As you might guess based on the earnings reaction, there wasn’t much to like and a LOT went wrong this quarter for the international payments processor dLocal (Nasdaq: DLO).

Our job — as investment analysts — is to determine whether the hiccups are of the temporary nature or suggestive of business model challenges.

What was okay?

• Total payment volume (TPV) of $5.3 Billion was up 49% year-over-year (YoY) and up 2% quarter-over-quarter (QoQ).
• Free cash flow (FCF) generation during the last twelve months (LTM) was $135 million.
• The company has $320 million in cash & equivalents.
• Management announced a $200 million stock buyback program.

What was bad?

• Gross profit growth slowed to 2% YoY and declined 10% QoQ, indicating margin pressure.
• Net income dropped 50% YoY and 38% QoQ. The large QoQ drop can be attributed to lower gross profits and increased operating expenses, primarily increased salary/wages, office/travel expenses, third party services, tech infra spending.
• New CFO Mark Ortiz described the main areas of expense increases as “tech-related”. Overall, operating expenses represented 57% of gross profit.
• Pricing renegotiation with a large merchant impacted gross margins by 130 bps. However, on a gross profit over TPV basis, the merchant price renegotiation had minimal impact.
• There’s still plenty of concentration risk with top 10 customers accounting for 65% of total revenue. This is particularly important as larger customers attain new tiers and/or come up for contract renewals.

Was the Q1’24 report impacted by “one-offs”?

• Arnt noted that they don’t have other merchants in a similar position yet. He also noted that despite the renegotiation in some markets, this merchant is still paying more than alternatives (because they value the one-platform setup offered by Dlocal).
• Q1’24 also impacted by mix shift towards lower monetizing payout vs pay-in; pay-in impacted as Q1 is seasonality light for e-commerce and advertising. A lot of the seasonality is now pronounced because of the sheer growth in TPV of eCommerce vertical which grew almost 3x YoY.
• Some client launches planned for Q1 were delayed. Some of them have launched in Q2.
• The operating expense bump you could say is also one-off. A lot of tech-related spending, which should beef-up the platform and help bring additional volume.
• Trend wise, CEO Pedro Arnt noted that “With a weak first 2 months of the year totaling $37 million in gross profit, while March gross profit came in at $25 million, which is above Q4 levels.”

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