DLocal (NASDAQ:DLO) held its second-quarter earnings conference call on Thursday. Below is the complete transcript from the call.
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Summary
DLocal reported a record quarter with Total Payment Volume (TPV) reaching $17.7 billion, a 92% year-over-year increase, marking the highest growth since Q1 2022. Net revenue retention stood at 153% and gross profit increased by 29% to $127 million.
The company is focusing on strategic initiatives including the deployment of AI and automation to improve operational leverage, and expansion into new geographies such as the Asia Pacific. They are also launching new services like dMOR, a merchant-of-record solution, and expanding their buy now, pay later offering.
For the second half of 2026, DLocal raised its TPV growth guidance to 60-70% year-over-year and gross profit growth to 25-30%. The company plans to maintain operating profit growth guidance despite previous tax impacts and FX headwinds. It continues to optimize costs and expects operating leverage improvements as AI initiatives take effect.
Full Transcript
OPERATOR
Good day and thank you for standing by. Welcome to the DLocal second quarter 2026 results conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again.
Please be advised that today's conference is being recorded. I will now turn the call over to the company.
Mirele Aragao, Head of Investor Relations
Good afternoon and thank you all for joining our earnings call today. If you have not seen the earnings release, as always, a copy is posted in the Financials section of the Investor Relations website. On the call today you have Pedro Arndt, Chief Executive Officer; Guillermo Lopez Perez, Chief Financial Officer; Christopher Strohmeier, SVP of Corporate Development; 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 DLocal's website at investor.dlocal.com. The recordings will be available shortly after the event has 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 DLocal'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 forward-looking statements. Actual results may differ materially from those included in DLocal's 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 DLocal's filings with the Securities and Exchange Commission, which are available on DLocal's Investor Relations website.
Now I will turn the conference over to DLocal. Thank you.
Pedro Arndt, Chief Executive Officer
Good afternoon everyone and thank you for joining us today. Our results for the second quarter of 2026 are yet another proof point of our continued traction and execution. There are four main trends I'd like to kick off with that best summarize the current strength of our business. TPV reached $17.7 billion, accelerating to 92% year over year, the highest growth rate since the first quarter of 2022. We've processed more in the second quarter than what we did throughout all of 2023.
Second, our net revenue retention was 153%, the fifth straight quarter above 140%. As we continue to deepen our relationships with our merchants, our gross profit hit $127 million, up 29% year on year. We've now hit an annualized rate of more than $500 million in gross profit. And finally, our operating leverage is improving, with operating profit as a percentage of gross profit up 6 percentage points quarter over quarter to reach 50%. As messaged previously, we expect further operating leverage improvements to kick in during the next two quarters as we benefit from the deployment of automations and AI we have been investing in, and spending in key areas that was front loaded to the first semester of this year. Focusing on TPV, the metric that reflects market share growth was extraordinary this quarter, but even more importantly has been consistently strong. TPV growth has remained above 50% year over year for seven consecutive quarters, with the last three quarters at above 70%. And furthermore, growth has accelerated over the past five quarters, reaching its higher year over year rate in over four years.
Although the pace and scale of this growth will naturally create more demanding comparisons as we move through the second half of the year and into 2027, what we are seeing today reflects the positive returns on investments we have made in our platform and our portfolio of licenses. It serves as a testament to the trust merchants place in us as they build and grow across emerging markets. This trust is a direct result of the execution on our value proposition.
Through a single integration, our merchants access the locally relevant payment methods, local schemes, and the financial infrastructure they need to operate and grow across more than 60 emerging markets. Our licenses, local teams, and operating expertise help them navigate complexity and improve performance in each country, ultimately increasing substantially their chances of a successful go-to-market deployment in the places that they partner with us.
Today, more than 760 leading global merchants trust DLocal. This includes four of the largest ride-hailing companies operating in emerging markets, five of the 10 largest e-commerce platforms, the top five video streaming platforms, and seven of the 10 largest remittance companies, amongst many other of the world's best businesses. We are now also starting to serve some of the world's preeminent AI companies and digital asset exchanges. The trust that these merchants place in us is translating into deeper relationships over time as they add countries, payment methods, and products.
Consequently, our TPV retention rate of 188% this quarter demonstrates the depth of these relationships. This quarter alone, several Tier-0 merchants had significant ramp-ups in some of our largest markets such as Brazil and Argentina, demonstrating that the opportunity remains substantial even in more established markets. We also continue to see our merchants expand into new geographies at a very rapid pace. Across our portfolio, we continue to gain both share of wallet and market share.
Across the Global South, share of wallet increased by 2 percentage points year over year in the first half to the low teens, and we now estimate our share of EM digital payments to be in the low single digits. Despite our growth, the opportunity to deepen relationships across our merchant base and capture even more new merchants remains massive. Asia Pacific is a clear example of this and one we're increasingly excited about. It is the largest, very fast-growing, and highly fragmented region with significant untapped opportunity that we serve.
