dLocal Ltd Q1 FY2023 Earnings Call

Good day, and welcome to the DLocal First Quarter 2023 Results Call. At this time, all participants are in a listen-only mode. As a reminder, this call may be recorded. I would like to turn the call over to Soledad Nager, Head of Investor Relations. You may begin.

Thank you very much, Operator. Good morning, everyone, and thank you for joining our first quarter 2023 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; Jaco 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 this conference call for a variety of reasons, including those described in the forward-looking statements and Risk Factors section of DLocal's filings with 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.

Good morning, everyone. Thanks for joining the call today. I'm pleased to share that we had a very strong start to the year. Our TPV grew 70% year-over-year and 8% quarter-over-quarter, reaching $3.6 billion. Our revenue grew 57% year-over-year and 16% quarter-over-quarter to $137 million. We continue to focus on growing our absolute gross profit and EBITDA dollars. We've added $7 million gross profit and $5 million EBITDA in the first quarter of 2023. Both figures increased double-digit year-over-year and quarter-over-quarter. Gross profit grew by 42% year-over-year and 12% quarter-over-quarter to reach $62 million, and adjusted EBITDA grew by 38% year-over-year and 13% quarter-over-quarter to reach $45 million. We have always been focused on delivering profitable growth while investing to achieve our long-term ambition, capitalizing on the huge opportunity ahead of us. We are proud to share that during the last nine quarters, our ratio of adjusted EBITDA to gross profit has remained consistently above 70%. This is because our disciplined investment approach is part of our DNA. We remain firmly focused on profitable growth at scale. We are still a young company in growth mode. Over the long term, there are clear opportunities to deliver operating leverage. Now Maria will discuss our operations and performance in Q1 2023.

Thank you, Seba. Hi, everyone. During Q1 2023, we significantly grew our business in our top 10 merchants. In Q1 2023, our revenue from our top 10 merchants reached $80 million versus $45 million a year ago. Our top 10 merchant concentration actually increased in Q1 2023 because we delivered very rapid growth among our top 10, in which 2 merchants newly entered the top 10 list. We work extremely closely with our merchants. During Q1 2023, our top 10 margins on average processed payments across 10 countries versus 8 a year ago. And all of them leveraged the local products in at least one country in Africa and Asia. This is a testament to our successful cross-selling strategy and to our merchants' trust in our solution. We are their partner of choice, both when they decide to go local in a country and also when they operate cross-border. 8 out of 10 of our top 10 merchants process with us both on a cross-border and local-to-local basis. Moving to the next slide. During the quarter, we focused our efforts on deepening our presence in the countries in which we already operate, mostly in Africa and Asia, by establishing more direct connections with payment methods and acquirers and continuing to enhance our solution. In our last earnings call, Jaco highlighted how excited we are about the growth opportunity in Nigeria. Let me share a little bit more of our journey in this country. We opened in this country back in 2019 because one of our merchants needed us to help them accept local payment methods. As our roadmap is driven in large part by our merchant needs, and the request was within emerging markets, we made the launch of Nigeria a priority. We were then able to offer this to our entire merchant base. And today, our solution in Nigeria is used by 6 out of our top 10 merchants. One of the great benefits of choosing our solution is the wide access to nontraditional payment methods. According to Statista, in Nigeria, only 3% of the population have a credit card. So merchants rely on us to connect alternative payment methods and local card schemes, such as Verve. The opportunity in Nigeria is massive as the country has a huge and young population. Also, from the perspective of our merchants, it is a market that is complex to operate in, and they strongly benefit from our solution there. As we mentioned in a previous quarter, gross take rate is significantly higher than average. While our net take rate is largely in line with other markets in which we operate. Gross profit margin is lower than the average, but we believe that over the medium to long term, as we go deeper into the region, developing more integrations and payment methods and gaining more efficiency in accessing the FX markets, the gross profit will expand. As we always emphasize, we focus on absolute dollar profit growth. Even if lower margin in the short term, maximizing absolute dollar profit will create the most valuable business in the long term. Now, I'll pass on to Jaco to discuss our achievements in different geographies.

