Q2 2023 DLocal Ltd Earnings Call
Speaker 1: you
Speaker 2: Good day and welcome to the D-local second quarter 2023 results. Please begin.
Speaker 3: Good morning everyone and thank you for joining us for the D-Local second quarter 2023 earnings call today.
Speaker 3: If you have not seen the earnings release, a copy is posted in the financial section of the Investor Relations website.
Speaker 3: On the call today you have Sebastian Kanoevich, Chief Executive Officer, Sergio Fochl, Co-President and Chief Strategy Officer.
Speaker 3: Diego Cabrera Canai, Chief Financial Officer.
Speaker 3: Maria Oldham, SVP of Corporate Development, Investor Relations, and Strategic Finance.
Speaker 3: And Soledad Ognagher, Head of Investor Relations. A slide presentation has been provided to accompany the prepared remarks. This event is being broadcast live via webcast and both the webcast and presentation may be accessed through D-Local's website at investor.dlocal.com.
Speaker 3: The recording will be made available shortly after the event is concluded. Before proceeding, let me mention that any forward-looking statements included in the presentation or mentioned in this conference call are based on currently available information and D-local's current assumptions, expectations, and projections about future events. While the company believes that our assumptions, expectations, and projections are...
Speaker 3: Actual results may differ materially from those included in the local'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 the local's filings with the Securities and Exchange Commission.
Speaker 3: which are available on the local's investor relations website. Now, I will turn the conference over to Syvastian Senovi?. Thank you. Good morning, everyone. Thanks for joining the call today.
Speaker 4: Before we start the call, let me thank all of you who joined the Ambassador Day back in June .
Speaker 4: For those who couldn't make it, the material is available on our Investor Relations website.
Speaker 4: Let me also add that we have in the call Pedro Ant, who will be joining me as co-s CEO .
Speaker 4: We are extremely excited to have Pedro join in the team.
Speaker 4: We are proud of the great talents that we have at the local. A Brilhín Pedro is the ultimate example of this.
Speaker 4: Pedro will bring new energy, a leadership and a highly complementary set of skills to the company, helping us to continue scaling the vices at pace and to realize the enormous opportunity that we have ahead of us. I would now like to invite Pedro to introduce himself.
Speaker 5: Thanks, Sewa, and greetings, everyone. We thought it'd be useful for me to introduce myself today and share with you what's led me to join Sewa, Ser Jojakowo, and the rest of the great team here at D-Local.
Speaker 5: They will then walk us through the local strong business performance as they expertly do every quarter.
Speaker 5: Having worked in Latin American tech over the last 25 years, I've obviously been aware of the local since its inception, merely seven years ago.
Speaker 5: However, upon being approached by the board and undertaking my diligence,
Speaker 5: What I found was a set of business success drivers, even more remarkable than I had initially anticipated. I'd like to spell some of those out for you today.
Speaker 5: First of all, a vast, untapped, total addressable market of $1.4 trillion within the rapidly expanding markets that we currently serve.
Speaker 5: Second, an exceptional opportunity for growth alongside these markets.
Speaker 5: as well as the potential to extend our reach to numerous additional markets.
Speaker 5: And this allows us to increase our time by over 2.5 times over the next five years.
Speaker 5: Third, the Product and Technology Stack is fantastic as it serves many of the world's leading and most demanding mega-cap tech companies.
Speaker 5: And fourth, this is an entirely customer-centric organization that's obsessively dedicated to our customer success and continues to pile up client-win over client-win. Growing clients by 41% kegur and TPV
Speaker 5: by a phenomenal 126% kegur over the past three years. And last, but certainly equally important, an extremely attractive financial model, characterized by a revenue kegur of 101% adjusted EBITDA over gross profit surpassing 70%.
Speaker 5: 90%. So in essence, large-tam, great product and tech stack, a winning customer-focused organization, and a free cash flow machine.
Speaker 5: An investor's ideal vision realized, right? Absolutely. But like with any young successful company, there is always more work that can be done. So as to further and fully realize the extraordinary value inherent in the exceptional business, I've just described to you.
Speaker 5: That work is already underway.
Speaker 5: And it's also where I hope to contribute the most in phase one of my journey here.
Speaker 5: I'm confident we will find ways to accelerate even further the pace at which we are rolling out additional processes.
Speaker 5: Deploying more and even better systems and adapting our organizational design to prepare the local for the future.
Speaker 5: I'm excited to see how all this will complement the extraordinary product and customer success work that's already being done on behalf of our clients.
Speaker 5: to further build a formidable company at scale. And as all this happens, I firmly believe that as we undertake these measures, we will propel the local's trajectory and further unlock returns for all stakeholders involved.
Speaker 5: I look forward to engaging with you as we carry out this journey.
Speaker 5: Let me now turn the floor over to Seva again to go deeper into the results of the quarter that already show the positive direction things are headed in.
Speaker 4: Thank you Pedro and once again welcome to the team.