It has become one of our strategic priorities as we have been expanding our presence and investments throughout that region. All of this growth that we're seeing today reflects the investments we've made in our platform over the last several quarters and years. Those investments are delivering tangible results and they continue to strengthen the foundation for our next phase of growth. Our focus remains on three areas. First, we continue to broaden our offering and invest in performance through our optimization capabilities.
In the end, the performance and breadth of our one DLocal offering is the single most important factor for our continued growth and success. Second, we are embedding AI and automation across the business. This is already increasing our development capacity with meaningfully higher monthly deployments and shorter lead times. And we expect the positive impact on our cost structure from our automation efforts to become increasingly visible starting in the second half of the year across different areas of the company.
And third, we're expanding the value-added services we offer merchants, creating additional opportunities and revenue streams over time. We will soon launch dMOR, our merchant-of-record solution through which DLocal acts as the legal seller on behalf of the merchant, allowing us to offer our clients a more comprehensive go-to-market solution. And our buy now, pay later offering continues to expand and improve and is now live in eight markets. We will continue to invest with discipline behind these priorities and the others we have as we continue to scale out the business.
With that, let me turn it over to Guillermo to walk you through our quarterly financial results.
Guillermo Lopez Perez, Chief Financial Officer
Thank you, Pedro. Good afternoon everyone. Let me start by briefly summarizing the key financial highlights for this record quarter. As Pedro mentioned, we had an exceptional quarter in volume which translated into another quarter of record gross profit. Operating profit improved 22% sequentially and we also began to see operating leverage improvements emerge during the quarter. With operating profit as a percentage of gross profit up 6 percentage points sequentially, net income increased 28% year over year and roughly 30% sequentially.
And EPS also benefited from the execution of our share repurchase program and cash generation remained strong with adjusted free cash flow conversion of 86% of net income in the first half of the year. Let me now dive into the details beginning with volume performance. Volume reached $17.7 billion in the second quarter, up 92% year on year. First half growth was exceptional, broad based across our merchants and verticals and helped by favorable FX.
Ride hailing was the largest contributor to sequential growth. One large global merchant was an important driver, but the growth wasn't concentrated just there. Several ride hailing and on-demand delivery merchants expanded meaningfully too. Travel, remittances, e-commerce, SaaS and advertising also contributed to growth. Financial services were down modestly, mostly seasonality, as some travel-related merchants in LatAm. So our business mix continues to evolve.
Local to local flows hit 61% of TPV, up 6 percentage points from Q1. The increase in local to local mix was primarily driven by the growth of ride hailing and on-demand delivery which are inherently local to local businesses. This volume growth translated into another record quarter of gross profit. Gross profit reached $127 million, up 29% year over year and 7% sequentially. Brazil and Argentina were the primary drivers. In Brazil, gross profit reached a record $40 million supported by the ramp-up of ride hailing and travel merchants alongside sustained e-commerce growth.
Argentina also delivered record gross profit with $20 million driven by broad-based growth across e-commerce, ride hailing and on-demand delivery as well as lower advancement costs elsewhere. In Latin America, gross profit grew 6% sequentially and 32% year over year. Mexico kept growing volume well. Gross profit was modestly lower sequentially though, and the mix shifted to local to local and some large merchants' ramp-ups reached their final pricing tiers.
In Africa and Asia, gross profit was down sequentially. That's mainly due to a lower share of higher-spread markets like Mozambique and Vietnam where Q1 had gains that don't necessarily recur as we flagged last quarter. Turning to expenses, total operating expenses were $63 million, up 46% year over year and down 4% sequentially. The year over year increase reflects three: the annualization of investments made in the second half of 2025, higher average salaries driven by the annual merit cycle and a limited number of senior strategic hires, and higher marketing spend concentrated in the first half around our World Cup campaign and large merchant events. Sequentially, the reduction reflects in part the absence of the $4.4 million non-recurring prior year tax item recorded in OPEX. In Q1 headcount remained broadly stable sequentially while gross profit per employee increased. From here, we don't expect material increases in headcount this year. As a result, operating profit reached $64 million, up 15% year over year and 22% sequentially. Operating profit represented 50% of gross profit, an increase of 6 percentage points from Q1.
As Pedro mentioned, we have invested heavily in automation. As those initiatives deploy and as we annualize our second half 2025 investments, we expect operating leverage to become increasingly visible during the rest of the year. Finally, below the operating line, net income reached $55 million, up 28% year over year. Diluted EPS was 18 cents, supported by earnings growth and helped by the execution of our share repurchase program. Under the $300 million program authorized in March, up to the end of Q2 we have repurchased approximately 6.9 million Class A shares for $86 million.
All of these shares have been cancelled. The reported effective tax rate for the quarter was approximately 16%. Excluding the non-recurring prior year tax adjustment, the normalized effective tax rate for the first half was 15%. As we have discussed, the effective tax rate can vary quarter to quarter based on country and business mix. Adjusted free cash flow was $69 million, up 41% year over year with adjusted free cash flow conversion of 125% of net income.
