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dLocal Q4 2021 Earnings Review: a Fintech with triple-digit revenue and profit growth
Earlier in the month dLocal ( DLO 0.00%↑ ), an acquirer helping some of the largest global merchants accept payments in emerging markets, reported Q4 2021 and full year 2021 results. I didn’t know much about the company a few months ago, and I should admit, I was totally missing out: the company, which launched only in 2016 and went public in June 2021, is already profitable and is still delivering triple-digit revenue and profit growth despite the scale.
The problem that the company is solving is straightforward: accepting payments in emerging markets is hard because of the variety of local payment methods and currencies. Guessing from the company’s financials (just look at the highlights below), the company is solving this problem really well.
How dLocal makes money
dLocal helps some of the largest merchants in the world to accept (and make) payments in the emerging markets (LatAm, Africa, and Asia). dLocal has built its business around the two complexities that merchants are dealing with in the emerging markets: local payment methods (local card schemes, local payment rails, wallets, etc.) and currency conversion. Think of a merchant that decided to expand to a new country (i.e. Brazil) and realized that locals are not keen on using their credit cards for online payments, and prefer to use another form of payment not supported anywhere else (and, of course, not supported by the merchant’s current payment processor).
Originally out of Uruguay, the company started by helping merchants in Brazil in 2016, but by the end of 2021 expanded to 35 emerging markets (and claims to support over 700 local payment methods). The company is well diversified in terms of the industries (commerce, streaming, gaming, SaaS, finance, travel, etc.) and boasts Microsoft, Uber, Nike, Shopify and over 400+ other companies, as their clients. It should be noted, that despite rapid expansion across the globe, LatAm remains the company’s largest market, accounting for 92% of the company’s revenues.
The company provides two key products: “Pay-ins” and “Pay-outs”. “Pay-ins” is a classical acquiring product: essentially, the company helps merchants accept online payments (think of Microsoft charging a Brazilian a monthly subscription for Microsoft Office). In addition to providing a variety of local payments options for the end consumer, dLocal also helps the merchant manage currency conversion.
“Pay-outs” are used by companies that are distributing payments to their employees or partners in emerging markets (think of Uber making payments to their taxi drivers). In this case, the merchant sends the money and the payment instructions to dLocal, while dLocal ensures that the money is converted to local currency and distributed to the local recipients via the preferred (local) payment type. “Pay-ins” accounted for 69% of the Total Payment Volume (TPV), while “Pay-outs” accounted for 31% of TPV in 2021.
Similar to other acquirers, dLocal charges its customers a fee for processing payments; thus, the key revenue drivers for the business are, a) Total Payment Volume (or TPV) and b) the Take Rate (the percentage of the TPV they charge merchants as the commission). To process the payments, the company occurs direct costs (like fees of local payment processors, bank commissions, salaries of employees directly involved in processing, etc.), which are denoted as “Cost of services” in the company’s financials. Deducting “Cost of services” from the “Revenue” results in “Gross Profit”, which is, essentially, the money that is left to cover operating expenses, taxes and compensate shareholders.
Total Payment Volume
dLocal reported $1.86 billion in Total Payment Volume in Q4 2021, and 6.05 billion for the full year 2021, which represents a mind-blowing 145% YoY growth for the quarter and 193% YoY growth for the full year.
As mentioned above, “Pay-ins” accounted for 69% of TPV, while “Pay-outs” accounted for 31% of TPV in 2021. “Pay-ins” also grew faster (242% YoY growth in TPV in 2021) than “Pay-outs” (124% YoY growth in TPV in 2021), which the management attributed to the reopening of the economies after the pandemic (and the consecutively lower volumes for their customers operating in delivery services).
Tripling the Total Payment Volume in a year should have come from multiple levers. Thus, the dLocal grew the number of merchants by 33% YoY from 300+ in 2020 to 400+ in 2021, including 90 larger merchants (for reference, dLocal defines a “Core Merchant”, as the merchant processing over $100K in TPV over the last year). However, the chart on the right (TPV by cohort), suggests that the merchants onboarded in 2021 had a minor contribution to TPV ($0.3 billion), and most of the TPV volumes in 2021 came from the merchants that the company onboarded in 2018 and 2020 ($2.5 billion and $2.1 billion in TPV respectively).
Revenue and Take Rate
dLocal reported $76.3 million in revenue for Q4 2021, and $244.1 million in revenue for the full year 2021, which represents 120% YoY growth for the quarter and 134% YoY growth for the full year 2021. Revenue growth in 2021 accelerated from last year (88.4% YoY).
As mentioned above, LatAm remains the company’s largest market as it accounted for 92% of the total revenue in 2021. Moreover, revenue growth in LatAm exceeded revenue growth in Asia and Africa (140.1% YoY vs. 86.2% YoY). Interestingly, last year (2020), revenue from the LatAm operations grew slower than from the company’s Asian and African operations (82.2% vs. 163.2% YoY).
