dLocal Ltd Q3 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to DLocal's Third Quarter 2023 Results Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to the company for prepared remarks and video. Please go ahead.

Good morning, everyone, and thank you for joining the third quarter 2023 earnings call today. If you have not seen the earnings release, a copy is posted in the Financials section of the Investor Relations website. On the call today, you have Pedro Arnt, Co-Chief Executive Officer; Sebastian Kanovich, Co-Chief Executive Officer; Sergio Fogel, Co-President and Chief Strategy Officer; Diego Cabrera Canay, Chief Financial Officer; Maria Oldham, SVP of Corporate Development, Investor Relations and Strategic Finance; and Soledad Nager, Head of Investor Relations. A slide presentation has been provided to accompany the prepared remarks. This event is being broadcast live via webcast, and both the webcast and presentation may be accessed through DLocal's website at investor.dlocal.com. The recording will be made 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 sections 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 Pedro Arnt. Thank you.

Thanks for joining us today. Let me start by saying that after my initial quarter at DLocal, I am enthusiastic about our future prospects and the promising opportunities that our business presents for us. As we'll cover briefly, our current performance, our future pipeline, and market opportunity present a unique opportunity for sustained growth over a multi-year period, driven by the powerful secular trends behind emerging market adoption of digital products and services. We need to remain focused on executing behind that opportunity while constructing the foundational blocks as a company to ensure we can scale at the pace our merchants and our markets will demand. Let me walk us through some of the highlights of our Q3 '23 results that are a testament to these statements. We delivered another quarter of solid performance. TPV grew 69% year-on-year, reaching $4.6 billion, supported by our well-diversified merchant and geographic base. Revenue grew 47% year-on-year despite a strong devaluation of the Nigerian Naira in the quarter. If we exclude Nigerian revenue, growth came in at 58% year-on-year. We remain focused on achieving gross profit growth as our key metric. And in 3Q '23, we attained $75 million of GP, increasing by 38% year-on-year and 5% sequentially. We're still delivering best-in-class profitability. Our ratio of adjusted EBITDA to gross profit came in at 75% for the quarter, and our Rule of 40 framework, which adds our gross profit growth and our adjusted EBITDA over gross profit margin, continues to exceed 100%, coming in at 113% during the quarter. Free cash flow, which you can reconcile in the accompanying presentation, was $45 million, with a cash conversion ratio that still remains above 100%. Our investments remained thoughtfully focused on expanding our global team and building the appropriate processes, tools, and governance mechanisms to ensure our business grows efficiently and scales the right way. During Q3, our team grew by 155 FTEs compared to the third quarter of 2022 or by 22% year-over-year to 867 employees. Hiring was evenly allocated across the company as we have intensified ongoing efforts to strengthen support areas and further upgrade internal processes and tools while maintaining our prior commitment to growing our engineering and sales teams. We continue to expand relationships with trusted financial partners, adding more globally, systemically important banks, pan-regional and national market-leading banks for our processing, FX, and hedging activities. To place some data points behind this, and as is included in our quarterly presentation, 84% of all our foreign exchange transactions during the quarter were carried out via GSIBs and pan-regional or national banks, 7% via authorized broker-dealers, 6% via our payment processing partners, 3% via authorized net settlement to fund flows and 0.3% through alternative assets. Before I turn things back over to Maria, I'd like to share some additional news regarding key leadership changes within the company. Firstly, our Chief Financial Officer, Diego Cabrera Canay, has decided to step down from his position to pursue new opportunities. Diego has played a significant role in our financial success during his period at DLocal. He has agreed to stay on through Q1 of next year to help us ensure a smooth transition. As one executive leaves, we're also strengthening our team. Daiana Beitler will be joining us as Senior Vice President of Strategic Partnerships and Government Relations. Daiana comes to us after eight years at Microsoft and the Bill & Melinda Gates Foundation. We've also appointed Ricardo Breakwell as our Chief Accounting Officer. Ricardo joined the team after 12 years at Cielo, Brazil's largest publicly listed merchant acquirer, leading their Accounting, Treasury & Control operations. I want to welcome both Daiana and Ricardo and wish Diego the best in his future endeavors. Let me now turn the call over to Maria to dive deeper into our business performance during the past quarter.

