dLocal Ltd Q2 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to the DLocal Second Quarter 2024 Results Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question-and-answer session. I would now like to hand it over to the company.

Good afternoon, everyone, and thank you for joining the second quarter 2024 earnings call today. If you have 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 Strategic and Investor Relations; and Mirele Aragão, Head of Investors Relations. A slide presentation has been provided to accompany the prepared remarks. This event has been broadcast live via webcast, and both the webcast and presentation may be accessed through DLocal's website at investor.dlocal.com. The recording will be available shortly after the event is concluded. Before proceeding, let me mention that any forward-looking statements included in the presentation or mentioned in this conference call are based on currently available information and DLocal's current assumptions, expectations and projections about future events. While the company believes that our assumptions, expectations and projections are reasonable given currently available information, you are cautioned not to place undue reliance on these 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 Factor 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 DLocal. Thank you.

Hi. Thanks everyone for joining us today. Let me start us off with a summary of where things are as we hit the halfway mark in 2024. We continue to see strong growth in our business, achieving another quarterly record of $6.0 billion of TPV during Q2 2024. The evolution of this key metric demonstrates our continued ability to grow as we gain share of wallet from our global merchant base and add new merchants to the mix as well. It also underscores our unique value proposition as a trusted partner for some of the largest and most sophisticated global companies across emerging markets. This momentum is solid, and our pipeline remains robust, both within existing merchant opportunities and also new merchant logos, which is a promising leading indicator of long-term growth potential. During the quarter, we have started processing for a few more marquee global names, such as a leading global Chinese fintech and one of the world's largest events and ticketing marketplaces. We also assisted multiple existing merchants that are among the world's largest e-commerce players in their initial forays into Africa, as they launched operations in South Africa during the last quarter, signaling our success across this very promising African continent. And finally worth noting, we continue to power the growth of cross-border payments in Brazil, being a part of the recent launch of a global marketplace powerhouse in that market. This $6 billion in TPV represents a 38% year-over-year growth, despite the tough comparison basis of 80% year-on-year growth in the stellar quarter of last year. Performance was good for us across multiple verticals, including continued strong growth in commerce, on-demand delivery and remittance verticals, accelerating growth in the software as a service and the ride-hailing merchants which grew 72% and 51% respectively year-over-year. This kind of sustained and well-diversified TPV growth with a focused commitment to low risk, high reputation verticals sets us up well for long-term success. We believe that our year-over-year growth showcases a unique combination of growth while focusing on reputable verticals, which is unique among the relevant comp base, who either grow less or over-index high-risk verticals or do both. Net take rates have held up sequentially, despite unfavorable events like the repricing by our largest merchant at the beginning of the year, material currency devaluations in Nigeria and Egypt more recently, and continued weakening across most emerging market currencies. This type of stable sequential pricing and growing TPV during the quarter translated into 11% quarter-on-quarter gross profit growth. Our OpEx excluding non-cash share-based compensation only grew by $1 million sequentially after previous quarters of sequential growth above $4 million and this happened as we adjusted our cash spend to the weaker gross profit that began to flow through our P&L. As I've mentioned previously, there is a limit to how much we're willing to defend margins in the short term, as we're truly committed to certain investments which are crucial for our long-term success, particularly those in our engineering pool, back-office capabilities and behind our license portfolio. But to balance this out, we are always revising other discretionary spending to make sure it matches our top-line performance and is aligned with our general philosophy of frugality. As a consequence of this, adjusted EBITDA reached $43 million reflecting what is still a lean structure and disciplined approach to spending while our cash generation also accelerated versus the prior quarter. These highlights also come with certain challenges that we are focused on rapidly addressing. Primarily the year-over-year gross profit performance was flat driven by Latin America that was actually down 13% on Argentine FX devaluation and the repricing by our largest merchant in Brazil and Mexico. Stellar African and Asian gross profit growth of 79% year-over-year unfortunately did not suffice to offset those two events in Latin America still our largest region. Let me wrap up this first part by stating that not only do we see more good than bad in the reported quarter, but taking a step back from a short-term quarter, DLocal is an incredibly strong company with a fantastic TAM, attractive business model and extremely promising future that at some point will be reflected in capital market performance. And so to keep things in perspective, we maintained strong product market validation as witnessed by nearly 40% year-over-year and 14% quarter-over-quarter TPV growth. We still run a high margin financial model with adjusted EBITDA to gross profit at 60% plus and the ability to scale from here to previously levels going forward, a cash conversion that remains very strong and growing as EBITDA increases sequentially with a cash conversion cycle that’s still in the 100% range over the last 12 months. When we analyze the potential of all this to compound over time, it's hard to not be optimistic about our future, despite the inherent challenges and volatility existent throughout the global South. We firmly believe that our long-term future is bright and our own ability to execute is the single most important factor behind us capturing that opportunity. That optimism is not only being relayed in my remarks, but also reflected in our capital allocation strategy. Our business has an attractive cash generation profile and we see upside in our stock as we grow and scale. As a consequence of this we have bought back stock during the quarter at a rapid pace. We trust this will prove to be a savvy capital allocation decision over time. With that, let me hand it over to Maria and Mark to take you through a more detailed overview of our second-quarter results.

