Q3 2024 DLocal Ltd Earnings Call
Speaker Change: Hello, and thank you for standing by. Welcome to the DLocal 3rd Quarter 2024 Results Conference Call.
At this time, all participants are in a listen-only mode.
Speaker Change: To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to hand the conference over to D-Local. You may begin.
Speaker Change: Good afternoon, everyone, and thank you for joining the third quarter 2024 earnings call today. If you have not seen the earnings release, a copy is posted in the financial section of the investor relations website.
Speaker Change: On the call today you have Pedro Arnt, Chief Executive Officer, Mark Ortiz, Chief Financial Officer, Maria Oldham, SVP of Corporate Development, Strategy and Investor Relations, and Mirele Aragau, Head of Investor Relations.
Speaker Change: A slide presentation has been provided to accompany the prepared remarks.
Speaker Change: This event is being broadcast live via webcast and both the webcast and the presentation may be accessed through Dlocal's website at investor.dlocal.com. The recording will be available shortly after the event is concluded.
Speaker Change: Before proceeding, let me mention that any forward-looking statements included in the presentation or mentioned in this conference call are based on the currently available information and D-Local's current assumptions, expectations, and projections about future events.
Speaker Change: including those described in the forward-looking statements and risk factors section of Dlocal's filing with the Securities and Exchange Commission, which are available on Dlocal's investor relation website. I will now turn the conference over to Dlocal. Thank you.
Thanks, everyone, for joining us today.
Speaker Change: Let me begin with a quick overview of our main highlights for the quarter.
We're encouraged by how we see the business evolving.
Speaker Change: After an admittedly soft first quarter, we see ourselves consistently gaining momentum.
Speaker Change: Despite a tough 2023 comparison, driven by extraordinary gains in Argentina, we've once again returned to delivering a quarter of record results in both TPV and gross profit.
Speaker Change: Our margins, cash position, and cash conversion have all improved quarter after quarter throughout 2024.
Speaker Change: A year that started off admittedly weak has gained positive momentum.
Speaker Change: Let me go into greater detail now, starting off with our top line results.
Speaker Change: We continue to deliver significant growth, with total payment volume re-accelerating to over 40% year-over-year, driven by our continued ability to expand our share of wallet of our existing global merchant base, as well as onboard new merchants.
Speaker Change: Our performance this quarter was strong across diverse verticals, countries, and products. Notably,
Speaker Change: We increased payment volume in Argentina, Mexico, Egypt, and other Latin America, mainly in Colombia and Peru, as well as in other Africa and Asia, with very strong performance in South Africa.
We reported record volume in our higher-take-rate cross-border business.
Speaker Change: During the period, we successfully integrated major players, including MoneyGram, one of the largest global providers of money transfer and payment services,
Speaker Change: Moving on to profitability, this quarter's results showcase the resilience of our business model. We reached record gross profit of $78 million, with net take rates stable at 1.2% since Q1 2024.
Speaker Change: We achieved those results despite weaknesses in most emerging market currencies.
Speaker Change: Brazil, Mexico, Argentina, Egypt, and Nigeria, our gross profit would have been approximately 6% higher during the third quarter 2024.
or over 18% Q1Q growth.
Speaker Change: and TPV growth would have been 14% quarter over quarter. Our adjusted EBITDA reached $52 million despite continued investments in our engineering team, back-office capabilities and our licensed portfolio, all crucial for our long-term success.
Speaker Change: Although adjusted EBITDA was down year over year, this represents the second consecutive quarter of increased operational leverage with adjusted EBITDA over gross profit margin now at 67%.
Speaker Change: This demonstrates the operational leverage inherent in our business model, general philosophy of expense control, and disciplined investment.
to deliver our long-term growth ambitions.
Speaker Change: During the past three months, we had net cash from operating activities, excluding merchant funds, minus CapEx, accounting to $26 million, a cash conversion of practically 100% to net income.
Speaker Change: I'd now like to cover some technology and product development deployments during the quarter.
Speaker Change: that shed further light on what our core offering is and how we differentiate from competitors.
