Good day, and thank you for standing by. Welcome to the DLocal First Quarter 2024 Results Conference Call. Please be advised today's conference may be recorded. I would now like to hand the conference over to your speakers today. Please go ahead.

Good afternoon, everyone, and thank you for joining the first quarter 2024 earnings call today. If you've not seen the earnings release, a copy is posted in the Financial section of the Investor Relations website. On the call today, you have Pedro Arnt, Chief Executive Officer; Mark Ortiz, 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 available shortly after the event concludes. 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 in DLocal's Investor Relations website. Now I will turn the conference over to DLocal.

Thanks, everyone, for joining us today. 2024 has gotten off to a contrasting start. The year started with us once again posting record quarterly TPV of $5.3 billion, a growth of nearly 50% year-on-year. This TPV growth was solid across multiple verticals with e-commerce nearly tripling in size, remittances practically doubling and ride-hailing, Software-as-a-Service, each growing north of 50% year-on-year. This is all a testament to the value of our solution that we offer merchants in varying verticals and of our increasingly strong competitive position and sustained share of wallet gains. We believe that nothing will set us up better for long-term success than this kind of sustained TPV growth, compounding over multiple years. As we move down the P&L, the quarter is less of a clear-cut success than our TPV growth indicates. We delivered solid revenue growth north of 30% year-on-year, while gross profit growth was flat, leading to a declining adjusted EBITDA. Mixed results during the first quarter are explained by a few relevant drivers I want to make very clear. First, we saw one of our largest merchants achieve a new level in our tiered pricing scheme and also renegotiate fees as their contract came up for renewal. Given the still high concentration on Top 10 merchants that the business has, such a renegotiation directly impacts revenue growth. Second, product mix shifted towards lower monetizing payout volumes as core pay-in verticals such as e-commerce and advertising are typically seasonally weaker in Q1. Additionally, a few important new launches that were scheduled for the first quarter were delayed by our merchants, something that we don't control and slowed down anticipated volume ramp-ups that should have offset those declines in take rates caused by the above-mentioned events. Finally, we decided to sustain our planned investment increases that support long-term growth, even at the current gross profit level. We have confidence that gross profit will eventually rebound and see these op-ex investments in capability building, internal mechanisms and technology as strategic for our long-term success. Trend-wise, performance got better as the quarter progressed, with a weak first two months of the year totaling $37 million in gross profit, while March GP came in at $25 million, which is above Q4 levels. Maria and Mark will take you through greater detail on the Q1 details in just a second, but let me first spend some time providing an update on our execution against our priorities. Our cross-border businesses returned to 9% quarter-on-quarter growth and hit a new record of $2.4 billion in TPV during Q1. This, after witnessing declining growth in the fourth quarter, driven by, among other things, the temporary slowdown in cross-border transactions in Argentina, we walked you through last quarter. Cross-border remains the core of our value proposition and seeing a return to sequential growth is a very positive indicator. The local-to-local processing business, despite being flat Q-on-Q, again driven by seasonal effects, delivered TPV growth at nearly 80% year-on-year. The continued success of our local processing dispels one of the structural concerns that existed about our business. It confirms that our world-class orchestrating offering, where our AI-powered smart routing is able to optimize traffic routes to deliver higher conversion rates, the robust fallback and redundancy that it offers, the efficient fraud prevention engines we incorporate, and best-in-class KYC and compliance layer, as well as merchant-specific features offer our global merchants a superior product and service offering to what they can receive through the direct integrations they could otherwise pursue to local acquirers. The investments we've made in adapting our infrastructure to meet the needs of global remittance partners and marketplace merchants is also paying off handsomely. Our payout business grew by 17% Q-on-Q and over 50% year-on-year. The quarterly pickup is particularly interesting and driven by a strong Q1 ramp-up in remittance corridors that we can offer our partners. This growing number of corridors not only represents an interesting vertical in itself for us but also generates opportunities for cross-border growth in pay-ins as it improves our liquidity and pricing that we can offer our merchants. In addition to continuing to evolve our product offering across our businesses, cross-border, local, pay-ins, and payouts, during Q1, we also maintained our commitment to making efficient and disciplined investments in key capabilities, including growing our license portfolio, deepening our relationships with global banking partners and ramping up our operations and back-office effectiveness. During the quarter, we were granted licenses in strategic markets such as Egypt and new payment operator registrations in Argentina, Ecuador, the Dominican Republic, and Kenya. We continue to believe our growing portfolio of regulatory approvals will constitute an increasing competitive advantage as our global merchants seek to navigate the complex regulatory environments in emerging markets. With that, let me hand it over to Maria to take you through a more detailed overview of these first quarter results.

