美卡多 (MELI) 2007 Q4 法說會逐字稿

Welcome to everyone to MercadoLibre's earnings release conference call for the fourth quarter and full year 2007. The conference call is also being broadcast on the Internet and is available through the Investor Relations section of our website.

The management team presenting today are Marcos Galperin, our CEO; Nicolas Szekasy, CFO. In attendance, we also have Hernan Kazah, Company COO, and Osvaldo Gimenez, Senior Vice President, Payments.

Before handing the conference over to Marcos and Nicolas, let me remind you that during today's call, management may make forward-looking statements relating to such matters as continued growth prospects for the Company, industry trends and product and technology initiatives. These statements are based on currently available information and are current assumptions, expectations and projections about future events.

While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not place undue reliance on these forward-looking statements. Our actual results may differ materially from those discussed in this call for a variety of reasons, including those described in the forward-looking statements and risk factor sections of our S-1, 10-Q and 10-K filings with the Securities and Exchange Commission, which are available on our Investor Relations website.

Now, let me turn the call over to MercadoLibre's CEO, Marcos Galperin.

Thank you, Pedro, and thank you all for joining us today. I'd like to walk you through some of the highlights from the quarter as well as the year and then hand the call over to Nicolas, who will go into greater detail on our financial performance before we answer questions.

Let me start by saying how pleased we are with our fourth quarter results, which culminated a year of significant milestones for MercadoLibre.

First of all, we made Company history with initial public offering of our common stock and listing on NASDAQ. We are very proud of this major accomplishment and of the hard work put in by our community of buyers, sellers and employees whose commitment and dedication made this task possible.

We are obviously pleased by the remarkably strong reception we received from the investment community, especially given the volatility in the broader markets. Furthermore, the December comScore Media Metrix Web traffic analysis ranks MercadoLibre as the leading online retail site in all of our major markets, as measured by unique visitors per month. We believe our position as the most visited Web retailer in Latin America highlights the strength of our brand and the growth prospects of our business.

Financially, we had a record year, leveraging our leadership position in the market, improving operating efficiencies and diversifying across geographies and businesses to deliver strong top line growth and healthy margin improvement. For the fourth quarter, total net revenue grew to $26.9 million, a 74% growth rate year-on-year, driven by strong performance from our Marketplace and Payments businesses. Income from operations grew to $7.3 million, up 250% year-on-year, with operating income margins expanding to 27.1%. Net income was $5.3 million, a growth rate of 189% year-on-year.

Growth for the quarter was balanced across our two business segments. Our core business continues to perform very well. Revenues for our Marketplace business unit was $21.1 million, up 62% year-on-year. This was led by solid growth in live listings, unique sellers, unique buyers and successful items. In Payments, revenue increased to $5.8 million in the quarter, a growth of 141% year-on-year.

As stated earlier, 2007 was one of the best years in our history. For the full year, total net revenue grew to $85.1 million, up 64% over 2006. Growth was driven primarily by the positive macroeconomic trends of most Latin American economies, the ongoing adoption of Internet-based commerce and the strength of MercadoLibre's position.

Our results were balanced across each of the 12 countries where we operate as we continued to add buyers and sellers to our community, thus increasing the number of listings and transactions on our platform. We also continued to improve the overall MercadoLibre experience for our users by focusing on improving our product and service offerings.

Income from operations for the full year was $20.9 million, up 288% year-on-year, with operating income margins expanding to 24.6%, up from 10.4% in 2006. Net income increased significantly to $9.7 million for the year, compared to $1.1 million in 2006. Importantly, this growth was consistent across our business segments -- core Marketplace, including classifieds and advertising, and Payments.

In our Payment business, MercadoPago continued to deliver strong results, generating robust revenue and profitability growth. This was driven in great part by sustained growth in listings share, significant reductions in bad debt rates and the success of credit card installments financing in Brazil.

We have fully launched our new payments platform, MercadoPago 3.0, in Chile, Colombia and, more recently, in February of 2008 in Argentina and are pleased that it has been well received. This new platform removes the escrow functionality and shifts the payment of the processing fee from the buyer to the seller, thereby making the process faster and more compelling. Additionally, MercadoPago 3.0 also enables payments both inside and outside of our platform, vastly expanding the addressable market for our payments platform. We plan to roll out MercadoPago 3.0 to Brazil, Mexico and Venezuela during 2008.

Lastly, we made great strides in growing our classifieds and advertising businesses, increasing revenue and gaining market share across the region. As we have said all along, we believe this accelerated growth underscores the real potential in these segments for MercadoLibre. During the year, we made substantial improvements to our user experience, and we finalized several key strategic and product initiatives.

