dLocal Ltd Q3 FY2022 Earnings Call

Good day, and thank you for standing by. Welcome to the dLocal Third Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Soledad Nager, Head of Investor Relations. Please go ahead.

Thank you very much, operator. Good morning, everyone, and thank you for joining our third quarter 2022 earnings call today. If you have not seen our earnings release, a copy is posted in the Financial section of our Investor Relations website. On the call today, I'm joined by Sebastian Kanovich, our Chief Executive Officer; Jacobo Singer, our President and COO; Diego Cabrera Canay, our Chief Financial Officer; and Maria Oldham, Vice President of Corporate Development and Investor Relations. We are providing a slide presentation to accompany our prepared remarks. This event is being broadcast live via webcast, and both the webcast and presentation may be accessed through dLocal's website at investor.dlocal.com. The recording will be 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. While the company believes that our assumptions, expectations, and projections are reasonable given currently available information, you are cautioned not to place undue reliance on those forward-looking statements. Actual results may differ materially from those included in dLocal's presentation or discussed in the conference call for a variety of reasons, including those described in the forward-looking statements and Risk Factors section of dLocal's filings within the Securities and Exchange Commission, which are available on dLocal's Investor Relations website. Now, I will turn the conference over to Seba. Thank you.

Hello, everyone. Thanks for joining us today. We are very pleased to report another strong quarter with record financial results combining growth, disciplined investment, laser-focused execution, and significant progress towards building the best financial infrastructure in emerging markets. We now operate in 39 markets, enabling our global merchants to reach over 2 billion consumers. All this is accessed through our One dLocal model, meaning one contract, one single platform, and one API. In Q3, our total processed volume reached $2.7 billion, and we recorded $112 million in revenue. Despite the high baseline set in 2021, we saw robust growth in TPV and revenue, increasing by 51% and 63% year-over-year, respectively. TPV grew by 12% quarter-over-quarter and revenue by 11% quarter-over-quarter. We continue to retain our clients with a solid NRR of 152% in Q3 2022. Moreover, it is important to highlight that we continue to grow our gross profit and EBITDA dollar amount consistently quarter-after-quarter. Gross profit increased to $54 million, up 56% year-over-year. Adjusted EBITDA was up 58% year-over-year to $42 million, both grew 9% quarter-over-quarter. We continue to operate with the philosophy of delivering disciplined profitable growth. We maintained our adjusted EBITDA margin relatively stable at 37% compared to 38% in the past four quarters. On Slide 6, our geographic expansion efforts outside Latin America continue to yield outstanding results. During the quarter, we saw unparalleled growth from Africa and Asia, with revenues increasing by four times year-over-year and 80% quarter-over-quarter, reaching $25 million. This is more than the $21 million revenue we recorded for the 12 months of 2021. We expect to continue to see solid growth as we cross-sell to merchants that initially started their relationships with us in Latin America, moving into Africa and Asia and vice versa. This illustrates a powerful network effect of our financial infrastructure and the quality of our solutions. On Slide 7, moving to our LatAm business, revenue in LatAm increased by 39% year-over-year to $87 million, flat quarter-on-quarter due to temporary market limitations in the Argentine cross-border operation. If we exclude Argentina's cross-border business, LatAm revenue increased by a solid 43% year-over-year or 7% quarter-over-quarter. The Argentinian government temporarily changed the conditions to access the foreign exchange market for the imports of certain goods and services, negatively impacting our Argentina cross-border volumes. The situation has improved during the quarter, and we have managed to continue processing most of our TPVs. Overall, our business continues to benefit from diversification across geographies, with no single country accounting for more than 20% of our total revenues in Q3 2022. I will now hand it over to Jaco to comment on our international expansion.