Thank you, Pedro. Good afternoon, everyone. As Pedro just mentioned, during this first quarter, we delivered strong TPV growth of 49% year-over-year and 4% quarter-over-quarter, reaching $5.3 billion. Record TPV was achieved despite Q1 being seasonally weak for our largest vertical, e-commerce, and strong devaluations, most notably in Argentina. Focusing on revenue, during the quarter, we experienced 34% year-over-year growth, reaching $184 million. This growth was driven by continued strong performance in our most competitive markets; Brazil with revenues up 89% year-over-year and Mexico up 50% year-over-year. Alongside the growth in Brazil and Mexico, we saw a 20% year-over-year increase in Other LatAm, including growth in Colombia, Costa Rica, Dominican Republic, and Ecuador, coming from streaming, SaaS, on-demand delivery, and ride-hailing verticals. Revenue growth was negatively impacted by Argentina, down 31% year-over-year. The annual Argentina comparison is a tough one. First of all, the official rate has devalued more than 70%. Second, FX spreads have tightened, generating less FX revenue in our mix, combined with a higher proportion of local-to-local volume. Finally, Argentina also saw a decline in TPV, given that many of our merchants have pulled back from that market, given the macro instability over the last 12 months. Chile was also a drag on our year-on-year revenue growth, down 13%, primarily due to customer churn at one of our financial service merchants. This is not that we have lost a merchant, but that one of our major financial service partners saw their volume in Chile decline significantly as they lost a key client in that market, negatively affecting our revenues. In Africa and Asia, the main contributors of revenue growth were Egypt, South Africa, Turkey, and the Philippines. Egypt growth was driven by the general growth of our business there, with TPV up 71% year-over-year, the wide spreads on FX rates between official and the market rates, and our strong liquidity position for that market, given that we had a solid combination of cross-border pay-ins and pay-out flows during the quarter. South Africa's revenue was driven by the expansion of two large e-commerce merchants into that market. One of these merchants grew volume significantly during 2023. The other one is a merchant that we onboarded at the end of 2023 and started processing volumes in South Africa in the first quarter of 2024, rapidly becoming the second largest merchant in their region. And finally, the biggest drag on year-on-year revenue growth was Nigeria, where revenues were down $20 million over the last year, mostly driven by the tightening of the spreads between market and official rates after the Naira devaluation in February 2024, generating less FX fees and a higher proportion of local-to-local volumes in Q1 2024. Now let me give you a brief overview of the key drivers of quarter-over-quarter evolution of revenues. Compared to Q4 2023, revenues decreased by 2%. This sequential decline was mostly driven by seasonality, with Q4 being a very strong quarter for our e-commerce vertical. Additionally, we saw one of our largest merchants achieve a new level in our tiered pricing scheme and also renegotiated fees as their contract came up to a renewal. As Pedro mentioned, given that our merchant concentration still remains high, such a renegotiation directly impacts revenue growth. These two factors largely explain the 14% and 4% decrease in Brazil and Mexico revenues, respectively. In addition, we saw a decrease in revenues in Chile, driven by lower volumes from some of our merchants in the e-commerce vertical, due to seasonality. Those volumes were compensated by higher volumes from financial service payout flows, albeit at a lower gross take rate compared to e-commerce volumes. The lower revenues in Brazil, Mexico, and Chile were partially offset by Argentina, with revenues up 31% quarter-over-quarter, mainly explained by higher cross-border settlements. As we indicated in the last quarter, we believe that merchants will continue to gradually grow cross-border volumes as liquidity improves. Other LatAm also helped quarter-on-quarter revenue growth, increasing by 9%, driven by a re-acceleration of growth in the ride-hailing and on-demand delivery verticals in Central America and Peru. Revenues increased 5% quarter-over-quarter in Africa and Asia. As mentioned earlier, in the year-on-year commentary, revenues in Egypt more than doubled quarter-over-quarter, driven by widening spread between the official and the market exchange rates in the first two months of the year. We also experienced solid quarter-over-quarter growth in South Africa, Indonesia, Turkey, and the Philippines, with the same dynamics playing out as those described year-over-year. Revenues in Nigeria were strongly affected by the devaluation, down 74% sequentially, offsetting a large part of the gains in the other African Asia markets. In addition to the devaluation, revenues were negatively impacted by a 35% sequential decline in TPV as our financial service vertical saw a material drop in volume after the devaluation with fewer FX trades occurring on our merchant's platforms. Now moving to gross profit. As you can see in Slides 8 and 9 from the accompanying earnings material from this quarter, we have included gross profit breakdown by region. Therefore, I would like to walk you through in some greater detail on the gross profit variation we experienced. During the quarter, we experienced 2% year-over-year growth to $63 million. In LatAm, gross profit was $49 million, decreasing 8% year-over-year. This result was significantly impacted by Argentina, with gross profit down 71% year-over-year. Given the lower FX revenue, as in the past, we benefited from the wide FX spreads. These, together with their lower share of cross-border volumes in Argentina, explains the contraction in gross profit margin from 89% a year ago to 37% in Q1 2024. In Q1 2023, Argentina corresponded to 29% of our gross profit; and in Q1 2024, 8%. Excluding Argentina, gross profit in LatAm grew 24% year-over-year, driven primarily by strong performance in our most competitive markets, with Brazil up 63% and Mexico up 44% year-over-year. Gross profit margin in Brazil contracted 7 percentage points year-over-year, driven by recent renegotiations explained by Pedro, growth of other Tier 0 merchants, and a higher share of payouts in local-to-local. Chile's gross profit contracted 18% year-over-year, driven by lower volumes of cross-border due to customer churn at one of our financial service merchants, as explained earlier. In Other LatAm, we saw gross profit slightly up year-on-year at 1%, mainly driven by Tier 0 merchant's growth. Looking to Africa and Asia regions, gross profit grew 60% year-over-year, supported by strong growth in Egypt, with gross profit up fourfold, driven by our merchants' growth in the country. Similarly to Argentina, in Egypt, we benefited from the wide spreads and our liquidity position, having developed cross-border flows of pay-in and payouts. We observed year-on-year gross profit margin contraction in Egypt due to lower liquidity at our platform, driven by more accelerated growth of pay-in cross-border compared to pay-outs cross-border. The gross profit growth in Egypt was partially offset by Nigeria performance as discussed earlier. On a quarter-over-quarter comparison, gross profit contracted by 10%. In Latin America, gross profit fell only in Brazil and Chile. This was mainly driven by, first, the previously mentioned key merchant renegotiation. Second, e-commerce seasonality driving lower volumes in this higher net take rate vertical. Third, increased payout mix. In addition, in line with the revenue decrease, we saw an 18% decrease in gross profit in Chile. These negative variations were partially compensated by Mexico, Argentina, and Other LatAm. In Mexico, although revenues dropped quarter-over-quarter, we saw gross profit growing 7%, driven by improvements in our cost structure as we gained scale and negotiation power vis-a-vis processors. In Argentina, with gross profit growing 30% in line with revenues. And in Other LatAm, with gross profit growing 16% quarter-over-quarter. In Asia and Africa, Egypt and Nigeria quarter-over-quarter variations in gross profit follow the same dynamics we observed in the year-over-year comparison. Nigeria declined by $1 million, while Egypt grew by $1 million. Although we acknowledge the quarterly gross profit results are disappointing, we do not see structural issues. On a year-over-year basis, the Q1 gross profit is of greater quality and sustainability, with the mix of Argentina FX revenues having fallen significantly. Quarter-over-quarter, we have been impacted by merchant repricing, but we believe that over time, we will offset these pricing negotiations with increased global volume from these merchants. Now let me hand over to Mark, to continue working our way down the P&L.

