Q4 2024 DLocal Ltd Earnings Call
Good day, and thank you for standing by.
Welcome to the D. Local fourth quarter 2024 result.
At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question answer session.
Ask a question during the session you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised.
Speaker Change: To withdraw your question. Please press star one one again please be advised that today's conference is being recorded I would now like to hand, the conference over to do local.
Speaker Change: Please go ahead.
Speaker Change: Good afternoon, everyone and thank you for joining the fourth quarter 2024 earnings call. Today. If you have not seen the earnings release, a copy is posted in the financial section of the Investor Relations website on the call today, you have Petro Hunt Chief Executive Officer, Mark <unk> Chief.
Speaker Change: Financial officer, and morale at Agal head of Investor Relations a.
Speaker Change: A slide presentation is being provided to accompany the prepared remarks.
Speaker Change: Event is being broadcast live via webcast and both the webcast and presentation may be accessed through <unk> website at investor <unk> local dot com.
Speaker Change: The recordings 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 currently available information and T locals current assumptions expectations and projections about future events.
Speaker Change: Whilst the company believes that our assumptions expectations and projections are reasonable given currently available information you are cautioned not to place undue reliance on those forward looking statements actual results may differ materially from those included in <unk> presentation or discussed in this conference call for a variety of reasons, including those described in.
Speaker Change: Forward looking statements and risk factors section of <unk> filings with the Securities and Exchange Commission, which are available on <unk> Investor Relations website, I will now turn the conference call over to <unk>.
Speaker Change: Yeah.
Speaker Change: At the local we're unlocking the power of emerging markets.
Speaker Change: And businesses to transact and thrived where immense growth potential is just beginning to unfold. The year 2024 has been a testament to the strength and resilience of our business model, we experienced remarkable growth our <unk> increased by 45% year over year, reaching a record of $26 billion. This achievement was due.
Speaker Change: Driven by strong performance across diverse vertical countries and products demonstrating the increased diversification of our business.
Speaker Change: Sides. The remarkable volume growth. We also delivered a gross profit of $295 million and adjusted EBITDA $189 million, despite ongoing investments to support the growth opportunities. Our adjusted EBITDA over gross profit margin remained at a solid level of 64%. These numbers are all attack.
Speaker Change: The strength of our financial model, delivering a rare combination of growth and high margin profitability as.
Speaker Change: As we lay the foundation for scalable and profitable growth over the coming years, our investments over the past year have focused on several key initiatives. These accomplishments would not be possible without our dedicated team.
Speaker Change: Local expertise and presence in emerging markets have become essential to our merchant.
Speaker Change: In 2024, we welcomed 194 new talent.
Speaker Change: Banding to 1095 team members across 49 countries.
Speaker Change: A substantial part of this increase came from our technology and product team, who work intensively to innovate our product portfolio develop new features to enhance performance for our merchants and expand payment method.
Speaker Change: While prioritizing cost and operational efficiency, both in terms of cost and OPEC.
Speaker Change: During 2024, we launched 20, new payment methods for pans and seven for payouts, while adding close to 100, new partner integrations to ensure redundancy cost efficiency and unlocking the latest and greatest payment feature we launched and ramped up our new payment orchestration solution for merchants with a fully localized operation.
Speaker Change: We continue to seek ways to increase transaction approval rates and reduce processing costs.
Speaker Change: First we enabled networks organization with seven processors across 10 countries.
Speaker Change: We launched and further improved our smart request functionality, a new AI engine to dynamically adapt the card authorization methods to acquirers in order to improve conversion rates and finally, we developed our new cost optimization engine for our smart router, which has decreased our processing costs, while maximizing <unk>.
Speaker Change: Approval rates.
Speaker Change: We also worked closely together to enhance our customer experience, reducing our customer support response time by 88% within nine months.
Speaker Change: And decreasing issue resolution time by 45% through AI implementation.
Speaker Change: Moreover, our suite of products continues to be overhauled from the ground up enabling an extensive list of use cases and setup and we continue to improve our merchant dashboard user experience.
Speaker Change: The combined efforts across our different teams are reflected in our competitive pricing optimize conversion rates and customer experience.
Speaker Change: As a result, we strengthened our relationships with our existing merchant.
Speaker Change: <unk> retention rate of over 140% in 2024, we expanded our reach by on boarding new merchants to our platform with the 2024 cohort achieving record level of first year TPB and we increased our NPS by eight points compared to the first half of 2024 reached.
Speaker Change: High levels within the industry.
Speaker Change: All of this has allowed us to close out the year, serving more than 700 merchants across more than 40 markets. As we continue to execute our disciplined approach to expense management, we have delivered considerable efficiencies by a methodical approach to renegotiating with processors and brokers on cost enhancing hedging strategies to minimize curve.
Speaker Change: <unk> losses, and reduce costs and optimizing structures in flows for tax efficiency.
Speaker Change: We have also secured nine new licenses globally, enabling us to expand product offerings access new growth opportunities and connect merchants with emerging markets. As we look back on 2024, we are proud of what we have accomplished these results highlight our ability to adapt and thrive in a dynamic market. Thanks.
Speaker Change: Our team's dedication to commercial effort technological innovation and execution capability in.
Speaker Change: In 2025, we remain committed to delivering sustained growth and value to our stakeholders as we continue to explore the growing total addressable market of cross border payments driven by shifts towards payment digitalization, the growing importance of emerging and frontier markets.
Speaker Change: The surging demand for cross border and instant payment method.