Thanks, Seba. Hi, everyone. We continue to execute on our strategy to expand to new markets. I'm happy to announce that this quarter we have added two more countries to our portfolio, meaning we now operate in 39 different emerging markets. During the quarter, we added Nicaragua, bringing the total number of markets serving Latin America to 16. We have also added Saudi Arabia to our financial infrastructure network, bringing the total number of markets serving Asia to 10. Our geographic expansion continues to be driven by two main factors: number one, addressing the needs of our merchants; and number two, the attractiveness of the market. Our investment into geographic expansion typically has a fast payoff because, first, we normally have a merchant in waiting when we add a new country, providing immediate demand. This was the case for both Nicaragua and Saudi Arabia. And second, with our One dLocal platform, any new geography or payment method becomes immediately available to our entire merchant base. We have been executing not only in our new countries but also to deepen our presence in the countries in which we already operate, providing a best-in-class local solution for our global merchants. During the last quarter, we continued to enhance our infrastructure and network, adding more than 10 new payment methods in Africa and Asia. Our growth strategy continues to be fundamentally based on our organic growth. However, we continue to explore selective inorganic opportunities to improve our scale, network, and products across key markets. We power merchants from diverse verticals and from all over the globe. Our business model is not dependent on the performance and outlook of any single vertical as we operate across more than 10 of them. Over the years, we have seen different verticals go through cycles, but there are always winners and losers. We are constantly looking for new opportunities to further diversify our business and increase our resilience. We are proud to partner and serve some of the largest global merchants and marketplaces, including Microsoft, Shopify, Dropbox, SHEIN, Spotify, Delivery Hero, and Deel, as well as other high-profile global companies that have disclosure restrictions. As you can see on the left-hand side of the slide, we continue to see more merchants joining our platform. Total enterprise merchants on our platform have grown to more than 600, and we currently manage around 200 key accounts actively. Our merchants value our Tech DNA and merchant-first approach, addressing complex needs with a convenient one-stop solution. The chart on the right shows our continued success in helping our merchants operate in more countries and accept more payment methods. In the first nine months of 2022, our enterprise merchants on average processed payments in eight countries, accepting on average 78 payment methods. This compares with an average of six countries and across 44 payment methods in 2020. As you can see, on top of growing with our existing merchants organically and gaining share of wallet, we have immense opportunity to continue growing through new geographies, new payment methods, and continuous development of our products. I will now pass it to Maria to comment on some relevant KPIs for our top 10 merchants.

Thanks, Jacobo. Hi, everyone. My name is Maria Oldham, and I'm very excited to be leading Corporate Development and Investor Relations at dLocal. I look forward to meeting many of you going forward. The revenue from our top 10 merchants continues to increase quarter-after-quarter, reaching $59 million in Q3 2022 and accounting for 53% of our total revenue. In the medium term, we see customer concentration decreasing. Although, in this quarter, our top 10 merchants outperformed the average. Our top 10 merchants may vary from quarter-to-quarter as we add new merchants and scale existing ones. In Q3 2022, our top 10 merchants were spread across various verticals, including ride-hailing, commerce, streaming, advertising, financial services, and on-demand delivery. The successful growth within our larger merchants is driven by a combination of continuous product innovation and a highly customer-centric approach. Our account managers have deepened trusting relationships with our merchants, giving us continuous insights into their needs and allowing us to keep developing and cross-selling products to fulfill those demands. We have been successfully expanding our geographic footprint within our top 10 merchants. Our top 10 merchants in Q3 2022 processed payments with us in 10 countries on average versus seven countries last year, with the maximum being 19 countries versus 11 last year. We continue to take our existing customers from LatAm to Africa and Asia. For instance, nine out of our top 10 merchants are already processing in these regions compared to five out of 10 a year ago. As you can see, we also have several growth levers within our top merchants. On top of exploring new geographies and new payment methods, we also maintain our focus on gaining share of wallet in order to further increase monetization in our existing merchants. Now, we will cover our team growth and distribution. First of all, it is important to remind you about our culture and the way that we operate. Since day one, we have had a lean culture, been highly disciplined with every dollar we spend, and always focused on profitable growth. Additionally, given that we operate in a very fast-growing emerging market, staying lean has been essential for us to remain agile and react fast. This has been an important competitive advantage that we are proud of and we continue to build on, especially in a challenging macro environment. Within the context of this lean culture, we continue to invest carefully in expanding our global team, responding to the new opportunities we see and driving towards our long-term objectives. At the end of Q3 2022, we had 712 employees, up 34% or by 180 FTEs year-over-year. Our headcount has significantly expanded outside the Americas as we focus on hiring locally to leverage on-the-ground knowledge and develop a deep understanding of local markets. We reached 146 FTEs in Africa and Asia by the end of September 2022, corresponding to 21% of our workforce and an increase of 103% year-over-year. Year-to-date, we have grown in all our areas to support our growth opportunities, including sales and marketing, operations and expansion, and tech and product teams. Tech-related growth continues to represent around 40% of our FTEs, with our sales and marketing and operations and expansion teams each accounting for around 20% of our FTEs. Diego will now review the financial highlights.