Some of the highlights from 2007 are -- we doubled the size of our technology team and opened a new development center in the San Luis province in Argentina, in addition to the one we already had in Buenos Aires. These two top-notch facilities and the world-class professionals working in them are at the center of our enhanced capacity to meet the increasing product and technology demands of our community of users.

We launched the use of videos on listings to improve the buying experience for our users, allowing shoppers to view detailed video of the products they are browsing for on MercadoLibre. We introduced final value fee only listings in Mexico and Colombia. These listings that do not charge insertion fees at all, but charge a higher final value fee if the listing is successfully sold, marks another successful step in our strategy of offering multiple pricing formats tailored for different seller segments.

We also began offering targeted pricing through a tiered pricing structure by category to increase monetization in a way that is also accommodating to the specific economics of sellers in different categories.

We upgraded our search and sort functionalities on the site, improving the algorithms that perform these steps, with the objective of creating a more efficient and relevant shopping experience for buyers. We allowed sellers to gain feedback on purchases made to them by repeat buyers as well as offering them discounts on these sales. That's created an added incentive for sellers to close repeat transactions on the MercadoLibre platform.

Finally, we also launched an improved and updated vertical category for motor vehicles in all major markets, further strengthening our product offering for online classifieds.

We are extremely proud of MercadoLibre's performance in 2007 and are confident about our prospects for 2008. We are uniquely positioned to leverage the positive growth trends influencing Internet, broadband and PC penetration rates in Latin America. We will remain focused on our plan to drive long-term value to our shareholders by attending to what is best for our community of buyers and sellers over the long run.

With that, I'd like to turn it over to Nicolas for a more detailed review of our financial performance.

Thanks, Marcos. I will now go over our Q4 financial performance in more detail. Overall, Q4 was a very good quarter. For the third consecutive quarter, we delivered accelerating revenue growth and healthy gross margins and achieved economies of scale in our expenses. Therefore, we generated robust operating income margins and net income.

Specifically, net revenue grew 74%, to $26.9 million. Gross profit margin was healthy at 77.1%. Operating income margin expanded to 27.1%. And we achieved record operating income of $7.3 million and record net income of $5.3 million.

Revenue growth was driven primarily by the addition of 1.6 million new confirmed registered users, bringing the total to 25 million. A 40% increase in marketplace gross merchandise volume to 461 million, an 87% increase in the total payment volume to $57 million, and that improvement in our consolidated take rate to 5.8% from 4.7% for Q4 2006.

You may recall take rate is measured by revenues as a percentage of GMV. On a consolidated basis, the take rate has increased because payments have grown faster than the marketplace, thus driving the average take rate upwards. In addition, in our Marketplace segment, our take rate increased to 4.6% from 4% in Q4 last year as a result of three factors.

First, we operated our sorting algorithm in 2007 to reward sellers who generate higher rates of buyer satisfaction and higher monetization. Second, we implemented pricing structure changes in Q1, whereby we increased final value fees and lowered insertion fees for low-rotation, high-margin categories that require a longer listing duration and [disemburse] for a high-rotation, low-margin categories. Additionally, we generated robust growth in classified and advertising revenues, which drove the marketplace monetization upwards.

Take rate in the Payments segment increased to 10.2% in Q4 this year, from 7.9% in the fourth quarter of 2006. As a reminder, payment take rate is measured as payment revenues as a percentage of total payment volume.

This increase was primarily due to introduction of 12 installments via credit card financing in MercadoPago Brazil. This initially has driven volume growth, in addition to increasing the average commission that we charge. The 74% total year-over-year revenue growth in Q4 represented a continued acceleration for the third quarter in a row, as the growth rate in Q3 had been 72%, in Q2 53%, and in Q1 50%.

In Q4, the Marketplace segment slightly accelerated the growth rate year-over-year versus Q3, and the Payments segment slightly decelerated. Our Marketplace revenues grew 62% to $21.1 million, and Payments revenues increased to 141% to $5.8 million. The Marketplace represented 78% of revenues and Payments 22% versus an 84%/16% breakdown in the same quarter of last year.

We had a positive Forex impact in Q4 2007. If we excluded the impact of currency rate changes and calculated Q4 '07 top line using Q3 '07 exchange rates, the year-over-year growth rate would have been 66%.

Gross profit grew 76% to $20.7 million, representing 77.1% of revenues versus 76.4% for the same period one year earlier. Improvements during Q4 in cost of goods sold in both the Marketplace and the Payments segments more than offset the higher rate of growth in Payments as compared to Marketplace.

Total operating expenses for the period totaled $13.4 million, a 37% increase year-over-year. These expenses represented 50% of revenues versus 63% of revenues in Q4 of 2006, and the business continued to show economies of scale.

