Q1 2023 DLocal Limited Earnings Call

Speaker 2: Good day and welcome to the D-local first quarter 2023 results call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. Instructions will be given at that time. As a reminder, this call may be recorded.

Speaker 2: I would like to turn the call over to Soledad Naggar, Head of Investor Relations. You may begin. Thank you very much, a break.

Speaker 3: Sebastian Canovis, our Chief Executive Officer, Jacob Singer, our President and COO, Diego Cabrera-Canay, our Chief Financial Officer, and Maria Olman, Vice President of Corporate Development and Investor Relations.

Speaker 3: We are providing a slight presentation to accompany our prepared remarks.

Speaker 3: This event is being broadcast live via webcast and both the webcast and presentation may be accessed through the local website at investor.delocal.com.

Speaker 3: The recording will be available shortly after the event is concluded.

Speaker 4: all were looking.

Speaker 3: In the future, we focus our efforts on deepening our presence in the countries in which we already operate, mostly in Africa and Asia, by establishing more direct connections with payment methods and acquirers, and continuing to enhance our solution.

Speaker 3: In our last Ernie skull, Haku highlighted how excited we are about the growth of opportunity Nigeria.

Speaker 3: Let me share a little bit more of our journey in this country.

Speaker 3: We open this country back in 2019.

Speaker 3: because one of our merchants needed us to help them access local payment methods.

Speaker 3: As our roadmap is driven in great part by our market needs and the request was within emerging markets, we made the launch of Nigeria priority.

Speaker 3: We were then able to offer this to our entire merchant base, and today our solution in Nigeria is used by 6 out of our top 10 merchants.

Speaker 3: One great benefit of choosing our solution is the wide access to non-traditional payment methods.

Speaker 3: According to statistics, in Nigeria, only 3% of the population have a credit card. So, Martin Trilion asks to connect alternative payment methods and local card schemes such as Verb.

Speaker 3: The opportunity Nigeria is massive, as the country has a huge and young population.

Speaker 3: Also, from the perspective of our merchants, it is a market that is complex to operate in and they strongly benefit from our solution there.

Speaker 3: As we mentioned in previous quarter, growth takes rate is significantly higher than average, while net takes rate is largely in line with other markets in which the local rates.

Speaker 3: Gross profit margin is lower than the average, but we believe that over the medium to long term, as we go deeper into the region, developing more integrations and payment methods, and gaining more efficiency in accessing the FX market, the gross profit will expand.

Speaker 3: As we always emphasize, we focus on absolute dollar profit growth, even if lower margin in the short term. Maximizing absolute dollar profit, we'll create the most valuable business in the long term.

Speaker 3: Now, I will pass on to Jaco to discuss our achievements in the different geographies. Thank you Maria. Africa and Asia have been a key engine of growth for us.

Speaker 5: Our merchants continue to sign up strong demand for our solution in these geographies and these markets also have attractive economics.

Speaker 5: The results of our push into these regions speaks for themselves.

Speaker 5: Revenue in Africa, Anation, U-123, Ruay 209.7% year over year, 53% quarter over water, reaching 39 million dollars with a large part of the acceleration driven by Nigeria.

Speaker 5: A. Jean-Frieca, a rate represent a really important of our business at 28% of our revenue in Q1 2023.

Speaker 5: In Q1 2023, we saw strong growth in Nigeria with revenues increasing by 16 times year over year and 91% quarter over quarter.

Speaker 5: Nigeria accounted for 20% of our revenues in Q1 versus 2% a year ago.

Speaker 5: We are also very proud of the problems we have achieved in several other markets, such as Egypt, Morocco, Indonesia, and Malaysia. All of them growing triple digit year over year and becoming more relevant to our business.

Speaker 5: It is still early days for us in these regions and we are very excited about what we believe to be a significant opportunity ahead.

Speaker 5: Moving on to Latin America, we continue to see the growth across the region in Q123, with revenue growing by 27% year over year and 6% quarter of a quarter to 98 million dollars. Q123 markets Argentina's return to positive revenue growth, increasing by 41% quarter of a quarter.

Speaker 5: the path word Mexico outperform all their markets.

Speaker 5: We look at two months' view to see an normalized view in order to assess the development of a region.

Speaker 5: In the last four months to Q123, each of the main countries individually showed significant revenue growth rather than 20% year-over-year and 62% growth on the aggregate.

Speaker 5: It is important to highlight that the revenue distribution by market is a result of our merchant strategy.

Speaker 5: Our commercial teams are internally organized for merchants and we do not optimize for targets by geography. We have global agreements with our merchants and we offer them access to all of the emerging markets in which we operate, supporting them in the markets in which they wish to grow. We continue to invest thoughtfully in expanding our global team.

