dLocal Q2 2022 Earnings Review: no signs of a slowdown and still profitable
dLocal delivered another fantastic quarter: the Total Payment Volume was up 67% YoY, revenue was up 72% YoY, and gross profit was up 50% YoY….and the company reported another quarter of profit and cash balance growth. I mean, they managed to deliver these growth numbers while keeping their operating expenses down! How cool is that?!
My only concern is about the long-term sustainability of an unusually high Take Rate and Gross Profit margins, but so far there were no signs of margin compression (perhaps, this is specific to operating in emerging markets?). Let’s keep our fingers crossed for this magic story to continue, and, in the meantime, review the company’s Q2 2022 results!
If you are new to dLocal, I suggest reading my previous reviews:
👉🏻 dLocal Q4 2021 Earnings: a Fintech with triple-digit revenue and profit growth
👉🏻 dLocal Q1 2022 Earnings Review: another quarter of triple-digit profitable growth
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Total Payment Volume
dLocal reported $2.4 billion in Total Payment Volume for the quarter, which represents a 67% growth compared to Q2 2021 and a 16% growth sequentially. As a reminder, the company allows its customers to accept payments (“pay-ins”), as well as distribute payments to i.e. their employees (“pay-outs”). This time dLocal did not provide the breakdown between pay-in and pay-out volumes, but the company’s CFO mentioned on the earnings call that pay-ins represented 3/4 of the volume (the share of pay-ins in the total TPV was 30% in 2021).
The company has a well-diversified mix of merchants across multiple categories; thus, a slowdown in one category can be compensated by the customers in the growing category. Thus, this time the company’s management mentioned its advertising, travel, commerce, and SaaS customers as the key drivers behind the TPV growth (while previously the growth was driven by ride-hailing, streaming, and financial services). You can see the TPV breakdown by vertical and the dynamic between Q1 2022 and Q2 2022 on the charts below.
Revenue and Take Rate
The company reported $101.2 million in total revenue, which represents a 72% growth compared to Q2 2021, and a 16% growth sequentially. The company now operates across 37 countries, with 22 countries outside of Latin America. As can be seen from the table below, the company’s revenue in LatAm grew by 63.3% YoY (and comprised 86% of the total revenue), while the revenue in Asia and Africa grew by 155.4% YoY (and comprised 14% of the total revenue).
Before this quarter, dLocal reported triple-digit revenue growth for five sequential quarters, which is insane. I would dare to forecast for how long dLocal can grow at such rates, but the company is confident in maintaining a Net Retention Rate of 150%+ (more on that below) and keeps onboarding new customers. Thus, until we hear the company’s management back off from their guidance of 150%+ NRR, we would expect the company to grow at the rate of 50-70% on a YoY basis despite the hard comps.
As per the company’s filing, dLocal served more than 590 merchants in the first six months of 2022 (compared to 340 merchants in the first half of 2021). Besides growing its customer base, the company keeps decreasing its client concentration. Thus, revenue concentration with the Top 10 clients decreased from 63% in Q2 2021 to 51% in Q2 2022 (please see the chart below).
The company’s management does not provide revenue guidance, yet, they reiterated their confidence in ensuring the Net Revenue Retention rate “north of 150%”. NRR rate illustrates the revenue growth for the existing clients over some time. Thus, the NRR of 157%, which the company delivered in Q2 2022, means that the same merchants that generated $59 million in revenue in Q2 2021, generated $92.6 million in revenue in Q2 2022.
My main concern with dLocal is the high Take Rate that the company can charge its clients. Thus, as you can see from the chart below, the company commands a Take Rate of over 4%, which is unusually high given the fact that they serve large enterprise merchants. Nevertheless, despite my concerns, there are no signs of the Take Rate deterioration over the last few quarters.
dLocal reported $49.6 million in Gross Profit for the quarter, which represents a 46.9% increase compared to Q2 2021. Gross Profit grew at a slower pace than the revenue (46.9% vs. 71.6% YoY), primarily due to escalating processing costs. Thus, the processing costs increase by 106.6% YoY.
dLocal continued to deliver a Gross Profit margin of around 50% (Gross Profit over Total Revenue), and gross profitability remained stable over the last four quarters. During the earnings call, Sebastian Kanovich, the company’s founder and CEO, reiterated that dLocal is not optimizing for gross profit margin, but rather for absolute contribution. Thus, the sales teams are incentivized to increase the gross profit, rather than maintain the gross profit margin.