Thank you, Pedro. Hi, everyone. During Q3, we continued to see strong growth across all verticals. We highlighted triple-digit growth year-on-year in our commerce platform, becoming our largest vertical since last quarter, as we continue to see strong traction through our platform solution for marketplaces, particularly in Brazil and Mexico. This growth was followed by ride-hailing, up by 81%; streaming, up by 59%; and SaaS, up by 54% year-on-year. This quarter, we observed lower growth in the financial services vertical, increasing 23% year-on-year, driven by customer churn at two of our financial services merchants. In Q4, we anticipate sustained growth in the commerce vertical, driven by the festive season. In terms of product, during Q3 2023, pay-ins increased by 68% year-on-year. Compared to Q2 of 2023, most of the growth came from pay-ins, which increased 8% quarter-on-quarter. Our pay-out volume remained stable quarter-on-quarter as we saw lower growth from our financial services vertical. Year-on-year growth was a very solid 73%. In terms of service mix, our cross-border and local-to-local volumes showed strong growth year-on-year, with the latter doubling year-on-year. Sequentially, we continue to see higher growth with our local-to-local volume, increasing by 10% quarter-on-quarter, while cross-border volume increased 2%. As a consequence, the share of local-to-local increased, reaching 51% in Q3 2023. In terms of geography, in Latin America, which is our largest region, we continue to experience sustained strong revenue momentum in Brazil and Mexico as we continue to grow with our existing customers and gain share of wallet. Growth in both countries has been driven mostly by merchants from commerce, on-demand delivery, streaming, and travel verticals. We saw lower revenues in Chile, mainly driven by the slowdown in the financial services vertical as explained earlier. In Argentina, we saw higher revenue driven by the widening spread between the official and the parallel exchange rate, while gross profits remained fairly flat, despite the devaluation in the quarter. We continue to see strong growth in other countries in Latin America, including the Dominican Republic, Colombia, and Guatemala. Our business in Africa and Asia continues to perform very well. In Q3, revenues in Africa and Asia increased 14% year-on-year despite being negatively affected by the devaluation of the Naira. Excluding Nigeria, this region grew 79% year-on-year, mainly driven by Egypt, Kenya, Vietnam, South Africa, Philippines, and Saudi Arabia. In Q3 2023, Nigeria revenues decreased by 39% year-on-year and 59% quarter-on-quarter. Continued strong growth of our diverse merchant base across multiple emerging markets translates into solid NRR, which was 141% in Q3 2023. We have built strong merchant relationships, and we have a tremendous opportunity to continue capturing more volume as our wallet share with our largest merchants is still low double digits. Diego will now review the financial highlights.

Thank you, Maria, and hello, everyone. As Pedro mentioned, I have decided to step down as Chief Financial Officer of DLocal to pursue new challenges. This is a personal decision that I have been discussing with the Board, and I believe now is the right time. It has been an honor to serve as the company's CFO for the past three years, working with such talented individuals, and I am very thankful for the trust and support of the Board and the senior management of DLocal. During the forthcoming four months, I will remain fully engaged and committed to facilitating a smooth handover process. I am confident in the company's prospects and firmly believe that under the continued guidance of the Board leadership, DLocal will persist in its trajectory of growth and success. With that, let's get into the quarterly results. Revenues reached a record high of $164 million in Q3 2023, growing 47% year-over-year, while quarterly growth remained positive at 2% quarter-over-quarter, even after a particularly strong Q2. We remain focused on growing absolute gross profit dollars. Our gross profits reached $75 million in Q3, up 38% year-over-year and 5% quarter-over-quarter. Gross profit margin increased from 44% in Q2 to 45% in Q3, positively impacted by a higher share from Africa and Asia, driven by countries with higher-than-average gross margin and lower expatriation costs in Nigeria. Net take rate remains stable at 1.6%, showing our pricing power continues to hold steady despite continued TPV growth. Compared to Q2, we saw a positive contribution from the higher share of pay-ins and from certain countries in Africa and Asia with higher-than-average net take rate. This was offset by the higher share of local-to-local volume. Profitable growth remains a top priority. During the quarter, we were able to grow our adjusted EBITDA to $56 million, up 34% year-over-year and 7% quarter-over-quarter. Adjusted EBITDA margin increased by two percentage points quarter-over-quarter to 34% in Q3. Our adjusted EBITDA over gross profit increased to 75% quarter-over-quarter. Net income totaled $40 million during the quarter, growing by 25% year-over-year. Sequentially, it decreased by 10% quarter-over-quarter. As detailed in the accompanying presentation, quarterly net income was negatively affected by the impact of Argentine devaluation on intercompany loans denominated in U.S. dollars, the inflation adjustment under IFRS and stock-based compensation. This was partially offset by gains from hedge bonds acquired to protect from that devaluation. We also observe an increase in our effective income tax rate from 16% in Q2 to 18% in Q3. As a result of the country mix, with higher local-to-local share of pretax income and the non-deductibility of IFRS inflation adjustment. Moving to cash flow. During the quarter, we observed a strong cash flow generation of our own funds, mainly driven by our net income and also by the recovery of $20 million of the restricted cash we held as a warranty for standby letters of credits, decreasing the amount of other assets to $28 million in Q3. We use part of our own funds to acquire an additional $50 million in Argentine dollar-linked treasury bonds as the final part of our investment plan for Argentina. Merchant funds decreased quarter-over-quarter, mainly driven by a decrease in net trade payables, particularly due to a reduction in the settlement periods to certain merchants. As Pedro mentioned earlier, our net income to free cash flow conversion continued to be above 100%, with $45 million of free cash flow generated during the quarter. We believe that our strong cash position remains a competitive advantage as it allows us to continue investing in the business. Pedro, the floor is yours.