Speaker 5: We have hired new talent particularly in the areas of sales and marketing, take-and-product and operations to pursue the opportunities we see in the markets and to drive towards our long-term objectives.

Speaker 5: Tech-related roles now account for around 41% of our FES supporting our crappy innovation of new products.

Speaker 5: In Q1 2023, we grew our team by 201 FTS or by 36% 8% over year to 763 employees.

Speaker 5: We continue to recruit talent outside of the America as we focus on hiring locally to leverage on the ground knowledge and develop deeper understanding of local market ideas in Greece.

Speaker 5: We reach 173 FTS in Africa, Asia by the end of Q123, representing 23% of our world.

Speaker 5: We will continue to invest in talent in a disciplined way, staying in line and always ensuring that we import talent that has a strong cultural fit.

Speaker 5: We are proud of our team and believe it is a stronger server.

Speaker 5: Diego will now review our financial highlights. Thank you, Jaco. And hi, everyone. We have seen a steady increase in pay-ins and pay-outs TPD quarter after quarter. During Q1 2023, pay-ins increased by 52% year over year and by 7% quarter over quarter.

Speaker 5: The yields increased by 133% year over year and 11% quarter over quarter.

Speaker 5: The product share remains relatively unchanged quarter to quarter with paying accounting for 70% of our TPV and payouts for the remaining 30%.

Speaker 5: The contribution from payouts has increased over a year as we have been successful in providing the last mile payment service in the merchant markets to global public payment companies and we continued position ourselves at the Payment Service provider of choice in the merchant market for global payroll, rail hailing and on demand delivery companies.

Speaker 5: We are product agnostic. All our products bring incremental profit. And when we combine them, they bring synergies both for emergence and for us.

Depending on which customers we onboard and their strategy in the quarter, the share of pay-ins versus pay-outs may vary.

We see brother diversification as one of the strengths of our business.

Going forward, we are very positive about the continued growth of our products.

Our cross border and local to local volume show solid growth year over year and quarter over quarter.

We cross border volume growing quarter by 12% increasing its share contribution from 53% in Q4 to 55% in Q1 to 2033.

As Maria mentioned earlier in the call, we have seen that large merchants tend to have a combined strategy and we expect fluctuation between services to continue from quarter to quarter.

Grabbing a source of reach at record height of $137 million in Q1, 2003.

Grow your 67% in your area and 16% in quarter to quarter.

We continue delivering strong revenue growth both from our existing and from our new customers.

During Q1 2023, of the 57% year-over-year revenue growth, 47 percentage points or $41 million came from existing merchants and 10 percentage points or $9 million came from new merchants.

Our revenues over TPD or gross take rate was 3.8% during the quarter, compared to 3.6% in 2004-2022. Fluctuations from quarter to quarter are mainly driven from changes in business mix. As Nigeria and Argentina, with higher than average gross take rate, were the main drivers of the quarter over quarter revenue and gross take rates.

in countries, products, then the methods, and increase the share of wallet.

Moving on to slide the thin, remain focused on growing absolute gross profit dollars.

During Q1, our gross profit reached $62 million, up 42% over here and 2% quarter over quarter. With a net stake rate, stable quarter over quarter, 1.7%. 1.7%.

Given the quarter where she turned increased, in pressing costs from 1.8% in default 2022 to 2% in 2021.

which is in line with increasing growth takers from 3.6 to 3.8%. These increases are mainly at 3.1 to increase in TPD in Nigeria with higher fees and higher expectation costs. From a growth profit margin perspective, margin drop to 45%, compared to 47%, if you would afford 2000.

In contrast, the country mixed reduced the margin as we experienced strong growth in Nigeria, which brings positive growth profit dollars with net-take rate largely in line with other markets, but a lower than average growth profit margin.

Excluding Nigeria, gross profit margin would have been about 50 percent in the previous quarters, reaching 54 percent in Q1, 2023, increasing from 51 percent in Q4, to also excluding Nigeria.

Excluding Nigeria, gross profit margin would have been about 50% in the previous quarters, reaching 54% in 2021-2023, increasing from 51% in Q4 2022, also excluding Nigeria. We also remain focused on growing RBDA.

During the quarter, we were able to grow an adjusted VD8 to $45 million up 38% year-older year and 13% quarter of the quarter.

adjusted VDA margin was 33% in Q1

The year over year and quarter over quarter decrease is driven by the gross margin decrease.

Particularly in 2021-2033, the main driver of that decrease was the high growth in Nigeria with lower than average cross-smarting.

Net income totals $35 million in any quarter.

growing by 35% over the year. Sequentially, it increased by 83%, I think you fought in 2022, we incurred non-recognitive expenses of $8 million. Before handing the call back to SEVA for the closing remarks, I will touch on liquidity.

