DLocal Limited

Good day and thank you for standing by. Welcome to the D-Local second quarter, 2024 results conference call. At this time, all participants are in a listen only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. I would now like to hand it over to the company.

Good afternoon everyone and thank you for joining the second quarter in 2024 earnings call today. If you have not seen the earnings release, a copy is posted in the financial section of the investor relations website. On the call today, you have Pedro Aren't, Chief Executive Officer, Mark Ortiz, Chief Financial Officer, Maria Oldham, SVP of Corporate Development Strategy and Investor Relations, and Mirele Aragão, Head of Investor Relations. A slide presentation has been provided to the company that prepared remarks. This event is being broadcast live via webcast and both the webcasts and presentations may be accessed through D-Local's website at .dlocal.com. The recording will be available shortly after the event is concluded. Before proceeding, let me mention that any forward looking statements included in the presentation or mentioned in this conference call are based on currently available information and D-Local's current assumptions, expectations and projections about future events. While the company believes that their 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 D-Local. Thank you.

Hi, thanks everyone for joining us today. Let me start off with a summary of where things are as we've hit the halfway mark in 2024. We continue to see strong growth in our business, achieving another quarterly record of $6 billion of TPV during Q2 2024. The evolution of this key metric demonstrates our continued ability to grow as we gain share of wallet from our global merchant base, add new merchants to the mix as well. It also underscores our unique value proposition as a trusted partner for some of the largest and most sophisticated global companies across emerging markets. This momentum is solid and our pipeline remains robust, both within existing merchant opportunities and also with new merchant logos, which is a promising leading indicator of long-term growth potential. During the quarter, we've started processing for a few more marquee global names, such as a leading global Chinese fintech and one of the world's largest events and ticketing marketplaces. We've also assisted multiple existing merchants that are among the world's largest e-commerce players in their initial forays into Africa as they've launched operations in South Africa during the last quarter, signaling our success across this very promising African continent. And finally, also worth noting, we continue to power the growth of cross-border payments in Brazil, being a part of the recent launch of a global marketplace powerhouse in that market. This $6 billion in TPV represents a 38% -on-year growth despite the tough basis of 80% -on-year growth in the stellar quarter of last year. Performance was good for us across multiple verticals, including continued strong growth in commerce, on-demand delivery, and remittance verticals, accelerating growth in the softer as a service and the ride-hailing merchants, which grew 72% and 51%, respectively, year over year. This kind of sustained and well-diversified TPV growth, with a focused commitment to low-risk, high-reputation verticals, sets us up well for long-term success. We believe that our -over-year growth showcases a unique and class combination of growth while focusing on reputable verticals, which is unique among the relevant comp base, who either grow less, over-index high-risk verticals, or do both. Net take rates have held up sequentially. Despite unfavorable events, like the repricing by our largest merchant at the beginning of the year, material currency devaluations in Nigeria and Egypt more recently, and continued weakening across most emerging market currencies. This type of stable sequential pricing and growing TPV during the quarter translated into 11% -on-quarter gross profit growth. Our OPEX, excluding non-cash share-based compensation, only grew by $1 million sequentially after previous quarters of sequential growth above $4 million. This happened as we adjusted our cash spend to the weaker gross profit that began to flow through our P&L. As I've mentioned previously, there is a limit to how much we're willing to defend margins in the short term, as we're truly committed to certain investments which are crucial for our long-term success, particularly those in our engineering pool, back-office capabilities, and behind our license portfolio. But, to balance this out, we are always revising other discretionary spending to make sure it matches our top-line performance and is aligned with our general philosophy of frugality. As a consequence of this, adjusted EBITDA reached $43 million, reflecting what is still a lean structure and disciplined approach to spending, while our cash generation also accelerated versus the prior quarter. These highlights also come with certain challenges that we are focused on rapidly addressing, primarily that -over-year gross profit performance was flat. Driven by Latin America that was actually down 13% on Argentine FX devaluation and the repricing by our largest merchant in Brazil and Mexico. Stellar African and Asian gross profit growth of 79% -over-year unfortunately did not suffice to offset those two events in Latin America, still our largest region. Let me wrap up this first part by stating that not only do we see more good than bad in the reported quarter, but taking a step back from a short-term quarterly prism, Dlocal is an incredibly strong company with a fantastic TAM, attractive business model, and extremely promising future that at some point will be reflected in capital market performance. And so to keep things in perspective, we maintain strong product market validation as witnessed by nearly 40% -over-year and 14% -over-quarter TPV growth. We still run a high margin financial model with adjusted EBITDA to gross profit at 60% plus and ability to scale from here to previous levels going forward. A cash conversion that remains very strong and growing as EBITDA increases sequentially with a cash conversion cycle that's still in the 100% range over the last 12 months. When we analyze the potential of all this to compound over time, it's hard to not be optimistic about our future despite the inherent challenges and volatility existent throughout the global south. We firmly believe that our long-term future is bright and our own ability to execute is the single most important factor behind us capturing that opportunity. That optimism is not only being relayed in my remarks, but also reflected in our capital allocation strategy. Our business has an attractive cash generation profile and we see upside in our stock as we grow and scale. And as a consequence of this, we have bought back stock during the quarter at a rapid pace. We trust this will prove to be a savvy capital allocation decision over time. With that, let me hand it over to Maria and Mark to take you through a more detailed overview of our second quarter results.