Thanks, Diego. Everyone here at DLocal is proud of the strong set of results we've delivered year-to-date. We are reaffirming our outlook for fiscal year 2023 and expect to end the year in the upper range of the revenue guidance, between $620 million and $640 million and in the mid-range of the adjusted EBITDA guidance of $200 million to $220 million. We continue to be incredibly constructive about the growth potential that the company has. There's plenty more growth to come and opportunities to unlock across emerging markets. We have a massive long-term opportunity ahead of us, and we will continue to execute on it. Let me remind everyone, DLocal is only getting started. One last thought; I want to send a big thank you to our entire global team for the work done, to our customers and our investors for their continued support and trust in us. And with that, let me hand things back over to the operator to open up for your Q&A, which Seba and Sergio will also be joining us to take. Thank you.

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

Hi, everyone. Good morning. And congrats on the numbers and Diego best of luck in your future endeavors. I wanted to ask about the devaluation of the currency in Nigeria and the impact you had on revenues. I just want to make sure it's clear how the FX impact is. I was under the impression that the vast majority of your cross-border transactions, you were charging commissions based on the dollars appropriated or moved back to your merchant's home base. And hence, as they continue to charge the same amount in dollars to their customers, their commissions will be affected by the devaluation, which seems to be the case. So you're not really exposed to any FX movements on the cross-border transactions. And I believe that's kind of like the way you portray the business, especially when people ask about Argentina. And then in the local-to-local portion, I was of the understanding that you had hedges in place to make sure that your revenues were protected. And so I wanted to understand what exactly happened in Nigeria? Why are your revenues down 60%? And I guess it's an important question also because we're probably a few days, maybe a week from getting a big devalue in Argentina here with the changing government. And I also wanted to get your view on how that's going to play out or what the potential impact to your business is? Thank you.

Hi, Jorge. This is Diego. Regarding Nigeria, the impact of the currency conversion rates was largely neutral on our gross profit dollars. The only effect was on our gross revenues; as the gap between the parallel and official exchange rates narrowed, our expatriation costs for transferring dollars out of Nigeria to our operating companies decreased, resulting in lower revenues reported to our merchants. However, on a gross profit level, this remained neutral. For perspective, if the FX difference remained the same as in Q2, we would see about $10 million more in gross revenues compared to that quarter. Yet, this is strictly in gross revenues and does not affect gross profit. Our local-to-local business in Nigeria is quite small, so it didn’t have a significant impact. In contrast, Argentina has a different economic situation. We have all our business hedged there and primarily operate at the official rate, meaning we don’t experience the same disparities between official and unofficial rates as we do in Nigeria.

Thank you for your question. Our business in Nigeria is performing better than last quarter. At the gross profit level, it remains neutral. We've seen a smaller amount of revenue being booked, which is matched by a smaller amount of costs. We track gross profit because it shows how much profit we earn from merchant transactions. The declining revenue does not mean we are taking a loss, as we are fully hedged. The gap between market rates and official rates has shrunk, resulting in smaller revenues and costs, but the gross profit remains neutral to positive. The business environment in Nigeria is healthier and easier for our merchants to navigate now. We perform better when there is macroeconomic certainty, and we view the steps taken in Nigeria positively. Merchants have welcomed the recent changes, making it easier to understand market operations. The same holds true for Argentina, where we are optimistic about future developments. This is not a political statement, but we believe having clear rules will enable our merchants to invest more. Our business continues to be tied to the growth of our global merchants, and more clarity typically benefits us.

Thank you for that. And if I may just add a quick follow-up. Could you remind us on the financial services vertical, what are the main companies, if you can, that you're operating for?

Sure, Jorge. The companies we can mention are typically public firms listed in the U.S., such as Worldpay, Payoneer, and Flywire. They mainly use our services to complete transactions in emerging markets where they are active. These customers help us reach merchant segments that we aim to target. For example, Flywire works with universities and hospitals, which are the types of merchants we usually pursue, and that’s why we value those partnerships. We collaborate with airports that sell to global banks. In the past, we faced technical challenges, and those aren't the types of customers we want to engage with directly, which is the reason for these partnerships.