Besides the staggering growth, there are two notable factors about dLocal revenue in 2021: Net Revenue Retention Rate (NRR) and Revenue concentration with Top 10 clients. Thus, the company reported an NRR rate of 219%, meaning that the merchants, that the company served in 2020, more than doubled their volumes in 2021 (generating additional $124 million in revenue). Revenue concentration with the Top 10 clients also continued to decrease, reaching 56% of the total revenue in 2021 (down from 64% a year earlier).
dLocal enjoyed a rich Take Rate (Revenue expressed as a percentage of TPV) of 4.04%. It came down from 5.04% last year, but the management explained the compression with the changes in the payment mix in 2021 (their merchant generated more “local-to-local” payments, which are payments within one country and are priced cheaper than cross-border payments). As a sign of confidence in the Take Rate levels, the company reported that the Take Rate for the merchants onboarded in 2021 was higher than the average for the year.
Gross Profit and Gross Profit Margin
The company reported $38.9 million in Gross profit for Q4 2021 and $130.4 million in Gross profit for the full year 2021, which represents 88% YoY growth for the quarter and 117% YoY growth for the full year.
As mentioned earlier, Gross Profit is the difference between the Revenue and the Cost of services. The Cost of services position consists of directly attributable costs related to payment processing (i.e. bank fees, fees of local processors, etc.), as well as losses on the currency exchange. As can be seen from the tables below, dLocal also attributed part of the salaries (employees directly involved in payment processing), and a portion of IT costs (hosting of the platform and amortization of software, including internally developed) to the Cost of services.
dLocal reported a Gross Profit Margin of 51% for Q4 2021 and a 53.4% Gross Profit Margin for the full year 2021. Over the last three years, the Gross Profit Margin has been contracting, but given the rapid growth of the revenues, I believe it is too early to make any conclusions from the chart. In any case, Gross Profit Margin is one of the key metrics to watch going forward.
Operating Expenses and Operating Profit
The company reported $24.6 million in Operating profit for Q4 2021, and $83.8 million in Operating profit for the full year 2021, which represents 97.1% YoY growth for the quarter and 170.9% YoY growth for the full year 2021. The company grew its operating expenses at a slower rate than its gross profit.
The company groups its operating expenses into three main categories: “General and administrative expenses”, “Sales and marketing expenses” and “Technology and development expenses” (you can ignore the seemingly large “Other operating gain/loss” position, as it primarily consisted of the rights to purchase company’s stock, which was recognized as a loss in 2020, and a gain in 2021, when the options were exercised).
Looking inside the key expense categories, one can see that salaries and wages (including share-based compensation) are the key components for each of them. “General and administrative expenses” category includes sizeable “Third-party services” position, which are the fees of auditors, legal and external HR, as well as two one-off items specific to 2021 in the total amount of $5.85 million (secondary offering of shares, and costs related to an acquisition of a company).
It should be noted that the total employee benefits in 2021 (salaries, wages, contractor fees, and share-based compensation) amounted to $35.1 million; however, the company capitalized $7.1 million of those costs, reflecting only $28 million in the Profit & Loss for the period.
Net Income and Adjusted EBITDA
The company reported $23.6 million in Profit for Q4 2021, and $77.9 million in Profit for the full year 2021, which represented 103% YoY growth for the quarter and 176% YoY growth for the full year. It is remarkable that the company, which was founded only in 2016, has been profitable for the past three years.
Like many other technology companies, dLocal reports Adjusted EBITDA, adjusting profit for non-cash and one-off items, as well as taxes. Thus, the company reported $29.1 million in Adjusted EBITDA for Q4 2021, and $99.2 million in Adjusted EBITDA for the full year 2021. This represents 112% YoY growth for the quarter and 136% YoY growth for the full year 2021, an Adjusted EBITDA margin (Adjusted EBITDA divided by Revenue) of 38.1% for the quarter, and an Adjusted EBITDA margin of 40.6% for the full year.
Outside of typical adjustments for the taxes, amortization and depreciation, as well as share-based compensation, the adjustments include one-off items covered earlier in the text (gain on exercises options to purchase company stock, costs related to the secondary offering, acquisition-related expenses).
Things to watch in 2022
Growth rates going forward. The company did not provide any guidance for 2022, so we just have to wait for the next reporting cycles to see how the growth rates of TPV and Revenue evolve. They indicated Net Retention Rate of “150% plus”, so we should expect at least 50% YoY growth in Revenue coming from the existing relationships.
Margin compression. The company enjoyed very rich margins so far (Take Rate and Gross Profit Margin), and it will be important to observe how those evolve overtime. As Jeff Bezos once said, “your margin is my opportunity”, so we should be expecting the competition to challenge dLocal on its margins.
Monetization of geographical expansion. Despite being present in 35 markets, 92% of the company’s revenues come from LatAm. The question remains if dLocal will be able to monetize its geographical expansion, or will remain a LatAm player.
Product range expansion. Looking at dLocal competitors in LatAm (StoneCo, PagSeguro), I wouldn’t be surprised if dLocal starts expanding its product range towards wallet / banking services for either consumers or businesses. They launched virtual card issuing service to support their existing merchants with prepaid cards, and have capacity to grow through acquisitions.
Source of the data used above: Investor Relations
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Disclosure & Disclaimer: despite rocky performance in 2021 and early 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.