Operator
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.
spk01
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.
Pedro
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.
Maria
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.
Marc
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.
Pedro
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.
Operator
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.
Tito Labarda
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.
Pedro
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.
Tito Labarda
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?
Pedro
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,
Gereme Grissman
that's super helpful. Thanks a lot, Pedro.
Operator
Thank you. Our next question comes from Gereme Grissman with JP Morgan. You may
Gereme Grissman
proceed. Gereme Grissman, your line is now open. One moment for our next question.
Operator
Our next question comes from Sumitara with New Street Research. He may proceed.
spk13
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.
Pedro
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.
Gereme Grissman
Thank
Pedro
you.
Operator
Thank you. Our next question comes from J.P. Morgan. You may proceed.
spk09
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.
Gereme Grissman
Sure. The remittance
Pedro
vertical
Gereme Grissman
continues
Pedro
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.
Gereme Grissman
That's super clear.
spk09
Nigeria, for the gross profit to be higher?
spk11
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.
Gereme Grissman
Okay. Thank you. Thank you.
Operator
Our next question comes from Neha Agarwal with HSBC. You may proceed.
spk05
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
Gereme Grissman
will
spk05
take? Thank you.