DLOCAL Third Quarter 2026 Results - DLOCAL LTD

Financial Performance:

• Transaction Volume (TPV) reached $18.3 billion, a 77% year-over-year increase, marking the eighth consecutive quarter of >50% growth and the fourth at or above 70%.
• Gross profit grew 28% YoY to $132 million; operating profit increased 37% YoY to $76 million, representing 58% of gross profit (highest since Q4 2023).
• Net income reached a record $68 million, up 31% YoY and 24% sequentially; diluted EPS hit $0.23, up 35% YoY.
• Adjusted free cash flow was $99 million for the quarter and $182 million year-to-date, achieving a 146% conversion to net income in Q3.
• Operating expenses (OPEX) decreased 11% sequentially to $56 million, driven by automation and lower headcount (headcount down 3% after peaking in Q2).
• Gross profit per employee surpassed $100,000 for the first time; merchant NPS rose to 51 (up 5 points vs. H2 2025).
• Net revenue retention stood at 140%, while TPV retention was 173%, driven by deepening existing merchant relationships.
• Share repurchases totaled $34 million in the quarter and $120 million year-to-date, with approximately 9 million Class A shares cancelled.
• Effective tax rate was 15%, broadly flat year-over-year.

Guidance and Future Outlook:

• Full-year TPV growth is expected toward the upper end of the 60-70% range, though growth is moderating against prior year comparisons.
• Full-year gross profit growth guidance has been lowered to the midpoint of the 25-30% range due to unanticipated FX headwinds in Brazil, Mexico, and Argentina (estimated 6 percentage points swing in Q4) and softer performance in some African and Asian markets.
• Full-year operating profit growth guidance has moderated to the lower end of the 27.5-32.5% YoY range, constrained by the aforementioned FX headwinds.
• Q4 results remain highly sensitive to the upcoming peak shopping season, which could alter current expectations.
• Management anticipates continued margin expansion in the coming years as the investment cycle concludes, with future growth focused on reinvesting organic growth into new geographies and products.

Business Segments and Product Lines:

• Verticals: Ride-hailing grew sequentially in all regions (Mexico, Brazil, Colombia, South Africa); on-demand delivery scaled strongly; social media advertising in Brazil was elevated due to election activity (expected to normalize); travel grew following product-market fit investments.
• Payment Flows: Local-to-local flows represented 62% of TPV; Payouts accounted for 25%; remittance growth was concentrated in Latin America.
• Product Innovation: Added 11 new local payment method integrations; developed card-on-file-like experiences for non-card payments; Buy Now Pay Later (BNPL) platform now serves over 15 merchants; physical payments launched in Mexico.
• Geographic Expansion: New licenses secured in the US (money transmitter), Canada (AML), and Tanzania (remittance); total regulatory licenses now stand at 42 across 26 markets with 20 applications active; Asia identified as a major growth vector, with a local team hired and initial ramp-up expected to be mid-to-high single digits of revenue in 2027.

Market and Competitive Landscape:

• Competitive advantage relies on operating in complex emerging markets with superior payment performance, operational reliability, and a dense network of licenses (42 held, 20 pending) that are difficult to replicate.
• Market dynamics show a shift toward local payment methods and increased fragmentation, particularly in Asia and Africa, favoring D-Local's localization strategy.
• Crypto and stablecoin usage is growing, particularly in remittance and repatriation flows, with a growing roster of merchants accepting stablecoins at checkout; "agentic commerce" is currently observed as human emulation rather than protocol-driven transactions.
• Management views the company as early-stage in emerging market payment localization with substantial potential to capture share of wallet with existing global merchants.

Risks and Challenges:

• FX Headwinds: Significant currency fluctuations in Brazil, Mexico, and Argentina are impacting gross profit growth in Q4 and the full year.
• Regional Volatility: Argentina experienced a seasonal volume drop in Q3 after a strong Q2; Mexico faced elevated processing costs and lower take rates due to pricing tiering with large merchants.
• Growth Moderation: TPV growth rates are naturally moderating after rapid ramp-ups in previous semesters; Q4 sequential performance depends heavily on holiday seasonality.
• Execution Risk: The successful ramp-up of the Asian market and new product lines (e.g., banking as a service) depends on execution of infrastructure and go-to-market strategies.
• Seasonality: High sensitivity to seasonal peaks in the fourth quarter for regional performance.

Management Commentary and Tone:

• Tone is confident and disciplined, emphasizing successful execution of operating leverage and automation initiatives.
• Management expressed strong optimism regarding the long-term addressable market, particularly in Asia and with new product verticals, while acknowledging near-term FX headwinds.
• Pedro Arndt (CEO) emphasized that the business has moved past the heavy investment phase and is now in a cycle of margin expansion and cash generation.
• Guillermo López-Pérez (CFO) highlighted that while quarterly OPEX can be lumpy, the structural trend supports growing gross profit faster than OPEX on an annual basis.
• Management noted that the "Rule of 40" is less applicable than their specific financial algorithm of high growth, expanding margins, and strong FCF conversion.

Analyst Questions and Answers:

• Asia Ramp-up: Management projected mid-to-high single-digit contribution to gross profit in 2027, noting it is an infrastructure build year; key anchor clients include a major streaming service, a music streaming company, and an AI lab.
• Credit Facility: The $150M facility obtained in August is for holding-level liquidity and general corporate purposes (including buybacks), not for inorganic M&A; leverage remains conservative at ~0.5x EBITDA.
• Mexico Turnaround: Challenges in Mexico involve lower take rates with large merchants and elevated processing costs; management expects a rebound by end of year or early next year through cost leverage and pricing optimization.
• OPEX Sustainability: Sequential OPEX decline was driven by structural automation (headcount reduction), disciplined third-party spend, and front-loaded marketing in H1; future balance will involve reinvesting organic growth into expansion.
• Crypto/Agentic Commerce: Stablecoin usage is showing solid growth in specific flows; agentic commerce is currently more theoretical/expected than numerically significant but is being monitored for future potential.
• Future Margins: Management reiterated a focus on annual margin expansion even while investing in new geographies, aiming to maintain a financial model with healthy FCF conversion and rising operating margins.

Other Key Points:

• Licensing Moat: The company now holds 42 licenses/registrations plus 10 regulatory authorizations across 26 markets, serving as a critical barrier to entry.
• Capital Allocation: Priority order is organic investment, share buybacks, and dividends; the buyback program is viewed as an integral driver of EPS accretion.
• Efficiency Metrics: Headcount peaked in Q2 and has since declined; automation is delivering measurable productivity gains, with gross profit per employee exceeding $100k.
• Merchant Expansion: Growth is increasingly driven by "share of wallet" expansion with existing merchants across new countries and verticals rather than solely new merchant acquisition.