In Q1 2003, we observed strong net cash generation of $50 million, even considering that we acquired $37 million of our own shares as part of the $100 million buyback program.

The two main drivers of our cash explosion generation were our profits and a sequential normalization of funds and funds for killing escrow as warranties for merchants and partners, and the main use of cash was the buyback. The main use of cash was the buyback.

During our last term in coal, we share with you that we have taken extraordinary short term measures in the form of warranties and advancements of funds to bring additional comfort to our merchants and partners.

using our own funds. We also mentioned that we expected a situation to normalize over the next quarters.

In Q1, we have already collected $10 million out of the $13 million in advances we gave to some of our merchants and we recovered $4 million of the restricted cash we had as warranty or standby letters of credit.

decreasing the amount of other assets from $57 million to $43 million.

Finally, we observe a sequential normalization of the settlement periods of our merchants that were in a few cases reduced in Q4, and we continue generating cash as we grew our TPD.

All together generating an inflow of $32 million from the variation of the net trade receivers and payers.

We ended March 1st, 2022, with a consolidated cash position of $518 million with $2,000 and $3 million of on funds and $295 million of merchant funds.

We believe our strong cash position remains a competitive advantage.

Seba, the floor is yours. Thanks, Diego. We are very proud of our strong start to 2023 and continue to be excited with the runway ahead of us. Our performance shows the distinctive strength of our business, which we continue to build, focused on long-term profitable growth. Combining.

Our robust dollar growth on a TPV revenue growth profit adjusted EVD and net income basis. From a strategic standpoint, a proven track record in executing our merchant growth health strategy and outstanding geographic expansion.

capitalizing on the huge opportunity ahead of us. This is all underpinned by our TechDNA and merchant-centric approach. Thanks to Henry to the broad reader community who is already good atqSBA.

Last and most importantly, our lean and disciplined culture. We deliver all this with a lean team, continuously striving for action.

Our culture is key to continue delivering our long-term ambitions. We reaffirm our outlook for the rest of the year. Revenue between $620 and $640 million, with an implied NRR between 140 and 150%, and adjusted EVDA in the range of $200 million to $220 million.

We will be celebrating two years as a public company. A lot has changed since the IPO, and we are excited to see you again and share an update on the next chapter of our story. Big thank you to our global team, our customers, and our investors for their continued support. I'll now hand back to the operator to open up for questions.

If you would like to ask a question, please press star 11.

If your question has been answered, you'd like to remove yourself in the queue. Please press star 1 1 again.

Our first question comes from George Currie with Morgan Stanley . Your line is open....

This question comes from George Curry with Morgan Stanley . Your line is open. Hello.

Can you hear me? Hi, Clark. We hear you. Hi, Clark. Thank you. Thanks and congrats on the numbers and the additional disclosure, much appreciated. I wanted to see if you can double click on...

The Nigeria business evidently has grown to be your biggest geography. And there's a lot of questions out there in the market about how do you operate in that market that has very high capital controls and restrictions? Can you maybe walk us through what percentage of that business is cross-war there versus local to local?

And the part that is cross-border, how does it operate from an FX perspective, can you access all of your needs in the official FX market? Is there any restrictions for you to repatriate a currency? Is there a parallel market that you're accessing? I think it would be beneficial for everyone to understand exactly.

the limitations and how you deal with them as you grow that business. And then my second question is on Argentina. There was a really nice optic in revenues in Argentina in the first quarter. So just wanted to see if this is the first of several similar step ups that we're going to see as that operation normalizes or was this sort of like a one of and you continue to expect the business to be.

a little bit under pressure because of the difficulties there. Thank you.

Thank you very much for the questions. I apologize in advance. I'm under the fluke. So I apologize for my voice.

Nigeria. So we are extremely excited about our results in Nigeria. We think it's a very, very positive news. That's part of the beauty of the company and part of the beauty of our value proposition. We started in the GN 2019.

So this is not an overnight success. It's taken us over four years to get to this point, and we are extremely proud of it. Just to give you a sense, today six out of our top 10 merchants are using us in Nigeria, both cross border and local to local.

Nigeria has a market dynamic where there's very, very few international credit cards. There's a credit card called Verf, which is very prevalent. And as you said, sorry, I apologize. There's very limited, there's very straight capital controls. What's happening in Nigeria is that there's a market rate, there's an official rate and there's a market rate.

We are accessing today the market rate, we are licensed to do so. And that's why you see our margins, our gross margins be lower than our net take rate. Sorry that our gross margins be lower than the average. Our net take rate, it's a creative, it's very much in line with other markets. In other words, we make money in Nigeria. We create value for our merchants.

but the margins are lower. This is part of the expectations we have going forward. As we normalize access to the FX markets, as we gain scale in both paying spare outs across border local to local, we expect our margin to potentially increase.

but the margins are lower. This is part of the expectations we have going forward. As we normalize access to the FX markets, as we gain scale in both pay-ins, pay-outs, cross-border, local to local, we expect our margin to potentially increase. HACO, feel free to compliment, please.