Speaker 4: I am pleased to share that we've had another quarter of outstanding results. Our performance once again proves the instinctive strengths of our business, which we continue to build focus on long-term profitable growth.
Speaker 4: These trends combine. One, superior technology that is driven by our commitment to make the complex simple for our merchants with our one API and one integration. What we call one the local.
Speaker 4: combined. One, superior technology that is driven by our commitment to make the complex simple for our merchants with our one API and one integration. What we call one, the local. Two,
Speaker 4: A world diversified business across verticals products and geographies, with vast geographic coverage of over 40 countries. And three, we lend it its execution of our merchant growth and cross-sold strategy across products and geographies.
Speaker 4: Last but not least, our lean and disciplined culture. We deliver all the previous strengths with a lean team. Continuously striving for excellence. Our culture is key to continue delivering on our long-term ambitions.
Speaker 4: These factors underpin our continued success in building the best payments ecosystem across emerging markets. Based on our 1D local, navigating the complexity of payments in these markets on behalf of our merchants, so they can remain focused on their core business.
Speaker 4: We have approved track records in leveraging these factors to deliver robust dollar growth of TPPV revenue, growth profit, adjusted EVA and net income.
Speaker 4: Moving to our financial highlights of the quarter, this access was reflected across all metrics.
Speaker 4: PPP grew 80% year over year and a strong 22% quarter over quarter. So passing for the first time the $4 billion mark.
Speaker 4: To put this in perspective, this quarterly TPPB is more than double our TPPB for the whole year of 2020, the year before we went public.
Speaker 4: We continue to focus on growing our bases in absolute dollar terms.
Speaker 4: Revenue, gross profit, and adjusted EVDA all increase at double digit rates both year over year and quarter over quarter.
Speaker 4: We recorded the highest contribution in gross profit and adjusted EVDA of the past eight quarters, increasing $9 million in gross profit and $7 million in adjusted EVDA quarter over quarter.
Speaker 4: We remain firmly committed to profitable growth at scale.
Speaker 4: In Q2 2023, our ratio of adjusted EVDA to gross profit remains stable quarter over quarter at 74%, which again is best in class.
Speaker 4: Moving to the next slide, we continue to invest thoughtfully in expanding our global team.
Speaker 4: We have hired new talent to pursue the opportunities we see in the market, also strengthening our foundations to face our long-term ambitions.
Speaker 4: We drew our team to 806 employees. This is an increase of 174 full-time employees compared to second quarter 2022 or right 28% year over year.
Speaker 4: We will continue to invest in talent in a disciplined way, staying lean and always ensuring that we onboard talent that has a strong cultural fit.
Speaker 4: We are proud of our team and believe it is stronger than ever.
Speaker 4: Now I will pass on to Maria to discuss our execution on our growth strategy.
Speaker 6: Thank you, Sabah. Hi, everyone. Let me remind you how we view our growth engine.
Speaker 6: We have three axes of growth, one product, two margins and three geographies.
Speaker 6: On product, during the squarter, we continue to focus our efforts on deepening our presence in the country's enemy troop operate.
Speaker 6: During the second quarter of 2023, we saw strong traction on our platform solution, in particular from Commerce Marketplaces, on merchants. We delivered strong revenue growth, both from existing and new customers.
Speaker 6: Net retention rate continues to be best in class at 148% in Q2 2023.
Speaker 6: New Martin's revenue reached $11 million in Q2-20-T3.
Speaker 6: All of our merchants, products, payment methods, and markets are linked to one API.
Speaker 6: This means that merchants can access all of our products and payment methods without any additional work, generating high value to our customers while growing our business.
Speaker 6: Now, let's take dive into one of the dimensions, geographies. In Latin America, where have our largest KO, we continue to experience strong growth across the region in Q2223.
Speaker 6: This proves that we still have ample room for growth in a town. Both will check existing and new merchants. In the last 12 months to Q2 2023, revenues in Mexico increased by 85% year-on-year, and in Brazil by 50% year-on-year. Growth in both countries has been driven mostly by merchants from commerce advertising.
Speaker 6: We continue to see strong growth of our clients in Brazil going forward. In Q2 2023, TPPV and revenue in Brazil double year over year and increased by around 80% quarter and quarter. Recent growth has been mainly led by merchants in the commerce, advertising and streaming verticals. In Brazil, we also proved the success and robustness of our local to local solution. Brazil is a market with higher local to local share and we have seen favorable trends growth in both cross-border and local to local flows. Moving on to our Canadian, our merchants continue to signal strong demand for our solution in the region.
Speaker 6: Continue to see strong growth opportunities in Brazil going forward. In Q2 2023, TPV and revenue in Brazil double year over year and increased by around 80% quarter and quarter. Recent growth has been mainly led by merchants in the commerce, advertising and streaming verticals. In Brazil, we also proved the success and robustness of our local to local solution. Brazil is a market with higher local to local share and we have seen favorable trends growth trends in both cross-border and local to local flows. Moving on to our country, our merchants continue to signal strong demand for our solution in the region. Egypt, Morocco, Indonesia, and Philippines.
