DLocal Limited (DLO) Q2 2021 Earnings Report, Transcript and Summary

Hello, everyone. Welcome to DLocal's Second Quarter 2021 Results Conference Call. This event is being recorded. At this time, all participants are in a listen-only mode. After the DLocal management team concludes their personal remarks, prepared remarks, there will be a question-and-answer session. [Operator Instructions] I'm going to turn the call over to DLocal.

Thanks, operator. Welcome to our first quarterly earnings conference call after our IPO. As a reminder, this event is also being broadcast live via webcast and maybe access through DLocal's website at investor.dlocal.com where the presentation is also available. The replay will be available shortly after the event is concluded. Before proceeding, let me mention that any forward statements included in the presentation or mentioned in this conference call are based on currently available information and DLocal's current assumptions, expectations, and projections about future events. While the company believes that their assumptions, expectations, and projections are reasonable in lieu of 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 on this conference call for a variety of reasons, including those described in the forward-looking statements and Risk Factors sections of DLocal's registration statement on Form F-1 and other filings with the Securities and Exchange Commission, which are available on DLocal's Investor Relations website. Now, I will turn the conference over to Sebastián Kanovich, our Chief Executive Officer. Seba, you may begin your presentation. Sebastián Kanovich: Hello everyone and thanks for joining our second quarter results conference call. Today. I'm joined by Sumita Pandit, our Chief Operating Officer; and Diego Cabrera Canay, our Chief Financial Officer. This is our first earnings call after our IPO on June 3, 2021 and we are excited to present an update on our business and we thank you for your interest in our company. Let's get right into it on Slide 3. We are aware that some of you are joining us to hear our story for the first time. So we are providing a recap of who we are, what are the problems we are addressing for our merchants and what we believe is our addressable market. We will then provide an update on our vectors of future growth followed by a review of our financial performance. We will leave time for a Q&A session at the end. So who are we? DLocal enables global merchants to connect seamlessly with billions of emerging market consumers. Our platform, One dLocal, presents a single API, single integration and single contract solution, global merchant. We are entirely B2B focused and we are proud to count some of the largest global merchants as our customers, such as Microsoft, Rappi, Kuaishou, Mailchimp, Wikimedia, InDriver and Wix. Today, our infrastructure supports our merchants across 30 emerging markets in Latin America, Africa and Asia. Now to the results. The second quarter has been our best quarter ever. Total process volume, TPV, grew 319% year-over-year when compared to the second quarter of 2020, reaching US$1.5 billion during the quarter. Our TPV this quarter represents a milestone for the company as it's the first time we have surpassed US$1 billion in a single quarter. As you may remember, we grew our TPV 139% year-over-year in our first quarter of 2021. So our growth has continued to accelerate both year-over-year as well as quarter-over-quarter. Our revenues in the second quarter of 2021 increased to $59 million, representing 186% year-over-year growth compared to the second quarter of 2020. Our business continues to benefit from cost discipline and efficiency as we continue to maintain our adjusted EBITDA margin along with high growth. Slide 4, let us briefly compare our Q2 2021 performance vis-à-vis Q1 2021 as well as full year 2020. We have improved every financial metric we have discussed with you. Our second quarter revenue of $59 million is 46% quarter-over-quarter growth versus $40 million in Q1. Our Q2 2021 revenue growth of 186% compared to 124% in Q1 and 88% in full year 2020. We have previously highlighted the net retention rate metric as a key KPI [indiscernible], we achieved 196% net revenue retention in Q2 2021 versus an already impressive 186% in Q1 2021 and 159% in full year 2020. Our adjusted EBITDA margin in Q2 2021 remains stable at 44% in comparison with our adjusted EBITDA margin for the first quarter and higher than our Q2 2020 adjusted EBITDA margin of 40%. Merchants and consumers continue to evolve on their behaviors as the pandemic goes through its different stages in the multiple countries that we operate in. We are seeing more utilization, less cost and wider adoption of alternative payment methods. We believe these new consumer behavior changes are here to stay and will continue to have a positive effect on our business. During this quarter, we have seen continued growth in our business from both existing and new merchants using our platform. Our global employee base has continued to thrive and will remain focused on serving our merchants. We have embraced a hybrid model of work, office or home as we continue to be flexible about work our employees choose to work from. This is not new for us. As seen in pre-COVID, we had a flexible approach to physical location, given our global roster of merchants and extensive emerging market network. For example, the three of us on this call today are based in different locations. I'm calling from Israel, while Sumita is in California, and Diego is in Uruguay. We have continued our efforts on the expansion front growing our presence in Africa and Southeast Asia. We have launched four new countries in the first half of this year. We have added 10 plus new merchants in the second quarter of 2021. We continue to benefit from the diversification of our business across verticals, some verticals such as retail, streaming, advertising, so accelerated growth as this has benefited from post-pandemic return to work and the gradual opening of economy. Our margins have remained stable in comparison with our previous quarter, even with continued investment in our infrastructure and people. We have continued to hire and strengthen our employee count in key functions. The headcount in DLocal grew 100% year-over-year. We see tremendous opportunity in the markets, merchants and products that we serve, and we intend to continue to invest in our people, platform and technology as we pursue above of growth. Our disciplined approach to growth and profitability till date has provided us with a unique position. We intend to continue investing in growth and therefore our margins may decrease in the coming quarters. We will maintain our discipline to ensure that every new dollar we brought this will contribute to our margin. Slide 5, what are the problems we are addressing? There are three primary challenges that we are solving for our merchants. First, payment methods are local by nature and very diverse in the 30 countries we serve. On top of that, we are seeing a trend of continued fragmentation as consumers adopt newly available payment methods. Cash methods are getting replaced by digital payment methods offering even more opportunities for consumers to participate in digital online commerce. Merchants are keen to access this rapidly growing end markets without building the payments royalties themselves. Second, achieving healthy conversion rates while keeping fraud under control is a challenge in emerging markets. We deliver high conversion rates and lower friction through automatic validation and dynamic routing transactions to multiple acquirers on payment methods. And third, we may get complex simple for our merchants. For those of you who have traveled to any of the markets we serve, you would know the no two markets in this region are the same. We enable our merchants to keep up with the changing regulatory and tax frameworks in emerging markets. Slide 6, as you may remember, we offer both pay-in and pay-out capabilities to our merchants. A typical fund flow for a pay-in transaction from an emerging market user to a global enterprise merchant requires smart routing payments processing withholding tax collection, FX management and merchant fund settlement. A typical pay-outs fund flow in the opposite direction from a global merchant to an emerging market user, imagine if you will, a ride-hailing company driver or a food delivery worker, requires user payment disbursement income tax management, FX management, payments processing and merchant fund collection. Our platform enables all of this by leveraging our connectivity to 600 plus local payment methods, including cards, bank notes, wallets, and alternative payment methods, as well as local acquirers, banks and nonfinancial institutions. We are not an acquirer ourself and instead connect to multiple acquirers in the local markets where we operate. We have recently launched, issuance-as-a-service to our global merchants. We have launched our first pilot with a merchant and expect this product to be highly complementary to our current product offering. Sumita over to you.