There are some differences per line item that we would like to highlight. G&A grew 89% year-over-year in Q4 of 2007, driven by new public company expenses combined with increased legal expenses.

Product and technology development grew 49% compared to the same quarter one year go, as we added developers in our main Buenos Aires center and we opened a second center in the province of San Luis, as Marcos described. Sales and marketing grew only 19% versus Q4 of 2006, driven by improvement in bad debt in both the Marketplace and Payments segments.

We're very pleased that as a result of the robust revenue growth, stable high gross profit margins and the significant leverage of expenses, our income from operations grew 260% year-over-year to $7.3 million, representing a 27.1% operating income margin.

Net income for the three months ending in December 31, 2007, was $5.3 million compared with $1.5 million during the same period of 2006, a 189% year-over-year increase.

Let me now move on to 2007 full year results. 2007 was an excellent year. During 2007, we added 6.7 million new confirmed registered users. Marketplace gross merchandise volume grew 41% to $1.5 billion, and the Payments segment total payment volume grew 78% to $158 million over the same period last year.

Our business generated net revenues of $85.1 million, growing 64% year-over-year. Revenue growth for the year was driven primarily by the combined growth in key volume metrics and take rate, which went from 4.8% to 5.6%. Our Marketplace revenue grew 55% to $69.5 million, and Payments revenue increased 113% to $15.6 million.

For the full year, the marketplace represented 82% of revenues and Payments 18% versus an 86%/14% breakdown last year. If we excluded the impact of currency rate changes and calculated 2007 top line using 2006 exchange rates, the year-over-year growth would have been 52%.

Total operating expenses for the period were $42.5 million, a 31% increase year-over-year or less than half the rate of growth of our revenues. These expenses represented 53% of revenues versus 66% in 2006.

Product and development, sales and marketing and general administrative expenses all grew versus 2006 at a rate lower than the rate of growth of revenues. As a result of all of the items described, income from operations grew to 288% year-on-year to $20.9 million, representing a 24.6% operating income margin, an impressive increase from 10.4% for last year.

Net income for 2007 was $9.7 million compared with $1.1 million during 2006, an 804% year-over-year growth. Important to highlight, 2007 net income included a $3 million noncash expense accrued to reflect the increase in the fair value of warrants versus $1.3 million charge in 2006. The total amount of warrants outstanding we had prior to our IPO were exercised at the time of the IPO.

Other expenses were $3.1 million of foreign currency losses, which were mostly generated as we transferred cash from Venezuela to the U.S., and $2 million of interest expense and other financial charges, which included $0.3 million derived from a $9.7 million year-end loans payable balance. We obtained this financing to fund MercadoPago working capital in Brazil, which was structured as a loan backed with MercadoPago credit card receivables and was, therefore, recorded as interest expense and not as [loss].

In terms of taxes, we accounted $4.7 million in 2007, which represented a full year tax rate of 33%. Net cash provided by operating activities during 2007 was $6.8 million versus $6.2 million in 2006. We continued to generate strong operating cash flows in our Marketplace segment. This was partially offset by working capital requirements in our Payments segment. MercadoPago funds payable to customers increased from $4.7 million in 2006 to $5.4 million in 2007, while the funds receivable from customers increased from $6 million in 2006 to $15.5 million in 2007.

As explained, we began utilizing loans backed with credit card receivables to finance funds payable. This type of financing is recorded as financial debt and not as a reduction in the receivable balance, and, therefore, the cash inflow is recorded as cash flow from financing activities in the statement of cash flows and not as cash flow from operating activities.

Purchases of property and equipment remained modest and totaled $3.1 million for the full year 2007, an increase of 46% from the same period one year earlier. And depreciation and amortization was $2.3 million.

Through the public offering of our common stock and listing on NASDAQ that Marcos mentioned, we raised $49.6 million of cash after deducting the underwriting discount and offering expenses, which allowed us to repay a $9.5 million loan and close the year with a very strong balance sheet.

In summary, we're very pleased with our robust growth for both the quarter and the full year and with our continued ability to leverage our business model to generate higher operating profit.

Finally, we have received a number of questions about our S-1 registration statement that we have on file with the SEC. The terms, timing and completion of any offering depend on market conditions and other factors deemed appropriate by any of the prospective selling stockholders and us. As the registration statement is not complete and has not yet been declared effective, we can not go into any detail on this matter and must refer you to our SEC filings for additional information.

And now, we would be pleased to answer your questions. Operator?

Thank you. (OPERATOR INSTRUCTIONS)

[Look] first to Bob Ford with Merrill Lynch.