Thanks, Maria. Hi, everyone. Let's begin with Slide 12. We continue to scale our business supported by a well-diversified segment base. We saw strong TPV growth during the quarter, reaching $2.7 billion, up by 51% year-over-year and 12% compared to the second quarter of 2022. As you can see in the pie chart on the right, we have merchants from more than 10 verticals, and every vertical is well-balanced in our portfolio with no single one accounting for more than 20% of our TPV in Q3 2022. Thus, our business model is not dependent on the performance and outlook of any single industry vertical. The TPV growth is attributable to the performance and continued growth of merchants across most verticals, particularly in commerce, on-demand delivery, travel, software as a service, advertising, and financial services. I would also like to highlight that we have experienced growth both in pay-ins and pay-outs during the quarter. Specifically, in Q3 2022, pay-ins have shown double-digit growth year-over-year and high-single-digit growth quarter-over-quarter. We continue to see improvement in our payout volumes with double-digit growth quarter-over-quarter and also year-over-year. Despite the hard comp as we had higher-than-average volumes from certain merchants running big marketing campaigns during that period. Regarding our cross-border and local-to-local volumes, both showed solid growth year-over-year and quarter-over-quarter. During this quarter, we experienced growth in local-to-local TPV due to the strong performance of some of our merchants and as cross-border volumes in Argentina slowed down as previously mentioned. Revenues also reached a new record, having grown 63% year-over-year and 11% quarter-over-quarter to $112 million in Q3 2022. Our revenues over TPV, or gross take rate, was 4.1% during the quarter compared to 4.2% in the second quarter of 2022 and 3.8% in the third quarter of 2021. Fluctuations from quarter-to-quarter are driven by changes in business mix. The small drop compared to Q2 2022 is driven by a higher share of payouts and local-to-local flows. Conversely, the take rate increased compared to Q3 2021, as pay-ins increased their relative contribution year-over-year. Zooming in on revenues, we continued delivering strong revenue growth both from our existing and new customers. Revenues from existing merchants are those revenues that are driven by merchants that were already processing with us in the same period of last year. Revenues from new merchants are those revenues that come from merchants that started operating with us after the same period last year. During Q3 2022, of the 63% year-over-year revenue growth, 52% or $45 million came from existing merchants. Our revenues from existing merchants continue to grow quarter-after-quarter, reaching $104 million in Q3 2022, increasing by 83% compared to the $57 million that we achieved in the same period of last year. Our net revenue retention for the third quarter was 152%. This is the result of having almost no churn, less than 1%. The organic growth of our merchants in emerging markets and our ability to continue bringing them to new countries, payment methods, and to increase share of wallet. This NRR is in line with our yearly guidance of 150 plus for the full year 2022. The remaining 11% year-over-year revenue growth or $8 million came from new merchants. This compares to $9 million recorded in the second quarter of 2022 and to $12 million in the same period of 2021. As our merchants typically have a three to six-quarter ramp-up period, we believe that the revenues from new merchants are just an initial indication of the potential of our new customers. Moving to Slide 14, we remain focused on growing gross profit and EBITDA dollars. During the quarter, we were able to scale our gross profit to $54 million, up 56% year-over-year and 9% quarter-over-quarter. Gross margin came in at 48%, relatively in line with the 49% margin levels seen during the first half of 2022. The slight decrease in gross margin is a reflection of country and product mix. Our cost of processing for the quarter represented 2% of our TPV, stable quarter-over-quarter and compared to 1.8% a year ago. The increase versus Q3 2021 was driven by business mix, particularly an increase in pay-ins, which have higher processing costs than payouts. Moving on to our adjusted EBITDA, it was $42 million for the third quarter of 2022, increasing by 58% year-over-year and by 9% quarter-over-quarter. Our adjusted EBITDA margin was 37%, relatively in line with the 38% margin seen in the past four quarters. This is in line with our yearly guidance of 35% plus for 2022. If we look at operating expenses for the quarter, we see that they have grown 26% year-over-year, as we saw an increase in salaries as we continued expanding our team with a focus on sales, expansion, and technology. In addition, we increased our travel and marketing expenses. We operate in a hyper-growth business and want to keep investing in building the infrastructure and harvesting long-term sustainable growth with a very disciplined and lean approach. Before handing the call back to Seba for the closing remarks, I will briefly touch on our net income and liquidity. Net income totaled $113 million in the last 12 months, compared to $78 million in the full year 2021 and $28 million in 2020. Our net income in Q3 2022 reached $32 million, increasing by 64% year-over-year and by 5% quarter-over-quarter. Net income for the quarter includes $2.5 million of net financial losses as a result of higher costs of hedges, as we adapted to certain changes in FX regulations and faced higher interest rates. We follow a disciplined hedging strategy covering any relevant balance that we temporarily hold in local currencies. We continue to deliver positive free cash flow, generating $121 million of own funds in the last 12 months, compared to $59 million in the full year 2021, excluding the PrimeiroPay acquisition, and $44 million in 2020, with a strong net income to cash conversion of 107% for the last 12-month period. Besides, we continue to strengthen our cash position. As a result, as of September 30, 2022, we had a robust cash position of $320 million of own funds and $222 million of merchant funds. Our strong balance sheet and continuous positive free cash flow generation remain a key competitive advantage and gives us flexibility to pursue our long-term growth strategy. Seba, the floor is yours.