Processing costs (which contribute 95% of the total cost of services) are driven by the transaction count and volume (TPV). Thus, in case the company sees its Take Rate deteriorating in the future, this will directly impact the Gross Profit margin. Overall, a 50%+ gross profit margin is relatively high for a payments business.
dLocal reported $14.5 million in operating expenses for the quarter, which represents a 2.2% decrease (!!!) compared to Q2 2021. Just think about it for a second: the company grew TPV by 67%, revenue by 72%, and gross profit by 50%…while keeping its operating expenses at pretty much the same level, as a year ago! As the result, the company reported an Operating Profit of $35.1 million for the quarter, up 85.5% compared to Q1 2021.
As can be seen from the expense breakdown above, the company spends a ridiculously low percentage of its revenue on “Technology and development” (1.6% of the total revenue) and “Sales and marketing” (3.1% of the total revenue in Q2 2022). Thus, the only sizeable expense category is “General and administrative expenses”, which includes salaries, fees for professional services, and office rent. As you can see, G&A expenses have been consistently declining as the company scaled its operations.
Profit and Adjusted EBITDA
dLocal reported $30.7 million in profit for the quarter, which represents a 73.5% growth compared to Q2 2021. As you can see from the chart below, dLocal has managed to keep the profit margin at around 30% of the revenue for five consecutive quarters.
The company also reported an Adjusted EBITDA of $38.2 million for the quarter, which represents a 47.5% increase compared to Q2 2021. The company calculates the Adjusted EBITDA by adjusting the profit for the period by depreciation and amortization, income taxes, as well as interest income and expenses on financial assets (i.e. investing company’s cash balance).
dLocal has been able to maintain its Adjusted EBITDA margin at around 38% for the past four quarters, and the company’s management reiterated its commitment to maintaining an Adjusted EBITDA margin of “north of 35%” going forward.
As of June 30, 2022, dLocal had US$454.0 million in cash, cash equivalents, and marketable securities, compared to US$266.0 million as of June 30, 2021.
Things to Watch in 2022
Take Rate and Gross Profit Margin. dLocal has delivered very impressive growth while maintaining profitability (which is super rare in the Fintech world). Therefore, my only concern is the company’s ability to maintain its (unusually high) Take Rate and Gross Profit margin. I am pretty sure that both, payments startups and established processors, will attempt to take a piece of this lucrative business away from dLocal.
Growth outside of LatAm. dLocal delivered a 155% YoY revenue growth from its operations in Asia and Africa, but those markets still represent just 13% of the company’s total revenue (up from 9% in Q2 2021). My understanding is that the company’s ability to serve customers across multiple emerging markets (through a single API) can become a strong competitive advantage over time, and the company’s growth outside of LatAm should be the best proof of that.
Acquisitions. dLocal is generating free cash flow, and over time has built up a sizeable buffer. I am curious about how the company’s management is planning to use it, and if they are building up a cash balance for some sizeable acquisition. Acquisitions that would increase the company’s footprint in Asia and Africa seem to be a logical use for this cash. Let’s see.
In summary, this was another very strong quarter from dLocal. It is truly remarkable that the company can grow at such a neck-breaking speed and still maintain profitability. My concerns about the sustainability of gross profit margins remain, but so far there were no signs of margin compression.
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Disclosure & Disclaimer: despite rocky performance in 2021 and the first half of 2022, I have open positions in most of the companies covered in this newsletter, as I am extremely bullish on the transformation in the financial services industry. However, none of the above is financial advice, and you should do your research.