DLocal Limited

Good day and thank you for standing by. Welcome to the D-Local fourth quarter 2024 results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to D-Local. Please go ahead.

Good afternoon, everyone, and thank you for joining the fourth quarter 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 Arndt, Chief Executive Officer, Marco Reitz, Chief Financial Officer, and Mirele Aragao, 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 Delocal's website at investor.delocal.com. The recordings 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 DLocal's current assumptions, expectations and projections about future events. Whilst 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 factors section of D-Local's filings with the Securities and Exchange Commission, which are available on D-Local's investor relations website. I will now turn the conference call over to D-Local. Thank you.

At D-Local, we're unlocking the power of emerging markets, enabling businesses to transact and thrive where immense growth potential is just beginning to unfold. The year 2024 has been a testament to the strength and resilience of our business model. We experienced remarkable growth. Our TPV increased by 45% year over year, reaching a record of $26 billion. This achievement was driven by strong performance across diverse verticals, countries, and products, demonstrating the increased diversification of our business. Besides the remarkable volume growth, we also delivered a gross profit of $295 million and adjusted EBITDA $189 million. Despite ongoing investments to support the growth opportunities, our adjusted EBITDA over gross profit margin remained at a solid level of 64%. These numbers are all a testament to the strength of our financial model, delivering a rare combination of growth and high margin profitability. As we lay the foundations for scalable and profitable growth over the coming years, our investments over the past year have focused on several key initiatives. These accomplishments would not be possible without our dedicated team whose local expertise and presence in emerging markets have become essential to our merchants. In 2024, we welcomed 194 new talents, expanding to 1095 team members across 49 countries. A substantial part of this increase came from our technology and product team, who work intensively to innovate our product portfolio, develop new features to enhance performance for our merchants, and expand payment methods, all while prioritizing cost and operational efficiency, both in terms of cost and OPEX. During 2024, we launched 20 new payment methods for pay-ins and seven for payouts, while adding close to 100 new partner integrations to ensure redundancy, cost efficiency, and unlocking the latest and greatest payment features. We launched and ramped up our new payment orchestration solution for merchants with a fully localized operation. we continued to seek ways to increase transaction approval rates and reduce processing costs. First, we enabled network tokenization with seven processors across 10 countries. Second, we launched and further improved our smart request functionality, a new AI engine to dynamically adapt the card authorization message to acquirers in order to improve conversion rates. And finally, we developed our new cost optimization engine for our smart router, which has decreased our processing costs while maximizing approval rates. We also worked closely together to enhance our customer experience, reducing our customer support response time by 88% within nine months and decreasing issue resolution time by 45% through AI implementation. Moreover, our suite of products continues to be overhauled from the ground up, enabling an extensive list of use cases and setups, and we continue to improve our merchant dashboard user experience. The combined efforts across our different teams are reflected in our competitive pricing, optimized conversion rates, and customer experience. As a result, we strengthened the relationships with our existing merchants, achieving a TPV retention rate of over 140% in 2024. We expanded our reach by onboarding new merchants to our platform, with the 2024 cohort achieving record level of first-year TPV, and we increased our NPS by 8 points compared to the first half of 2024, reaching high levels within the industry. All this has allowed us to close out the year serving more than 700 merchants across more than 40 markets. As we continue to execute our disciplined approach to expense management, we have delivered considerable efficiencies by a methodic approach to renegotiating with processors and brokers on cost, enhancing hedging strategies to minimize currency losses and reduce costs, and optimizing structures and flows for tax efficiencies. We have also secured nine new licenses globally, enabling us to expand product offerings, access new growth opportunities, and connect merchants with emerging markets. As we look back on 2024, we are proud of what we have accomplished. These results highlight our ability to adapt and thrive in a dynamic market, thanks to our team's dedication to commercial efforts, technological innovation, and execution capabilities. In 2025, we remain committed to delivering sustained growth and value to our stakeholders as we continue to explore the growing total addressable market of cross-border payments, driven by shifts towards payment digitalization, the growing importance of emerging and frontier markets, and the surging demand for cross-border and instant payment methods. D-Local, unlocking the power of emerging markets.