So, Jorge, thank you very much for your time and thank you for your question. It is important to also mention, as you asked, is as of today we are able to fulfill 100% of our needs in the market and to operate at scale and to serve all of our merchants with the full suite of products.

It's important to mention that also in Nigeria, we managed to be super successful in Nigeria because for global merchants, we want to grow and scale within the market. It's a must to go local and under the CMEPI, they are integrated to us. They managed to offer all the local payment methods which are as a example, verb.

and operate an grow and go from scaling the work. Okay, on you.

Sorry, on your question on Argentina, the best way to look at our business is not by country by country basis and not on a quarter by quarter basis, but across regions. So your question, your point is fair. We've had a great quarter in Argentina. We are seeing fundamentally good trends coming back to this market after a crisis.

that impacted us during Q3 and Q4. So you saw some of the normalization that we were mentioning. Obviously, Argentina is a complex market and it has its volatility. But I think the key point in Argentina is how reliant the merchants are on ourselves. This applies also to Nigeria. We are solving for very complex environments.

We are solving countries like Argentina or Nigeria for merchants including Facebook, Netflix, and Spotify. So these are very relevant merchants on the ground and for the country. We expect for them to be able to continue to navigate. We've operated successfully in Argentina since 2016 across every macroeconomic environment. We don't expect that to change in the near future.

Thanks, Seba, and Kako, and Kongrad again. Thank you. Our next question comes from Tito, La Barada, with Goldman Sachs. Your line is open.

Hi, good morning, Seva Hacobo. And everyone, thank you for the call. I'll be taking my questions. A couple of questions. One, first off, follow up on Argentina. Just some concerns about a potential currency devaluation. I know you've had a lot of issues in Argentina last three quarters, which seem to be correcting. But if there is a devaluation of the currency,

How could that impact your business? If at all, just help us think about, you know, potential risks related to that. And then my second question, I mean, I guess around Latin America, but more specific in Brazil, you know, the growth in Latin America has somewhat slowed. And if you look at Brazil, you know, last four quarters, revenues have been kind of flattish. And I know you say, you know, don't look at any one country in particular.

But just to understand, if there's anything going on specifically in Brazil, why the revenue is up in kind of flatish, any color you can give on the outlook there would be helpful. Thank you. Thank you very much for the question. So in terms of the evaluation, we've been operating in Argentina for all these years, and there's been constant evaluation. And our business hasn't suffered from it.

Keep in mind, we have global merchants that think of their products in dollars. So typically when there's a devaluation, the reprise, devaluation does an effect at all our ability to expatriate or repatriate funds. It's just a different price at which we buy or stop currency. So we don't expect any impact on devaluation of the currency. We don't have effect exposure to Argentina.

Our revenues are in dollars, USD accounts. So, the valuation of the peso wouldn't affect us. The same way that it hasn't affected us in the past. There's a Brazil.

Your question is sir, we've grown Brazil last 12 months growth. It's been 30%, Latami 20%, 38%, Mexico just to give you a sense was 93%. The reason why I chose these metrics is because those are meant to be the most mature markets. We are seeing very positive trends already in Q2 in Brazil.

Brazil is a market that has fly more exposure in our end on retail and retail, obviously it's a little bit more seasonal than Q4 than Q1. So we expect growth in Q2 to come from multiple different markets, including Brazil and Mexico. So if you will, we expect more of a normalization in that sense. We don't grow in step, we typically grow in step functions. So you don't see the linear growth and that's why I see it.

the question. So a couple of questions here. The first one, Seba, just to understand, when you provide services to your clients in Argentina, are you able to provide the official effects to the about 230 or the market effects about 460? And then ask the second one.

Don't hide, how are you? Thanks for the question. Both. There's a set of merchants that access what's called MULK, which is what you call the official rate. And there's another set of merchants that access the market rate. We've operated with both models. We spoke about this in our Q3 and Q4 calls, where that access has been limited.

What we've seen is that merchants do business in the country independently of the FX rate. The reality is that they are here to stay. Our merchants are very consolidated in this country. And the FX number or the price of the currency is just a given point. Keep in mind when you have an official rate you also have a set of taxes that apply. So we operate in both models. We also have payouts which act as a hedge and the opposite flow. So both dynamics are important. Harco feel free to compliment.

Let me just ask, just to make sure, and how about for yourself, are you able to expatriate that the official, the marketable for also?