Thank you, Pedro. Good afternoon everyone. As Pedro just mentioned, during the second quarter we once again delivered strong TPV growth of 38% year-over-year and 14% quarter-over-quarter, reaching $6 billion. Our cross-border business core to our value proposition grew 11% quarter-over-quarter and 22% year-over-year, reaching a new record of $2.7 billion in TPV. The quarterly growth is driven especially by the ride-hailing vertical. The local-to-local processing business continues to prove our strong values through domestic flows posting a 16% increase quarter-over-quarter and 55% year-over-year, confirming our superior offering to our global merchants compared to direct integrations to local acquirers. The quarterly increase was driven particularly by growth in commerce in Mexico and Argentina. Our pay-ins business grew by a healthy 17% quarter-over-quarter and 34% year-over-year, driven by strong performance in commerce, on-demand delivery and ride-hailing verticals. Our pay-outs business increased 7% quarter-over-quarter and close to 50% year-over-year. The continuous growth is driven especially by financial services, ride-hailing and SaaS verticals. As we move down to the P&L we observed divergent dynamics at the revenue and profitability levels. Moving to revenue, we achieved $171 million, up 6% year-over-year primarily driven by Egypt with over 200% year-over-year growth across advertising and streaming verticals; commerce and streaming in Mexico; and strong performance of other LatAm, Africa, and Asia across different verticals. These positive results compensated for lower revenues in Nigeria due to the naira devaluation in February 2024. On a quarter-over-quarter basis, despite the healthy TPV growth, revenues declined by 7%, driven by the currency devaluation in Nigeria and Egypt. The more we continue to scale and diversify our business geographically, the more we expect a dilution in topline volatility over time, as we reduce the reliance on a few markets. Now moving to gross profit dynamics. During the quarter, gross profit was $70 million, a slight decrease of 1% year-over-year. Starting with LatAm, gross profit was $54 million, down 13% year-over-year. Most of this decline was driven by Argentina, due to lower FX spreads following the currency devaluation in December 2023. Mexico also impacted LatAm gross profit, decreasing 17% year-over-year due to merchant repricing and local-to-local increase. Gross profit in Chile contracted 7% year-over-year due to lower cross-border volumes. Other LatAm markets showed a 10% year-over-year increase in gross profit, driven by Tier zero merchants’ growth. In Africa & Asia, gross profit grew 79% year-over-year, supported by our overall growth in Egypt; ramp-up of our merchants in South Africa, primarily in the commerce vertical, and temporary FX dynamics in Nigeria. On a quarter-over-quarter basis, gross profit increased by 11%. In LatAm, gross profit increased by 10% quarter-over-quarter. The main drivers were the growth in Argentina, and other LatAm markets, mainly Colombia and Costa Rica; and Brazil, with lower processing costs following renegotiation with processors, coupled with a change in payment mix. Those two factors partially offset the impact of a key merchant repricing, with full impact in the Q2 compared to two months in the previous one. In Africa and Asia, gross profit increased by 13% quarter-over-quarter. The main drivers were temporary FX dynamics in Nigeria and growth in Other Africa and Asia. Despite the quarterly improvement, we acknowledge that our results for this period are still challenging. However, it is important to emphasize that we do not see any structural changes in our business. Let me now hand it over to Mark to continue discussing our financials.