Thanks everyone for joining us today. As we walk through a review of our performance over the past quarter and year, I'd like to get us started with a recap of the investment thesis behind dLocal. As the previous video illustrates, and as we've repeatedly mentioned, we think of five pillars underpinning that investment thesis. First of all, a massive addressable market given the untapped potential of emerging and frontier markets as they digitize payments and as global merchants go to market throughout the global south. It's worth reminding everyone that 85% of the world's population resides in emerging markets and that two-thirds of global growth by 2035 will come from there. Second, consistent high top-line growth driven by a proven track record of delivering value to the world's most sophisticated global digital merchants that has allowed us to capture a market-leading share of the expanding TAM I just referred to. Third, attractive margin business with the potential to deliver operational leverage once we've laid the foundational blocks and further scale benefits begin to kick in. Fourth, strong cash generation financial model as net income, which converts well into free cash flow, generates more and more available cash. And finally, a strong innovation pipeline. We're investing behind our product development capabilities to generate additional growth vectors for dLocal. These growth vectors will come from new categories, such as stablecoins and APMs, just to name a few we're already focused on. New products that will be launched this year and in future years and that generate additional mid-term revenue streams. Constant feature innovations that help us sustain high recurring business from our merchants. And potential M&A activity as we see the cross-border fintech space poised for consolidation at attractive valuations going forward. Our fiscal year 24 results show how that investment thesis remains intact. In terms of market size, with record TPV of $26 billion, accelerating growth to 45% year over year, with mix continuing to move to newer, more attractive markets, while core markets rebounded from Q3 softness. Case in point to all this, TPV retention for 2024 was above 140%, showing how constantly innovating on behalf of our merchants' businesses generates high loyalty and recurrence of business. Revenue and gross profit hit record highs as well at $746 million and $295 million respectively. Adjusted EBITDA to gross profit margins closed out the year at 64%, but improved consistently as the year progressed. And net income to free cash flow of owned funds, conversion, exited the year at a rate above 100%. These strong 2024 results I've just walked you through should be seen in the context of two things. An admittedly weak first quarter, which was then followed by progressively stronger quarter on quarter on quarter performance, and the continuation of an investment cycle aimed at achieving greater scalability for our business over the long run. As the annual video just shown highlights, some of these investments and the results that we're starting to collect from them So, as we exit the year with very solid momentum, we're encouraged by having delivered consistent improvement in results since Q1 across key metrics, as I'll highlight next as I give you a quick recap of Q4 24 results. Q4 continued the positive trend from the previous quarter, and despite having a tough comp in Q4 2023, TPV grew by more than 50% year over year during the period. On a quarter-over-quarter basis, TPV growth accelerated to nearly 20% Q on Q, driven by the seasonality of the e-commerce vertical and strength in remittances and ride-hailing categories. We're convinced that our growth continues to reinforce our position as a trusted partner for global companies seeking to do business across emerging markets. Our performance came from a well-diversified list of countries, with notable contributions from Argentina, Egypt and the other Latin American market segment, as well as other Africa and Asia. As a result of our expansion into more frontier markets, we also continue to see solid growth in cross-border payment volumes, as well as local to local. Moving on to profitability for the quarter, we reached a record gross profit of $84 million. Net take rate was 1.1%, reflecting a market dynamic where higher volumes drive lower take rates, Also, an increase in the payout share, which is lower take rate. And finally, the depreciation of emerging market currencies. To offset this, we continue to drive cost efficiencies through processor and broker renegotiations and improvements to our hedging strategy. We also continue to push into higher take rate markets and verticals, which over the long term should partially offset Take rate compression. Despite our ongoing step-up in investments in our engineering team, operational capabilities, and licensed portfolio to support our long-term growth ambitions, our adjusted EBITDA also hit a new record of $57 million in the quarter at an adjusted EBITDA over gross profit margin which improved queue-on-queue to 68%. Cash generation, another strength of the financial model, was also solid as we continue to increase free cash available to deploy behind our capital allocation strategy. This sustained cash generation increases our flexibility when thinking through M&A, buybacks or reinvesting in a disciplined manner back into the business. One important note as I conclude on the advances in our license portfolio. As we've stated, we've continued added licenses and registrations throughout 2024, counting with nine additional ones. This reaffirms our belief that over time, an expanding portfolio of licenses will prove to be a competitive advantage. Most important among these and worth noting is the Authorized Payment Institution License granted to us by the United Kingdom's FCA. The overall growing portfolio will allow us to offer our merchants greater regulatory confidence and more importantly underscores our commitment to compliant practices and coming under regulatory oversight. And now, wrapping up, Q4 marked a successful end to 2024 in terms of consistent TPV growth, control take rate decline, and balancing investment for future growth with a healthy margin and free cash profile. The company remains hyper-focused on our mission of unlocking the power of emerging markets by continuously building trust with our clients and strengthening our partner relationships so as to expand digital products and services throughout the Global South. With that, let me hand it over to Mark to take you through a more detailed overview of the results during the quarter.