Speaker 6: are going triple digits year-on-year and have the potential to become a significant part of our business. Our business in African-Asia continues to grow very fast. In the last 12 months through Q2 2023, revenues in African-Asia increase more than three times year-on-year. Excluding Nigeria, this region agreed 78% year-on-year in the last 12 months through Q2 2023. In Q2 2023, Nigeria revenues increased by more than four times year-on-year. The Q2 desaleration was driven by the NIRRA devaluation in the last 15 days of the Q2. Nevertheless, Nigeria continues to present similar net-to-create as other markets. And it is a key geography for the local.
Speaker 4: Given the magnitude of our business in Argentina, as we announced in a press release in June , we committed to show additional economic substance in the country. On June 14, we acquired, with our own funds, $48 million worth of Argentine dollar-linked treasury bonds. We acquired an additional $49 million by the end of July . We plan to use these funds in the following years to fund our local operations and investment opportunities in the market.
Speaker 4: We continue to collaborate with local authorities in Argentina to ensure that, despite the macroeconomic situation, Argentinian customers are able to access international services. Moving to Nigeria, in mid-June, the central bank implemented a free-floating policy of the NARA, leading to the devaluation of the local currency, as Maria mentioned. I would like to highlight that we see the unification of the exchange rates as a positive for the country and for our business, as it promotes transparency and efficiency, and it increases liquidity.
Speaker 4: We continue to have a bullish outlook on the operations in Nigeria for the long run and continue to onboard and grow with merchants in the country. Last but not least, Brazil. Shortly after the end of Q2, we reached another milestone in a revolution. At our investor day, we shared that we applied for a payment institution licensing Brazil. I am thrilled to share that we were granted this license in July . We can now offer more payment methods and solutions in Brazil and participate directly in Brazil's payment system. We expect this to increase the efficiency of our operations in the country.
Speaker 4: becoming a payment institution, Paris would be a higher level of scrutiny by Brazil's central bank. We welcome such scrutiny in Brazil and in other countries as it helps boost the level of confidence of global merchants doing business in emerging markets and also increases our competitive advantage.
Speaker 4: This is a clear example of our ongoing efforts to further strengthen our compliance infrastructure across emerging markets. Being well diversified in over 40 emerging markets allows us to continue benefiting from very high growth regardless of the specific circumstances in any given geography.
Speaker 4: For example, of our ongoing efforts to further strengthen our compliance infrastructure across emerging markets. Being well-diversified in our 40 emerging markets allows us to continue benefiting from very high growth regardless of the specific circumstances in any given geography. This is a key strength of our business.
Speaker 7: Depending on which merchants we onboard in a given quarter, as well as the relative growth rate of each merchant, there are many fluctuations in the share of pay-ins versus pay-outs, and cross-border versus local to local. Overall, we see a positive growth outlook across all our products and services and see this diversification as a key strength. Revenues also reached a record high of $161 million in Q2 2023, growing 59% year-over-year and 17% quarter-over-quarter.
Speaker 7: During this quarter, we saw strong quarter-over-quarter revenue growth, particularly in online commerce, ride-hailing and on-demand delivery. And from a geographical standpoint, Revenue Group quarter-over-quarter mainly from processing payments in Brazil, Mexico, South Africa, Egypt, Colombia, Peru and Costa Rica.
Speaker 7: Processing costs over TBB remains stable at 2% quarter to quarter. Gross profit margin and net-take rate remain almost unchanged quarter to quarter, even with a high increase in the share of local to local volume. The waterfall chart on the left shows the main changes in our gross profit margin quarter to quarter. Gross profit margin was positively impacted by changes in merchant mix, particularly in Brazil. This was upset by the higher share of pains and local to local volume and lower share of revenues in our Argentina. Moving to the right hand of the slide, the slide decreased in the net-take rate from 1.7% in Q1 to 2023.
Speaker 7: Our adjusted EBITDA over gross profit remained stable quarter over quarter at 74% as we continued investing in our people, both in terms of compensation and expanding the team. Net income totaled $45 million during the quarter, growing by 46% year over year. Sequentially, it increased by 26% quarter over quarter. Net income for the quarter includes $7.5 million of net financial gains. These results were driven by our funds held in interest-bearing accounts and money markets.
Speaker 7: partially offset by the financial costs of hedges across the market. We also observe an increase in our effective income tax rate from 11% in Q1 to 16% in Q2.
Speaker 7: driven by a higher share of profits in local markets as a result of higher local-to-local PPV and financial gains.
Speaker 7: Let's move to cash generation. During the first six months of the year, we observed strong cash flow generation.
Speaker 7: the main drivers of our cash increase, where our net income will substantially converge to cash, and an increase in net trade payables, particularly as a result of the growth of our business with negative working capital and a higher average settlement period to our merchants.
Speaker 7: This resulted in an increase of $141 million.