Thank you, Maria. Hi everyone. During this quarter, as Pedro mentioned earlier, we are committed and continue to invest in our team’s capabilities and innovation while also seeking efficiencies across many areas of our business. We are confident that this type of efficient investment, given the opportunities ahead of us, will pay off in the mid to long term. With that, total operating expenses reached $40 million for the quarter, an increase of 72% year-over-year. OpEx, excluding share-based compensation and certain other non-cash items, grew 46%. OpEx growth has a clear allocation tilt towards investments focused on Product Development & IT capabilities. Product & IT OpEx is up by 143% year-over-year while all other expenses grew by 55% as we also continue an investment cycle behind strengthening our back-office capabilities for future growth. We remain committed to maintaining a balanced approach to expense management balancing short term and long-term opportunities. As a result, we delivered operating profit of $30 million for the quarter, up 12% quarter-over-quarter, and adjusted EBITDA of $43 million, up 16% quarter-over-quarter, representing an adjusted EBITDA margin of 25%. This is a result of higher gross profit and disciplined OpEx investment. The ratio of adjusted EBITDA to gross profit increased to 61% for the quarter, up 3 percentage points quarter-over-quarter. On a year-over-year comparison, operating profit came down 37% and adjusted EBITDA was down 18%, given the gross profit dynamics that Maria explained and our decision to sustain many of the long-term investments that I have just mentioned. Net income was $46 million for the quarter, up 161% quarter-over-quarter and 3% year-over-year. The earnings presentation provides a detail of the quarter-over-quarter evolution of net income, which was mostly impacted by higher finance income, mostly driven by a $23 million non-cash mark to market effect related to Argentine bond investments used to hedge our local currency position in that market. Our effective income tax rate decreased to 18% from 29% last quarter, closer to levels of previous quarters. Moving on to cash flow for the quarter, we generated $35 million of free cash flow from own funds, resulting in a free cash flow conversion rate of 77%, up $23 million and 7 percentage points from Q1. Without taking into account the extraordinary gain from the Argentina bond, cash conversion would be over 100%, in line with our historical levels. We ended the quarter with a strong liquidity position of $306 million including $186 million of available cash for general corporate purposes, and $120 million of short-term investments. Before I pass it over to Pedro, let me give you a more detailed update on our share buyback program. During the second quarter, we purchased $82 million, representing 9.2 million shares, using our own funds. With this, let me hand it over back to Pedro for closing remarks.

Now, and finalizing. As you know, emerging markets are inherently volatile, which can, and often do, impact our short-term results. However, our long-term view remains optimistic as I mentioned earlier. During our quarterly bottom-up review of our pipeline and existing contracts, we project out share of wallet, probable market growth, and new commercial opportunities on a merchant-by-merchant basis; we are getting to the following revised outlook for 2024: Our new TPV expectation is explained by lower probability of volumes ramp-up on certain merchants, pipeline development skewed even more towards tier zero merchants with lower take rates, and weaker emerging markets currencies expectations going forward; For gross profit, our forecast takes into consideration these impacts that I just mentioned for TPV, while also assuming a growth of volumes in our local-to-local flows, as our local businesses continue to thrive. Our current expectation for adjusted EBITDA reflects our desire of not wanting to slow down certain key investments in long-term projects, and hence, the decision to not defend our short-term margin structure as aggressively as we could given our ability to tightly control costs and the flexible costs structure we have. We need to continue hiring more IT and product talent, strengthening our internal controls for the ever more complex business we manage, and investing in control functions that protect our merchants' business and reputations across the Global South. I want to make sure I remind you that we still see significant operational leverage in the business mid-term once these investments are carried out. Wrapping up, we continue to thrive across emerging markets, despite their complexities, which we embrace, as we deliver simple, effective solutions to our merchants. Our focus remains on execution and long-term growth. Our commitment to our merchants and our expertise in the regions where we operate enables us to consistently win business from these global players. As we scale, this growth will help mitigate short-term volatility and dilute market fluctuations. Therefore, it’s crucial for us to continue focusing on TPV growth, increasing our share of wallet, and addressing new clients, all of which we have consistently delivered since the company's inception, while continuing to drive operational leverage in the business once we get through the current disciplined investment cycle we are in. With that, we are ready to take your questions and thank you for your interest.

Thank you. Our first question comes from Tito Labarta with Goldman Sachs. You may proceed.

Hi. Good evening. Thank you for the call, and taking my question. I guess my question is on the guidance just to understand a little bit the dynamics there and thanks for the explanation. That was helpful. But just if I go back a little bit, in your first quarter conference call you were already kind of halfway through 2Q and you felt comfortable that you could deliver the lower end of the guidance and I completely understand all the volatility in emerging markets. So, I just want to understand if something changed from the last conference call to now. One, gross profit you had kind of mentioned that March was very strong. This looks like it had been running below that March rate. And going forward, you expect the modest increase in gross profit from here it seems. But just to understand if there was anything different from 2Q from when you had the 1Q conference call to today, to have you a little bit more cautious on delivering that guidance on? And then I have another question after that. Thank you.

