DLocal Ltd. Q3 FY2024 earnings call

• Top-line growth: Total payment volume re-accelerated to over 40% YOY, driven by expanding share of wallet and onboarding new merchants. Cross-border flows surpassed $3 billion quarterly for the first time.
• Vertical and country performance: Strong across diverse verticals, countries, and products; ramped up operations in more countries, offered more payment methods, and gained share of wallet in various verticals.
• Technology deployments: Launched Smart Requests to boost transaction performance; developed real-time cost calculation models; launched new alternative payment methods and a standalone payment orchestration option.
• License portfolio: Obtained licenses in Nigeria, Ecuador, and Uganda, seen as valuable intellectual property enhancing competitive advantages.

Total payment volume re-accelerated to over 40% year-over-year. Total payment volume (TPV) was $6.5 billion, up 41% year-over-year and 8% quarter-over-quarter. Cross-border flows grew 12% quarter-over-quarter and 35% year-over-year, reaching $3 billion. Local-to-local TPV increased by 4% quarter-over-quarter and 47% year-over-year. Pay-ins business grew 8% quarter-over-quarter and 35% year-over-year. Payouts business grew 7% quarter-over-quarter and nearly 60% year-over-year. Revenue was $186 million in Q3, a 13% year-over-year growth. Gross profit reached a record $78 million, with net take rates stable at 1.2% since Q1 2024.

• Guidance remains unchanged. Q4 results heavily weighted towards next three to four weeks due to seasonal lift in commerce volumes and Black Friday. Long-term optimism driven by secular trends like payment digitalization, growth of emerging markets, and surging demand for cross-border/payment methods. Industry forecasts predict cross-border payment market to reach $65T by 2030, and dLocal sees potential to capture a portion of this growth.

• Currency fluctuations: Weakness in most emerging market currencies impacted results. Constant currency growth would have increased gross profit and TPV.
• Regulatory changes: Varied regulatory environments in emerging markets, e.g., specific merchant in Brazil required to go direct to acquirers due to license, impacting share of wallet.
• Merchant-specific issues: Potential impact of individual merchant performance on overall results, e.g., softness in Brazil due to one top merchant's license change.

Q: My first question is on the gross profit loss in Brazil. Could you maybe give us some more color on that? If you expect other merchants to follow suit, what specifically happened there? And my second question is regarding the decrease in G&A in the quarter, right? It fell 16% sequentially. And I think Mark mentioned that it's due to additional cost controls. But Pedro mentioned that you still intend to continue with the plan on investing in your engineering team, back office capabilities, et cetera. So just wondering if that expense line, if that level still makes sense going forward, given your investment plans, how should we think about expenses going forward? Does it increase from here and especially, going forward into next year also?

A: Thank you. Just some context before I answer the specifics on Brazil. I think it's important to not forget that we run the company based on merchants and increasingly global and diversified contracts with those merchants. We don't really decide where our merchants are going to ask us for support, what markets to open, or what specific countries volumes will be up or down. We do trust that in general, merchant relationships will grow consistently given the quality of the service we offer. And when we look at the second quarter, one of the things that I'm the proudest of is how, despite weakness in a market that is very relevant like Brazil, we were still able to deliver record gross profit. And that's a testament that what we have been saying, and that is that as we scale and diversify the business, the fluctuations that are inherent in emerging markets will become easier to manage through diversification. And Q3 is definitely a case in point where, again, despite weakness across a few key markets, strength across a growing number of relevant markets allowed us to deliver record gross profit nonetheless. And I think this is very, very important when we think of the dLocal opportunity and investment thesis going forward. On Brazil specifically, Brazil has a very particular regulatory environment. This specific merchant was granted a payment institution license, and the regulatory environment in Brazil does not allow a sub-acquirer or a payment institution to process through another sub-acquirer, leading them to have to go direct to acquirers. And that's just the way it played out. You really should not extrapolate that to other markets, and I would not extrapolate that to other merchants either. I think this is somewhat of a particular situation. More importantly, the orchestration product we launched is a product that has both an offensive nature and a defensive nature. The defensive nature is that it allows us to address exactly this type of situation, where the merchant can now run on their own licenses, have their own direct contract with acquirers, yet continue to use our One dLocal solution and benefit from our technology stack. We've already migrated this specific merchant over to the orchestration product. We're off to a strong start in Q4, beginning to recoup volumes, beginning to increase, again, share of wallet on credit cards, and we hope to be able to continue to execute, perform, and regain as much, if not all, of that volume going forward. I'll let Mark take the one on costs. Thanks, Pedro. In terms of cost, I think it's important to notice that we still continue to invest in our future and in our folks here. It's interesting to see the fact that even though the G&A came down and it was really an action that we took after the first quarter. It was a bit of a weaker quarter for us. We decided to take some actions, and we did reduce some costs around third parties and some other areas that we thought were prudent to do this in the shorter term. We continue to invest in our product and IT folks. If you look at quarter-over-quarter, the IT and product costs have gone up by about 8%. The other cost came down by 6%, and that's part of where the G&A cost comes down as well. Looking forward here, we expect that cost to slightly rise. Again, we're going to continue to invest in our infrastructure. We're going to continue to invest in our IT. We see that those costs are slightly going up here, but we're going to continue to be measured in terms of how we look at each one of those costs and those investments for the future.

Q: Thank you for the presentation. Congrats on the results. Very strong operational performance. Just on the country base, Pedro, we noticed very strong gross profit growth, specifically on the other geographies, which is not sure if we can say non-core because, as you said, you're a global company, but it's outside the names you usually put in the breakdown of gross profit. Other Latin and other Africa was very strong. Just to confirm, if there is any new geography that you are seeing that is ramping up very fast, and what is the nature of the business, if it's more cross-border or more local to local in those geographies?

A: Thanks. Great question. I think another one of the strengths in the quarter was the performance in the cross-border business. As Maria noted, it crossed $3 billion for the first time in a quarter of TPV. And part of that strength is aided by this increasing diversification in more and more markets. So the answer is many of these newer markets are indeed cross-border. They tend to be frontier-ish markets in some cases, where infrastructure for payments is somehow less developed, and merchants are less inclined to have to incurring costs of setting up local operations, dealing with local payments. The fact that they're already integrated into our One dLocal solution makes it very easy for them to add these markets. This is exactly what we're very good at. We did give specifics around some of the markets that we're most excited about and where we've seen significant strength. It's a good combination of LATAM and also Africa and Asia. In addition to continued strength in Mexico, which is a core market, and Egypt, which we've been strong in for a while, we've now begun to see the emergence of a really strong franchise in South Africa. Colombia performed incredibly well this quarter, as did Peru. It's really interesting to see a growing number of countries that are delivering strong results in TPV and gross profit. And it's exactly that type of global diversification that drives what we believe is very long-term sustained growth opportunities, but also increased diversification to be able to manage the inherent fluctuations that exist in emerging markets.