Great. Thank you very much.

Thank you. One moment for our next question, please. Our next question comes from the line of Tito Labarta with Goldman Sachs. Your line is now open.

Hi, good morning. Thank you all for the call and taking my question. A couple of questions actually, if I can. One, I guess, a little bit of a follow-up to Jorge, but more, I guess, on Argentina. Just I think, helpful just to go through the mechanics a little bit with devaluation in Argentina. I mean, revenues have actually come up this year a bit in Argentina. How should the devaluation impact revenues, specifically in Argentina? And I think there was also some impact related to inflation accounting. How should we take that into account going forward? And then my second question, I think, Pedro, we met a few months ago. You mentioned you were kind of reviewing the business to see if there were any additional investments that are needed. Noticed you kept your midterm guidance unchanged, although there were some management changes with Diego stepping down and some other people that were hired. Just any update on sort of that review? Could there be future changes to the guidance? Do you think everything is in place that you need to continue to grow and scale the business from here? Thank you.

Sure, Tito. So, let me start with Argentina, given that it's topical. First of all, as we've stated throughout, we've always taken a long-term view on Argentina, and this is a market that we've remained committed to throughout. We actually think that the removal of uncertainty after the election and the potential for a more stable economy bodes well for our merchants in Argentina going forward. If you look at some of the slowdown in the business, although it has continued to grow through the tough macro and the devaluations, potentially gets reversed if we see that economy rebounding. So when we look mid-term, we see more positives than negatives emerging out of Argentina. From a devaluation perspective, really, the impact will depend on how fast our merchants reprice. So you could see a growth in TPV to adjust to a new level of peso to dollar. We remind you that most of our merchants are global merchants that have an underlying dollarized cost to what they offer in Argentina. And equally important, as Diego mentioned earlier, from a financial perspective, our exposure to the Argentine peso is fully hedged. So, all in all, when we look at Argentina going forward, despite shorter-term dislocations that might occur, if there is a strong devaluation, the more important trends are mid-term. We think it bodes well for that market. Our merchants have the ability to reprice over time, and our Argentine peso exposure is almost entirely hedged. On guidance and cost; as mentioned in the prepared remarks, we continue to invest behind strengthening the foundational pieces of our business. There's a lot of work that's going on now that was already going on, and there's also additional work of scoping where else we can strengthen. We mentioned our increased partnerships with globally significant banks, with national banks. I think the more appropriate time to finally conclude on whether we need to change guidance or not is not now. For now, we've reiterated our midterm guidance and our underlying belief is that with the incremental gross profit that can flow through the P&L from our continuous growth of the business and the way we're seeing things trend towards the end of the year, will suffice to reinvest back into the business where necessary. But once we reiterate annual guidance for next year, we'll have even more detail on that front.

That's great. That's helpful information. I have a quick follow-up about Argentina. I want to clarify the impact of the inflation accounting. Is that related to the operations of the business, or is it more connected to the bond you purchased? How will that affect the results moving forward?

Hello, Tito. The inflation adjustment is necessary under IFRS for countries experiencing hyperinflation, like Argentina. It is a non-cash adjustment. Essentially, you need to restate revenues, costs, and everything based on current prices, and then adjust them according to the new exchange rates that change from time to time. In this particular quarter, as you may recall, the valuation of the official exchange rate right after the primary elections was a significant factor in the loss reflected in the P&L. The continuation of this situation will depend on price changes and valuations in Argentina. It's important to emphasize that this is a non-cash adjustment.

And picking up on that, let me just complement more on the actual financial exposure and instruments. And you will see significant disclosure in the accompanying presentation. What happened in the third quarter is the following. The U.S. dollars that we invested in Argentina generate an inter-company loan that sits on the Argentine balance sheet in U.S. dollars. That actual position is fully hedged. So, at maturity, there is a derivative instrument that entirely protects that investment. In the interim period before maturity, the bond, which has the derivative actually trades at mark-to-market. And during the second quarter, there was some dislocation between the mark-to-market value of the bond and the actual derivative. That is the loss that you will see and the gain that you will see disclosed in the package. So the U.S. dollar liability generates an exchange impact on the P&L and the value of the bond almost entirely offsets that loss. But it wasn't a perfect hedge from an accounting perspective because it's mark-to-market. What's really important to say is that at maturity, the bond is a perfect hedge to the investments made in Argentina. And the outcome of the election actually generates greater certainty that those hedges and those bonds will be honored.