Thank you, Pedro. Good afternoon, everyone. As Pedro mentioned, our fourth quarter results mark a strong conclusion to the year, reflecting healthy growth and reinforcing the strength of our business model. We wrap up 2024 on the back of three quarters of progressively stronger results, underpinned by the continued diversification of our business across geographies. This increased global reach is evident in our Q4 results. Brazil and Mexico, our two largest markets, experienced sequential re-acceleration on TPV growth, but they saw a decline in gross profit. Despite this, our consolidated revenues, gross profit, and adjusted EBITDA reached record levels, driven by growth and strength across our other geographies. As a result, we achieved TPV of $7.7 billion, up 51% year-over-year and 18% quarter-over-quarter. In constant currency, given general weakness in emerging market currencies, those growth rates are even more impressive, about 30 points higher year over year. From a business line perspective, our cross-border flows grew 23% quarter over quarter and 67% year over year, mainly driven by the commerce, financial services, on-demand delivery, and SaaS verticals. Our local-to-local TPV increased by 14% quarter-over-quarter and 38% year-over-year, with strong performance in Brazil, Mexico, and Argentina. Our pay-ins business grew 15% quarter-over-quarter and 44% year-over-year, with strong performance in the seasonal commerce category, as well as ride-hailing across various countries. Our payouts business grew 26% quarter-over-quarter and nearly 70% year-over-year, driven by financial services and remittances merchants. Moving on to revenue, we surpassed a milestone of over $200 million in Q4, representing a 9% year-over-year growth. This result is driven by Argentina and Egypt, both with revenue growing significantly. Other markets, particularly Colombia and South Africa, with strong growth across commerce, ride-hailing, and SaaS verticals. Mexico, which grew sequentially both annually and quarterly at 14% and 4% respectively, though at a slower pace to prior quarters, decelerating due to higher growth of Tier 0 merchants coupled with a shift in the payment mix. These positive year-over-year results compensated for lower revenues on currency devaluations. primarily in Nigeria due to the Naira devaluation in February of 2024. In constant currencies, revenue growth for the period would have been around 40% year over year. Revenues were also negatively affected by lower take rates from the ramp up of the standalone payment orchestration option we launched at the end of Q3, which on a positive note, allowed for the recovery of volumes in Brazil versus the prior quarter. In addition, Brazil was also impacted by a shift in payment mix. On a quarter-over-quarter basis, revenue grew 10%, driven by the volume increase in Egypt, as well as positive results in other LATAM and other African Asia, with notable performance in South Africa, Turkey, Colombia, and Ecuador. Now moving on to gross profit dynamics. During the quarter, gross profit reached a record level of $84 million, up 20% year over year. Starting with LATAM, gross profit was $56 million, up 3% year over year, mainly driven by the volume growth in Argentina, Mexico, and other LATAM markets, which were mostly offset by Brazil, as just explained, and currency devaluations. In African Asia, gross profit posted a stellar growth of 82% year-over-year, driven by our TPV growth in Egypt, TPV ramp-up of our commerce merchants in South Africa, and positive performance in other African Asia markets, including Turkey and Vietnam. This geographic diversification is core to our strategy, as discussed earlier, as it allows the company to continue growing at a high pace despite short-term headwinds in a few of our countries. On a quarter-over-quarter basis, gross profit increased by 7%. In Latam, gross profit increased by 1% quarter-over-quarter, driven by Argentina's positive performance. This result was offset by drivers in Mexico and Brazil, as explained in the previous section. It is important to note that other Latin markets that continue to grow TPV were negatively impacted on a quarter-over-quarter basis by the strong growth in Q3 from widening FX spreads in certain smaller markets, as disclosed in the previous quarterly results, which tightened this quarter. In Africa and Asia, gross profit increased by 21% quarter-over-quarter, with highlights being the positive performance in Egypt, Nigeria, and Turkey in categories such as remittances, financial services, ads, and streaming. As Pedro already mentioned, during Q4, we decided to resume the pace of certain investments in building out our capabilities. It is important to reinforce that we are making these investments in core areas to drive efficiency in our business and ensure future growth while maintaining our lean and disciplined structure. With this, for Q4, our total operating expenses reached $41 million, a 12% increase quarter over quarter and a 44% increase year over year. On an annual comparison, most of the OPEX growth continues to be mainly allocated to product development and IT capabilities, with these expenses increasing by 70% year-over-year, while combined sales and marketing and G&A expenses grew by 29%. We expect this allocation tilt toward product and IT to continue in the future. On a quarterly basis, the tech and development expenses were slightly down, as increases in headcount were offset by reductions in other IT expenditures. Combined sales and marketing and G&A expenses grew by 11%, driven by our continuing investment in operating capabilities and marketing investments. As a result, we delivered an operating profit of $42 million for the quarter, up 3% quarter-over-quarter, and adjusted EBITDA of $57 million, up 9% quarter-over-quarter, representing an adjusted EBITDA margin of 28% on par with last quarter. The ratio of adjusted EBITDA to gross profit reached 68% for the quarter, up 1% point quarter-over-quarter, making the third consecutive quarter of improvements. Moving on to net income, net income was $30 million for the quarter, up 11% quarter-on-quarter and 4% year-over-year. Compared to the prior quarter, the result was impacted by a positive non-cash mark-to-market effect related to our Argentine bond investments, lower finance costs, and partially offset by higher taxes. our effective income tax rate ended at 27% for the quarter and 20% for the year, impacted by an income tax settlement related to prior periods. Excluding this tax settlement, our effective income tax rate stood at 16% for the fourth quarter and 17% for the year, compared to 16% in 2023 as a result of slightly higher local-to-local share of pre-tax income. Last, but certainly not least, free cash flow for the quarter, which is the net cash from operating activities, excluding merchant funds, less capex, amounted to $33 million, up from $26 million in Q3, representing a 25% increase. This continued cash generation allowed us to further strengthen our liquidity position. With this, let me hand it over back to Pedro for closing remarks.