Hi, everyone. Thank you, Maria. I'm delighted to be here today and very excited about our future prospects after my initial month at DLocal. While we will continue to invest in our capabilities, as Pedro mentioned in his opening remarks, we are also looking for ways to be more efficient across all areas of our business. During the quarter, we have continued to further invest in building out the team, capabilities and establishing processes and systems to support our long-term growth ambitions. As a result of these investments, which we trust will pay off in the mid-term, overall operating expenses reached $36 million for the quarter. The main areas of expense increases quarter-on-quarter were tech-related expenses, including engineers, software licenses and infrastructure expenses; and salaries and wages across our operations, compliance and finance teams. As a result, operating expenses represented 57% of gross profit. For a more detailed view, please refer to Slide 16 of the accompanying earnings material. Let me also add that our global team has grown to 951 people after adding 50 net FTEs during the quarter, with most of the hires in tech, sales, and operations in Uruguay, Argentina, Brazil, and Spain. All of this resulted in an operating profit of $27 million for the quarter, down 32% year-on-year and 34% quarter-on-quarter. Similarly, adjusted EBITDA came in at $37 million, down 19% year-on-year and 25% quarter-on-quarter, with an adjusted EBITDA margin of 20%, down 6 percentage points quarter-on-quarter. Approximately half of this decrease was driven by the gross profit compression discussed earlier and the other half by increased operating expenses I just mentioned. Along the same lines, the ratio of adjusted EBITDA to gross profit was 58% for the quarter. Net income was $18 million for the quarter, decreasing 50% year-on-year and 38% quarter-on-quarter. The earnings presentation provides a detail of the quarter-on-quarter evolution of net income, which was mostly impacted by lower EBITDA. In addition, our effective income tax rate increased to 29% from 21% last quarter as a result of the mix in revenues shifting towards higher-tax entities. Moving on to cash flow. During the quarter, we generated $12 million of free cash flow. And with that, our net income to free cash flow conversion came in at 69% for the quarter. Having said that, our net income to free cash flow conversion continues to be above 100% when looking at the last 12 months. We ended the quarter with a strong liquidity position of $320 million, including $212 million of available cash for general corporate purposes and the $108 million of short-term investments. Considering the robust cash position, the Board has authorized up to a $200 million share buyback program to purchase Class A common shares. The plan will expire on the earliest of May 2025 or upon reaching the $200 million repurchase limit. Our business continues to generate strong margins and solid cash conversion. This share buyback program reflects where our current capital allocation framework stands. We are allocating a portion of that cash, as we have already mentioned a few times, towards strengthening company capabilities by improving our internal systems and teams. This is seen in the margin compression in the short term in our P&L. On the corporate development input, we will take a very disciplined approach, but should attractive opportunities arise, we still have an under-leveraged balance sheet to deploy to complement our cash reserves. Finally, taking into consideration that cash generation should continue to be strong going forward, we are confident this buyback program represents an added element to the capital allocation framework. It is an attractive use of capital given the trajectory we believe DLocal can have over time as it executes against its enormous opportunity. So, this buyback program underpins our confidence in the prospects of our business going forward and our ability to continue to generate sufficient future cash to carry out our ambitious strategic plan. With this, let me hand it over back to Pedro for closing remarks.

