Q1 2024 DLocal Ltd Earnings Call
Okay.
Yeah.
Good day and thank you for standing by welcome to the T. Local first quarter 2024 results conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need a press star one on your telephone.
Speaker Change: Didn't hear an automated message advising you. Your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference maybe recorded I would now like to hand, the conference over to your speakers today. Please go ahead.
Speaker Change: Good afternoon, everyone and thank you for joining the first quarter 'twenty to 'twenty four earnings call today.
Speaker Change: If you've not seen the earnings release, a copy is posted in the financial section.
Speaker Change: Vascular relations website.
Speaker Change: On the call today, you have Petro Hunt Chief Executive Officer.
Speaker Change: Alright, Chief Financial Officer.
Speaker Change: Larry or older as VP of corporate development Investor Relations and strategic finance.
Speaker Change: So did that night head of.
Speaker Change: Investor Relations.
Slide Presenter: A slide presentation has been provided to accompany the prepared remarks. This event is being broadcast live via webcast.
Slide Presenter: The webcast and presentation may be accessed through <unk> website.
Speaker Change: First our adult day local adult com.
Investor Relations: The recording will be available shortly after the event is concluded before proceeding let me mention that any forward looking statements included in the presentation or mentioned in this conference call are based on currently available information.
Speaker Change: The locals current assumptions expectations and projections about future events, while the company believes that our assumptions expectations and projections are reasonable.
Investor Relations: Currently available information.
Investor Relations: You are cautioned not to place undue reliance on those forward looking statements.
Investor Relations: Actual results may differ materially from those included indeed locals presentation or discussed in this conference call for a variety of reasons, including those described in the forward looking statements and risk factors sections of the locals filings with the Securities and Exchange Commission.
Speaker Change: Which are available in the locals Investor Relations website now I will turn the conference over to the local.
Speaker Change: Thanks, everyone for joining us today.
Speaker Change: 24 has gotten off to a contrasting start.
Speaker Change: The year started with us once again posting record quarterly T. P V a $5 $3 billion a growth of nearly 50% year on year.
Investor Relations: The C. P V growth was solid across multiple verticals with ecommerce nearly tripling in size.
Investor Relations: Maintenance is practically doubling in ride hailing software as a service each growing north of 50% year on year.
Investor Relations: This is all a testament to the value of our solution that we offer merchants in varying verticals and Navarre increasingly strong competitive position and sustained share of wallet gains.
Investor Relations: We believe that nothing will set us up better for long term success than this kind of sustained T. P V growth compounding over multiple years.
Investor Relations: As we move down the P&L the quarter is less of a clear cut success that our T V growth indicates we.
Investor Relations: We delivered solid revenue growth north of 30% year on year, while gross profit growth was flat leading to a declining adjusted EBITDA.
Investor Relations: Mixed results during the first quarter are explained by a few relevant drivers I want to make very clear.
Investor Relations: First we saw one of our largest merchants achieve a new level and our tiered pricing scheme and also renegotiate fees as their contract came up for renewal.
I: Given the still high concentration on top 10 merchants that the business has such a renegotiation directly impacts revenue growth.
I: Second product mix shifted towards lower monetizing pay out volumes as core pay in verticals such as E Commerce and advertising are typically seasonally weaker in Q1.
I: Additionally, a few important new launches that were scheduled for the first quarter were delayed by our merchants something that we don't control and slowed down anticipated volume ramp ups that should have offset those declines and take rates caused by the above mentioned defense.
Speaker Change: And then finally, we decided to sustain our planned investment increases that support long term growth even at the current gross profit level.
Speaker Change: We have confidence that gross profit will eventually rebound and see these opex investments in capability building internal mechanisms and technology are strategic for our long term success trend wise performance got better as the quarter progress with a weak first two months of the year.
Speaker Change: $37 million and gross profit while March G. P came in at $25 million, which is above Q4 levels.
Speaker Change: Marine and Mark will take you through greater detail on the Q1 details in just a second but let me first spend some time, providing an update on our execution against our priorities.
Speaker Change: Our cross border business is returned to 9% quarter on quarter growth and hit a new record of $2 $4 billion in T. P. V. During Q1. This after witnessing declining growth in the fourth quarter driven by among other things the temporary slowdown in cross border.
Speaker Change: Transactions in Argentina, we walked you through last quarter.
Speaker Change: Cross border remains the core of our value prop and seeing a return to sequential growth is a very positive indicator.
Speaker Change: Local to local processing business, despite being flat Q on Q again, driven by seasonal effects delivered T. P V growth at nearly 80% year on year.
Speaker Change: The continued success of our local processing dispelled one of the structural concerns that existed about our business. It confirms that our world class orchestrating offering where our AI powered smart routing is able to optimize traffic routes to deliver higher conversion rates the robot.
Speaker Change: Just fall back on redundancies that it offers the efficient product prevention engines, we incorporate and best in class K Y C and compliance layer as well as merchant specific features offer our global merchants, a superior product and service offering to what they can receive.
Speaker Change: Ive through the direct integrations, they could otherwise pursue to local acquirers.
Speaker Change: The investments we've made in adapting our infrastructure to meet the needs of global Remittance partners and marketplace merchants is also paying off handsomely RP.
Speaker Change: Our payout business grew by 17% Q on Q and over 50% year on year.
Speaker Change: The quarterly pick up is particularly interesting and driven by a strong Q1 ramp up in remittance corridors that we can offer our partners.
Speaker Change: This growing number of corridors not only represents an interesting vertical in itself for us, but it also generates opportunities for cross border growth in pains as it improves our liquidity and pricing that we can offer our merchants.