Okay. Great. Thanks Pedro and Diego. And best of luck, Diego, on your new role on your future endeavors.

Thank you. One moment for our next question, please. Next Question comes from the line of Jason Kupferberg with Bank of America. Your line is now open.

Sorry about that. I wanted to ask about Brazil, tripled-digit growth there this quarter. It's really accelerated significantly over the past couple of quarters. So wanted to see how you feel about the potential sustainability of these elevated growth rates. I know you got the new payment license back in July, and it sounds like the platform business is doing well there. But just wanted to get a sense of your visibility of these very strong trends in Brazil revenue growth perhaps continuing here over the next two or three quarters?

Yes. So, we see extremely strong performance in our two largest markets, Brazil and Mexico, which is a great indication of the strength of our business and our merchant satisfaction with what we're offering. We're seeing that strength, as you can see, in the vertical breakout across most verticals. But interestingly enough, it's most marked in our largest vertical, which is commerce. A significant portion of that growth is a consequence of our platform product that we launched last year and is really solving complex payment flows for very large global marketplaces across those markets. And so everything seems to point to the direction of high levels of merchant satisfaction that we're solving complex problems for them across these markets. And therefore, we are still positive about those markets despite the fact that they are our largest markets and are quite stable markets.

Right, okay. I have a two-part question as a follow-up. The first part is that revenue from new merchants was down a bit quarter-over-quarter, so I'm curious how that compared to your expectations. Also, Pedro, could you comment a bit more about your hiring for internal processes? I know you're bringing on a new Chief Accounting Officer. What have you observed in back office operations as you've delved into local efforts over the past few months?

Great. If you look at the concentration from larger merchants, which is a metric we disclose, you'll see that growth in the past quarter was primarily driven by the expansion within merchants we had previously acquired. That's how this quarter unfolded. It's positive because it demonstrates our ability to attract new merchants and subsequently increase our share of their spending and help them grow their businesses effectively. During this quarter, new merchants contributed somewhat less to growth but are still seeing an increase. The pipeline appears very solid when viewed in more constant terms and in the more recent period. Therefore, I wouldn’t read too much into that as a negative indicator. Again, the pipeline remains very strong.

Yes. And if I may complement on that point, on the pipeline and the new sales. So there's a natural lag in terms of that metric. So, one thing is when we onboard those customers, then there's a relative delay on how fast those customers ramp up, particularly during this quarter, we've onboarded the biggest company in the world, and we are yet to see those results. So, we are very optimistic about our ability to continue to land new customers and them kicking within NRR and net revenue retention, which is again our key metric.

And then just on the back office. Pedro, thank you.

Again, I want to stress this and be very clear. In the ordinary course of business, this is a company that's growing top line at nearly 70% across 40 emerging markets. It's expected that we have to continue to invest behind all of our back-office operations to ensure that they are as robust as our merchants require. Remember that a big part of our value proposition is that we are dealing with a payments layer but also a compliance and regulatory layer on behalf of our merchants. And so, that should always be an area of focus and investment for us, but just ordinary course of business. Also remind you that when you look at our value chain and hence, the disclosures on who we operate with in terms of financial institutions, we move money around primarily through global banks, national and regional banks. And that also generates, I think, a second layer of solidity to the operations that perhaps in the past we hadn't been as clear about.

Thank you for the comments.

Thank you. One moment for our next question, please. Our next question comes from the line of Jamie Friedman with Susquehanna International Group. Your line is now open.

Good morning, everyone. Thank you for your questions. Pedro, I'd like to ask you about the emphasis you've placed on the fabric of global banks in your remarks. This is a perspective I haven't encountered much from DLocal before, and I'm curious about the significance you see in highlighting this aspect. And Seba, regarding your previous answer, you mentioned boarding the world's largest. Is that related to the logos you referenced in Q2? While I understand you may not disclose specifics, could you share what vertical it pertains to, as you alluded to earlier? Thank you both.

Jamie, so thanks for the question on banks. And I think that's simply one of the feedback we got from investors is that perhaps we hadn't educated the Street enough on how it is that we actually carry out repatriation of money and there was a perceived notion of potentially more usage of alternative assets or smaller broker-dealers, and that's simply not the case. The vast majority of our fund flows, Forex derivatives are carried out either through globally systemically important banks or national market-leading banks or regional market-leading banks. And I think it's just an idea to give increased disclosure on not just what we do, but how it is that we do it.

Thank you, Pedro. Jamie, on the question on the commercial front, we cannot disclose the name, but we've onboarded a multi-vertical global leader, which is one of the Top 5 biggest companies in the world. When you look at our merchant base, we've been able to disclose some of those products. We continue to work with others to be able to name them during this call. But we've also been very open about the fact that we want to onboard the Top 500 companies on the Internet and make sure that they are customers of ours. In investor discussions, I've been very open about the fact that there are some of those that we're missing, and we knew who they were, and we wanted to make sure that they were our customers. Today, we are proud to say that one more logo has become a customer of ours.

