DLocal Limited Price & Performance (DLO)

Good afternoon, everyone, and thank you for joining the the fourth quarter twenty twenty four earnings call today. Relations website. On the call today, you have Pedro Ant, Chief Executive Officer Marco Reitz, Chief Financial Officer and Mirele Aragao, Head of Investor Relations, A slide presentation has been provided to accompany the prepared remarks. This event is being broadcast live via webcast and both the webcast and presentation may be accessed through delocal's website at investor.delocal.com DLocal. Recordings 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, and delocal's current assumptions, expectations and projections about future events. Whilst the company believes that our assumptions, expectations and projections are reasonable, given currently available information, you are cautioned not to place undue reliance on those looking statements. Actual results may differ materially from those included in delocal presentation or discussed in this conference call for a variety of reasons. Including those described in the forward looking statements and risk factors section of Delocal's filings with the Securities and Exchange Commission. Which are available on Deluxell's Investor Relations website.

I will now turn the conference call over to DLocal DLocal. Thank you.

At d local, we're unlocking the power of emerging market where immense growth potential is just beginning to unfold. The year 2024 has been a testament to the strength and resilience of our business model.

We experienced remarkable growth, Our TPV increased by 45% year over year. Reaching a record of $26,000,000,000 This achievement was driven by strong performance across diverse verticals, countries and products, demonstrating the increased diversification of our business. Besides the remarkable volume growth, we also delivered a gross profit of $295,000,000 and adjusted EBITDA $189,000,000 Despite ongoing investments to support the growth opportunities, our adjusted EBITDA over gross profit margin remained at a solid level of 64%. These numbers are all a testament to the strength of our financial model. Delivering a rare combination of growth, and high margin profitability. As we lay the foundations for scalable and profitable growth over the coming years, our investments over the past year have focused on several key initiatives, These accomplishments would not be possible without our dedicated team, whose local expertise and presence in emerging markets have become essential to our merchants. In 2024, we welcomed 194 new talent. Expanding to ten ninety five team members across 49 countries. A substantial part of this increase came from our technology and product team. Who work intensively to innovate our product portfolio, develop new features to enhance performance for our merchants, and expand payment methods, all while prioritizing cost and operational efficiency.

Both in terms of cost and OPET. During 2024, we launched 20 new payment methods for pay ins and seven for payouts. While adding close to 100 new partner integrations to ensure redundancy, cost efficiency, and unlocking the latest and greatest payment features. We launched and ramped up our new payment orchestration solution for merchants with a fully localized operation. We continue to seek ways to increase transaction approval rates and reduce processing costs First, we enabled network tokenization with seven processors across 10 countries Second, we launched and further improved our smart request functionality. A new AI engine to dynamically adapt the card authorization message to acquirers in order to improve conversion rates. And finally, we developed our new cost optimization engine for our smart router, which has decreased our processing costs while maximizing approval rate We also worked closely together to enhance our customer reducing our customer support response time by 88% within nine months and decreasing issue resolution time by 45% through AI implementation. Moreover, Our suite of products continues to be overhauled from the ground up. Enabling an extensive list of use cases and setups, and we continue to improve our merchant dashboard user experience. The combined efforts across our different teams are reflected in our competitive pricing, optimized conversion rates, and customer experience.

As a result, we strengthen the relationships with our existing merchants. Achieving a TPV retention rate of over 140% in 2024. We expanded our reach by onboarding new merchants to our platform with the 2024 cohort achieving record level of first year TPV and we increased our NPS by eight points compared to the first half of twenty twenty four, reaching high levels within the industry. All this has allowed us to close out the year serving more than 700 merchants across more than 40 markets, As we continue to execute our disciplined approach to expense management, we have delivered considerable efficiencies by a methodical approach to renegotiating with processors and brokers on cost, enhancing hedging strategies to minimize currency losses and reduce costs and optimizing structures and flows for tax efficiency. We have also secured nine new licenses DLocal, enabling us to expand [indiscernible] access new growth opportunities, and connect merchants with emerging markets. As we look back on 2024, we are proud of what we have accomplished. These results highlight our ability to adapt and thrive in a dynamic market, Thanks to our team's dedication to commercial efforts, technological innovation, and execution capabilities. In 2025, we remain committed to delivering growth and value to our stakeholders as we continue to explore the growing total addressable market of cross border payments, driven by shifts towards payment digitalization, the growing importance of emerging and frontier markets, and the surging demand for cross border and instant payment method.