Cash flow from operations before working capital changes increased to $83 million reflecting higher operating profit. But free cash flow also benefited from a partial reversal of last quarter's temporary working capital effects which was partially offset by higher income tax paid. With that, I will hand it over back to Pedro.
Pedro Arndt, Chief Executive Officer
Thank you, Guillermo. Following the strength we've seen in the first half, we're updating our annual guidance. Looking ahead, we continue to see strong momentum across multiple verticals and geographies. This strength is broad based and gives us the confidence to raise our TPV growth guidance to 60% to 70% year over year. It's worth reinforcing why TPV remains such an important metric for us — payments is ultimately a scale business. As our volumes grow, we gain greater leverage with downstream providers, deepen our FX liquidity, and generate more data to improve performance.
These dynamics reinforce one another over time and are central to the long-term value creation of our business model. Following the strength in volumes and the continued ramp-up of several large merchants, we are also raising our gross profit growth guidance to 25% to 30% year over year. We are maintaining our operating profit growth guidance of 27.5% to 32.5% year over year only because, as Guillermo discussed, annual operating profit will be dragged down by the non-recurring prior year tax item and FX headwinds that we did not expect in the original forecast.
As always, our outlook is subject to the inherent volatility of the emerging markets in which we operate. That said, we believe this guidance best reflects what we see in the business as of today. And with that, I'll hand it over to Chris to lead us through some questions on the quarterly results.
Christopher Strohmeier, Investor Relations
Hello everyone from a wintry but sunny day here in Montevideo, Uruguay. As we did last quarter, we wanted to take a few minutes here to cover the key themes that we think will be relevant to investors from this quarter. Pedro, Guillermo, thank you so much for being here with us again. And Pedro, let me start with you. We delivered another spectacular quarter in terms of TPV growth with evident share of wallet gains across our portfolio. As we move into tougher comps going forward, what gives you confidence that we can keep delivering high growth in the medium term?
Pedro Arndt, Chief Executive Officer
So big picture, the growth we're seeing is a reflection of two things: the market opportunity, which is still enormous and will continue to be enormous, but also the returns on the investments we've been making to improve performance, broaden product offering, and strengthening our competitive positioning. So those are trends that we feel comfortable will sustain themselves in time. Looking at it a little bit shorter term, the first half of the year also benefited from a ramp-up of some large global merchant expansion deals both into existing geographies and new markets.
So for example, the largest Tier 0 merchant that Guillermo discussed previously, that ramp-up across key markets is already completed. And so the headwinds from the tiered pricing impact as they ramped up, which have been significant factors over recent quarters, becomes less pronounced going forward. One interesting data point is if we exclude this one very large merchant relationship and a few currency volatility effects, net take rate would have been very close to flat quarter over quarter, despite TPV growth that still would have been in excess of 65% year on year.
So even as we enter these tougher year on year comps from these ramp-ups that already have been behind us, we really don't see any signs of the overall growth model slowing down, and we continue to expect share of wallet gains across the existing merchant base, expansion into new merchants, going into new geographies, and then, as always, continue to offer more payment methods and new products. So the investment thesis is one of a durable growth opportunity, again supported by size of market and an overall secular trend towards digitalization of emerging market economies globally.
So as we continue to execute, we feel very, very enthusiastic about the mid to long term opportunities of this business.
Christopher Strohmeier, Investor Relations
Great. Guillermo, going over to you. Turning from growth to profitability, operating expenses declined modestly quarter over quarter. But I think more importantly, our full-year guidance implies further and important improvements in operating leverage in the following quarters. What gives you confidence in that trajectory?
Guillermo Lopez Perez, Chief Financial Officer
Well, there are a few things that are coming together to give me some confidence. The first one, and I would say the big one, is timing. There's a lot of investments we made in the second half of last year. They are now fully in our numbers in the first half, so I think that headwind will fade in the second half. We also have front-loaded marketing into the first half. So we have the World Cup campaign, we have a large merchant event, and that happened in the first half of the year and that shouldn't repeat in the second half.
It's also worth saying that the first half carried one-off costs that we don't expect to happen in the second half. So we have high equity loss provisions that we expect there, we have high operational losses, we have the prior year tax adjustments. So we don't expect that level of one-offs in the second half, although it must be said that those are always difficult to predict. And also finally, headcount, as you can see in the earnings script, has been broadly flat.
There's a salary step-up that was really the merit cycle that we do every year and a few senior hires that we did. And now that's embedded into our base. And there's the automation program that Pedro mentioned that should still roll out throughout the organization and help us see some of that leverage in the second half. One thing I would mention and that I would flag is that if you take some combinations of our guidance ranges, you can back into an OPEX cut that's bigger than what we have currently planned.
So cost discipline always carries some risk. So we'd rather hold the operating profit guidance as it is unless the gross profit upside and the cost normalization play out. I think that's the way we are balancing the near term with the long-term investments that we need in this growing business.