Speaker Change: The local unlocking the power of emerging markets.
Speaker Change: Thanks, everyone for joining us today.
Speaker Change: As we walk through a review of our performance over the past quarter and year I'd like to get US started with a recap of the investment thesis behind the local.
Speaker Change: As the previous video illustrates and as we've repeatedly mentioned, we think of five pillars underpinning that investment thesis.
Speaker Change: First of all a massive addressable market given the untapped potential of emerging and frontier markets as they digitize payments and as global merchants go to market throughout the global South.
Speaker Change: It's worth reminding everyone that 85% of the worlds population resides in emerging markets and that two thirds of global growth by 2035 will come from there.
Second consistent high top line growth driven by our proven track record of delivering value to the world's most sophisticated global digital merchants.
Speaker Change: That has allowed us to capture a market leading share of the expanding Tam I just referred to.
Speaker Change: Third attractive margin business with the potential to deliver operational leverage once we've laid the foundational blocks and further scale benefits begin to kick in.
Speaker Change: Fourth strong cash generation financial model, as net income, which converts well into free cash flow generates more and more available cash.
Speaker Change: And finally, a strong innovation pipeline.
Speaker Change: We're investing behind our product development capabilities to generate additional growth vectors for D logo.
Speaker Change: These growth factors will come from new categories, such as stable coins and APM just to name a few we're already focused on.
Speaker Change: New products that will be launched this year and in future years and that generate additional mid term revenue streams.
Speaker Change: Constant feature innovations that help us sustain high recurring business from our merchants.
Speaker Change: And potential M&A activity as we see the cross border Fintech space poised for consolidation.
Speaker Change: Attractive valuations going forward.
Speaker Change: Our fiscal year 'twenty four results show, how that investment thesis remains intact.
Speaker Change: In terms of market size with record PPV of $26 billion accelerating growth to 45% year over year with mix continuing to move to newer more attractive markets, while core markets rebounded from Q3 softness.
Speaker Change: Yes.
Speaker Change: Case in point to all this TPB retention for 2024 was above 140% showing how constantly innovating on behalf of our merchant businesses generates high loyalty and recurrence of business.
Speaker Change: Revenue and gross profit hit record highs as well at $746 million and $295 million, respectively. Adjusted EBITDA to gross profit margins closed out the year at 64%, but improved consistently as the year progressed.
Speaker Change: And net income to free cash flow of own funds conversion exited the year at a rate above 100%.
Speaker Change: The strong 2024 results I've just walked you through should be seen in the context of two things.
Speaker Change: And admittedly weak first quarter, which was then followed by progressively stronger quarter on quarter on quarter performance.
Speaker Change: <unk>.
Speaker Change: The continuation of an investment cycle aimed at achieving greater scalability for our business over the long run as.
Speaker Change: As the annual video just shown highlights some of these investments and the results that we're starting to collect from them.
Speaker Change: So.
Speaker Change: As we exited the year with very solid momentum, we're encouraged by having delivered consistent improvement in results since Q1 across key metrics.
Speaker Change: Highlight next as I give you a quick recap of Q4 'twenty four results.
Speaker Change: Q4 continued the positive trend from the previous quarter and despite having a tough comp in Q4 2023, TPB grew by more than 50% year over year during the period.
Speaker Change: On a quarter over quarter basis, TPB growth accelerated to nearly 20% Q on Q driven by the seasonality of the e-commerce vertical and strength in remittances and ride hailing categories.
Speaker Change: We're convinced that our growth continues to reinforce our position as a trusted partner for global companies seeking to do business across emerging markets.
Speaker Change: Our performance came from a well diversified list of countries with notable contributions from Argentina, Egypt, and the other Latin American market segment, as well as other Africa and Asia.
Speaker Change: As a result of our expansion into more frontier market. We also continue to see solid growth in cross border payment volumes as well as local to local moving on to profitability.
Speaker Change: For the quarter, we reached a record gross profit of $84 million net.
Speaker Change: Net take rate was one 1%, reflecting a market dynamic where higher volumes drive lower take rates.
Speaker Change: Also an increase in the payout share, which is lower take rate and finally, the depreciation of emerging market currencies.
Speaker Change: To offset this we continue to drive cost efficiencies through processor and broker renegotiations and improvement to our hedging strategy.
We also continue to push into higher take rate markets and verticals, which over the long term should partially offset.
Speaker Change: Take rate compression.
Speaker Change: Despite our ongoing step up in investments in our engineering team operational capabilities and licensed portfolio to support our long term growth ambitions are adjusted EBITDA also hit a new record of $57 million in the quarter at an adjusted EBITDA over gross.
Speaker Change: Profit margin, which improved Q on Q to 68% cash.
Speaker Change: Cash generation another strength of the financial model was also solid as we continue to increase free cash available to deploy behind our capital allocation strategy.
Speaker Change: The sustained cash generation increases our flexibility when thinking through M&A or buybacks or reinvesting in a disciplined manner back into the business.
Speaker Change: One important note as I conclude.
Speaker Change: On the advances in our license portfolio.
Speaker Change: As we've stated we've continued added licenses and registrations throughout 2024 counting with nine additional ones.
Speaker Change: This reaffirms our belief that over time and expanding portfolio of licenses will prove to be a competitive advantage.
Speaker Change: Most important among these and worth noting is the authorized payment institution license granted to us by the United Kingdom's FCA.
Speaker Change: The overall growing portfolio will allow us to offer our merchants greater regulatory confidence and more importantly, underscores our commitment to a compliant practices and coming under regulatory oversight.