Delocal, unlocking the power of emerging markets.

Thanks, everyone, for joining us today. As we walk through a review of our performance over the past quarter and year, I'd like to get us started with a recap of the investment thesis As the previous video illustrates and as we've repeatedly mentioned, we think of five pillars underpinning that investment thesis. First of all, a massive addressable market given the untapped potential of emerging and frontier markets as they digitize payments and as global merchants go to market throughout the DLocal South. It's worth reminding everyone that 85% of the world's population resides in emerging markets. And that two thirds of global growth by 02/1935 will come from there. Second, consistent high top line growth driven by a proven track record of delivering value to the world's most sophisticated global digital merchants. That has allowed us to capture a market leading share of the expanding TAM I just referred to. Third, attractive margin business with the potential to deliver operational leverage once we've laid the foundational blocks and further scale benefits begin to kick in. Fourth, strong cash financial model as net income which converts well into free cash flow, generates more and more available cash. And finally, a strong innovation pipeline.

We're investing behind our product development capabilities to generate additional growth vectors for DLocal. These growth vectors will come from new categories such as Stablecoins and APMs just to name a few we're already focused on. New products that will be launched this year and in future years and that generate additional mid term revenue streams, constant feature innovations that help us sustain high recurring business from our merchants. And potential M and A activity as we see the cross border fintech space poised for consolidation at attractive valuations going forward. Our fiscal year twenty twenty four results show how that investment thesis remains intact. In terms of market size, with record TPV of $26,000,000,000 accelerating growth to 45% year over year with mix continuing to move to newer more attractive markets while core markets rebounded from Q3 softness. Case in point to all this, TPV retention for 2024 was above 140%. Showing how constantly innovating on behalf of our merchants' businesses Generates high loyalty and recurrence of business. Revenue and gross profit hit record highs as well, at $746,000,000 and $295,000,000 respectively. Adjusted EBITDA to gross profit margins closed out the year at 64% but improved consistently as the year progressed.

And net income to free cash flow of owned funds conversion exited the year at a rate above 100%. These strong 2024 results I've just walked you through should be seen in the context of two things. An admittedly weak first quarter which was then followed by progressively stronger quarter on quarter on quarter performance and the continuation of an investment cycle aimed at achieving greater scalability for our business over the long run. As the annual video just shown highlights, some of these investments and the results that we're starting to collect from them So as we exit the year, with very solid momentum, we're encouraged by having delivered consistent improvement in results since Q1 across key metrics. As I highlight next, as I give you a quick recap of Q4, 'twenty four results. Q4 continued the positive trend from the previous quarter. And despite having a tough comp, in Q4 twenty twenty three, TPV grew by more than 50% year over year during the period. On a quarter over quarter basis, TPV growth accelerated to nearly 20% Q on Q driven by the seasonality of the e commerce vertical and strength in remittances and ride hailing categories. We're convinced that our growth continues to reinforce our position as a trusted partner for global companies seeking to do business across emerging markets.

Our performance came from a well diversified list of countries with notable contributions from Argentina, Egypt and the other Latin American market segment, as well as other Africa and Asia. As a result of our expansion into more frontier markets, we also continue to see solid growth in cross border payment volumes as well as local to local. Moving on to profitability, for the quarter, we reached a record gross profit of $84,000,000 Net take rate was 1.1% reflecting a market dynamic where higher volumes drive lower take rates, Also, an increase in the payout share which is lower take rate and finally, the depreciation of emerging market currencies. To offset this, we continue to drive cost efficiencies through processor and broker renegotiations and improvements to our hedging strategy. We also continue to push into higher take rate markets and verticals which over the long term should partially offset take rate compression. Despite our ongoing step up in invest operational capabilities and license portfolio to support our long term growth ambitions our adjusted EBITDA also hit a new record of $57,000,000 in the quarter at an adjusted EBITDA over gross profit margin, which improved Q on to 68%. Cash generation, another strength of the financial model, was also solid.

