dLocal’s volume-led growth: CEO Pedro Arnt on FY 2023 earnings

dLocal’s volume-led growth: CEO Pedro Arnt on FY 2023 earnings

dLocal has ended 2023 with strong earnings Q4 and FY 2023 earnings, particularly on volume growth. Newly appointed CEO Pedro Arnt discusses the company’s performance and strategy for 2024.

Emerging markets-focused dLocal finished FY 2023 with revenue $10m above its previous projections, increasing 55% YoY to $650m overall, and growing 59% YoY in Q4 to reach $188m.

The company also broadened its geographical impact. dLocal’s core markets of Brazil and Mexico saw full-year revenue grow 89% and 72% YoY respectively, with Latin America overall seeing growth of 43%. However, the company also saw outsized growth in other regions, with Nigeria seeing a 149% increase to become dLocal’s third largest single-country market, while Other Africa and Asia saw an increase of 86%.

Despite this, volume was the focus for the payments processor, with total payment volume (TPV) increasing 67% YoY for FY 2023 to reach $17.7bn, $8.7bn of which was cross-border. The company expects this to go significantly further in 2024 and is projecting TPV to grow 40-50% to reach $25bn-27bn.

However, while full-year adjusted EBITDA increased 32% YoY to $202m and Q4 increased 22% YoY, it was down 11% quarter-on-quarter and was at the bottom end of its projected range, resulting in a yearly adjusted EBITDA margin below previous projections.

Earlier this week, the company also exclusively shared in my Forbes column that former Co-CEO Pedro Arnt was taking over as sole CEO. In his first earnings call after the news, he said that the company saw Tier 0 merchants (further explained below) as key to the company’s 2024 growth and that dLocal plans to increase investment in 2024, focusing primarily on technology, as well as operations and sales.

I caught up with Pedro Arnt to find out more about the company’s results, as well as its strategy for the coming year.

Topics covered:

Drivers of dLocal’s 2023 growth

Daniel Webber:

Let’s start with the top line. What’s been driving your growth on revenue or total payment volume?

Pedro Arnt:

Let’s start with total payment volume. At the end of the day – as we always say – that’s how our merchants choose us. Our payment volume is their revenue, so in terms of merchant choice, in terms of market share and share of wallet, TPV really is the best metric.

If we take a step back, dLocal’s CAGR over the last three years is north of 70%. And if you look at just 2023, it’s 67%, so pretty close to the CAGR. That really is an indication of a company that’s still firing on all cylinders. 

If we zoom in even more, and we look at just sequentially the fourth quarter, it was up 11% versus the third quarter. That’s double-digit quarter-on-quarter growth in terms of TPV. 

So in those metrics, the most important long-term metrics that indicate the quality of our service, we feel like we had a very strong fourth quarter.

dLocal domestic volume growth outpaces cross-border
dLocal quarterly domestic and cross-border total payments volume, Q4 21-23

2024 volume projections

Daniel Webber:

You’ve given guidance that you’re looking at 40-50% TPV growth for 2024. What underpins that confidence? 

Pedro Arnt:

Two significant things. First of all, when you look at the growth of our local-to-local business, you see one of the areas that was concerning in the past, which is that as merchants began to set up more and more local presence, they would potentially migrate away from dLocal and choose direct connections with local processors. What we’ve shown is that the orchestration layer we offer is actually very competitive even versus local settlement alternatives. 

So we believe we can continue to gain share even in the large markets where our merchants eventually have more and more local presence. Brazil and Mexico were among the strongest performers in Q4.

The second thing is that we’re beginning to see a lot of interest for the other markets we offer. Africa and Asia continue to grow very, very strongly, more than doubled year-over-year in terms of revenue. And we’re seeing a lot of inbound interest in some newer regions that we’re building out capabilities in, like the Middle East.

Domestic versus cross-border

Daniel Webber:

What’s the use case for domestic versus cross-border, and do all your clients have a mix of both?

Pedro Arnt:

We offer two flavours and our merchants can choose one, both, or a combination, and we have all types of merchants. 