Thank you Pedro. Good afternoon everyone. As Pedro just mentioned, during the second quarter we once again delivered strong TPV growth of 38% year over year and 14% quarter over quarter, reaching $6 billion. Our cross-border business, quarter value proposition grew 11% quarter over quarter and 22% year over year, reaching a new record of $2.7 billion in TPV. The quarterly growth is driven especially by the ride hailing vertical. The local to local processing business continues to prove our strong value through domestic flows, posting a 16% increase quarter over quarter and 55% year over year, confirming our superior offering to our global merchants compared to direct integrations to local acquires. The quarterly increase was driven in particular by growth in commerce in Mexico and Argentina. Our pay in business grew by a healthy 70% quarter over quarter and 34% year over year, driven by strong performance in commerce, on-demand delivery and ride hailing verticals. Our payouts business increased 7% quarter over quarter and close to 50% year over year. The continuous growth is driven especially by financial services, ride hailing and SaaS verticals. As we see, the revenue and profitability levels are changing. Moving to revenue, we achieved $171 million, up 6% year over year, primarily driven by Egypt, with over 100% year over year growth across advertising and streaming verticals, commerce and streaming in Mexico, and strong performance of other latam, African, and Asian across different verticals. These positive results compensated for lower revenues in Nigeria due to the Naira devaluation in February 2024. On a quarter over quarter basis, despite the healthy TPV growth, revenues declined by 7%, driven by the currency devaluation in Nigeria and Egypt. The more we continue to scale and diversify our business geographically, the more we expect a dilution in top-line volatility over as we reduce the reliance on a few markets. Now moving to gross profit dynamics. As you can see in slides 8 and 9 from the accompanying earnings materials, since last quarter we have included gross profit breakdown by region. During the quarter, gross profit was $70 million, a slight decrease of 1% year over year. Starting with latam, gross profit was $54 million, down 13% year over year. Most of this decline was driven by Argentina due to the lower FX spreads following the currency devaluation in December 2023. Mexico also impacted latam gross profit, decreasing 17% year over year due to merchant repricing and local to local increase. Gross profit in Chile contracted by 7% year over year due to lower cross-border volumes. Other latam markets show that 10% year over year increase in gross profit, driven by tier zero merchant growth. In Africa and Asia, gross profit grew 79% year over year, supported by our overall growth in Egypt, ramp up of our martens in South Africa, primarily in the commerce vertical, and the temporary FX dynamics in Nigeria. On a quarter over quarter basis, gross profit increased by 11%. In latam, gross profit increased by 10% quarter over quarter. The main drivers were the growth in Argentina and other latam markets, mainly Colombia and Costa Rica, and Brazil with lower processing costs following our renegotiation with processors, coupled with change in payment mix. Those two factors partially offset the impact of the key merchant repricing, with full impact in the second quarter compared to two months in the previous one. In Africa and Asia, gross profit increased by 13% quarter over quarter. The main drivers were temporary FX dynamics in Nigeria and growth in other African-Asia. Despite the quarterly improvement, we acknowledge that our results for this period are still challenging. However, it is important to emphasize that we do not see any structural changes in our business. Let me now hand over to Marc to continue discussing our financials.

Thank you, Maria. Hi, everyone. During this quarter, as Pedro mentioned earlier, we are committed and continue to invest in our team's capabilities and innovation, while also seeking efficiencies across many areas of our business. We are confident that this type of efficient investment, given the opportunities ahead of us, will pay off in the mid to long term. With that, total operating expenses reached $40 million for the quarter, an increase of 72% year over year. OPEX, excluding share-based compensation and certain other cash items, grew 46%. OPEX growth has a clear allocation tilt towards investment focused on product development and IT capabilities. Product and IT OPEX is up by 143% year over year, while all other expenses grew by 55%, as we also continue an investment cycle behind strengthening our back office capabilities for future growth. We remain committed to maintaining a balanced approach to expense management, balancing short-term and long-term opportunity. As a result, we delivered operating profit of $30 million for the quarter, up 12% quarter over quarter, and adjusted EBITDA of $43 million, up 16% quarter over quarter, representing an adjusted EBITDA margin of 25%. This is a result of higher gross profit and disciplined OPEX investment. The ratio of adjusted EBITDA to gross profit increased to 61% for the quarter, up three percentage points quarter over quarter. On a year over year comparison, operating profit came down 37% and adjusted EBITDA was down 18%. Given the gross profit dynamics that Maria explained and our decision to sustain many of the long-term investments that I just mentioned. Net income was $46 million for the quarter, up 161% quarter over quarter, and 3% year over year. The earnings presentation provides a detail of the quarter over quarter evolution of net income, which was mostly impacted by higher finance income, mostly driven by a $23 million non-cash market. Mark to market effect related to the Argentine bonds investments used to hedge our local currency position in that market. Our effective tax rate decreased to 18% from 29% last quarter, closer to levels of previous quarters. Moving on to cash flow for the quarter, we generated $35 million of free cash flow from our own funds, resulting in a free cash flow conversion rate of 77%, up $23 million and seven percentage points from Q1. Without taking into account the extraordinary gain of the Argentine bond, cash conversion would be over 100% in line with our historical levels. We ended the quarter with a strong liquidity position of $306 million, including $186 million of available cash for general corporate purposes. And $120 million of short-term investments. Before I pass it over to Pedro, let me give you a more detailed update on our share buyback program. As a reminder, we disclosed in the first quarter results that our board had authorized up to $200 million share buyback program to purchase Class A common shares as part of our capital allocation strategy. During the second quarter, we purchased $82 million, representing 9.2 million shares using our own funds. With this, let me hand it over back to Pedro for closing remarks.

