Q4 2023 Dlocal Ltd Earnings Call

Thomson Reuters StreetEvents03-20

Participants Pedro Arnt; Co-CEO; DLocal Limited Maria Oldham; VP of Corporate Development, IR & Strategic Finance; DLocal Limited Sebastian Kanovich; Chief Executive Officer; Dlocal Group Ltd Sergio ...

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Sebastian Kanovich; Chief Executive Officer; Dlocal Group Ltd. Sergio Fogel; Co-President & Chief Security Officer; DLocal Limited. Kaio Prato; Analyst; UBS Investment Bank, Research Division. Good day and thank you for standing by. Welcome to the Dlocal fourth quarter 2023 results.  Please be advised today's conference is being recorded. I would now like to hand the conference over to the Company, please go ahead.Hi, everyone. As the video illustrates, we've just delivered an incredibly strong year that is finished on a high note with regards to increases in both TPV and revenue. As a growth company, these two metrics are really important to us since they reflect our merchant's choices. Remember, our TPV is their revenue, and is the best indicator of our ability to capture","collect":0,"end_time":0,"defaultTopTitle":"yahoo.com","property":["earning"],"viewcount":null,"language":"en","relate_stocks":{"DLO":"DLocal Limited"},"translate_title":"2023年第四季度Dlocal Ltd收益看涨期权","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"DLO":0.9},"content_text":"Participants\nPedro Arnt; Co-CEO; DLocal Limited\nMaria Oldham; VP of Corporate Development, IR & Strategic Finance; DLocal Limited\nSebastian Kanovich; Chief Executive Officer; Dlocal Group Ltd\nSergio Fogel; Co-President & Chief Security Officer; DLocal Limited\nTito Labarta; Analyst; Goldman Sachs Group, Inc.\nNeha Agarwal; Analyst; HSBC, Research Division\nJamie Friedman; Analyst; Susquehanna International Group, LLP.\nMatt Coad; Analyst; Autonomous Research\nAshwin Shirvaikar; Analyst; Citigroup Inc., Research Division\nKaio Prato; Analyst; UBS Investment Bank, Research Division\nPresentation\nOperator\n Good day and thank you for standing by. Welcome to the Dlocal fourth quarter 2023 results. (Operator Instructions) Please be advised today's conference is being recorded. I would now like to hand the conference over to the Company, please go ahead.\n Good morning, everyone, and thank you for joining the fourth quarter 2023 earnings call today. If you have not seen the earnings release, a copy is posted in the financial section at the Investor Relations website. On the call today, you have Pedro Arnt, Co-Chief Executive Officer; Sebastián Kanovich, Co-Chief Executive Officer; Sergio Focal, Co-President and Chief Strategy Officer; Diego Cabrera Canay, Chief Financial Officer; Maria Oldham as VP of Corporate Development, Investor Relations and Strategic Finance; and Soledad Nager, Head of Investors Relations. A slide presentation has been provided to accompany the prepared remarks. This event is being broadcast for live webcast and both the webcast and presentation may be accessed through Dlocal's website at investor.Dlocal.com. The recording will be available shortly after the event is concluded. Before proceeding, let me mention that any forward-looking statements included in the presentation or mentioned in this conference call are based on currently available information on Dlocal's current assumptions, expectations and projections about future events. While the Company believes that our assumptions, expectations and projections are reasonable given currently available information you are cautioned not to place undue reliance on these forward-looking statements. Actual results may differ materially from those included in Dlocal's presentation or discussed in this conference call for a variety of reasons, including those described in the Forward-Looking Statements and Risk Factors sections of Dlocal filings with the Securities and Exchange Commission, which are available on Dlocal's Investor Relations website. Now I will turn the conference over to Dlocal. Thank you. (video playing)\nPedro Arnt\n Hi, everyone. As the video illustrates, we've just delivered an incredibly strong year that is finished on a high note with regards to increases in both TPV and revenue. As a growth company, these two metrics are really important to us since they reflect our merchant's choices. Remember, our TPV is their revenue, and is the best indicator of our ability to capture and retain share of wallet. We think in terms of decades, not quarters. And over the long run, which as I've just said, is what we're focused on, consistent growth in these two metrics, drive operational leverage, which in turn drives increased profitability and cash flow, which is ultimately what generates shareholder value creation. Now let me walk you through a more short term view, revealing our fourth quarter of 2023 results. We delivered what we consider stellar TPV growth of 55% year over year and an 11% quarter on quarter growth surpassing $5 billion to $5.1 billion. This is another quarterly record, proving our solutions, strong competitive position. The strong TPV performance we deliver translated into revenue growth of 59% year on year and 15% quarter over quarter, reaching a record $188 million. Growth was driven by a very strong performance in our most competitive markets. Brazil, where revenues doubled year over year and grew 12% Q on Q, in Mexico, which was up 59% year on year and 18% quarter on quarter. Additionally, Nigerian revenue doubled year over year and increased three times quarter on quarter, driven by widening spread between the official and the market exchange rates, which conversely also resulted in a significant increase in expatriation costs. This strength in our biggest markets, combined with continued growth across other markets, was offset by a negative 26% year on year and negative 56% quarter on quarter contraction in Argentina. The weakness in Argentina was driven by two factors. First, a Q-on-Q decline in our higher take rate cross-border business as a consequence of tighter capital controls leading up to the year-end transition in government, which resulted in what we believe to be a temporary shift towards more local to local settlement by our merchants. Second, the country's currency devalued significantly towards the end of the quarter, further affecting our performance in