Speaker Change: And now wrapping up Q4 marked a successful end to 2024 in terms of consistent TPB growth controlled take rate decline and balancing investment for future growth with a healthy margin and free cash profile. The company remains hyper focused on our mission.
Speaker Change: <unk> of unlocking the power of emerging markets by continuously building trust with our clients and strengthening our partner relationships, so as to expand digital products and services throughout the global South.
Speaker Change: With that let me hand, it over to Mark to take you through a more detailed overview of the results during the quarter.
Mark: Thank you Pedro good afternoon, everyone as Petro mentioned, our fourth quarter results marked a strong conclusion to the year, reflecting healthy growth and reinforcing the strength of our business model.
Mark: We wrap up 2024 on the back of three quarters of progressively stronger results underpinned by the continued diversification of our business across geographies.
This increased global reach is evident in our Q4 results, Brazil, and Mexico are two largest markets experienced sequential reacceleration on PPV growth.
Mark: But they saw a decline in gross profit. Despite this our consolidated revenues gross profit and adjusted EBITDA reached record levels, driven by growth and strength across our other geographies.
Mark: As a result, we achieved PPV of $7 7 billion up 51% year over year and 18% quarter over quarter.
Mark: In constant currency, given general weakness in emerging market currencies.
Mark: Those growth rates are even more impressive about 30 points higher year over year from a business line perspective, our cross border flows grew 23% quarter over quarter and 67% year over year, mainly driven by the commerce financial services on demand delivery and SaaS verticals.
Mark: Our local to local TPB increased by 14% quarter over quarter, and 38% year over year with strong performance in Brazil, Mexico, and Argentina, our paint business grew 15% quarter over quarter, and 44% year over year with strong performance in our seasonal commerce category as well.
Mark: The ride hailing across various countries.
Mark: Our payouts business grew 26% quarter over quarter, and nearly 70% year over year, driven by financial services and remittances merchants.
Mark: Moving on to revenue.
Mark: We surpassed the milestone of over $200 million in Q4, representing a 9% year over year growth.
Mark: This result is driven by Argentina, and Egypt, both with revenue growing significantly.
Mark: Other markets, particularly Colombia, and South Africa, with strong growth across commerce, brighter healing and sub verticals.
Mark: Mexico, which grew sequentially, both annually and quarterly at 14% and 4%, respectively, though at a slower pace to prior quarters decelerating due to higher growth of tiered zero merchants, coupled with a shift in the payment mix.
Mark: These positive year over year results compensated for lower revenues on currency devaluations, primarily in Nigeria due to the naira devaluation in February of 2024.
Mark: Constant currency revenue growth for the period would have been around 40% year over year.
Mark: Revenues were also negatively affected by lower take rates from the ramp up of the Standalone payment orchestration option, we launched at the end of Q3.
Mark: On a positive note allowed for the recovery of volumes in Brazil versus the prior quarter. In addition, Brazil is also impacted by shift in payment mix.
Mark: On a quarter over quarter basis revenue grew 10% driven by the volume increase in Egypt as well as positive results in other Latam and other African Asia with notable performance in South Africa, Turkey, Colombia, and Ecuador, now moving onto gross profit dynamics.
Mark: During the quarter gross profit reached a record level of $84 million up 20% year over year, starting with Latam gross profit was $56 million up 3% year over year, mainly driven by the volume growth in Argentina, Mexico, and other Latam markets, which were mostly offset by Brazil has just.
Mark: And currency devaluations.
Mark: And Africa, and Asia gross profit posted its stellar growth of 82% year over year, driven by our PPV growth in Egypt, PPV ramp up of our commerce merchants in South Africa, and positive performance in other African and Asian markets, including Turkey and Vietnam.
Mark: This geographic diversification is core to our strategy as discussed earlier and that allows the company to continue growing at a high pace. Despite short term headwinds in a few of our countries.
Mark: On a quarter over quarter basis, gross profit increased by 7% and Latam gross profit increased by 1% quarter over quarter, driven by Argentina's positive performance.
Mark: This result was offset by drivers in Mexico, and Brazil as explained in the previous section.
Mark: It is important to note that other Latam markets that continue to grow TPB were negatively impacted on a quarter over quarter basis.
Mark: Strong growth in Q3 from widening FX spreads in certain smaller markets as disclosed in the previous quarterly results, which tightened this quarter.
Mark: And Africa, and Asia gross profit increased by 21% quarter over quarter with highlights being the positive performance in Egypt, Nigeria, and Turkey in categories, such as remittances financial services ads and shrink.
Mark: As Pedro already mentioned during Q4, we decided to resume that pace of certain investments and building out our capabilities. It is important to reinforce that we are making these investments in core areas to drive efficiency in our business and ensure future growth, while maintaining our lean and disciplined structure.
Mark: With this for Q4, our total operating expenses reached $41 million at.
Mark: A 12% increase quarter over quarter, and a 44% increase year over year.
Mark: On an annual comparison most of the Opex growth continues to be mainly allocated to product development and ITT facilities with these expenses, increasing by 70% year over year, while combined sales and marketing and G&A expenses grew by 29% we.
Mark: We expect this allocation tilt towards product in 90 to continue in the future.
On a quarterly basis, the tech and development expenses were slightly down as increases in head count were offset by reductions in other it expenditures.