Thank you, Maria. Africa and Asia have been a key engine of growth for us. Our merchants continue to sign strong demand for our solution in these geographies, and these markets also offer attractive economics. The results of our push into these regions speak for themselves. Revenue in Africa and Asia for Q1 2023 grew by 297% year-over-year, 53% quarter-over-quarter, reaching $39 million, with a large part of the acceleration driven by Nigeria. Asia and Africa already represent a relevant portion of our business at 28% of our revenue in Q1 2023. In Q1 2023, we saw strong growth in Nigeria with revenues increasing by 16x year-over-year and 91% quarter-over-quarter. Nigeria accounted for 20% of our revenues in Q1 versus 2% a year ago. We are also very proud of the progress we have achieved in several other markets, such as Egypt, Morocco, Indonesia and Malaysia, all of them growing triple digits year-over-year and becoming more relevant to our business. It is still early days for us in these regions. And we are very excited about what we believe to be a significant opportunity ahead. Moving on to Latin America, we continue to see solid growth across the region in Q1 2023, with revenue growing by 27% year-over-year and 6% quarter-over-quarter to $98 million. Q1 2023 marked Argentina's return to positive revenue growth, increasing by 41% quarter-over-quarter, albeit still at slightly lower levels than a year ago. LatAm, excluding Argentina, showed strong revenue growth of 38% year-over-year and was stable quarter-over-quarter. On a quarter-to-quarter basis, you might see revenue growth vary; for example, in the past quarter, Mexico outperformed other markets. We look at a 12-month view to see a normalized view in order to assess the development of a region. In the last 12 months to Q1 2023, each of the main countries individually showed significant revenue growth greater than 20% year-over-year, a 62% growth on the aggregate. It is important to highlight that the revenue distribution by market is a result of our merchant strategy. Our commercial teams are internally organized for merchants, and we do not optimize for targets by geography. We have global agreements with our merchants, and we offer them access to all of the emerging markets in which we operate, supporting them in the markets in which they wish to grow. We continue to invest thoughtfully in expanding our global team. We can hire new talent, particularly in the areas of sales and marketing, product and operations to pursue the opportunities we see in the markets and to drive towards our long-term objectives. Tech-related roles now account for around 41% of our FTEs, supporting our rapid innovation of new products. In Q1 2023, we grew our team by 201 FTEs, or by 36% year-over-year to 763 employees. We continue to recruit talent outside of the Americas as we focus on hiring locally to leverage on-the-ground knowledge and develop a deep understanding of local market idiosyncrasies. We will reach 173 FTEs in Africa and Asia by the end of Q1 2023, representing 23% of our workforce. We will continue to invest in talent in a disciplined way, always ensuring that we onboard talent that has a strong cultural fit. We are proud of our team and believe it is as strong as ever. Diego will now review our financial highlights.

Thank you, Jaco. Hi, everyone. We have seen a steady increase in pay-ins and pay-outs TPV quarter-after-quarter. During Q1 2023, pay-ins increased by 52% year-over-year and by 7% quarter-over-quarter. Pay-outs increased by 133% year-over-year and 11% quarter-over-quarter. The product share remains relatively unchanged quarter-over-quarter, with pay-ins accounting for 70% of our TPV and pay-outs for the remaining 30%. The contribution from pay-outs has increased year-over-year as we have been successful in providing the last-mile payment service in emerging markets to global public payment companies, and we continue to position ourselves as the payment service provider of choice in emerging markets for global payroll and on-demand delivery companies. We are product agnostic. All our products bring incremental profit, and when we combine them, they generate synergies both for our merchants and for us. Depending on which customers we involve and their strategy in the quarter, the share of pay-ins versus pay-outs may vary. We see product diversification as one of the strengths of our business. Going forward, we are very positive about the continued growth of our products. Our cross-border and local-to-local volume showed solid growth year-over-year and quarter-over-quarter, with cross-border volume growing quarter-over-quarter by 12%, increasing its share contribution from 53% in Q4 to 55% in Q1 2023. As Maria mentioned earlier in the call, we have seen that large merchants tend to have a combined strategy, and we expect fluctuation between services to continue from quarter-to-quarter. Revenues also reached a record high of $137 million in Q1 2023, growing 57% year-over-year and 16% quarter-over-quarter. We continue delivering strong revenue growth both from existing and from our new customers. During Q1 2023, 57% year-over-year revenue growth, 47 percentage points or $41 million came from existing merchants and 10 percentage points or $9 million came from new merchants. Our revenues over TPV or gross take rate was 3.8% during the quarter compared to 3.6% in Q4 2022. Fluctuations from quarter-to-quarter are mainly driven by changes in business mix, as Nigeria and Argentina with higher-than-average gross take rates were the main drivers of the quarter-over-quarter revenue and gross take growth. We continue to deliver a strong net revenue retention of 147% for the quarter. This is driven by very low churn, less than 1% year-over-year, the organic growth of our merchants in emerging markets, and our ability to continue bringing them to new countries, products, payment methods and increased share of wallet. Moving on to Slide 16, we remain focused on growing absolute gross profit dollars. During Q1, our gross profit reached $62 million, up 42% year-over-year and 12% quarter-over-quarter, with a net take rate stable quarter-over-quarter at 1.7%. During the quarter, we saw an increase in processing cost from 1.8% in Q4 2022 to 2% in Q1 2023, which is in line with the increase in gross take rate from 3.6% to 3.8%. These increases are mainly attributable to the increase in TPV in Nigeria with higher fees and higher operational costs. From a gross profit margin perspective, margins dropped to 45% compared to 47% in Q4 2022 and 50% in Q1 2022. The waterfall chart on the right shows the main changes in our gross profit margin. Product, service mix and cost optimization contributed favorably to the margin, as we have a higher share of cross-border and pay-outs quarter-over-quarter. In contrast, the country mix reduced the margin as we experienced strong growth in Nigeria, which brings positive gross profit dollars with a net take rate largely in line with other markets but a lower than average gross profit margin. Excluding Nigeria, gross profit margin would have been above 50% in the previous quarters, reaching 54% in Q1 2023, increasing from 51% in Q4 2022, also excluding Nigeria. We also remain focused on growing our EBITDA. During the quarter, we were able to grow our adjusted EBITDA to $45 million, up 38% year-over-year and 13% quarter-over-quarter. Adjusted EBITDA margin was 33% in Q1. The year-over-year and quarter-over-quarter decrease is driven by the gross margin decrease. Particularly, in Q1 2023, the main driver of that decrease was the high growth in Nigeria with lower than average gross margin. Net income totaled $35 million in the quarter, growing by 35% year-over-year. Sequentially, it increased by 83% as in Q4 2022, we incurred nonrecurring expenses of $8 million. Before handing the call back to Seba for the closing remarks, I will touch on liquidity. In Q1 2023, we observed strong net cash generation of $50 million, even considering that we acquired $37 million of our own shares as part of the $100 million buyback program. The two main drivers of our cash flow generation were our profits and a sequential normalization of funds advanced as warranties for merchants and partners. The main use of cash was the buyback. During our last earnings call, we shared with you that we have taken extraordinary short-term measures in the form of warranties and advancements of funds to bring additional comfort to our merchants and partners using our own funds. We also mentioned that we expected the situation to normalize over the next quarters. In Q1, we have already collected $10 million out of the $30 million in advances we gave to some of our merchants, and we recovered $4 million of the restricted cash we held as a warranty or standby letters of credit, decreasing the amount of other assets from $57 million to $43 million. Finally, we observed a sequential normalization of the settlement periods of our merchants that were in a few cases, reduced in Q4, and we continue generating cash as we grew our TPV. Altogether, generating an inflow of $32 million from the variation of the net trade receivables and payables. We ended March 1, 2022, with a consolidated cash position of $518 million with $233 million of own funds and $285 million of merchant funds. We believe our strong cash position remains a competitive advantage. Seba, the floor is yours.