dollars, not unlike the impact felt by most other companies with a relevant exposure to the Argentine market. I'd like to remind you that despite the short term headwinds, we continue with a long-term view that Argentina is a relevant market for us and more importantly, for our merchants. In complexity we thrive, and we will continue to serve global merchants and consumers in that market. This impact that I've just narrated carried over to our gross profit line, resulting in a quarterly decrease in total gross profit to $70 million, that's down 6% Q on Q. However, if we exclude the Argentine segment, gross profit grew by 7% Q-on-Q. When we go to a year on year basis, gross profit grew by a still sound 27% year on year or a very strong 48% when we exclude Argentina. Our net take rate decreased during the quarter by [20.5] basis points Q-on-Q to 1.4%. This has been as a result of shifts in business mix with a lower share of payments and cross-border volumes. We believe that these results indicate that although downward pressure on take rates continues as we've repeatedly signalled, it is happening at a slow pace. And more importantly driven primarily by mix shift as we still continue to see limited pricing pressure that's derived from competitive dynamics. Let's move on to our OpEx structure for the quarter. During Q4, we continued to invest further in building out our team and establishing processes and systems to support our long-term growth ambitions. As a consequence of these investments, overall, OpEx increased to $29 million in the quarter. Main areas of expense increases were, one, tech-related expenses, including engineers, software licenses and other IT and security expenses. Second, non-IT salaries and wages as we continue to strengthen our team, including important leadership positions. And third office expenses as we've grown our global footprint. Overall, OpEx represented 41% of gross profit compared to 31% the prior quarter. For a more detailed view, please refer to slide 18 from the accompanying earnings materials. I'd like to stress that we are convinced that these investments in technology, product and people are very relevant to continue building a sustainable, high-growth business. As we continue to gain scale, we expect to see operating leverage in the midterm. As I go down the P&L all this resulted in adjusted EBITDA of $49 million, up 22% year on year, but down 11% Q on Q. Adjusted EBITDA margin contracted quarterly to 26%, primarily driven by the previously noted gross profit margin compression. Despite the slowdown in adjusted EBITDA, we continued to deliver best in class profitability. Our ratio of adjusted EBITDA to gross profit came in at 71% for the quarter, notwithstanding the investments undertaken, I've just walked you through. Net income totalled $28 million during the quarter, growing by 47% year on year. Sequentially. That was a decrease of 29%. As we detail in the accompanying presentation, the quarterly evolution of net income was negatively affected by lower EBITDA, inflation adjustments under IFRS, which are accounting impacts and increased stock-based compensation. Consequently, we've also observed an increase in our effective income tax rate from 18% the prior quarter to 21% in Q4. And that's a result of higher local to local share of pretax income and the fact that the IFRS inflation adjustments are non-deductible. Moving on to cash flow, during the quarter, we generated $36 million of free cash flow. That's our own fund generation and $166 million during the year. Our net income to free cash flow conversion continued to be above 100%. Strong Own Funds cash flow generation was mainly driven by the net income profile of our financial model and also by the recovery of $13 million of restricted cash that we had held as guarantees for standby letters of credit. During Q4, we also used part of our own funds to acquire an additional $16 million in Argentine dollar-linked treasury bonds in order to successfully hedge against FX exposure in that market. Consequently, we ended the year with a robust liquidity position of $326 million, including $223 million of available cash for general corporate purposes and $103 million of short-term investments. We remain committed to evaluating opportunities to take advantage of our differentiated financial profile that combines profitable growth with very strong cash generation, which allows us to explore inorganic growth, possible buybacks and instituting a dividend policy. Overall, we're very proud of what we achieved in 2023, and we're also excited about our outlook for 2024 and even beyond. As I said before, I came to the Dlocal with a strong belief, this is an outstanding business with significant opportunities ahead. That conviction has done nothing but increase in my time here. As a team, we remain focused on capturing the huge market opportunity ahead of us by continuing to execute our land and expand strategy with our merchants, maximizing opportunities and gaining share of wallet from them. We will also continue investing behind and tightening the foundations for future growth because we trust there will be a lot of future growth. First of all, we will further strengthen the Dlocal team, investing in human capital with a particular emphasis on the engineering pool. Second, we will further upgrade our back-office capabilities. And third, we want to continue investing behind our licensed portfolio throughout emerging markets, which we are convinced can become a unique asset in the coming years. And this last point, it's worth pointing out that we were granted incremental licensees and registries' across 10 markets during 2023 as the intro video showed. These three factors will contribute to further widening our competitive position over the long run. I'd like to now hand it over to Maria, who will walk you through how everything I've just outlined for you translate in terms of our financial outlook for 2024.