Thanks, Seba. Slide 7. Our business benefits from strong industry tailwinds, such as the increasing globalization of online commerce, the rise of the digital economy along with the rise of digital goods that move even more quickly across borders than physical goods, the aspirational middle class that is expanding and is keen to buy the products and services that users in the Western developed economies have always had access to, purchasing power continues to expand in these countries and there is a trend towards equalization of purchasing power that is driving global consumption trends. Global merchants are meeting their own growth forecast. They have promised their investors by going outside their domestic markets to pursue growth. As a result, traditional borders of commerce continue to blur. We therefore grow organically with our merchants. The complexity of the markets we serve makes our solution powerful. Slide 8. We commissioned a market study by AMI to measure our addressable market in the countries we serve. E-commerce volume, in the countries we serve, was estimated to be $1.2 trillion of which $0.4 trillion is pay-ins and is expected to grow at a 27% annual growth rate. And $0.8 trillion is pay-outs. AMI expects the share of pay-outs to increase versus pay-ins, which implies an even higher percentage growth for pay-outs than 27%. This includes both cross border and local to local e-commerce transactions. This does not include China e-commerce volume because we process minimal volume of payments in China. Also, not all of this volume is comprised of global merchants, however, our TPV at $1.5 billion for the quarter is a very small fraction of the opportunity ahead of us. We grew our TPV at an impressive 219% year-over-year in our second quarter, we grew 159% year-over-year in our first quarter. In the first half of 2021, we achieved US$2.4 billion in TPV, 15% more than what we processed on a 2020 full-year basis. Sebastián Kanovich: We have three primary vectors of growth, commercial efforts, product expansion and geographic expansion. On the commercial effort side, we are focused on three levers, organic growth of our merchants, availability to cross sell through account management and availability to add new clients. On the product front, we continue to enhance our product portfolio with improvements in our features for pay-ins and pay-outs, together with the development and launch of new product lines. On the geographic expansion vector, we are constantly deepening our presence in the countries where we currently operate, together with significant efforts to expand our offering into new countries. As an example of the latter, we have added Vietnam, Malaysia, and Guatemala to our platform in Q2. Our financial results are a reflection of the power of our platform, the operating leverage of our business and the stickiness of our merchant relationship. Our revenue growth plus EBITDA margin, The Rule of 40 as some of you may call this metric, was 129% in 2020, 168% in Q1 2020 and 230% in Q2 2021. We believe that the strong cash flow generation of our business also supports an inorganic strategy that will accelerate our time to market. We plan to pursue inorganic opportunities to accelerate any of our three growth vectors, including commercial efforts, product, or geographic expansion.