Thanks, Diego. We are very proud of our strong start to 2023 and continue to be excited about the runway ahead of us. Our performance shows the distinctive strength of our business, which we continue to build focused on long-term profitable growth, combining our robust dollar growth on a TPV revenue, gross profit, adjusted EBITDA and net income basis, from a strategic standpoint, a proven track record in executing our merchant cross-sell strategy and outstanding geographic expansion, capitalizing on the huge opportunity ahead of us. This is all underpinned by our tech DNA and merchant-centric approach. Last and most importantly, our lean and disciplined culture. We deliver all this with a lean team continuously striving for excellence. Our culture is key to continue delivering our long-term ambitions. We reaffirm our outlook for the rest of the year: revenue between $620 million and $640 million, with an implied net revenue retention between 140% and 150%, and adjusted EBITDA in the range of $200 million to $220 million. We remain humble and focused on providing the best and most comprehensive solution for our merchants in emerging markets. I am thrilled to share more about our business and our trajectory in our first-ever Investor Day on June 8. We will be celebrating 2 years as a public company. A lot has changed since the IPO, and we are excited to see you again and share an update on the next chapter of our story. A big thank you to our global team, our customers and our investors for their continued support. I will now hand back to the operator to open up for questions.

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

Hello. Can you hear me?

Hi, Jorge. We hear you.

Hi. Sorry. Thank you. Thanks and congrats on the numbers and the additional disclosure. Much appreciated. I wanted to see if you can double-click on the Nigeria business evidently has grown to be your biggest geography. And there are a lot of questions out there in the market about how do you operate in that market that has very high capital controls and restrictions. Can you maybe walk us through what percentage of that business is cross-border versus local-to-local? And the part that is cross-border, how does it operate from an FX perspective? Can you access all of your needs in the official FX market? Is there any restrictions for you to repatriate currency? Is there a part of the market that you're accessing, I think it will be beneficial for everyone to understand exactly the limitations and how you deal with them as you grow that business. And then my second question is on Argentina. There was a really nice uptick in revenues in Argentina in the first quarter. So I just wanted to see if this is the first of several similar step-ups that we are going to see as that operation normalizes, or was this sort of like a one-off and you continue to expect the business to be a little bit under pressure because of the difficulties there. Thank you.