Sure. Thanks Tito. Admittedly, I think the evolution of guidance over the last few quarters has shown that it's evolved as we run through our process of trying to project out how existing volumes on the 706 merchants we have running will play out over the remainder of the year then what our assumptions are on new volumes from those merchants and new merchants, and then finally, there's an element of trying to overlay some macro expectations in terms of currency. Unfortunately, I think the revisions as we run that methodical process have been towards the downside over the last two reviews but that's exactly what it's been. So it's 40-plus markets, 700-plus merchants. These are not software-as-a-service contracts. We're actually having to regain our business every day with them and we do the best we can in trying to project how we think the year will come out. On the cost line, we feel we have absolute control of what we spend on the TPV and gross profit levels. I think it's clear that we do the best we can. Where we're coming at is we continue to see a strong adoption of our products and services. And I think that's reflected in the TPV guidance and the TPV growth. When you get to gross profit, we do see a greater share towards existing tier zero merchants. We see a continued outperformance in local-to-local business, which in one hand doesn't have the FX monetization. So that drives take rate down modestly but down. On the other hand, you could argue those local-to-local businesses both prove the staying power of what we offer and are pure transactional revenues. So in a way those are less volatile and you could argue lower margin higher-quality volume that we think mix will skew towards more than we did a quarter ago. And then on EBITDA as I said, we fully control what we spend. We just wanted to make sure that we continue to benefit from the long term. And so the adjustments we're making are not fully aggressive on trying to deliver the margin target, but making sure that if there are investments we think we need to make, we're making them anyway. And as we've said a few times and as the evolution of our OpEx shows, those are heavily skewed towards product development and technology, and then strengthening some of the mid-office and back-office functions.

Okay. No that's very helpful, Pedro. Thanks for the color there. And I guess a follow-up on that, right. You mentioned you're growing more in local to local. We did see a big drop in the gross take rate, but the net take rate I guess maybe positively held up fairly well. I guess, do you expect this shift toward more local to local to continue? Could that put maybe more pressure on the gross take rate? Do you think maybe and again I know this is hard to predict, but the net take rate is maybe stabilizing a little bit from what we had seen in the prior quarters?

Yeah. So one thing I do strongly suggest, we focus on the net take rate as we try to understand the monetization capacity of our business going forward. The gross take rate is heavily influenced by revenue that is very volatile especially driven by dual exchange rate markets. So I do think the net take rate question you're asking is the right question. If you look at the mid-points of the guidance, we believe that given the local to local shift and the greater concentration in tier zero merchants that you will continue to see a decline in take rates in the short run, but those are moderate declines. I think if anyone was expecting a bottom to fall out or merchants queuing up to reprice as our largest merchant did at the beginning of the year that has definitely not been the case. And you can see that in the Q-on-Q evolution of net take rate, which is down by a few single basis points, a single-digit basis points. So again, if you look at the midpoint, our expectation is downward, but in a very controlled fashion. If we take somewhat more of a mid-term view on take rates, what we're working on, and I think the objective here is, as some of our newer products like the invoicing product or the platform products, and hopefully new products we launch to market, begin to grow and scale, we can try to offset some of the structural declines in take rates that are happening across all of fintech, especially in the payments piece, try to offset that with more value-added services. But that's more of a mid-term strategic answer. Your specific question, if you look at the midpoints, we're expecting somewhat of a downward trajectory in take rates driven by more local to local and more Tier 0 merchants or the very large merchants in the mix, but fairly controlled in terms of the magnitude of that take rate decline.

Yeah. Okay. That's super helpful. Thanks a lot, Pedro.

Thank you. Our next question comes from Guilherme Grespan with JPMorgan. You may proceed.

Hello. Thank you, Pedro for the call. I have two questions. First, could you provide an update on the evolution of remittances? Is this one of the opportunities you see going forward? Please highlight how it is developing and comment on which countries can utilize those remittances for different flows to offset the cross-border business. The second question is a bit of a technicality, but I want to understand why Nigeria's gross profit was higher than expected. What specifically drove this mismatch? Thank you.

The remittance vertical continues to perform exceptionally well, achieving over 80% growth year on year as we onboard more global consumer-facing remittance companies. In this vertical, we act as a provider of enterprise solutions, serving as infrastructure for companies that maintain consumer-facing relationships for remittances. Additionally, we have recently focused on a new vertical that has gained momentum in the past few quarters. This business not only stands on its own but also enhances our liquidity efficiency in certain markets where netting is allowed. The list of these markets is extensive, although some, like Brazil, have previously not permitted netting. However, that situation is potentially changing, but we currently do not net in Brazil. In most other markets, we can net effectively, as our remittance business expands and pay-out flows increase in these regions.

That's very clear. And Nigeria for the gross profit to be higher.

Yes, sir. On that, I will answer. On Nigeria, what we have and we have the FX dynamics where you have the official rate trading above the parallel market. So these dynamics result in the P&L that you're seeing where you see the gross profit higher than the revenue. We see this as a temporary dynamic.

Okay. Thank you.