Speaker Change: Some context. Always remember that the backdrop of where we operate is an emerging market landscape where payments are still characterized by three main factors. They're fragmented, they're costly, and they have lower performance.
Speaker Change: During the quarter, we launched our Smart Requests functionality, boosting our transaction performance and therefore improving conversion rates by an average of 1.22 percentage points across the board.
Speaker Change: Smart requests rely on per-country machine learning models that optimize routing and chaining so as to maximize authorization rates for our merchants.
Speaker Change: We've also continued to develop increasingly advanced real-time cost calculation models to optimize processing costs, which also contributed to our gross profit achievement and stable net take rate.
Speaker Change: A third area of innovation has been our launch of new and promising alternative payment methods.
Speaker Change: As part of our ongoing efforts to deepen our infrastructure in various countries and add more value to our merchants, we've successfully deployed integrations with NuPay in Brazil for global merchants.
Speaker Change: This represents an expansion of our payment method footprint with this widely adopted and advanced feature set APM.
Speaker Change: A standalone payment orchestration option which allows merchants to retain our smart routing, fraud detection, and unified reporting while obtaining their own licenses and contracting directly with processors in each market. Although this model may result in a lower take rate net of acquiring costs.
Speaker Change: It enhances our ability to capture share of wallet with relevant clients and continues to add value to merchants through our single API connection and product functionalities while delivering optimized conversion and cost results.
Lastly, we continue to invest in expanding our license portfolio.
Speaker Change: Obtaining an International Money Transfer Operator's License in Nigeria, Financial System Auxiliary Services License in Ecuador, and a Payment Service Provider and Payment System Operator License in Uganda.
Speaker Change: We still see this growing portfolio across complex and volatile emerging markets as very valuable intellectual property, and adding to it every quarter is a deepening of our competitive advantages.
Speaker Change: Wrapping up, we're delivering on the outline plan for sequential performance after Q1.
Speaker Change: Consistently hitting record TPV, holding the line on take rate declines.
Speaker Change: showing best gross profit ever for a quarter and improving our margins through reduced absolute dollar OPEX.
In short, things are trending in the right direction.
Speaker Change: With that, I'll hand it over to Maria to take you through a more detailed overview of our third quarter results and then to Mark to walk us through key financials.
Thank you, Pedro. Good afternoon, everyone.
Maria Oldham: As Pedro mentioned, despite some softness in Brazil, our third quarter results show healthy growth and momentum.
Maria Oldham: We achieved TPV of 6.5 billion dollars, up 41% year over year and 8% quarter over quarter.
Maria Oldham: From a business line perspective, our cross-quarter flows grew 12% QoQ and 35% EoY, reaching $3 billion in TPV.
Maria Oldham: Mainly driven by commerce, financial service, on-demand delivery, and soft verticals.
Our local-to-local TPV increased by 4% quarter-over-quarter and 47% year-over-year.
Maria Oldham: with strong performance in Mexico and Argentina. We experienced sequential slowdown in growth in Brazil, driven by a loss of share of wallet in credit card payments with a top commerce merchant.
On a positive note,
through a pipeline that includes alternative payment methods.
Maria Oldham: and onboard them to our new stand-alone payment orchestration option that Pedro described earlier. Excluding the impact of this merchant, TPV in Brazil would have been up 8% quarter over quarter.
Maria Oldham: Driven by advertising and commerce verticals. Our paintings business grew 8% quarter over quarter and 35% year over year, with strong performance in Mexico.
Maria Oldham: Colombia, Argentina, South Africa, and Egypt across various verticals. Our payouts business grew 7% quarter over quarter and nearly 60% year over year driven by financial services and remittances.
Maria Oldham: representing a 13% year-over-year growth. This is mainly driven by Egypt.
Maria Oldham: With volume growing over 90% year-over-year, Mexico with positive performance in commerce and financial services, and other markets, particularly Colombia and South Africa, with strong growth across commerce and wide-ranging verticals.
DRIVEN BY THE PERFORMANCE IN ARDENTINA, EGYPT
Maria Oldham: with volumes increasing by over 30% in the period, as well as the positive results in other LATAM and other African Asia. Now moving to gross profit dynamics.