Let me just ask, just a mixture, and how about for yourself, are you able to expatriate the official, the marketable for also cargo?

I think you're muted.

Sorry. So, let me be clear about one point. Our revenues and profits are dollar denominated also in Argentina. We collect revenues in dollars and our revenues are deducted prior to settlement, which are dollar denominated. That acts as a rule in all of the markets, including Argentina.

Let me get to the part where I want to understand. You are recognizing $20 million approximately in revenues in Argentina. Those, if I understand accounting rules, they have to be converted by effects. We have other companies recovering there, they are never the same.

But that other case, they don't really expect to create or they don't take out the money. So in reality, like if they were to exchange that in market rate, in your case, it would be like you're actually not only 20 million, you're only market rate 10 million dollars in Argentina. So the point I'm trying to get here is like,

When you convert, can you get the 230? And the same in Nigeria, because I understand you're also doing both, or we're looking at an accounting statement that has an official rate, but that money is either part or converted as a different rate and how exactly does that flow in your income statement. Thank you, Dom. And thank you for following up. We'll...

What that means that at the time we deduct, grab you some fees, the funds are varying dollars in our operating entities in the EU or the US. So I want to, there is no money parking, urgent key, or anything like that, where you know, it's an account thing.

Okay, I want to have a minute. In Nigeria, our profits are in dollars in the US and European Union accounts. It's not FX mutual, it's dollar accounts in global markets. We don't hold our profits in local currency, in local markets.

Super dear. Thank you very much guys and congrats on the on the print.

Thank you. Our next question comes from Jason Cufferberg with Bank of America. Your line is open. Thank you guys. Good morning. I wanted to come back on Art and Tina. I'm sorry on Nigeria. I should say, I know you've been there since 2019, but pretty remarkable growth just in the last 12 months. You've gone from 2% of total revenue to 20%.

Can you just call out what some of the most significant drivers of that have been? Is it a handful of large merchants that have really scaled operations there? And then can you just go a little bit deeper into why the gross margin is lower? Is it pay in pay out mix? Is it cross border local to local mix? Is it just

what processing costs are in the country for some of the alternative payment methods. Thanks. Jason, thank you very much for the question. So what has happened in Nigeria is that our product has gotten better incrementally. It's not easy to gain the trust of your merchants going into a new region. That's not something that happens overnight.

to the sixth out of our top ten customers operate with us in Agia and we are extremely proud of that. Also from a competitive dynamic you see that the reality on the ground is that there are not many alternatives to the service we offer, particularly not when dealing with global public companies. I think we've been able to differentiate on that.

And again, our product gets better over time. We have a much deeper understanding, a much deeper product line in this country. And there are things that there's a clear understanding by global merchants that Nigeria is a massive opportunity. We're looking at one of the biggest countries from a population standpoint.

extremely positive and great growth and we're very proud of that. But you see many of the same dynamics in our business, in Egypt, in Morocco, in Indonesia, in Malaysia. Some of that takes time, but over time, and that's why we continue to insist on investing on this opportunity. We believe those things compound and allow us to differentiate.

We had extremely, extremely bullish about the opportunity in Nigeria, not only because of Nigeria, but also because when merchants use that in Nigeria, we are a better company. We become more entrenched. We have much more significant competitive advantage. And we differentiate from every other play out there.

In terms of margin, Maria, feel free to compliment. We have a much higher than average gross pay grade. We have a very much in-line net pay grade. And that's a function of our costs of processing payments and expatriation. And that's what's driving it. When I sit on this point of the 40 countries, I know Nigeria calls out everyone's attention and we are very proud of it. But there's many levers. And that's why we care so much about coming to this door.

You're going to have quarters where one country is going to grow faster. This case was Nigeria. There's going to be other quarters. There's going to be Brazil. Others are going to be Indonesia. We think that's a perfectly healthy thing.

Thank you, Jason. Just complimenting on the gross profit margin, very important to notice that Nigeria is one of our expansion markets. And then as we go deeper in the market, building more connections, building more connections with our car and gain volume scale, we have opportunities to improve our processing costs and expand our gross margin. Right, right. Okay, that makes sense. Just as a follow up, I wanted to ask about your own cash.

Sure. Thank you for the question. And first thing to say, we had a very strong catch generation during the quarter, a total cash increase by $50 million. Even after invested $7 million in the share buy-back program, this would have been $17 million increasing the quarter without that.

18 million of this comes from an inflow from release of a portion of the warranties and advancements we provided to the merchants and partners. We also recorded an income of 35 million dollars that converts to cash and the inflow we generate with the growth of the TPB.

and we expect this trend to continue going forward. With regard to our own funds, you know, you have to, whenever you have your own cash, you need to analyze both what is in the own bank accounts and the profits that we still have pending to be transferred from the other accounts. If you consider those two together, you see that our own cash increased by $20 million even after…

amounts we have in Q4 plus the profits of the quarter. We expect these to sequentially reduce in the following quarter.

in Q4 plus the profits of the quarter. We expect this to sequentially reduce in the following quarter. That's great color. Thank you guys.