Thank you. Our next question comes from Neha Agarwala with HSBC. You may proceed.

Hello, good afternoon. This is Carlos Gomez from HSBC. I have two questions. The first one refers to your assumptions. You mentioned that you are trying to forecast to some degree also what the foreign exchange is doing. Which markets are of particular concern for you? Which ones do you think we could see another significant foreign exchange adjustment? Is it Egypt, Argentina, any others that we are not looking at right now? And second, regarding your investment phase and the necessary investments that you are making now, would you be able to quantify how many quarters or years do you consider this investment phase will take? Thank you.

Sure. Regarding currency assumptions, I don't specifically remember each market, but I do recall that real and Mexican pesos are significant among them. Generally, for most emerging market currencies, we have utilized bank and market data to update our projections for the rest of the year, and we're seeing weaker emerging market currencies compared to last quarter. This reflects a overall strengthening of the dollar against the mix of currencies in over 40 markets where we operate. On the investment cycle, which can sometimes raise concerns, the company had previously provided mid-term guidance of 75% on EBITDA to gross profit and achieved that last year in Q3. We have since adjusted that number down in Q1 due to lower-than-expected gross profit, which is now returning to low 60s after being in the high 50s. If we assume that sequential gross profit grows faster than operating expenses and take a mid-term perspective, we believe we can return to historical levels, indicating that this is not a long-term structural change in our market. We haven't pinned down a specific timeframe for this recovery yet. There are ongoing investments in product development and technology. I mentioned earlier the accelerated launch of new products as a long-term strategy to counteract declines in take rates. dLocal has expanded significantly across numerous markets in the past few years, enhancing our capabilities and processing network in these areas. We are now focused on strengthening these capabilities and expanding features with our partners, which necessitates investment in technology and product. This is likely not a multi-year cycle; we are thinking in terms of several quarters. Although margins this year are below our mid-term guidance, especially in H1, we expect gradual sequential improvement. We should exit this year positioned to achieve margins next year much closer to our mid-term guidance, and ideally, by the latter half of next year and beyond, we will be approaching historical margin levels in the low- to mid-70s.

Thank you very much for that detailed answer on the ForEx. I understand that, you are saying that, you expect the general depreciation of the currencies versus the US dollar. But as you have seen, particular markets can have an impact on the company. Again, Argentina, Egypt, Turkey, any other currencies that we should be watching carefully?

Yes. Look, I think if we look at the 2024 business, Argentina especially has normalized somewhat. We've seen a pickup in the Argentine business. It was one of the strong performers in Q2. Bear in mind that isn't because the spreads have widened dramatically there although they have widened. But it's driven by a genuine acceleration in our Argentine business. So the currencies that typically have been more volatile and have had a bigger impact on the business have been the Argentine peso and the Egyptian pound. I'd look at those, but I think significantly de-risks especially Argentina from where it was last year. The Egyptian pound, I just mentioned, the spreads have tightened, but volumes there have picked up 30% plus Q-on-Q. So I don't know how much more room for tightening there is. Turkey is an interesting opportunity for us, but still a very, very small business. We're beginning to see more interest and offering more and more services in that market as some other global processors pull out. But that's still a small one for us. So I would look at the gross profit disclosures we gave you and those are the currencies to track more closely: Brazilian real, Mexican peso, Chilean peso, Argentine peso, Egyptian pound, Nigerian naira.

Thank you very much. And again, thank you for the additional disclosure. It's very useful. Thank you.

Thank you. Our next question comes from Cassie Chan with Bank of America. You may proceed.

Hey, this is Cassie from Bank of America. I wanted to ask if you can share any insights about trends in July and August compared to the second quarter, whether that's in terms of TPV or gross profit. Additionally, how should we view the third quarter in relation to the fourth quarter, knowing you don't provide quarterly guidance? I'm curious if you see the third quarter as potentially the lowest point and expect a rebound in the fourth quarter. Any information you can provide would be appreciated. Thank you.

Thanks. So let me try to give you a TPV cadence. May had significant e-commerce promotional days across the region. So May was a very strong month from above $2 billion of TPV which was a new landmark for us. June came in a little bit softer than May in terms of TPV but held up quite nicely in terms of gross profit. And then as we entered the current quarter, July was once again above $2 billion TPV month so the second month ever where we've surpassed the two handle in terms of monthly TPV. And margin-wise, it was slightly softer than June. But still, I think we need to continue focusing on the TPV metric. If we compound that over time and we continue to deliver solid sequential growth that's really, I think the core of the investment thesis here is looking back in multiple quarters. And at that level of sequential compounding, for example, if you look at these results or you look at the high end of the guidance and you play that out, it's really a remarkable opportunity driven by the TAM we have and how increasingly important in emerging markets are becoming to global companies. So those are the positives. I think in general, again, you have our guidance update to get a general sense of the quarter. Yes, that does skew towards Q4, as e-commerce has become our largest vertical. E-commerce obviously is very seasonal and that's generated increased seasonality in the company which I think also shows that we do see some limited risks in Q3, and then picking up in Q4. But it's still early to tell. There's still more than half of the quarter to go. And so we'll report back with the specifics when we announced the third quarter.