Speaker 7: We invested $61 million in completing our share repurchase program and $48 million in Argentine dollar linked treasury bonds as part of our commitment to increase our economic substance in the country. We believe our strong cash position remains a competitive advantage as it allows us to continue investing in the business.
Speaker 7: Seba, the floor is yours. Thank you.
Speaker 4: We are very proud of the strong set of results we delivered during the first half of the year, and we are even more excited about the runway ahead of us.
Speaker 4: We see continuous growth of our business in the second half of the year. Given the outstanding first six months performance, we would be on track to over deliver on our guidance or revenue while being in line on EVTA. However, due to the current depreciation in Nigeria, we are not able to afford the EVTA.
Speaker 8: which will reduce revenues with neutral impact on gross profit. In other words, it won't affect our gross profit dollar amount. We expect to end the year in line with guidance in terms of both revenue and EVDA. Revenues between 620 and 640 million dollars.
Speaker 8: an adjusted EVDA in the range of $200 million to $220 million. We have a truly diversified business that can deliver on our goals under changing specific circumstances in certain markets, and we are very, very pleased to be in such a position.
Speaker 8: We remain dedicated to building the best financial infrastructure for global merchants in emerging markets. The value proposition of our 1D local platform is clear to help our merchants navigate local complexities in receiving and sending payments in emerging markets. Everything that we do is focused on further improving this value proposition.
Speaker 8: which Pedro will also be joining.
Speaker 2: If you would like to ask a question, please press star 11. If your question hasn't answered and you'd like to move yourself in the queue, please press star 11 again. Thank you. Our first question comes from Tito Laborado with Goldman Sachs. Your line is open. Hi. Good morning. Thank you for the call.
Speaker 9: Pedro, if I could start with you. Thanks for some of the calls that you gave on the opportunity to see and joining DeLocal. But, you know, we've gotten several questions and we'd love to hear from you, you know, coming from Mali, you know, very well respected company, you know, just to understand a little bit, just sort of your reasoning to come over to DeLocal and talk a little bit about the opportunity.
Speaker 9: from you on that. And then second question on the revenues, very strong performance on revenues, Deb, as you mentioned, you're maintaining the guidance there. But let's get a little bit more color. You think Brazil can continue to grow the way we saw it growing this quarter? And is that coming from one particular merchant? Again, Nick is one of our followers filled with great leadership. I think one of the biggest things that I'm trying to gain from this market has been the new investment in bookstores.
Speaker 9: Is it several merchants that are giving a lot of local to local volumes there? And do you expect some headwinds because of the depreciation in Argentina next quarter as well? Just to understand a little bit some of the revenue dynamics and how it could evolve on a quarterly basis in here. Thank you.
Speaker 5: Hi, Tito. Hi, everyone. Great to be here. Thanks for the question. I think I laid it out in the prepared remarks. This is a phenomenal business with a large expanding TAM, great technology and product.
Speaker 5: the right customer focus and a winning sales organization and the super attractive financial model. So D-Local is a gem, no? What I've done and what I've seen over the last 24 years is how to build scale. And I think I've seen scaled in Latin American tech.
Speaker 5: like few others have had, because I've had the privilege to work at the largest Latin American tech company from nearly zero to where it is today. And I've seen how the way you generate value in technology is by building scale and compounding results over the long term. And I think the local is the ideal landing spot for the next...
Speaker 5: channel next leg in my professional career to be able to generate scale and compound results over long time with a business that operates in a growing time and has a phenomenal financial model. So this is a decision that makes extreme sense.
Speaker 5: For me, and I think I can add a lot of value to the great work that's being done here at D-Local. Thanks, everyone. Thank you.
Speaker 8: Tito, thanks Pedro and Tito, thanks for your question. So there's a lot to unpack there. Please let me know if we are covering everything. On the guidance question, I'm sorry, on the guidance question. So we are very proud of the first half results. We are clearly trading towards the higher end of that guidance in terms of revenue, but are clearly referring to take a conservative approach given the macro environment. Specific chances of circumstances, as such as the evaluation of Nigeria affect our...
Speaker 8: delivered on all metrics to which we have guidance since we went public over two years ago. And there I think I'll say is that the guidance, the yearly guidance we provided accounts for close to 50% year-on-year growth at best in class margin. And this is a great outcome for our 2020. And a testament again of the resilience and the world diversified that our business
Speaker 8: which again are best in class.
Speaker 8: again our besting class. Given is a little bit more fun.
Speaker 8: qualitative comment Tito. Brazil was great news. We grew over 100% year, over year, 80% quarter, over quarter. But also Mexico grew at close to 80% year, year. And I call those two geographies out because they are some of our most mature.
Speaker 8: And I think the underlying message here is that our geographic is continued to compound and they continue to differentiate and they continue to drive growth for our merchants. We're going to have quarters where one market is going to grow faster than others and that's perfectly expectable. Keep in mind, our growth is depending on our merchant growth and some of them will decide to ramp up faster in one country versus the other and that's not something we can
Speaker 8: driving that growth. We are not relying on any particular merchant across any particular geography. So in that sense, a great, great quarter for us. You had a question, Argentina and the evaluation. Sergio, I know you have some remarks on this that are probably worth commenting on, but yeah, the only thing I'll say to you on this is that we serve global merchants and global merchants think in dollar amounts.
