Balance in your couple of years at dLocal now?
I think it's my second because I've been here for two years. At the parallel, I'll give you a positive one and a not so positive one. I think that's more balanced. On surprises that perhaps I underestimated when joining the company, we still inhabit a highly fragmented cross-border payment space. We see many, many sub-scale companies, product of the fintech financing boom pre-2022, that probably generate a market structure that has more cross-border payment companies than necessary. I think that's one of the factors that goes into the declining take rate reality that I'm sure we'll address. It's more fragmented than I thought it was, and I knew it was fairly fragmented. The upshot to that is that we probably are on the verge of some level of consolidation, and that will probably benefit the staying power of incumbents.
On the positive side, the more I'm immersed in emerging market cross-border payments, the more the thesis of why we add value crystallizes to me. Payments across the global South are extremely fragmented. Every market has way more than just your Visa and MasterCard. In developed markets, you have real-time payment networks, bank transfers, digital wallets, buy now, pay later. There's this really fragmented ecosystem. That ecosystem is very different from one emerging market to the next, to the next. Regulatory frameworks are very different from one market to the other, and tax regimes are very different from one market to the other, and typically are multi-layered. They even are varied from one state to the next within a jurisdiction.
When you put all of that complexity into the blender across the 45 markets we serve, it's become incredibly clear to me why, if you're a global merchant, you would not want to build the solution for all that in-house. It just makes so much more sense to have one integration with dLocal, and then we abstract away all of that multi-layered complexity for you. Now that I've been at the business for two years, it's a lot of complexity.
No, it makes sense. If we think about, I mean, you had a very good second quarter recently where you raised your guidance, maybe just kind of thinking from a long-term perspective, you mentioned a very large addressable market to capture. The surprise in the second quarter, also thinking a bit more longer term and the opportunity set that's available to you.
Yeah. Strong execution across the board. I think that was one of the real positive outcomes of second quarter results. We saw our largest markets, Brazil and Mexico, that had had a weak second half of 2024, really rebound nicely, starting in Q1, but really materializing in Q2. On the back of multiple merchant strengths, there's not a single merchant driving the rebound in those markets. We continued to see, and this is perhaps the more important trend, really solid growth coming out of non-LATAM markets. Africa and the Middle East for us, plus Asia, already represent nearly a quarter of our business and are growing significantly faster than LATAM. That increased diversification brings all sorts of benefits, higher take rates, less dependency on a single market. Africa and the Middle East are this enormous five to ten-year TAM for us.
In that sense, I think the two key takeaways from the second quarter were how strength was distributed across merchants and geographies. Really firing on all cylinders across the board, and it's sustainable going forward when we look at the back half of the year because it is so diversified.
Yeah, I think if we look at some of your global payment peers who were negatively impacted by the tariff situation, I think maybe you're on the positive side of that. Maybe can you talk a little bit about that and that up?
Yeah, for sure. Definitely we have been beneficiaries, at least in this first phase of the rejigging of the global commercial order. When you look at our numbers and you look at how our business has behaved, it's pretty easy to extrapolate that primarily our Asian merchants, as they began to see their growth prospects in the U.S. and EU closed off through tariff and non-tariff barriers, you see this clear reallocation of capital and resources to emerging markets. We've seen significant pickup in the number of markets and number of payment methods that we offer to our Asian merchants over the past year. Phase one for us has been very positive. I just think we need to continue to monitor this closely because this is something that's in constant flux.
We have begun to see isolated pockets, nothing that changes our confidence in H2 guidance, but we have begun to see pockets where we began to see tariff increases across the global South to protect local retailers from this very aggressive entry of the Asian e-commerce players. Phase one, very good to us. Let's see if there is a phase two and how that plays out.
When we think about your TPV growth guidance of 40% to 50% a year, you're at the high end of that, even above it. If you think about maybe sustainability of it, where is the biggest opportunity? Pay-ins, payouts, country sector exposure, if we can kind of unpack that a little bit.
Yeah. Tying it back to my initial comment, I think if we continue to help global merchants solve for that enormous amount of complexity that exists across the payment ecosystems in the emerging world, these levels of growth, or high levels of growth at least, are sustainable. The way we think about the growth vectors, I would say in order of importance over the next two quarters, the first one is to continue to offer our existing merchant base more markets and more payment methods. As we have proof of concept with what we're doing for them, we've been able to really accelerate the pace of cross-selling. Over the last 18 months, for our top 50 merchants, the average number of countries that we serve has gone from eight to 11, and the average number of payment methods has gone from mid-30s to low 40s.