Christopher Strohmeier, Investor Relations
So following up on what Guillermo said about automation, which is what's actually happening operationally in the company, Pedro, can you give us some more color on how we're seeing our AI efforts and where we are on that trajectory?
Pedro Arndt, Chief Executive Officer
Yeah, so we're really seeing AI as a core enabler across the company as we increasingly embed it across engineering, compliance, operations, commercial, customer support, and there are tangible results already, although we expect more to come, especially in the back half of the year. So as we've said previously, over 60% of code is already AI-generated. That's led to a, I think it's nearly doubling of engineering deployments year over year and a significant reduction of lead times in our software development cycle.
And that's how we're supporting volume growth that is over 80% for H1 with headcount, as Guillermo just said, which is really broadly stable overall, and that bodes well for the long-term operational leverage of the business model. So when I look ahead, I see further efficiency opportunities through AI and automation in more of a medium-term look. As we expand our product portfolio and cover more and more countries, we expect to be able to selectively add headcount, but primarily feet on the ground and localization, while at a centralized and overall middle- and back-office level, which is always relevant in a payments company, we expect to be able to really push the envelope in terms of automation and high operational leverage there.
Christopher Strohmeier, Investor Relations
Great. Turning to taxes, where investors have seen some volatility in the last few quarters in terms of our effective tax rate. How should they think about the tax rate going forward?
Guillermo Lopez Perez, Chief Financial Officer
So quarter to quarter the tax rate will keep moving and it depends on the country and the business mix, so there's going to continue to be that volatility in coming quarters. Now, looking ahead and based on the legislation currently enacted, we do expect some upward pressure on our ETR, particularly in jurisdictions that are implementing the OECD's Pillar 2 framework, which we expect to impact us starting in 2027. It's important to say that there are still regulatory developments under discussion across several of the countries in which we operate, so it's too early for us to quantify the ultimate impact.
But we continue to evaluate these changes with our external advisors and we will provide updates as appropriate. That said, more on this year, excluding the quarter-to-quarter volatility that I discussed and the prior-year tax adjustments, our normalized effective tax rate for the first half provides a reasonable reference point for the remainder of the year.
Christopher Strohmeier, Investor Relations
Great. And one last one, Pedro, before we open the line, let me just come back to you. From everything we've covered during the earnings presentation during this conversation, for you, what are the most important takeaways that you'd like to leave our investor community with?
Pedro Arndt, Chief Executive Officer
Yeah. So first of all is the strength of the execution, right, and the kind of growth that that's delivered, but more importantly that it should continue to deliver. And all of this supported by the fact that our relationships with global merchants are increasingly deeper and stickier. You see that in the retention rates we mentioned during the prepared remarks. And we're seeing merchants adding countries, adding payment methods, and now beginning to add products that they use from us.
And so that generates the kind of positive cycle where we can continue to invest in platform, in product and innovation. And we see the returns of those investments allowing us to capture what is a sizable market opportunity going forward. Second, and this is somewhat related to scale, somewhat related to AI, and somewhat inherent to the business model, is the operating leverage long term. You're going to see some of that in the second half as the business continues to scale and the automation initiatives that we've mentioned get deployed.
And longer term, the balancing act becomes one of making sure that we find that right equilibrium between continued deliverance of operating leverage while at the same time investing to keep that flywheel going. This is a highly attractive cash generative financial model and that gives us the ability to continue investing to carry out that flywheel, yet consistently return value to shareholders. So really, we think the company is in a really strong position right now and we just need to continue executing on our strategic plan.
Christopher Strohmeier, Investor Relations
Great. Thank you very much, Pedro. This concludes our conversation and we now open the line to questions.
OPERATOR
As a reminder, if you would like to ask a question, please press star 11 on your telephone. You'll hear the automated message advising your hand is raised. If you would like to remove yourself from the queue, press star 11 again. We also ask that you wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster. Our first question will be coming from the line of Tito Labrota of Goldman Sachs.
Your line is open.
Tito Labrota, Analyst at Goldman Sachs
Hi, good evening. Thank you, Pedro, Guillermo, Chris, for taking my question. I mean, very impressive on the TPV growth. I guess, I mean, just to understand what drove such a large increase in the quarter. I know you gave some color there on some merchants and ride hailing, et cetera, but was there anything unexpected? I mean, I don't think anybody was modeling 90% year-over-year TPV growth. So just to understand that dynamic, and it seems like there's still room for that to continue to grow at a very healthy pace.
And Pedro, you mentioned that there was that one merchant that negatively impacted the take rate, but if it wasn't for that, it would have been flat. I just kind of missed if you can just mention that again because I think, on the other hand, what everybody's trying to figure out is what is the floor on the take rate. And I know there's that inverse relationship between TPV growth and take rate, and there was a lot of local-to-local volumes in Brazil and Mexico.
But help us think about the take rate/TPV growth. Thank you.
Christopher Strohmeier, Investor Relations
Thanks, Tito.