As we continue to increase free cash available to deploy behind our capital allocation strategy. This sustained cash generation increases our flex ability when thinking through M and A, buybacks or reinvesting in a disciplined manner back into the business. One important note as I conclude on the advances in our license portfolio. As we've stated, we've continued added licenses and registrations throughout 2024. Counting with nine additional ones This reaffirms our belief that over time, an expanding portfolio of licenses will prove to be a competitive advantage. Most important among these and worth noting is the authorized payment institution license granted to us by The United Kingdom's FCA. The overall growing portfolio will allow us to offer our merchants greater regulatory confidence and more importantly underscores our commitment to compliant practices and coming under regulatory oversight. And now, wrapping up, Q4 marked a successful end to 2024. In terms of consistent TPV growth controlled take rate decline and balancing investment for future growth and free cash profile. The company remains hyper focused on our mission of unlocking the power of emerging markets by continuously building trust with our clients, and strengthening our partner relationships so as to expand digital products and services throughout the global South.

With that, let me hand it over to Mark to take you through a more detailed overview of the results during the quarter. Thank you, Pedro. Good afternoon, everyone.

As Pedro mentioned, our fourth quarter results marked a strong conclusion to the year. Reflecting healthy growth and reinforcing the strength of our business model. We wrap up 2024 on the back of three quarters of progressively stronger results, underpinned by the continued diversification of our business across geographies. Increased global reach is evident in our Q4 results. Brazil and Mexico our two largest markets, experienced sequential reacceleration on TPV growth. But they saw a decline in gross profit. Despite this, our consolidated revenues gross profit and adjusted EBITDA reached record levels driven by growth and strength across our other geographies. As a result, we achieved TPV of $7,700,000,000 up 51% year over year. And 18% quarter over quarter. In constant currency, given general weakness in emerging market currencies, those growth rates are even more impressive. About 30 points higher year over year. From a business line perspective, our cross border flows grew 23% quarter over quarter and 67% year over year. Mainly driven by the commerce, financial services, on demand delivery and SaaS verticals. Our local to local TPV increased by 14% quarter over quarter and 38% year over year. With strong performance in Brazil, Mexico and Argentina. Our Payings business grew 15% quarter over quarter and 44% year over with strong performance in the seasonal commerce category.

As well as rider hailing across various countries. Our payouts business grew 26% quarter over quarter and nearly 70% year over year.

Driven by financial services, Moving on to revenue. We surpassed a milestone of over $200,000,000 in Q4. Representing a 9% year over year growth. This result is driven by Argentina and Egypt, both with revenue growing significantly. Other markets, particularly Colombia and South Africa, with strong growth across commerce, ride hailing and SaaS verticals Mexico, which grew sequentially both annually and quarterly at 144%, respectively. Though at a slower pace to prior quarters. Decelerating due to higher growth of tier zero Merchants, Coupled With A Shift In The Payment Mix. These Positive Year Over Year Results Primarily In Nigeria due to the Nairo devaluation in February of twenty twenty In constant currencies, revenue growth for the period would have been around 40% year over year. We by lower take rates from the ramp up of the standalone payment orchestration option, we launched at the end of Q3.

Which on a positive note allowed for the recovery of volumes in Brazil versus the prior quarter. In addition, Brazil was also impacted by a shift in payment mix. On a quarter over quarter basis, revenue grew 10% driven by the volume increase in Egypt, as well as positive results in other LatAm other African Asia. With notable performance in South Africa, Turkey, Colombia, Ecuador.

Now moving on to gross profit dynamics. During the quarter, gross profit reached a record level of $84,000,000 up 20% year over year. Starting with LatAm, gross profit was $56,000,000 up 3% year over year mainly driven by the volume growth in Argentina, Mexico and other LatAm markets. Which were mostly offset by Brazil, as just explained. And currency devaluations. In Africa and Asia, gross profit posted a stellar growth of 82% year over year driven by our TPV growth in Egypt, TPV ramp up of our commerce merchants in South Africa, and positive performance in other African and Asia markets, [indiscernible] Turkey and Vietnam. [indiscernible] This geographic diversification is core to our strategy as discussed earlier as it allows the company to continue growing at a high pace despite short term headwinds in a few of our countries. On a quarter over quarter basis, gross profit increased by 7%. In LatAm, gross profit increased by 1% quarter over quarter. Driven by Argentina's positive performance This result was offset by drivers in Mexico and Brazil, as explained in the previous section. It is important to note that other LatAm markets that continue to grow TPV were negatively impacted on a quarter over quarter basis the strong growth in Q3 from widening FX spreads.