Speaker 8: So typically what we've seen over the years is whenever there's a devaluation our merchants tend to reprise pretty fast. In other words, a big streaming services doesn't think of their product being worth 10 pesos. They think of their product being worth a certain amount of dollars. And if there's a massive devaluation that typically reprise really fast.
Speaker 2: Thank you. Our next question comes from Gilaire Mae Greston with JP Morgan. Your line is open.
Speaker 8: operator I'm interested to meet but I'm not listening.
Speaker 10: I can get a saw-up off the ES photo. You won't get hurt. I won't get hurt before I may hurt you.
Speaker 10: Yes, I'm here.
Speaker 10: Can we move to the next one shortly?
Speaker 2: Our next question comes from Jason Cupverberg with Bank of America. Your line is open.
Speaker 2: Jason Cufferberg, your line is open.
Speaker 11: Hi, good morning. Thank you for taking the question. I just wanted to start on the...
Speaker 11: So the new management arrangement, just maybe if both seven Pedro, maybe just want to comment a little bit on how do you foresee kind of splitting day-to-day duties going forward, especially once Pedro has the opportunity to ramp up on the business.
Speaker 8: I Jason sure paid a few free to compliment please.
Speaker 8: So there is a first of all Pedro and me have extremely complementary backgrounds. Our season of opportunity that has plenty plenty of challenges that we need to tackle. And whenever you have the ability of finding a talent like Pedro and getting him to join, it's an absolute no brain of rest. We are still in the working, so the exact...
Speaker 8: that each one of us is going to be undertaking, but fundamentally from a strength perspective, we are very, very complimentary and at least couldn't be better news for us.
Speaker 10: run
Speaker 11: And then my second question was just on, you had that helpful slide showing the bridge on the gross margins. Just as you think about the second half and recognizing there's obviously unpredictability from a mixed perspective, I mean, what sort of a base case working assumption that you guys are thinking about?
Speaker 11: reiterating the guide on a suggested ebit. For the year. Thanks.
Speaker 5: I know Pedro you have some remarks I do we're making and then they work on shirts. I think you're going to go for them. No, no, I was just reiterating. I think we'll figure out the governance throughout my process. I've obviously done diligence and the chemistry we failed not only with Sabah but with the entire team.
Speaker 5: gives me confidence that there's plenty of work to be done here and our complementarity I think will make that even easier. So I'm not concerned at all about that.
Speaker 8: Jason, on your question on guidance, again, we are known to be a very conservative company this month. We are taking an extremely conservative approach, given the market environment. We are clearly trading towards the higher end of that revenue guidance that we provide it.
Speaker 8: We don't provide shorter term guidance. I want to emphasize that we're building this for the long run.
Speaker 8: We believe that 50% over 50% year near growth, and again, the midterm guidance of 35% KGAR is best in class. And that's what we're focusing on. We want to retain flexibility to continue to invest in the opportunity we have. This is a time for us to differentiate the emerging markets of our opportunities bigger than ever. And we want to retain the flexibility to invest as much as we see fit, while maintaining the discipline approach we've always had.
Speaker 7: If I may, if you look at the first machine and let's take it in the second quarter, it was very similar to the first quarter, 1% decreasing was measured from 45 to 44, 1 0.1% decreasing the take that was part of your question. It's basically the result of this as meek. As you see in this quarter, we can hire a share of local
Speaker 7: when and how to grow so the behavior of those methods is the same or half will be basically the right or how I know that those are between these and which types.
Speaker 2: Okay, thank you for the comments. Thank you. Our next question comes from Galer, Maygreson with JP Morgan. Your line is open.
Speaker 12: Hello, can you hear me?
Speaker 12: Hello, can you hear me? Yeah, we do.
Speaker 8: Yes, thank you, Sibha, in the team for the presentation. Two questions on my side. The first one is related to Nigeria. You mentioned that you expect some impact from the deval, I think, was 40% to 50% deval on the effects. And we already see treating the revenues decline the share of Nigeria.
Speaker 8: on total top line. But it was interesting to hear that you do not expect any impact into gross profits. So I'm trying to reconcile those two statements. The only way I can think of is that your gross profit margin in Nigeria is close to zero. And I do want to confirm if you operate in the cloud, in the cloud.
Speaker 8: This is related to Argentinian bones. If you can recap how much those bones are pain.
Speaker 8: And if we had any non-recurring financial gains, meaning the appreciation of the bond in the quarter, or if it is level of 19 million gross income per quarter, should be the new recurring level given now you're invested in those bonds. Thank you.
Speaker 8: Thank you very much for the question. So we've spoken about Nigeria and the PAP. Actually, now we're Q1 call. We call this out. How Jentria had a higher than average, a much higher than average growth state rate and much, much worse margin structure given the gap between the market rate and the official rate.