We're seeing very rapid expansion of what we offer with existing merchants. The second driver, I would say, is those same merchants and the payment methods and countries that they already contract from us gain share of wallet there through improved performance. We're also seeing that improve. The third driver is new merchants, and we only have about 715 active merchants. The potential is in the thousands. It's also true that when you add a merchant, there's a typical one to two-year ramp-up before they actually start having a substantive impact on our P&L. That's why I placed that one third. The merchants that we add in 2025 probably become very relevant to us in 2027. The final one is new products, which I think is something that historically we kind of lagged behind.
We're still very much focused on payouts and pay-ins, but we are beginning to accelerate our capacity to push new products that give our commercial team a wider portfolio to cross-sell. Now we've launched credit solutions, we've launched physical store payments, and we intend to continue doing that so as to have a more well-rounded portfolio of products and services. If you think of it that way, there are plenty of growth vectors going forward, and I think all of them are sufficiently equipped for us to be able to sustain high levels of TPV growth if we execute.
Great. Having had the luxury of sitting in a few meetings before this, the top 10 concentration has remained relatively steady, but one interesting comment was that the top 10 merchants has actually changed. Maybe marrying that a little bit with your wallet share with those merchants, how do we think about that?
Interesting. The disclosure that we typically give is that the top 10 merchants account for 60% of our revenue, and that's been fairly consistent over the last two to three years. There's a tendency to extrapolate that the business has remained concentrated on very few merchants. The data point that should be in the disclosures and isn't is that the top 10 merchants in 2025, only half of those were part of that top 10 cohort in 2023. The business is actually more diversified on the merchant front as well. It just happens to be that the evolving top 10 tend to be 60% of the business, but they're a very different group of top 10 as the years move on.
What that means is that even as some merchants may decline in share of wallet, the overall business still grows very well because it's growing the number of large merchants it has. Tying that to share of wallet very quickly, we actually still have low share of wallet of our merchants. I think in Latin America, which is where we're strongest, we calculate that if you were to grab the entire business of our entire existing merchant base in Latin America, we only process about 20% of their payments. The rest is either done primarily by international acquiring or to a lesser degree by competitors or other payment service providers. If you move to Africa, that number is even smaller, and that's because international acquiring is still even more prevalent. In Asia, that number is in the low single digits, and that's primarily because we were late to Asia.
We've only really started focusing on Asia over the last year or so. This is still very early stages for dLocal. Just through share of wallet gains of existing merchants, we can grow this business multiple times over the next few years. If you overlay on top of that all the new merchants we can add, again, the growth algorithm is quite compelling.
Yeah, I mean, I think definitely the market sees that growth opportunity. I think on the other side of it, the question mark is always what happens to take rates, right? I think there is a bit of an inverse relationship with growth and take rates, but you help us unpack a little bit the take rates given merchant concentration, sector concentration, pay-ins, payouts, et cetera.
Yeah, so there is an inverse proportion for sure between volume growth and take rates, and that's because our commercial relationships are kind of structured that way. Our merchants, as they grow global TPV with us or local TPV, hit newer tiers of discount. That's just typical volume discounts. What's been happening consistently is that the rate of TPV growth has more than offset the take rate compression, and gross profit dollar growth has begun to accelerate more recently. If you think of it really as a management team, we're here to manage for gross profit dollar growth, because then when you overlay that with the inherent operational leverage that exists in the financial model, that gets you to very solid EBITDA and earnings growth that we can compound over multiple years. Take rate for management teams is typically an output.
If you can add a very large contract at half your average take rate, but all of those gross profit dollars are incremental, obviously you're going to do it. It doesn't matter because you're adding incremental gross profit dollars. Take rates typically become a contentious point because when you're modeling the company out, it's more of an input, right? TPV times take rate X. Yes, they will continue to come down most likely. TPV growth should offset compression sufficiently so that gross profit dollars growth is very healthy, and the natural operational leverage in the business gets us to strong EBIT growth that we believe we can compound out over multiple years because of how large the TAM is.
Maybe going back a little bit to sort of my initial question from when you started to today in the sense of, I think one concern investors fight on dLocal is a little bit the volatility in the results. Now, I mean, you had a quarter where your gross profit guidance almost doubled, right, from $20 million to $30 million to $40 million to $50 million. How are you feeling? How are you sleeping at night today relative to when you first started, given where the business is and where you may have wanted it to be?