Pedro Arndt, Chief Executive Officer
If you look at the vertical performance quarterly, I think it paints a picture in terms of phenomenal strength around ride hailing and travel primarily. Ride hailing has doubled Q-on-Q. It's not even a year-on-year number. And that's just a reflection of some very rapid expansion into numerous new markets and significant share-of-wallet gains across a few key counterparts. Very, very large global companies that have really, I think, bumped DLocal up to a whole new tier in terms of the importance and the amount of volume that they flow through us.
In a way, I think this is a confirmation of what we've always said, that even relative share of wallet of our existing merchants allows for significant room to grow. And when we see that happen, you have this kind of acceleration in TPV. So it sets up tough comps for next year. But on the flip side, there are plenty, plenty of merchants and global opportunities where, if we continue to execute well and deliver performance and cost, we can see this kind of massive ramp up.
And then on take rate, I think—thanks for the question—if you will, the flip side, but it's not really a flip side, that's just a consequence maybe of over-focusing on take rates. When merchants have these significant spikes in volume, they do rapidly hit new pricing tiers. That's still all incremental gross profit to us and it's very positive, but it does drive down the headline take rate. Were you to back out that one very large ride-hailing merchant's mix gains at a lower take rate, take rate would have been relatively flat sequentially.
That doesn't necessarily signal a bottom, Tito, but it does show that there is potentially increasingly an asymptotic shape to this. And more importantly, I think it confirms what we've said all along, that incremental TPV at incremental gross profit is really the financial model here and not managing to any specific take rate.
Tito Labrota, Analyst at Goldman Sachs
Okay, no, that's super helpful, Pedro. And so just to clarify then, so it was just that one ride-hailing merchant which seemed to have given you a lot of volume—excluding that one, take rates would have been relatively flat. And then in terms of—you mentioned your wallet share, right? But how about with ride-hailing merchants or with maybe your top 10 merchants? How does the wallet share maybe compare to that versus the average overall?
Pedro Arndt, Chief Executive Officer
So yeah, this is a very large global merchant. So interestingly, even with this massive ramp up for that merchant, it's not like we're maxing out share of wallet or that it has a significantly different share of wallet with us. But that won't always be the case. I think it's fair to say that in some cases a very rapid ramp up could mean that we become significant in terms of share of wallet. And remember, we measure share of wallet exclusively in markets where we operate.
This ramp up, as you've seen, is very much focused on LatAm, which means that in the future, potentially there still could be more and more share-of-wallet gains from someone like this if we're able to serve them in a growing number of African, Middle Eastern, or Asian markets. So we still have a very large untapped addressable market ahead of us if we continue to execute, even when you look at it on a per-merchant basis.
Tito Labrota, Analyst at Goldman Sachs
Okay, very helpful. Thank you, Pedro, and congrats on the strong result.
OPERATOR
Thank you. One moment for the next question. Our next question is coming from the line of Jamie Friedman of Taquana International Group. Please go ahead.
Jamie Friedman, Analyst at Taquana International Group
Hi. Thank you for taking the question. So Gary, in terms of the annual operating profit growth guidance, I know there were a couple of one-timers that you're calling out—foreign exchange and tax. I apologize if I missed this, but did you quantify the effect of those? And if not, could you?
Guillermo Lopez Perez, Chief Financial Officer
I think you're referring to when I quantified how to think about tax in the remainder of the year. So, there was the one-time tax impact that we booked in Q1. That was a one-off and it's not repeatable. If you normalize for that item, in Q1 the tax rate was about 15%. In Q2 we saw around 16%. And what I was trying to say is that if you think about the balance of the year, that normalized tax rate in the first half should be a good example of what we would expect for the remainder of the year.
Now in terms of FX, I don't know exactly what you refer. I mean, we talk about the FX headwind that we saw on volume and that is included in some of the presentations that we share. But obviously it's very difficult for me to say how FX will impact the remainder of the year from a volume or gross profit perspective.
Jamie Friedman, Analyst at Taquana International Group
But the operating profit guidance of 27 and a half to 32.5% growth for the year is unchanged. I may be mistaken, but I thought that you had mentioned. So we know about the tax from the Q1 and then—
Pedro Arndt, Chief Executive Officer
Jamie, let me see if we can help you walk through this. What we're saying is we are not adjusting stuff out. Operating profit is operating profit. So with the $4.4 million of prior-year tax, plus the fact that if you look at currencies, they've actually become a little bit of a headwind versus where they were at the beginning of the year when we issued the guidance, those two effects lead us to leave the guidance unchanged. If you look at the matrix slide, what we're saying is, were we to adjust out the prior-year tax period, it's likely we would have raised the operating income guidance as well.
But we'd rather not adjust and just give you guys this kind of clarity.
Jamie Friedman, Analyst at Taquana International Group
Yeah, no, I got it.