Speaker 8: That was a drug on our margin structure and that's why you saw it eroding. We broke that down in previous quarters. What has happened is that the Nigerian government has unified those two markets and therefore the gap that was existing before between market rates and official rates doesn't exist anymore.
Speaker 8: We never process payments in any country at zero margin. That's not the business variant. Every dollar we process contributes to our profit. And what we say is that at a gross profit level, which is a key metric, we keep track of internally, this will be neutral if not positive. Let me explain why.
Speaker 8: The gap in the effects in Nigeria made it very hard for merchants to understand why there was an official market rate and there was the market rate and why they had to navigate out of that complexity. Some of that complexity is no so. So for our global merchant it's no easier to navigate this country and we expect that to be one neutral to positive from a growth profit
Speaker 8: But, too, obviously, a creative to our emergency interaction. We spoke about our emergency being punished before, given our Nigeria visas. Now, we probably get some outside from it. Maria Diagoteca-Pifri, to compliment on this point, please.
Speaker 4: The only thing I would add is that not only it's not zero, it's actually a
Speaker 4: Profit only higher than average in net-day margin-grade
Speaker 8: Do you have your second question on the financial profile? Maria, do you want to take it? Oh, sure. We had in the quarter roughly $7.4 million of financial profits.
Speaker 7: That is basically the result of having higher amounts of cash in local markets, countries like Brazil or Argentina, as you mentioned. $2-3 million is the result of the bond.
Speaker 7: but mostly is money markets of interim rent account and we have in those countries that generate cash. We use part of those process profits to invest in hedges, to be fully covered and that is the cost, the financial cost that you see in the P&L. The net of those two has been very positive in the quarter over the medium term that should...
Speaker 7: Sequentially go back to a lower number, but particularly this quarter we had these situations where we have significant amounts of cash invested. Only also at the operating company level with higher interest rates. Just a follow up if I may, how much those bonds, Argentinian bonds are paying?
Speaker 7: So they are mark to market. The interest rate, the nominal interest rate of the bond is minimal, it's 0.4 because they are dollar linked but it's mainly the result of the mark to market of that bond. But again out of the financial income of the quarter only a small portion of that is the bond.
Speaker 2: but I want to make sure this is properly understood. Yeah, sure. It was clear. Thank you for the answers. I appreciate it. Thank you. Our next question comes from Ashwin Srivakar with Citi. Your line is open.
Speaker 9: Hi, can you hear me? Yes. Hello, can you, yeah, okay. Good to hear from you, Albrecht. Maybe I can also start with, you know, congratulations to Pedro and also a question for you. The local issue has never really been growth which you mentioned, you know, what one of the key reasons you're coming is the growth in TAM opportunity. I feel like…
Speaker 9: The issue, as you had mentioned, is scalability over time, scalability of technology where you can bring your expertise, governance and a few other things. So maybe you can talk a little bit more about the challenges that you feel like they need to be overcome and.
Speaker 9: If in your early view, based on just the diligence you did, if you feel like the investment that need to be made might be an impact on the longer term margin structure, I know it's very early days, but just based on the diligence that you've done so far.
Speaker 5: Thank you. That's a fantastic question. So conceptually, first of all, and I think this is important. Like any company that's grown as much and as fast as D-Local has, there are growing pains in scaling up. I think that's evident, and I agree with your diagnostic.
Speaker 5: There's already, prior to my arrival, a lot of focus, as with any company that's growing and work being done, to strengthen whatever is needed to strengthen and to prepare for scale. But that is a big part of what I've liked about the challenge is I feel that that's what I've done and what I like doing and what I know how to do.
Speaker 5: So we really need to set this up so that this company can grow 5X 10X 50X.
Speaker 5: this up so that this company can grow 5X, 10X, 50X once the opportunity arises.
Speaker 5: It's a bit early. I think I will get back to you guys with a better diagnostic. I am not a big believer in throwing money at these kinds of problems. I think we throw a passion for problem solving and systems at these problems. But I still need to complete my diagnostic. This is literally day two for me.
Speaker 5: everything that's being billed or if there might be a ramp up in investments needed. Give me a little more time, give Seba and myself some time to take a look at this.
Speaker 9: I truly appreciate that answer. Zeba, maybe something we have discussed before, on an in-country basis, the objective perhaps of achieving reasonable balance between pains and payouts.
Speaker 9: As you look at your forward opportunity in the next five, six countries that you feel should ramp up, how do you feel you're situated as far as that in-country balance is concerned? Sorry, just one thing I wanted to add that is relevant. If the challenge to scale is investing a little margin, and I'm not saying that's the case, we've reiterated our midterm guidance, but if that's the challenge, then this is a company with best in class margin structure and there's room to do so. I really think it's a double positive here.
Speaker 8: Thank you, Pedro. Ashley, on your question on pay-ins and pay-outs, so we like both products that are extremely complementary but we never have an internal target for one versus the other.