Mark: <unk> sales and marketing and G&A expenses grew by 11% driven by our continuing investment and operating capabilities and marketing investments as a result, we delivered an operating profit of $42 million for the quarter up 3% quarter over quarter, and adjusted EBITDA of $57 million up.
Mark: 9% quarter over quarter, representing an adjusted EBITDA margin of 28% on par with last quarter. The ratio of adjusted EBITDA gross profit reached 68% for the quarter up one percentage point quarter over quarter, making the third consecutive quarter of improvements.
Mark: Moving on to net income net income was $30 million for the quarter up 11% quarter on quarter, and 4% year over year compared to the prior quarter. The result was impacted by a positive noncash mark to market effect related to our Argentine by investments lower finance costs, and partially offset by <unk>.
Mark: Current taxes.
Mark: Our effective income tax rate ended at 27% for the quarter and 20% for the year impacted by an income tax settlement related to prior periods.
Mark: Excluding this tax settlement, our effective income tax rate stood up 16% for the fourth quarter and 17% for the year compared to 60% in 2023 as a result of slightly higher local to local share of pre tax income.
Mark: Last but certainly not least free cash flow for the quarter, which is the net cash from operating activities, excluding merchant funds less capex amounted to $33 million.
Mark: Up from $26 million in Q3, representing a 25% increase discontinued cash generation allowed us to further strengthen our liquidity position.
Pedro: With this let me hand, it over back to Pedro for closing remarks.
Pedro: Thank you Mark.
Pedro: Before concluding our remarks I'd like to talk about 2025 guidance.
Pedro: First of all the strong PPV growth guidance is primarily driven by.
Pedro: Our strategic focus on becoming a scaled leader over the midterm, leading us to prioritize not losing contracts on price, especially in larger markets.
Pedro: The increased share of wallet and continued ramp up of our large global tier zero merchants, especially key ones. We on boarded in the 2023, and 2024 cohorts and new opportunities converting through the pipeline both in geographies, where our business is.
Pedro: Nathan as well as verticals, we are entering into and where we see large volume opportunities.
Pedro: We're guiding to a revenue growth that shows the sustained momentum of our top line and also highlight that our combination of revenue growth margin structure and free cash generation is not that common there arent that many companies today, who are as profitable as we are.
Pedro: Our growing revenues at the pace, we are growing and consistently generating free cash.
Pedro: Our expected gross profit guidance.
Pedro: A metric we focus on more than revenues as we manage the business.
Shows growth range is based on the following assumptions.
Pedro: We anticipate a higher mix of transactions from those tier zero merchants, who typically have a lower take rate as we continue to increase the share of wallet.
Pedro: And work on the global expansion of these relationships with them.
Pedro: On sustained growth in local to local transactions that have a lower take rate while our cross border segments should also continue to experience accelerated growth as it demonstrated throughout 2024.
Pedro: And competitive pricing in key markets, such as Brazil, and Mexico, following our focus on market share gains and TPG growth as I mentioned earlier.
Pedro: And then finally, the ramp up of the new Standalone orchestration model that we launched at the end of Q3 2024 and that does have a lower take rate.
Pedro: In addition.
Pedro: On guidance and given our presence in emerging markets and the general volatility of currencies in these regions, we anticipate potential tightening of FX spreads in certain geographies.
Pedro: If you consider all of those assumptions, we should expect net take rate compression, while delivering high TPG growth even at the scale we've already attained.
Pedro: Over the mid term, we will work diligently to maintain that strong PPV growth, while recognizing that given the extremely strong levels of retention that we're able to deliver our larger merchants will continue to obtain lower pricing tiers in contract.
Pedro: We will focus on offsetting this take rate compression through growth and higher take rate new verticals that we're pursuing Nash.
Pedro: Natural mix shift towards higher take rate frontier markets away from Brazil, and Mexico, Despite still growing well in those large markets and new revenue streams through new product launches and constant innovation.
Pedro: Finally regarding adjusted EBITDA growth range.
Pedro: We assumed the continuation of our disciplined investment cycle, maintaining as seen in 2020 for a balance between topline growth and profitability.
Pedro: Our investment focus remains on product in development with growth, they're outpacing gross profit growth.
Pedro: <unk> investments in our licensed portfolio with the benefit that brings but also the increased regulatory costs and investments in continuing to build our local operations teams in markets that are only now beginning to ramp up.
Pedro: Yet despite these investments we anticipate achieving operational leverage with an adjusted EBITDA to gross profit ratio improving year over year and still tracking towards levels. We have delivered in the past once we conclude this investment cycle.
As you know our business operates in some of the fastest growing and most dynamic markets in the world.
Pedro: The opportunity in digital payments across emerging markets is massive.
Pedro: And we do continue to see strong demand, increasing penetration and long term structural tailwind that support our growth.
Pedro: However, the very nature of our markets, which is a benefit to our business also comes with volatility.
Pedro: Either due to macroeconomic shift to regulatory changes or currency fluctuations.
Pedro: And while we remain highly confident on our ability to deliver sustained high growth results over the long term.
Pedro: We believe that providing mid term guidance transmit a sense of predictability that is not really accurate over a multiyear timeframe.
Pedro: For this reason we've made the decision to discontinue midterm guidance for the time being.
Pedro: We will continue to focus on delivering strong operational execution, so as to hit the annual targets, we disclose and we will remain as always transparent in our communication sharing with you key drivers both good and bad of our performance against those annual targets.
Pedro: Finally, looking ahead to 2025.
Pedro: <unk> cuts.