Yeah. We're always behind where we want to be. I think that's inherent in any CEO, and I think that's fine. We have made significant strides over the last 24 months in terms of building much more solid foundational blocks for the company to be able to grow multiple times over the next five years. We've invested in operations, we've invested significantly in product and technology teams, we've upped our compliance game, which was one of the big concerns. I sleep much better at night because I think this is a much more solid company. One case in point, I always say, I think the best proof point of our confidence level in our internal controls and our internal operations is that we've made growing our license portfolio an actual strategic mandate.
We're now licensed in the UK, we're licensed in the EU, we have a license in Singapore on the way, we have 37 other licenses and registrations, and we've actually started pursuing U.S. licenses. When you are pursuing licenses in the U.S., that's probably the strongest indication that we feel very good about the robustness of our internal operations, compliance, regulatory frameworks. It's never finished, right? I mean, when you operate across 45 emerging markets with differing and constantly in flux regulatory environments, you're always having to invest behind all of those back offices. At the end of the day, when global merchants are outsourcing to you their payments operations across all of those markets, your number one objective is to ensure the reputational safety of those merchants. We're significantly better off than we were two years ago. It'll be a never-ending process of continuous improvement.
Maybe touching on investments needed for the business, you already have very high EBITDA margins, 70%. I mean, you've been as high as 75%. Help us think about what investments are needed, what does that mean for operating leverage, and can you get back to those 75% EBITDA margin?
Yeah. Structurally, this business is actually extremely attractive from a financial model, right? It's completely asset light. Even if you think of the core technology that we build, we're building integrations into existing payment mechanisms. Not to say that that isn't complex, but it's not the most complex of technology builds. We're not building a digital wallet. We're not building an acquirer. We're being an integration layer, and then we're building all sorts of technology and processes that optimize the performance of all of those payment products across each market. The business is inherently high margin and is inherently cash flow positive, right, and has inherent operational leverage.
When you overlay on top of that very attractive structural business and financial model, the potential impact of AI on our cost structure, because so much of what we do still are people running compliance checks, people doing reconciliations, people carrying out refunds, a lot of these back office tools of the 1,300 people we have, there's probably 400 to 500, which really are manual intensive processes still, that with successful AI deployments, you could significantly reduce that cost structure. If you overlay all of that on top of it, given everything I know today, I see no reason why we couldn't hit that 75% of adjusted EBITDA to gross profit that we had delivered in the past. If you take a midterm view, even end up above that.
Interesting. At the same time, given the growth outlook, given the operating leverage and high margin, why would that not invite competition, which could maybe pressure it on the other side of things on pricing or something?
Yeah, so going back to my initial question point, I said this is a very fragmented market. I think it is a market that has a lot of competitors. I'm actually optimistic. I see it in the other direction. I think that as you begin to gain scale and grow in scale, you can probably deliver some of those scale benefits back to your clients in the form of improved pricing, hence the take rate compression that I said will continue to exist. With your scale and your operational capacity, you probably crowd out smaller competitors from the market.
I think if you take a longer look, what I've said consistently is, although over the next 24 months, I continue to see take rates declining, I do think it's asymptotic, and I think it flattens out much higher than what developed world PSPs are at, which then makes for long-term a very attractive financial model.
Yeah, okay, makes sense. Maybe if we can break it down a little bit on a country-by-country basis to some extent, we saw Brazil had a very good quarter last quarter. You know, what went right there? Why was Brazil able to grow so much? It's already, I think, your biggest market, you know.
Yeah. I think to understand the strength in Brazil, you have to understand the weakness in Brazil in H2 of 2024, right? Brazil, we were coming in weak in the back half of last year on the back of one large contract where we were losing share of wallet. We had 100% of their business. They had built the technology to have redundancy, and we were going from 100% to less share of wallet. That negatively affected us in the back half of 2024. As the share of wallet with that merchant began to stabilize because they had already introduced the redundancy, what happened is that the strength that we had had all along across the rest of the merchant base began to kick in without being offset by continued declines from that large merchant.
As we look into the back half of the year, that's why we're optimistic that Brazil will sustain these levels of growth. It's not like all of a sudden many merchants accelerated, it's that the one merchant that was hurting results plateaued. The strength that had been there all along in the rest of the merchant base no longer has that offset. On top of that, we've seen a pickup in installments in Brazil, which helps our take rate. Strength and strength that we believe should perdure into the second half of the year.