Got it. Thank you, both. I’ll jump back in queue.

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

Hi, thank you everyone, and congratulations on the results. My question is regarding the tax rate. We've seen a quarter-over-quarter increase in the effective tax rate. Could you elaborate on this? I noticed the explanation in the earnings release, but I'd like to understand more about why the effective tax rate is rising. Also, should we anticipate this trend to persist? Is this included in the guidance you provided, or although it may not affect the bottom line, should we expect the rate to continue increasing in 2024 as well? What rate should we expect in the coming years? Additionally, the concentration among your top merchants is rising, which may put pressure on the take rate. Is there a strategy in place to diversify more? Is that an objective you are targeting to decrease the concentration within the top 10 merchants? Thank you.

Hello Neha. On taxes, the income tax rate that we have is the result of the country and product mix that we have. And as you know, we don't solve for that. Particularly, we have been seeing in the past few quarters, a sequential increase in our local-to-local business, and that is basically taxed on local tax rates, which are higher than our average. So that is the main driver for that. Also, we discussed before about the inflation adjustment that has a loss that is non-deductible for tax basis, and that also affects the tax rate. We don't guide to a particular tax rate. Again, we say that said, we'll continue the same line that is now, but it will continue to change based on the different trends that we have in our country mix and product mix, service mix.

Hi, Neha, on concentration, we don't manage our business to that metric. I think the increase in concentration you've seen is a testament to how much share of wallet we've continued to gain from some of the largest global retailers and that's good news. Having said that, if we think over longer periods of time, Seba was mentioning, we aspire to have the 500 largest digital companies in the world going through the platform. And so the longer-term tendency, yes, we believe we will diversify and add new logos, and that over longer periods of time we should see diminishing dependence on any one or ten single merchants. Also, remember that that Top 10 is not always the same Top 10 as you had in the prior quarter. This quarter, three of those are actually new Top 10. So there is increased diversification going on even when the concentration in the 10 in any given quarter might have gone up, driven by the stellar performance in Mexico and Brazil of our platforms product.

Thank you. One moment for our next question, please. Our next question comes from the line of John Coffey with Barclays. Your line is now open.

Great. thank you very much for taking my question. I had just had two short ones. I saw that the revenues in Chile look like they went down about 9%. And it seems like Chile had always been a fairly good grower. I wasn't sure if there's any one particular driver there. So just like to hear a bit more about Chile. The second question is, it looks like sales and marketing, those expenses stepped up in Q3. Perhaps that ties to Pedro's earlier comments that you're investing in your sales channel. But how should we expect your thoughts about investing in the sales and marketing going forward through the rest of this year and onward into next year?

Let me discuss Chile. Diego will handle the expense question. The situation in Chile is primarily influenced by the financial services sector. Seba previously mentioned that in many cases, we serve as a distribution channel for certain types of merchants and financial institutions that we do not serve directly. One of our financial services partners in Chile lost a client, which accounts for the decline we're seeing. However, we have gained direct access to that client, and we are still in the process of ramping up our efforts. This could potentially lead to positive developments in the longer term. In the short term, the decline in Chile is due to the loss of a client from one of our financial services partners.

Regarding sales and marketing expenses, if you compare to Q2, you will see an increase from $3 million to $4.4 million. Actually, the number that was a little bit affected in Q2, which was affected by a recovery of stock-based compensation. If you look at the longer sequence, like the previous quarters, you see, for instance, that Q1 was 4.9%. Q4 of last year was roughly $4 million. So the trend continues to be the same. The outlier was particularly Q2 that had a recovery of basically of stock-based compensation for our features.

All right. Thank you.

Thank you. One moment for our next question, please. Our next question comes from the line of Matt Coad with Autonomous Research. Your line is now open.

Hi, guys. Good morning. And thanks for taking questions here. Just wanted to ask one more on Argentina. And I know it's kind of uncertain, a little bit of a black box right now, but wanted to ask about dollarization and the impact on your business if that ultimately occurs.

Hi, this is Sergio. Thank you for your question. There is a lot of uncertainty regarding that. The elected President mentioned plans to dollarize, but it seems less likely recently. Therefore, it will take some time. If it does happen, we believe that as certainty increases in Argentina, more customers will invest in the country. Given the size of its economy and our past experiences, Argentina should ideally rank among our Top 3 countries in terms of volume. Thus, as certainty grows, we should become more optimistic and it should have a positive impact on our business there.