Speaker Change: In addition to continuing to evolve our product offering across our businesses Cross bartel local pay in and pay out. During Q1, we also maintained our commitment to making efficient and disciplined investments in key capabilities, including growing our license portfolio.
Speaker Change: Deepening our relationships with global banking partners and ramping up our operations and back office effectiveness.
Speaker Change: During the quarter, we were granted licenses in the strategic markets such as Egypt.
Speaker Change: A new payment operator registrations in Argentina, Ecuador, the Dominican Republic and Kenya.
Maria: We continue to believe our growing portfolio of regulatory approvals will constitute an increasing competitive advantage as our global merchants seek to navigate the complex regulatory environment in emerging markets with that let me hand, it over to Maria to take you through a more detailed one.
Maria: A review of these first quarter results.
Maria: Thank you Pedro well doctrine, where everyone.
Maria: Better just mention during this first quarter, we delivered strong CPC growth, a 49% year over year, and 4% quarter over quarter, reaching $5 $3 billion.
Maria: Of course, if COVID-19 was achieved despite Q1 being seasonally weak for our largest vertical in e-commerce and strong devaluations, most notably in Argentina, focusing on revenue.
Maria: During the quarter, we experienced 34% year over year growth, reaching $884 million.
Maria: This growth was driven by continued strong performance in our most competitive markets, Brazil with revenues up 18, 9% year over year and in Mexico.
Speaker Change: 50% year over year.
Speaker Change: Alongside the growth in Brazil, and in Mexico, We saw 20% area increase in their lifetime, including growth in Colombia, Costa Rica, Dominican Republic, and Ecuador, coming from streaming SaaS, only Monday livery and ride hailing vertical.
Speaker Change: Revenue growth was negatively impacted by Argentina down 31% year over year.
Speaker Change: In Oregon in a comparison is a tough one first of all the official rate has evaluated more than 70%.
Speaker Change: Second FX spreads have tightened generating less effects revenues in army.
Speaker Change: Combined if a higher proportion of local to local volume.
Speaker Change: Finally, Argentina also saw a decline in T. P V. Given that manual farmer margins have pulled back from that market given the macro and stability over the last 12 months.
Speaker Change: <unk> was also a drag on our year on year revenue growth down, 13%, primarily due to a customer churn at one of our financial service margin. This is not that we have lost the merchant, but that's one of our major financial service partners saw their volume actually declined significantly as they lost a key clue.
Speaker Change: And in depth market negatively affecting our revenues in Africa and Asia. The main contributors of revenue growth for Egypt, South Africa, Turkey, and the Philippines.
Speaker Change: Egypt the growth was driven by the general growth of our business, there or CP V up 71% year over year, the widespread on FX rates between the official in the markets right.
Speaker Change: And our strong liquidity position far enough market, even that we had a solid combination of cross border pain and fee outflows during the quarter.
Speaker Change: South Africa revenue was driven by the expansion of two large e-commerce margins into that market.
Speaker Change: One of them is Martin square volume significantly during 'twenty to 'twenty three.
Speaker Change: Another one is the margin that we on boarded at the end of 'twenty three and it starts with processing volumes in South Africa in the first quarter of 'twenty 'twenty four rapidly, becoming the second largest marches in their region.
Speaker Change: And finally, the biggest drag on year on year revenue growth was Nigeria, where revenues were down $20 million over the last year, mostly driven by <unk>.
Speaker Change: The tightening of the spreads between the market and the Fisher right. After the naira devaluation in February thank Jenny for you've been raising last effects.
Speaker Change: And a higher proportion of local to local volumes in Q1, 'twenty 'twenty four.
Speaker Change: Now let me give you a brief overview of the key drivers of Barco required to evolution of revenues compared to Q4 'twenty three revenues decreased by 2%. The sequential decline was mostly driven by seasonality with Q4 being a very strong quarter for our e-commerce vertical.
Speaker Change: Additionally, we saw one of our largest martin's achieve a new level in our church pricing scheme.
Speaker Change: And also renegotiated fees and their contract came up for renewal.
Peter: As Peter mentioned, given that our merchant concentration still remains high such a renegotiation directly impacts revenue growth.
Speaker Change: These two factors largely explain the 40% and 4% the crazy in Brazil, and Mexico revenues, respectively.
Speaker Change: In addition, we saw the crazy revenues in Chile, driven by lower volumes from some of our workflows in the e-commerce vertical they'll just seasonality.
Speaker Change: Those volumes were compensated by higher volumes from financial service Bay outflows, albeit at lower gross state rates compare to commercial items.
Speaker Change: The lower revenues in Brazil, Mexico, and Chile were partially offset by Argentina with revenues up 31% quarter over quarter, mainly explained by higher cross border settlement.
Speaker Change: As we indicated in the last quarter, we believe that margins will continue to gradually grow cross border volumes as liquidity inflows.
Speaker Change: All of them also helped courts on quarter revenue growth, increasing by 9% driven by a reacceleration of growth in the ride hailing and on demand and live or verticals in Central America and Peru.
Speaker Change: Revenues increased 5% quarter over quarter in Africa and Asia.
Speaker Change: As mentioned earlier in the year on year commentary or wherever it is in Egypt more than doubled quarter over quarter, driven by widening spreads between the official and then market exchange rate in the first two months of the year.
Speaker Change: We also experienced solid quarter over quarter growth in South Africa, Indonesia, Turkey, and the Philippines with.
Speaker Change: With the same dynamics playing out as those described year over year.