Got it. That's helpful. And then I guess just wanted to ask you guys had mentioned some delays in new launches last quarter. Did that materialize in the second quarter? Are you expecting that back half? And I guess, the NRR, is that what's kind of driving the NRR which was about 100% this quarter? I know you guys mentioned Nigeria, but Just any thoughts or details there. And we know what you're expecting that metric to be for fiscal 2024?

Great. Let me take those backwards. If you adjust the NRR excluding Nigeria and the strong devaluation there and remember that as Maria walked us through, revenues in Nigeria didn't necessarily affect gross profit performance which was up sequentially. But the Nigeria adjusted NRR is about 114% which continues to show the stickiness of what we offer. We rarely ever churn. Merchants which is one of the positives about the company again when we think of long-term growth. No, no, sorry there's a second part of the question. So, we had called out delays in certain important new businesses for us. We've given you some color in the prepared remarks. Those are live now which is very good. We mentioned in the prepared remarks that we see ourselves as a central player in the cross-border payments in growth of Africa. Three of the world's largest e-commerce companies have made maiden forays into e-commerce in Africa and South Africa. And we are a payments provider for all three of those very large global e-commerce players and those all got launched a little bit later than we anticipated. So, the ramp-ups are also taking slower. I don't think Africa is necessarily a short-term material impact on our business. It's certainly accretive. And long-term we see enormous opportunity there and we think we're super well-positioned to capture it and you see that in the growth of our Africa and Asian segments. The second one is one of the world's largest fintechs based out of Asia. And this one got delayed I'd say by quite a bit and we're very, very encouraged by already having that live and running. It's still relatively small, but the focus now is making sure we deliver for them and be able to ramp up that business. We started in Brazil, which is a good first market and we're already beginning to look at incremental markets with them.

Thank you. Our next question comes from John Coffey with Barclays. You may proceed.

Hi. Thanks for taking my call. Just two quick questions I can ask; both at once. I think you had mentioned the tax rate had declined to about 18% this quarter. Is that a good way to think about the dLocal tax rate going forward in future periods, quarters, years? And the second is it seems like Pedro from your comments it doesn't seem like there's any real change in your medium term guidance. Are there any other little caveats you'd like to add from the guidance given last year in your Investor Day?

So, I'll take the tax question here. So, as you know when we operate in over 40 countries, right, so our tax rate is derived from all those activities. In the mix of revenues, you know we talked about local-to-local increasing. We've got our sophisticated hedging strategies, all of those things tend to impact the way we the way our business is taxed. And so at this stage I would say second quarter we came back to what I call more historical levels, which were the ones that we were experiencing in the last 12 months. Q1 was a bit of a peculiar time for us. So, again, it's hard to tell where we're going to be here in the future. I think it's hard to pinpoint a certain tax rate, but I think where we stand today is just about the place where we think we're going to be as we grow the local-to-local business maybe the tax rate go up a little bit here, but I think we feel pretty good about kind of the rate that we have at this stage.

At this point, we have not reviewed our mid-term guidance, as it's a more extended process that we will address at the end of the year. We are proud of the work we've been doing, but guidance has faced challenges due to market volatility. Therefore, we haven't provided any formal update on mid-term guidance. Conceptually, we continue to see excellent opportunities for TPV growth over several years, with a pipeline full of chances as we collaborate with our global merchants. This should drive sustained growth in gross profit over time. If you compare 2024 to 2023, where gross profit growth was not favorable, we had specific tailwinds in 2023 that make it a challenging comparison. We believe that 2024 will serve as a reset, presenting a solid opportunity for growth both sequentially and year-over-year from the new base. The sequential growth we've observed from Q2 to Q1 illustrates this point. Regarding EBITDA, we are currently in a disciplined investment cycle, with our EBITDA to gross profit margins in the low 60s, which is among the best in our peer group, even compared to much larger companies. This demonstrates that we are a lean, well-managed organization, even as we make incremental investments. We believe that once we navigate through this investment phase, there will be considerable operational leverage in our financial model. We will provide specific updates on mid-term guidance later this year.

Thank you. And our next question comes from Madeleine Zhou with Susquehanna International Group. You may proceed.