Just to complement on that, I think while it's very early to say what's going to happen in Argentina, we welcome normalization. But at the same time, Argentina is still a country that is full of friction. even in the context of full dollarization. Many of our merchants won't operate locally. There's still going to be cross-border settlement fees. So, we expect our business to thrive even in that scenario.

That's super helpful, guys. And then just one quick follow-up that I had. Just on the financial services vertical, you guys have mentioned churn a couple of times. So I just wanted to make sure that we understand that properly. Is it churn that your financial services partners are experiencing or is it churn in terms of you lost some financial services partners? And then I just wanted to make sure, did we experience that full impact of any churn in 3Q or is there some impact to come in 4Q as well?

Thank you for that question. It's important to clarify that we have not experienced any churn in our merchant base. All of our financial service partners remain our customers. While one or two of them have lost clients, which has affected us, we have established a direct integration with one key customer, although it has not ramped up yet. We have absorbed the impact, but the benefits have not been realized yet.

Awesome. Thanks, guys.

Thank you. One moment for our next question, please. Our next question comes from the line of Guilherme Grespan with JPMorgan. Your line is now open.

Hi, good morning, everyone. Thank you for the presentation. Just one question on G&A on our side. We saw a meaningful drop quarter-over-quarter 17%. Just want to make sure there is nothing here less recurring this quarter? And how should we think about G&A going forward? And if I may, just a clarification, is still on Argentina, just want to make sure I got the message. If there is a big depreciation of the FX, you guys are saying that from an accounting standpoint, we should not expect meaningful impact to earnings. Is that right? Thank you.

Let me start with Argentina quickly, and we're not trying to avoid the answer. The reality is that there are multiple factors that will boil into whether we have an accounting impact or not from Argentina. So let me try to recap again. We have hedges on our Argentine positions that at maturity will fully cover us financially from any devaluation. Prior to maturity, those instruments are marked to-market. And if for some reason the performance of the instruments mark-to-market doesn't entirely follow the underlying hedge, which is what happened in the third quarter, and you can look at the disclosures for breakouts, then you could have an accounting impact. Furthermore, as Diego walked you through, IFRS inflation adjustments could also generate accounting impacts from a devaluation. The third portion of this is how fast our merchants reprice under a devalued scenario to protect the dollar value of the digital services that they are offering. So, all in all, financially hedged, and then what the impact of the devaluation is shorter-term will depend on those variables, and it's not that easy to predict beforehand.

Okay, super clear. And on the G&A?

So, overall, we see G&A expenses stable quarter-over-quarter. I don't know if you refer to a specific line item, maybe we can take it offline, but overall G&A, we see very stable quarter-over-quarter.

Guilherme, to add to Pedro's earlier comments, I understand that the situation in Argentina is challenging, especially with the recent elections. However, Argentina accounts for less than 15% of our revenue as we operate in 40 markets. We believe that the most difficult times in Argentina are behind us, and there is potential for growth there. Additionally, the strength of our business model allows us to thrive in markets like Brazil, Mexico, Egypt, Vietnam, Indonesia, Saudi Arabia, and Kenya. This diverse presence provides us with natural hedges and various growth opportunities. Some markets may perform better than others in specific quarters, but overall, we have designed our business to withstand crises in any particular region. We've successfully navigated many challenges across different locations, and our ability to operate and grow at scale remains strong. It's important to keep this perspective in mind.

Okay. Thank you.

Thank you One moment for our next question, please. Our next question comes from the line of Kaio Da Prato with UBS. Your line is now open.

Hello, thank you for taking the question. Two quick on my side, please. First, in your presentation you mentioned that e-commerce has become your main vertical and Pedro also did mention about the launch of the platform Solutions last year that is supporting this level of growth. So just would like to better understand here what explains this growth after the launch of this feature. If there is any competitive advantage in this platform solution, what are you doing differently from your competitors in the business? And also, if you can share after the launch, how was the evolution of the share of wallets of your main e-commerce peers? And then my second one is in terms of your cash position. This quarter, we saw a reduction in your cash due to lower settlement period, again, for certain merchants and you also mentioned the repatriation of outstanding loans. So just would like to know if you could share a little bit more details on both reasons behind that, especially on the reduction of the settlement period for certain merchants. Why did that happen this quarter? If it was a one-off or if it did change somewhat the profile of your working capital going forward?