\nMaria Oldham\n Thank you, Pedro. Good morning, everyone. I would like to share our expectations for the full year 2024. We are adding TPV expectations this year as we believe this is the most relevant operational metric for our company. It is the cleanest indicator of market share. As we mentioned earlier, ultimately, our merchants chooses us by routing more and more volumes through our systems, than other alternatives they may have. We are guiding for TPV growth of 40% to 50%, surpassing $26 billion of TPV at the midpoint. As we currently see things, incremental volume growth will be back ended in the year, starting off at a similar level to how we exited 2023 and picking up pace as the year progresses, given our growth in a highly seasonal e-commerce vertical and how we currently see our late-stage pipeline panning out. This strong TPV growth will be driven mainly by increased share of wallet from existing merchants and continued scaling of Tier 0 margins. We continue to benefit from structural tailwinds associated with digital economy and the growth of the middle-class in emerging markets. Africa and Asia are expected to grow at a faster pace, signalling the long-term potential for global growth. Verticals is most expected growth are e-commerce, advertising and ride-hailing. As we always emphasize, our main financial focus is on maximizing absolute dollar gross profit growth. Thus, we decided to guide for gross profit instead of revenue as we believe this metric better reflects how we run our business. We see gross profit for 2024 between $320 million and $360 million. Our gross profit range assumes, first, increased mix coming from Tier 0 margins as we continue to ramp up those global relationships, drive incremental TPV and wallet share from the world's leading tech companies, but at lower take rates. Second, sustained growth in our local to local business. We see this as a validation of our [concentration] approach to payments, and proves that we are competitive versus local acquirers. Third, normalization or tightening of FX spreads in certain lower currency rate markets such as Argentina and Egypt that generated the windfall benefits in 2023. Despite the tightening of FX spreads being a headwind for our plan in 2024. It also represents a more sustainable and lower risk gross profit profile. And four, mix of growth shifting to less mature markets where we haven't scaled yet. Final guidance is on adjusted EBITDA, we are committed to running a financial model that combines robust midterm gross profit growth with EBITDA margin that is among the best in our concept. This is our model of highly profitable growth. As such, we are reaffirming our midterm guidance of 25% to 35% gross profit growth, 75% adjusted EBITDA to gross profit margin. The trajectory towards that midterm guidance comes in for 2024 at around 70% adjusted EBITDA to gross profit. This is an adjusted EBITDA of $220 million to $260 million. We foresee OpEx increasing around 45% year on year. When compared to Q4 run rate, OpEx growth will be around 25%, despite a two times growth rate expected for TPV in 2024. Confirming the operational leverage acquisition in our business model and indicating that much of the incremental OpEx spends necessary for the long-term growth has already been incurred during H2 2023. This growth in year-on-year OpEx will be driven primarily by tech investments as we aim to grow our talent pool by around 50%. Other main areas of OpEx growth will include sales and operations. As our short-term guidance indicates we are investing in discipline. So as not to deviate significantly from our midterm margin guidance. And by reiterating our midterm outlook as we look beyond 2024, we are signalling that once we conclude our short-term investment cycle in tools, processes and people to secure our ability to scale the company for long-term growth. We believe we will start to see the operational leverage inherent to our business model kick in even more clearly. As mentioned in the opening remarks, that kind of scaling is what generates the cash flow that drives shareholder value creation over time. The clear potential of the local becomes obvious if one compounds our growth in line with our midterm target over a multiyear period. Let me now hand it over to Seba.\nSebastian Kanovich\n In a carefully planned transition that unfolded since August, Pedro is set to take on the role of sole CEO. My commitment to the local remains strong, and I will actively lead the newly established commercial and M&A committee as part of the company's Board of Directors. Over the past few months, Pedro and I have not only work together but learn from each other, capitalizing on our complementary skills to enhance the Company's performance, especially in navigating intricate situations. As we progress through the next phase of our transition plan, emphasizing efficiency in daily decision making, we are confident that Pedro is the ideal person to oversee Dlocal's day-to-day operations. His instrumental role in scaling one of the most successful emerging market technology companies speaks volumes about its capabilities. Pedro's focus will be on the ongoing mission of company building, while my attention turns towards identifying pivotal growth opportunities for Dlocal in the future. Now I'll hand it back to Sergio to unveil further details of our upcoming managemental changes.\nSergio Fogel\n Hi, everyone. Thank you, Seba, for sharing this news with us. On behalf of Dlocal's Board of Directors and the shareholders, I want to express our deep gratitude for your significant contributions to our company since inception. Working with you has been and will continue to be an absolute pleasure. Witnessing your journey, steering the local from its humble beginnings to a thriving start-up in Latin America and now to a global powerhouse fills me with pride. As we move forward, we anticipate a shift in the leadership style needed by the company according to the various stages in its evolution. The challenges of 2023 prompted a dispensing approach leading to operational consolidation. With these changes now on track, we are transitioning to an offensive strategy. Our focus is on reaccelerating our long-term growth prospects through a combination of innovation with new product launches, expanded coverage in high-potential verticals and growing our commercial team to ensure it is fit for purpose and when the right opportunities arise in organic growth through M&A Sebastian's pivotal role in leading the newly constituted commercial business development and M&A committee will be instrumental in executing this more assertive strategy, year towards long-term