Guillermo Lopez Perez, Chief Financial Officer
When you say the matrix slide, you're talking about the bridge, right? The guidance update, you'll see that it indicates that operating profit, excluding the estimate, we would have seen the year coming in around the upper range of the original guidance and potentially would have also raised guidance on operating profit.
Jamie Friedman, Analyst at Taquana International Group
I got you. Okay, sorry to belabor that. But I think that that is something investors are really focused on.
UNKNOWN, Analyst
And then let's see, in terms of the local-to-local—so where is this? Sorry, I'm going to page 21. Yeah, pay-ins, payouts, local-to-local. So, okay, how should we be thinking about the composition of those dimensions? Both pay-ins, payouts and local-to-local, cross-border, and their impact on take rates?
Guillermo Lopez Perez, Chief Financial Officer
Yeah, payouts in general have a lower take rate. They're instrumental many times in generating liquidity for us and having a better margin on the pay-in business, but they are lower take rate. And then local-to-local don't have the FX components that cross-border does, and those are also lower take rate. So when we mention a very large ride-hailing merchant, ride-hailing typically has a strong mix of local settlement because they need cash in market to settle to the driver.
Therefore, those are lower take rates. And so that kind of explains why, in part, if you back out for that very large ramp-up in volume coming from a local-to-local ride-hailing merchant, you would have gotten flat take rate on the rest of the book.
UNKNOWN, Analyst
Okay, now I got you. And just to clarify, sorry, is that sequentially? Right. These comments have all been sequential? Okay. All right, great. Thank you, guys. I'll drop back in the queue.
Guillermo Lopez Perez, Chief Financial Officer
That's sequentially, not year over year. Yes, sequential.
OPERATOR
Thank you. One moment for the next question. Next question will come from Guheme of J.P. Morgan. Please go ahead.
Guheme, Analyst at J.P. Morgan
Hello, good evening, everyone. My question is on the outlook for the second half and going forward. Pedro, I think the message is super clear that we could see costs slowing down a little bit. But my question is how much costs are tied to the strong performance—commercial performance—that you are printing. Right. Because there's a positive effect here. We always want companies to cut costs but, in some way, there's a positive effect, I think, on revenues as you invest in headcount expansion.
So in the end, I'm not 100% sure how much of your very strong TPV and revenues, in some way, are tied to the investments you have been making on the business. So my question is, more looking forward, if there is any risk that you, as you slow down a little bit, costs and the investments, if we could see the top line that today has a very strong momentum, it also lose a little bit of momentum—how you think about this trade-off. Thank you.
Pedro Arndt, Chief Executive Officer
Let me take a first cut at this and Gieshe can complement me. There's obviously always a relationship between what you're investing and how you're growing. However, if you listen to the prepared remarks, I think we've highlighted three factors that we think drive the ability to really manage cost for the second half of the year. One is simply that you will no longer have the prior-year tax impact. Two, marketing spend, because of the World Cup campaign where we were a World Cup sponsor, was heavily tilted to the first half of the year and doesn't happen in the second half of the year.
And third, the operating leverage that we're expecting to see—and the first two are already confirmed, the third is the one that we need to confirm as it plays out—is driven by the deployment of a lot of the automations and AI-driven replacement of headcount that we will carry out in the second half of the year. So it doesn't necessarily have a detrimental impact to top-line growth, because this is where the leverage is coming from. I don't think it's that the World Cup marketing has a direct pass-through to growth.
That's just long-term merchant relationship building. So I think we're fairly confident that this is a business model that can continue to deliver strong growth and operating leverage into the future.
Guheme, Analyst at J.P. Morgan
That's clear, and just a follow-up. Put one on the point—I think it was asked in the call as well—the FX point. We're just curious. You mentioned that FX played a little bit against the beginning of the year, but just in what portion of the business, Pedro? Because I'm trying to reconcile here. The EMFX had a very strong performance year to date. Most of the countries had a positive tailwind from FX. So just trying to understand why it was a headwind throughout this first half.
Guillermo Lopez Perez, Chief Financial Officer
So I think—go ahead. Yeah. So if I think about OPEX and some of the FX impacts that we mentioned in Q1, if you think about the footprint of our resources, they are in countries whose currency has appreciated against the dollar. So we're talking countries like Brazil, for example, or—why it's difficult to predict going forward—but that's the impact that we've seen in the first half. That said, it's not some of the most material impact that has had in terms of OPEX growth.
So, as we said, in the first half the majority of the impact came from the investments that we did in the second part of last year.
OPERATOR
Thank you. One moment for the next question. And our next question will be coming from the line of Pedro of Itaú BBA. Please go ahead.
Pedro, Analyst at Itaú BBA
Thank you very much. Good evening. Congrats on the quarter. And here, Pedro, I'm trying to also puzzle things together a little bit. I mean, you're pacing on a much stronger TPV or client-traction pace, gross-profit pace, choosing to reinvest a little bit—yes—but you go into 2027 with a lot more momentum. When I play here with my model, the pace that you're ending this year at for gross profit—and a little bit also tied into the second question—so how much I carry from it, also in terms of the reinvestments that you're doing, of course should be more, but relatively speaking for 2027.