Thank you. Our next question comes from Ashwin Sherbakar with Citi. Your line is open. Thank you. Hey guys, so I want to stay on the on the cash question because as I look at the page.

of your presentation. You're kind of talking about releasing restricted cash to your own funds at the 10 million degrees in merchant advancements and the decrease in guarantees to merchants and trade processors. Did you provide some of the...

rationale behind this is this sort of a structural development that continues to benefit you in the future or is this

sort of a one-off thing you did and maybe some background on why this is.

sort of a one-off thing you did and maybe some background on why this is. Maria, do you want to take it?

Thank you for your question. First of all, as we mentioned in Q4, we took extraordinary measures to provide comfortable to our merchants. And this is the reason why you see that other assets increasing.

As you mentioned before, we expect that to reduce over time. And you know, this reduction of 14 million is the trend that we have highlighted. We expect that to continue reducing.

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

This is a normalization of the previous trends. So we were under attacking Q4, we told you this would normalize in Q1 and that has normalized already and it's going to continue to normalize over Q2 and Q3. So there's no structural difference in our business. We don't require balance sheet to grow.

our TPV actually generates cash and that's why you see in this current quarter our cash file increasing. So there was no fundamental distinction or difference in our business dynamics in this Q1. There was a normalization from what was happening before the short-serve report. Understood. Is that clear?

Yes, it is clear, thank you for that. The other question I had was with regards to, so as I look at sort of your TPV growth, your revenue growth, your gross profit growth, and adjusted EBITDA growth, of course the fastest one is TPV and the slowest growth is adjusted EBITDA, so.

And I do see the explanation, you know, growth in Nigeria as a primary driver of why gross profit growth is slower. Investments you're making as a driver for why adjusted GDP growth is even slower than that. My question is more of normalization over time.

as you know entering into new countries is part of your business model. You continue to do this. You already mentioned that Nigeria is still relatively early stage for you. So in terms of financial metrics what is a good strategy for you?

normalized gross profit margin level? What is a normalized EBITDA margin level over time?

Maria, start and Diego, feel free to compliment. Actually, I appreciate the question. So I think it's good to get one step back and see where we are currently standing. When you get our ability to do all of our work, which is the way that some of our competitors report, we are best in class. We've had a 74%.

margin this quarter, it's been consistently over 70%. And we think we're in a very healthy position. We're starting at the HCA, and we will be over for much shorter. We think that will be a very big mistake for us and for our shareholders. We wanna keep the independence of investing. We have the benefit of already having a very profitable business. We do so in a very disciplined approach. So that we would like to do for really many numbers for this year.

That's what we can say for now. There's no fundamental reason why we will change that at this point. You mentioned a geographic expansion. Yes, it's going to continue to come. At the same time, there's no other hundred markets we want to go after. We already have 40. But we leave that break. We are not optimizing. We don't have any particular targets that we are optimizing for.

We want to keep the independence and the ability to continue to invest, which we believe is the right thing to do. Again, taking into account that our work is just a beginning of the profession.

Thank you. Our next question comes from Nihah Aguala with HSBC. Your line is open. Thank you so much for taking my question. Congratulations on the quarter. A few clarifications first on Nigeria.

With the number you provided, I think we calculated a gross profit margin of about 9% for Nigeria. You mentioned that the fees are higher, the repatriation costs are higher in Nigeria, but when can we expect to normalize and at what level? I think it is currently quite dilutive to your overall gross profit margin.

in providing advances to select merchants. Is it right to assume that of the 72 million you were able to release 18 million this quarter? And my third question is on the TPV growth. Can you give us some sense of how the pipeline for 2Q and 3Q are evolving since you have very good rules or

profit dollars to our business. That's what we want and that's what we're optimizing for. Yes, Nigeria is diluted to our margins. Tomorrow if we switch off Nigeria our margins will go to 54%. We don't think that's the right thing to do, we don't think that's the smart thing to do, and we don't think that creates value for the long run. How fast are those margins going to normalize?

We don't know. We expect that over time to normalize in the mid to long term. It's also a function of how the market develops, how our customers develop, and how our product develops. But even today at the current scenario, we want to continue to do this business. We think this is a great business for our company. And again, we are not optimizing for the margin structure. We don't think that's the right thing for our business to do.

Nigeria contributes our profits at a very similar level than every other market. The dynamics behind revenue are different and that's why you see the margin being slower. And I insist, tomorrow morning we switch off Nigeria, our margin jumps to 54%, but we are a much much worse company. That's the first question. In terms of cash...