Let me clarify the second part of your question. We haven't reviewed our mid-term guidance yet; that's a longer process that we'll address at the end of the year. We're quite proud of the work we've accomplished, but guidance has been somewhat challenging due to market volatility. Therefore, we haven't provided any formal updates on mid-term guidance. Conceptually, we still see very good opportunities for compounding Total Payment Volume growth over several years, and our pipeline remains full of opportunities as we engage with global merchants. This should also contribute to continued growth in gross profit over longer timeframes. When comparing 2024 to 2023, where gross profit growth was not positive, we had specific tailwinds in 2023 that made it a tougher comparison. We believe that 2024 will serve as a reset, offering solid opportunities for sequential and year-over-year growth from a new base. The sequential growth we observed from Q2 compared to Q1 illustrates this. Regarding EBITDA, we are currently navigating a disciplined investment cycle. Our EBITDA to gross profit margins are in the low 60s, which is among the best in our peer group, even against larger companies. It's crucial to keep in mind that we are a lean and well-run organization, even while investing a bit more. We believe that once we complete this investment cycle, there will be significant operational leverage within our financial model. These insights reflect our current view on the mid-term, and we intend to offer specific mid-term guidance towards the end of the year.

Hi, thank you. Pedro, it's Jamie at Susquehanna. I just wanted to ask about constant currency. Is there a structure that you may be thinking about you could share to gauge the performance of the company on a constant currency basis both from and as reported but also from an investor relations perspective because I think a lot of us in the buy-side are struggling to meter that. Your old chart used to be more forthcoming about that. Is it possible to share that with an Investor Relations message?

Jamie, you're correct. I have spent a significant portion of my life dealing with constant currency. However, I’m not sure it fully addresses the complexities we face. The real complexity comes from the presence of numerous emerging market countries with highly volatile currencies. Even if we analyze these situations in constant currency, we would still observe significant volatility. To answer your question, yes. Additionally, it wouldn’t reveal anything that isn't already public since you can take the dollar disclosures and convert them to constant currency. We can make that easier for you and prepare that information; I will note that down. However, I don’t believe it truly resolves the challenges everyone faces in making projections going forward or in understanding the different markets. The currency information is publicly available, so when we report in dollars, it’s relatively straightforward to convert back into constant currencies. We can certainly do that. The reality remains that emerging markets offer incredible opportunities, many of which arise from volatility and complexity. That’s what we are addressing for our merchants, which complicates projections.

Okay. I mean, yeah, I think it would be helpful. You may be giving us too much credit if you think we could do it. And I mean we try by certain markets of 40 markets is, it's a treasury assignment. It's hard for an analyst. And then so to go back to John's question about the medium-term guidance, I mean I guess asked another way is there anything that you know now that you didn't know when you took the job? I mean, you said in your prepared remarks this is still a great TAM, a great company. And I know you love the payments universe, but is there anything operationally that you know now that you didn't know.

Absolutely not. I think it will be a year I think tomorrow. I remember when I took the job, I mentioned super attractive opportunity in terms of addressable market and the relevance that the global South will have for global businesses, a fantastic lineup of global merchants, most of the largest global digital companies by market caps we are serving in one market or the other, and then a high margin, high cash generation financial model. I think all of that continues to be true. And so it gives us an incredibly solid base off of which to build dLocal. Now again granted 2024 has been challenging from a profitability perspective, not so from a TPV perspective, which I still think is the most important metric. And so I'm equally encouraged as I was when I took the job. And actually looking back on the prior quarters, I think things begin to look in a way easier going forward as I really think there has been a general reset and now we can start growing from here. It will be volatile. Emerging markets are volatile at our scale. As our scale grows and we have more TPV and more merchants, I think we benefit from law of large numbers and hopefully the volatility levy gets decreased. But I continue to be optimistic. There's a lot of work and execution will be key. But I don't see anything structural or anything that makes me less optimistic on our ability to generate shareholder value over the appropriate time period.

Thanks for taking the question. I wanted to revisit the discussion about the net take rate. Pedro, you provided great insights into what influenced the conversation with your largest client. However, I would like to delve a bit deeper into the factors in the market that led your largest merchant to request a reduction in those tiers. Additionally, I'm curious why merchants ranked two through ten wouldn't have the same leverage. Understanding this better could help us establish a baseline for the net take rate and reignite our enthusiasm for the stock. Thank you.