Thank you.
Pedro Arndt, Chief Executive Officer
Okay, thanks, Pedro. I think you're picking up on something which is important, and I don't want to get too ahead of myself in terms of giving 27 guidance, but I think the nature that this year is playing out—with more expenses in OPEX in the first half of the year than the second half of the year. We've called out World Cup, we've called some of the prior-year tax issues—you're going to have a very strong operating leverage exiting Q4. I don't think you guys should then project that into all of 27 linearly, because 27 should be better spread out in terms of where the spend occurs as well.
And we're trying to make sure we find the right balance here between investing for the long term and delivering operating leverage. So, again, we'll address this when we issue the guidance for 27. Now, it's a bit premature, but what I'm trying to say is be careful with grabbing Q4 margin structures and assuming it continues to leverage from there; that may not be the case. Full year 27 versus 26, certainly we're committed to very consistent operating leverage, but not necessarily Q4 exit rate to 27 full year.
I hope that helps.
Pedro, Analyst at Itaú BBA
Yeah, and you got exactly the outcome I was getting here. So it helps me paint the picture a little bit. And we'll talk again soon. Thank you very much.
OPERATOR
Thank you. One moment for the next question. The next question is coming from the line of Matthew Coet of Truist. Please go ahead.
Matthew Coet, Analyst at Truist
Hey, guys, thanks for taking the question here. I have one more on the take rate. If I look at the monetization bridge slide that you guys provide, which is really helpful, it looks like there was like a 5 bip impact from lower FX spreads in Vietnam and overall volatility. Could you kind of unpack that a little bit more for us? Would you expect this to potentially reverse in the back half of the year or at least for this headwind to go away? And, yeah, it kind of goes into—if I look at the implied guide for the take rate in the back half of the year, it's 75 basis points versus 72 this quarter.
So I'm just trying to connect the dots because usually the take rate's a little bit lower in 4Q. Thank you.
Pedro Arndt, Chief Executive Officer
Okay, let me start with the easier one, which is the FX spreads—Vietnam. I think what you've seen with our business consistently is that there are pockets of the emerging world which at times show very, very large spreads on FX because of macroeconomic volatility. So for periods of time it's been Argentina. For other periods it's been Egypt. For others, it's been Bolivia. For others it's been Nigeria. The beginning of this year, we saw that in Vietnam, and then the spreads in that market have significantly compressed when you compare Q2 to Q1.
So I think this is inherent in certain pockets of our footprint—smaller markets, more volatile—but that have periods of very high profitability. And this is just inherent in the business. I think the good thing is that as we deliver more and more time, kind of our thesis has been playing out—that which pocket of the emerging world is high spread changes, but there always seems to be somewhere appearing. Volatility, I think, is a little bit more predictable going forward.
It should lessen, I think, into the back half. There's about a third to slightly less than a half of that volatility that really was very much Q1-related of this year. And unless something else happens in terms of quick dislocations of currency values, I don't think you'll have this level of volatility in future quarters. A lot of this happened in Mozambique, to be very specific. So yet another pocket of the emerging world.
Matthew Coet, Analyst at Truist
Pedro, that was super helpful, and then maybe more fun of a question here. When you first provided your 2026 guidance, you gave a nice bridge in terms of the breakdown of incremental TPV where you broke it up into share of wallet gains in existing countries and new countries, new merchants, new products. I wanted to focus on the new merchants and the new products aspect of that guide. Could you just give us a reminder or update us on how that's trending compared to your original expectations?
And then could you also double click on the merchant-of-record solution business—kind of curious, like what geos, what verticals, where do you see product-market fit there? Thank you.
Pedro Arndt, Chief Executive Officer
Okay. Yeah. The answer there is no material changes directionally. If we were to update that data, you would see more performance from share of wallet gains of the existing book, less from new merchants, and less from new products. I think the new merchants versus existing merchants is almost more of a mix thing—just that, as we said, there's been more than one existing merchant with very, very strong share-of-wallet gains that have exceeded initial forecasts.
On the new product issue, I think it's fair to say they're slightly behind where we'd like them to be right now, and there's work to be done there. Merchant of record—again, I think it's an attempt at having a broader portfolio of products to see which ones stick, which ones have a faster ramp-up. Merchant of record, I think, if I were to give a proxy from a competitor, it does some of the things Stripe Atlas does and then more. It essentially places more of the burden of setting up a local entity, filing taxes, collecting taxes on us, and less on the merchant.
So it's a product that allows merchants to accelerate their go-to-market into a new country even faster, because not only do they not have to deal with payments under the MOR, they don't have to deal with many other statutory issues and tax issues. So we're just trying to do more and more of the heavy lifting when it comes to opening operations into a new emerging market. And obviously those products allow us to capture a higher take rate.
Matthew Coet, Analyst at Truist
That's super clear. Thank you.
