Dlocal (DLO) Q2 2023

wsm007 · September 11, 2023, 3:12pm

Dlocal just delivered $161m of revenue, up 59% yoy with a 148% NRR and a 28% net profit margin. That’s pretty impressive. The market cap is around $6bn for a 11x run-rate revenue multiple and a 48x ttm GAAP PE.

The campany has had some discussion around these parts, and I’ve taken a small starter position. I know that @anthonyms owns a little as well.

I think that Fintech has had a long and probably well-deserved winter, with the likes of Upstart leading the way down. I also think that therein may lie opportunity for companies that have perhaps unfairly been caught in the downdraught.

I wonder if Dlocal might be such a company and would love to hear others’ views.

Links

Introductory discussion on Saul’s
Investor relations link
Q2 ER Press Release
Q2 Results deck (great overview and content)

What they do

Dlocal is the Stripe or Adyen of emerging markets. They enable online payments via a single API focused on markets outside the US and EU. The bulk of their revenue and growth is from South America, with Africa and the Middle East second.

Where they come from

The founders are from Uruguay and attended the same university there. The CEO Sebastián Kanovich was recruited by the founders Sergio Fogel (currently Chief Strategy Officer - Insead MBA, Computer Science in Israel, ex IBM) and Andrés Bzurovski (on the BoD) as general manager and now sports the title CEO and co-founder (and almost billionnaire). Here’s the back-story which is well worth a read:

Their solution is clearly resonating with customers, as can bee seen in their sky-high NRR in the past (although this has come down of late):

NRR %	Q1	Q2	Q3	Q4
2021		196%	185%	198%
2022	190%	157%	152%	146%
2023	147%	148%

Some other positives:

Revenue has been going up and to the right, and accelerated in the last quarter:

Revenue $m	Q1	Q2	Q3	Q4	QoQ Q1	Q2	Q3	Q4
2020			31	35				13%
2021	40	59	69	76	14%	48%	17%	11%
2022	87	101	112	118	14%	16%	11%	6%
2023	137	161			16%	17%

That led to the highest raw $ added of $24m in their history. This was fuelled by Latam and a nice uptick in TPV - below is the sequential $ TPV added per quarter:

New TPV	Q1	Q2	Q3	Q4
2020				185
2021	169	530	356	44
2022	248	329	301	562
2023	278	799

In addition, they have been profitable for many quarters already, with net income margins solidly in the 30%-ish range - very impressive:

Net Inc %	Q1	Q2	Q3	Q4
2020			28%	33%
2021	42%	30%	29%	31%
2022	30%	30%	29%	16%
2023	25%	28%

They are also cash-generative, so what’s not to like?

Some question marks

Leadership
I find the recent addition of a veteran in Latam, the ex CFO of MELI - Pedro Arndt - interesting, but also wonder why this is happening. Are they planning for a CEO transition? Co-CEO’s don’t work well in the best of situations imo (remember Blackberry/RIM) and I don’t think they are made to last when there is a new one brought in. Would love to hear other views here, but to me this sounds like Pedro is being set up to succeed the current CEO, and I wonder whether that will be a good thing…

Customer concentration
They’ve got customer concentration issues, and have been whittling that down in prior periods, but this has been going the wrong way again of late:

The good progress of the past:

And the recent reversal:

African stagnation

The Q2 strength was all Latam - Africa&Asia actually decreased sequentially, and was pretty much flat even when reversing currency headwinds in Nigeria:

Conclusion

I’m left wondering whether to hang on to my position given the hypergrowth and recent acceleration in Latam, but worry that the leadership transition, customer concentration and apparent African stagnation could point to trouble ahead.

-wsm

wpr101 · September 12, 2023, 12:26am

I have a moderate size position in DLocal and I’m adding when possible. This is an incredibly well run company.

Some of the numbers they are putting up,

Since IPO all metrics have grown 3x+, volumes more then 3x higher, revenue is more then 3x higher, and adj EBITDA is 3x+ higher. (Note the share price is down since IPO). “We’ve widely exceeded our estimates”
Last two years have 83% CAGR on gross profit growth
159 on the “Rule of 40” for last 2 years
TPV and revenue has basically doubled in two years and gross profit grew 83%
Number of countries grew from 19 to 40, payments methods from 300 to 800, merchant base from 190 to 650 (last two years)
Gross profit over headcount was $184,000 two years ago, now its $278,000 per person
CAGR of free cash flow has been 76% in last two years
When you measure profitability by EBITDA we come in first
Growing clients by 41% CAGR and TPV by 126% over last three years
“Revenue CAGR of 101%, adjust EBITDA over gross profit surpassing 70% and annual conversion of free cash flow to net income exceeding 90%.”
TPV grew 80% year over year, 22% QoQ
Net retention best in class at 148%
Mexico increased 85% YoY, Brazil 50% YoY
Egypt, Morocco, Indonesia, and Philippines are all growing at triple digit rates
Revenues in Africa and Asia increased more then 3x YoY
Revenue up 59% YoY, 17% QoQ
Gross profit up 43% YoY, 14% QoQ
EBITDA up 36% YoY, 14% QoQ
Net income up 46% YoY, 26% QoQ

For those unfamiliar with their business they provide payment services in third world countries that enable other companies to sell there. For example, Facebook is a customer and using DLocal they can accept payments easily for a basket of different emerging markets without doing any heavy lifting. Amazon, Google, Booking, Netflix, and Spotify are also customers. I’m honestly not too concerned if the customer concentration is top heavy with names like these purchasing more services.