Let's double click on these three growth vectors. Slide 10, commercial vector. We saw expansion in our relationships with existing and new merchants. We are actively targeting merchants globally, including in China that are looking to expand outside their local market and expand into Latin America, Africa and Asia. Our net retention rate as shown on this slide is a function of organic growth of our merchants, our increase in share of wallet of our merchants, increase in products per merchant, increase in countries per merchant and increase in payment methods per merchant. We continued to improve our net retention rate 196% in Q2 2021, by improving our commercial efforts with our existing merchants. We calculate an NRR by measuring the dollar revenues from existing merchants we had on our platform on a year-over-year basis. Therefore, a $100 of revenues in Q2 2020 from the same set of merchants became $196 in Q2 2021. This is a key KPI we obsessively measured as it indicates the strength and predictability of our merchant relationships. We've onboarded 10 plus new merchants this quarter, including a merchant that is a U.S. content provider that launched in 13 countries with us change.org, a global short video sharing app and a social network platform that develops a lip-syncing video that launched in four countries with us. Revenues from new clients, was $19 million in Q2 2021, versus $1 million in Q2 2020. Revenues coming from merchants onboarded in the last 12 months are considered under new clients for this KPI. This is a rolling measure for a year-over-year comparison. Slide 11, product vector. Our product innovation journey is never static. Emerging markets are always changing and we believe we need to remain agile as it is our biggest, competitive advantage. In this quarter, we continued to bring enhancements to our pay-in solution with new features, such as the FlexibleScheduler enabling dynamic fund transfer, we improved our TaxManager to allow tax handling my payment methods, both debit or credit, we added new integrations to add redundancy in our card processing in existing markets and we added new payment methods. We also enhanced our pay-out solution, expanding our instancy pay-outs in more countries. We added direct connections with new partners and banks, and we went live with fixed mobile app in Brazil through our own APK. We improved our fraud and data capabilities with new machine learning models tailored for retail and gaming verticals. We added profiling and fingerprinting tools and went live with device ID among other KYC improvements. Our issuance-as-a-service solution enables merchants to create new lines of revenue and easily issue prepaid cards in local currencies to reach millions of consumers in emerging markets. Slide 12, geography vector. We’ve added four countries to our network in the first half of 2021. Our strategy is not to innovate in a vacuum and to the extent possible have a merchant in waiting when we open a new country. This is an example of our disciplined growth strategy. Our expansion strategy is both merchant-led that is we go where our merchants ask us for a solution as well as the local-led that is markets where we know that there will be demand. We are not dependent on any single country for our performance. We also don’t forecast our performance by country. We are solely focused on measuring our performance by our merchants. Slide 13. We see strong growth across verticals with a 319% year-over-year TPV growth as our business benefits from diversification. Our business model is not dependent on the performance and outlook of any single industry vertical. We see continued growth in verticals such as ride healing and travel that started seeing strong return in volumes in the first quarter of 2021. We are also seeing accelerated growth in multiple verticals such as streaming, retail, advertising and financial services. I’m now going to hand it over to Diego to review our financial highlights.