Thank you, Marc. Before concluding our remarks, I'd like to talk about 2025 guidance. First of all, the strong TPV growth guidance is primarily driven by our strategic focus on becoming a scale leader over the midterm, leading us to prioritize not losing contracts on price, especially in larger markets. the increased share of wallet and continued ramp up of our large global tier zero merchants, especially key ones we onboarded in the 2023 and 2024 cohorts, and new opportunities converting through the pipeline, both in geographies where our business is still nascent, as well as verticals we are entering into and where we see large volume opportunities. We're guiding to a revenue growth that shows this sustained momentum of our top line and also highlights that our combination of revenue growth, margin structure, and free cash generation is not that common. There aren't that many companies today who are as profitable as we are, growing revenues at the pace we are growing and consistently generating free cash. Our expected gross profit guidance A metric we focus on more than revenues as we manage the business shows growth range is based on the following assumptions. We anticipate a higher mix of transactions from those tier zero merchants who typically have a lower take rate as we continue to increase the share of wallet and work on the global expansion of these relationships with them. on sustained growth in local to local transactions that have a lower take rate, while our cross border segment should also continue to experience accelerated growth as it demonstrated throughout 2024, and competitive pricing in key markets, such as Brazil and Mexico, following our focus on market share gains and TPV growth, as I mentioned earlier, And then finally, the ramp up of the new standalone orchestration model that we launched at the end of Q3 2024 and that does have a lower take rate. In addition, on guidance and given our presence in emerging markets and the general volatility of currencies in these regions, we anticipate potential tightening of FX spreads in certain geographies. If you consider all those assumptions, we should expect a net take rate compression while delivering high TPV growth, even at the scale we've already attained. Over the mid-term, we will work diligently to maintain that strong TPV growth while recognizing that given the extremely strong levels of retention that we're able to deliver, our larger merchants will continue to attain lower pricing tiers in contracts. We will focus on offsetting this take rate compression through growth in higher take rate new verticals that we're pursuing, natural mix shift towards higher take rate frontier markets away from Brazil and Mexico, despite still growing well in those large markets, and new revenue streams through new product launches and constant innovation. Finally, regarding adjusted EBITDA growth range, We assume the continuation of our disciplined investment cycle, maintaining, as seen in 2024, a balance between top-line growth and profitability. Our investment focus remains on product and development with growth there outpacing gross profit growth, continued investments in our licensed portfolio with the benefit that brings but also the increased regulatory cost, and investments in continuing to build our local operations teams in markets that are only now beginning to ramp up. Yet despite these investments, we anticipate achieving operational leverage with an adjusted EBITDA to gross profit ratio improving year over year and still tracking towards levels we have delivered in the past once we conclude this investment cycle. As you know, our business operates in some of the fastest-growing and most dynamic markets in the world. The opportunity in digital payments across emerging markets is massive, and we do continue to see strong demand, increasing penetration, and long-term structural tailwinds that support our growth. However, the very nature of our markets, which is a benefit to our business, also comes with volatility, whether due to macroeconomic shifts, to regulatory changes, or currency fluctuations. And while we remain highly confident on our ability to deliver sustained high growth results over the long term, we believe that providing mid-term guidance transmits a sense of predictability that is not really accurate over a multi-year time frame. For this reason, we've made the decision to discontinue mid-term guidance for the time being. We'll continue to focus on delivering strong operational execution so as to hit the annual targets we disclose, and we will remain, as always, transparent in our communication, sharing with you, key drivers, both good and bad, of our performance against those annual targets. Finally, looking ahead to 2025, some thoughts. We remain confident in our ability to execute and sustain the momentum with which we've exited 2024. The investments we've made over the past year across technology, product innovation, and market expansion position us well for the next phase of growth. While we've just recognized the inherent volatility of emerging markets, we believe that the disciplined approach to scaling Our business, our deep local expertise, and our commitment to delivering value to merchants will continue to differentiate us in the industry. Our strategy remained focused on capturing the vast potential of digital payments across high growth regions, driving operational efficiencies, and reinforcing our market leadership. We're excited about the opportunities ahead and are committed to executing with the same rigor and discipline that have defined our success so far. We thank you for your continued trust and support. And with that, we're glad to take any questions you may have.