Thanks, Mark. By the way, I'm pleased to have you on the call today. I've enjoyed working together with you and the rest of the leadership team in Montevideo altogether over the past few weeks. Now, let me wrap us up here. Our actual performance versus guidance will always hinge mainly on our own execution, but it will also be affected by a few exogenous variables such as FX rates, macroeconomic conditions, merchant go-live timing on signed contracts, and regulatory changes, just to name a few. We manage and de-risk these variables as much as possible, but they still hold the level of unpredictability that is characteristic of the emerging markets we are focused on. That's simply the reality of this business. So, with that context in mind, we are working on delivering on our 2024 plan that is aligned with the guidance that we shared at the beginning of the year. At this point in time, and to the best of our current data, expectations, and knowledge, we believe that we are tracking toward these objectives, although with a greater likelihood of coming in towards the lower end of the issued ranges. Our mandate for the remainder of 2024 is to land and improve on that. Short-term volatility aside, we're highly encouraged by our general progress and remain incredibly positive on the bigger picture opportunity to compound profitable growth over the long term. Emerging markets still represent an unrivaled market opportunity for digital businesses and payments remain a major friction point. Mark's announcement earlier on our new share repurchase program and the summarized outline of our capital allocation framework is a testament to the confidence we have in both our company and the potential of its business. With that, we'd now like to take your questions. Thank you very much.

Our first question is from Jorge Kuri with Morgan Stanley.

Hi, Jorge Kuri from Morgan Stanley. Wanted to ask about EBITDA to gross profit margin, which was 58% this quarter and your guidance for the year, and I did hear what Pedro said about maybe shooting for the low end of the guidance, hopefully not. But that is still 69% to 72%. So can you maybe walk us through how do you close that gap from 58% to get to 69%? Is there anything this quarter that is clearly one-off that you can clean out and produce a gross profit margin that you think is more reflective of what we could see in the next couple of quarters? If you help us bridge that gap, I think that will be very useful to understand how things are going to progress from here.

Thanks, Jorge. So, three things on how we're thinking through the financial model. The first one, obviously, is that this is a top line acceleration that we need to focus on. The cost structure came in where it did because from a gross profit perspective, we're behind where we'd like to be. So, part of closing that gap and I would say the most important part is the conversion of existing pipeline so as to be able to come within the guidance range that was given from a gross profit perspective. The second thing is that we always review our cost structure with relationship to where we are in terms of revenue or gross profit, and it's potentially the lever we have the most impact on is what we spend. The third consideration is because this is a top line-driven contraction of margin, we need to make sure that we balance the short-term objectives we have with the long-term ambition we have, and we make sure that when we adjust costs, we do so taking into account that equilibrium between short and long term.

If I may, maybe just an expansion on that. The gross profit take rate of 1.19% for the quarter, down 18 basis points quarter-on-quarter. How does one look at the rest of the year as some of these items that you mentioned normalize?