Thanks, Diego. To summarize, our performance in this quarter shows the distinctive strengths of our business that we continue to build focused on long-term profitable growth, combining: number one, from a financial standpoint, robust dollar amount growth on TPV, revenue, gross profit, and adjusted EBITDA; with solid NRR for the nine months of 2022 at 166%. Two, from a strategic standpoint, a proven track record in executing our merchant cross-sell strategy and outstanding geographic expansion capitalizing on the huge opportunity in Africa and Asia, all underpinned by our Tech DNA and merchant-centric approach. Revenue from Africa and Asia accumulated $48 million in the first nine months of the year. Third, last and most importantly, our lean and disciplined culture; we delivered all that with a team of 712 people continuously striving for excellence. Our culture is a key factor for us to continue delivering on our long-term ambitions. We are very proud of what we achieved this past quarter and even more excited about what is ahead of us; we have just started. We will continue to remain humble and focused on providing the best and most comprehensive solution for our merchants in emerging markets. A big thank you to our global team, our customers, and our investors for their continued support. I’ll now turn it back to the operator to open it up for questions. Thank you all for listening. It was a pleasure being here today.

Our first question comes from Jorge Kuri with Morgan Stanley. Your line is now open.

Hi, everyone. Good morning. Could I ask you to please explain what exactly happened with those FX limitations that you had in Argentina? What is the temporary nature of them? It just doesn't feel that it's going to get much better with CPI at triple-digits, Central Bank rates probably reaching triple digits soon, and the government running out of FX reserves. What exactly happened? What gives you comfort that this is not going to be a recurring issue, at least until things improve in Argentina? And also, if you can tell us what would have been your revenues excluding this effect because we did see a significant deceleration of your revenue growth. You grew 15% sequentially in the first quarter, 16% sequentially in the second quarter, and then we're down 11% this quarter. And so I want to understand how much of that deceleration was because of the Argentina issue? Thank you.