Thank you. At this time, we will conduct the question and answer session. During Q&A, we also have the presence of Sergio Fogel, our President and Chief Strategy Officer. As a reminder, to ask a question, you will need to 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. Please stand by while we compile the Q&A roster. Our first question comes from Tito Labarta of Goldman Sachs. Your line is now open.

hi uh good evening uh pedro mark fit here thank you for the call uh and taking my question i have a couple questions i can't to start uh one i guess um um just how do you think about fx when you set the guidance right because i mean it was the headwind in 2024 um right i think you mentioned um on an fx neutral basis i think grew like 80 i think it was in the quarter um so the guidance for this year does imply a slowdown. But do you expect, do you factor in maybe more currency depreciation? I mean, to start the year, we've had some appreciation. Just want to understand how you think about FX. And I know there's a lot of countries involved, but if you can help us understand how you think about it when you set the guidance. And then a second question, and I know you're getting rid of the midterm guidance, which probably makes sense, but But just to help us think about the long-term growth outlook, can you help us understand kind of where do you think you are in terms of like your wallet share with your merchants? I think you, I mean, overall, I think the industry is growing. How do you think about like overall payments growth in the markets that you're in and your wallet shares to help us kind of think about what that long-term growth could be? Thank you.

Thanks Tito. So on the FX piece, when we build the bottoms up approach per merchant, we've tried to not bake in too many assumptions around FX. So it's almost assuming general steady FX rates from where the last year ended up.

In terms of sort of, and sorry to interrupt, but so you kind of think of it like on an FX neutral basis, is what you're saying?

Fair to say. So I think if we end up having continued currency depreciation, that will be a headwind. If the trends we've seen in Q1 hold up, then that's potentially a tailwind.

Okay, perfect. Great. Thanks. I'm sorry to cut you off as well.

No, no. In terms of the size of the addressable market and the opportunity around payments, it really is probably the most significant piece of the investment thesis. Anytime you spend with global merchants, it becomes very clear that most of them, except for the larger, more sophisticated ones, are still doing an important part of their global cross border through international acquiring. Many of them are only beginning to really leverage local payment methods, alternative payment methods, all of which will only increase adoption and usage across the global south. So we are extremely optimistic on the potential for sustained high levels of TPV growth because we think the market will continue to generate tailwinds over a long period of time. simply from the increased digitalization of the consumer across emerging markets. When you look at the mix shift of our business, as it gradually moves towards countries that are newer in our portfolio and slowly moves away from the larger markets, I think that's a very strong indication of how much opportunity still exists. The share of our merchants' overall wallet from those smaller markets is still very low and that will continue to grow. And also our ability to gain share from international acquiring in a growing number of markets is still very, very large.

Okay, great. That's helpful. Thank you.

Thank you. One moment for our next question. Our next question comes from Jeremy Grespin of JP Morgan. Your line is now open.

Hi, Pedro, Mark. Thank you for the presentation and opening for questions. Two on my side. The first one is related to the cash. There was a big cash decrease in the quarter. You put a bullet there in the release, mentioned there was some temporary settlement delay, as well as some changes in settlement with merchants. Just if you can provide a little bit more color, what exactly is those changes in settlement to understand the movement on the cash? And then the second question is related to gross profit on the guidance. The guidance, it's basically 20% to 25%, right? But we had a big ramp up in gross profit in the second half of 2024. I was doing my math here. 25 midpoint against second half. It's only a 10% increase, seems a big slowdown going forward in the midpoint. You touched a little bit some of the points you see to build up the guidance, but just if you can provide a little bit more color where you see pressure, because it seems that when you benchmark against the second half kind of momentum, it seems to be a big slowdown. Thank you.