Yes. So look, I think there are multiple factors here. The first one is starting point is a very relevant part of the conversation. I think as we disclosed last time, this was a merchant who we had accompanied through a phenomenal execution and growth across the region where their focus in managing us was very much on efficiency, conversion reliability, redundancy. They were pushing go-to-market very quickly and weren't necessarily optimizing around cost. That's the typical go-to-market strategy and they've clearly been very successful. That also meant that we were running them at a net take rate, like we said, which was literally, 10 times what they were being offered by certain local processors. So it really wasn't sustainable and that's not the case with all the Tier Zero merchants. We just mentioned another very large Asian cross-border merchant, who've been also been assisting with across all of LatAm. Their starting point from a take rate perspective is much lower, so the risk of downside is smaller. Other than that, there are vertical category considerations, country mix considerations that go into the conversation. But I think the most important driver is really we had grown very quickly with them and they were running at a take rate that simply wasn't sustainable over time. So as they've gone to a more sustainable take rate in the 40%, 50%, 60% net take rate range, which is still 3x, 4x, 5x what they could get with local providers, I think that shows the value of what we offer them. That's probably more along the lines of what an incredibly large merchant in that vertical with their country footprint potentially should be running at and not where they were running prior to that.

That's super helpful, Pedro. And then just one follow-up kind of thinking about like the long-term, right. I was hoping you could opine a little bit on like what you believe your moat is. And this is kind of from a competitive dynamic standpoint as well just thinking your net take rate is 115 basis points today your largest global peers like Stripe and Adyen and sub company like Nuvei, they all have net take rates in their developed markets have say 15, 20 basis points, right? So you have a really attractive revenue pool that they might want to come after. So I was hoping you could kind of like just talk big picture about like what's your moat? Why won't your merchants leave, if a company like Adyen and Stripe offers them more attractive processing rights.

Thanks. That's a great question. And the kind of questions we like to answer. So first of all, I'd be very wary of extrapolating developed market take rates and to emerging markets. And you've done that implied in the question. You're not extrapolating. But I also think the key success factors and what a company's core competencies should be built around are very different to be successful in developed markets and emerging markets. I think in developed markets, it's really began to become a race for features and a race for volume, primarily. Those companies you mentioned have all built stocks in the markets where they operate. If you were to trying to replicate that across 40, 50 emerging markets it simply doesn't translate, because many of these markets are subscale. So you might see greater vertical integration in Brazil or in India, you're not going to go build a full-fledged acquirer across 50 markets. So I always like to say dLocal is less of a vertical play and it's more of a horizontal play. We are this API layer and this middleware one single that abstracts all of the complexity both technological but also regulatory, conciliations across 40-plus financial – 40-plus emerging markets. And that's a very different build to what you have to build if you're building for developed markets. So we've always said, we don't think we have something to offer in developed markets and hence we've retained our focus on the global south. I think it's fair to say many of our developed market competitors with their playbooks we don't believe will fare as well as we do in emerging markets because the key success factors are others. It's how do you make this network of multiple acquirers, multiple digital wallets, multiple central bank sponsored payments systems in a highly fragmented, highly volatile world work, which is different to what works in the US or Europe. On take rates, don't forget that what currency pairs you're doing on your FX and your cross-border make a big difference. So our developed world competitors are doing euro to dollar; there's no spread there. When you're doing Argentine peso, Egyptian pound, Nigerian naira, Peruvian sol, you begin to see currency pairs that actually generate much more FX spread. That's always been the case. That's the case for credit cards, and that's part of the attractiveness of the emerging market play, is that you do have that cross-border overlay, which is much higher in terms of take rates than if you focus on developed markets. So at the end of the day, that combination of sole focus on the global South, one single middleware that abstracts complexity across 40-plus markets, and the FX overlay is what we think differentiates what we're doing and gives us a high chance of success going forward.

That's a really comprehensive answer, Pedro. Thank you.

Thank you. I would now like to turn the call back over to the company for any closing remarks.

Yeah, thank you. So, thanks, everyone, for the interest and support, as always. There's a lot going on here. I think we're all excited about what we're building as we've reset the base in this 2024 for a long-term growth story. We mentioned many times in the call today, our addressable opportunity is really, really large across emerging markets. And we believe that emerging markets will continue to become ever more important to global companies, and we're one of the default options for payment needs across the global South. We continue to launch a few select new markets. We continue to see great interest in our Southeast Asian and Middle Eastern expansion, so there are many growth vectors we need to execute on. We've tried to recognize and highlight that short-term there is volatility across the global footprint that we serve. But longer term, as we grow and scale, that volatility hopefully becomes more manageable. And we really think that this company is uniquely positioned to continue to grow and capture value given the right time horizon and investment outlook. Our financials are super solid. Our balance sheet position is super strong. And so we really can focus on continuing to deliver value for our merchants over the long run. We look forward to reporting back to you as all of this happens on a quarterly basis, and we will speak again in three months' time. Thank you very much.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.