value creation for our shareholders. In my capacity as founder, principal shareholder and active manager, it's immensely gratifying to observe Pedro, Seba and the Board collaborating to navigate this transition seamlessly. Our unwavering objective remains to preserve the core values and the capabilities that fuelled our growth while embracing new opportunities as we scale into a much larger organization that can best serve our merchants throughout emerging markets. We firmly believe in this strategy, as proof of this during 2023, as the main shareholders of the company. We have bought back $160 million worth of the local shares, showing our confidence in the long-term success of the business. In many ways, I see myself as a good story of our company's legacy and culture. Stealing the course to maintain continuity while also bridging the path towards essential changes that will secure our future success. With this, let me hand it over back to Pedro.\nPedro Arnt\n Thanks, Sergio. As we reconfigure these leadership structures, I'm also very pleased to announce the newest addition to the team. Mark Ortiz will be joining the Company as Chief Financial Officer, starting his role in April. As we continue our upward trajectory, we sought a robust financial leader capable of guiding us through the next phase of our growth. Mark brings a wealth of experience in that sense, boasting over 30 years of senior financial leadership, primarily at GE Capital, where he held roles as global FP&A leader and Global Controller across multiple departments. Mark's extensive background includes not only key financial expertise that's fit to our current requirements, but also working assignments across over 20 markets, making him well suited for the global complexity that our company presents. I trust Mark is the optimal CFO's choice to propel us to the next level of growth and reinforce our standing as our front runner in payment solutions for emerging markets. I hope everyone has a chance to meet Mark over the coming years and share the same enthusiasm we have with his arrival. I also wanted to make sure we all extend our gratitude to Diego Cabrera Canay for his invaluable contributions to Dlocal. Diego played a pivotal role in establishing numerous finance functions at the Company, prepped it for substantial international expansion and growth, and guided the company through its public listing process. Over the last three and a half years, Diego has been a steward of a business that has grown 10 times in TPV, opened over 20 country operations and multiplied its market cap by four times. We wish Diego the best. In summary, I'd like to thank our global team, our valued customers and our investors for all their continued support. And before we head back to your questions, I'd like to wrap up today's prepared remarks with one last thought. 2023 was a watershed year for Dlocal. Despite facing significant market tests and macro challenges, we believe we've demonstrated the resilience of both our value proposition to our merchants and also of our business model, persistently growing and thriving through turbulent times. We believe we emerge strengthened and focused on tapping into the immense business opportunity ahead of us. We're committed to realizing the long term curve penny purpose of unlocking the potential of emerging markets. What we mean by this is building a bridge between the growing base of billions of consumers in the global sell and the products and services they demand, but that until very recently were exclusive to the minority of consumers who had access to payment mechanisms from developed markets. And as we accomplish this mission of closing the digital divide for emerging market consumers, we're also tapping into an incredibly attractive long-term market opportunity that is the one that underlies the investment thesis in Dlocal. I look forward to giving you updates on our progress along this journey as the quarters evolve. And with that, we can take your questions.\nQuestion and Answer Session\nOperator\n Thank you. (Operator instructions) Tito Labarta, Goldman Sachs.\nTito Labarta\n Hi. Good morning, everyone, thank you for the call and taking my questions. A couple of questions, I guess if I can. Maybe to start with Argentina, just given all the moving parts there, just to clarify from the comments from -- I think you mentioned that there was more local to local transactions now, is that mean that your existing merchants, are they getting a local subsidiary and then are able to interact locally or are they being as they are and not being able to do cross-border keeping money in the country? Just to understand some of the mechanics given the issue there. And then would you expect this to sort of normalize in 1Q already or would it take longer to normalize? And somewhat related to that, just on the gross profit guidance of $320 million to $360 million, what does that imply for Argentina, does that mean if Argentina sort of remains as it is -- you're sort of at the midpoint of that guidance. Do you expect Argentina to improve deliver either at the higher and the refinery, we are in a good course at the lower end. And then my second question, I guess is more on Nigeria and Egypt. Could you also see big devaluations there in the first quarter of this year and we did see a big growth in both Nigeria and other Asia and Africa, if you can help us understand what the potential impact of those devaluation should be, I guess in 1Q and how that may have been reflected in the guidance? Thank you.