Pedro: We remain confident in our ability to execute and sustain the momentum with which we've exited 2020 for the investments we've made over the past year across technology product innovation and market expansion position us well for the next phase of growth.
Pedro: While we've just recognize the inherent volatility of emerging markets, we believe that the disciplined approach to scaling our.
Pedro: Our business.
Pedro: Our deep local expertise and our commitment to delivering value to merchants will continue to differentiate us in the industry.
Pedro: Our strategy remains focused on capturing the vast potential of digital payments across high growth regions, driving operational efficiencies and reinforcing our market leadership.
Pedro: We're excited about the opportunities ahead and are committed to executing with the same rigor and discipline that have defined our success so far.
Pedro: We thank you for your continued trust and support and with that we're glad to take any questions you may have.
Sergio: Thank you at this time, we will conduct a question and answer session. During Q&A. We also have the presence of Sergio <unk>, our president and Chief strategy Officer.
Sergio: As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again, please standby will be compile the Q&A roster.
Speaker Change: Our first question comes from Tito Laboratory of Goldman Sachs. Your line is now open.
David: Hi, Good evening, David off market here. Thank you for the call and taking my question I have a couple of questions to start.
Speaker Change: One I guess.
Speaker Change: And just how do you think about FX when you set the guidance right because it was a headwind in 2024.
Speaker Change: Right I think you mentioned.
Speaker Change: On an FX neutral basis, I think we were like 80% I think it was in the quarter.
Speaker Change: So the guidance for this year it does imply.
Speaker Change: A slowdown.
Speaker Change: But do you expect do you factor in maybe more currency depreciation I mean to start the year. We got some appreciation just wanted to understand how you think about FX and I know theres a lot of countries involved but if you can help us understand how you think about it when you set the guidance.
Speaker Change: And then second question I know you are getting rid of the midterm guidance.
Speaker Change: It probably makes sense, but just help us think about the long term growth outlook.
Speaker Change: Can you help us understand kind of where do you think you are in terms of like your wallet share with your merchants I mean overall I think the industry is growing how do you think about like overall payments growth in the markets that youre in and your wallet share to help us kind of think about what that long term growth could be thank you.
Peter: Thanks Peter.
Peter: So on the FX piece, when we build a bottoms up approach per merchant.
Peter: We've tried to not bake in too many assumptions around FX. So it's almost assuming general steady FX rates from where the last year ended up.
Peter: Yes.
Peter: Yeah.
Speaker Change: In terms of sort of sorry, im sorry to interrupt.
Speaker Change: You kind of think of it like on an FX neutral basis.
Speaker Change: Okay. Thanks.
Speaker Change: Fair to say, so I think if we ended up having continued currency depreciation.
Speaker Change: <unk> will be a headwind.
Speaker Change: The trends we've seen in Q1 hold up and that's potentially a tailwind.
Mike: Okay perfect great. Thanks, Mike I'm, sorry to cut you off.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: In terms of the size of the addressable market and the opportunity around payments.
Speaker Change: It really is probably the most significant piece of the investment thesis.
Speaker Change: Any time, you spend with global merchants it becomes very clear.
Speaker Change: Most of them, except for the larger more sophisticated ones are still doing an important part of their.
Speaker Change: Global Cross border through international acquiring.
Many of them are only beginning to really leverage local payment methods alternative payment methods.
All of which will only increase adoption and usage across the global SaaS.
Speaker Change: So we are extremely optimistic on the potential for sustained high levels of TPG growth.
Speaker Change: Because we think the market will continue to generate tailwind over a long period of time simply from the increased digitalization of the consumer across emerging markets. When you look at the mix shift of our business as it gradually moves towards.
Speaker Change: Countries that are newer in our portfolio and slowly moves away from the larger markets I think thats, a very strong indication of how much opportunity still exists.
Speaker Change: The share of our merchants overall wallet from those smaller markets is still very low and that will continue to grow and also our ability to gain share from international acquiring in a growing number of markets is still very very large.
Patrick: Okay, Great. That's helpful. Thank you Patrick.
Patrick: Thank you.
Patrick: Moment for our next question.
Patrick: Our next question comes from Chris.
Patrick: Chris <unk> of Jpmorgan. Your line is now open.
Speaker Change: Hi, Pedro Mark. Thank you for the presentation and the opening for questions two on my side.
Patrick: First one is related to the cash.
Speaker Change: There was a big deal.
Patrick: Cash decreased in the quarter.
Patrick: You put a bullet there in the release mention there was some temporary settlement delay.
Patrick: As well as some changes in settlement with motions.
Patrick: Just if you can provide a little bit more color what exactly those changes and settlement to understand the movement on the cash.
Patrick: And then the second question is related to gross profit on the guidance.
Patrick: The guidance.
Patrick: Basically 20% to 25% rate, but we had a big ramp up in gross profits in the second half of 2024 I was doing my math for your <unk>.
Patrick: 25 midpoint against second half, it's solely a 10% increase seems a big slow down going forward and the mid point.
Patrick: You touched a little bit some of the points that youll see to build up the guidance, but just if you can provide a little bit more color, where you're seeing pressure because it seems that when you benchmark against the second half kind of momentum.
Patrick: It seems to be a big slowdown thank you.
Patrick: Jimmy Let me take the the cash flow question first first remind you that as most payment companies here, we look at free cash flow net of merchant funds right working capital changes because most of them are safeguarded or had very short settlement.
Patrick: So our total working capital for this quarter was really affected by changes in the merchant funds working capital in two in two pieces one was the.