Maria de Valle de Tequil. Hi, Nihat. So yes, our own cash, if you include the profits that we still have been transferred to our own bank accounts, grew $20 million. And that is after the $37 million we invested in the shared buyback. We had at the end of the quarter $74 million of cash that we haven't transferred.

That is basically what we had at December , that was about 38 million dollars, plus the estimated profits of the quarter. We follow a very proven approach before transferring profits to our own bank accounts, so we make sure that we have audited information. Keep in mind that we file our audited financial statements by April after we close the first quarter, so both the Q4 and the Q1 numbers were audited after the quarter.

During Q2 we expect to transfer those funds or a substantial part of those funds to our bank accounts and we will still have always the profits that we generate in the quarter pending to be transferred as results are being audited.

Nihon, your last point on TPB. We are seeing very healthy pipelines. I mentioned before, we are seeing so far in the quarter very healthy trends across multiple geographies. Again, I've said this in the past, we've never been a better company from a product standpoint than a geographic footprint standpoint. When you look at our merchant base, it's the best it's ever been.

So we are very optimistic about our Q2 numbers and our Q3 going forward. And as you said, yes, we do have a good sense of visibility. So far everything we have seen is very positive across multiple different genres.

Thank you. Can I just follow up with Diego on the cash part? It's not very clear to me. So 72 million was used up in 4Q. Of that 18 million was released this quarter and you still have 54 million tied up.

With some merchants which is going to be released in the coming quarters. Is that right? I'm not sure if I follow the numbers you are calculating Nisha But basically if you are talking about the restricted cash That's a different question. I'm not talking about restricted cash

In the fourth quarter, you mentioned that you used $72 million of owned funds because you wanted to give guarantees or advance receivables to some of your select merchants to give them comfort. Right? So $72 million is fine.

Yeah, probably that includes also reductions in settlement periods and some other measures that we had in Q4 that were already reversed in Q1. Okay. Mija, and that's the point we were raising. All of those trends are normalizing.

So they normalize in Q1 and we expect them to continue to normalize in Q2, Q3 and Q4. If you look at our cash flow you will see that we have also an inflow of 32 million dollars of the net increase in trade payables and receivables and that is also part of that normalization or that improvement as settlement periods of the merchants went back to normal but also as we grew our TPB we also grow our cash.

I want to emphasize one last point. Sorry, I think this is important. Our business doesn't require balance sheet for us to grow. So growth, it's a creative, we are negative working capital. We before receive the funds and then we settle and that remains the case. That's why you see our cash going up consistently. Has the settlement period reduced after the fourth quarter? No.

So you still have 7 to 14 days to tell them? No, no, no. The settlement period improved after Q4.

We have a longer settlement period to be clear. The 32 million dollars cash increase you have in net trade as you are on pay was a result of a PPD increase but also of the normalization of most of the settlement periods we have used in Q4.

Why has the settlement period increased? We have settlement period increasing, it's a good thing. It means that we pay much of later. It's a good thing. It's a good thing. It definitely shows that your merchants are more confident leaving their cash with you. But I'm just curious as to why has it increased. Is this because Nigeria has a higher settlement period and that's why your average settlement period has gone up? No, because you… I just want to know why it has gone up. Why has the settlement period increased?

No, because you have seen a decrease in sentiment periods and now you are seeing a normalization back to previous level. Okay, okay. So after fourth quarter it has decreased and then now it is going back to normal.

Yes, you see all the trends trending in the positive direction. Yes. Okay, thank you so much. Don't answer it. I appreciate it. Thanks for the question.

Thank you. Our next question comes from Matthew Cote with Autonomous Media. Hey guys, thanks for taking the question. Another one on Nigeria for me.

curious how you're thinking about sequential growth from here, right? Revenues were up 93% quarter over quarter and we were doing some rough math so like assuming a 5% gross take rate and if you annualize that volume that points to say like 2 billion of annualized volume from Nigeria.

That would be about 1% of total consumer spending there and say like 25% of total e-commerce activity in Nigeria So seems like you're pretty far penetrated in that market So I was just hoping that you could kind of like provide some additional color on like how you see growth from here

Hi Matthew and thanks very much for your question. So, obviously I've said it before about other markets, you don't grow in step functions, so our growth is not linear and typically you see a quarter where you grow a little bit faster, you've seen it in the past and the normalization and growth again. I have to disagree with you in terms of penetration. Please share those stats from what we've seen.

We are always scratching the surface, even with the merchant base that we have today. So, six out of ten operate with us in Nigeria, out of the top ten. There's only there four more for us to capture. And our business is still relatively small from a TPD standpoint in Nigeria. So, we believe that there's significant growth to come over the years.