Maria Oldham: During the quarter, gross profit reached a record of $78 million, up 5% year-over-year despite the hard comparison with Q3 2023, starting with Latam.
Gross profit was $56 million.
Maria Oldham: and Brazil, given the repricing for our largest merchant, which occurred in Q1 2024, and share losses in credit card payments. This was partially offset by Mexico.
Maria Oldham: where gross profit grew over 60% year over year due to the volume growth and lower processing costs from renegotiation with processors in Q1 2024. In Africa and Asia, gross profit was also stellar with almost 50% growth year over year.
and TPV Ramp-Up of our Commerce Merchants.
Maria Oldham: Combined with cost optimization in South Africa, on a quarter over quarter basis, gross profit increased by 12%. In LATAM, gross profit increased by 4% quarter over quarter.
Maria Oldham: driven by Mexico and other Latin markets, where we experienced 2 million growth from widening effects spread that may eventually fade away in case of currency devaluation.
These positive factors were partially offset by Brazil,
Maria Oldham: Given the share losses on credit card payments of a top merchant.
Maria Oldham: and Argentina, where we had higher expatriation costs. In Africa and Asia, gross profit increased by 39% quarter over quarter, due to the same factors just discussed in the year-on-year comparison.
Maria Oldham: As you can see by these results, Q3 continued to build on the growth of Q2 and delivered record gross profit despite the softness in Brazil.
Maria Oldham: Demonstrating increased diversification on a geographic and merchant basis. As we continue to scale our business, we expect to reduce volatility on our top and bottom lines. In addition,
Maria Oldham: Please note that we provide detailed country-by-country information to help you better understand the drivers of our results.
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Maria Oldham: It is important to emphasize that our business is ultimately driven by the volume our merchants entrust to us and the unique dynamics of each of the markets.
We encourage you to view our performance holistically.
Maria Oldham: as this perspective best reflects the quality and resilience of our business as a whole. Let me now hand it over to Mark to continue discussing our financials.
Thank you, Maria. Hi, everyone, as discussed in previous quarters.
Mark Ortiz: We continue to invest in our capabilities and innovations to drive efficiencies across various areas of our business.
Mark Ortiz: We have maintained investments in key areas critical to our future growth, while balancing out other expenditures given our top-line path. With this,
Our 4Q3, our total operating expenses reach $37 million.
Mark Ortiz: a 6% decrease quarter over quarter, and a 61% increase year over year. Most of the OPEX growth continues to be mainly allocated to product development and IT capabilities, with these expenses increasing by 88%.
Pedro highlighted in his opening remarks
Mark Ortiz: Some of the projects our tech and product teams have been working on during the past few months.
Speaker Change: We expect this allocation tilt toward product and IT to continue in the future.
The 6% decrease quarter over quarter.
Speaker Change: after a weaker-than-expected result in the first semester. Through reignited growth and cost management, we delivered an operating profit of $41 million for the quarter, up 36% quarter-over-quarter, and adjusted EBITDA of $52 million, up 23% quarter-over-quarter.
Speaker Change: The ratio of adjusted EBITDA to gross profit followed a similar trend, reaching 67% for the quarter, up 6 percentage points quarter over quarter.
which was mostly impacted by lower finance results, more specifically.
Speaker Change: Deposit of $23 million, non-cash mark-to-market effect related to the Argentine bond investments in Q2-24, as mentioned last quarter. And higher finance costs this quarter, mainly driven by exchange differences and higher cost of hedges.
Speaker Change: Adjusted net income, which excludes the impact of the Argentine bonds and intercompany loan, was $43 million for the quarter, down 5% quarter over quarter.
Speaker Change: Our effective income tax rate decreased to 8% from 18% last quarter.
Speaker Change: Primarily driven by lower pre-tax income in Argentina, on a year-to-date basis, our effective tax rate stands at 18%. Moving on to cash flow for the quarter. Net cash from operating activities, excluding merchant funds, less CapEx, amounted to $26 million.