Jorge, thank you for your questions. I apologize for my voice as I’m currently dealing with the flu. We are very excited about our results in Nigeria, which we believe is very positive. This is part of our company's strength and value proposition. We entered the Nigerian market in 2019, and it has taken us over four years to reach this stage, and we are very proud of our progress. Currently, six of our top ten merchants in Nigeria are using our services for both cross-border and local transactions. The market in Nigeria presents challenges, such as a limited number of international credit cards, with Verve being the most common. There are also strict capital controls in place. In Nigeria, there is both an official exchange rate and a market rate, and we are licensed to access the market rate. This explains why our gross margins are lower than our net take rate; we are generating revenue in Nigeria and providing value for our merchants, albeit with lower margins. We anticipate that as we normalize access to the foreign exchange market and gain scale in pay-ins, pay-outs, cross-border, and local-to-local transactions, our margins may improve. Jaco, feel free to add any comments.

So, Jorge, thank you very much for your time and thank you for the question. It's important to also mention, as you asked, that as of today, we are able to fulfill 100% of our needs in the market and to operate at scale and to serve all of our merchants with a full suite of products. It's important to mention that also in Nigeria, we managed to be super successful because for global merchants, we want to grow and scale within the market. It’s a must to go local. And under the MPI, they are integrated with us. They managed to offer all the local payments, such as Verve, and operate and grow and scale in the market.

Sorry, regarding your question about Argentina, it's more effective to view our business by regions rather than country-by-country or quarter-by-quarter. Your point is valid. We've experienced a strong quarter in Argentina and are witnessing positive trends returning to the market after the crisis that affected us in the third and fourth quarters. The normalization we referred to is evident. Argentina is a complex market with its volatility, but the important aspect is the dependence of merchants on our services. This also applies to Nigeria. We are addressing a complicated environment for merchants in countries like Argentina and Nigeria, including major players like Facebook, Netflix, and Spotify. These are significant markets and partners. We anticipate that they will continue to navigate successfully in Argentina, similar to how they have since 2016, regardless of the macroeconomic landscape. We don't foresee any changes in the near future.

Thanks, Seba and Jaco, and congrats again.

Thank you. Our next question comes from Tito Labarta with Goldman Sachs. Your line is open.

Hi. Good morning, Seba, Jaco, and everyone. Thank you for the call and for taking my questions. A couple of questions. One, I guess, first, a follow-up on Argentina. Just some concerns about a potential currency devaluation. I know you've had a lot of issues in Argentina in the last few quarters, which seems to be correcting. But if there is a devaluation of the currency, how could that impact your business, if at all, just help us think about potential risk related to that? And then my second question, I mean, I guess, around Latin America, but more specific in Brazil, the growth in Latin America has somewhat slowed. And if you look at Brazil, in the last 4 quarters, revenues have been kind of flattish. And I know you say not to look at any one country in particular, but just to understand if there's anything going on particularly in Brazil, why the revenues have been kind of flattish. Any color you can give on the outlook there would be helpful. Thank you.

Tito, thank you very much for the question. So in terms of devaluation, we've been operating in Argentina for all these years, and there's been constant devaluation. And our business hasn't suffered from it. Keep in mind that we have global merchants that think of their products in dollars. So typically, when there's a devaluation, they reprice. Devaluation doesn't affect at all our ability to expatriate or repatriate funds. It's just a different price at which we buy our stock currency. So we don't expect any impact on devaluation of the currency. We don't have exposure to Argentina. Our revenues are in USD accounts. So devaluation of the peso wouldn't affect us the same way that it hasn't affected us in the past. In terms of Brazil, your question is fair. We've grown Brazil. The last 12 months growth, it's been 30%, LatAm is 38%. Mexico, just to give you a sense, was 93%. The reason why I chose these metrics is because those are meant to be the most mature markets. We are seeing very positive trends already in Q2 in Brazil. Brazil is a market that has slightly more exposure on our end on retail. Retail, obviously, it's a little bit more seasonal in Q4 than in Q1. So we expect growth in Q2 to come from multiple different markets, including Brazil and Mexico. So if you will, we expect more of a normalization in that sense. We don't grow in step. We typically function. So you don't see linear growth and also you've seen it annually. It's typically an easier thing to do.

Okay. That's helpful. Thanks, Seba.

Thank you. Our next question comes from Dom Falavina with J.P. Morgan. Your line is open.

Good morning, everyone. Thanks for taking the question. So a couple of questions here. The first one, Seba, just to understand, when you provide services to your clients in Argentina, are you able to provide the official FX today about 230 or the market FX about 460? And then I'll ask the second one.