Thanks, Sumita. Let’s start with Slide 15. Since we started our operations five years ago, we have on average almost double our TPV year-after-year. We see an acceleration in our TPV growth with 319% in the second quarter of 2021 compared to 60% in the fiscal year 2020. This growth benefits from specific verticals such as ride hailing and travel that were affected in Q2 2020. We are also seeing tremendous growth in all the other verticals such as streaming, retail, advertising and financial services. Let me highlight that even in Q2 2020 during the heart of the pandemic we had still grown 17% year-over-year. While we expect to see continued strength in our business in the remainder of the year, the percentage growth maybe normalized as the comparable quarters in the second half of 2020 had already seen significant growth. Let’s move to Slide 16. Our revenues in the second quarter of 2021 reached $59 million, 186% year-over-year growth from Q2 2020 and 46% quarter-over-quarter growth from Q1 2021. Our revenue over TPV ratio or take rate was 4.1% in Q2 2021 versus 4.3% in Q1 2021. This is equal to the take rate we had in 2019. This ratio changes based on the underlying business mix. In 2020 pay-in had swung to a larger portion of our overall business resulting in a higher revenue over TPV ratio of 5%. This ratio also decreases as the volumes with some of our largest merchants increase, given that we set price in tiers by volumes in our merchant agreements. Higher volumes with our largest merchants, typically decreases the ratio but it is great for our business as they bring incremental EBITDA. Let’s switch to Slide 17. We are very pleased with our continued improvement in adjusted EBITDA. In Q2 2021 our adjusted EBITDA grew to $25.9 million 213% year-over-year growth and 45% quarter-over-quarter growth. Our adjusted EBITDA margin remains stable at 44% since last quarter and improved 384 basis points year-over-year. We have achieved this while we have continued to invest in our people, platform and technology. We intend to continue investing in growth and therefore our margin may decrease in the coming quarters maintaining our discipline to drive profitable growth with every additional dollar that we process. Cost of services dropped to 2.6% of TPV in the second quarter of 2020 to 1.7% of TPV in the second quarter of 2021, mainly as a result of business mix. Operating expenses grew $11.2 million year-over-year mainly driven by expenses related to the secondary portion of the initial public offering for $3 million, stock-based compensation for $2.1 million and salaries and wages that grew $3.7 million as we double our headcount and brought key talent on board. Let’s continue with Slide 18. Of the 186% year-over-year revenue growth in Q2 2021, $20 million came from existing merchants and $19 million came from new merchants. The comparable numbers for Q1 2021 were $15 million and $7 million respectively. Revenues from existing merchants are those revenues that are driven by merchants that were already processing in the same quarter of last year. And revenues from new merchants are those revenues that are driven by merchants that started operating with us after the same quarter of last year. As mentioned, our net revenue retention rate continues to improve with 196% in the second quarter of 2021 compared to an already outstanding 186% in the first quarter. Switching to Slide 19. When we look at our KPI per merchant we see that they have sequentially continued to improve. The average number of countries per merchant in the second quarter of 2021 reached seven compared to six in the first quarter. Given that we have already built our payments network in 30 countries there is significant capability to continue to bring our merchants to more geographies. And the same applies to the payment methods per merchant we reach 62 compared to 53 in the first quarter, while we offer more than 600 payment methods in the countries that we operate. With that, I will turn it back to Seba to conclude. Sebastián Kanovich: Thanks, Diego. On Slide 20. In conclusion our five strengths are as follow. First, we have a large and expanding addressable emerging market ecosystem. Second, we have a direct integration with some of the largest online merchants in the world. Third, our scalable single API technology infrastructure makes a complex simple for our merchants. Fourth, we are diversified across verticals and clients. And fifth, our rapid growth is combined with our disciplined profitability. And this is just the beginning. We continue to remain focused, humble and agile as we enable our global merchants to connect with billions of emerging market users and execute on our growth strategy. Thank you for joining us today. I will now request the operator to open it up for questions.

[Operator Instructions] Our first question comes from Jorge Kuri with Morgan Stanley. You may proceed with your question.