Speaker Change: Revenues in Nigeria were strongly affected by the devaluation down 74% sequentially offsetting a large part of the games in their or their African Asia market.
Speaker Change: In addition to these evaluation revenues were negatively impacted by 35% sequential decline in T. P. V. As are our financial service vertical saw a material drop in volume after the devaluation, which last effects trades occurring on our March on spot from now.
Speaker Change: Now moving to gross profit.
Speaker Change: As you can see in the slides eight and nine from their company earnings material from this quarter, we haven't pulled that gross profit breakdown by region.
Speaker Change: Therefore, I would like to walk you through in some greater detail on the gross profit the variation that we experience.
Speaker Change: This quarter, we experienced a 2% year over a year ago to $63 million in lifetime rough profit was $490 million decreasing 8% year over year. This result was significantly impacted by Argentina, which gross profit down 71% year over year.
Speaker Change: Given the lower effects revenue as in the past we benefited from there why the FX spreads.
Speaker Change: These together from the lower share of cross border volumes in Argentina explains the construction in gross profit margin from 89% I Gotta go to 37% in Q1 'twenty if any for.
Speaker Change: In Q1, 'twenty, three Argentina corresponded to 29% of our gross profit and in Q1 and four 8%.
Speaker Change: Excluding Argentina gross profit in all of them grew 24% year over year.
Speaker Change: Primarily by strong performance in our most competitive markets, which brings you up 63% and in Mexico up 44% year over year.
Speaker Change: Gross profit margin, Brazil constructed seven percentage points year over year, driven by risk since we're in negotiation explained by Facebook.
Speaker Change: Growth of all their chairs zero margins and higher share of payouts and local to local.
Gross profit construct is 18% year over year, driven by lower volumes of cross border due to customer churn at one of our financial service margins as explained earlier.
Speaker Change: Are there a lockdown we saw gross profit slightly up year on year at 1%, mainly driven by chairs Euro Martin's growth.
Martin: Looking to asking Asia region gross profit grew 60% year over year supported by strong growth in Egypt with gross profit up four times driven by our Martin's growth in the country.
Speaker Change: Similarly, a charge in Teaneck in Egypt, we benefited from the widespread and our liquidity position, having developed cross border flows of pain and payouts.
Speaker Change: We observed a year on year gross profit margin construction do you need to go to a lower liquidity at our platform driven by more accelerated the growth of pain from border compared to pay out to cross border. The gross profit growth in Egypt was partially offset by Nigeria performance as discussed earlier or.
On a quarter over quarter comparison gross profit constructed by 10%.
Speaker Change: That's in America gross profits fell only in Brazil, and Chile. This was mainly driven by first the previously mentioned Jean Martin or in negotiation.
Speaker Change: If congress seasonality driving lower volumes in this higher net take rates vertical.
Speaker Change: Third increased payout mix. In addition in line with their revenue decrease we saw an 18% decrease in gross profit in Chile. This negative variation were partially compensated by a Mexico, Argentina and are there lots of them.
In Mexico, although revenues dropped quarter over quarter, we saw gross profit growing 7% driven by improvements in our cost structure as we gain scale and negotiation of power vis vis processors.
Speaker Change: And Argentina with gross profit growing 30% in line with revenues.
Speaker Change: And in all their lifetime with gross profit growing 16% quarter over quarter.
In Asia, and Africa, Egypt, Nigeria quarter over quarter variations in gross profit followed the same dynamics, we observed in the year over year comparison.
Speaker Change: Nigeria declined by 1 million, while Egypt real back the 1 million.
Although we acknowledge the quarterly gross profit results are disappointing, we do not see structure issue.
Speaker Change: On a year over year basis. The Q1 gross profit is up on greater quality and sustainability, which then makes up Argentina, FX revenues, having falling significantly.
Speaker Change: Of course are required that we have been back to the buy margins with pricing what do we believe that overtime, we will offset these pricing negotiations with increased global volume from these margins now.
Now, let me hand over to Mark to continue working our way down the P&L hi, everyone. Thank.
Thank you Maria I'm delighted to be here today, and very excited about our future prospects. After my initial months of the local.
While we will continue to invest in our capabilities as Pedro mentioned in his opening remarks. We are also looking for ways to be more efficient across all areas of our business.
Speaker Change: During the quarter, we have continued to further invest in building out the team capability and establishing processes and systems to support our long term growth ambitions.
As a result of these investments, which we trust will pay off in the midterm.
Overall operating expenses were $36 million for the quarter.
Speaker Change: Areas of expense increases quarter on quarter work SEC related expenses, including engineers.
Software licenses and infrastructure expenses.
Speaker Change: Salaries and wages across our operations compliance and financing.
<unk> operating expenses represented 57% of gross profit.
Speaker Change: For a more detailed view please refer to slide 16 of the accompanying earnings material.
And you also add that our global team has grown to 951 people out there, adding 15 that FTE during the quarter.
Speaker Change: With most of the hires in tech sales and.
Speaker Change: Operations in Uruguay, Argentina, Brazil, and Spain.
All of this resulted in an operating profit of $27 million for the quarter down 32% year on year and 34% quarter on quarter. Similarly, adjusted EBITDA came in at $37 million down, 19% year on year and 25% quarter on quarter.
With adjusted EBITDA margin of 20% down six percentage points quarter on quarter.
Speaker Change: Approximately half of this decrease was driven by the gross profit compression discussed earlier and the other half by increased operating expenses I just mentioned along the same lines the ratio of adjusted EBITDA gross profit was 58% for the quarter.
Speaker Change: Net income was $18 million for the quarter decreasing 50% year on year.
38% quarter on quarter.