Dom, hi, how are you? Thanks for the question. Both, there's a set of merchants that access what's called the official rate. And there's another set of merchants that access the market rate. We've operated with both models. We spoke about this in our Q3 and Q4 calls where that access has been limited. What we've seen is that merchants do business in the country independently of the FX rate. The reality is that they are here to stay. Our merchants are very consolidated in this country. On the FX number or the price of the currency is just a given point. Keep in mind when you have an official rate, you also have a set of taxes that apply. So we operate in both models. We also have payouts, which are hedged and the opposite flow. So those dynamics are important. Jaco, feel free to complement.

Let me just ask to make sure, are you able to differentiate between the official and unofficial?

Sorry. So, Dom, let me be clear about one point. Our revenues and profits are dollar-denominated also in Argentina. We collect revenues in dollars and our revenues are deducted prior to settlements, which are dollar-denominated.

Yes, I want to clarify something. You are recognizing approximately $20 million in revenues in Argentina. If I understand correctly, accounting rules require these to be converted by foreign exchange. Other companies operating there have had similar situations, but they do not actually transfer the money out. Therefore, if they were to exchange at the market rate, it would appear that you are not actually earning $20 million; instead, it would be more like earning $10 million at market rates in Argentina. My question is about the conversion process—can you achieve the 230? It's the same issue in Nigeria. Are we looking at an accounting statement that uses an official rate, while in reality, the money is converted at different rates? I want to understand how this affects the income statement.

Jaco? Jaco, I think you are muted.

Sorry. So, Dom, I want to be clear about this point. Our revenues and profits are dollar-denominated also in Argentina. We collect revenues in dollars, and our revenues are deducted prior to settlements, which are dollar-denominated.

Yes, our profits are in dollars in U.S. and European Union accounts. It's not FX neutral; it's dollar accounts in global markets. We don't hold our profits in local currency in local markets.

Super clear. Thank you very much, guys, and congrats on the performance.

Thank you. Our next question comes from Jason Kupferberg with Bank of America. Your line is open.

Thank you, everyone. Good morning. I wanted to revisit Nigeria. I know you've been operating there since 2019, but the growth over the past year has been impressive, increasing from 2% of total revenue to 20%. Can you highlight some of the key drivers behind this growth? Are there a few large merchants that have significantly expanded their operations in the region? Additionally, could you explain why the gross margin is lower? Is it related to the mix of pay-in and pay-out, the combination of cross-border and local transactions, or the processing costs associated with alternative payment methods in the country? Thank you.

Jason, thank you very much for the question. So what has happened in Nigeria is that our product has gotten better incrementally. It's not easy to get the trust of your merchants going to a new region. That's not something that happens overnight. Today, 6 out of our top 10 customers operate with us in Nigeria, and we are extremely, extremely proud of that. Also, from a competitive dynamic, you see that the reality on the ground is that there are not many alternatives to the service we offer, particularly not when dealing with global public companies. I think we've been able to differentiate on that. And again, our product gets better over time. And we have a much deeper understanding, a much deeper product line in this country. And the other thing is that there's a clear understanding by global merchants that Nigeria is a massive opportunity. You are looking at one of the biggest countries from a population standpoint in the world. It's one of the countries where there's the most expectation for growth. And at the same time, it's an extremely complex country to navigate. And when you add all those ingredients together, it's a perfect mix for us. I think I'd say is that it's not only in Nigeria. I know Nigeria calls out everyone's attention, and we are very proud of that. But you see many of the same dynamics in our business in Egypt, in Morocco, Indonesia, in Malaysia; some of that takes time. But over time, and that's why we continue to insist on investing in this opportunity. We believe those things compound and allow us to differentiate. We are extremely, extremely bullish about the opportunity in Nigeria, not only because of Nigeria but also because when merchants use a synergy, we are a better company. We become more entrenched. We have a much more significant competitive advantage, and we differentiate from every other player out there. In terms of margin, Maria, feel free to complement.

Thank you, Jason. Just complementing on the gross profit margin, it’s very important to notice that Nigeria is one of our expansion markets. And then as we go deeper in the market, building more connections and gaining volume scale, we have opportunities to improve our processing costs and expand our gross margin.

Right, right. Okay. That makes sense. Just as a follow-up, I wanted to ask about your own cash balance. I know you had the $37 million of buybacks in the quarter. So we did see a quarter-over-quarter decline in your own cash. Just as we think about directionally for the second quarter, how should we be looking at that figure? Do you think your own cash will go up or down quarter-over-quarter in Q2?

Diego, do you want to take it?

Sure. Thanks for the question. And first thing to say, we had a very strong cash generation during the quarter. Our total cash increased by $50 million, even after investing $37 million in our share buyback program. This would have been an $87 million increase in the quarter without that. $18 million of this came from an inflow from the release of a portion of the warranties and advancements we provided to the merchants and partners. And we also recorded net income of $35 million that compares to cash and the inflow we generate with the growth of the TPV. And we expect this trend to continue going forward. With regard to our own funds, you have to analyze both what is in the own bank accounts and the profits that we still have pending to be transferred from the other accounts. If you consider those two together, you see that our own cash increased by $20 million even after again buying $37 million of the share buyback program. So excluding that, the increase in noncash is $57 million. We have a higher amount of profit pending to transfer to our own bank accounts compared to Q4, and that is because we released our financial statements in April. So we basically have the amounts we had in Q4 plus the profits of the quarter. We expect this to sequentially reduce in the following quarter.