Pedro Arndt, Chief Executive Officer
Thank you.
OPERATOR
One moment for the next question. Next question is coming from the line of Camila Azibio of UBS. Please go ahead.
Camila Azibio, Analyst at UBS
Hi, everyone. Thank you for the space, and congrats on the results. I have one question in terms of the regional and vertical analysis when we talk about Brazil, Argentina, overall. So while we saw strong TPV and gross profit in Brazil and Argentina, we saw the sequential decrease in gross profit in Mexico. So could you please provide more detail on the cost pressures and also volume price tiers affecting the Mexico market, please? Thank you.
Guillermo Lopez Perez, Chief Financial Officer
Great. So Mexico, I think it's worth covering. So thank you for the question. Mexico obviously continues to have very strong TPV growth. It actually had very strong revenue growth of 64% year on year. So I'd say top line, very strong, then disappointing gross profit line, if you will. But the reason I'm calling out the revenue is that what that points to is that that's primarily a cost issue. So what's happening in Mexico is the decline in our pricing power, which is not that marked.
That's why revenues continue to grow, 64%, have been significantly offset by not being able to push down our cost structure. Our cost structure in Mexico is actually, as a percentage of TPV, slightly up. So what we need to do a better job at—and I think scale and just further negotiation with processing partners should allow us to get there—is to manage the Mexican cost basis, primarily that of processing payments, better. And that should begin to align gross profit growth closer to revenue growth, which continues to be very strong.
So there's work to be done in Mexico, but it's more cost management, which I feel relatively confident we will deliver on. Did you ask about another region, Camila? Sorry, I was focusing on Mexico.
OPERATOR
Pardon me, this is the operator. Camila has left the stage. One moment for our next question. Our next question is coming from the line of Niha Arguela of HSBC. Please go ahead.
Niha Arguela, Analyst at HSBC
Hi. Thank you for taking my question, and apologies if I'm making you repeat any of the answers. I just wanted to get a bit more color. You mentioned that you are gaining more share with the existing merchants. What is driving the strong TPV momentum that we are seeing? What is allowing you to gain this share? Is it the conversion rates that you're providing, which is better, or just the breadth of the platform? And I know there's not one silver bullet, but a mix of things.
But if you can input in hierarchies as to what are the key things that is allowing you to win more business with your merchants. And would that also translate into more accelerated take rate pressure as margins quickly hit the tiered pricing, as we saw that impacted take rate in this quarter as well? So should we see a more accelerated compression in that take rate in the near term as you grow more with existing merchants? Thank you.
Pedro Arndt, Chief Executive Officer
Yeah, thanks. I think you've hit on some of the key drivers of a merchant decision on how to give us more markets, more volume, more products. It's a combination of conversion rate, price, and obviously also service model and quality of service. I wish there were one answer for every single merchant. I think different merchants and different verticals will focus more on different things. Very low-margin businesses may be more price sensitive; higher-margin businesses will be more conversion rate or service model sensitive.
But those are usually, I think, the three factors that drive decision. And given the strengths of and sustained strength of our TPV growth, I think it's fair to say that we're definitely doing a good job on delivering value on conversion, service model, and price. If you want a more specific readout on the current quarter results, I think it would be fair to say that this very rapid ramp-up of one global merchant is a good example of when, because we have a multi-market relationship with them, we're able to ramp them up very quickly at a lower take rate, but it's still significantly accretive to gross profit.
And then there are other secondary benefits that come from this. As our TPV grows across a market, it allows us—hasn't happened in Mexico; it's definitely happening everywhere else—to lower our cost of processing, which then improves our net take rate across the rest of the book. Just because pricing is flat, cost is coming down. But on this specific win, I think it is the combination of them realizing that a rapid ramp-up gets them to lower price tiers and that we've reached a level of operational excellence that they can trust us with this level of share of wallet going forward.
I think this is—I'm going to be careful here—but given what we're seeing today, I think our expectation is not of accelerating take rate decline into the end of the year. That's as far forward as I'll give you an indication of what we're seeing today.
Niha Arguela, Analyst at HSBC
Got it. Pedro, if I can just clarify there, would it be fair to assume that part of the take rate decline that we saw sequentially in this particular quarter could be maybe reversed in third quarter because it was driven by mix shift, which you can't control, which might change again next quarter, and also FX-related volatility? So could we see part of the net take rate pressure ease in third quarter?
Pedro Arndt, Chief Executive Officer
I think implied in our revised guidance is not a reversal of take rate. It is a deceleration in the rate at which take rate declines. We've raised TPV guidance, which means I think the way we're managing the model is to even stronger market share gains and TPV acceleration, all in accretive gross profit deals, which means we've also raised the gross profit range, but not necessarily because take rates are going up, but rather on the strength of TPV growth.
Niha Arguela, Analyst at HSBC
Very clear. Thank you so much.
OPERATOR
Thank you. And that does conclude today's conference call. Thank you all for joining. You may now disconnect.
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