Now, and finalizing. As you know, emerging markets are inherently volatile, which can and often do impact our short-term results. However, our long-term view remains optimistic, as I mentioned earlier. During our quarterly bottom-up review of pipeline and existing contracts, where we project out share of wallet, probable market growth, and new commercial opportunities on a -by-merchant basis, we are getting to the following revised outlook for 2024. Our new TPV expectation is explained by lower probability of volume ramp-ups on certain merchants, pipeline development that is skewed even more towards Tier 0 merchants with lower take rates, and weaker emerging market currency expectations going forward. For gross profit, our forecast takes into consideration these impacts that I just mentioned for TPV, while also assuming a growth of volumes in our -to-local flows as our local businesses continue to thrive. Our current expectations for adjusted EBITDA reflect our desire of not wanting to slow down certain key investments in long-term projects, and hence the decision to not defend our short-term margin structure as aggressively as we could, given our ability to tightly control costs and the flexible cost structure we have. We need to continue hiring more IT and product talent, strengthening our internal controls for the ever more complex businesses we manage, and investing in control functions that protect our merchant's business and reputations across the Global South. I want to make sure I remind you that we still see significant operational leverage in the business mid-term once these investments are carried out. Wrapping up, we continue to thrive across emerging markets, despite their complexities which we embrace as we deliver simple, effective solutions to our merchants. Our focus remains on execution and long-term growth, and our commitment to our expertise in the regions where we operate enable us to consistently win business from these global players. As we scale, this growth will help mitigate short-term volatility and dilute market fluctuations. Therefore, it's crucial for us to continue focusing on TPV growth, increasing our wallet, and addressing new clients, all of which we have consistently delivered since the company's inception, while continuing to drive operational leverage in the business once we get through the current disciplined investment cycle we're in. With that, we're ready to take your questions, and thank you for your interest.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment for questions. Our first question comes from Tito Labarda with Goldman Sachs. He may proceed.

Hi. Good evening. Thank you for the call and taking my question. I guess my question is on the guidance, just to understand a little bit the dynamics there, and thanks, Pedro, for the explanation that was helpful. But just if I go back a little bit, in your first quarter conference call, you were already kind of halfway through to queue, and you felt comfortable that you could deliver the lower end of the guidance. I completely understand all the volatility in emerging markets. I just want to understand if something changed from the last conference call to now, one, gross profit, you had kind of mentioned that March was very strong. This looks like it had been running below that March rate. Going forward, you expect a modest increase in gross profit from here, it seems. But just to understand if there was anything different from when you had the one-queue conference call to today to have you a little more cautious on delivering that guidance, and then I have another question after that. Thank you.

Sure. Thanks, Tito. Admittedly, I think the evolution of guidance over the last few quarters has shown that it's evolved as we run through our process of trying to project out how existing volumes on the 706 merchants we have running will play out over the remainder of the year, then what our assumptions are on new volumes from those merchants and new merchants, and then finally, there's an element of trying to overlay some macro expectations in terms of currency. Unfortunately, I think the revisions as we run that methodical process have been towards the downside over the last two reviews, but that's exactly what it's been. So, it's 40-plus markets, 700-plus merchants. These are not softer as a service contracts. We're actually having to regain our business every day with them, and we do the best we can in trying to project how we think the year will come out. On the cost line, we feel we have absolute control what we spend. On the TPV and gross profit levels, I think it's clear that we do the best we can. Where we're coming at is we continue to see a strong adoption of our products and services, and I think that's reflected in the TPV guidance and the TPV growth. When you get to gross profit, we do see a greater share towards existing tier zero merchants. We see a continued outperformance in the -to-local business, which in one hand doesn't have the FX monetization, so that drives take rate down modestly, but down. On the other hand, you could argue those -to-local businesses both prove the staying power of what we offer and our pure transactional revenues. In a way, those are less volatile, and you could argue lower margin, higher quality volume that we think mix will skew towards more than we did a quarter ago. Then on EBITDA, as I said, we fully control what we spend. We just want to make sure that we continue to build for the long term. The adjustments we're making are not fully aggressive on trying to deliver the margin target, but making sure that if there are investments we think we need to make, we're making them anyway. As we've said a few times, and as the evolution of our OPEC shows, those are heavily skewed towards product development and technology, and then strengthening some of the mid-office and back-office functions.