Guilherme, let me take the cash flow question first. First, remind you that as most payment companies here, we look at free cash flow net of merchant funds, working capital changes, because most of them are safeguarded or have very short settlement. So our total working capital for this quarter was really affected by changes in the merchant funds working capital in two phases. One was the increasing trade receivables due to some temporary settlement delays. You know, we had a lot of large volume at the end of the year and we experienced some delays in those funds coming through to us. I'm happy to say that all those funds came in at the beginning of the year into our business. And then second, it's the declining trade payables, you know, and we talked about shortening of some settlement periods. As Pedro mentioned, we've moved into, you know, we've got a new modality here with a new orchestration model here in Brazil. And those tend to shorten quite a bit the settlement periods for our merchants. So a combination of those things, plus we had some accumulated funds that were with us that we had to settle with merchants. The combination of all those things drove the reduction in the working capital here for the merchants and our working capital and cash flow.

And just to follow up, if I may, the change in the settlement bill because of the requestation product, are you financing the motion for more days? Meaning at the end of the day, I want to see if there's going to be implications to net financial results. Was there an increase in how many days you financed the motion? Is there a mismatch? Meaning you're using your own cash to prepay the motion in some way?

No, so what the orchestration product does is that essentially rather than the funds going through D-local and then to the merchant, and therefore we have that float, the settlement is direct to the merchants. So I'd say it's the inverse. We're not financing anything, but it simply reduces the day of merchant funds on balance sheet. That's clear. Okay. On gross profit, a couple of thoughts. I think first of all, as we said, the overall growth algorithm on the guidance we think is still very robust with really strong TPV growth, very strong revenue growth, getting us at the midpoint to close to a billion dollars of revenue. Then driven by merchants hitting higher tiers on their contracts, take rate contraction. which is really, I think, what generates the math you're doing through your head, but then adjusted EBITDA margins that are growing faster than gross profit, despite the fact that 25 is still a year of investment, and we believe that you can see more operational leverage after that. Also bear in mind that there is seasonality into the fourth quarter, so annualizing either Q4 or both Q3 and Q4. probably gets you to a more aggressive full year projection than otherwise. But again, if you look at the growth at the midpoint, we're essentially saying that we think we can sustain TPV growth at similar level to full year 23, despite coming off of a much, much higher basis, which shows our optimism in retaining merchants, but also accelerating new merchants versus prior years.

Okay, that's clear. Thank you, Pedro.

Thank you. Our next question comes from Madeline Zhao of SIG Group. Your line is now open.

Hi, thanks. It's Jamie Freeman. So my math is that at the midpoint of the 25 guidance, you got about a 15 basis point deterioration in the take rate. I was wondering if you could comment on that with the logic of slide 18. So in slide 18, you showed that 12 basis points of the deterioration was really through the zero merchant clients. You said, Pedro, in your prepared remarks, that you were suffering from the 23-24 boarding of those prices, right? And then actually those increased as a percentage of the total volume. That's the second slide. So I was just wondering in terms of what investors are trying to find is capitalizing a take rate for this company and for the industry, frankly. So if you could provide some more quantitative logic like you do in slide 18, not going backwards, but going forwards about how you're thinking about where the take rate is headed.

Yeah, so I think you've kind of walked us through what my answer would have been, Jamie, directionally. So you're seeing in 3Q24 to 4Q24 what the impact of some of the very large merchant growth can be. And yet when you look at the full year at the midpoint, we're not doing this kind of deterioration times four, right? So what we're saying is that despite the fact that there is still significant growth coming from the very large merchants, who by definition give us significant TPV, but also command lower pricing, we're still baking in only 12 percentage points of compression. That's a consequence of we're not only growing with those merchants in the large markets where they have a lot of volume, but we're also seeing those merchants asking us for more frontierish markets, which obviously command higher pricing. We anticipate some new products into the market that should also generate some incremental take rate. And so I think our story has remained somewhat unchanged, which is we still see a downward trend in take rates, but we think that there are both offsets and that the level of that compression will not be what we've seen from Q3 to Q4, but perhaps more muted. And if you look at Q2 to Q3, or even Q1 to Q2, it was more muted. So this isn't a rapid race to the bottom, but rather, again, these 15 points for this year, and I don't think you should assume 15 points into the midterm either. I think when you look at the percentage of our revenues that come from FX, some of the new merchants that we're onboarding, and again, we haven't issued a midterm guidance because there's so much uncertainty in the markets where we operate, But I wouldn't suggest that someone simply roll out 15 points of compression over the next three years to get to an end state. I don't know exactly what that end state would be, but I think that that would be probably assuming too much compression.