Hi. Good afternoon, everyone and congrats on the numbers. I have two questions, if I may. The first one is on your new merchant growth of $19 million was pretty spectacular more than 2x what you did the previous quarter. Can you give us a little bit of a sense of who those new merchants are? How big can they be? Could any of them potentially be one of your top 10 merchants? That’s evidently a very large uptake in new merchant growth. So I’m assuming there’s some really large clients there. And then the second question is on your net revenue retention rate of 196% is evidently well ahead of what you did last year, well ahead of the soft guidance you had provided of around 150%, 160%. How do you see this number trending in the second half of this year? Thanks. Sebastián Kanovich: Thanks, Jorge. Thanks for thanks very much for joining us. So on your first question I think that an important clarification to make is that this is a trailing metric. So we are taking into account every customer as new merchants that we’re in there on a year ago. So you'll see that number continues to evolve. Having said that, yes, this was a very strong quarter Sumita talked in her remarks on some of the merchants we've been able to win, including a social network, a U.S. content provider short video sharing app. And for us, Jorge, what we believe it's more important is the trajectory rather than the starting point. Yes, we are extremely excited of these customers we've been able to onboard. By having the ability of onboarding them if they want, then it's where we need to make sure we are continuing, adding value into new geographies, new products and that's where our net revenue retention starts to trigger and starts to compound. So we are definitely excited with the current ones we've been able to onboard, but hopefully we'll be able to see their growth in the next many quarters to come. And your second question around net revenue retention, Sumita you want to take it?

Yes, sure. Yes. Happy to step outside, and Jorge the question, I want make sure that we understand the methodology carefully here. So when we see revenues from new clients and that number was $19 million in second quarter 2021, that number used to be $1 million in second quarter 2020. And the reason you see that increases that's the revenue from any new clients in the last 12 months. And so it could be a client that we added in Q3 of last year or Q4 of last year or Q1 of this year, all of that aggregates into that $19 million number. And that's why in comparison to Q2, that number looks that big $19 million versus $1 million. On your question on the guidance, what I would say is that this has been a fantastic quarter for us. If you look at the year-over-year growth rate numbers, the reason also the percentages are so high is that Q2 2020 was right in the middle of the pandemic. And we are getting the benefit of a slightly lower base last year in the second quarter. I think, as we look out over the next two quarters, we expect our dollar numbers to look good, but I would not predict a percentage growth rates that are similar to what we've been able to achieve in the second quarter, because Q3 and Q4 of last year were stronger quarters than Q2 of last year.

Thanks. Sorry to push backward. But, so again, my first question stands, so what type of merchants are you adding that they're ramping up their revenue so rapidly? And there are bringing such a large amount of new revenues and whether or not this could be much bigger. So like top 10 revenues, we're trying to understand how can your revenues ramp up from here? And I think it would be really helpful if you can help us understand, who are these clients, what are – sort of what they do, how big are they’re even the names would be very useful to try to get a better sense on how revenues can go up from here. Thank you. Sebastián Kanovich: Sure. Okay. So first of all, I think it's worth conceptually discussing who we focused on. We are serving some of the largest companies in the world and many of those names you can – you get to see on our website. Obviously, we would read the state with – we tried to make sure we would discuss together with them. And those are the names that we've been able to disclose out there. But these are companies that have ambitions to operate in more than one country that are some of the world's leader in their respective areas. And we've announced some of those partnerships during not only the last quarter, but during the year. So a lot of those customers are out there. We obviously have expectations for them to become a much, much bigger, as Sumita was touching on the standpoint. Well, we believe our numbers will be very impressive and we are extremely proud of them. We are clearly still a drop in the ocean of the opportunity we have ahead. And we are of the idea that those volumes in emerging markets are going to be driven by the type of burden we serve, which are the largest companies in the world. So that's how we're – that's it, I would love to give you the names, but that's it – I hope some further clarification of who those merchants are.

Thanks. That's fine. Congrats again, great numbers. So all the best, thank you.

Thank you. Our next question comes from Tito Labarta with Goldman Sachs. You may proceed with your question.

Good afternoon, also congratulations on a very strong results. Two questions kind of piggybacking a little bit on Jorge's questions a bit, but first on the growth of new merchants, more given the strong growth at the IPO, you had mentioned you didn't – most of the growth expected to be coming from the existing merchants. So are there more new merchants like going forward from here on out that you can boost that growth from new merchants, more than you initially expected? I guess maybe to rephrase it, post IPO has something changed where you think you can maybe capture more new merchants than before, which should boost that growth. And then the second question also on the net revenue retention rate, I guess, following up on Jorge's question, right? You had guided for that 150% to 160% and you're well above that, I mean, is it looking back, do you think that 150% to 160% was too conservative, can you accelerate even from here, the 196%, I understand you have soft comps last year, but just to get a sense, right, the 196%, well, above that 150%, it looks like there should be upside to that 150% to 160% guidance that you had given at the IPO. Is that fair to assume? Thank you.