Okay. That's very helpful, Pedro. Thanks for the color there. I guess a follow-up on that, and you mentioned growing more in -to-local. We did big drop in the gross take rate, but the net take rate, I guess, maybe positively helped off you fairly well. I guess, do you expect this shift towards more -to-local to continue? Could that put maybe more pressure on the gross take rate? Do you think maybe, and again, I know this is hard to predict, but that the net take rate is maybe stabilizing a little bit from what we had seen in the prior quarters?

Yeah. One thing, I do strongly suggest we focus on the net take rate as we try to understand the monetization capacity of our business going forward. The gross take rate is heavily influenced by revenue that is very volatile, especially driven by dual exchange rate markets. I do think the net take rate question you're asking is the right question. If you look at the midpoints of the guidance, we believe that given the -to-local shift and the greater concentration in tiers year merchants, that you will continue to see decline in take rates in the short run, but those are moderate declines. I think if anyone was expecting the bottom to fall out or merchants queuing up to reprice as our largest merchant did at the beginning of the year, that has definitely not been the case. You can see that in the -on-queue evolution of net take rate, which is down by a few single-digit basis points. Again, if you look at the midpoints, our expectation is downward, but in a very controlled fashion. If we take somewhat more of a midterm view on take rates, what we're working on, and I think the objective here is as some of our newer products like the invoicing product or the platform products and hopefully new products we launch to market begin to grow and scale, we can try to offset some of the structural declines in take rates that are happening across all of FinTech, especially in the payments piece, try to offset that with more value-added services. But that's more of a midterm strategic answer. Your specific question, if you look at the midpoints, we're expecting somewhat of a downward trajectory in take rates driven by more -to-local and more tier zero merchants, so the very large merchants in the mix, but fairly controlled in terms of the magnitude of that take rate decline. Okay,

that's super helpful. Thanks a lot, Pedro.

Thank you. Our next question comes from Gereme Grissman with JP Morgan. You may

proceed. Gereme Grissman, your line is now open. One moment for our next question.

Our next question comes from Sumitara with New Street Research. He may proceed.

Thanks, guys, for the opportunity to ask a couple of questions. First of all, just to go back to the merchant repricing point, as you said, you're saying that there isn't a long queue of people lining up to try and reduce prices, but how much visibility do you have on that in terms of looking forward in the coming month? I guess we're all a little surprised by developments at the beginning of the year. What sort of visibility do you have on that process, particularly given the concentration of merchants remains still pretty high? That's the first question, please. If I could just squeeze in another quick one, just a more detailed one on Egypt, actually, where there was obviously the devaluation effect, but actually the gross profit seemed to hold up pretty well relative to what I was looking for and relative to how things trended in Argentina. Maybe just a bit of detail on how that all played through in Egypt would be helpful. Thanks very much.

Thank you. Visibility. As we mentioned last quarter, our pricing is not stipulated in long term contracts or dated contracts. They're stipulated in the contract, but the merchant has the option to approach us and discuss pricing at any moment. Therefore, there are no predetermined moments of pricing renegotiation. That's both good and bad. The visibility is really driven by the constant conversation the commercial team has with different merchants and if the issue is being brought up or not. The way we try to avoid this becoming a constant conversation is most of our contracts are tier driven. The merchant knows that as he attains greater volumes, there's a built-in automatic pre-negotiated repricing. That's not what happened in the beginning of the year where there was a sit down and let's renegotiate all the tiers beyond what the tiering had initially identified. When we say we're not seeing other merchants lining up to try to drive price, it literally means that most of our contracts continue to run as according to the original tiering structures that were determined at signing. That's what gives us to the best of our current knowledge confidence that what happened with the largest merchant, which we've always said was 2x larger than the number two. There was a significant scale there is not something that is playing out across the rest of our merchant base. On Egypt, I think Egypt has been a better performer than maybe we anticipated. We have seen the macro conditions play out as we anticipated with a tightening of the spreads between the market rate and the official rate, which that dynamic compresses our gross profit in the market. However, that has been made off by very strong TPD growth of roughly 30% plus. We continue to be one of the most reliable providers of liquidity in that market for our global merchants to be able to do cross border transactions. As a consequence of that and our strong both pay in and pay out combination in that market that generates that liquidity, we've seen significant growth in payments volumes there cross border, which has offset the compression in the unit gross profit, so to speak.

Thank

you.

Thank you. Our next question comes from J.P. Morgan. You may proceed.

Hello. Thank you, Pedro. Two questions on my side. The first one is, Pedro, if you can provide a quick update on the remittance evolution. I think this is one of the opportunities that we see going forward. Just highlight how this is evolving and if you specifically comment a little bit on which countries you can use remittances, different flows, right? The two sides of the equation to offset the cross border business. Then the second question is actually, not sure if a technicality, but just to understand, Nigeria gross profit was higher than just want to understand what exactly drove this mismatch. Thank you.