That's great color. Thank you, guys.

Thank you. Our next question comes from Ashwin Shirvaikar with Citi. Your line is open.

Thank you. Hey, guys. So I want to stay on the cash question because as I look at Page 19 of your presentation, you're kind of talking about releasing restricted cash to your own funds, the $10 million decrease in merchant advancements and the decrease in guarantees to merchants and credit processors. Could you provide some of the rationale behind this? Is this sort of a structural development that continues to benefit you in the future? Or is this sort of a one-off thing you did and maybe some background on why this is?

Maria, do you want to take it?

Sure. Thank you, Seba. Thank you for your question. First of all, as we mentioned in Q4, we took extraordinary measures to provide comfort to our merchants. And this is the reason why you see that other assets increasing. As we mentioned in Q4, we expect that to reduce over time, and this reduction of $14 million is the trend that we have highlighted. We expect that to continue reducing.

So in other words, this is sort of a structural development or in terms of how you transact with your clients and try your contracts and so on and so forth, just to confirm.

Ashwin, this is a normalization of the previous trend. So we were under some pressure in Q4. We told you this would normalize in Q1 and that has normalized already, and it's going to continue to normalize over Q2 and Q3. So there's no structural difference in our business. We don't require a balance sheet to grow. Our TPV actually generates cash, and that's what you see in this current quarter, our cash generation is increasing. So there was no fundamental distinction or difference in our business dynamics in this Q1; there was normalization from what was happening before.

Understood. Yes, it is clear. Thank you for that. The other question I had was regarding your TPV growth, revenue growth, gross profit growth, and adjusted EBITDA growth. Clearly, TPV is growing the fastest, while adjusted EBITDA is growing the slowest. I see the explanation of growth in Nigeria as a primary driver of why gross profit growth is slower, and the investments you're making explain why adjusted EBITDA growth is even slower than that. My question is about normalization over time since entering into new countries is part of your business model, and you continue to do this. You already mentioned that Nigeria is still relatively early stage for you. In terms of financial metrics, what is a good normalized gross profit margin level? What is a normalized EBITDA margin level over time?

Maria, start and Diego, Maria feel free to complement. Ashwin, I appreciate the question. So I think it's good to get one step back and see where we are currently standing. When you compare to the previous year, our margin this quarter has been consistently over 70%. We think we are in a very healthy position. We want to keep the independence of investing. We have the benefit of already having a very profitable business. We do so in a very disciplined approach. So we’ve guided you already on numbers for this year. That's what we can say for now. There's no fundamental reason why we would change that at this point. You mentioned geographic expansion. Yes, it's going to continue to come. At the same time, there's no other hundred markets we want to go after. We already have 40, so we are not optimizing for any particular target.

Understood. Thank you.

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

Hi. Thank you so much for taking my question. Congratulations on the quarter. A few clarifications. First, on Nigeria. With the number you provided, I think the calculated gross profit margin is about 9% for Nigeria. You mentioned that the piece is higher. Repatriation costs are higher in Nigeria, but when can we expect to normalize, and at what level? I think it is currently quite dilutive to your overall gross profit margin. And even in terms of dollar amount, it's 3% to 4% of total gross profit dollars. My second question is on the cash balance. Last quarter, you mentioned that you consumed $72 million in own funds in providing advances to select merchants. Is it right to assume that of the $72 million you were able to release $18 million this quarter? And my third question is on the TPV growth. Can you give us some sense of how the pipeline for Q2 and Q3 are evolving since you have very good visibility on how your merchants are behaving? That would be very helpful color. Thank you so much.

Sure. Thank you, Neha, for the questions. I will start with the Nigeria one. Our net take rate in Nigeria is higher than average. It means that it brings gross profit dollars to our business. That's what we want, and that's what we are optimizing for. Yes, Nigeria is dilutive to our margins. Tomorrow, if we switch off Nigeria, our margins will go to 54%. We don't think that's the right thing to do. We don't think that creates value for the long run. How fast are those margins going to normalize? We don't know. We expect that over time to normalize in the mid to long-term. It's also a function of how the market develops, how our customers develop, and how our product develops. But even today, at the current scenario, we want to continue to do this business. We think this is a great business for our company. And again, we are not optimizing for the margin structure. We don't think that's the right thing for our business to do. Nigeria contributes our profits at a very similar level to every other market. The dynamics behind revenue are different, and that's why you see the margin being lower. But I see tomorrow morning, we switch off Nigeria, our margin jumps to 54%, but we are a much, much worse company. That's the first question. In terms of cash, Maria or Diego, I'll let you take.