I can start with, I can question Tito, which is on your own question on net retention rate, and then let's come back to the new merchant question. On the net retention rate, if we look at our cohorts over a period of time, the reason, we've spoken about the 150% to 160%, by the way, that was also our net retention rate number for our full year 2020, as you may remember when we look at cohorts over a slightly longer period of time, and we look at the trends. We see that the 160% number is actually quite stable. So I think in the medium term, we still think that that is the right net retention rate to consider as those cohorts mature. In the initial years, when we add a merchant our NRR could be really, really high, but it stabilizes as we've discussed with you in the past. So we think that the 150% to 160% are still the right medium term net retention rate. And therefore it's still what we've modeled. In terms of your first part of the question, which was related to your new merchants, we actually think that that number will actually come down because we've added some very large merchants in the last 12 months, as I mentioned, it's the rolling measure. So keep in mind, these are not new merchants we’ve added only in this quarter. These are any merchants that were not in our local business in Q2 of 2020. So it's a rolling measure of any new motions in the last 12 months. And so we've added some merchants in the last 12 months that are contributing to that new client number. We expect that number to come down in the next two quarters as that rolling measure changes. Sebastián Kanovich: These are on – just to compliment on that, sorry, the other driver for new merchant growth is having the ability of having new products, both – sorry, new products on new geography. So you had a question around, are there more customers to be won? And what we expect is that through additional geographies, through additional products, through additional capabilities, on the mid to long term, we'll be able to continue adding merchants, not necessarily at the pace we did this quarter. But yes, we do believe there's plenty of opportunity ahead in terms of new logos to bring into the platform.

Great. Thanks, Seba and Sumita. That's helpful. Maybe one follow-up, then on the net revenue retention rate, again. I understand in the midterm, yes, it should trend lower to the 150, 160. But I guess in the shorter term, it looks like that should be running higher, right? So midterm, and maybe I guess to quantify the midterm is that like in two, three years, and in the shorter term, there seems to be some upside or is the midterm next year, just to try to quantify that in the midterm a little bit. Thank you.

Yes, I think that it's about two years from the start of when a merchant comes on board. So it's a cohort-based measure, Tito, and I think we discussed this with you during IPO as to how those cohorts trend out. We've added some pretty large merchants in the last 12 months. We expect them to stabilize in about 24 months from the beginning of when they come on our platform. So I would say it's in the next 12 to 18 months is where we see the 150% to 160% to be a stable place.

Perfect. That's very helpful. Thank you, Sumita.

Thank you. Our next question comes from Neha Agarwala with HSBC. You may proceed with your question.

Hi, congratulations on the earnings, very strong results. I had a clarification mostly on the revenues and TPV, does that also include the impact of the PrimeiroPay acquisition that you closed in April of this year? I believe some of the new merger revenues might be driven from the acquisition of PrimeiroPay. Is that right to assume?

Yes, this includes PrimeiroPay.

Could you tell us what would the TPV and the revenues look like without PrimeiroPay – without inclusion of PrimeiroPay this quarter?

We – I don't think we're disclosing the information Neha. But I would say that it is – it's not significant enough to make as much of a difference to the numbers. But we are not disclosing the PrimeiroPay numbers separately, because it was an asset deal as you know, we acquired the assets of PrimeiroPay.

Yes.

We will not be breaking out those numbers. But it's not significant enough to be broken out either.

Okay, perfect. And then again, on the operating expenses, this quarter was a bit high because of some extraordinaries. But going forward, should we expect costs to be a bit elevated? As you mentioned, you expect some pressure – you could see some pressure on margins. What is the expectations in terms of costs? Given that revenues are already coming very strong so far, so should we see a pickup in the cost? Do you plan to have stronger geographical expansion in the coming quarters, any color on that?

Hi, Neha. This is Diego. So, if you look at Q2 2021, the main one-off expenses that we have were the IPO expenses for roughly $3 million and some M&A expenses mainly related to PrimeiroPay around $300,000. So everything else is organic and expect to continue a sequential increase going forward as we continue to grow. So you should exclude those numbers and the rest is the trend that to continue going forward.

Okay. And lastly, on the issuer-as-a-service program, you launched a pilot program. How has the response been so far? And when do you think you can formally launch this new service for your clients? Sebastián Kanovich: Neha, hi, and thanks very much for the question. So we've launched a pilot. The product is readily available to our customers who wish to use it. Obviously, we have enterprise merchants. So the sales cycles as you were aware all long. So we see this product the same way as we've seen payouts back in the day, pay-in is highly complementary one with each other. We – going forward, don't intend to break down revenue byproduct, because again, we're always driven by this idea of having more products and more solutions to offer our merchants. The product is readily available for merchants who want to be on-boarded. Having said that, we expect the profit ramp up to take time.