Sure. The remittance

vertical

continues

to be a very strong performer. It grew at 80 plus percent year on year as we continue to onboard more global remittance consumer facing remittance companies. Remember, we are in this vertical and as in most verticals, we're a provider of enterprise solutions, so we serve as infrastructure for companies that actually have the consumer facing relationships on remittances. One new vertical for us that we really started to lean into about a year and a half, two years ago, but has really began to pick up over the last few quarters. It's an interesting business in itself, but as we've also said, it also allows us to have very efficient liquidity in certain markets where netting is permissible. The list of markets where netting is permissible is actually a quite long one. There are some markets where it can't be done. Historically, Brazil was one where that was not possible. That's potentially in flux, but we don't really net in Brazil. Then there are a handful of others. Most of the other markets, we are able to net and we net wherever we have payout flows flowing into those markets as our remittance business grows.

That's super clear.

Nigeria, for the gross profit to be higher?

Yes, sure. On that, on Nigeria, what you're having, you have the effect dynamics where you have the official rate trading above the parallel market. These dynamics result in the P&L that you're seeing where you see the gross profit higher than the average. We see this as a temporary dynamic.

Okay. Thank you. Thank you.

Our next question comes from Neha Agarwal with HSBC. You may proceed.

Hello. Good afternoon. This is Carlos Gomez from HSBC. I have two questions. The first one refers to your assumptions. You mentioned that you are trying to forecast to some degree also what the foreign exchange is doing. Which markets are of particular concern for you? Which ones do you think we could see another significant foreign exchange adjustment? Is it Egypt, Argentina, any others that we are not looking at right now? Second, regarding your investment phase and the investments that you are making now, would you be able to quantify how many quarters or years do you consider this investment phase

will

take? Thank you.

Yeah, sure. Look, the assumptions in terms of currencies, I don't recall specifically on a market per market basis. I recall Real, Mexican Peso, some of the bigger ones in the mix for sure. But across, I think the majority of the basket of EM currencies, I think the majority of the EM currencies, we've used bank and market data to reassess the projections for the remainder of the year and they come in with weaker emerging market currencies than what we had used in the prior quarter. So I think it's more of a blanket statement in general of a strengthening dollar versus the overall mix of currencies in the 40 plus markets where we operate. On the investment cycle, and let me be precise here because investment cycle at times can generate certain concerns. I think the company had issued a midterm guidance of 75% of EBITDA to gross profit and it had actually hit that number last year in Q3, I believe. We've since lowered that number in Q1 and that was driven by weaker gross profit than we expected to high 50s. It's now back to low 60s. So if you assume compounding out of sequential gross profit growth faster than growth in OPEX and you take a bit of a midterm view, we believe that we can be back where we were historically and that this isn't a structural long-term change in the market structure of the business. Now what that specific time frame is, I don't think we've nailed that down. There's still investments in product and technology. I previously mentioned accelerating the pace of launching new products as one of the long-term drivers of offsetting take rate declines. I think D-LOCO went through a massive expansion of its number of markets over the last two, three years, which means we've built capabilities and a processing network across many of these markets. Now we're in the process of strengthening those capabilities, deploying more features across all of these partners and that requires investing in technology and product. Is this a multi-year cycle? Probably not. I think we're thinking a bit more in terms of multiple quarters. So certainly the margins this year come in below what the midterm guidance was, obviously, if you look at H1. But with gradual sequential improvement. So we should be exiting this year on track to deliver margins next year much closer to that midterm guidance. And then ideally when we look towards the back half of next year and beyond, we'll be closer already at what those historical levels were in the low to mid 70s.

Thank you very much for that detailed answer. On the Forex, I understand that you are saying that you expect the general depreciation of EM currencies versus the US dollar. But I should have seen particular markets can have an impact on the company. Again, Argentina, Egypt, Turkey, any other currencies that we should be watching carefully?

Yeah, look, I think if we look at the 2024 business, Argentina especially has normalized somewhat. We've seen a pickup in the Argentine business. It was one of the strong performers in Q2. Bear in mind, that isn't because the spreads have widened dramatically there, although they have widened. But it's driven by a genuine acceleration in our Argentine business. So the currencies that typically have been more volatile and have had a bigger impact on the business have been the Argentine peso and the Egyptian pound. I'd look at those, but I think significantly de-risked, especially Argentina from where it was last year. The Egyptian pound, I just mentioned, the spreads have tightened, but volumes there have picked up 30 plus percent Q1Q. So I don't know how much more room for tightening there is. Turkey is an interesting opportunity for us, but still a very, very small business. We're beginning to see more interest and offering more and more services in that market as some other global processors pull out, but that's a small one for us. So I would look at the gross profit disclosures we give you, and those are the currencies to track more closely. Brazilian real, Mexican peso, Chilean peso, Argentine peso, Egyptian pound, Nigerian naira.