In certain smaller markets, as disclosed in the previous quarterly results. Which tightened this quarter. In Africa and Asia, gross profit increased by 21% quarter over quarter. With highlights being the positive performance in Egypt, Nigeria and Turkey, categories such as remittances, financial services, ads and streaming. [indiscernible] As Pedro already mentioned, during Q4, we decided to resume the pace of certain investments in building out our capabilities. It is important to reinforce that we are making these investments in core areas to drive efficiency in our business, and ensure future growth while maintaining our lean and disciplined structure.

With this, for Q4, our total operating expenses reached $41,000,000 a 12% increase quarter over quarter and a 44% increase year over On an annual comparison, most of the OpEx growth continues to be mainly allocated to product development, and IT capabilities.

With these expenses increasing by 70% year over year while combined sales and marketing and G and A expenses grew by 29%. We expect this allocation tilt toward product and IT to continue in the future. On a quarterly basis, the tech and development expenses slightly down as increases in headcount We're offset by reductions in other IT expenditures. Combined sales and marketing and G and A expenses grew by 11% driven by our continuing investment in operating capabilities and marketing investments. As a result, we delivered an operating profit of $42,000,000 for the quarter. Up 3% quarter over quarter adjusted EBITDA of $57,000,000 up 9% quarter over quarter. Representing an adjusted EBITDA margin of 28% on par with last quarter.

The ratio of adjusted EBITDA to gross profit reached 68% for the quarter, up one percentage point quarter over quarter. Making the third consecutive quarter of improvements. Moving on to net income. Net income was $30,000,000 for the quarter, up 11% quarter on quarter and 4% year over year. Compared to the prior quarter, the result was impacted by a positive non cash mark to market effect related to our Argentine bond investments, lower finance costs and partially offset by higher taxes. Our effective income tax rate ended at 27% for the quarter. And 20% for the year. Impacted by an income tax settlement related to prior period. Excluding this tax settlement, our effective income tax rate stood at 16% for the fourth quarter and 17% for the year, compared to 16% in 2023. As a result of slightly higher local to local share of pre tax income. Last, but certainly not least, free cash flow for the quarter which is the net cash from operating activities, excluding merchant funds less CapEx amounted to $33,000,000 up from $26,000,000 in Q3.

Representing a 25% increase.

This continued cash generation allowed us to further strengthen our liquidity position. With this, let me hand it over back to Pedro for closing remarks. Thank you, Mark.

Before concluding our remarks, I'd like to talk about 2025 guidance. First of all, the strong TPV growth guidance is primarily driven by Our strategic focus on becoming a scale leader over the midterm leading us to prioritize not losing contracts on price, especially in larger markets the increased share of wallet and continued ramp up of our large global Tier zero merchants especially key ones we onboarded in the 2023 and 2024 cohorts and new opportunities converting through the pipeline both in geographies where our business is still nascent as well as verticals we are entering into and where we see large volume opportunities. We're guiding to a revenue growth that shows this sustained momentum of our top line and also highlights that our combination of revenue growth margin structure and free cash generation is not that common. There aren't that many companies today who are as profitable as we are growing revenues at the pace we are growing, Our expected gross profit guidance a metric we focus on more than revenues as we manage the business, shows growth range is based on the following assumptions. We anticipate a higher mix of transactions from those Tier zero merchants who typically have a lower take rate as we continue to increase the share of wallet and work on the global expansion of these relationships with them, on sustained growth in local to local transactions that have a lower take rate, while our cross border segment should also continue to experience accelerated growth as it demonstrated throughout 2024, and competitive pricing in key markets such as Brazil and Mexico following our focus on market share gains and TPV growth, as I mentioned earlier, And then finally, the ramp up of the new standalone orchestration model that we launched at the end of Q3 twenty twenty four and that does have a lower take rate.