Speaker Change: The earnings presentation provides a detail of the quarter on quarter evolution of net income, which was mostly impacted by lower EBITDA.
In addition, right.
The income tax rate increased to 29% from 21% last quarter.
A result of the mix in revenues shifting towards higher tax.
Moving onto cash flow during the quarter, we generated $12 million of free cash flow.
And with that our net income to free cash flow conversion came in at 69% for the quarter, having said that our net income to free cash flow conversion continues to be above 100% when looking at the last 12 months.
We ended the quarter with a strong liquidity position of $320 million, including $212 million of available cash for general corporate purposes.
Speaker Change: And the $108 million of short term investments.
Speaker Change: Considering the robust cash position the board has authorized up to $200 million share buyback program to purchase class a common shares.
Speaker Change: The plan will expire on the earliest of May 2025, or upon reaching the $200 million repurchase limit.
Our business continues to generate strong margins and solid cash conversion.
This share buyback program reflects where our current capital allocation.
Frameworks.
We are allocating a portion of that cash as we have already mentioned a few times towards strengthening company capability by improving our internal systems and teams.
This is seen in the margin compression in the short term in our P&L.
On the corporate development input.
Speaker Change: We will take a very disciplined approach, but should attractive opportunities arise we still have an under leveraged balance sheet to deploy to complement our cash reserves and finally <unk>.
Into consideration that cash generation should continue to be strong going forward. We are confident this buyback program, where we presented an added element to the capital allocation framework.
It is an attractive use of capital given the trajectory. We believe local can have over time, a good executes against its enormous opportunity.
So buyback program underpins our confidence.
And the prospects of our business going forward and our ability to continue to generate sufficient future cash to carry out our ambitious strategic plan.
With this let me hand, it over back to Pedro for closing remarks, thanks, Marc by the way I'm pleased to have you on the call today I've enjoyed working together with you and the rest of the leadership team in Montevideo altogether over the past few weeks.
Pedro: Now, let me wrap us up here.
Our actual performance versus guidance will always hinge mainly on our own execution.
But it will also be affected by a few exhaust genus variables such as FX rates macroeconomic conditions merchant go live timing on signed contracts and regulatory changes just to name a few.
We manage and Derisk these variables as much as possible, but they still hold the level of unpredictability that is characteristic of the emerging markets. We are focused on.
Pedro: That's simply the reality of this business.
Speaker Change: So with that context in mind, we are working on delivering on our 2024 plan that is aligned with the guidance that we shared at the beginning of the year.
At this point in time and to the best of our current data expectations and knowledge. We believe that we are tracking toward these objectives, although with greater likelihood of coming in towards the lower end of the issued ranges.
Our mandate for the remainder of 2024 is to land and improve on that.
Speaker Change: Short term volatility aside we're highly encouraged by our general progress and remain incredibly positive on the bigger picture opportunity to compound profitable growth over the long term.
Merging markets still represent an unrivaled market opportunity for digital businesses and payments remained a major friction point.
Speaker Change: Mark's announcement earlier on of our new share repurchase program and the summarized outline of our capital allocation framework is a testament to the confidence we have in both our company and the potential of its business and with that we'd now like to take your questions. Thank you very much.
Yeah.
Thank you, ladies and gentlemen, if you would like to ask a question at this time. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment, while we compile our Q&A roster.
Yeah.
And our first question is going to come from the line of George <unk> with Morgan Stanley. Your line is open. Please go ahead.
Yeah.
Speaker Change: Yeah.
George your phone maybe on mute.
Hi, Hey, Jorge Kuri from Morgan Stanley. Thanks for taking my question.
Wanted to ask about EBITDA to gross profit margin, which was 58% this quarter.
Your guidance for the year.
I'd hear word pivotal set about maybe shooting.
Shooting for the low end of the guidance hopefully not but that is still 69% to 72%.
So can you maybe walk us through how do you close that gap tool from 58 to get to 69.
Speaker Change: Is there anything this quarter that is clearly one of nonrecurring that you can clean out and produce a gross profit margin that you think is more reflective of what we could see in the next couple of quarters have you help US bridge. The gap I think that was very useful to understand how things are going to progress.
Speaker Change: From here. Thank you.
Yeah.
Thanks for him so three things on how we're thinking through the financial model. The first one obviously is that this is a top line acceleration that we need to focus on the cost structure came in where it did because from a gross profit perspective, we're at <unk>.
Behind where we'd like to be so part of closing that gap and I would say the most important part is the conversion of existing pipeline, so as to be able to come.
Within the guidance range that was given from a gross profit perspective. The second thing is that obviously, we always review our cost structure.
With relationship to where we are in terms of revenue our gross profit and it's potentially the lever we have the most impact on is what we spend.
The third consideration is because this is a.
Speaker Change: Topline driven contraction of margin, we need to make sure that we balance the short term objectives, we have with the long term ambition, we have and we make sure that when we adjust costs, we do so taking to account that equilibrium between.
Speaker Change: Short and long term.
Speaker Change: Thank you Pedro if I.
I may maybe just.
Expansion on that the gross profit take rate of 190% 1.1 hundred 9% I'm sorry for the quarter.
18 basis points quarter over quarter.
How does that Ah.
How does that should look the rest of the year.
Speaker Change: Some of these items that you mentioned normalize.
Speaker Change: Look like we've said our business is a series of moving parts across 40 markets multiple merchants and end markets that are very volatile so.
Speaker Change: So we've given guidance, we've given you where we see we're standing on our guidance and I think we'd rather focus the questions on answering the quarter that just got reported than trying to confuse continuously reiterate the exercise of how we get to the guidance in general and I'm.