Thank you very much. And again, thank you for the additional discussion. It's very useful.

Thank you. Thank you. Our next question comes from Cassie Chan with Bank of America. You may proceed.

Hey, this is Cassie from Bank of America. I just wanted to ask if there's anything you can tell us about quarter to day trends in July and August relative to the second quarter, anything you're seeing there, either by TPV or gross profit. And I guess how should we think about the third quarter versus the fourth quarter, understanding you don't give quarterly guidance? Just how should we think about it in terms of maybe a third quarter in your mind, probably the top before we're expecting to see the acceleration in fourth quarter? Anything there would be helpful. Thank you.

Thanks. So let me try to give you a TPV cadence. May had significant e-commerce promotional days across the region. So May was a very strong month, above two billion of TPV, which was a new landmark for us. June came in a little bit softer than May in terms of TPV, but held up quite nicely in terms of gross profit. And then as we entered the current quarter, July was once again, a above two billion dollar TPV month. So the second month ever where we've surpassed the two handle in terms of monthly TPV. And margin wise, slightly softer than June, but still, I think we need to continue focusing on the TPV metric. If we compound that over time and we continue to deliver solid sequential growth, that's really, I think, the core of the investment thesis here, is looking back in multiple quarters and at that level of sequential compounding. For example, if you look at these results or you look at the high end of the guidance and you play that out, it's really a remarkable opportunity and driven by the time we have and how increasingly important emerging markets are becoming to global companies. So those are the positives. I think in general, again, you have our guidance update to get a general sense of the quarter. Yes, that does skew towards Q4 as e-commerce has become our largest vertical. E-commerce obviously is very seasonal and that's generated increased seasonality in the company, which I think also shows that we do see some limited risks in Q3 and then picking up in Q4. But it's still early to tell. There's still more than half of the quarter to go. And so we'll report back with the specifics when we announce the third quarter.

Got it. That's helpful. And then I guess just wanted to ask, you guys had mentioned some delays in new launches last quarter. Did that materialize in the second quarter or you're expecting that in back half? And I guess the NR, is that what's kind of driving the NR, which was about 100% this quarter? I know you guys mentioned Nigeria, but just any thoughts or details there and if we know what you're expecting that metric to be for fiscal 24?

Great. Let me take those backwards. If you adjust the NRR, excluding Nigeria and the strong devaluation there, and remember that as Maria walked us through, revenues in Nigeria didn't necessarily affect gross profit performance, which was up sequentially. But the Nigeria adjusted NRR is about 114%, which continues to show the stickiness of what we offer. We rarely ever churn merchants, which is one of the positives about the company, again, when we think of long-term growth.

Thank you. No, no, sorry.

Sorry. There's a second part to the question. So we had called out delays in certain important new businesses for us. We've given you some color in the prepared remarks. Those are live now, which is very good. We mentioned in the prepared remarks that we see ourselves as a central player in the cross-border payments growth of Africa. Three of the world's largest e-commerce companies have made maiden forays into e-commerce in Africa and South Africa, and we are a payments provider for all three of those very large global e-commerce players. And those all got launched a little bit later than we anticipated. So the ramp-ups are also taking slower. I don't think Africa is necessarily a short-term material impact on our business. It's certainly accretive, and long-term we see enormous opportunity there, and we think we're super well positioned to capture it. And you see that in the growth of our Africa and Asian segment. The second one is one of the world's largest fintechs based out of Asia, and this one got delayed, I'd say, by quite a bit. And we're very, very encouraged by already having that live and running. It's still relatively small, but the focus now is making sure we deliver for them and be able to ramp up that business. We started in Brazil, which is a good first market, and we're already beginning to look at incremental markets with them.

Thank you. Our next question comes from John Coffey with Barclays. You may proceed.

Hi, thanks for taking my call. Just two quick questions I can ask both at once. I think you had mentioned the tax rate had declined to about 18% this quarter. Is that a good way to think about the delocal tax rate going forward in future periods, quarters, years? And the second is, it seems like, Pedro, from your comments, it doesn't seem like there's any real change in your medium-term guidance. Are there any other little caveats you would like to add from that guidance given last year in your investor deck?

So

I'll

take the tax question here. So as you know, we operate in over 40 countries, right? So our tax rate is derived from all those activities. And the mix of revenues, we talked about local to local increasing. We've got our sophisticated hedging strategies. All of those things tend to impact the way our business is taxed. And so at this stage, I would say, second quarter, we came back to what are called more historical levels, which were the ones that we were experiencing in the last 12 months. Q1 was a bit of a peculiar time for us. So again, it's hard to tell where we're going to be here in the future. I think it's hard to pinpoint a certain tax rate. But I think where we stand today is just about the place where we think we're going to be as we grow the local to local business. Maybe the tax rates go up a little bit here. But I think we feel pretty about the rate that we have at this stage.

Great. Thank you. Our next question comes from Madeline Zao with Susquehanna International Group. You may proceed.