Hi, Neha. So, yes, our own cash, if you include the profit that we still have to transfer to our own bank accounts grew by $20 million, and that is after the $37 million we invested in the share buyback. We had, at the end of the quarter, $74 million of cash that we haven't transferred. That is basically what we had at December. That was about $38 million, plus the estimated profit of the quarter. We follow a very prudent approach before transferring profits to our own bank accounts. So we make sure that we have audited information. Keep in mind that we filed our audited financial statements by April after we closed the first quarter, so both the Q4 and the Q1 numbers were audited after the quarter. During Q2, we expect to transfer those funds or a substantial part of those funds to our bank accounts, and we will still have always the profits that we generate in the quarter pending to transfer as results are being audited.

Neha, your last point on TPV, we are seeing very healthy pipeline. I mentioned before, we are seeing so far in the quarter, very healthy trends across multiple geographies. Again, I've said this in the past, we've never been a better company from a product standpoint and geographic footprint standpoint. And when you look at our merchant base, it's the best it's ever been. So we are very optimistic about our Q2 numbers and our Q3 going forward. And as you said, yes, we do have a good sense of visibility. And so far, everything we've seen is very positive across multiple different geographies.

Thank you. Can I just follow-up with Diego on the cash? It's not very clear to me. So $72 million was used up in Q4. Of that $18 million was released this quarter, and you still have $54 million tied up with some merchants, which is going to be released in the coming quarters. Is that right?

I'm not sure if I follow the numbers you are calculating, Neha. But basically, if you are talking about the restricted cash, that's a different story.

Okay.

Neha, and that's the point we were raising. All of those trends are normalizing. So they normalized in Q1, and we expect them to continue to normalize in Q2, Q3, and Q4.

If you look at our cash flow, you will see that we have also an inflow of $32 million from the net increase in trade payables and receivables, and that is also part of that normalization or that improvement as the settlement periods of the merchants went back to normal, but also as we grew our TPV, we also grew our cash.

And, Neha, I want to emphasize one last point. Sorry, I think this is important. Our business doesn't require balance sheet for us to grow. So growth is accretive. We have negative working capital. We receive the funds before we settle, and that remains the case. That's why you see our cash going up consistently.

Has the settlement period reduced after the fourth quarter?

No.

So you still have 7 to 14 days settlement period.

No, no.

The settlement period improved after the previous quarter. We had a longer settlement period, to be clear.

The $32 million cash increase you have in net trade receivables and payables as a result of TPV increase, but also of the normalization of most of the settlement periods that were reduced in Q4.

Then why has the settlement periods increased?

Neha, settlement period increasing, it's a good thing. It means that we pay merchants later.

Yes, it's a good thing. It definitely shows that your merchants are more confident leaving the cash with you. But I'm just curious as to why it has increased, because Nigeria has a higher settlement period and that's why your average settlement period has gone up. I'm just trying to understand why it's gone up?

Neha, settlement periods increasing is due to a normalization back to previous levels.

Okay. Okay. So after the fourth quarter, it decreased and then now it is going back to normal?

Yes, you see all the trends trending in a positive direction.

Okay. Okay. Thank you so much. Congrats again.

I appreciate it. Thanks for the question.

Thank you. Our next question comes from Matthew Cook. Your line is open.

Hey, guys. Thanks for taking my question. Another one on Nigeria for me. Curious how you're thinking about sequential growth from here, right? Revenues were up 93% quarter-over-quarter. And we were doing some rough math, so like assuming a 5% gross take rate and if you annualize that volume, that points to say like $2 billion of annualized volume from Nigeria, that would be about 1% of total consumer spending there. And say, like 25% of total e-commerce activity in Nigeria. So it seems like you're pretty far penetrated in that market. So I was just hoping that you could kind of like provide some additional color on like how you see growth from there.

Hi, Matthew, and thanks very much for your question. So obviously, I've said it before about other markets, you don't grow in step functions. So our growth is not linear. And typically, you see a quarter where you go a little bit faster. You've seen it in the past and the normalization and then growth again. I have to disagree with you in terms of penetration. Please share those stats. From what we've seen, we are only scratching the surface even with the merchant base that we have today. So 6 out of 10 operate with us in Nigeria, out of the top 10. There's only therefore more for us to capture. And our business is still relatively small from a TPV standpoint in Nigeria. So we believe that there's significant growth to come over the years. We are not saying it's going to come next quarter, but that's not what we're optimizing for. And we are optimizing for growth in the long term in Nigeria, compounding with all the other markets that we operate. And in that sense, we are actually extremely confident.