To answer your question, but trying to refer a little bit more to the first quarter. When you look at the drivers of gross margin compression for the quarter. There is an important part of that which is driven by seasonality Q1 is a weaker quarter.
For our e-commerce vertical which is typically a higher.
Speaker Change: Take great vertical.
Speaker Change: And also a pay and driven vertical so the mix between <unk> and pay outs that we saw it tilt towards payouts in Q1.
As the e-commerce vertical progresses, and especially towards the back end of the year.
It helps to increase take rates.
From a merchant renegotiation perspective, which is one of the other drivers we've outlined.
Speaker Change: We can get into greater detail and other questions, but we really believe that this isn't something that necessarily gets extrapolated into a structural issue, but rather something that's isolated to very large global relationships. So I think you can build a case for take rate going in either.
Direction and not necessarily continuing the decline that we saw from Q4 to Q1, but then again, we need to let the year play out and see how all of the multiple variables variables fall.
Got it.
Thank you thanks for that.
Speaker Change: Thank you and one moment as we move on to our next question.
Speaker Change: And our next question comes from the line of Qdoba BARDA with Goldman Sachs. Your line is open. Please go ahead.
Speaker Change: Hi, Good evening, Thank you for the call and taking my question.
Qdoba BARDA: I'll ask you a little bit about the guidance as well.
Speaker Change: Pedro you mentioned you feel comfortable you perhaps at the low end of the guidance that you mentioned.
Speaker Change: March gross profit.
Speaker Change: $25 million.
Pedro: Is that sort of a good base that you think you can grow off.
Pedro: Sort of be able to deliver that guidance, even for me you're still going to have to grow.
Pedro: To get to that lower end.
The guidance just to understand anything in particular sort of January and February and was there any pent up demand that.
Pedro: Maybe benefited march or as Mark sort of a better base to think of and then also just.
Speaker Change: As you have these big concentration.
Of large merchants.
Speaker Change: How can you either one I guess diversify.
Speaker Change: From that or given the size of those merchants that are you're always going to be somewhat dependent.
Speaker Change: And then for that growth.
Because we can deliver sort of the longer term growth outlook that you expect.
Speaker Change: And and I have a.
Speaker Change: Second question looking at scrapping.
Speaker Change: Okay.
Great.
Speaker Change: So.
We work backwards from your questions on diversification.
We've sustained that as the business continues to grow and as we continue to onboard more and more merchants over time, we expect that diversification to fall. So we should be less dependent on top 10 merchants as we scale out the business. If you look sequentially, we saw a little bit of.
Speaker Change: That the Q1 Q concentration in top 10 merchants.
Speaker Change: Is actually down somewhat.
Speaker Change: So I do think there is ample opportunity for us to continue to onboard.
Hundreds of large enterprise clients and to have an increasingly diversified base overtime I think what we've seen in the recent quarters is very very strong success retaining share of wallet of some very large global relationships and actually accompanying those merchants as they expand.
Speaker Change: Throughout emerging markets and that's generated the level of concentration that we're seeing right now.
Speaker Change: March I think has different puts and takes again.
We can try to explain what happened in March not extrapolate, what's going to happen over the remaining nine months of the year. Our guidance is built on a very detailed bottoms up analysis of our pipeline and each merchant opportunity and then adjusting probability of occurrence for that and giving you guys. The best.
Speaker Change: The calculation we have of how we think the year plays out March I think was a reflection of growing TBD.
Speaker Change: Throughout the quarter getting better towards the end of the quarter that TPG momentum was sustained into Q2, which which is a positive indication that in terms of share of wallet and growth business that we process for merchants, we continue to trend in the right direction.
Speaker Change: On the flip side March was still a quarter, where we had.
Some positive gross profit flowing through from Egypt, which after the devaluation and for full Q2 begins to decrease.
And so again puts and takes here core underlying metric of PPV.
Merchant adoption of our platform good momentum into Q2, then we need to see how everything plays out in terms of the different geographies.
Speaker Change: And how that adds up to a total Q3.
Speaker Change: Number.
Speaker Change: Okay. That's very helpful. Thank you and the other question I had was just there was a big Egypt revenues were up quite a bit particularly year over year.
Speaker Change: There has been some devaluation in the curve.
Speaker Change: They're typically when we see that negatively.
Speaker Change: Negatively impact revenue so just to understand.
What specifically happened in Egypt.
How does the gross margin in Egypt, maybe compare to other markets and could this be a headwind if there's further FX depreciation in Egypt.
Yes, so as you've seen throughout emerging markets.
Speaker Change: Time time and time again.
These opportunities emerge in markets that are either with limited FX liquidity or half capital controls and so.
The business, we office offer our merchants and those points in time is extremely useful and unique for them and we're able to profit from those widening FX spreads 2023, H one Argentina was case in point H two of 2023, Argentina began to compressed spreads, but Egypt emerged.
Speaker Change: Now what we're seeing heading out of Q1 and into Q2 is that Egypt has devalued its currency spreads have tightened and what we need to see is if in the remainder of the year. Another one of these opportunities emerges or not.
Yes, Egypt was a case of higher margins and take rates as a consequence of wide FX spreads and with the devaluation those margins tightened for Q2, and so the Egyptian business Q on Q becomes a headwind that we need to offset with volume.
And wins across the remaining markets I think it's an advantage that our business is fairly diversified but things don't always line up in a way where when you lose one market immediately you get another one over time when we look at the trend there are always these kinds of opportunities popping us across our.
Speaker Change: Markets and our footprint.