We are not saying it's going to come next quarter, but that's not what they're optimizing for. We are optimizing for growth in the long term in Nigeria, compounding with all the other markets that we operate. And in that sense, we are extremely, extremely confident.

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

Sure, so again we don't optimize for one product over the other. You've seen in this quarter cross border mix going up, last quarter it was going down. And we are not prouder from one or the other, we are agnostic in that sense. Right sharing is a strong payouts vertical for us.

education payment, sorry, payroll payments are strong, payouts vertical for us. But fundamentally, it's many of the same merchants. It's more of a commercial dynamic of what customers kick in at what speed.

growth in payouts is spread across the board. So there's no significant dynamics difference in one country versus the other from a product standpoint. So.

We really like the Payouts product because it's highly complimentary with our pay-ins, the same way cross-border local to local are complimentary. But there's not much more color we can add in this. All right, helpful. Thank you.

We like the Payouts product because it's highly complementary with our pay-ins, the same way cross-border local to local complementary. But there's not much more color we can add in this. All right, helpful. Thank you. Thanks very much.

Your line is open.

Hi, can you hear me okay? Yes, we do. Sorry, sorry, it went blank. Just a couple for me please.

One just question on the hedges. I think there's a reference in the press release to lower hedging activity and we see that in a better financial result for the quarter. I just wondered, you know, given there's more exposure to kind of higher inflation.

economies why would that be the case if you could help explain that. That's the first question please I'll come back with a second one.

Sorry, this is Sumit at New Street Research. Sure, I appreciate it.

Sorry, who's this? Sorry, this is Sumit at New Street Research. Sure, I appreciate it. Dio, Maria doesn't want to take it.

Sure, yes, during the quarter we reduce our exposure particularly in Argentina. We told you that in the second half of the year we sequentially normalized the situation there. So basically you keep in mind that we have a practice of for hedging every open position in local currencies and what happened during Q1 is that we reduced, we had much lower positions, very low positions in Argentina so we reduced the cost of hedging.

from the margin or the gross margin discussion which obviously relates to the higher gross take rate but just to keep things simple as your processing costs and FX costs.

hopefully come down over time. Do you keep that profit or do you pass that on to the merchant? Thanks for the question. So the way we price it's typically we first understand the cost and then we price and that's why we always say we optimize for gross profit. So should cost go down some of that we'll share with the merchant other part of that a significant part of that will be...

the potential to go up significantly.

Yeah, okay, great, okay, thanks. Thank you. Our next question comes from John Coffey with Barclays. Your line is open. Great, thank you very much for taking my call. I have yet another question on Nigeria. And really, my question pertains to the verticals in which you're starting to see some of these volumes.

Thank you for the question. It's very well diversified. Very similar dynamics than Alboroborobis. So that's why the 6 out of 10 merchants is a good signal for this. Our top 10 are very well diversified and the same applies to Nigeria. So no particular vertical has more prevalence than ours. Great. Thank you. And just one quick follow on. I think you've said Nigeria and Argentina's markets that are complex to navigate and that really seems to be.

Sure. So we operate across 40 emerging markets and they are all complex realistically. That's our speciality. That's where we exist.

I love to see that people now think of Brazil as a developed market. It wasn't the case where we launched. So we see the complexity across the board. There is plenty of friction. We are in the business of solving friction and abstracting it for our merchants. And whether we like it or not, there is plenty of friction today and to come in emerging markets. So that's what we are solving for. Indonesia, Malaysia, Morocco, Egypt, South Africa. Yes.

That's just to name a few, but the same could be said around Mexico and the same could be said around Pakistan. So there's plenty of friction for us to solve. As we solve it, we typically manage to add a lot of value to our customers and at the same time capture some of that value for our company.

but the same could be said around Mexico and the same could be said around Pakistan. So there's plenty of friction for us to solve. As we solve it, we typically manage to add a lot of value to our customers and at the same time, capture some of that value for our company. All right, thank you.

Thank you. That's all the time we have for questions. I'd like to turn the call back over to CEO Sebastian Knoepes for closing remarks. Sure, thanks very much. Thanks, everyone, for listening to today's call. I hope that this was helpful. It was a pleasure being here today. I just want to make sure that I have a final complaint. We tend to love having an excessive focus on the short term. I would like to re-emphasize to everyone that we continue to build this business focused on making decisions for the long term.

That's why you see us investing in geographic and product growth. We are extremely excited about the opportunity we have to go after such a huge market and build a multi-million revenue business over the coming years. I want to thank you all for your questions and comments. We are very much looking forward to seeing you all on our investor day on the 8th of June . I hope you enjoy the rest of your day.

Thank you for your participation. This does include the program. Please do not disconnect.