Up from $19 million in Q2'24, representing a 37% increase.
With that...
Speaker Change: We continue to hold a strong liquidity position of $320 million, including $208 million of available cash for general corporate purposes and $112 million of short-term investments, even after the $100 million share buyback executed this year.
Speaker Change: With this, let me hand it over back to Pedro for closing remarks.
Thanks, Mark.
Before we conclude our presentation,
Speaker Change: Dlocal is a young and dynamic company, less than 8 years old, and yet, during this period, it's delivered extraordinary growth. We've expanded our roster of sophisticated enterprise merchants.
Speaker Change: This growth underscores our success in serving and supporting these most demanding digital merchants with tailored solutions that meet their evolving needs.
Speaker Change: We navigate the highly complex and changing payment landscape and regulatory environments across EM with one of the most complete emerging market processing ecosystems.
Speaker Change: Our best-in-class orchestration layer, competitive forex liquidity and rates, robust fallback and redundancy features, efficient prod prevention engines.
Speaker Change: and KYC regulatory and compliance layers are built to suit each market we serve. The comprehensiveness of our 1D local solution allows our merchants to add new markets and payment methods.
Speaker Change: at a marginal incremental implementation cost, providing cost-effective and speedy geographic go-to-market strategies. This value supports the resilience of our business, despite operating in the volatile global south.
Speaker Change: We have rebounded from weakness in 1Q to deliver two consecutive quarters of consistent growth in metrics, as well as an adjusted EBITDA.
Speaker Change: This type of sequential growth, when compounded over many quarters, shows the extraordinary potential of delocal.
Secular trends also favor us.
Speaker Change: We have a huge and growing TAM underpinned by shifts towards payment digitalization, the growing importance of emerging and frontier markets, and surging demand for cross-border and instant payment methods.
Speaker Change: Industry forecasts predict the cross-border payment market can reach 65 trillion dollars by 2030.
Speaker Change: And we see ourselves as well positioned to be capturing a reasonable portion of that growth in this immense opportunity.
Speaker Change: Our ability to innovate and capitalize on these trends, coupled with our financial model characterized by operational leverage and good cash conversion, will fuel long-term value creation for both our shareholders and merchants.
Speaker Change: We're just beginning to realize the compounding nature of all this.
Speaker Change: and we remain steadfast in our mission to deliver on this promise.
Speaker Change: in all the relevant geographies that our merchants need us to be. Thanks to those who have shown us continued support and confidence and I look forward to updating you on our progress in the upcoming quarters.
With that, we can now take questions.
Speaker Change: Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 1-1 on your telephone and then wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.
Speaker Change: Our first question comes from Alana Beatrice Abreu with Goldman Sachs. Your line is open.
Speaker Change: And my second question is regarding the decrease in GNA in the quarter, right, fell 16% sequentially.
Speaker Change: And I think Mark mentioned that it's due to, you know, additional cost controls.
Speaker Change: But Pedro mentioned that you still intend to continue with the plan on investing in your engineering team, back-office capabilities, etc. So, just wondering if that...
Speaker Change: expense line, if that level still makes sense going forward, given your investment plans, how should we think about expenses going forward? Does it increase from here, and especially, you know, going forward into next year also?
Thank you.
Speaker Change: Thank you. Just some context before I answer the specifics on Brazil. I think it's important to not forget that we run the company based on merchants.
and increasingly global and diversified contracts with those merchants.
Speaker Change: We do trust that in general merchant relationships will grow consistently given the quality of the service we offer.
Speaker Change: and that's a testament that what we have been saying and that is that as we scale and diversify the business
Speaker Change: The fluctuations that are inherent in emerging markets will become easier to manage through diversification.
Speaker Change: Q3 is definitely a case in point, where again, despite weakness across a few key markets,
Speaker Change: Strength, across a growing number of relevant markets, allowed us to deliver record gross profit nonetheless. And I think this is very, very important when we think of the delocal opportunity and investment thesis going forward.
On Brazil specifically.
Brazil has a very particular regulatory environment.