Jorge, good morning, and thanks for the question. So Diego, I'll start, but feel free to complement. So Jorge, we've been navigating a complex situation in Argentina from the beginning of this current quarter. If anything, what we've seen is that in Argentina, things get tougher at first and then as weeks or months go by, there's more clarity around the local framework. If anything, we see everything trending in the right direction. Obviously, Argentina is a complex country. It represents, as no other country does, a challenging environment. It's not a big portion of what we do. But we also can navigate complex geographies. And part of the value that we bring to the table is our ability to continue to navigate countries and situations like this. We've been in Argentina since 2016. We've been through ups and downs in every creativity that the local government has had. And so far, we've been able to navigate it. If anything, we are very comfortable today because we've seen things trending in all the right directions as we head into Q4. Has it not been for the Argentina growth? We probably could have added 4% to 5% more in revenues. But Jorge, I need to emphasize that we are extremely proud of the growth numbers we've shared today. Our Africa and APAC business is booming, and we see that as a key factor going forward. We continue to not have reliance on any particular geography. And situations like this, like the one we faced in Argentina, will happen in emerging markets. It's expectable. We have 39 countries where we operate today. It's only to be expected. But what's really important is our resilience and our deep understanding of the local regulatory framework. And most importantly, when situations like this occur, how we navigate and ensure continuity for our merchants, which is something we are very happy to have maintained for the most part. Diego, feel free to complement if there's anything you want to add.

Okay. From my side, the situation has substantially normalized by the end of the quarter. So we adapted, and the banks adapted, and the Central Bank adapted to these regulations. There were several changes during the quarter from the beginning of July to the end of September. Initially, the changes were negative, but then they adapted to more positive. The banks take time to adjust to these regulations, and we face those challenges as we have many times; we started Q4 in a much better position and are growing from there.

Thank you for that. I appreciate the company's resilience and your ability to adapt to changes. I would really like to understand what exactly happened. I’m unsure if the response was clear. What precisely occurred? How did it impact your ability to grow revenues? And what is happening now that makes you believe the situation has returned to normal? Could you clarify this so we can fully understand? Thank you.

Sure. When the Argentine government introduces new regulations regarding foreign exchange, they often create a broad regulatory framework that restricts various industries. In our experience with the local central bank, their priority is to ensure that global companies essential to the population can access dollars. This primarily relates to our merchant base, which serves vital needs for the local community. Although initial regulatory changes can be challenging, we usually observe increased flexibility over time. Additionally, as mentioned, there is a period during which banks need to familiarize themselves with the new regulations. We expect that the situation in Argentina will continue to develop. It's important to note that the country is quite volatile, representing only a small fraction of our overall business. Navigating these challenges is integral to our business model. The final week of the third quarter showed significant improvement compared to the first week, indicating a positive trend. Therefore, we are confident as we approach the fourth quarter and the upcoming year that conditions will remain manageable for our merchants.

Thank you.

Please stand by for our next question. Our next question comes from Tito Labarta with Goldman Sachs. Your line is now open.

Hi. Good morning. Thank you for the call and taking my questions. A couple of questions, if I can. Maybe first, just a quick follow-up on the question on Argentina. Are you able to price for that? So maybe because of these issues, you increased the take rate, just to try to say if there's any offset given the issues that you face there? And did this also impact your financial cost, which kind of went up a lot in the quarter? Just I think you mentioned related to hedging. So just if you could give some more color on that. And then I have a second question, but I'll ask that.

Sure. Tito, thanks. Good morning, and thanks very much for the question. I'll start with the first part, and then I'll let Jacobo cover the second. Yes, our pricing always reflects the complexity in countries that are easier to navigate. We typically have lower take rates in countries where there's volatility and where the regulatory environment is challenging. Typically, you see our take rates being higher in markets that are more volatile like this case, where we tend to have the ability to charge higher rates. Jacobo, do you want to complement?

Sure, Tito, thank you for the question. Regarding the financial expenses related to this regulatory change, we did incur high costs for hedges during part of Q3 due to the regulation. We believe these costs are temporary and necessary to cover our position. As we've mentioned before, we maintain a conservative approach to foreign exchange and do not engage in taking corrective risks, which is why we hedge non-dollar amounts. We expect these costs to normalize in the coming quarters.