\nPedro Arnt\n Thanks, Tito. So lots of moving pieces. Let me walk down the questions. So the increase in local to local settlements in Argentina, is not a change in how our merchants are set up, but rather as volatility increased and more importantly capital controls tightened even further leading into the election, many merchants started to opt for local settlement. We don't necessarily think that's a structural change. We see that eventually as capital controls are lifted, there is an opportunity to regain those flows into cross-border, but that will take continued normalization in Argentina, which we believe will have a midterm not happening short term. Our guidance for the year when we compare it to the 2023 comps does assume Argentina structurally, although potentially has an opening of capital controls will also have tighter spreads on FX as the government has signalled an intent to move towards a single exchange rate. So we do build into our 2024 guidance, lower gross profit from Argentina when compared to 2023 on a margin perspective. What we need to see is does macro improve enough so that towards the end of the year, volumes pick up significantly. Or is that more of a mid-term trend. We do believe that long term, that market continues to be an important and attractive market for us. Egypt, I would say has similar dynamics. Egypt, as we've seen in Q1, the devaluation and that's made for tighter spreads on repatriation and cross-border flows. Potentially it starts signalling greater liquidity in the market for FX, but at a lower margin profile than what we had up until now. And just to give you an order of magnitude, Egypt full year represented roughly less than 10% of our business, but growing towards the back half of the year, given that spreads were widening and now with the tightening of spreads on FX for 2024, we also assume that Egypt becomes a bit of a headwind short term for us, so into 2024. Nigeria as somewhat of a different situation. I think as we've said consistently, the revenue fluctuations in Nigeria don't really flow through gross profit as much. So gross profit in Nigeria for the quarter was roughly in line with what it was for Q3, very, very slightly down despite the big increase in revenues. And so the guidance for Nigeria is that in terms of trajectory, we hope to continue to see TPV growth there generally at similar margin levels than what we had in 2023.\nTito Labarta\n Great. That's helpful. Very clear, Pedro. Maybe just a follow-up, if I can. On -- back on Argentina, just to make sure I understood correctly, see that merchants are opting for local settlement, that means that they're basically keeping money in Argentina, and I guess they're not bringing that -- I'm just trying to think how that necessarily impact their business. But I guess the assumption would be as things normalize, they would eventually expatriate that money back to their home country. And then could you get some additional revenues as that happened, just to make sure I understood that correctly.\nPedro Arnt\n That's correct. So we have two flavours of settlement. We can settle locally and therefore, we don't have an FX component to our fee or the core of our business, roughly half of the volume we can settle for merchants internationally and then there's an additional fee for the repatriation service. What we've seen in Q4, and you see that in the disclosures is that the mix has shifted more towards local to local, and that's been particularly the case in Argentina as capital controls tightened towards the end of the year.\nSergio Fogel\n Okay, that's clear. Thanks a lot Pedro. Appreciate the response.\nOperator\n Jason Kupferberg, Bank of America.\n Hey this is (Inaudible) on for Jason. In your prepared remarks, you mentioned making investments in hiring and upgrading office capabilities in '23. Can you give us an idea of the cadence of these investments throughout the year? Will they be sort of like spread evenly or front or back-end loaded? Any details there would be helpful.\nPedro Arnt\n Two quick thoughts there. The first one, as you can see from the margin structure, the adjusted EBITDA, the gross profit margin in the '24 guidance at the midpoint, we are leaning into the business to build the right foundations, but we're doing so in a very, very disciplined manner. So even in this year where we're not delivering operational leverage, we're still coming in at what would be best-in-class adjusted EBITDA to gross profit margin at around 70%. I think that's important to stress. The cadence of incremental investment, if we look at the Q4 run rate is really not significantly increased into 2024, which should be one of the heavier years in terms of investment. And we continue to be optimistic about the mid-term operational leverage and even more so the long-term operational leverage of our financial model, as is the case with most payments companies. And therefore, we've reiterated the midterm guidance. The cadence of that could potentially be slightly skewed towards the first half of the year. But since the biggest areas of incremental investment, as we said, is engineering talent. And that's also one of the reasons why we're optimistic about mid-term operational leverage, is a lot of what we're doing is building capabilities to be able to automate more to be more efficient. Dlocal will continue to want to run as a lean organization where we automate as much as we can. But so if we're able to hire more of those engineers in the first half of the year, excellent, that might lean, it might skew the investments to H1. But we want to make sure we're hiring the right people. So that could end up being evenly distributed throughout the year, depending on the pace of hiring.\n Okay. Cool. Thanks.\nOperator\n Neha Agarwal, HSBC.\nNeha Agarwal\n Hi. Thank you for taking my question. Just a quick one in terms of volume growth, are you seeing a pickup or slowdown from your key merchandising changes in terms of which verticals are more important or less important, anything to highlight in terms of volume growth? And then second question is again on Argentina, should we expect Argentina, Nigeria -- Nigeria, you mentioned could be a bit of a headwind, but what other distortions can we expect a decent first half of this year from countries like Argentina, Nigeria and any specific colour would be veery helpful. Thank you very much.