Speaker Change: This specific merchant was granted a payment institution license, and the regulatory environment in Brazil does not allow a sub-acquirer or a payment institution to process through another sub-acquirer.
leading them to have to go direct to acquirers.
Speaker Change: I would not extrapolate that to other merchants either. I think this is somewhat of a particular situation. More importantly, the orchestration product we launched is a product that has both an offensive nature and a defensive nature. The defensive nature is that it allows us to address exactly this type of situation.
Speaker Change: where the merchant can now run on their own licenses, have their own direct contracts with acquirers, yet continue to use our 1D local solution and benefit from our technology stack.
Speaker Change: We've already migrated this specific merchant over to the orchestration product. We're off to a strong start in Q4, beginning to recoup volumes.
Speaker Change: beginning to increase again share of wallet on credit cards, and we hope to be able to continue to execute, perform, and regain as much if not all of that volume going forward.
Thank you.
I'll let Mark take the one on costs.
Mark Ortiz: Thanks Pedro. In terms of cost, you know, I think it's important to note that we still continue to invest in our future and in our folks here. So I think it will be, it's interesting to see the fact that
Mark Ortiz: Even though the GNA came down and it was really an action that we took around after the first quarter, it was a bit of a weaker quarter for us. We decided to take some actions and we did reduce some costs around third parties and some other areas that we thought were prudent to do this in the shorter term. And we continue to invest.
Mark Ortiz: For looking forward here, we expect that cost to slightly rise. Again, we're going to continue to invest in our infrastructure. We're going to continue to invest in our IT. So we see that those costs slightly going up here, but we're going to continue to be measuring in terms of how we look at each one of those costs and those investments.
for the future.
Very clear, thank you.
Thank you.
Speaker Change: Our next question comes from the line of Gil Hermag-Grespen with J.P. Morgan. Your line is open.
Speaker Change: Just on the country base, Pedro, we noticed very strong gross profit growth specifically on the other geographies, which is not sure if we can say non-core, because as you said you're a global company, but it's outside the names you usually put in the breakdown of gross profit, other Latin and other Africa was very strong.
Speaker Change: So, just to confirm, if there is any new geography that you are seeing that is ramping up very fast, and what is the nature of the business, if it's more cross-border or more local-to-local in those geographies? Thank you.
Thanks, great question.
Speaker Change: I think another one of the strengths in the quarter was the performance in the cross-border business.
Speaker Change: As Maria noted, it crossed $3 billion for the first time in a quarter of TPV, and part of that strength is aided by this increasing diversification in more and more markets.
Speaker Change: So, the answer is, many of these newer markets are indeed cross-border. They tend to be more frontier-ish markets in some cases, where infrastructure for payments is somehow less developed.
Speaker Change: and merchants are less inclined to have to incur in costs of setting up local operations, dealing with local payments.
Speaker Change: And so the fact that they're already integrated into our 1D local solution makes it very easy for them to add these markets and this is exactly what we're very good at.
Speaker Change: We did give specifics around some of the markets that we're most excited about and where we've seen significant strength.
Speaker Change: It's a good combination of LATAM and also Africa and Asia.
Speaker Change: So in addition to continued strength in Mexico, which is a core market, and Egypt, which we've been strong in for a while, we've now began to see the emergence of a really strong franchise in South Africa.
So really interesting to see a growing number of countries.
Speaker Change: that are delivering strong results in TPV and gross profit. And it's exactly that type of global diversification that drives what we believe is very long term sustained growth opportunities.
Speaker Change: but also increased diversification to be able to manage the inherent fluctuations that exist in emerging markets.
Speaker Change: Forgel, Maria Oldham, Diego Canay, Mark Ortiz, Soledad Nager, Sebastian Kanovich, Unknown Executive, Pedro Arnt
That's clear. Thank you and congratulations again.
Thank you. Please stand by for our next question.
Speaker Change: Our next question comes from the line of Matt Langeau with South Qujanna International Group. Your line is open.
Oh, hi, it's Jamie Freedman.
So... Thank you. Thank you.
Speaker Change: I wanted to ask, is it fair to think of the fourth quarter guidance?