Great. Thank you. That's helpful. And my second question, more on the net revenue retention rate; you continue to be above the 150 plus that you've guided for. Maybe if you don't have these issues in Argentina, it could have been close to where you were in Q2. Just to think about the trajectory from here, you're seeing very strong growth in Asia and Africa. Any color you can give on either Q4 but even beyond, like into next year? Should we expect continued deceleration in the net revenue retention rate? Anything that can increase it from here, maybe some seasonality in Q4? And any color on 2023 would be helpful. Thank you.

Sure. So Tito, we had a very tough comp, and we are extremely proud of the growth we've just posted. We remain very consistent, and we guided to 150 plus for the year, and we are very, very confident that that's going to be delivered. We've never had a better business. All of the growth engines in the company from a strategic standpoint and from a commercial standpoint continue to be at full throttle. So we are extremely optimistic about what's going to come for Q4 and 2023. We are taking the advice from the street and trying to provide more clarity on how we are going to navigate 2023. But we are extremely, extremely optimistic about what's going to happen in Q4 and future years. We've never been a better company. I know I repeat this again and again, but we've never had more products. When you see new countries and merchants, when you see geographic diversification, everything points in the right direction. Those factors are long-term building blocks that we are happy to have in place today. So very optimistic for Q4 and for 2023 as well.

Great. Thanks, Sebastian. And maybe just one quick follow-up on that in terms of what gives you that optimism? Is it the growth you're seeing in Asia and Africa, perhaps Argentina bouncing back to some extent? Particularly, many global online merchants are having a tough time in some local markets, but maybe there's still a lot of growth in developed markets. Just any color on what makes you so optimistic?

Sure. So Tito, in LatAm, we are clear market leaders, and we think that differentiation is going to continue to compound. We have clear advantages where the biggest merchants rely on us for the most complex operations in these countries, and we believe that differentiation will continue to evolve. Obviously, Africa and APAC have been significant stories for us. When we went public, we told you we wanted to expand into these regions, and that has become a clear reality. We have a run rate of $100 million outside of LatAm. So while LatAm will continue to be our stronghold and part of our growth engine, having that complemented with our strategy across other emerging markets is key. Overall, we cannot avoid being positive. Our pipeline has never been better; merchants rely on us for more geographical coverage and more payment methods. Those are the key things that drive value. We recognize we need to solve complex problems for our merchants, and we feel that we're doing so more than ever. It's impossible for us not to be very bullish. And the other thing, Tito, is some of these merchants are facing tough microenvironments, but emerging markets have proven to be a growth engine for them. We fit right into that strategy. When layoffs happen, our services become more pivotal because they often outsource that work to us. So all of those trends are heading in the right direction, and I want to re-emphasize our optimism.

That’s great color. Thanks, Seba.

Please standby for our next question. Our next question comes from Tyler DuPont from Bank of America. Your line is now open.

Hi. This is Jason Kupferberg from Bank of America. Can you hear me?

Hi, Jason. Good morning. We can hear you.

Good morning. Thank you. Now that Q4 is halfway over, I assume you have really good visibility here in the near term. I mean just as a general frame of reference, should we assume that the full-year guidance for both NRR and adjusted EBITDA margins is valid for Q4 specifically?

So Jason, we've never updated our guidance. We haven't done it in Q1. We haven't done it in Q2. We are not going to do it this time. I think the color that's important to share is that everything is trending in the right direction. We've seen nothing that makes us worry in the short term. We continue to see positive underlying growth in our business. So there's no reason why we shouldn't continue to deliver on those numbers.

Okay. Understood. And just given the explosive growth you've seen in Asia and Africa, can you talk about any notable differentials in either gross or net take rates in those geographies relative to LatAm? And then anything you're seeing just in terms of your merchant clients setting up local legal entities more frequently to turn cross-border transactions into domestic? Thank you.

Sure. Jacobo, do you want to take it?