Thank you. And then I realize you're not doing the midterm guidance. You did say, though, in your prepared remarks, I'm paraphrasing, that you're in the middle still of an investment cycle. And you could, I think you said something like you could return to the profitability of the past. Is the rule of 100 that you shared at the Analyst Day in November three years ago, is that, I mean, your rule, that ratio is rising. It was a very strong sequence across the quarters of the year, a good end. So is the rule of 100 still possible or not? What would be the factors that would move that up or down? Thank you.

Yeah, let me address your question the following way. When we look at where our adjusted EBITDA to gross profit margins exited the fourth quarter, given that the fourth quarter has some scale benefits from a seasonally strong top-line quarter, We look at the fact that we have been investing and continue investing in the business at an accelerated pace. The remark was more around trying to indicate that if you assume that once we're through this phase of investing behind those foundational blocks, the nature of this financial model is one that does have operational leverage. It's relatively low in capex. It's primarily human capital and technology. we don't see why we can't be on a trajectory towards returning to that adjusted EBITDA to gross profit somewhere in the mid 70s. Now don't construe this as solid guidance, but there is an indication that if we're exiting Q4 at 67-ish, 68, the full year next year is better than 24 even though we're still investing, you can assume that after that, because we're also indicating that we see many years of sustained growth, given the size of the addressable market and the potential, that those margins back in the mid-70s over a longer period of time, we do believe are achievable with our financial model.

Got it. Thank you, Pedro. Thank you very much.

Thank you. Our next question comes from Neha Agarwala of HSBC. Your line is now open.

Hi. Thank you, Petra Mark, for taking my questions. First one is, during your remarks, you mentioned things like not losing merchants due to price and focus on market share gains. Could you elaborate on that? Anything... significant that we can expect for that in terms of compression, further compression in key markets like Brazil, Mexico. Second is regarding the orchestration model, which you expect to expand. So do you expect to expand in other geos? Or what are the further plans for this payment orchestration model? Thank you so much.

Yeah, so on the first one, We really see the importance of not getting caught up in short-term worries about take rate, but the importance of continuing to gain scale to drive down processing costs over the long run. Winning merchant contracts in markets where we compete in an RFP or where they ask us to add a market. Understanding that over time, you can then leverage those relationships across more and more markets. And again, I go back to the sustained TPV growth over a long period of time, we think is the single most important metric of success right here. And take rate is almost an output and not an input. The input we try to manage for is how do we win as much volume from our merchants as possible? obviously reflecting in the pricing the value that we add to them and what the underlying cost structure is, and understanding that the scale leader here over the longer period of time will be able to drive down the most cost from its processors. So that's a way of indicating why at the midpoint you will see that we continue to indicate a decline in take rate, but very, very solid TPV growth in line with 2024, despite 2025 coming off of a much larger base. The orchestration product is a product that we can roll out to multiple markets. I don't necessarily see it as a market that makes a lot of sense for our merchants across many of our smaller frontier markets or higher take rate markets. I think the orchestration product is one that makes more sense in the very large markets where we operate, where merchants are more likely to have larger businesses and therefore a subset of these, I would say a small subset of the merchant base, may want to have direct contractual relationships and direct settlement with multiple acquirers and payment methods. And so in those markets, we can offer to them the orchestration layer, which allows them to continue to interact with one single technology layer, which is ours, have a single set of reporting and conciliations, have a single point of contact to deal with acquire and payment method issues that arise, but have direct settlement and direct negotiation of those contracts. So I don't see this necessarily as a product that makes sense across the 40 plus markets, it's probably a product that makes more sense in a small number of larger, more relevant geographies to our global merchant base.

Perfect. If I can follow up on my first question. Typically, in our experience, when you talk to large merchants, the discussion is not just about pricing. A large part of deciding which player to go with for the merchant would probably would include pricing, how the platform is, the conversion rates, all of these things are probably equally important. During the last year, have you seen pricing discussions gaining more importance when you're talking to merchants about winning an RFP? And are you seeing any of your competitors being more aggressive in terms of pricing which has changed the ballgame a bit for you and you're required to talk more about pricing versus a year ago, say?