In addition, on guidance, and given our presence in emerging markets, and the general volatility of currencies in these regions, of FX spreads in certain geographies. If you consider all those assumptions, we should expect a net take rate compression while delivering high TPV growth even at the scale we've already attained. Over the midterm, we will work diligently to maintain that strong TPV growth while recognizing that given the extremely strong levels of retention that we're able to deliver, our larger merchants will continue to attain lower pricing tiers and contracts. We will focus on offsetting this take rate compression [indiscernible] Growth in higher take rate new verticals that we're pursuing natural mix shift towards higher take rate frontier markets away from Brazil and Mexico despite still growing well in those large markets, and new revenue streams through new product launches and constant [indiscernible] Finally, regarding adjusted EBITDA growth range, we assume the continuation of our disciplined investment cycle maintaining, as seen in 2024, a balance between top line growth and profitability. Our investment focus remains on product and development with growth there outpacing gross profit growth, continued investments in our license portfolio with the benefit that brings but also the increased regulatory cost, and investments in continuing to build our local operations teams in markets that are only now beginning to ramp up.

Yet despite these investments, we anticipate achieving operational leverage with an adjusted EBITDA to gross profit ratio improving year over year and still tracking towards levels we have delivered in the past once we conclude this investment cycle. As you know, our business operates in some of the fastest growing and most dynamic markets in the world. The opportunity in digital payments across emerging markets is massive. And we do continue to see strong demand increasing penetration and long term structural tailwinds that support our growth.

However, the very nature of our markets which is a benefit to our business, also comes with volatility. Whether due to macroeconomic shifts, to regulatory changes, or currency fluctuations. And while we remain highly confident high growth results over the long term, we believe that providing mid term guidance transmits a sense of predictability that is not really accurate over a multiyear timeframe. For this reason, we've made the decision to discontinue mid term guidance for the time being. We'll continue to focus on delivering strong operational execution so as to hit the annual targets we disclose, and we will remain as always transparent in our communication sharing with you key drivers, both good and bad, of our performance against those annual targets. Finally, looking ahead to 2025, some thoughts. We remain confident in our ability to execute and momentum with which we've exited 2024. The investments we've made over the past year across technology, product innovation and market expansion position us well for the next phase of growth. While we've just recognized the inherent volatility of emerging markets, we believe that the disciplined approach to scaling our business, our deep local expertise, and our commitment to delivering value to merchants will continue to differentiate us in the industry.

Our strategy remained focused on capturing the vast potential of digital payments across high growth regions driving operational efficiencies and reinforcing our market leadership. We're excited about the opportunities ahead and are committed to executing with the same rigor and discipline that have defined our success so far. We thank you for your continued trust and support And with that, we're glad to take any questions You may have.

Thank you. At this time, we will conduct a question and answer session. During Q and A, we also have the presence of Sergio Fogel, our President and Chief Strategy Officer. Our first question comes from Tito Labarta of Goldman Sachs. Your line is now open. Hi, good evening, Pedro.

Mark, thank you for the call and taking my question. Have a couple of questions if I can to start. One, I guess, just how do you think about FX when you say set the guidance, right? Because I mean, it was a headwind in 2024.

Right? I think you mentioned on an FX neutral basis, I think you grew like 80%, I think it was in the quarter. So the guidance for this year does imply a slowdown But do you expect do you factor in maybe more currency depreciation? I mean, to start the year, we've had some appreciation. Just want to understand how you think about FX and I know there's a lot of countries involved, but if you can help us understand how you think about it when you set the guidance And then second question, and I know you're getting rid of [indiscernible] probably makes sense. But just help us think about the long term growth outlook can you help us understand kind of where do you think you are in terms of like your wallet share with your merchants? I think you I mean overall, I think the industry is growing. How do you think about like overall payments growth in the markets that you're in and your wallet share to help us at least kind of think about what that long term growth could be? Thank you. Thanks, Tito. So on the FX piece, when we build the bottoms up approach per merchant, we've tried to not bake in too many assumptions around FX.