Maybe its neighbor in Argentina, which seems to be coming back, but now there's some uncertainty given recent elections and FX. What's the outlook for Argentina?
Harder to tell. Argentina, over the last three or four quarters, had been one of the strongest performers. As Argentina reduced import tariffs and began to ease capital controls, we began to see merchant interest in Argentina pick up significantly. When you look at the last three quarters, it was one of the strongest performers. What we've seen more recently is an acceleration in the devaluation of the peso, which always is a bit of a headwind if you're running an Argentine business in peso and reporting in U.S. dollars. This weekend, the government had a setback in regional elections. It is too early to tell if that changes the macroeconomic outlook. You could guess that maybe the pace of devaluation accelerates. From an accounting and reporting perspective, you may see a slowdown in Argentina. I don't think necessarily that translates into a slowdown in constant currency growth.
I still think that the demand of Argentine consumers for cross-border trade is unmet and that there's still a lot of run room to the business of our cross-border merchants into that market.
Right. Maybe what about other countries? Egypt has been strong. Other LATAM. Where's the opportunity and where are their risks?
Yeah, yeah. We're seeing a lot of opportunities in Africa. South Africa has been quite strong more recently. Middle East is beginning to pick up, a lot of that driven by Turkey, but also beginning to make inroads in Saudi Arabia. Rest of Latin America, I think, had a very strong Q1, sequentially kind of flattish Q2, potential to rebound in Q3 and accelerate again. More pockets of strength and weakness. Egypt, which you mentioned, we actually anticipate will be a pocket of weakness. We're seeing slowdown in volumes there and some compression in spreads. I think that's really the only identifiable potential weak spot into the back half of the year.
Right. Okay, great. I think another common question we've been hearing is on the stablecoin, right? Some people may see it as a risk. I think you've been saying it's potentially an opportunity. What's the opportunity risk there?
Yeah. A lot to unpack on stablecoins. I think we're quite optimistic right now because if you look at all the stablecoin use cases that are emerging right now, none of them really do away with fiat. They all start in fiat, then move to stablecoin, and eventually move back to fiat. I would argue that most of the value in terms of ability to monetize across that stablecoin transaction is the on-ramps and the off-ramps, where you go from stable back into local currency. You need someone who has local liquidity, and the person who has that local liquidity can actually make the FX. It so happens to be that that's exactly what dLocal is, right? We do local payments into dollars, and we do local payouts from dollars into local currency.
We see a very large opportunity for us to serve existing cryptocurrency operators with those on-ramp and off-ramps and FX across the markets where we operate. If we execute well, that should be a big vertical for us. The second thing we've done is we already have the ability to be settled in stablecoin or to settle to our merchants in stablecoin. Very limited adoption so far. We have some use cases of remittance players who will settle to us in stablecoins to accelerate the fund flow for the remittances. Consequently, they don't have to pay us one or two days of working capital that we would typically foot for them because they receive the remittance instruction, instruct us immediately. We do immediate payout for them in local currency, and then they take one or two days to send us the U.S. dollars.
We would typically charge them for those two days of float. If they send us USDC, it's immediate, and they save that cost. That's really the only use case that we're seeing. We're not seeing the large enterprise merchants of the world, the Googles or the Netflix or the Amazons, asking to be settled in stablecoin. I do think that today stablecoin is probably more disruptive at the consumer level and at the SMB level, where maybe spreads have historically been higher and are more sensitive to time of settlement than at the enterprise level, where enterprise merchants are already transacting at wholesale FX prices and may not be sensitive to one or two days of extra time to settlement. The capabilities are built. If we see global treasuries wanting to move money around in stablecoin, we can already offer that to them. We're not really seeing significant pickup.
The third element that we're working on, this one hasn't been launched yet, is merchant acceptance. In the same way that merchants across the global South use us to be paid in credit cards or local payment methods or real-time networks, we'd like to be the ones who offer them the technology to accept stablecoin as payment. I don't think there will be much consumer adoption for that, but I'd rather build the product and be there should it pick up than just assume that it's not going to happen.
Right. Okay, makes sense. What about other products? I think recently launched like SmartPix, Binance PayLater. What other products can you launch with the opportunity set is there?
Yeah. I think one of the weaknesses of our model today is we're still very much reliant on our two core products, right? The pay-ins and the payouts. The ability to allow merchants to collect in local payment methods and then the ability to send money to people in their local bank accounts, local wallets, cash, whatever they want. Related to the take rate issue, but also related to increased stickiness with our merchants, one of the things we want to be able to do is to have a broader portfolio of products to cross-sell. I've seen a lot of fintech companies rush to sort of, you know, oh, I need to improve my take rate, so I'm going to offer software, I'm going to offer a whole bunch of things that then the execution of the cross-sell just doesn't happen.