Speaker 8: It's not us that decide what product we are selling, it's our customers that decide what products they want to buy from us. We always build our operations on a completely standalone basis. Let me explain this. We never subsidize pay-ins with pay-outs. Every dollar in our platform is processed at a profit independently of it being pay-in or pay-out.
Speaker 8: restriction in terms of how much growth. In other words, if we can grow extremely fast our paying product and our payouts product will be a little lower that's perfectly okay for us. Over time we know those things do balance out but even if they don't we are we are still okay in the long run.
Speaker 8: In other words, if we can grow extremely fast, our paying product and our payouts product will be a little lower, that's perfectly okay for us. Over time we know those things do balance out, but even if they don't we are still okay in the long run.
Speaker 2: Yeah, yeah, understood. Thanks. Thank you. Our next question comes from Jitinder Singh with HSBC. Your line is open.
Speaker 2: Dr. Tindra Singh with HSBC, your line is open. Dr. Tindra Singh with HSBC, your line is open.
Speaker 2: Dr. Tindra Singh with HSBC, your line is open. Thank you everyone for signing in and happyados this week!
Speaker 13: Hi, this is Neha Gaurwal with HSBC. I guess I used the long link. Firstly, I'd like to welcome Pedro. Very nice to have you here at D-Local. My question in this quarter is related to the revenues in Brazil which saw a big jump quarter on quarter. I believe this is driven by stronger volumes in Brazil.
Speaker 13: which led to stronger revenue. So if you could just elaborate on that and give any color what drove that. Also the TPV growth this quarter was almost 22% quarter on quarter which is significantly higher than an average of about 10, 12% that we have seen in the previous quarters. So I believe we should expect this to normalize in the coming quarters and see more normal level of sequential TPV evolution.
Speaker 13: led to stronger revenue. So, if you could just elaborate on that and give any color what drove that. Also, the TPV growth this quarter was over 22% quarter on quarter, which is significantly higher than an average of about 10%, 12% that we have seen in the previous quarters. So, I believe we should expect this to normalize in the coming quarters and see more normal level of sequential TPV evolution. Thank you so much. Thank you.
Speaker 8: Hi, Nija, how are you? Good morning, thanks for the question. So yes, our TPV grew in Brazil, therefore our revenues grew. What I'll say is that we spoke about this in the past. We have a great solution in Brazil. The Brazilian market is massive. There's a huge stamp for us to go after. This quarter was just a testament of those trends that we were expecting in, that we spoke about in previous quarters. I think this should also be a lesson from what is, how is it...
Speaker 8: This was a local win that manifested during this quarter in Brazil and in Mexico. Last quarter it was in Nigeria. So we expect growth to continue in this market. What's great, again we reiterated our guidance on how we see growth going forward. But I want to emphasize the point that our business is better understood at the global level, at the macro level and not at the geography by geography basis. Geography by geography basis are...
Speaker 10: because that's where the real value is. And regarding the sequential growth in TPV,
Speaker 8: We are seeing our business firing at all cylinders. We spoke in the past about our pipeline being healthier than ever. I continue, we continue to see a very, very strong pipeline. Rec Yellow benevol
Speaker 8: This quarter without an impact yet in the current results. We were able to sign two of the top ten global merchants So there's plenty of growth to come again. We don't always control and the sequence at what that growth happens That's why I focus on the on the mid to long term It's it's doing our business, but we continue to see great logo wins We continue to see a great pipeline and a great opportunity generation.
Speaker 10: We need to continue to build a product and make sure we we are best in class across all 40 emerging markets who we are Thank you so much everyone. Thank you so much Daddy local team. Congratulations
Speaker 2: Thank you. Our next question comes from Jamie Friedman with Equity Research. Your line is open.
Speaker 14: Hi. Good morning and let me echo the congratulations, Pedro.
Speaker 14: is with regard to the local compliance. And I was wondering, since you incubated a great payments company as well, and Mercado Pago, what's your perspective on the compliance infrastructure at DLO? That's one question. I'll just ask my second one as well. Sergio, we appreciated your comments about Argentina, and this is part of a continuum. I was wondering what the
Speaker 14: At a very high level, is this the same worse, better in terms of the regulatory scrutiny at Argentina now than what you have seen in the past? So the first one for Pedro, the second one for Sergio. Thank you. If you are plan to implement a framework by putting out a framework, this is for with
Speaker 5: Hi Jamie and thanks. Neha, thanks also before I hadn't answered you. So again guys, this is day one, but obviously that's an area that I've done as much diligence as was possible throughout our conversations. And I think what's important to understand is that the reason we add so much value to our…
Speaker 5: wouldn't generate the kind of margins, take rates and value that we add. I see a compliance team and a compliance organization that is compliant. This is a publicly traded company in the US and as such needs to be compliant.
Speaker 5: We will face local challenges regardless of how much infrastructure, processes and systems we continue to build. So that's part of our value. I don't think it's something that concerns me and it's something that, and I want to stress here, will continue to be built out.