\nPedro Arnt\n Hi Neha. Thanks. So in terms of verticals, if you look at the disclosures, we continues to see incredible strength in e-commerce, that was nearly 200% year-on-year growth as a vertical and then continued strength across many of the other verticals, financial services, ride-hailing. We saw, I would say, less relevant growth in the high 20s or low 20s across on-demand delivery and advertising, some of that driven by the Argentina situation and some of that more globally. But in general, I would say there hasn't been a significant change in verticals with the exception that e-commerce continues to gain mix. We are a particularly well-suited service provider and solution for many of the global e-commerce players as they globalize more and more. So we're seeing some really interesting gains in new markets that we are offering to some of the largest global e-commerce players. On Argentina, Nigeria and Egypt, just to be clear, again, on what I said before, what we've built into the guidance is we expect for Argentina and Egypt, a certain level of margin headwinds when we think of gross profit margin in those markets as exchange rates spreads have tightened. And so that is built in to '24, the tougher comps from '23 in those two markets that had high margins on wide FX spreads, especially in Q2 and Q3. Nigeria, I said, is a different situation where at the revenue level, we do see oscillations because of fluctuations between the official and the market exchange rate, but it's much more neutral at the gross profit level. And so Nigeria, we see a similar gross profit margin for the 2024 guidance.\nNeha Agarwal\n Perfect. Super clear Pedro. One last one, I know this year, the focus is more on setting up the organization and investing a bit more on setting up the company, but any plans in terms of revenue diversification? You talked about additional services like (Inaudible) is any of new services on your mind that we would expect during this year or next year? Thank you so much.\nPedro Arnt\n So as Sergio mentioned in his remarks, our strategy is one of being innovative in launching new products into the market and also pursuing new verticals. We've had tremendous recent success with the marketplace product, and we hope to continue to see that in 2024, we've launched an invoice product, which is aimed at corporate treasuries and accounts receivables that we'd like to push and see that grow. And then there are a few new verticals that we're beginning to plant the seeds for, and we'll need to see how those play out, as you know, in our business, there are sometimes long lead times in terms of moving into a new vertical and then those ramp-ups really kick in. So if anything, those are expected more towards the back end of '24 and then potentially into '25.\nOperator\n Jamie Friedman, Susquehanna International Group.\nJamie Friedman\n Hi, guys. Thank you for taking my questions. I like the new format of the presentation by the way I just want to mention, but I wanted to ask about the revenue growth from new merchants up 68.6%, which accelerated from the third quarter. Can you help unpack that? Is that from the new merchants that you had alluded to earlier in the year or if you could share a framework about how to think about new framework by new merchant contribution, it would be helpful. Still there Pedro?\nPedro Arnt\n We're here. We're just making sure we get our numbers right.\nJamie Friedman\n Okay. Just wanted to make sure you guys didn't get disconnected.\nPedro Arnt\n Yeah. No, we're here. So Jamie, thanks for the comments on the presentation. I'll give you directional, so and when I look at the new merchant growth, there's a combination of some of the well-known large global brands, particularly some out of Asia that have been relying on us for their expansion mainly into Latin America, but we continue to increase set of new geographies with them. You see that when you look at the e-commerce vertical, the growth there, we've had some ramp up from another very large global merchant in Chile. That's also adding to that. And then the rest is fairly distributed among some smaller Tier two merchants that we've onboarded and whose ramp up has been quicker sometimes also because they typically exclusively used to us for their international expansion.\nJamie Friedman\n Okay. And maybe just as a follow-up to that same direction, I should know this, but can you remind us how much of the TPV or revenue come from the installed base each year? If that's an obvious question, I apologize. But if not, is there a way to think about that?\nPedro Arnt\n Jamie, I think Maria or Diego or Seba can take that one. Just one more clarification on your previous question, also some of those Tier two merchants have an overlay from Nigeria. We've seen the big revenue jump in Nigeria because of the exchange issue, so that also drives some of the new merchant volume growth. I'd say the large global merchants in Latin America. That's long term, sustainable and very healthy. The Nigeria piece, as you know, is somewhat more volatile and less impactful at a gross profit level. And I'll hand it over to the team for the question on recurring revenue versus new merchant revenue.\nMaria Oldham\n Sure. In terms of our business trends, one of those is [our NRR]. So we continue to post 149% NRR for Q4 at 150% for the year, which shows that we continue to grow our existing merchant base. We are still in mid low 10s on the market wallet share, post so they are very high potential still from our existing base. We'll continue to work on our pipeline with very strong names coming in, in Q4, you saw $12 million of revenues coming from new merchant cohorts, and this is pretty much in line with the pricing up the cohorts.\nJamie Friedman\n Great Thank you, Maria. Thank you, Pedro.\nOperator\n [Matt Coad, Autonomous Research].\nMatt Coad\n I think that was for me. The [Matt Coad] from Autonomous Research. Guys your language, I feel like changed a little bit in terms of potential M&A. Just wanted to ask a question about that. Just if you could double-click on kind of like what assets -- what type of assets would you treat.\nSebastian Kanovich\n Matt, Sebastian here. Thanks for the question come. We've stayed very consistent over the years about our intention to potentially do M&A. We've been extremely conservative around us, particularly because we really like our Company on organic growth story, we'll continue to look at three potential vectors. One is a commercial distribution. The other one is product innovation and the third one geographic footprint. Ideally, we'll combine all three of those. We've done only one deal in our history, which was in our view, an absolute home run back in 2021. But at the same time, we'll always benchmark any potential M&A against our own company-owned it would we could potentially do buying back our own shares. So when we yes, are we bullish as a company, we always make sure to benchmark those again, against the local competition, M&A target. We have a big pipeline of opportunity and we continue to engage with multiple targets, there's nothing imminent today, but it's definitely a vector that we're going to continue to explore. We believe there's going to be consolidation in this space and we believe that the local is very well positioned to be a consolidator.