing at all cylinders. We spoke in the past about our pipeline being healthier than ever. We continue to see a very, very strong pipeline. Anecdotally, during this quarter, during the This quarter, without an impact yet in the current results, we were able to sign two of the top 10 global merchants. So there's plenty of growth to come. Again, we don't always control the sequence of what that growth happens. That's why our focus on the mid to long term, it's doing our business. But we continue to see great logo wins. We continue to see a great pipeline and a great opportunity generation. We need to continue to build a product and make sure we are best in class across all 40 emerging markets where we are.

Great. Thank you so much, Seba, and thank you so much to the entire local team. Congratulations.

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

Hi. Good morning, and let me echo the congratulations, Pedro. So my first one is for Pedro. I was just wondering, and it may be early, but a question that investors ask a lot, is with regard to D-Local compliance. And I was wondering, since you incubated a great payments company as well, and Mercado Pago, what's your perspective on the compliance infrastructure at D-Low? That's one question. I'll just ask my second one as well. Sergio, we appreciated your comments about Argentina, and this is part of a continuum. But I was wondering, at a very high level, is this the same, worse, better in terms of the regulatory scrutiny at Argentina now than what you have seen in the past? So the first one for Pedro, the second one for Sergio. Thank you.

Hi, Jamie, and thanks. Niha, thanks also before I hadn't answered you. So again, guys, this is day one, but obviously that's an area that I've done as much diligence as was possible throughout our conversations. And I think what's important to understand is that the reason we add so much value to our customers is that we tackle complex markets, markets that operate very differently. I think my running joke yesterday with the press was if all of emerging markets were Switzerland, then we wouldn't generate the kind of margins, take rates and value that we add. And so I see a compliance team and a compliance organization that is compliant. This is a publicly traded company in the US and as such needs to be compliant. We will face local challenges regardless of how much infrastructure processes and systems we continue to build. So that's part of our value. I don't think it's something that concerns me, and it's something that, and I want to stress here, will continue to be built out. The impression here should not be that this hasn't been built out, this hasn't been done. There's a great team here led by great people, and my job is to continue to make sure that we invest and we strengthen across all of our internal functions.

I will take the second question. The situation in Argentina right now, as you may know from the news, is extremely volatile. There have been changes in the last couple of days. Almost every day there is a change in regulation. We are big believers in the country in the long term. Right now, we as the rest of the market is in a wait-and-see mode to see how this is going to evolve and what's going to happen with the election. All I can say is that we have been in the country for a long time now. We are particularly flexible. We know the market very well. to us as to the rest of the market. And we believe that we have the best knowledge and flexibility in the market, and we will use our unique position to gain advantage.

Thank you both.

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

Hey, guys. Thanks for taking the question. Wanted to just ask a couple more on Argentina. Based on the press release and your opening statement, it seems like the investigation there is going well. Just hoping you could double-click on that. And then I'm interested in how the incremental hiring in Argentina could impact your margins over the long term. And then the last one, and this kind of might be a similar answer to the one you guys just gave, but If we do see dollarization ultimately in Argentina, how does that impact your business?

Okay. Um, I will, I will take it. Um, so, uh, about the, the, the investigation, we, we share the, we share all, all of the green share on the, on the six, uh, six case. And, um, we will do that, uh, if there is any material information. About the hiring, we are growing our payroll. We just decided that the growth is going to come more from Argentina than before. It is a place where we find very good talent and we have complete priority over other countries. Right now, we have over 150 people FTEs. And again, as you know, hiring takes time until you find the right talent and onboarding, etc. But we are on track to increasing our workforce there. We don't see it impacting the P&L. Again, you can find very good talent in the short term. It's a bit... cheaper than other parts of the world. But in the mid to long term, we expect it to converge to international or to emerging market prices. And regarding the dollar index, I don't know if it's going to happen. It's very hard to speculate on that. If it were to happen, of course, it would make our life much easier in terms of processing cross-border payments, so we would welcome this.

Thank you. Super helpful. And then I just had one quick follow-up. The tax rate was a bit higher this quarter at 16%, 11% last quarter, and you noted like the mix to local to local and more financial income driving that. Could you provide any guidance for like how we should think about modeling the tax rate going forward?

So again, it would be the result of the mix of profits we have in the different countries that we operate. There are very different tax rates within the different jurisdictions. And as you know, we currently have operations in 40 countries, another five countries at the holding and operating company levels. So it's really complex to write a specific number. As long as we continue having a higher local to local profit as we did this quarter, and we also have a financial income, particularly in countries like Argentina, that would trigger higher income tax rates because those countries have a tax rate of 30 plus percent. So as long as that situation continues, we expect to have similar tax rates as what you have seen in Q2. But again, we don't guide for that because it will be basically the outcome of the changes in mix by country and the different type of transactions that we eventually have.

Awesome. Thanks, guys.

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

Hey, hello, everyone. Hi, Seba and Tim. Thank you very much for the opportunity, and welcome, Pedro. I have two quick questions on my side, please. The first is following the management change Just would like to have your view about the strategy going forward, if there will be any change given the recent movements, or if there is any other initiatives beyond payments and your current projects that you could pursue in the medium term. And if so, if you can give us an example, would be really helpful, please. And the second one, if I may, is just another quick follow-up in Argentina. Not sure if I completely understood, but I think in one of your answers, you mentioned that you do not expect any impact from the additional deval in the peso as you reprice your clients. Otherwise, you will have a negative input. Is that right? Just would like to confirm. And if so, have you already repriced your clients this week after the devaluation or not? That's it.

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

Oi, Caio.

So I learned a long time ago, you don't fix something that isn't broken. Look at the first half that we've just delivered. Our Brazilian business or our largest business grew revenues nearly doubled year on year. Our newer markets, which are a huge opportunity, Africa and Asia, I think grew over two times, nearly two and a half times. We've had some one-offs. We had a devaluation in Nigeria. and the currencies in Argentina. But if I look at the long-term prospects for this business, and that's a big reason why I'm here, this does not need a change in strategy at all.

Okay, thank you. But just wondering if you could pursue any other opportunity beyond payments or no, it's not the strategy?

The addressable market, the global reach of this company presents significant opportunities for us. So, again, reiterate, the local strategy is clear. The vision is clear. It's incredibly compelling. And what we need to do is execute on behalf of our global merchants behind their needs in fintech and emerging markets.

Okay. Thank you very much, Pedro and Seba.

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

Sylvain, I think closing remarks are yours today.

Yep. Thanks for that, Seva. So, first of all, thank you, everyone, just to reiterate how excited I am to be here and the opportunity. And I do want to leave everyone with a final thought. Companies tend to get lost if they start placing excessive focus on the short term. And so we want to continue to reiterate and reemphasize to everyone that we're building this business for the long term. And that's where we're making our decisions. I'm convinced that that is how value is created in technology, as I said earlier, when you compound the kind of results we're delivering over longer periods of time. So our job as leaders of this organization is to find the best way for DLocal to be able to compound those results over a long period of time. That's why you see us investing in geographies, in product and systems. We're super, super excited about this opportunity. We have a huge market to attack globally to turn this into a multi-billion dollar revenue business over the coming years. And that's where our focus is. I look forward to updating everyone on our progress on that journey over the course of the next few quarters, and thank you very much.

Thank you for your participation. This does include the program, and you may now disconnect. Everyone, have a great day.