Speaker Change: Okay, great. Thank you Peter.
Okay.
Thank you and one moment as we move on to our next question.
And our next question comes from the line of Jason Kupferberg with Bofa. Your line is open. Please go ahead.
Hey, this is muscle on for Jason.
I just had a question. So you said like in the quarter.
Decrease in gross profit of one of the factors was large merchant achieving new pricing tier and renegotiating fees.
Do you kind of see are there any other sort of significant or like top 10 merchants with contract renewals coming up that might impact your ability to meet the lower end of your gross profit guidance and with respect to the delays in some of the launches do you have visibility for when those will go live.
Speaker Change: Yeah.
Thanks to great questions. So, let me give a little bit more context on the merchant. Okay. So the first thing is that the merchant that that we're talking about is a very very large global contract for us and when we look at the renegotiated prices to the best of our understanding.
Speaker Change: They are still higher than what this merchant could have potentially found through other alternatives in the markets, where it was renegotiated and yet we've been able to retain most of their volume in those markets even at a higher price point and I think that's a reflection of the quality of the platform and the service.
Is that we offer for them.
So I think what I'm trying to say here is that this is much more the natural consequence of the enormous volumes that David change with us.
And if we do have other merchants and we don't have any right now that we think are similar process will happen potentially.
Potentially this merchant could happen in other markets, but not other merchants that's actually I would argue good news. It means that we're having merchants that are attaining significant volume thresholds that justify that kind of tearing impact and renegotiation of contracts I think the.
The other point that's important to point out here is we're looking at the impact of this renegotiation in one market because we're trying to give the street clear visibility on what happened in Brazil. The way, we actually manage the merchant relationships is taking both the global look and also making sure. It's a long term view.
And as a consequence of this when I look at this particular merchant. We've also been able to continue expanding with them into new markets and we trust that as they grow their emerging market footprints. They will continue to do so through us.
Speaker Change: So what should happen over a longer periods of time is that when we look back the compounded growth rate of our relationships with these very very large merchants should justify the kind of pricing that they are commending all right. So we don't see this as an indication of a structural change or competitive.
Dynamics, but rather simply the pricing dynamics are very large global relationships and the volume discounts that makes sense to offer them to continue to be able to grow alongside them.
Speaker Change: You had a second question which was.
Just on the delays with some of the launch Yep Yep Yep Yep Yep. So.
Some of these have already gone live in the second quarter.
Some of them are very large very long term high potential clients that we'd like to be able to go live Q2.
So I'd say potentially in some cases impact already in the second quarter, others, the second quarter impact might still be muted, but long term. Some of these logos are very very attractive logos that we've been pursuing are working on for quite some time.
Speaker Change: <unk> when they go live and we start ramping up for it in terms of a longer term perspective.
These are incredibly promising and hopefully we'll be able to give you updates when we announce Q2.
They are life.
Speaker Change: Yeah.
Okay, great. Thanks for taking my question.
Thank you and one moment for our next question.
Ladies and gentlemen, when we when you ask your questions. We do ask that you. Please limit yourself to one question and one follow up our next question does come from the line of Jamie Friedman with Susquehanna International Group. Your line is open. Please go ahead.
Hey, guys.
I wanted to mentioned I appreciate the.
Incremental disclosures.
Marine, especially about the gross profit by region that's helpful.
Speaker Change: But you know how it is when you.
Sure something everybody wants more so I was wondering is there any way to.
Contemplate the margin characteristics.
Slide five which are the.
Speaker Change: Verticals, even if you can't say the margin characteristics of those <unk>.
Natural Pan and payout.
Attributes of those because that might be indicative.
Speaker Change: Oh.
Speaker Change: So.
Asked noted Jamie in general terms, the payout business has a lower take rate business.
Most.
Most quarters, it's a slightly higher margin than pay ins, but pay ins come in at.
Speaker Change: Larger take rates.
The payout business when they when they offer us liquidity in markets. We're netting is permitted they actually impact the profitability on the <unk> business, because that's where the.
Speaker Change: Usage of the liquidity.
In terms of being able to repatriate pay ins at FX spreads gets reflected so there is a strong interplay between both of these and then in terms of take rates per vertical again, we haven't been disclosing that so not too much to comment here.
We'll take note and if at some point, we think that's helpful. We'll consider it.
Okay, and then if I could just follow up Pedro in your prepared remarks, you talked about the relative strength of March versus January February apart from Egypt.
Can you call out which regions may have seen stronger growth in March.
Or is that more a function of the onboarding of the new merchants.
Like I mentioned total payment volume. So again that gives you a general indication of companywide growth in terms of what we're processing for our merchants.
<unk> gradually stronger each month of the year and that's continued to be the case into the second quarter. So Egypt as a part of that and I think it's important for us to highlight that because that does change in the second quarter.
But in general the PPV trend has been one of our sequential month on month growth throughout through April obviously may isn't finished yet so we can't comment there but.
Speaker Change: The business in general in terms of the volume we're processing for merchants and.
An incremental merchant businesses in countries that were launching continues in the right trajectory.
Got it thank you so much.
Okay.
Speaker Change: Thank you and one moment as we move on to our next question.
And our next question comes from the line of Nihon <unk> with each.
HSBC Your line is open please.
Hi, Thank you for taking my question quick one on the share of CPE between cross border and local to local.
We saw the local to local share actually ill window, and then cross border was a bit stronger could you. Please explain that because I would imagine that with Argentina.
Speaker Change: That would be a hot issue.
We'll go to local so anything that is.
Explained this shift.
And chicken meat on the expense side could you please elaborate a bit on when exactly.