Patrick: Increasing trade receivables due to some temporary settlement delays, we had a lot of the larger volume at the end of the year and we experienced some delays in those funds coming through to us.
Patrick: I'm happy to say that all of those funds that came in at the beginning of the year into our into our business.
Patrick: And then second it's the declining trade payables, and we talked about shortening of some settlement periods.
Pedro Mark: Pedro mentioned, we've moved into we got a new.
Pedro Mark: Modality here with in York orchestration model here in Brazil.
Pedro Mark: And those tend to shorten quite a bit the settlement periods for our merchants. So a combination of those things plus we had some accumulated funds that were with us.
Pedro Mark: But we have to settle with merchants the combination of all those things.
Pedro Mark: The reduction in the the working capital here for.
Pedro Mark: Our merchants are working capital and cash flow overall.
Pedro Mark: And just a follow up if I may the change in the settlement.
Pedro Mark: Because of circumstantial products.
Pedro Mark: Are you finally, seeing the motion for more days, meaning at the end of the day I want to see if there is gonna be implications to net financial results.
Pedro Mark: Was there any queries.
Speaker Change: And how many days who filed the motion is there a mismatch. Many of you are using our own cash to compete emotion in some way.
Speaker Change: No. So with the orchestration product does is that essentially a rather than the funds going through <unk> local and then to the merchant and therefore, we have that slow the settlement is direct to the merchants. So I'd say, it's the universe, we're not financing anything but it simply reduces.
The day of merchant funds on balance sheet.
That's clear okay.
Speaker Change: Okay.
Speaker Change: On gross profit a couple of thoughts I think first of all as we said the overall growth algorithm on the guidance. We think is still very robust with really strong PPV growth.
Speaker Change: Strong revenue growth getting us at the midpoint to close to $1 billion of revenue.
Speaker Change: Then driven by merchants hitting higher tiers on their contracts take rate contraction, which is really I think what generates the math you're doing through your head, but then adjusted EBIT margins that are growing faster than gross profit. Despite the fact that 25 is still a.
Speaker Change: Year of investment and we believe that you can see more operational leverage after that.
Speaker Change: Also bear in mind that there is seasonality into the fourth quarter. So annualize either Q4 or both Q3 to Q4, probably gets you to a more aggressive full year projection than otherwise.
Speaker Change: But again, if you look at the growth at the midpoint, we're essentially saying that we think we can sustain TPB growth at similar level to full year 'twenty three despite coming off of a much much higher basis, which shows our optimism in retaining merchants, but also.
Speaker Change: Also accelerating new merchants versus prior years.
Speaker Change: Okay. That's fair thank you pivotal.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Madeline DAU.
Speaker Change: Group Your line is now open.
Jamie Friedman: Hi, Thanks, It's Jamie Friedman.
Speaker Change: So my math is that at the midpoint of the 25 guidance you got about a 15 basis point deterioration in the take rate I was wondering if you could.
Jamie Friedman: Comment on.
Jamie Friedman: That with the logic of slide 18, so on slide 18, you show the 12 basis points of the deterioration was really through the zero merchant.
Pedro Mark: Clients, you said Pedro in your prepared remarks.
Jamie Friedman: That.
Jamie Friedman: You were suffering from the 'twenty three 'twenty four boarding of those prices are right and then actually those increased as a percentage of the total volume.
Jamie Friedman: Second slide.
Jamie Friedman: I was just wondering in terms of like the best way or trying to find is.
Jamie Friedman: Capitalizing a take rate for this company and for the industry frankly, so if you could provide some more quantitative logic like you do in slide 18, not going backwards, but going forward, how youre thinking about where the take rate is headed.
Speaker Change: Yeah. So I think you've kind of walked us through what my answer would have been Jamie Directionally. So youre seeing in three <unk> 24 to <unk> 24, what the impact of some of the very large merchant growth can be and yet.
Speaker Change: When you look at the full year at the midpoint, we're not doing this kind of <unk>.
Speaker Change: Deterioration times four right. So what we're saying is that despite the fact that there is still significant growth coming from the very large market merchants, who by definition give us significant CTV, but also command lower pricing, we're still baking in only.
Speaker Change: 12 percentage points of compression.
Speaker Change: That's a consequence of where not only growing with those merchants in the large markets, where they have a lot of volume, but we're also seeing those merchants asking us for more frontier ish markets, which obviously command higher pricing.
Speaker Change: We anticipate some new products into the market that should also generate some incremental take rate and.
Speaker Change: And so I think our story has been remains somewhat unchanged, which is we still see a downward trend in take rates.
Speaker Change: But we think that there are both offsets and that the level of that compression will not be what we see from Q3 to Q4, but perhaps more muted and if you look at Q2 to Q3 or even Q1 to Q2. It was more muted. So this isn't a rapid race to the bottom.
Speaker Change: But rather.
Speaker Change: These 15 points for this year and I don't think you should assume 15 points into the mid term either.
Speaker Change: I think when you look at the percentage of our revenues that come from FX. Some of the new merchants that we're onboarding.
Speaker Change: And again, we haven't issued a midterm guidance because there's so much uncertainty in the markets, where we operate but I wouldn't suggest that someone simply rollout 15 points of compression over the next three years to get to an end state I don't know exactly what that end state would be but I think that that would be probably.
Speaker Change: Assuming too much compression.
Speaker Change: Thank you and then.
Speaker Change: I realize youre not doing the mid term guidance you did say, though in your prepared remarks, I'm paraphrasing that you're in the middle still of an investment cycle.