So it's almost assuming general steady FX rates from where the last year ended up. Okay. In terms of sort of and sorry to interrupt. But so you kind of think of it like on an FX neutral basis, You're saying Fair to say. So I think if we end up having continued currency depreciation that's will be a headwind if the trends we've seen in Q1 hold up. Then that's potentially a tailwind. [indiscernible] Sorry to cut you off as well. No, no. In terms of the size of the addressable market, and the opportunity around payments, It really is probably the most significant piece of the investment thesis. Anytime you spend with global merchants, it becomes very clear that most of them except for the larger, more sophisticated ones, are still doing an important part of their global cross border through international acquiring. Many of them are only beginning to really leverage local payment methods, alternative payment methods all of which will only increase adoption and usage across the global South DLocal. So we are extremely optimistic on the potential for sustained high levels of TPV growth because we think the market will continue to generate tailwinds over a long period of time simply from the increased digitalization of the consumer across emerging markets When you look at the mix shift of our business, as it gradually moves towards countries that are newer in our portfolio.

And slowly moves away from the larger markets I think that's a very strong indication of how much opportunity still exists.

The share of our merchants overall wallet from those smaller markets is still very low and that will continue to grow. And also our ability to gain share from international acquiring in a growing number of markets is still very, very large. Okay, great. That's helpful. Thank you, Bennett.

Thank you. One moment for our next question. Our next question comes from Jeremy Greskin of JPMorgan. Your line is now open.

Hi, Peter, Mark, thank you for the presentation. [indiscernible] The first one is related to the cash. Was a big cash decrease in the quarter You put a bullet there in the release, mentioning there was a some temporary settlement delay as well as some changes in settlement with merchants. Just if you can provide a little bit more color what exactly is those changes in settlement to understand the movement on the cash Then the second question is related to gross profit on the guidance. The guidance it's basically 20% to 25%, right? But we had a big ramp up in gross profit in the second half of twenty twenty four. I was doing my math here 25 midpoint against second half.

It's only a 10% increase seems a big slowdown Moving forward, in the midpoint. You touched a little bit some of the points you see to build up the guidance, but just if you can provide a little bit more color where you're seeing Pressure because it seems that when you benchmark against the second half, kind of momentum, it seems to be a big slowdown. Thank you. Guillermo, let me take the the cash flow question first. First, remind you that As most payment companies here, we look at free cash flow net of merchant funds. Right, working capital changes, because most of them are safeguarded or have very short settlement. So our total working capital for this quarter was really affected by changes in the merchant funds working capital. In two phases. One was the increase in trade receivables due to some temporary settlement delays We had a larger volume at the end of the year and we experienced some delays in those funds coming to us, [indiscernible] happy to say that all those funds that came in at the beginning of the year into our business. And then second, it's the declining trade payables. And we talked about shortening of some settlement As Pedro mentioned, we moved into we've got a new modality here with a new orchestration model here [indiscernible] And [indiscernible] tend to shorten quite a bit the settlement periods for our merchants.

So a combination of those things plus we had some accumulated funds that were with us that we had to settle with merchants. The combination of all those things drove the reduction in the working capital here for the merchants and our working capital and cash flow. Overall.

And just a follow-up, if I may. The change in the settlement period because of the requestation product, Are you financing the merchant for more days, meaning in the end of the day, I want to see if there's going to be implications to net financial results. Was there an increase in how many days you financed the merchant? Is there a mismatch meaning you're using our own cash to prepay in a motion in some way? No. So what the orchestration product does is that essentially rather than the funds going through DLocal, and then to the merchant, And therefore, we have that float. The settlement is direct to the merchants.

So I'd say it's the inverse. We're not financing anything.

But it simply reduces the day of merchant funds on balance sheet. That's clear. Okay. On gross profit, a couple of thoughts. I think first of all, as we said, the overall growth algorithm on the guidance we think is still very robust with really strong TPV growth very strong revenue growth getting us at the midpoint to close to $1,000,000,000 of revenue then driven by merchants hitting higher tiers on their contracts, take rate contraction, which is really I think what generates the math you're doing through your head, but then adjusted EBITDA margins that are growing faster than gross profit despite the fact that $25,000,000 is still a year of investment and we believe that you can see more operational leverage after that.

Also bear in mind that there is seasonality into the fourth quarter. So [indiscernible] either Q4 or both Q3 and Q4 probably gets you to a more aggressive full year projection than otherwise.