That answer really is a market-by-market answer. But I think implied in our comment about, especially in the larger markets, this trend, it's first of all driven primarily by merchant volumes. We were very candid and transparent in Q1 about an actual repricing because that was a very significant event. As we said, our largest merchant was running at a take rate which was above the company average, which is quite an anomaly and responded primarily to their focus on go-to-market and performance less than price. And then they obviously repriced that. that shouldn't be seen as an assumption that that's been a repeated pattern. Had that been a repeated pattern, the take rate compression full year would have been significantly larger than it has been. So really the biggest driver of this take rate compression is simply increased volumes from very large merchants hitting new tiers on their contracts. So I still think the name of the game is not just price, it's price plus conversion plus performance. That's the principal reason why we are investing behind product and technology. And that's the biggest area of incremental investment and margin compression, because this will continue to be a game where the single most important way to keep your take rate significantly higher than in developed markets is because you're dealing with a fragmented and complex payment ecosystem in each of these markets. and through technology and innovation is how we deliver performance. So I don't think that has changed substantially. I do think that our merchants are becoming very large and hitting the discounts in their tiered contracts or because of global relationships are able to drive down take rates based on global volumes. Do I think there's increased competitive Dynamics versus two years ago or four years or six years ago in some of our large markets, I think the answer is probably yes. But even if you look at the disclosed growth rates of some of our larger competitors for Latin America, it continues to seem as though we're winning market share and growing more than they are in the region.

Super clear. If I can just ask another question on the licensing. Now you're trying to build your licensing portfolio. Does that give you any advantage in winning RFPs or in terms of pricing? Or is it just more from a regulatory and oversight perspective, you're safeguarding yourself and improving your compliance?

Really, who we are safeguarding is our merchants. especially across emerging markets. So the principal reason behind this is that we do feel that this is very valuable IP. And yes, it is something that will help us win more RFPs, close more deals, and gain more share of wallet. If you think of a global north merchant who's looking for someone to whom they will essentially outsource their payment stacks for a market that is not a focused market in many cases and that they don't understand well. The value proposition of D-Local is that combination of technology that has proven to be effective to them, lower cost because we offer local payments, higher conversions and feet on the ground to optimize relationships with issuers, processors and regulators. And on top of that, the licenses gives them the security from a reputational perspective that they are choosing a partner that comes under regulatory oversight. So we do think this is a competitive advantage and even more than protecting ourselves, it's about protecting our merchants volumes across these markets.

Perfect. Thank you so much, Pedro, for your answers.

Thank you. Our next question comes from Cassie Chan of B of A. Your line is now open.

Thanks for taking my question at the end. I'll just ask my two quick questions just up front. So first just wanted to ask how, you know, the pipeline is looking like for you guys and what you're expecting growth from new merchants versus existing to look like in 2025. And typically when you ramp up these new merchants, do these also come at a higher, you know, take rate typically? And then my second question is just, you know, how to think about free cash flow in 2025 relative to 2024 as a percentage of conversion or anything that we should be thinking about that could impact that. Thank you.

Great. So let me take the first one, Cassie. I think when we look at, again, to the best of our current you know, expectations on 2025. We see a continued high net TPV retention. So we still think that for every dollar we generated in 2024 for merchants, we'd like to generate a consistent TPV retention to what we delivered in 24. But on top of that, and that's why we believe we can deliver that consistent high TPV growth, we do see a pickup in the percentage of volume that will come from new merchants. And that's a consequence of feeling quite encouraged by what is in the pipeline of merchants that do not yet process through us, and also our ability to continue to gain share and offer new markets and new payment methods to our existing merchants. So we'd like to see a pickup in new merchant ad and their percentage of volume flowing through the 25 numbers. One final data point that we mentioned in the video and that you'll have in the disclosures in the slides is the cohort for 2024 in terms of how well that cohort performed the first year is record TPV. It's the strongest cohort we've ever had in terms of first-year volume. You asked a question about take rate of new cohorts, and that is highly dependent on size of the global merchant or the new merchant, and also if it's a pay-in merchant or a pay-out merchant. So one of the factors driving the extremely strong performance from the 24 cohort has been the growth of our remittance business. and how well we've performed there. But that does come in at a lower take rate because that's payouts. We've also had some phenomenal wins in e-commerce players and FinTech players. But to answer your question, not necessarily all new merchants come in at higher take rates because it really depends on the vertical. It depends on if it's a pay-in or a pay-out merchant and what the overall size of that merchant is. a merchant that has a very large five, 10-year potential, we will be more willing to onboard at a lower take rate than one that potentially has less of a 10-year potential or a five-year potential for us.

Thank you. I'm seeing no further questions at this time. I would now like to turn it back to D-Local for closing remarks.

Great. So thanks, everyone, as always, for your interest. I think we're wrapping up 2024 that's exiting on really solid momentum, very solid growth in the last quarter and the past two quarters. And everyone here is working to carry that into 2025 and beyond. So we look forward to updating you with our Q1 results in a few months.

Thank you for your participation in today's conference this does conclude the program you may now disconnect.