Look, like we've said, our business is a series of moving parts across 40 markets, multiple merchants and markets that are very volatile. So, we've given guidance. We've given you where we see we're standing on our guidance. And I think we'd rather focus the questions on answering the quarter that just got reported than trying to continuously reiterate the exercise of how we get to the guidance. In general, and I'm going to answer your question, but trying to refer a little bit more to the first quarter. When you look at the drivers of gross margin compression for the quarter, there's an important part of that, which is driven by seasonality. Q1 is a weaker quarter for our e-commerce vertical, which is typically a higher take rate vertical and also a pay-in driven vertical. So, the mix between pay-ins and pay-outs that we saw tilt towards payouts in Q1. Ideally, as the e-commerce vertical progresses and especially towards the back end of the year, helps to increase take rates. From a merchant renegotiation perspective, which is one of the other drivers we've outlined, we can get into greater detail in other questions, but we really believe that this isn't something that necessarily gets extrapolated into a structural issue, but rather something that's isolated to very large global relationships. So I think you can build a case for take rate going in either direction and not necessarily continuing the decline that we saw from Q4 to Q1. But, then again, we need to let the year play out and see how all the multiple variables fall.

Our next question comes from the line of Tito Labarta with Goldman Sachs.

Thank you for the call and taking my question, although I'll ask a little bit about the guidance as well. But just, Pedro, you mentioned you feel comfortable perhaps with the low end of the guidance, but you mentioned the March gross profit was $25 million. I mean, is that sort of a good base that you think you can grow off to sort of be able to deliver that guidance? Because I mean, even from there, you're still going to have to grow to get to that lower end of the guidance. Just to understand anything in particular, sort of in January and February, and was there any pent-up demand that maybe benefited March or is March sort of a better base to think of? And then also, just as you have this big concentration of large merchants, how can you either one, I guess, diversify away from that? Or given the size of those merchants, are you always going to be somewhat dependent on them for that growth and particularly to deliver sort of the longer-term growth outlook that you expect? And I have a second question, I can ask after.

Great. So, let me work backwards from your questions. On diversification, we've sustained that as the business continues to grow and as we continue to onboard more and more merchants over time, we expect that diversification to fall. So we should be less dependent on Top 10 merchants as we scale out the business. If you look sequentially, we saw a little bit of that. The Q-on-Q concentration in Top 10 merchants is actually down somewhat. So, I do think there's ample opportunity for us to continue to onboard hundreds of large enterprise clients and to have an increasingly diversified base over time. I think what we've seen in the recent quarters is very, very strong success, retaining share of wallet of some very large global relationships and actually accompanying those merchants as they expand throughout emerging markets, and that's generated the level of concentration that we're seeing right now. March, I think, has different puts and takes. Again, we can try to explain what happened in March, not extrapolate what's going to happen over the remaining nine months of the year. Our guidance is built on a very detailed bottoms-up analysis of our pipeline in each merchant opportunity and then adjusting the probability of occurrence for that and giving you guys the best calculation we have of how we think the year plays out. March, I think, was a reflection of growing TPV throughout the quarter, getting better towards the end of the quarter. That TPV momentum was sustained into Q2, which is a positive indication that in terms of share of wallet and growth of the business that we process for our merchants, we continue to trend in the right direction. On the flip side, March was still a quarter where we had some positive gross profit flowing through from Egypt, which after the devaluation and for full Q2, begins to decrease. And so, again, puts and takes here, core underlying metric of TPV, merchant adoption of our platform, good momentum into Q2. Then we need to see how everything plays out in terms of the different geographies and how that adds up to a total Q3 number.

Okay, that's very helpful. The other question I had was about Egypt, where revenues increased significantly year-over-year. However, there has been some currency devaluation, which typically has a negative effect on revenue. I want to understand what specifically occurred in Egypt. Additionally, how does the gross margin in Egypt compare to other markets? Could further foreign exchange depreciation in Egypt pose a headwind?

Yes. So, as you've seen throughout emerging markets, time and time again, these opportunities emerge in markets that are either with limited FX liquidity or have capital controls. The business we offer our merchants in those points in time is extremely useful and unique for them, and we're able to profit from those widening FX spreads. 2023, H1 Argentina was a case in point. H2 of 2023, Argentina began to compress spreads, but Egypt emerged. Now what we're seeing heading out of Q1 and into Q2 is that Egypt has devalued, its currency spreads have tightened, and what we need to see is if in the remainder of the year, another one of these opportunities emerges or not. Yes, Egypt was a case of higher margins and take rates as a consequence of wide FX spreads, and with the devaluation, those margins tighten for Q2. So the Egyptian business Q-on-Q becomes a headwind that we need to offset with volume and wins across the remaining markets. I think it's an advantage that our business is fairly diversified, but things don't always line up in a way where when you lose one market, you immediately get another one. Over time, when we look at the trend, there are always these kinds of opportunities popping up across our markets and our footprint.