Hey, Jamie. Thanks.
Speaker Change: A difficult question. So first of all, let me just try to parse that out a little bit. This is still a high growth company. When we look at our pipeline, we see significant opportunities that as we convert them, should lead to definitely a consistently growing book of business into 25 and beyond.
Speaker Change: Part of that success is also driven by continued strength in the commerce category, which also means that we'll be exposed to increased seasonality as e-commerce, everyone knows, is much more backloaded, particularly in the fourth quarter.
And so the balance between the strength of seasonality.
and the inherent sustained long-term growth of the book.
Speaker Change: beyond the seasonal effect is one that I think it's probably too soon for us to go on record on when we revise midterm guidance, which is an annual process for us, we'll be able to give you greater clarity on what 2025 looks like.
Speaker Change: I think the key message is here is we're optimistic about the pipeline. We're seeing a consistent improvement quarter on quarter since.
Speaker Change: the beginning of the year. So certainly we feel like we're exiting the year on a very different cadence than the way we entered the year, which is for us very positive when we start looking into 2025.
Okay, thanks. And then, and that's clear.
I wanted to ask about remittances.
Speaker Change: So you had some real nice traction on the growth number in front of me but it was like 80% I'm doing that memory. When you go into the money grams of the world or others
Speaker Change: with a remittance narrative. What do you what does that conversation look like? And what do you feel like is your competitive advantage with your remittance offering?
Speaker Change: So at the end of the day, what most remittance companies are looking for when they're looking for infrastructure is speed.
of the Payout, and it's...
FX Competitiveness and Availability of Liquidity Which Ties to Speed
Speaker Change: What's somewhat unique about D-Local is that with the phenomenal execution that the payout team has been delivering.
Speaker Change: We kind of combine a very strong franchise in payouts with a very strong franchise in pay-ins Which is somewhat? Unusual I don't want to say entirely unique, but it's definitely its strength
Speaker Change: That ability of having both the flows that are going southbound, so the remittance flows, and the pay-in flows that are going northbound, is what allows us in markets where netting is regulatorily permissible to have
Speaker Change: Extremely fast payout capacity at very competitive FX pricing and strong liquidity because we have money in the markets that needs to leave the markets and money that's trying to come into the markets.
Speaker Change: with all the endpoints for remittances across these markets that not many people have built that kind of local operations and local integrations.
And then the final thing is, again,
Speaker Change: Through one integration layer, many times we're able to offer you multiple markets across the Global South.
Rather than having to pursue specific partnerships.
Speaker Change: for specific regions or for specific countries. So it's a pretty potent bundle. And I think that's really what's driving the success we've seen in that business over the last year.
Speaker Change: Got it. Thank you, Pedro. I'll drop back in the queue.
Thank you.
Please stand by for our next question.
Speaker Change: Our next question comes from the line of Neha Agrawala with HSBC. Your line is open.
Speaker Change: Hi, thank you for taking my question. Just a quick one on the gross profit margin. When we look at Latin America, we are at a margin of around 38%, whereas in the other geos, we're around 56%.
Speaker Change: Where should we expect this to normalize? What is a good level of gross profit margin to expect? Because we think over time you should be gaining more leverage in terms of reducing costs with your partners and that should reduce the cost of doing business. Can you elaborate on that? It's a more medium term question, but would be helpful to understand.
Speaker Change: Sure, I think you're understanding the building blocks accurately. There's always inherent, I think, cost.
Negotiation Power as we grow our business and gain scale.
Speaker Change: A big part of what we do is aggregation theory, in that rather than have global merchants
have to negotiate with local processors.
Speaker Change: On a case-by-case basis, we aggregate all of that volume, we negotiate based on that aggregate volume, and even by keeping our spread, we're still able to continuously lower costs.
Speaker Change: Right. And if you look at year over year, there have been, I think, circa
Speaker Change: 20 basis points, I believe it is already of cost improvements in terms of processing costs. And that's something that we think we can continue to improve going forward.
Speaker Change: The cross-border, as we mentioned before, some of these newer markets tend to, in general terms, be higher margin markets.