In cross-border, we settle to merchants accounts outside of the market where we’re processing. So in a sense we do local payment methods, alternative payment methods, potentially local credit card acquiring for them, and then we also do the repatriation leg. We make an FX fee on top of that. 

For merchants that either have local operations that might require some working capital or for whatever reason would rather do the FX piece themselves, we can also settle locally for them. 

We’re fine offering both of those. Merchants choose which ones they want, and at times they will move more in one direction or more in the other direction based on general company decisions on how competitive our FX quotes are or other factors.

dLocal sees strong revenue growth but EBITDA margin dips
dLocal yearly revenues and adjusted EBITDA margin, 2019-2023

EBITDA and profitability

Daniel Webber:

You are a profitable cross-border payments company. Can you provide some colour on your EBITDA and profitability?

Pedro Arnt:

In the same way that we considered the top-line performance in Q4 to have been stellar, we are investing more into the business and we also saw a compression in some of the FX fees versus the third quarter. 

Growth, when we look at a gross profit level or adjusted EBITDA level, has still been very solid. So if you look year-over-year, gross profit grew by 37% and EBITDA by 32%. But sequentially it actually came down. It was down 6% in gross profit and 11% in adjusted EBITDA. 

Bear in mind that that entire contraction can be explained by one market, Argentina, where you had significant increase in capital controls in the fourth quarter, which meant that a lot of our volume could not be done cross-border and was therefore done local-to-local, which is at a lower margin. 

If you exclude Argentina, gross profit sequentially was up 7%, which is very healthy.

Africa outpaces LatAm on dLocal revenue growth
dLocal quarterly revenue by region, Q1 22-Q4 23

dLocal’s Tier 0 merchants

Daniel Webber:

You’ve talked about Tier 0 merchants being key to growth for 2024. Take us through what that means and what a Tier 0 Merchant is.

Pedro Arnt:

The Tier 0 Merchants are the very large merchants, so what you would recognise as the most well-known global digital brands: SHEIN, Temu, Meta, Netflix. After you hit a certain volume threshold, you’re considered Tier 0. 

Those are drivers of significant long-term opportunity because their ability to be cross-sold into – given their global reach – is very large, but they also have a general tendency to command lower pricing because of the volumes that they give us globally. 

When we say that the 2024 guidance has an increase in the mix from Tier 0 Merchants, in a way we’re explaining the very aggressive TPV growth that we’re guiding to, but also explaining why you could expect some increased take-rate compression as those merchants are very large in volume, but are able to price take rates lower than a smaller merchant.

dLocal grows profit, but margin down YoY
dLocal quarterly net profit and profit margin, Q1 20-Q4 23

Investment priorities for 2024

Daniel Webber:

What are the areas you would like to focus on from an investment side in 2024?

Pedro Arnt:

The first thing is we’ve been careful to characterise it as a disciplined short-term investment cycle. When you look at the guidance for 2024, adjusted EBITDA to gross profit still comes in at 70%, which is still among best-in-class for our global peers, but it is lower than what we did in 2023 and it’s lower than our mid-term guidance. Hence, it is a year of a pickup in investment. 

We’ve said that it’s primarily in two areas. By far the largest driver of margin compression will be an increase in the number of engineers and product professionals. So we want to be able to widen our throughput capacity in terms of technology, both because it allows us to innovate faster and for more merchants simultaneously.

Remember that we always say that one of our competitive advantages is that we’re not a software factory, clearly. We’re an API and a product company, but we do have a level of tailored solutions given that we work with very large merchants where the economics allow us to do that. 

More engineers is very important and also because we’re investing now so that we can have a more automated company, a more mechanised company, which will allow us to not have to increase headcount in the future. So we continue to be very committed to what’s always been a part of dLocal, which is a very lean organisation where things are done through technology and not by throwing people at problems.

Then the second area of investment, after the growth in the engineering talent pool, is more feet on the ground for operations across these 40 markets.