Sure. Jason, hi, thank you very much for the question. We are very positive with the steps we have been taking towards Africa and Asia. The two regions have become very relevant to us. In terms of net take rates, it's still too early to provide specifics as it depends on the payment mix and the countries where merchants are going to be penetrating. If anything, we see merchants trusting us more and more in these services, and we don't see them establishing local entities quite on the opposite; they prefer to penetrate these complex regions in partnership with us. So we remain very optimistic about the progress we are making in those two new geographies, which has been translated into revenues for this quarter. We are payment method agnostic; we are able to offer both types of services to our merchants. And this agnosticism, if anything, gives us the chance to have the merchants lock into more geographies, and that's the reason why most of the merchants never abandon us.

Okay. Thank you.

Please standby for our next question. Our next question comes from Soomit Datta, New Street Research. Your line is now open.

Hello, there. Thanks very much. A couple of quick questions, please. Again, firstly, just returning to Asia and Africa, very good performance. I mean, you kind of almost doubled your revenues in the third quarter. So again, just not to try and ask the same question again, but just curious, was there anything in particular in this quarter, which was kind of happening? Countries were coming online or a couple of merchants here or there? Is this the kind of run rate we should expect going forward with such strong performance? And then secondly, on a related basis, please. I'm just curious, what kind of card volumes or mix of card versus non-card are you seeing in these newer markets? I would assume that there's less card volume and just wonder if that was having any impact on the economics of these transactions. Thanks very much.

Hi, and thanks very much for the question. What has happened in both Africa and APAC is what we expected to happen, which is One API, one contract, and us being able to bring our global merchants into the new region. Nine out of our top 10 merchants use us today in Africa and APAC. The opportunity ahead is massive. We've been bullish in this region and continue to believe it's going to be a huge growth driver for us. We are not updating any guidance because that's not something we've done as a practice. But we believe there's plenty of opportunity ahead. Jacobo can provide more insight on that; he has been spending time in South Africa and can give you a much better view. In terms of cards, the expectation is similar to what we've seen historically in other markets in LatAm. Some countries are cards-heavy; others are not that relevant. We remain payment method agnostic in the sense that we need to offer whatever payment method users want to pay with, and we intend to continue doing so. Keep in mind, typically our net take rates reflect our cost of processing, so we shouldn't expect significant differences between one payment and the other. Jacobo, if you want to complement on the growth drivers for Africa and APAC, go ahead.

Sure. Overall, it's taking what Seba was saying that there are a lot of analogies between the services we have been providing in Latin America and the opportunities that are in Africa and Asia, and we have been able to replicate our playbook in LatAm in those two continents. The merchants value the fact that the playbook is constant with the same API and the same agreement, allowing them to test our service or in the region faster than doing any other solution before. Being able to understand the complexity in Nigeria and the relevance of cashless payment methods in Kenya or credit and debit card reliance in South Africa, just as we have done with UPI in India, gives us leverage to cross-sell to a merchant and achieve returns on our investments for the regions.

Okay. Thank you.

Please standby for our next question. Our next question comes from Andrew Bauch with SMBC. Your line is now open.

Hey. Good morning team, and thanks for taking the question. You spoke to the success within your top 10 merchants being a derivative of new product innovation and adoption of some of your solutions. So maybe you could provide everybody with some specific examples on things that you're doing now within that base that you may have not been doing last year or the year before that?

Sure. Hi, Andrew. Good morning, and thanks for the question. So I think it's always a matter of product innovation plus scale. Innovations like credit card acquiring in Nigeria or the acceptance of UPI in India; some of the wallets we've been able to offer in Indonesia; and cash collections in Egypt, all of those small things compound in payments. Innovation comes in small incremental steps. Having a valued solution means that you are solving multiple problems for your merchants at the same time. So those are the incremental things that compound and allow you to differentiate. We are doing what we've always done at a much bigger scale, and we are able today to provide the building blocks for our merchants to be created. Some of them just want to conduct on-time payouts. That requires deep infrastructure, connections with every single bank, which is a hard task that we've been investing in for many years now, and that's how we differentiate ourselves. There's no singular bullet; it's continuous incremental innovation, and that's what we are determined to do.

Sorry, just an additional metric. Last year, the top merchants were in five countries, five of them were in Asia and Africa with us. And this year, this quarter, nine of them are already in Asia and Africa with us. Our margins are growing as they expand with us into these markets.