But again, if you look at the growth at the midpoint, we're essentially saying that we think we can sustain TPV growth at similar level to full year 2023 despite coming off of a much, much higher basis.

Which shows our optimism in retaining merchants but also accelerating new merchants versus prior years. Okay. That's great. Thank you, Pedro.

Thank you. Our next question comes from Madeline Zhao of SIG Group. Your line is now open. Hi, thanks. It's Jamie Friedman.

So my math is that at the midpoint of the 25 guidance, you got about a 15 basis point deterioration in the take rate. I was wondering if you could comment on on that with the logic of Slide 18. So in Slide 18, you show that 12 basis points of the deterioration was really through the zero merchant clients. You said Pedro, in your prepared remarks that you were suffering from the 23, 24 boarding of those prices right? And then actually those increased as a percentage of the total volume, that's a second slide. So I was just wondering in terms of what events are trying to find is to capitalizing a take rate for this company and for the industry, frankly. So if you could provide some more quantitative [indiscernible] about how you're thinking about where the take rate is headed?

Yes. So I think you've kind of walked us through what my answer would have been [indiscernible] directionally. So you're seeing in 03/2004 to 4Q 'twenty four, what the impact of some of the very large merchant growth can be And yet when you look at the full year at the midpoint, we're not doing this kind of deterioration times four, right? So what we're saying is that despite the fact that there is still significant growth coming from the very large market merchants, who by definition give us significant TPV but also command lower pricing we're still baking in only 12 percentage points of compression. That's a consequence of we're not only growing with those merchants in the large markets, where they have a lot of volume, but we're also seeing those merchants asking us for more frontierish markets which obviously command higher pricing. We anticipate some new products into the market that should also generate some incremental take rate And so I think our story has remained somewhat unchanged, which is we still see a downward trend in take rates But we think that there are both offsets and that the level of that compression will not be what we've seen from Q3 to Q4.

But perhaps more muted And if you look at Q2 to Q3, or even Q1 to Q2, it was more muted. So this isn't a rapid race to the bottom. But rather again, these 15 points for this year. And I don't think you should have assume 15 points into the midterm either.

I think when you look at the percentage of our revenues that come from FX, some of the new merchants that we're onboarding And again, we haven't issued a midterm guidance because there's so much on uncertainty in the markets where we operate. But I wouldn't suggest that someone simply roll out 15 points of compression over the next three years. To get to an end state. I don't know exactly what that end state would be. But I think that that would be probably assuming too much compression. Thank you. And then I realize you're not doing the midterm guidance You did say though in your prepared remarks, I'm paraphrasing that you're in the middle still of an investment cycle. And you could I think you said something like you could return to the profitability of the past Is the rule of 100 that you shared at the Analyst Day in November three years ago, is that [indiscernible] ratio is rising. It was a very strong sequence across the quarters of the year. A good end. So is the Rule 100 still possible or what will be the factors that would move that like up or down? Thank you.

Yes.

Let me address your question the following way. When we look at where our adjusted EBITDA to gross profit margins exited the fourth quarter given that the fourth quarter has some scale benefits from a seasonally strong top line quarter. We look at the fact that we have been investing and continue investing in the business at an accelerated pace.

The remark was more around trying to indicate that if you assume that once we're through this phase, of investing behind those foundational blocks, The nature of this financial model is one that does have operational leverage It's relatively low in CapEx. It's primarily human capital and technology. We don't see why we can't be on a trajectory towards returning to that adjusted EBITDA to gross profit somewhere in the mid-70s.

Now don't construe this as solid guidance, but there is an indication that if we're exiting Q4 at sixty seven ish, sixty eight the full year next year is better than '24 even though we're still investing, you can assume that after that because we're also indicating that we see many years of sustained growth given the size of the addressable market and the potential that those margins back in the mid-70s over a longer period of time we do believe are achievable with our financial model. Got it. Thank you, Pedro.