Sorry, let me, sorry, Madeline, let me just answer the second part of the question at the risk of thinking that otherwise we've avoided it. So, but let me be very precise on the question around midterm guidance. At this time, we have not reviewed our midterm guidance. It's a bit of a longer process and we'll do that at the end of the year. I think we're incredibly proud of a lot of the work we've been doing here. I think guidance has been something somewhat challenged given the volatility in the markets where we operate. So we haven't formally given any update on the midterm guidance. I think conceptually, we continue to see, and I've said this a few times, really good opportunities to compound TPB growth over a multi-year period. We see a pipeline that's still full of opportunities as we work with our global merchants. That should also drive continued compounding of growth, growth profit growth over longer periods of time. I think if you look at 24 versus 23, where growth profit growth has not been a positive, there are very specific tailwinds that we had in 23, which make it a tough comp. And so we, believe to the best of our current understanding that 24 somehow is a reset and there should be a good opportunity to growth both sequentially and certainly more so year over year from the new 24 base. And I think the sequential growth we've just seen, Q2 versus Q1, is one historical example of that. And then on EBITDA, the previous question kind of alluded to this, we are going through a disciplined investment cycle. Our EBITDA to gross profit margins are now in the low 60s. That's still best in peer set or among the best in peer sets, even versus companies that have significantly larger scale than ours. I think it is important to remember that as well. This is a very lean, well-run organization, even as we invest a little bit more. And even more so if you compare against other similar companies, much larger than we are. And we believe that once we're through this investment cycle, there is strong operational leverage in the financial model. So those are the conceptual, I think, undertakings of what we see for the midterm. We'll give updated specific midterm guidance on numbers towards the end of the year.

Thank you. And our next question comes from Madeline Zhao with Susquehanna International Group. You may proceed.

Hi. Thank you, Pedro. It's Jamie at Susquehanna. I just wanted to ask about constant currency. Is there a structure that you may be thinking about that you could share to gauge the performance of the company on a constant currency basis, both from an as reported but also from an investor relations perspective? Because I think a lot of us in the buy side are struggling to meter that. Your old shop used to be more forthcoming about that. Is it possible to share that with an investor relations message?

Jamie, hey. So yeah, you're right. I've spent most of my life within a constant currency universe. I'm not necessarily sure it addresses the complexity here. I think the complexity here is simply the footprint of so many emerging market countries with very volatile currencies. So even if you were to look at these things in constant currency, you'd still see that tremendous volatility. The answer to your question is yes. Again, it wouldn't even be disclosing anything that isn't really available because you can grab the dollar disclosures and work them back to constant currency. We can make your life easier and prepare that. We'll jot that down. But I don't necessarily think that that necessarily solves both everyone's difficulty in projecting going forward, but even times in actually understanding the different markets. The currencies are public information. So we give it in dollars. It's fairly easy to translate back into constant currencies. We can do that. And the reality will still be that emerging markets present incredible opportunities. Many of those opportunities are because of volatility and complexity. That's really what we're solving for our merchants. It makes things like projecting challenging.

Okay. Yeah, I think it would be helpful. You may be giving us too much credit if you think we could do it. And I mean, we try by certain markets, but 40 markets is it's a treasury assignment. It's hard for an analyst. And then so to go back to John's question about the medium-term guidance, I mean, I guess asked another way. Is there anything that know now that you didn't know when you took the job? I mean, you said in your prepared remarks, this is still a great team, great company. And I know you love the payments universe, but is there anything operationally that you know now that you didn't know that?

Absolutely not. Again, I think it'll be a year, I think, tomorrow. I remember when I took the job, I mentioned super attractive opportunity in terms of addressable market and the relevance that the global south will have for global businesses, a fantastic lineup of global merchants. Most of the largest global digital companies by market caps, we are serving in one market or the other. And then a high margin, high cash generation financial model. I think all of that continues to be true. And so it gives us an incredibly solid base off of which to build the local. Now, again, granted, 24 has been challenging from a profitability perspective, not so from a TPV perspective, which I still think is the most important metric. And so I'm equally encouraged as I was when I took the job. And actually, you know, looking back on the prior quarters, I think things begin to look in a way easier going forward, as I really think there has been a general reset. And now we can start growing from here. It'll be volatile. Emerging markets are volatile at our scale. As our scale grows, and we have more TPV and more merchants, I think we benefit from law of large numbers. And hopefully the volatility gets, you know, decreased. But I continue to be optimistic. There's a lot of work and execution will be key. But I don't see anything structural or anything that makes me less optimistic on our ability to generate shareholder value over the appropriate time period.

Great. Thank you. I'll drop back in the queue.

Thank you. And as a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. Our next question comes from Matt Coad with Autonomous Research. You may proceed.

Hey, guys, thanks for taking the question. I just wanted to go back to the net take rate discussion. And Pedro, you gave some great detail on, you know, like kind of what drove the conversation with your largest client. But I was hoping we could opine on that a little bit more. So like, what were the factors in the market that allowed your largest merchant to make you sit down and lower those tiers? And why wouldn't your, like, merchants two through 10 be able to do the same thing? If we could better understand that, I think we could, you know, maybe put a floor on the net take rate and get excited about the stock again. Thanks.