Speaker Change: Because they have a combination of a higher mix of cross-border but also tend to be currency pairs Because there are more exotic currencies that have higher margins
Speaker Change: So that's also I think I'd add when you're trying to project margins into the midterm
Speaker Change: On the flip side of that, country mix, and then also payment mix.
Speaker Change: because margins do vary by payment mix, whether it's cards, whether it's debit, where it's APMs, whether it's account to account, is what is a little bit harder to predict. At the end of the day, we're not shooting for a margin. We're receiving merchant specific
Solves
Speaker Change: For as many payment methods, as many markets as possible, and we're trying to optimize the gross profit dollars that we're generating off of that.
Speaker Change: So hard to give very specific guidance on where it lands.
Speaker Change: But those are the building blocks to think through how the financial model scales into the future.
Speaker Change: Last question, Pedro, on the cost. For this year, you've mentioned investments leading to higher OPEX. How should we think about the investments going forward? Do you think you'll be done with these enhancements in the business in 2024? Or should we continue to expect more investments coming through in 2025? Or should you again go back to gaining operational leverage? How should we think about the OPEX going forward? Thank you so much.
Unknown Executive, Pedro Arnt
Yeah, so if you look at the last sequential quarters.
We have been delivering consistent operational leverage quarter-on-quarter.
Speaker Change: If you look at where we were last year, where we were already at the midterm guidance point when we look at Q3, which was somewhere in the mid 70s,
Speaker Change: To the best of our current thinking, that's still very much the midterm level we'd like to achieve. And I think the answer to your specific question on investment versus leverage, what we're trying to show is that we're still in a phase.
Speaker Change: I don't know if it's for another two quarters, three quarters, four quarters, where we have to combine both continuing to lean into the business to build the right capabilities.
with the right directionality of
progressing towards those midterm targets.
Speaker Change: I think after we get through this phase, which is not now, and it's not in the beginning of 25, but it's not in the very distant future either.
Speaker Change: you see the business potentially kicking in to a whole entire gear of operational leverage, which is typical of a payments product, right? In the meantime, we will have to deal with other moving pieces, like what happens with take rates.
Speaker Change: what happens with country makes. But from a cost perspective, I think the answer is, there's still a few more quarters of disciplined investment. Ideally, that investment is not such that it offsets leverage, but it doesn't
Speaker Change: foresee the full operational leverage built into the financial model until a few more quarters out.
Very clear, Pedro. Thank you so much.
Thank you.
Will you stand by for our next question?
Speaker Change: Our next question comes from a line of John Coffey with Barclays. Your line is open.
Great, thank you very much for taking my question.
Speaker Change: I guess the first is, I was wondering, you mentioned some investments that you recently made in Nigeria, Ecuador, and Uganda.
Thanks.
Speaker Change: So the question on licenses is actually a good question. Unfortunately, licenses do not come with improved cost structures. As we all know, they come with regulatory costs.
Speaker Change: They also, we increasingly believe, are a differentiating factor when you're offering solutions to Global North merchants for emerging and frontier markets.
Speaker Change: So what we hear from our merchants is that from a perspective of
Speaker Change: Compliance alignment and trust, it's always better for them if they're able to flow their payments through a regulated partner than an unregulated one.
Speaker Change: And so where we should see this over the long run is on greater volumes.
Speaker Change: and winning more deals because we have this licensed portfolio that aligns and gives our merchant comfort on how we're approaching these complex markets.
Speaker Change: But I don't think it's that easy to model short-term. This is more just a
Speaker Change: Commercial Advantage that we believe we have as we grow that license portfolio.
Speaker Change: So orchestration essentially is merchants can choose to keep it very simple and we have the contract and we have the merchant of record model with the processors.
or for merchants who would rather keep our
Speaker Change: Service, Operations, Reporting, Fraud Models, Technological Integrations, but want to have direct contracts with processors and therefore not use the Merchant of Record model, we can also offer it to them.
Speaker Change: And we actually see this product more as a way of pursuing incremental business and incremental merchants who potentially already have relationships with processors or who want to enter a market under that model.