It's great to see the geographic expansion. Your headcount has increased significantly over the past few quarters. I'm curious about the pace of hiring you anticipate for the next year, especially given the current uncertainties in the world. Should we expect a similar number of new hires to join the platform in the coming year, or do you foresee a slowdown? Any additional insight would be appreciated.

Sure. So Andrew, we've always operated with a small team. 700 people for the size of our business is considerably smaller than other companies at our scale. We intend to continue this way. This is the time for us to invest. The opportunity is massive. Our business has shown its operating leverage. It's very clear that we are at an opportunity to invest. We don't foresee and we've never had hiring targets. We've never set ourselves a number of people to hire. We make sure we have the right culture in place. We really care about being profitable, growing fast, and being lean. We booked small local functions for the first few years of our history, and that DNA has become deeply ingrained. So we are always going to be a company that's extremely cautious about how we spend. We believe there's a massive opportunity ahead of us, and we're going to be able to invest against it. But we are also big believers in small teams. We think small teams with highly skilled, aligned individuals, can achieve amazing results. This formula has always worked for us, and this formula is now more impactful and relevant than ever.

Our next question comes from Leonardo Lee with UBS. Your line is now open.

Hey, everyone. It's Kaio Prato from UBS. Thanks for the opportunity to ask questions. I have one follow-up in terms of G&A. If we look at your G&A expenses, we had a relevant increase from a quarter-over-quarter basis of more than 25%. So I understand that you continue to hire more people, but I also see that it also happened in the last quarter. So I just would like to have a sense about what can we attribute this massive increase during this quarter? And what can we expect going forward, especially for the fourth quarter? And just to complement, are you now more comfortable to maintain this level of 37%, 38% EBITDA margin also in the fourth quarter? If not, where can we see any type of pressure going forward? Thank you.

Yes, sure, Seba. So particularly in the third quarter, we had mid-year salary increases. We also had some additional professional expenses and one-off technology expenses. There were specific situations, I would say, in Q3. Going forward, we see a lot of operating leverage. As Seba mentioned, we will continue growing headcount, which is our main line of expenses, particularly in technology, sales and marketing, and expansion. But in all other corporate areas like staff, finance, compliance, and so on, we are in a much more mature and sophisticated stage. So we expect those ones to scale quite a bit going forward.

Okay. Thank you. In terms of the EBITDA margin?

What is your question, sorry?

So just to add, as we are currently in the middle of the fourth quarter, and considering that most of the hiring for this year is already done, can we expect to maintain the 37% to 38% margin for the fourth quarter? If not, where might we encounter any pressure?

Sure. So we give you annual guidance, so we're not giving guidance per quarter. As we mentioned, all the strengths continue in terms of growth. As I mentioned, we have an increase in OpEx in the third quarter, but we don't expect that type of increase in the coming quarter. So we expect operating leverage going forward. We will guide to a new EBITDA margin level in the next year, but these are the trends that we are seeing right now.

Sorry, Diego, and Kaio, just to complement on that, we believe we are already very profitable. We are generating cash. The opportunity ahead of us is massive, and we believe it's important for us to have enough resources to invest. We've clearly shown that when we invest, there's a clear ROI. We've demonstrated good capital management, and we intend to continue to do so. We're not going to overspend; we remain very lean. But whenever we identify an opportunity for growth and investment in growth, we want to seize it because we believe that’s the long-term path for us. We remain very excited about our prospects. We don't think right now is the time to optimize for small variations in EBITDA; instead, we want to focus on ensuring we have the right investments in place that will fuel growth. We know because we've seen it that our business has significant operating leverage.

Okay. Thank you, Seba and Diego.

At this time, I show no further questions. I would now like to turn the conference back to Sebastian Kanovich, CEO, for closing remarks.

Thank you very much. So I don't want to be repetitive, but I want to say we are extremely proud of the results we posted this quarter. We are extremely excited about the opportunities we see for the company, both in Q4 and for 2023. Our strong performance year-to-date has shown that the strategic decisions we've made in the last year, together with very strong execution, are placing us in a great position. So I want to emphasize that we are very bullish for Q4 and for 2023. I really appreciate all of the questions, and thanks very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.