Yeah. So look, I think there are multiple factors here. The first one is starting point is a very relevant part of the conversation. I think as we disclosed last time, this was a merchant who we had accompanied through a phenomenal execution and growth across the region, where their focus in managing us was very much on efficiency, conversion, reliability, redundancy. They were pushing go to market very quickly and weren't necessarily optimizing around cost. That's the typical go to market strategy. And they've clearly been very successful. That also meant that we were running them at a net take rate, like we said, which was literally 10x what they were being offered by certain local processors. So it really wasn't sustainable. And that's not the case with all the tier zero merchants. We just mentioned another very large Asian cross border merchant who had also been assisting with across all of Latam. Their starting point from a take rate perspective is much lower. So the risk of downside is smaller. Other than that, there are vertical category considerations, country mix considerations that go into the conversation. But I think the most important driver is really we had grown very quickly with them and they were running at a take rate that simply wasn't sustainable over time. So as they've gone to a more sustainable take rate in the 40, 50, 60 net take rate range, which is still three, four, five X what they could get with local providers, I think that shows the value of what we offer them. That's probably more along the lines of what an incredibly large merchant in that vertical with their country footprint potentially should be running at and not where they were running prior to that.

That's super helpful, Pedro. And then just one follow up kind of thing about like the long term. I was hoping you could define a little bit on like what you believe your moat is. And this is kind of from a competitive dynamic standpoint as well, just thinking your net take rate is 115 basis points today. Your largest global peers like a Stripe and Audi and some company like Nuve, they all have net take rates in their developed markets of say 15, 20 basis points. So you have a really attractive revenue pool that they might want to come after. So I was hoping you could kind of like just talk big picture about like what's your moat and why won't your merchants leave if a company like Audi and our Stripe offers them more attractive processing rates?

Thanks. That's a great question and kind of questions we like to answer. So first of all, I'd be very wary of extrapolating developed market take rates to emerging markets. And you've done that implied in the question, you're not extrapolating. But I also think the key success factors and what a company's core competences should be built around are very different to be successful in developed markets and emerging markets. I think in developed markets, it's really become a race for features and a race for volume. Primarily, those companies you mentioned have all built the stacks in the markets where they operate. If you were to try to replicate that across 40, 50 emerging markets, it simply doesn't translate because many of these markets are subscale. So you might see greater vertical integration in Brazil or in India, you're not going to go build a full fledged acquirer across 50 markets. So I always like to say the local is less of a vertical play, and it's more of a horizontal play. We are this API layer and this middleware one single that abstracts all of the complexity, both technological but also regulatory conciliations across 40 plus financial mark 40 plus emerging markets. And that's a very different build to what you have to build if you're building for developed markets. So we've always said we don't think we have something to offer in developed markets, and hence we've retained our focus on the global south. I think it's fair to say many of our developed market competitors with their playbooks, we don't believe will fare as well as we do in emerging markets because the key success factors are others. It's how do you make this network of multiple acquirers, multiple digital wallets, multiple central bank sponsored payment systems in a highly fragmented, highly volatile world work, which is different to what works in the US or Europe. On take rates, don't forget that what currency pairs you're doing on your FX and your cross border make a big difference. So our developed world competitors are doing euro to dollar. There's no spread there. When you're doing Argentine peso, Egyptian pound, Nigerian Naira, Peruvian sol, you begin to see currency pairs that actually generate much more FX spread. That's always been the case. That's the case for credit cards. And that's part of the attractiveness of the emerging market play is that you do have that cross border overlay, which is much higher in terms of take rates than if you focus on developed markets. So at the end of the day, that combination of sole focus on the global south, one single middleware that abstracts complexity across 40 plus markets and the FX overlay is what we think differentiates what we're doing and gives us a high chance of success going forward.

Really comprehensive answer, Pedro. Thank you.

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

Yeah, thank you. So thanks everyone for the interest and support as always. There's a lot going on here. I think we're all excited about what we're building as we've reset the base in 2024 for a long term growth story. We mentioned many times in the call today, our addressable opportunity is really, really large across emerging markets. And we believe that emerging markets will continue to become ever more important to global companies. And we're one of the default options for payment needs across the global south. We continue to launch a few select new markets. We continue to see great interest in our Southeast Asian and Middle Eastern expansion. So there are many growth vectors we need to execute on. We've tried to recognize and highlight that short term there is volatility across the global footprint that we serve. But longer term, as we grow in scale, that volatility hopefully becomes more manageable. And we really think this company is uniquely positioned to continue to grow and capture value given the right time horizon and investment outlook. Our financials are super solid. Our balance sheet position is super strong. And so we really can focus on continuing to deliver value for our merchants over the long run. We look forward to reporting back to you as all of this happens on a quarterly basis. And we will speak again in three months time. Thank you very much.

Thank you. This concludes the conference. Thank you for your participation.

You may now disconnect.