Their Investor Day (June 8) was what really sold me on increasing my investment. Management is gritty, determined, and frugal. Some examples,

They have executives go live in areas to try out the local payment methods
Every transaction adds to their bottom line, they rejected onboarding a major German consumer company because they didn’t get the bottom line transaction fee they wanted
All executives fly coach, every expense is examined
They take a long term approach to building the business, and mention repeatedly they are not building for quarter to quarter numbers
Executives massively doubled down on buying shares, understanding the market was undervaluing them
Compliance and legality is built into the company, they hire local lawyers and compliance officers
Teams are hired locally in the markets to get local expertise and save on costs

Some other highlights from the investor day,

They follow all Central bank rules, every wire has proper documentation and within regulatory framework
The market is huge, these countries they are in are the fastest growing, market keeps getting bigger and bigger
Completely bootstrapped, “We are frugal. We are not only owners of this business, but we act like owners”.
Pix is most used payment company in Brazil. Paypal won’t accept them because it’s too complicated, DLocal figured it out.
People in emerging markets like Mozambique, Nigeria, or Brazil see payment friction every day
We offer our merchants the ability of accepting installments without taking credit risk
We are indexed to some of the biggest global merchants in the world, and when you hold tied to them, you grow
Average large customers works with 10 different geographies. Have 40 currently, adding more
Many big companies see growth falling in stable markets but can grow in emerging, which is why they come to DLocal
The market is very poorly served, just scratching the surface. Even being the leader in the space, have less then 1% of market opportunity.
Merchants like Amazon and Google do not have the time to think about each emerging market, not their core business, they have bigger things to think about.
Only one API, simple integration, up and running fast
Vertical agnostic, can serve every single merchant
We want to be close to the financial regulators, also close to tax regulators
We have the licenses, permissions, authorizations that we need in order for our merchants to be receive the money they collect
AI driven fraud protection and financial crime prevention, also have tax management
Offer most relevant local payment methods in every country, make it easy to pay online
Smart router technology, AI driven that dynamically picks converting payment processor can optimize for conversion rate, delay or to minimize costs. If transaction gets declined smart chaining kicks in, can route to second best option. With Didi food in Mexico got a 2.6% conversion increase using this which is a lot
We make it as easy to take payments in Nigeria as it would be in the UK. White label payment solutions for both cards and alternative payment methods
Easy refunds for customers and merchants by leveraging payout infra
Financial model has three pillars: growth, profitability, cash flow generation

Some stories they tell,

Visiting India, called Jaco (other executive), said “This is nightmare, it’s complex, volatile, full of friction. This is the type of market we need to be in.” … “Because if it’s complex for us, it’s there’s complexity for everyone, there’s a problem to be solved.”
We want to be frugal spenders. We own this company together between the management team and some of our founding shareholders here. We own close to 80% of the company.
We are not 20 different payment companies under one umbrella. This is one payment company. It means one API, one contract, one team, one culture. Offer 900 payment methods, but it’s one company.
There is no one doing what we are doing, closest competitor is Adyen but they only focus on developed markets
Visit with Facebook and they asked for ability to solved 13 countries in Africa the same way they did for them in Latin America
For Amazon, in Chile built a white label payment experience where a user cannot tell DLocal behind it
Enabled Amazon for installment payments which is a first for Amazon worldwide and that is key in Latin America
For Spotify in Kenya enabled M-Pesa
Asked the team to prioritize absolute gross dollar profits on every individual deal
Went to Money 20/20, bought cheapest booth offering coffee, 1/3rd the cost, look to save money everywhere
Buying their own shares, price to earnings and net income growth show why it’s a clear buy. Sergio (executive) and two other executives have bought recently

Addressing a few concerns

They had both Argentina and Nigeria have currency trouble and still put up record numbers. They reprice in local prices which then go to dollar/euro so they don’t care about local prices too much. There’s not too much risk from currencies in this respect
At IPO many of the founding members were part of a previous company which took payments from the adult industry and gambling. They mentioned in the prospectus a number of issues about this. I don’t see this as a big risk currently, and I like they were upfront about the conflicts and risks of that previous business.

anthonyms · September 12, 2023, 12:32am

Hi WSM007 and WPR101 - good raise and nice summation. I still keep a 1% holding in Dlocal and am comfortable with that.

WRT the points you raised, I would consider the following as positives and risks:-

Positives:-

Solution Relevance - given that I live in the middle of emerging Asia, I see the relevance of their solutions constantly and there is very little by way of options for citizens of the emerging market countries even from the mainline payments firms and the local operators mostly range from amateur operators to outright scams.