Our next question comes from the line of Jason Kupferberg with BofA.

This is Melissa on for Jason. I just had a question. So you said, like in the quarter, the decrease in gross profit. One of the factors was a large merchant achieving a new pricing tier and renegotiating fees. Do you kind of see, are there any other sort of significant or like Top 10 merchants with contract renewals coming up that might impact your ability to meet the lower end of your gross profit guidance? And with respect to the delays in some of the launches, do you have visibility for when those will go live?

Thanks, Melissa. Two great questions. So, let me give a little bit more context on the merchant, okay? So, the first thing is that the merchant that we're talking about is a very, very large global contract for us. When we look at the renegotiated prices, to the best of our understanding, they're still higher than what this merchant could have potentially found through other alternatives in the markets where it was renegotiated. We've been able to retain most of their volume in those markets, even at a higher price point, and I think that's a reflection of the quality of the platform and the services that we offer for them. So I think what I'm trying to say here is that this is much more the natural consequence of the enormous volumes that they've attained with us. If we do have other merchants, and we don't have any right now that we think a similar process will happen — potentially, this merchant could happen in other markets, but not other merchants. That's actually, I would argue, good news. It means that we're having merchants that are attaining significant volume thresholds that justify that kind of tiering impact and renegotiation of contracts. It's important to understand that when we look at this particular merchant, we've also been able to continue expanding with them into new markets, and we trust that as they grow their emerging market footprints, they will continue to do so through us. What should happen over longer periods of time is that when we look back, the compounded growth rate of our relationships with these very large merchants should justify the kind of pricing that they're commanding, right? We don't see this as an indication of a structural change or competitive dynamics but rather simply the pricing dynamics of very large global relationships and the volume discounts that make sense to offer them to continue growing alongside them. You had a second question, which was...?

Just on the delays with some of the launches.

Yes. Yes, yes, yes. So, some of these have already gone live in the second quarter. Some of them are very large, very long-term, high-potential clients that we'd like to be able to go live in Q2. I'd say potentially, in some cases, the impact already in the second quarter. Others, the second quarter impact might still be muted. However, some of these logos are very, very attractive that we've been pursuing or working on for quite some time. Eventually, when they go live and we start ramping up in terms of a longer-term perspective, I think these are incredibly promising, and hopefully, we'll be able to give you updates when we announce Q2 that they are live.

Next question comes from Jamie Friedman with Susquehanna International Group.

I want to mention, I appreciate the incremental disclosures, Maria, especially about the gross profit by region, it's helpful. But you know how it is when you share something, everybody wants more. So I was wondering, is there any way to contemplate the margin characteristics of Slide 5, which are the verticals, even if you can't say the margin characteristics of those, the natural pay-in and pay-out attributes of those because that might be indicative?

So, as noted, Jamie, in general terms, the payout business is a lower take rate business. But most quarters, it's a slightly higher margin than pay-ins, but pay-ins come in at larger take rates. The pay-out business, when they offer us liquidity in markets where netting is permitted, they actually impact the profitability on the pay-ins business because that's where the usage of the liquidity in terms of being able to repatriate pay-ins at FX spreads gets reflected. There's a strong interplay between both of these. In terms of take rates per vertical, again, we haven't been disclosing that, so not too much to comment here. We'll take note. And if at some point we think that's helpful, we'll consider it.

Okay. And then if I could just follow-up, Pedro, in your prepared remarks, you talked about the relative strength of March versus January and February. Apart from Egypt, can you call out which regions may have seen stronger growth in March? Or is that more a function of the onboarding of the new merchants?

Like I mentioned, total payment volume. So, again, that gives you a general indication of company-wide growth in terms of what we're processing for our merchants was gradually stronger each month of the year, and that's continued to be the case into the second quarter. Egypt is a part of that, and I think it's important for us to highlight that because that does change in the second quarter. However, in general, the TPV trend has been one of sequential month-on-month growth through April. Obviously, May isn't finished yet, so we can't comment there. But the business in general, in terms of the volume we're processing for merchants and incremental merchant businesses in countries that we're launching continues to trend in the right direction.

Our next question comes from the line of Neha Agarwala with HSBC.

Quick one on the share of TPV between cross-border and local to local. We saw the local to local share actually went down and cross-border was a bit stronger. Could you please explain that? Because I would imagine that with Argentina, there would be a higher share of local to local. So anything that explains the shift? And secondly, on the expense side, could you please elaborate a bit on where exactly did the extra spending go for the first quarter? What in the tech platform are you spending more on? Is it the platform you're making more robust or is it because you are developing more depth in any specific geos? Any more color would be helpful.