And you separately monetize that. It's not included as the full package. That is a service that merchants can take up on a separate basis, and you can monetize that service. Sebastián Kanovich: Exactly. So, exactly the same way of paying somebody else work where there's a fee for our pay-in transactions. There's a fee for pay-out transaction. There'll be a fee for issuing for our issuing product. So yes, it's going to be a new revenue line if you will from – you'll see it bundled, but it will be a new source of revenue for our product.

Perfect. That's very clear. Thank you so much Seba, Sumita and Diego. Sebastián Kanovich: Thanks, Neha.

Thank you. Our next question comes from Ashwin Shirvaikar with Citi. You may proceed with your questions.

Thank you, and congratulations from me as well. Good quarter. You had mentioned the benefit of ride hailing and travel as your clients recover from the impact of the pandemic. Could you maybe emphasize this or maybe indicate how much more benefit you might get if you just get back to say 2019 levels from purely economic recovery? Sebastián Kanovich: Sure, Ashwin. Hi and thank you very much for the question. Obviously, we are very different business than what we were back in 2019. So that normalization wouldn't make much of a change. We are not dependent on any particular vertical or the industry. We are really well diversified. So yes, we've seen some recovery on the ride hailing and travel space. But we are not counting on any sort of pre-pandemic numbers. We don't forecast that way. We're not counting on that to happen. If it happens, it will be good news for us. But at the end of the day, we like to believe we've been COVID agnostic. Yes, there's been indices that have accelerated. There have been other that have been losers. But we believe in the long run, we are in a very sustainable trajectory, which will have some losers that are going to lag. And therefore, our performance is going to lag together with them. But we are not counting on any bounce back off any of those industries to move the needle for us.

Understood. And then a separate question as you ramp many of these new clients that you're signing including perhaps transition over some of the PrimeiroPay clients. What should we expect with regards to a margin impact from that? Is that what you're indicating when you say that margins maybe a bit softer in the nearer-term quarters?

Yes, I think Ashwin, thanks for the question. I think on the margin question, as you can see, our margins has stayed stable between Q1 and Q2. And we think that we will really look to invest over the next few quarters. And we think that there could be some margin compression from the 44% levels in the coming quarters. And the reason for that is really driven by our expansion plans, our product plans, and I think our commercial efforts. The other thing to also keep in mind is that one of the reasons, I think, Diego mentioned this in his prepared remarks where he walked you through what the revenue over TPV number is. And it's at 4.1% in this quarter. It was 4.3% in Q1. The reason we think that there could be some margin compression as we continue to see tremendous volume growth from our large merchants. And I think we've mentioned this, we have volume peers [ph] in our contracts. So as the dollar volume goes up and the tiers go up, the pricing comes down, which is actually good for our business. We actually liked it because that means that we're going to get more volume. But I think given those two factors, we think that while on a dollar basis, we will continue to grow. From a margin perspective we expect to see some progression in the next few quarters.

What would you be able to size the level to which, I mean, I am here talking low-40s not lower than that?

Yes. I think we are tanking low-40s. I think if you think about the 2020 year numbers, both for net retention and margin, we think that that's a good place for us to plan for.

Great. Very helpful. Thank you. Thank you all.

Thank you, Ashwin.

Thank you. [Operator Instructions] Our next question comes from Soomit Datta with New Street Research. You may proceed with your question.

