DLocal Reports Record Gross Profit
Taking a Look at DLocal's (DLO) Earnings Report.
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DLocal Q3 2024 Earnings
Key Financial Highlights
Total Payment Volume (TPV): Reached a record $6.5B, up 41% YoY and 8% QoQ, driven by strong performance across various verticals and countries.
Revenue: Increased by 13% YoY to $185.8M, marking an 8% QoQ growth.
Gross Profit: Achieved a record $78.2M, up 5% YoY and 12% QoQ, with a stable net take rate of 1.2% since Q1 2024.
Adjusted EBITDA: Reached $52.4M, demonstrating operating leverage expansion for the second consecutive quarter, with Adjusted EBITDA over gross profit margin increasing to 67% in Q3 2024, up 6 percentage points QoQ.
Operational Highlights
Expansion Across Verticals & Geographies
Market Penetration: Expanded operations into more countries and offered additional payment methods.
Client Growth: Increased market share among key clients in financial services, SaaS, on-demand delivery, advertising, ride-hailing, and commerce verticals.
Regional Performance: Notable TPV growth in Argentina, Mexico, Egypt, Colombia, Peru, South Africa, and other regions in Latin America, Africa, and Asia.
Cross-Border Business Growth
Record Volume: Surpassed the $3B quarterly mark in cross-border transactions for the first time.
Diversified Services: Enhanced ability to meet diverse merchant needs across multiple regions.
Merchant Pipeline Growth
New Integrations: Successfully integrated major players like MoneyGram and other significant remittance companies across Latin America, Africa, and Asia.
Global Expansion: Continued to increase volumes with a leading Asian commerce player and launched services in Brazil with a major global fintech company from Asia.
Product & Technology Innovations
Smart Requests Functionality: Launched to boost transaction performance and improve conversion rates.
Cost Optimization Models: Developed advanced real-time cost calculation models to optimize processing costs, contributing to stable net take rates.
Alternative Payment Methods (APMs): Introduced new APMs, including integrations with Nupay in Brazil.
Payment Orchestration Option: Launched a standalone solution allowing merchants to utilize DLocal's smart routing, fraud detection, and unified reporting while obtaining their own licenses and directly contracting with processors.
Financial Performance Analysis
Revenue Growth Drivers
Geographical Contributions: Revenue growth primarily driven by strong performances in Argentina, Egypt, and other Latin American and African markets.
Merchant Expansion: Growth fueled by expanding the share of wallet with existing global merchants and onboarding new merchants.
Vertical Diversification: Success across diverse verticals contributed to the overall revenue increase.
Gross Profit & Margins
Gross Profit Margin: Stood at 42%, compared to 45% in Q3 2023 and 41% in Q2 2024.
Contributing Factors: Improvement due to volume growth in key markets like Egypt, South Africa, Mexico, and other Latin American countries.
Offsetting Challenges: Partially offset by higher expatriation costs in Argentina and share losses in Brazil due to regulatory compliance requirements for a top merchant.
Operating Expenses & Adjusted EBITDA
Investment Focus: Operating expenses grew by 61% YoY, mainly due to investments in product development, IT capabilities, and licensing.
Expense Management: Sequential decrease of 6% QoQ in operating expenses reflects disciplined cost management.
Adjusted EBITDA Margin: Recorded at 28%, down from 34% in Q3 2023 but up from 25% in Q2 2024, demonstrating operational leverage.
Net Income & Cash Position
Net Income: Reported $26.8 million, or $0.09 per diluted share, down 34% YoY and 42% QoQ.
Influencing Factors: Decrease impacted by non-cash mark-to-market effects related to Argentine bond investments in the previous quarter and higher finance costs due to exchange differences and hedging.
Cash Generation: Net cash from operating activities, excluding merchant funds and less capital expenditures, amounted to $26M, representing a cash conversion of nearly 100% of net income.
Cash Reserves: As of September 30, 2024, DLocal held $560.5M in cash and cash equivalents, including $208M of own funds and $352.5Mof merchants’ funds.
Business Outlook & Guidance
Unchanged Guidance: Despite strong Q3 performance and positive trends into Q4, the company maintained its full-year guidance, noting that Q4 results are heavily weighted towards the upcoming weeks due to seasonal factors like Black Friday.
Future Growth Strategy: DLocal emphasizes its commitment to innovation, expanding product offerings, and deepening competitive advantages in emerging markets.
Market Opportunities: Positioned to capitalize on secular trends favoring digital payments, cross-border transactions, and the growing importance of emerging and frontier markets.
Long-Term Value Creation: The company's ability to innovate and adapt is expected to fuel long-term value for shareholders and merchants.
My Take
It appears that the murky waters surrounding DLocal are becoming clearer, as reinforced by this quarter's performance. In previous articles, I've mentioned that I didn't believe DLO would suffer permanent setbacks that would break the investment thesis; the challenges the company faced were beyond its control, and they have navigated these issues effectively. During times of uncertainty, I consider Total Payment Volume (TPV) to be the key metric for DLO. As long as this number continues to rise consistently, investors should not be overly concerned.
Some investors have raised questions about take rates and net income, noting that take rates seem to have plateaued or are on a downtrend, and there has been a significant decrease in net income quarter over quarter. Let me address these concerns, starting with net income.
Decrease in net income is primarily due to two main factors:
Impact of Argentine Bond Investments: In the previous quarter (Q2 2024), there was a positive non-cash mark-to-market effect of approximately $23M related to Argentine bond investments, which positively impacted net income at that time. However, this positive impact was absent in Q3 2024, contributing to a lower net income.
Higher Finance Costs: The quarter experienced higher finance costs, mainly driven by exchange rate differences and increased costs for hedges. These finance costs also contributed to the reduction in net income.
Regarding the stable take rates, it's important to note that a stable take rate isn't necessarily negative—especially if the company can manage its costs and continue to attract new clients. However (let me put my bear hat on), if DLO faces increased competitive pressure or rising costs in the future, they might need to explore ways to increase their take rate or identify other revenue sources. The reason we observe this stability is due to contract changes and new service offerings that have influenced the take rate. This means they've adjusted how much they charge on certain transactions to retain clients and stay competitive.
Another contributor to the take rate, as mentioned in the report, is that they lost some share of credit card payments in Brazil. This occurred because a top client received a payment license and needed to connect directly with acquirers to remain compliant. This contract change means they can't charge that client in the same way, which slightly impacts the take rate.
Moreover, they also introduced a standalone "Payment Orchestration" product. This service allows clients to manage more of their own payment processing while still using DLO’s routing and fraud detection tools. While this new offering could make the company more appealing to clients, it also means DLO takes a smaller cut on these transactions. This helps explain why the take rate has remained stable rather than increasing.
Personally, I’m happy with the quarter. I decided to add right before they released their earnings, and it turned out to be a good move in the short-term with the stock up over 10%. I will find ways to add to my position, but I won’t be as aggressive as I am with my other top positions.