We're selling to some of the largest and most sophisticated global merchants. They're not going to buy from us just because we're pitching it to them. They're going to buy best in class or best of breed. We've tried to identify what things are very closely related to the payouts and the pay-ins that make sense as a cross-sell. Right now, the two products we've announced that have gone to market and that we'd like to scale, the first one is on credit. If you think about emerging market consumption, credit is absolutely necessary. Consumers across the global South need credit to buy. On credit cards, it's obvious where the credit is coming from. On alternative payment methods, which is more than two-thirds of our volume, there aren't that many credit overlays.
If we can integrate existing Buy Now Pay Later players, existing credit offerings, not take on credit risk or credit on our balance sheet, but integrate existing credit providers into our merchants' businesses so that they can offer more credit to their emerging market consumers, we think that's a very attractive business and one with higher monetization. Buy Now Pay Later Fuse is our Buy Now Pay Later platform, where in the same way that merchants can select which payment methods they want to include in checkout, they can now also include Buy Now Pay Later and other credit alternatives into checkout integrated through dLocal. We manage all of that complexity for them. The second product that we've said we're piloting and testing is another characteristic of the developing world is that online penetration is still much lower. The vast majority of payment transactions are still occurring in physical stores.
Historically, we had no way to offer payment solutions at point of sale. We're now building a product which would be a dLocal point of sale solution. That would allow us to provide infrastructure to merchants that have physical store payment necessities and needs, to emulate what we do for online merchants for offline merchants. That's what we've announced. The idea is to build the internal capability so that we get better at launching new products that are needed by our merchants and that we believe we have a right to win by launching that product.
Yeah, great. We still have a couple of minutes. I want to see if there's any questions from the audience, if anybody has any. I have a couple more. Alex?
Oh, sure. I thought your discussion on consistency gave a great answer about your internal controls now that makes you comfortable. Later on, you talked about how you see no problems really at the country level. When Tito asked the question, I thought about the previous quarters where there were sudden surprises, like one country was a surprise, one customer was a surprise. Is there anything that you can do going forward to reduce that sort of volatility, or is it just inherent?
Yeah, okay, so thanks for those final comments. Emerging markets are volatile, and they will be volatile, and they continue to be volatile. Like I was talking about weakness in Brazil and Mexico. Those are our two largest markets. That's not minor weakness. Despite that, H2 was a record semester for us. Now we're seeing Brazil rebounding faster than I thought. That's also volatility in the good direction. That's not going to go away. I think what's happening, and we've said this all along, is scale by definition will smoothen out the impact of that inherent emerging market volatility. Now Egypt is weak. We're still guiding to a very strong H2 despite Egyptian weakness.
One of the things that I think we've delivered the most on since I took over is just that consistency of growth and diversification has meant that the business is increasingly less exposed to whatever pocket of weakness is occurring in one emerging market or the other. That's always going to be there because it's the nature of EM. If that didn't exist, the value of what we offer our merchants wouldn't be as large either. They could probably go and do it themselves if everything was Switzerland.
Just a question at the end of the interview.
Go ahead, Mike.
Question on your Asia business. What's the split between new logos versus existing clients just for the Asia business? As you said, there are a ton of competition there. What's really the value add for a new logo? Just a cheaper rate? Reversely, do you see the Asian guys actually coming to attack Latin America?
Perfect question. I said we were late to Asia, and most of Asia has been solved. Our Asia growth strategy is not really about new logos. Very hard pitch. It's about existing merchants who have solid relationships with us in Africa or Latin America, are already integrated. If I can offer conversion or price, or maybe they just need one more redundancy player, that's my in. I don't think we expect to go gain Asian logos from zero, at least not in the initial phases. Once we have sufficient scale, then maybe we can. Do I expect the Asian guys to come into Latin America? I think eventually, yes, but that's also an opportunity. For example, I can say this without saying it, I think the largest Asian fintech actually uses a lot of our infrastructure for their Latin America growth.
There's also an opportunity if we see Asian fintechs wanting to move into Africa or Latin America because we're also a very relevant infrastructure play.
Great. I think with that, we're out of time. Thank you so much, Pedro. It's been a pleasure.
Thank you.