Hi, Neha. So I'll first take the one on the cross-border volume that you mentioned. On the prepared remarks, you may remember Pedro mentioning the success of the remittance business. We have been growing corridors and growing that business. This has helped us growing the cross-border volumes, especially within the payouts.

On the expense side, this is Mark here. In terms of the investments that we've done here and the expenses, we're really focused on the technology side and technologies, making sure that we have investments that will continue to help us accelerate the products and the launches that we have to continue to create further business for us.

Our next question is going to come from the line of John Coffey with Barclays.

One thing I looked at is when you go back to your revenue cadence for the years that you've been public, you'll see that from Q4 to Q1, there's that normally sequential increase in revenues. And so now we see a little bit of a sequential decrease. Should I think of this as essentially now that you're more penetrated in e-commerce and other verticals, which might tie more to retail that DLocal's revenue cadence is going to start to conform more to the seasonality that those kinds of verticals normally have? And my follow-up was in the last quarter's call, Pedro, I think you had mentioned some potential M&A that you're considering just broadly. I was wondering if you have any updated thoughts on that.

Sure. So, you're spot on in terms of, two things happen, I think, as businesses grow and the way we're growing. One is at smaller absolute numbers, the typical seasonal cadence isn't as present because you're growing off of a smaller basis, and your Q-on-Q growth rates are a lot higher. More importantly, in our case, if you look at the e-commerce vertical year-on-year growth, and we give that disclosure, e-commerce actually grew threefold volume year-on-year. Our platform is much more penetrated today by e-commerce merchants with very strong seasonality from Q4 to Q1. I'd say advertising, which is the other one that has a certain seasonal cadence to it, not nearly as relevant as e-commerce, but also plays a role in the seasonal movements from Q4 to Q1.

And on the M&A, your thoughts?

Look, I think the best I can comment, for obvious reasons, is we want to make sure, given the fragmentation we still see in the fintech space is that if we do M&A or we don't do M&A, it's not a consequence of things having dropped on our laps or not, but us actually making a concerted effort to scan the landscape, understand where there are potential acquisitions that could help us accelerate growth and then decide whether it makes sense or not. We are diligently working on making sure that we're talking to those we have to talk to and understanding where there are opportunities or not. That's really where we're at. If there were anything significant to report, we would report it, there isn't, but we're working.

Our next question comes from the line of Matt Coad with Autonomous Research.

Pedro, I wanted to go back to the large merchant pricing renegotiation. Curious if you could provide some color on why this type of negotiation would not occur with your other large merchants. I would just think naturally a lower take rate is kind of the price of doing business with these very successful merchants. So, any color that you could provide there would be really helpful.

I agree with you. I think what we're trying to say is the scale of the merchant that generated the renegotiation is such that you shouldn't simply extrapolate that across the remaining merchant base within a short period of time. If we were to have to sit down with more merchants to replicate this kind of negotiation, it would imply that the absolute volume of those merchants is so large that our business is growing at a significant pace. Yes, that could be the tendency, but there’s a certain benefit to when that happens, which is that the merchants have become very, very large. If you look at the disclosure presentation, we're giving you guys incremental color, and I think this is important in terms of just isolating the pricing impact of this round of renegotiation in terms of the consolidated business. Now, not just focusing solely on Brazil, you'll see is that there's about 130 basis points of gross profit compression and only about 4 basis points of take rate compression when we isolate the pricing piece of this. Remember that this also has a tiering impact to it. Again, it explains the Brazil situation. If you do this, you can quantify this so that there is an undue weight placed on the impact of the pricing change.

My other question, I just wanted to touch on the netting opportunity that you guys kind of touched on briefly during your prepared remarks and the growth of your payout business that's kind of enabling that. Could you kind of just broadly speak of what percentage of your volume is netted like that? And then just like longer term, as your business grows, kind of like the potential to improve unit economics as a result of netting?

Sorry, just trying to make sure we have the right numbers there. As you've seen, the remittance business is a newer business for us. Remember, we don't touch end consumers. We're a provider of remittance infrastructure for merchants or financial service verticals that offer remittances to end users. It's extremely fast-growing, very successful. In terms of absolute size, you have the TPV there, but that leads to about 4% of our repatriations currently being done through netting. It's still small. What the netting allows us to do in markets where it's regulatorily allowed is it gives us very competitive rates on the FX because we don't have to go through our global banking relationships or brokers. We can simply net. Again, it's still at 4%, growing very fast over time. If those netting corridors grow, that makes us more competitive in terms of FX, so we can win more business and it also improves the FX spreads. If the market is an extremely competitive FX market, then the impact to gross margin is not that relevant because the amount you can improve is not that big. In markets where exotic currencies are being traded, and we do a lot of those, the netting could be very significant in terms of the incremental gross profit. It allows for us, and we've seen that sporadically over time with the Argentina case or the Egypt case.