Speaker Change: And you could I think you said something like you could return to the profitability of the past is the rule of 100 that you shared at the analyst day.
Speaker Change: November three years ago is that are you.
Speaker Change: Our route.
Speaker Change: That ratio is rising it was a very strong sequence across the quarters of the year are good and so as a rule 100 still possible or or what would be the factors that would move that up or down. Thank you.
Speaker Change: Yeah.
Speaker Change: Let me address your question in the following way.
Speaker Change: When we look at where our adjusted EBIT guided gross profit margins exited the fourth quarter.
Speaker Change: Given that the fourth quarter has some scale benefits from a seasonally strong top line quarter. We look at the fact that we have been investing and continue investing in the business at an accelerated pace.
Speaker Change: The remark was more around trying to indicate that if you assume that once we're through this phase of investing behind those foundational blocks. The nature of this financial model is one that does have operational leverage.
Speaker Change: Relatively low in Capex, it's primarily human capital and technology.
Speaker Change: We don't see why we can't.
Speaker Change: Be on a trajectory towards returning to that adjusted EBITDA gross profit somewhere in the mid seventies now don't construe. This as solid guidance, but there is an indication that.
Speaker Change: If we're exiting Q4 at 67 ish 68, the full year next year is better than 24, even though we're still investing you can assume that after that because we are also indicating that we see many years of sustained growth given the size of the addressable.
Speaker Change: Market and the potential that those margins back in the mid seventies over a longer period of time, we do believe are achievable with our financial model.
Jamie Friedman: Got it. Thank you Pedro Thank you very much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Nihon Agarwalla of HSBC. Your line is now open.
Speaker Change: Hi, Thank you bad remark for taking my questions.
Speaker Change: First one is do you think.
Speaker Change: Box, you mentioned things like.
Speaker Change: Not losing margins due to price and focus on market share gains could you elaborate on that.
Speaker Change: Anything.
Speaker Change: Significant that we can expect for that.
Speaker Change: So compression further compression in key markets like Brazil, Mexico second is regarding New York location model.
Speaker Change: Which you expect to expense do you expect.
Speaker Change: Do you expect to expand in other geos.
Speaker Change: Or what is what are the floor plans for this Stephen Douglas orchestration model. Thank you so much.
Speaker Change: Yes, so on the first one.
We really see the importance of not getting caught up in short term.
Speaker Change: <unk> about take rate, but the importance of continuing to gain scale to drive down processing costs over the long run.
Speaker Change: Waning merchant contracts in markets, where we compete in an RFP or where they asked us to add a market understanding that over time, you can then leverage those relationships across more and more markets and again I go back to the sustained <unk> growth over a long period of <unk>.
Speaker Change: <unk>, we think is the single most important metric of success right here and take rate is almost an output and not an input the input we try to manage for is how do we win as much volume from our merchants as possible, obviously, reflecting in the pricing the value that we add to them and what the <unk>.
Speaker Change: Underlying cost structure is and understanding that the scale leader here over the longer period of time, we'll be able to drive down the most cost for me. It's processors. So that's a way of indicating why at the midpoint you will see that we continue to indicate a day.
Speaker Change: Client and take rate.
Speaker Change: But very very solid <unk> growth.
Speaker Change: In line with 2024, despite 2025 coming off of a much larger base.
The orchestration product is a product that we can roll out to multiple markets.
Speaker Change: Don't necessarily see it as a market that makes a lot of sense for our merchants across many of our smaller frontier markets are higher take rate markets.
Speaker Change: The orchestration product is one that makes more sense in the very large markets, where we operate where our merchants are more likely to have.
Speaker Change: Larger businesses and therefore, a subset of these I would say a small subset of the merchant base may want to have direct contractual relationships and direct settlement with multiple acquirers and payment methods and so in those markets we can offer.
Speaker Change: To them the orchestration layer, which allows them to continue to interact with one single technology layer, which is ours have a single set of reporting and conciliations.
Speaker Change: Have a single point of contact to deal with acquire and payment method issues that arise, but have direct settlement and direct negotiation of those contracts. So I don't see this necessarily as a product that makes sense across the 40 plus markets it's probably.
Speaker Change: We have product that makes more sense in a small number of larger more relevant geographies to our global merchant base.
Perfect. If I can follow up on my first question.
Speaker Change: Typically.
Speaker Change: So when you talk to large merchants. The discussion is not just about pricing a large part of deciding which player to go with for the merchant.
Speaker Change: Would include pricing.
Speaker Change: How the platform is the conversion rates all of these things are probably equally important.
Speaker Change: During the last year have you seen pricing discussions.
Speaker Change: Many more important when you're talking to merchants about winning an RFP and are you seeing any of your competitors are being more aggressive in terms of pricing.
Speaker Change: So the test James Tippit, ballgame or bad for you when you're required to talk more about pricing.
Speaker Change: Versus a year ago.
Speaker Change: That answer really is a market by market answer, but I think implied in our comment about especially in the larger markets.
Speaker Change: This.
Speaker Change: Trend, it's first of all driven primarily by merchant volumes, we were very candid and transparent in Q1 about an actual re pricing because that was a very significant event as we said our largest merchant.
Speaker Change: Had was running at a take rate, which was above the company average, which is quite an anomaly and responded primarily to their focus on go to market and performance less in price and then they obviously reprice that that shouldnt be seen as an assumption that that's been a repeated pattern has that been.
Speaker Change: Repeated pattern the take rate compression year full year would have been significantly larger than it has been.