Speaker 5: The impression here should not be that this hasn't been built out, this hasn't been done. There's a great team here led by great people and my job is to continue to make sure that we invest and we strengthen across all of our internal functions.
Speaker 4: I will take the second question. Well, the situation in Argentina right now is, as you may know from the news, is extremely volatile and there have been...
Speaker 4: changes in the last day actually in the last couple of days almost almost every day there is a change in regulation. We are a big believers in the country in the long term and right now a
Speaker 4: We, as the rest of the market, are in a wait-and-see mode to see how this is going to evolve and what's going to happen with the election.
Speaker 4: All I can say is that we have been in the country for a long time now. We are particularly flexible, we know the market very well. We are a...
Speaker 10: Thank you both. Thank you. Our next question comes from Matt Code with Autonomous Research. Your line is open. Hey, guys. Thanks for taking the question. I wanted to just ask a couple more on Argentina. Based on the press release and your opening statement, it seems like the investigation there is going well. Just hoping you could double click on that. And then, interested in how the incremental hiring in Argentina could impact your margins over the long term. And then, the last one. And this kind of might be a similar answer to the one you guys just gave. But if we do see dollarization ultimately in Argentina, how does that impact your business? Okay. Bill, any next words?
Speaker 4: We are growing our payroll. We just decided that the growth is going to come more from Argentina than before. It is a place where we find very good talent and we have complete priorities that we have over other countries. Right now we have over 150,000 people in the world.
Speaker 4: Again, as you know, hiring takes time until you find the right talent and onboarding, etc. But we are on track to increasing our workforce there. We don't see it impacting the P&L. Again, you can find very good talent in the short term. We are on track to increasing our workforce there.
Speaker 4: cheaper than other parts of the world, but in the mid to long term we expect it to converge to international or to emerging market prices. And regarding the dollar index, in the mid to long term we expect it to converge to international or to emerging market prices.
Speaker 4: I don't know if it's going to happen, it's very hard to speculate on that. If it were to happen, of course, it would make life much easier in terms of processing cross-border payments, so we would welcome it.
Speaker 10: Thank you, super helpful. And then I just had one quick follow-up. The tax rate was a bit higher this quarter at 16%, 11% last quarter. You noted the mix to local to local and more financial income driving that.
Speaker 7: Could you provide any guidance for like how we should think about modeling the tax rate going forward? So again, it would be the result of the mix of profits we have in the different countries that we operate. There are very different tax rates within the different jurisdictions and as you know, we currently have operations in 40 countries and another five countries at the end.
Speaker 7: holding an operating company level, so it's really complex to write a specific number. As long as we continue having a higher local to local profit as we leave this quarter and we also have a financial income, particularly in countries like Argentina or Argentina, that would trigger higher income tax rate because those countries have a tax rate of 30 plus percent. So as long as that situation continues, we expect to have similar tax rates as what you have seen in Q2, but.
Speaker 2: Thank you. Our next question. Okay. Thank you. Our next question is from
Speaker 2: Our next question comes from Kayo Prado with UBS. Your line is open. Your line is open.
Speaker 2: Are you. Kyle Prado with UBS your line is open.
Speaker 15: Hey, hello everyone. Hi, Ceba and Tim. Thank you very much for the opportunity and welcome Pedro. I have two quick questions on my side please. The first is following the management change, just would like to have your view about the strategy going forward if there will be any change given the recent movements or if there is any other initiative beyond payments and your current products that you could pursue in the medium term. I have beenita on this, that said, make some closing comments from us that this was clearly something special.
Speaker 15: If so, if you can give us an example, it would be really helpful, please. And the second one, if I may, is just another quick follow-up in Argentina. Not sure if I completely understood, but I think in one of your answers you mentioned that you do not expect any impact from the additional devoule.
Speaker 15: in the puzzle as you will price your clients otherwise you will have a negative input. Is that right? Just would like to confirm and if so, have you already reprised your clients this week after the evaluation or not? That's it. Thank you. I'll take the second part and let you take the first one which is the fossil.
Speaker 8: It's that our merchants have higher amounts or charge higher amounts and therefore we are the factor reprising our service.
Speaker 5: So, I learned a long time ago, you do not fix something that is not broken. Look at the first half that we have just delivered. Our Brazilian business or our largest business grew revenues nearly doubled year on year. Our newer markets, which are a huge opportunity, Africa and Asia, I think grew over two times, nearly two and a half times. We have had some one-offs. We had a devaluation in Nigeria and the currencies in Argentina. But if I look at the long-term prospects for this business, and that is a big reason why I am here, this does not need a change in strategy at all. Okay, thank you.
Speaker 5: merchants behind their needs in fintech and emerging markets. Okay. Thank you very much Pedro and Seba. Thank you. That's all the time we have for questions. I'd like to turn the call back over to Seba for close remarks. Pedro, I think closing remarks are yours today. Yep. Thanks for that, Seba. So, first of all, thank you everyone just to reiterate how excited I am to be here and the opportunity.
Speaker 5: building this business for the long term. And that's where we're making our decisions.