I want to bring a new company to the board that IPO’d in June and has been in hyper growth mode since the foundation in 2016: dLocal (DLO). dLocal has been founded in Uruguay but is listed on the Nasdaq. DLO is currently worth approx. $12.8 billion with 2020 revenue of $104 million, however expected to increase by triple digit percentage to >$200 million in 2021. Q1 2021 revenue growth was 124% and accelerated from 88% for full year 2020. I estimate the 2021 EV/S around 56, which puts them valuation-wise in the same category as Cloudflare and slightly cheaper than Snowflake. As an emerging market payment provider, revenue is transactional and recurring in nature.
Activity
dLocal redfines the online payments experience in emerging markets. Through one direct API, one technology platform, and one contract, DLO enables global enterprise merchants to get paid (pay-in) and to make payments (pay-out) online in a safe and efficient manner. Merchants on the platform benefit from improving acceptance and conversion rates, reduced friction, and improved fraud prevention, leading to enhanced potential interaction with nearly 2 billion combined internet users in the countries they serve (excluding China). DLO’s fully cloud-based platform has the ability to power both cross-border and local-to-local transactions in 29 countries as of the date of the prospectus (which includes seven new countries where they have not yet processed volume). DLO enables global merchants to connect with over 600 local payment methods, as commonly used payment methods in the developed countries such as credit card and paypal are not as widely used in emerging markets, who often prefer their local solutions. Rather than having to build integrations with each individual payment method, merchants can turn to DLO and through one API get access to almost all local payment methods.
Business model
dLocal has 330+ merchants using their API’s as per the S-1, some well known customers include Amazon, Didi, Microsoft and Spotify. From 2016 through 2020, DLO has successfully added on average nearly six new pay-in merchants per month and one new pay-out merchant per month (pay-out merchant is for example Didi that uses DLO to pay its drivers in Brazil in local currencies). DLO is an enterprise-focused company, targeting large global merchants that operate in different verticals and geographies. On average, their global merchants used dLocal’s platform in nearly six different countries and 44 payment methods in 2020.
The solution seems sticky as DLO is often subject to rigorous vetting processes with global enterprise merchants that invest significant time and resources in the selection, diligence, and on-boarding of technology and payments providers. This on-boarding process can often take several months as these merchants assess their technological capabilities, ability to comply with their data security protocols, and adherence to regulatory, tax and compliance requirements.
DLO earns revenue from fees charged to its merchants in connection with payment processing services for cross-border and local payment transactions in emerging markets. These fees are primarily generated on a per approved transaction basis as either a fixed fee per transaction or fixed percentage per transaction. The fees include a Merchant Discount Rate, or MDR, to compensate DLO for its services, as well as an FX service fee earned on payments involving conversion and expatriation of funds to and from various currencies.
As mentioned, they are currently present in 29 countries, including Mexico, Argentina, Colombia, and Chile in Latin America; India and Indonesia in Asia; and Egypt, Nigeria, and South Africa in Africa.
The opportunity
Payments in emerging markets are still dominated by local payment methods. Whereas in the United States and Europe, credit and debit cards are widely held and used online, this is not the case in emerging markets where, according to AMI, banking penetration can fall below 20% of the adult population and cash-based payment methods, local digital wallets, and bank transfers are prevalent. According to AMI, local payment methods represented 83% of total e-commerce expenditure in 2020 in the 14 core markets analyzed by them. The prevalence of local payment methods creates a fragmented payment system in emerging market countries, which hampers global merchants’ ability to expand in these new markets.
To give some examples:
Brazil: Credit cards only represent 10% of e-commerce payment volumes, whereas domestic-only credit cards and cash-based methods represented 55% and 13% of the aggregate e-commerce payment volumes in 2020, respectively, and the remaining 35% were alternative payment methods.
Nigeria: Nigeria, internationally-enabled credit cards only represented 13% of the aggregate e-commerce payment volumes in 2020, whereas debit cards and bank transfers represented 28% and 27%, respectively.
There are other favorable trends for DLO such as:
- Increasing globalization of commerce (e.g. Amazon uses DLO to accept payments in emerging countries)
- Continued rise of the digital economy (e-commerce is growing faster in emerging markets than in developed markets, with South-East Asia and LATAM leading)
- Middle class in emerging markets continues to expand
- Cross-border payments in emerging markets are fragmented and poised for growth
- Global enterprise merchants are establishing local presence in selected emerging markets
- Highly complex and evolving local regulatory and tax environments
The numbers
TPV (total payment volume) has shown a 97% CAGR since 2016:
2016: 136m
2017: 313m (+130%)
2018: 554m (+77%)
2019: 1.288m (+132%)
2020: 2.065m (+60%)
2021 Q1: 926m (+138%)
The revenue evolution:
2019: 55.3m
2020: 104.1m (+88%)
2021 Q1: 40.3m (+124%)
Gross margins were 58% in Q1 2021 compared to 61% in Q1 2020. Gross margins were 58% in FY 2020 vs. 65% in FY 2019. Gross margins will never be SaaS-like as there is a pass-through of revenue to all the local payment providers, local acquirers and banks. The decrease in gross margins is explained as “mainly due to a change of mix in payment methods, and, to a lesser extent, to the increase in hosting expenses, salaries, and wages directly related to the day-to-day operations of the company, as well as the amortization of intangible assets.”
However the cost structure is very attractive (low S&M and R&D expenses) resulting in EBITDA margins of 44.3% in Q1 2021 and 40.3% in FY 2020, up from 36.3% in FY 2019. Operating profit margins are similar to EBITDA with 47% in Q1 2021.
Net dollar retention rates:
2020: 171%
2021 Q1: 186%
There is some revenue concentration as a relatively small number of customers account for a significant share of our revenues. The top 10 customers in terms of revenues represented approximately 62% of DLO’s revenues in the three months ended March 31, 2021 and 64% of DLO’s revenues in the year ended December 31, 2020, however down from 70% of revenues in the year ended December 31, 2019. In 2020, there were two customers that individually accounted for more than 10% of our total revenues.
Geographically, the operations provided to merchants in Latin America account for a substantial portion of the business. Such operations accounted for 89% and 94% of DLO’s revenues for the three months ended March 31, 2021 and 2020. Being from Uruguay, they started in Latin America and hence the high concentration, however this seems to be going down as they expand to Africa and Asia.
Disclosure: No position yet but have been following them since IPO. Valuation is sky high but given the growth, the multiple will contract quickly. Profitability is also best in class. Would be curious to hear if someone has any thoughts on the company.
Link to the S-1 for further research: https://www.sec.gov/Archives/edgar/data/1846832/000095010321…