\nMatt Coad\n Super helpful Seba. Thank you. And then just as my follow-up guys, the short term investment cycle that you guys have touched on so far today, just kind of wanted to unpack that a little bit more and just -- it makes sense to us right like there's a lot of reinvestment that needs to occur to run a complicated cross-border payment system. Could you unpack a little bit like of why that's occurring today and why it hasn't occurred over time? And kind of just reinforce why you think this is kind of a onetime investment cycle rather than just natural reinvestment that needs to occur consistently over time.\nPedro Arnt\n Sure. And let me start by the back question. There is an element of playing catch-up. Let me give some more granularity when we look at 2024 guidance and where we're increasing our investments. The greatest area of incremental spend is on the engineering talent pool. We were striving to grow that talent pool by between 50% and 75%, and that's by far the largest increase in expense. The second area is in operations as we begin to consolidate our position across these 40 plus markets. We continue to add more processing partners, more relationship with issuers, more relationships with the local payments' ecosystem, and that requires a level of increase on feet in the ground to build increasingly more robust operational capabilities in many markets where initially we launch with the bare minimum necessary to serve our merchants. And then we add more and more capabilities in those markets. So I think part of the pickup in spend is just the natural tendency to go deeper in markets. But then that has sort of a flattening out. I think we've said we don't necessarily aspire to cover 80 markets, our footprint will grow if our merchants ask for more markets, but we believe we have a good grasp on most of the attractive emerging markets and so you go a bit deeper, but there is a point where you already feel you have very robust capabilities, and the investment cycle flattens out a little bit. And the same goes for IT. I mean, clearly, we're not going to be growing our engineering talent pool at those levels consistently over a multiyear process because that's simply not efficient. We do think there's a bit of catching up to do. And we also think that with this leaning into the engineering talent, short term, it also allows us to be much more efficient on the back end of that because we're able to automate more and more functions that otherwise would require increases in headcount or third-party services. Hence, we believe that there's this cadence of specific -- (Technical Difficulty) When we look at our late-stage pipeline, if we execute well on what looks like a promising late-stage pipeline, our expectation is that the business begins to pick up as we move forward towards the end of the year. Again, that's predicated on continued successful execution, but to the best of our knowledge today that's what's built into the guidance.\nMatt Coad\n All right. Thank you. I just had one follow up, given that I think we only have, like, you know, 10 or 12 more days left in Q1, you've seen a lot of the quarter already. Do you have any idea early comments you could say about anything that you may have seen in January, February or what we've seen of March so far regarding any early indicators and just any thoughts you have Q1\nPedro Arnt\n I think we should follow the protocol and we'll comment on Q1 when we come out with the complete information and communication to the market. So we'll be more than glad to give you guys as much detail as is necessary when we announce Q1, I think in terms of the general cadence built into the guidance, which was your previous question, we've given you as much directional understanding of what the guidance implies as makes sense at this point.\nMatt Coad\n All right. Thanks, Pedro.\nOperator\n Ashwin Shirvaikar, Citi.\nAshwin Shirvaikar\n Thank you. I appreciate all the detail and colour on the call, Pedro, a question for you. As I sort of look at the stock over time. One of the repeat issues for the stock has been just dearly definition of where you focus, which is emerging markets, which implies, narrow situations, volatility, influence of regulation by country so on. So is there anything you think you could do from a organizational design or risk management perspective, and I know it may already be in progress, but just want to figure out what you can do to and avoid sort of the quarter to quarter volatility by country that has played the stock for many quarters in a row now.\nPedro Arnt\n Yeah, I wish I had a better answer for you. But the reality is that we operate in volatile parts of the world. The answer to that is scale, as our business continues to grow, as our TPV continues to come from an increasing number of markets and increasing number of merchants, in general that diversification ideally, we'll generate less lumpiness in the business as it scales out. That's both from an exposure to a market, but also exposure to merchant. We still have a higher level of concentration in the top merchants and is ideal. And then we strive to have if we look forward to three, five years. So the best answer I can give you is, this is a lumpy business driven by the complexity of the markets where we operate and the fact that our merchants sometimes take long to ramp up and then when they begin to ramp up, ramp up very aggressively as we saw in the fourth quarter, where concentration actually increased driven by two merchants that have given us incremental share and have grown volumes significantly. So the solve here is not a short term solve. It is what it is. And the solve this simply size, scale and diversification ideally generates more predictable revenue streams going forward. Also focus on gross profit, that is a metric that although it's also characterized by the volatility, typical of emerging markets is less volatile than the revenue metric and hence why we've been giving increased importance to that one.