One of the things that merchants appreciate is that we are their feet on the ground for payments across markets where, quite frankly, they don’t want to have to hire payments teams because it’s frontier and emerging markets. So we see the value of efficiently growing those local operational teams.

Fuelling a strong net revenue retention rate

Daniel Webber:

Your net revenue retention rate has reached 149%, which is an extremely high number relative to your competitors, and you are also retaining very large companies who in other cases sometimes choose to set up their own solutions over time. Why are they opting to stay with you and is there any other colour on net revenue retention?

Pedro Arnt:

First, let me give you the answer to why they would stay with us locally. Remember that most of the markets where we operate have very fragmented payment infrastructures. Look at Brazil. It has Pix, it has digital wallets, it has non-international debit cards, credit cards, cash is still quite prevalent. 

Going local doesn’t just mean signing one agreement with one credit card acquirer and you’re done. Because of the fragmentation, it’s significantly more complex than in developed markets. 

That’s a lot of resources to build out all of those pipes, all of those connections, all of those integrations in markets that, because they’re emerging markets, don’t necessarily justify that, when the local has already spent the last eight years building those pipes and already has them.

The second area is that because we have integrations with so many local processors, many times we’re able to offer better results as a consequence of that orchestration. 

If you’ve integrated with one acquirer who’s your acquirer of choice in that market and for whatever reason maybe you get a denial on a transaction, then you’re done. If you’re going through dLocal, we can try a second acquirer, a third acquirer, a fourth acquirer. 

That orchestration has allowed us to many times prove to our merchants that when you do cost times conversion, you actually end up with better results. Although you are paying an added middleman in that value chain, which is ourselves, we more than make up for it on conversion rate lift, on unified conciliation reporting, on fraud monitoring and other areas. That’s really been the driver behind why even as our merchants start asking for local settlement, they continue to use us.

On retention, I want to share this information that we’ve put together [pictured below]. 

The vertical axis is EBITDA margin, and the horizontal margin is net revenue retention. Typically when you have very low margins, your retention is higher because it’s a cheap product, so to speak. When you have high margins, typically you’ll see greater churn because it’s a more costly product. 

We are this unique combination of high margin, high retention, which is really an outlier, and it goes to speak about how merchants really get locked into what we do. And because we offer services in the emerging world, that you’re typically able to monetise better, it’s higher margin.

dLocal performance vs. peer group on EBITDA margin, NRR
Reproduced from dLocal's own internal graphics

Daniel Webber:

Is there anything else you would like to cover?

Pedro Arnt:

We are very pleased with where we’re at. We are very optimistic about the long-term potential of the business. 

We’re convinced that to capture that long-term potential, leaning into the investments very efficiently as we’ve indicated, will be important. And so we have tremendous conviction in what we’re doing.

Daniel Webber:

Pedro, thank you.

Pedro Arnt:

Thank you.

The information provided in this report is for informational purposes only, and does not constitute an offer or solicitation to sell shares or securities. None of the information presented is intended to form the basis for any investment decision, and no specific recommendations are intended. Accordingly, this work and its contents do not constitute investment advice or counsel or solicitation for investment in any security. This report and its contents should not form the basis of, or be relied on in any connection with, any contract or commitment whatsoever. FXC Group Inc. and subsidiaries including FXC Intelligence Ltd expressly disclaims any and all responsibility for any direct or consequential loss or damage of any kind whatsoever arising directly or indirectly from: (i) reliance on any information contained in this report, (ii) any error, omission or inaccuracy in any such information or (iii) any action resulting there from. This report and the data included in this report may not be used for any commercial purpose, used for comparisons by any business in the money transfer or payments space or distributed or sold to any other third parties without the expressed written permission or license granted directly by FXC Intelligence Ltd.

Read More About

Nuvei goes private: Inside the Advent International deal

April 11th, 2024

Key trends for payment processors in FY 2023: Insights from earnings

March 28th, 2024

How have cross-border payments stocks performed in 2023?

December 8th, 2023

Sign In
Account Registration
By creating an account, you agree to our
Terms and Conditions
Please enter your email address
We'll send you instructions on how to reset your password.