Speaker Change: Did the extra spending goal by the first quarter what in the deck.
Speaker Change: Platform are you spending more on is it the platform youre, making more robust or is it because you are then nothing more that in any specific geos any more color would be helpful. Thank you so much.
Hi, Thank you for your question. So I'll first take the one on the cross border volume that you mentioned.
On the prepared remarks, you may remember Pedro mentioning the success of the remittance business. So we have been growing car doors and growing that business. So this has helped us grow in the cross border volumes, especially within payouts.
Alright.
Sure.
On the expense side this is mark here.
In terms of the.
Investments that we've done here in the expenses.
Really focused on the on the technology side and technologies make sure that we have.
Investments that we will continue to help us accelerate.
Products and the launches that we have to continue to.
Create further further business for us.
Okay.
Okay.
Thank you so much I mean any specific.
And one moment as we move on to our next question.
Our next question is going to come from the line of John Murphy with Barclays. Your line is open. Please go ahead.
John Murphy: Alright, Thank you very much for taking my question.
John Murphy: One thing I looked at is when you go back to your revenue cadence for the year.
In public.
You'll see that from Q4 to Q1, there is normally a sequential increase in revenues and so now we see a little bit of a sequential decrease is this should I think of this as essentially now that youre more penetrated e-commerce, and other verticals, which might tie more to retail that day locals revenue cadence is going to start to conform more to the season.
<unk> that those kinds of verticals normally have and my follow up was in the last quarters call. Pedro I think you had mentioned some.
Potential M&A that you are considering just broadly I was wondering if you have any updated thoughts on that.
Thank you.
Sure.
So you are spot on in terms of two things happen I think as businesses grow and the way. We're growing one is at smaller absolute numbers the typical seasonal.
Cadence isn't as president because you're growing off of a smaller basis in your Q on Q growth rates are a lot higher more importantly in our case. If you look at the e-commerce vertical year on year growth and we give that disclosure E. Commerce actually grew three X volume year on year. So clearly.
<unk> platform is much more penetrated today by e-commerce merchants with very strong seasonality from Q4 to Q1.
Say advertising, which is the other one that has a certain seasonal cadence to it not nearly as relevant as ecommerce, but also plays a role in the seasonal movements from Q4 to Q1.
Thank you and the M&A thoughts.
Look I think the best I can comment for obvious reasons is what we wanted to make sure given the fragmentation, we still see in the Fintech space is that if we do M&A or we don't do M&A, it's not a consequence of things having dropped on our laps.
Not but us actually making a concerted effort to scan the landscape understand where there are potential acquisitions that could help us accelerate growth and then decide whether it makes sense or not so we are diligently working on making sure that we're taught.
John Murphy: Turning to those we have to talk to and understanding where there are opportunities or not.
That's really where we're at and if there were anything significant to report we would reported there isn't but we're working.
John Murphy: Thank you.
Thank you and one moment as we move on to our next question.
Okay.
And our next question comes from the line of Matt <unk>.
Matt <unk>: <unk> with autonomous research. Your line is open. Please go ahead.
Hey, good afternoon, guys Pedro I wanted to go back to the large merchant pricing renegotiation I'm curious if you could provide some color on why this type of negotiation would not occur with your other large merchants I would just think naturally a lower take rate is kind of the price of doing business with these various success.
Matt <unk>: Merchants, so any color that you could provide there would be really helpful.
Matt <unk>: I agree with you.
I think what we're trying to say is the scale.
Of the merchant that generated the renegotiation is such that you shouldn't simply extrapolate that across the remaining merchant base within a short period of time and so that's why I think on a positive note.
Matt <unk>: Were we to be able.
Actually we said a different way, where we need to have to sit down with more merchants to replicate this kind of negotiation would imply that the absolute volume of those merchants is so large that our business is growing at a significant pace. So over time, yes that could be the attendance.
But there is a certain benefit to when that happens which is that the merchants have become very very large if you look at the disclosure presentation. We're giving you guys incremental color and I think this is important in terms of just isolating the.
Pricing impact of this round of renegotiations in terms of the consolidated business now not just focusing solely on Brazil, what youll see is that there's about 130 bps of gross profit compression and only about four bps of Te.
Speaker Change: Great compression when we isolate the pricing piece of this remember that this also has material impact to it.
So again it explains the Brazil situation I do think it's the natural tendency when merchants get very large and I would say, it's a pretty good situation to be in because it means we've been able to accompany our merchant on a global basis.
These things also smoothen the relationship so the open other opportunities in other markets and they set us up well to continue to winning new geos with those merchants and finally, we've given you enough disclosure. So that you can actually try to quantify this so that there is an undue weight pace place.
On what the impact of the pricing change is.
Yeah.
Hi.
Pedro: Really really helpful. Pedro Thank you.
My other question I, just wanted to touch on the <unk> opportunity that you guys kind of touched on briefly during your prepared remarks, and the growth of your payout business thats kind of enabling that could you kind of dish.
Broadly speak of like what percentage of your volume is netted.
That and then just like kind of like longer term as your business grows kind of like the potential to improve unit economics as a result of <unk>.
Sorry, just trying to make sure.
We have the right numbers there okay. So as you've seen the remittance business is a newer business for US remember, we don't touch end consumers, we're a provider of remittance infrastructure for merchant or financial service verticals that offer remittances to end users. So it's extremely.
<unk> fast growing very successful in terms of absolute size you have the TPB, there, but that leads to about 4% of our repatriation currently being done through netting so it's still small what the netting allows us to.