\nAshwin Shirvaikar\n Okay. Now that makes a ton of sense. I guess the second question is just with the with regards to all the changes that have been going on at Dlocal, as you've been having conversations with your clients, do they care about all the internal changes going on? Or is it more or less that they need these capabilities in emerging markets? The list of companies that provide services across multiple markets is a short list. And so the TPV growth should continue at a healthy level.\nSebastian Kanovich\n Hi, Ashwin. How are you? Seba here. Thanks for the question. So Ashwin, the way merchants, bulge, if you will, it's worth some to still on because that's what they get to the set of revenue, gross profit EBITDA. So it's more on our own efficiency. And if anything, we've seen that merchants not only continue to both for Dlocal, but they do so at the scale that we've never seen before. And that last year we grew our volumes and more than 50%. You see quarter-over-quarter growth. I think that's a testament of how valuable what we are doing if Merchants derive a lot of value from our offering and we continue to be extremely differentiated. And if you ask me that probably what makes you the most bullish. We've been through a lot last year and the fact that we haven't lost any customer, but not only that -- as we have been able to grow as much as we did. I think it's a testament of how unique our positioning it. Merchants want Dlocal to be a living creature. And we've always been a living creature where we're always iterating and trying to become a better company. We will continue to do so. And I think if there's anything that our customers value is the fact that we are very innovative, we move fast, we will continue to do so and will intend to continue to do so. We are very, very optimistic for what we see in 2023 and what we are seeing and for the future.\nAshwin Shirvaikar\n Thank you.\nOperator\n Kaio Prato, UBS.\nKaio Prato\n Hello, everyone. Good morning. Thanks for the opportunity. I have two on my side, please. First is a quick follow-up on Argentina, please. You mentioned in your first answer that believe that merchants will probably come back, it's quite for operations. But just to understand here what makes you comfortable with that? Like in other words, why do think it would make sense for merchants to opt for cross border again to today, you have probably worked with other options. So just like to understand if you're already seeing increasing demand for cross border again at this point and then I will come back to the second thing.\nPedro Arnt\n Okay. So our indication was not that merchants are doing cross-border through other options. Merchants with stricter capital controls were settling locally. So as to not leave funds with their processor, namely us but have the funds themselves. The ultimate objective of these merchants is to repatriate those funds. Many times the alternative to local payment methods like the ones we offer is simply international processing, which is more expensive, has lower performance and also locks out millions of consumers. So just if we look at the underlying dynamics of payments, and that's why we exist and why we add so much value to our merchants, the cross-border option many times is a better solution for them than local to local. At the end of the day, we need to serve our merchants, which whatever is best for them. We don't decide if it's local to local or cross-border. We've seen really good growth in our local to local business which is something that was doubted of us and we've delivered consistently. So we'll see what happens. But the conversations with merchants and the underlying logic is that eventually as capital controls are lifted cross border will pick up again. And we do have access in Argentina for a series of verticals to do cross-border repatriation already. So we're beginning to see increased liquidity, and we're beginning to see that market open. And therefore, short term, we don't see any dramatic change in what we saw in Q4. But more midterm, we do believe that cross-border can pick up again.\nKaio Prato\n Okay, good. This is very clear. Thank you, Pedro. And the second one is regarding to your latter that you mentioned that about the license portfolio, I just would like to understand if you could give us an example of license that you are in to pursue this year and what benefits could that bring to the company, just wondering if you are thinking about the process in Brazil at this point. Thank you.\nPedro Arnt\n Okay. I believe our license portfolio in Brazil is already complete for what we have applied to in terms of short and mid-term plans. It's one of the markets where we have multiple licenses. When I look globally, we have many, many licenses in the pipeline, both at an emerging market level and also at an OpCo level, the licenses for us; A, enable us to integrate more vertically. So many times, we don't have to rely on licensed partners. If we have the license ourselves, which allows us to offer better solutions. In some cases, the licenses allow us to move into verticals or flows that we can't pursue without the license. And equally important, the license, I think is brings us under regulatory oversight and gives our merchants an added sense of comfort with the operation. So because of that, there is, as we've said, a fairly large pipeline of licenses and registries that we've applied for, we've continued to be granted some of those in Q1. We'll give detail when we announce Q1, and that should continue to be that trend going forward. We actually see a robust License portfolio across complex emerging markets as a potential competitive advantage when we think of Dlocal long term.\nKaio Prato\n Okay, great. Thank you very much.\nOperator\n And I'm not showing any further questions at this time. I'd like to turn the call back over to the Company for any closing remarks.\nPedro Arnt\n Thanks, everyone, for the questions. A lot of information we've sent your way. I hope the increased disclosures are helpful, and we look forward to updating you on our Q1 results in the coming months. Thank you very much.\nOperator\n Ladies and gentlemen, this does conclude today's presentation. 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