Hi guys. Thanks very much, and congratulations on very good numbers. Just two quick ones for me please. First of all, just on pay-in and pay-out, which I guess is shaping your take rate to a degree. Are we kind of broadly back to if you like the historic ratios we've seen between pay-in and pay-out. And so can we think about this level as kind of being a little bit more normalized or do you still think post-COVID does a bit of a reset likely to take place? Secondly, just on competition which hasn't been mentioned. Are we seeing anything by way of response from either the incumbents or buying some of the banks or large in anything happening on a competitive front, which is what flagging? And then just final one, please, maybe just looking forward, talk a little bit about card issuance as a service, which sounds pretty interesting. And one of the things I was interested in was prepayment income, which is such a source of revenue and profit across Latin America, in particular. Any thoughts on whether that is a revenue you could try and pursue going forward? Thanks very much. Sebastián Kanovich: Thank you, Sumit. So on the question around the split between paying something else, we've seen those two evolve along the years, and we believe it's going to continue to evolve. We are still in a micro and a macro world. So depending on which customers we are able to more than at what speed, you'll see, pay-in, pay-outs gaining a different share. So I don't think we can point you to any mature stage split between those two, depending on who the merchants are and how probably the use of our platform you'll see that that's really continues to evolve. On the competition question, look we believe for many years in a very competitive space. We believe there's many great companies – many great payments companies, worldwide some of them are public. But we also are of the idea that this opportunity in emerging market is huge. And we also believe we are very well positioned to capture; hopefully a lot of that opportunity and some of the competitive advantage that we build in the, the idea of having the direct connections, the idea of that technology having the deep cultural understanding of the markets, where we operate, we believe are sustainable advantages. So to answer your question, we are counting on competition to be aggressive, but at the same time we are confident of the efforts on the advantages built in into our platform. The fourth – the third question is on prepayment, I'll start there, Sumit are you feel free to compliment. As of now, we don't make revenues from prepayments the way you would see for other companies in particularly in Brazil. Is that an opportunity? Probably, yes. It's not included in any of our internal forecasts. We are more focused today on continue with our geographic roadmap continue with our product roadmap. And if anything, that would be a weak or, or an easy win to pursue further down the line.

Okay. Thanks.

Thank you. Our next question comes from Domingos Falavina with JPMorgan. You may proceed with your question.

Thank you. Hi, good evening, everyone. As the song of repetitive here, congratulations as well; amazing figures. I'm having a little bit, I think, to Jorge's first question. You guys brought in a lot of new clients in and I remember you guys had kind of a funnel that the process is long, like you said, so if you could give anyone, if it's either quantitative or qualitative comments on kind of how this pipeline looks, I can example, you had in the last stage of this fund or like 30 companies have converted 10 of them and maybe you're moving at additional five to this funnel, we just want to kind of grasp or understand a little bit how this pipeline of new clients, how much really how it's evolving? Sebastián Kanovich: Hi, Dom, and thanks for the question. So we've onboard 10 new merchants in the last quarter, but that's probably doesn't tell much of this story. Part of the reason why we've decided to become bilingual and we want it to raise awareness in the market authorities stands to our merchants, and we believe we manage to do so to a certain extent. But that by no means it has an impact on our current quarter. If anything, does will help us drive more leads into that funnel that we were discussing. The other thing is that, that funnel is fed by opportunities that are based on geographies and products. So the more geographies we have, the more products we have, the more we are able to have a conversation with any customer until then we have a have a service to offer you. So we see a pipeline that is extremely healthy, that it's full of opportunities across all different stages. But also if you remember what we discussed at IPO, there's two key funnels for us. It's a new sales funnel. We are going after the new merchants. But at the same time, there's an account management funnel, which is the one that drives the net revenue retention. And that's the one we focus the most, making sure there's more opportunities with each one of these customers that are on-boarded, it’s ever been healthier.

Very clear. And in the new company funnel, like in this last stage, did it grow? Did it shrink? So basically, did you absorb most of the opportunities or are you basically stable as far as the things that you were expecting that same next six months? Sebastián Kanovich: It's very much in line with what we were expecting. Again, enterprise merchants by nature are cyclical. There's going to be times where we were going to have hired new merchants. There's going to be time where we were going to be slower. That's why we care so much, about the account management funds. Having a customer in our world and doing at $1 volume is not much. What we want to know is that those customers continue to grow with us, continue to drive more business, and that's where we are the most focused. Making sure we have enough opportunity with our current merchants in our platform because we know new merchants will come but we also know that our success is going to be tied with us, delivering value to them, and we enable to grow with them as they grow.

Thank you, guys.

Maybe, one of the – sorry one of the points if I may. I would say a big opportunity for us is merchants that want to grow outside their home countries. I think we mentioned that in our prepared remarks, we see that there is tremendous pent up demand from merchants looking to go outside their home countries, including from China. So as we keep highlighting, we don't actually process significant payment volume in China, but we do work with Chinese merchants outside China, and that's also been beneficial to us.

Okay. Thank you again and congrats.

Thank you. I would not like to turn the call back over to Sebastián for any further remarks. Sebastián Kanovich: Thanks everyone for joining today. We are glad, and thanks for your questions. We are happy to spend touch in the future. Thank you very much.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.