Let me take the commerce one. So, yes, the platform solution, which is not only for commerce, by the way, right; but was part of the story behind the stellar growth in the commerce category. It's not the only explanation. We have many commerce merchants that grew very well in the quarter. I would say that there are competitive advantages to our solution in that our solution has been tailor-built for the markets where we are offering it. And that has been one of the reasons why we have seen very large global marketplaces, either increase share of wallet through our platform solution or in some cases, fully migrate away from competitor solutions onto our solutions, driven by a very strong adaptation of the platform to their needs and to the local realities, both in Brazil and Mexico. Specific numbers on share of wallet, we don't know. But like I said, we do know that in one instance, there was churn away from a competitor, and in others, given the growth in volume, we are receiving an overwhelming portion of their platform volumes in those markets.

Regarding cash flow and settlement periods. So, during the quarter, we had some negotiations of terms with a few merchants, large merchants, particularly in Brazil. They had higher than average settlement periods and much higher than our collection period. So part of their transition of the terms was a reduction of those days that we pay. We were paying roughly 30 days. Now we're paying approximately 15 days to those merchants. That has a one-off effect that you see in the cash flow of around $60 million. It doesn't continue going forward. And it's important to point a couple of things. One, we keep our negative working capital for merchant funds both on a total level and also on a merchant-by-merchant level. And we have an excellent quarter in terms of generation of our own cash. If you see the cash flow, we basically generated $45 million of free cash flow. And if you add to that, the $20 million recovery of the restricted cash we had with certain banks, that $65 million generation of our own cash. Part of that, as you also see there, was invested around $50 million in the bonds that we have in Argentina.

Thank you. One moment for our next question. Our next question comes from the line of Ashwin Shirvaikar with Citi. Your line is now open.

Thanks. I had a question, and I guess, my first question is on the TPV evolution charts that you provided on Page 12. As I sort of look at the quarter-over-quarter growth, when we look at the relative growth of cross-border TPV evolution versus local-to-local, are there specific things you're doing to promote the local-to-local, if you could talk about that? Is that a trend that we should see continue? And then the flat growth on payouts versus the pretty good sequential growth on pay-ins, what is the underlying factor that's driving that?

We are primarily focused on merchants that operate in three or more global geographies and do not pursue purely local merchants. The growth in local-to-local transactions is a result of our merchants valuing our solution and technology enough to use us for local processing as well, which is significant given the questions about our competitiveness as merchants and markets matured. The data shows that we are consistently chosen for both local-to-local and cross-border transactions. However, we are not actively targeting local merchants; our emphasis remains on multi-geography merchants that engage in both cross-border and local transactions, reflecting the strength of our solution. Regarding payouts, we see a substantial opportunity to assist global remittance companies with last-mile access in the markets we serve. Our focus in that area is increasing, and we observe strong year-over-year growth in that business. On a quarterly basis, this was somewhat affected by churn in financial services, where a partner lost a customer. Nevertheless, we still see significant strength and opportunity, and a strong payout business in areas where net settlement is feasible also enhances our margins on the cross-border side of our business.

Got it. And then one question for Pedro. As you've observed the business and its development over the last three months, are there design principles that you implement that could address a couple of points? Specifically, I notice that TPV dollar growth often outpaces revenue dollar growth, gross profit dollar growth, and adjusted EBITDA dollar growth, which is the opposite of what one might typically expect in a payments company with operating leverage. Additionally, growth frequently seems to be driven by only one or two countries at a time, like Nigeria or Argentina, and the company faces idiosyncratic factors in those locations. Is there a way to mitigate these issues when considering future growth? I know this is a broad question, but that's my inquiry.

Sure. So I think in terms of the financial model, which you allude to in the first question, in large part, this is a consequence of a growing relationship with large merchants. So there is downward pressure on take rates. If you look at a year-on-year evolution, I think if you look at this quarterly, you see that pricing power has actually remained fairly strong Q-on-Q, which is a good sign. But I don't necessarily think that over the shorter period, we will see a dramatic reversion in the fact that our TPV is growing faster than our gross profit. From a margin perspective, if you look at our adjusted EBITDA to gross profit, we have extremely high margins, and I don't think we are in a phase over the next multiple quarters where we should be focusing on significant margin expansion. I think that will come over the long run and the mid-term as we grow out our overall size and scale. But right now, we need to make sure we continue to invest in a very disciplined fashion within the construct of our midterm guidance, but making sure that we continue to invest behind the opportunity we have, which is huge. So, we do not have a design principle for this period of delivering significant margin growth or GP growth above TPV. I think that's not the phase we're in. We're in a phase where we have an extremely attractive margin profile. We generate an extremely healthy net income to cash conversion and what we need to focus is on sustaining growth, and then the operational leverage will kick in more aggressively over the mid-term once we have a larger and more diversified business.

Very, very helpful. Yes. Thank you.

Thank you. Thank you for your questions. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.