Q2 - Earnings Highlights

This is a payments company that facilitates global merchants to receive and make online payments (both cross border as well as locally) in emerging markets across Latin America, Middle east, Africa and Asia. They allow global (merchant) brands like Spotify or Nike to sell products in developing countries - primarily enabling ease of payments (pay in and out) of those countries. Dlocal utilizes a simple API which these global companies utilize to process payments.

Customer profile:

Impressively, at Dlocal’s young stage, it already boasts of large big tech companies such as Microsoft, Amazon, Spotify, Goggle, Netflix, Nike, Expedia and many more. This helps to build strong credibility and is a testament that the company has a truly unique and strong product. The high Net Retention Rate of 198% (which is includes any upsells and cross sells of products, geographies, and payment methods to such merchant customers) and gross churn of over 99% is evidence of the value proposition that the product provides to its customers.

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My thesis and the key competitive advantages for this business include:

  1. Customer profile: Impressively, at Dlocal’s young stage, it already boasts of large big tech companies such as Microsoft, Amazon, Spotify, Goggle, Netflix, Nike, Expedia and many more. This helps to build strong credibility and is a testament that the company has a truly unique and strong product. The high Net Retention Rate of 198% (which is includes any upsells and cross sells of products, geographies, and payment methods to such merchant customers) and gross churn of over 99% is evidence of the value proposition that the product provides to its customers.
  2. International FX & Payments is difficult: Dlocal’s product is solving a challenging problem. Developing a syncronized payment platform between North American (USD) and emerging markets that simplifes currencies, FX, taxes, variety of payment methods in local countries into one-single API is phenonemal. They cover 29+ countries The business handles complexity behind the scences and provides an easy/smooth interface for their clients. However, Dlocal has payment methods for (xx currencies/payment methods). The product value proposition relative to complexity is significantly high as a result, this should support take rates.
  3. Switching costs: The more merchants build and expand on the platform. The more they process large volumes of payments, the harder it becomes to switch away. The companies client base are large enterprise which as a result involves long sales process but builds strong commitment over the long-term. The consistently high net retention rate of >170% on a 3-CAGR is evidence of this stickiness.
  4. Natural Barriers to Entry: The complexity of the business model and low gross margin proflile is a natural deterrent for new entrants into the industry. The barriers come as a result of the interconnected complexities that result from managing a variety of banks and FX partners to process payments. This advantage is best evidenced in their large customer profile and competitive players within the space.
  5. Competitive landscape is niche: Dlocal was one of the first-movers into their particular category of helping US large corps to sell into difficult markets. It is important to acknowledge they face competition from Adyen and Ebanx who are major players within emerging markets. Industry reports show that Adyen and dlocal have similar pricing. However, Dlocal’s Big Tech customer clients is evidence of the niche they have created for themselves.
  6. High Revenue Growth supports product-market fit: The company has consistently maintained a triple digit growth rate on TPV and Revenue growth over the last 4-quarters. They went from 0 in 2016 to $2B in TPV in 2022 and In revenues from $7M in 2019 to $244M within 3-years.
  7. High Operating Margins: Dlocal has EBITDA Margins of 38%. This high operating margin should continue to scale due to the fact the business operates using an Cloud-based API for its partners. The Gross margins (40%) are low primarily because Dlocal utilizes a variety of banks and currency partners to process all their payments on their network.