That's super helpful. Thank you. And then just my second question, the pay-out volume growth continues to be really robust. I was hoping you could opine on that a little bit more in terms of the vertical mix and geography mix as well.

We don't prioritize one product over another. In this quarter, our cross-border mix has increased, while it decreased last quarter. We are neutral regarding our product offerings. Ridesharing is a strong payout segment for us, along with education and payroll payments. However, we are working with many of the same merchants, and the growth in payouts depends on how quickly customers engage. The increase in payouts is consistent across different regions, with no significant difference in product mix from one country to another. We appreciate the payouts product because it complements our pay-ins, just as cross-border transactions complement local transactions. There's not much additional detail we can provide on this topic.

Helpful. Thank you.

Thanks for the question.

Your line is open.

Hi. Can you hear me, okay?

Yes, we do.

Sorry. Just a couple for me, please. One, just a question on the hedges. I think there's a reference in the press release to lower hedging activity, and we see that in a better financial result for the quarter. Just wondered given there's more exposure to kind of higher inflation economies, why would that be the case? If you could help explain that? That's the first question, please. I'll come back with a second one.

Sure. Sorry, who is this?

Sorry. Soomit. Soomit, New Street Research.

Sure. I appreciate it. Diego, Maria, do you want to take it?

During the quarter, we reduced our exposure, particularly in Argentina. We mentioned that in the second half of the year, we sequentially normalized the situation there. It's important to note that we have a practice of hedging every open position in local currencies. In Q1, we had significantly lower positions in Argentina, which allowed us to decrease the cost of hedges we maintain in dollars for our available investments. Consequently, you will see a positive turnaround in our financial results for the quarter due to these actions.

Okay. Clear. And then a quick follow-up, please, again, just back to Nigeria. Just kind of trying to move away from the margin or the gross margin discussion, which obviously relates to the higher gross take rate. But just to keep things simple, as your processing costs and FX costs hopefully come down over time, do you keep that profit? Or do you pass that on to the merchant?

Thank you for the question. We typically start by understanding costs before setting our prices, which is why we focus on optimizing for gross profit. If costs decrease, we will share some of those savings with the merchant, but a significant portion will benefit our own efficiency. The closer we get to the system, enhancing our access to liquidity and securing better terms, the more advantageous it becomes for us. Additionally, our merchant contracts are generally not linked to our costs, creating potential benefits for us.

Okay. And so presumably, your net take rate will go up then?

It has the potential to go up significantly.

Yes. Okay, great. Very clear. Thank you.

Thank you. Our next question comes from John Coffey with Barclays. Your line is open.

Great. Thank you very much for taking my call. I have yet another question on Nigeria. And really, my question pertains to the verticals in which you're starting to see some of these volumes. Last quarter, you gave a really helpful slide. I think, Page 11, where you showed that I think 20% of your TPV was in financial services. The second biggest bucket was commerce. Is there any kind of color you could give on where Nigeria slots into the different verticals? Is it one of those? Is it really completely spread out across all verticals?

Thank you for the question. It's very well diversified, very similar dynamics to our overall business. So that's why the 6 out of 10 merchants is a good signal for this. Our top 10 are very well diversified, and the same applies to Nigeria. So no particular vertical has more prevalence than others.

Thank you. I have a quick follow-up. You mentioned that the markets in Nigeria and Argentina are complex to navigate, which seems to be where you add the most value. Looking beyond these two markets, would you say that Egypt, Morocco, and Indonesia also fall into this category of being particularly complex compared to more developed markets where there are greater efficiencies? Do you see these as significant opportunities moving forward?

We operate in 40 emerging markets, all of which present their own complexities, and that is our area of expertise. I hope people now view Brazil as a developed market, which was not the case when we started. We still encounter significant friction in these emerging markets, which is what we aim to resolve for our merchants. Emerging markets will continue to present challenges, and that is what we are addressing. Countries like Indonesia, Malaysia, Morocco, Egypt, and South Africa exemplify this, as does Mexico and Pakistan. There is ample friction for us to tackle. As we address these issues, we typically add significant value to our customers while also capturing some of that value for our company.

All right. Thank you.

Thank you. That's all the time we have for questions. I'd like to turn the call back over to CEO, Sebastian Kanovich for closing remarks.

Sure. Thanks very much. Thanks, everyone, for listening to today's call. I hope that this was helpful. It was a pleasure being here today. I just want to make a note on the short-term. I would like to reemphasize to everyone that we continue to build this business focused on making it efficient for the long term. That's why you see us investing in geographic and product growth. We are extremely excited about the opportunity we have to go after such a huge market and build a multibillion revenue business over the coming years. I want to thank you all for your questions and comments. And we are very much looking forward to seeing you all on our Investor Day on the 8th of June. Thanks for your time, and enjoy the rest of your day.

Thank you for your participation. This does conclude the program. You may now disconnect.