Speaker Change: and we can now offer them that solution as well. So really, at the end of the day, the end game is to be able to solve whatever the merchant needs are under different contractual models based on whatever the merchants want.
Great, thank you very much.
Thank you.
Please stand by for our next question.
Speaker Change: Our next question comes from the line of Cassie Chan with Bank of America, the line is open.
Cassie Chan: Hey guys, thanks for taking my question. So I guess just wanted to go back to fourth quarter I know you guys mentioned typical seasonality given the ramp up of commerce and and a holiday shopping
Cassie Chan: And, you know, obviously the full year guide was reiterated, which kind of implies stable quarter over quarter growth, you know, both on GP and in margins, but mainly, you know, focusing on the top line for the fourth quarter, I guess, like, is there anything that you guys have seen in the data quarter to date?
Cassie Chan: as a reason to believe why the 4Q seasonality, you know, that you typically expect wouldn't materialize? Or is it just, you know, trying to be a little bit more conservative given obviously volatility in the emerging markets? And then and then I have a follow up. Thank you.
Hey Cassie, thanks for that.
Speaker Change: The answer is obviously we haven't had a stellar management of guidance so far this year.
Speaker Change: And the fourth quarter is very particular because, as you know,
Speaker Change: The real quarter plays out over the next four weeks, so mid-November to mid-December, right before the holidays.
Speaker Change: And so it's a quarter where I think a certain level of caution is necessary, given that we don't really know how the full quarter plays out until we see the next four weeks.
I think quarter to day TPV trends are coming in.
Speaker Change: Very solid. We're seeing a rebound in Brazil, like I mentioned before. But again, unfortunately, I think we still need to err on the side of being crystal clear that despite the strong start to the quarter, the next four weeks is where it all plays out.
Okay, understood.
Speaker Change: And I guess just wanted to ask about the top 10 clients, you know, that was up nicely, I think about 16% and then non-top 10 clients of about 8% I think in terms of revenue growth. How should we think about ongoing, you know, revenue concentration? It's obviously still above, you know, 60% of your total revenues and diversification as well, both within top and non-top 10 clients going forward. Thank you.
Yeah.
Speaker Change: We're seeing merchants who try us in a few markets really trust
what we're, how we're performing for them, and
Speaker Change: From a merchant perspective, again, the midterm vision is also to be able to reduce reliance on the top 10 and top 25 merchants.
Speaker Change: However, that might be a little bit more of a midterm play. When I look at this emerging world footprint, the reality is that the merchants that are really focused on these markets have a tendency to be the larger, really global players.
Speaker Change: The Tier 2 or Tier 3 merchants today, I think, are still more about beginning to wade into the water of global go-to-market and emerging markets, so I see that as a second wave of growth.
Speaker Change: The good thing there is that that's exactly why I'm so optimistic as to why D-Local can sustain growth.
Speaker Change: for a very prolonged period of time going forward, because there's a whole bunch of merchants in the digital world that are emerging, and that aren't really focused.
Speaker Change: on their Global South footprint and will be in a few years.
For now, where I see most of that interest,
Speaker Change: is in the really, really large global digital players. And so I think that we will still have concentration in line with what you're seeing today with slight improvements into the next few quarters. I don't anticipate that deconcentrating very quickly.
That's very helpful. Thanks so much, guys.
Speaker Change: Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back to D-Local for closing remarks.
Speaker Change: Thanks everyone for the interest. I think things continue to progressively get more and more encouraging. As we've said, this is our second consecutive quarter of very consistent improvement on a sequential basis.
Speaker Change: If we continue to deliver like this, the power of compounding, sequential growth, and the high single-digit, low double-digits is phenomenal when you look at that over a multi-year period. And so that's what the entire team at Delocor is laser-focused on executing and delivering on. And I look forward to updating you on how the fourth quarter played out in a few months.
Thank you and until then.
Speaker Change: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Speaker Change: UNKNOWN EXECUTIVE WERE HORRENDOUSLY HARD TO KEEP THANK YOU FOR WATCHING!