Our last question is going to come from the line of Kaio Prato with UBS.

Two questions on my side really quick, please. First is related to the effect of the devaluation on the results this quarter. Just would like to get a sense about what would be the level of gross profit and gross profit margin without the major deval that we saw, and again especially in Nigeria if you have any estimate to share with us? And second, in terms of G&A expenses, again, we saw a massive increase, especially in salaries, which we already saw in the fourth quarter, and we continue to see a sequential increase this quarter with G&A of almost 20% Q-on-Q. Just would like to double click here if this is all related to new headcount because seeing that the net addition was not that high this quarter, and what can we expect for the following quarters?

Let me take the first one, Mark will take the second one. So, first of all, the devaluation from a gross profit perspective in Nigeria, it doesn't have an accounting impact that is that relevant because of the way that revenue flows into gross profit in Nigeria for us. The impact it has in that market is that we saw a lot less activity from our merchants after the devaluation as they leaned into that market less. We also have a higher mix of financial service clients in Nigeria that after the devaluation were less active than they were being prior to the devaluation. So, it's not a direct accounting impact that we could give you a constant currency gross profit for Nigeria. It's actually just less business. We haven't quantified that. Argentina, the devaluation really occurred in Q4 for a few weeks, and then you saw the devalued peso effect the full first quarter, but notwithstanding from a gross profit perspective, we saw Argentina rebound. The increase in cross-border business was enough to offset the lower TPV at the lower currency level. If anything, on constant currency, the Argentine business would have looked even better, but we haven't disclosed any quantification there on that. Egypt, as I said, the devaluation is primarily going to hit us in the second quarter, didn't impact that much in the first quarter. Just when you refer to G&A, I assume you're asking us OpEx as a whole or specifically G&A within OpEx.

On the G&A side, there are a couple of factors to consider. First, we are investing in our workforce, and our headcount has increased by about 50 people. This change has contributed to some of the increases observed at the end of last year. Additionally, the devaluation and inflation in Argentina have affected the figures; in the fourth quarter, these numbers were somewhat lower due to this situation. The apparent increase might seem exaggerated, and if we exclude those factors, the numbers would align more closely. Overall, we are seeing the impact of inflation and deflation, along with the increase in headcount resulting from our investments.

Okay. So, should we assume like this is a starting point for the upcoming quarters, right, because of all the effects of devaluation that we saw at this point? Is it a fair assumption?

I think as I said before, we constantly review our cost structure in light of where our gross profit is coming in. So, all things being equal, there are certain one-offs also in the G&A in this quarter. But I think as a general directional, were we not to change anything, then that would be a valid starting point for you to calculate. But again, like we said, we're constantly reviewing and balancing short-term and long-term and how we are flowing costs through the P&L. So, there's always the possibility that we decide to change that cadence and cut back in certain areas where we think it won't hurt our long-term prospects in any significant way.

Thank you. And I would like to hand the conference back over to the company for any further or closing remarks.

Okay, I think we've lost the operator here, so I'll do the operator duties for a second. I think that wraps up the Q&A portion that we had for today. Thanks for the questions. Just before we drop, one last set of thoughts on our part. When we look at our business as a whole over long periods of time and not over a few quarters, it's consistently grown across all of our key metrics, I'd say. But that growth has never been evenly distributed across geographies and products. That's one of the reasons we're giving the gross profit per market. What we see typically is in the short run, some countries are growing, some products are growing and others are not. We think that this is one of the strengths of the winning business model we have, is that it's very diversified, and we don't expect that to change. If anything, as we grow geographies and we grow products, that diversification should grow. However, there are periods where you see perfect storm-like activity where simultaneously decelerating geos or products coincide across multiple revenue streams, we think Q1 has some aspects of that. When these hiccups do occur, let's not lose focus on the longer-term trends of a business that we are still convinced is equipped to grow very well over the long run. We remain committed and firmly believe that this doesn't signal a break in our capacity to deliver long-term fee growth, gross profit growth, EBITDA growth and cash generation, although clearly it is a quarter that came in disappointing, not from a top line and TPV perspective, but on gross profit and subsequently what happened to EBITDA. We're fully committed to turning that around over the remainder of the year and we hope to give you guys updates as the year progresses. Thank you very much.

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