Operating excellence - they have a single global API that accommodates every layer of pay in/out facilitation. They manage currency risk and never get caught out by local currency volatility and depreciation. They have strengthened their market entry team so now they enter territories and achieve licences faster than ever and they have invested in their regulatory compliance and governance team.

Growth Durability - they continue to grow at hyper growth rates and are delivering outstanding profitability margins. The countries they operate in continue to provide significant growth potential as they reach more customers, more merchants with more payment options - even the mature markets where they have been embedded for a while like South America.

Leadership - I hadn’t been a fan of the style of the existing board but the snagging of Pedro Arndt from MercadoLibre is a massive coup. Pedro had ~20 years tenure at MercadoLibre and is first class. What he also does is at one stroke provide validation of the business - if you read the transcripts of the recent earnings release, he talks at length of the due diligence he expended on checking into everything about Dlocal - which was one of the ongoing risks and fears investors had of the business. His appointment nearly doubled the share price overnight.

Risks:-

Slowdown in new market entries - Dlocal used to enter ~5+ markets per year but that has really slowed down in the most recent years. Sure they have entered the major opportunity geographies but there are more markets to enter.

Regulatory transitions - whether it is Argentina or anywhere else, these are opaque and complex markets they operate in and they need to ensure their governance and operations are fully compliant at all times. For instance, Argentina compliance blew up in the media recently (potentially an exaggerated hit piece), but so far it has been addressed by the company effectively.

Customer concentration risk - the top 10 merchants do account for significant amounts however their merchant list is not a bunch of random customers but includes major enterprises (Salesforce, Google, Amazon, Shopify, Meta, Spotify, Netflix etc). Also if you look at their sector exposure - it is very nicely distributed across 8+ major industry sectors from financial services, streaming, ride hailing and commerce to advertising, delivery, SaaS and travel.

This company has continued to perform extremely well however the share price has been very volatile. It is Uruguay based which whilst referred to as the Switzerland of Latin America still might raise alarm bells for some. It definitely isn’t a widows and orphans stock!

If you want to understand them better this is the investor presentation to read. It is one of the most informative investor releases I have ever read. It addresses every level of investor enquiry and concern - which it had to as there were short attacks and regulatory concerns abound:-

Ant

nilvest · September 12, 2023, 2:42pm

i followed this company sometime back…
If I remember right, they had decreasing % of take rate even though increasing TPV consistently… my impression was they were chasing profitless prosperity… or be in very competitive market… has this changed? Any opinion on this?

wsm007 · September 12, 2023, 3:12pm

Hi @nilvest there has been a bit of a reduction in gross take-rate from where it was 3 years ago, yes, but it seems to have stabilised in the ±4%-ish range. This is what I get for revenue as a % of TPV, or gross take rate:

Take rate	Q1	Q2	Q3	Q4
2020			5.4%	4.6%
2021	4.3%	4.1%	3.8%	4.1%
2022	4.1%	4.2%	4.1%	3.6%
2023	3.8%	3.7%

In the last conf call for Q2 2023 they stated net take-rate was 1.6% and in Q1 2023 1.7%.

In prior conf calls they spoke about the change in take-rate being a function of changes in mix and more local-local payments. They also emphasised a number of times - and have been consistent in this messaging - that they have $ gross profit targets and not margin targets. This was the CEO in Q1 2022:

We are not optimizing for take rate. So we’ve been able – and that was important for us to be able to show that take rate goes up and go down. You’ve seen that effect last year. So we might continue to see the same evolution. It’s a function of our business mix, who are the merchants that are growing the fastest, what are the regions that are growing the fastest and what are the products.

We don’t optimize for our gross take rate. We don’t think that’s the right way of building our business. We are optimizing for gross profit, making sure that every dollar in our platform contributes to our margins. And that’s, again, the way we incentivize our commercial team.

So we’ll happily take deals at lower take rates, provided that they contribute to our gross profit margin. Ours is a business that benefits from scale. And we’ve always start up the business that way, and we intend to continue to do so.

Doesn’t seem like a big red flag to me; do you see it differently?

-wsm

buynholdisdead · September 12, 2023, 3:13pm

They were always profitable and their FCF margins are at 31 percent which is very good. The problem I had with them is that their Margins were top notch and It made me nervous because they were always better than everyone else.

Then the short report came out and they were killed, but with this new Co-CEO it gives them an air of respectability.

Andy

nilvest · September 12, 2023, 4:07pm

Thank you for follow up…

My issue with reducing take rate is that means one needs to care about growth rate of GM$ and not revenue $…

e.g. their latest quarter, revenue grew ~60% but GM$ grew “only” 42%…

ofcourse 42% is fantastic but it can not be valued as 60%…

or… last three quarters, revenue growth rate is bouncing back but GM$ growth rate is flat…

i understand this is a function of mix - product and revenue from different countries… in some economies, there is not much margin available…

anyways, it seems they are trying to stabilize take rate… that bodes well…

And, I agree, Pedro Arnt gives them tremendous credibility…

However, with current valuation, its less interesting but certainly added back to watch list