Thank you. Our next question comes from Neha Agarwala of HSBC. Your line is now open. [indiscernible] Questions. First one is, during your remarks, you mentioned things like not losing merchants due to price and focus on market share gains, you elaborate on that? Anything significant that we can expect for that in terms of compression further compression in key markets like Brazil, Mexico Second is regarding the orchestration model, which you expect to expand. So do you expect to expand in other geos? Or what is what are the further plans for this payment orchestration model? Thank you so much. Yes. So on the first one, we really see the importance of not getting caught up [indiscernible] short term worries about take rate, but the importance of continuing to gain scale to drive down processing costs over the long run, Winning merchant contracts in markets where we compete in an RFP or where they ask us to add a market understanding that over time, you can then leverage those relationships across more and more markets And again, I go back to the sustained TPV growth over a long period of time we think is the single most important metric of success right here And take rate is almost an output and not an input.

The input we try to manage for is how do we win as much volume from our merchants as possible obviously reflecting in the pricing the value that we add to them and what the underlying cost structure is.

And understanding that the scale leader here over the longer period of time will be able to drive down the most cost from its processors. So that's a way of indicating why at the midpoint, you will see that we continue to indicate a decline in take rate but very, very solid TPV growth in line with 2024 despite 2025 coming off of a much larger base.

The orchestration product is a product that we can roll out to multiple markets.

I don't necessarily see it as a market that makes a lot of sense for our merchants across many of our smaller frontier markets or higher take rate markets I think the orchestration product is one that makes more sense in the very large markets where we operate where merchants are more likely to have Larger businesses and therefore a subset of these I would say a small subset of the merchant base may want to have direct contractual relationships and direct settlement with multiple acquirers and payment methods, And so in those markets, we can offer to them the orchestration layer which allows them to continue to interact with one single technology layer, which [indiscernible] have a single set of reporting and reconciliations have a single point of contact to deal with acquirer and payment method issues that arise but have direct settlements and direct negotiation of those contracts.

So I don't see this necessarily as a product that makes sense. Across the 40 plus markets.

It's probably a product that makes more sense in a small number of larger, more relevant geographies to our global merchant base.

Perfect. If I can follow-up on my first question. Typically, in our experience when you talk to large merchants, the discussion is not just about pricing. A large part of deciding which player to go with for the merchant would would include pricing, how the platform is, the conversion rates, all of these things are probably equally important. During the last year, have you seen pricing discussions gaining more importance when you're talking to merchants about winning an RFP. And are you seeing any of your competitors being more aggressive in terms of pricing which has changed the ballgame a bit for you and you're required talk more about pricing Versus a year ago, say?

That answer really is a market by market answer. But I think implied in our comment about especially in the larger markets [indiscernible] trend, it's first of all driven primarily by merchant volumes.

We were very candid and transparent in Q1 about an actual re Pricing because that was a very significant event. As we said, our largest had was running at a take rate, which was above the company average. Which is quite an anomaly and responded primarily to their focus on go to market and performance less than price and then they obviously reprice that. That shouldn't be seen as an assumption that that's been a repeated pattern. Had that been a repeated pattern, the take rate compression year full year would have been significantly larger than it has been. So really the biggest driver of this take rate compression is simply increased volumes from very large merchants hitting new tiers on their contracts.

So I still think the name of the game is not just price, It's price plus conversion plus performance. That's the principal reason why we are investing behind product and technology. And that's the biggest area of incremental [indiscernible] the single most important way to keep your take rate significantly higher than in developed markets is because you're dealing with a fragmented and complex [indiscernible] ecosystem in each of these markets and through technology and innovation is how we deliver performance. So I don't think that has changed substantially. I do think that our merchants are becoming very large and hitting the discounts in their tiered contracts or because of global relationships are able to drive down [indiscernible] Based on global volumes. Do I think there's increased competitive dynamics versus two years ago or four years or six years ago in some of our large markets, I think the answer is probably yes. But even if you look at the disclosed growth rate of some of our larger competitors for Latin America, It continues to seem as though we're winning market share and growing more than they are in the region. [indiscernible] If I can just ask another question on the license licensing portfolio.

Does that give you any advantage in winning RFP or in terms of pricing Or is it just more from a regulatory and oversight perspective you're safeguarding yourself and improving your compliance?

Really who we are safeguarding is our merch especially across emerging markets.

So the principal reason behind this is that we do feel that this is very valuable