Speaker Change: So really the biggest driver of this take rate compression is simply increased volumes from very large merchants hitting new tiers on their contracts.
Speaker Change: So I still think the name of the game is not just price, it's price plus conversion plus performance.
Speaker Change: That's the principal reason why we are investing behind product and technology and that's the biggest area of incremental investment and margin compression. Because this will continue to be a game, where the single most important way.
Speaker Change: To keep your take rate significantly higher than in developed markets is because youre dealing with a fragmented and complex payment ecosystem in each of these markets and through technology and innovation is how we deliver performance.
Speaker Change: So I don't think that has changed substantially I do think that our merchants are becoming very large and hitting the discounts in their tiered contracts or because of global relationships are able to drive down.
Speaker Change: Take rates based on global volumes.
Speaker Change: Do I think there is.
Speaker Change: Increased competitive.
Speaker Change: Dynamics versus two years ago, or four years or six years ago in some of our large markets I think the answer is probably yes, but even if you look at the disclosed growth rates of some of our larger competitors for Latin America. It continues to seem as though we're winning market share and growing more than they are in there.
Speaker Change: Regional.
Speaker Change: Yes.
Speaker Change: Super clear.
Speaker Change: If I can just ask.
Speaker Change: Asked another question on the licensing now you have you're trying to build your licensing portfolio does that give you any advantage in winning artist fees are in terms of pricing or is it just more from a regulator and oversight perspective, you're safeguarding yourself and <unk>.
Speaker Change: <unk> yard.
Speaker Change: The compliance.
Speaker Change: Really who we are safeguarding is our merchants, especially across emerging markets. So the principal reason behind this is that we do feel that this is very valuable IP and yes. It is something that will help us with.
Speaker Change: In more rfps close more deals and gain more share of wallet. If you think of a global north merchant, who is looking for someone with whom to whom they will essentially outsource their payment stack for a market that is not a focus market in many cases and that they don't.
Speaker Change: Understand well the value proposition of the local is that combination of technology that has proven to be effective to them.
Speaker Change: Lower cost because we offer local payments higher conversions and feet on the ground to optimize relationships with issuers processors and regulators and on top of that.
Speaker Change: The licenses gives them the security from a reputational perspective that they are choosing a partner that comes under regulatory oversight. So we do think this is a competitive advantage and even more than protecting ourselves it's about protecting our merchants volumes across these.
Speaker Change: <unk>.
Speaker Change: Perfect. Thank you so much better for your answers.
Speaker Change: Thank you.
Cathy Chan: Our next question comes from Cathy Chan of Bofa. Your line is now open.
Cathy Chan: Thanks for taking my question at the end I'll just ask my two quick questions. Just upfront. So first just wanted to ask how the pipeline is looking like for you guys than what you're expecting growth from new merchants versus existing or look like in 2025, and typically when you ramp up these new merge entities also come at a higher take rate typically.
Cathy Chan: And then my second question is just you know.
Cathy Chan: To think about free cash flow in 2025 relative to July 24.
Cathy Chan: As a percentage of conversion or anything that we should be thinking about.
Cathy Chan: That could impact that thank you.
Cathy Chan: Great. So let me take the first one and Kathy I think when we look at again are to the best of our current.
Cathy Chan: Expectations on 2025, we see.
Cathy Chan: Continued high net TPB retention, so we still state that for every dollar we generated in 2024 for merchants, we'd like to generate a consistent.
Cathy Chan: <unk> retention to what we delivered in 'twenty four.
Cathy Chan: But on top of that and Thats why we.
Cathy Chan: Believe we can deliver that consistent high TPG growth, we do see a pickup in the percentage of volume that will come from new merchants and Thats a consequence of ceiling.
Cathy Chan: Quite encouraged by what is in the pipeline of merchants that do not yet processed through us and also our ability to continue to gain share and offer new markets and new payment message to our existing merchants. So we'd like to see a pickup in new merchant adds.
Cathy Chan: And their percentage of volume flowing through the 25 numbers.
Cathy Chan: One final data point that we mentioned in the video and that you'll have in the disclosures in the slides is the cohort through 2024 in terms of how well that cohort performed the first year is record TPB. It's the strongest cohort we've ever had in terms of first year volume.
Cathy Chan: You asked a question.
Speaker Change: Question about take rate of new cohorts and that is highly dependent on <unk>.
Speaker Change: Size of the global merchant or the new merchant and also if it's a pay in merchant or a payout merchant. So one of the factors driving the extremely strong performance from the 24 cohort has been the growth of our remittance business.
Speaker Change: And how well we perform there but that does come in at a lower take rate because best payouts.
Speaker Change: We've also had some phenomenal wins and ecommerce players in Fintech players, but to answer your question not necessarily all new merchants come in at higher take rates because it really depends on the vertical it depends on if it's a pay interim payout merchant and what the overall <unk>.
Speaker Change: <unk> of that merchant is a merchant that has a very large 510 year potential we will be more willing to onboard at a lower take rate than one that potentially has less of a 10 year potential or a five year potential for us.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: I'm seeing no further questions at this time I would now like to turn it back to the local for closing remarks.
Speaker Change: So thanks, everyone.
Always for your interest I think we're wrapping up 2024, that's exiting on really solid momentum very solid growth in the last quarter in the past two quarters and everyone. Here is working to carry that into 2025 and beyond so we look forward to updating you.
Speaker Change: With our Q1 results in a few months.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Speaker Change: Okay.
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