Do in markets, where its regulatory Lee allowed is it gives us very competitive rates on the FX because we don't have to go through our global banking relationships or brokers. We can simply net again, it's still at 4% growing very fast over time if those.
<unk> net inquiry doors grow.
Pedro: That makes us more competitive in terms of FX. So we can win more business and it also improves the FX spreads if the market is an extremely competitive FX market and the impact to gross margin is not that relevant because the amount you can improve is not that big in markets where <unk>.
Currencies are being traded and we do a lot of those the netting could be very significant in terms of the incremental gross profit. It allows for us and we've seen that sporadically over time with the Argentina case or the Egypt case.
Pedro: Okay.
Pedro Arnt: Thanks Pedro.
Thank you and one moment for our next question.
Our last question is going to come from the line of Kayo Petro with UBS. Your line is open. Please go ahead.
Hi, everyone. Thanks for the opportunity.
Kaio Penso Da Prato: Two question on my side really quickly.
First is related to the effect of the devaluation on the reserves. This quarter just would like to get a sense about what would be the level of gross profit and gross profit margin without a major default that we saw again, especially in Nigeria.
And estimate to show.
And second.
G&A expenses.
Again, we saw a massive increase especially salary.
Which we already saw in the fourth quarter and we continue to see a sequential increase this quarter G&A of almost <unk>.
20% Q on Q I, just would like to double click here if it is.
All related to new head count because it seems that the net addition was not that high this quarter.
Can we expect for the fourth.
Speaker Change: Alright, thank you.
Okay.
So let me take the first one mark will take the second one.
So first of all the devaluation from a gross profit perspective in Nigeria. It doesn't have an accounting impact that that is that is that relevant because of the way that.
Revenue in flows into gross profit in Nigeria for us the impact it has in that market is that we saw a lot less activity from our merchants after the devaluation as they leaned into that market less we also have a higher mix of financial service clients.
In Nigeria that after the devaluation, we are less active than they were being prior to the devaluation. So it's not a direct accounting impact that we could give you a constant currency gross profit for Nigeria, It's actually just less business. So we haven't quantified that Argentina, the devout really.
Occurred in Q4 for a few weeks and then you saw the devalued peso effect the full first quarter, but notwithstanding from a gross profit perspective, we saw Argentina rebound. So the increase in cross border business was enough to offset.
At the lower PPV at the lower.
Currency level, and so if anything on constant currency level. The Argentine business would have looked even better but we haven't disclosed any quantification there on that.
Egypt as I said, the devaluation is primarily going to hit us in the second quarter Didnt impact that much in the first quarter.
Speaker Change: Just when you referred to G&A I assume you're asking us opex as a whole or specifically G&A within opex.
Specifically the DNA.
Okay.
Okay on the <unk>.
G&A.
Speaker Change: On the G&A side, there's a couple of things going on there first of course, we're investing in people. So our head count as we showed on.
Prepared remarks has gone up by about 50 people. So we have the impact of that of course in some of the increases at the end of last year.
Speaker Change: But also there is an impact.
Pedro mentioned, the whole devaluation inflation in Argentina, so in the fourth quarter, the numbers were somewhat lower than that.
Then related to this whole devaluation and inflation so.
Speaker Change: The increase looks a bit inflated.
If you were not do you have that numbers would be a bit closer to each other so you've got a couple of things going on there, but mostly again. It's there is the impact of that inflation deflation and then you've got of course the increased.
Our head count that we've talked about it and the investment that we did.
Okay. So should we assume like this is a starting point for that.
Coming quarters, right because of all the effect of devaluation as we saw this quarter.
Speaker Change: Sure.
Speaker Change: I think as I said before we constantly review our cost structure in light of where our gross profit is coming in so all things being equal there are certain one offs also in the G&A in this quarter, but I think as a general directional.
Or are we not to change anything then that would be.
About a valid starting point for you to calculate.
But again like we said, we're constantly reviewing and balancing short term and long term and how we are slowing costs through the P&L. So.
Theres always the possibility that we decide to change that cadence and cut back in certain areas, where we think it won't hurt our long term prospects in any significant way.
Speaker Change: Okay. Thank you very much.
Thank you and I would like to hand, the conference back over to the company for any further or closing remarks.
Okay, I think we've lost the operator here so I'll do the operator duties for a second I think that wraps up the Q&A portion that we had for today. Thanks for the questions just before we drop one last set of thoughts on our part.
When we look at our business as a whole over a long periods of time and not over a few quarters. It has consistently grown across all of our key metrics I'd say.
But that that growth has never been evenly distributed across geographies and products and that's one of the reasons, we're giving the gross profit per market as well.
So what we see typically is it in the short run some countries are growing some products are growing and others are not and we think that this is one of the strengths of the winning business model. We have is that it's very diversified and we don't expect that to change if anything as we grow geographies and we go products that diversification.
Speaker Change: <unk> should grow.
However, there are periods, where you see perfect storm like activity, we're simultaneously decelerating geos air products coincide across multiple revenue streams. We think Q1 has some aspects of that and so when these hiccups do occur let's not lose folk.
<unk> on the longer term trends of our business that we are still convinced is equipped to grow very well over the long run.
And so we're still firmly committed and firmly believe that this doesn't signal a break in our capacity to deliver long term growth gross profit growth EBITDA growth and cash generation. Although clearly it is a quarter that came in disappointing not from a top line in <unk>.
PV perspective, but on gross profit and subsequently what happened to EBITDA, we're fully committed to turning that around over the remainder of the year and we hope to give you guys updates as the year progresses. Thank you very much.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Speaker Change: Okay.
Okay.
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Okay.