Hey, good afternoon, everybody. And I guess after the warning in the S-1, I should congratulate you. It sounds as if you beat the guidance that you had set in the S-1 in terms of the decline in operating margin sequentially. And I was curious, Nicolas, as to what occurred because it seemed as if, at the time that you filed the S-1, your perception of the quarter was a little bit worse than what you actually reported.

Yes, hi, Bob. How are you?

Basically, we were conservative in the guidance that we offered in our S-1 that we filed in January, when we were in the very preliminary stages of closing our books and records. And we're really pleased that the final margin numbers exceeded this initial expectation. And basically, these results reaffirm our confidence in the long-term strength of the business.

So I would say it was basically we filed the S-1 in January, when we were very, very early in the process of closing the books. And fortunately, when we finalized the process, the results were better than those initial expectations.

Okay, and then with respect to the effective tax rate -- much lower than prior periods, lower than, I think, most would have expected. Can you talk a little bit about the longer term outlook for your effective tax rate, particularly given the favorable tax status that you now enjoy in Argentina? And then, last, if you could touch on any new developments with respect to your financial services offerings in Brazil?

Sure. The tax, as you know, we recognized the provision for income taxes based upon taxable income and the temporary differences for each of the tax jurisdictions in which we operate. And we come from a history in which we had losses in the early years, and therefore, the tax rate has been -- the calculation has been quite complex over the last few years.

We are now completing the utilization of the losses we had from the early stages. And the tax rate in most of the countries where we operate is around 35%. So we believe that the tax rate going forward should be around 35%.

We have some tax benefits in Argentina. On the other hand, some of the tax -- of the expenses on our P&L are non-deductible. So we think that somewhere around 35% is a fair assessment of the tax rate that we expect as we move forward.

And with respect to the consumer financing process, that was the last question?

Yes, that was.

Yes, we continue to make progress there. As you know, we have been involved in a process in which several banks have participated. We are now working with a very, very short list and trying to find the right match for us.

In the meantime, obviously, we continue to offer financing through credit cards. We have talked about our 12 installment program. So we already are offering a compelling financing. The idea is to upgrade what we have now and offer better terms for our buyers and better economics for us. So it's a work in progress in terms of this upgrade to the program. We're making advancements, but we're not finalized with that.

We're also working, also in -- that's in Brazil. We're also working in Argentina in parallel on another similar process. So I think in 2008, we will have something up and running, but not yet.

Thank you. And again, congratulations.

Welcome.

We'll take our next question from Imran Khan with JP Morgan.

Yes, good afternoon. This is Joe Boushelle. Imran is currently traveling. On the MercadoPago segment, are there any plans to roll out deferred payment plans outside Brazil? And for on the 12 month plans? And also, the second consecutive quarter of 10% plus take rate on the Payments segment, with the rollout of Pago 3.0, do you think that's sustainable in 2008? Thank you.

Yes, the 12-month, we have that also in some of the other markets. But where we have seen the most attraction has been in Brazil. In some of the other markets, we have had 12 months for quite some time. In Brazil, we had had six months for a few years, and when we introduced 12 months, it really took off.

In terms of the take rate, we believe that as we migrate to the new platform, it should not affect the take rate in any significant way. What we're basically doing is making the seller pay for the processing fee, which is around 6%, instead of having the buyer pay for that, and then buyers choosing financing options will pay for that. And that is one -- that's another approximately 4 percentage points to the take rate.

So the expectation, hopefully, is that as we roll out the new payments platform, we will not see any reduction in the take rate.

All right, thank you.

Welcome.

We'll go next to Steve Weinstein with Pacific Crest.

Right, thank you very much. A couple of questions. One -- and I'm still working through the numbers. So if there's something that you have to calculate later, I apologize for asking it now. But it looks like in Brazil, you have revenue acceleration again. And I'm wondering how much of that reflects acceleration in GMV versus improvement in the overall take rate? That's my first question.

Hernan, you want to take that one?

Yes. So looking at Q4 numbers, the GMV grew -- hold on a second, just want to make sure I give you the right figure here. Brazil only?

That's right.

I don't think we had it broken down here. But basically, the revenue growth is -- Brazil is not different from other countries. We have not done any significant pricing in Brazil any different from what we have done in Mexico or Argentina of our operations.

So, basically, the difference between the rate of growth in revenues and the rate of growth in GMV is a result of what we were saying before. The take rate has increased, driven by the sorting algorithm, driven by some of the pricing restructurings that we have done and also driven by the growth in classifieds and advertising.

Yes, our revenues in Brazil during Q4 grew 61%. That's higher than what we had in Q3. But if you look at our GMV -- I don't have the exact figure now -- but they remain more or less at the same level. So the increase there was not an acceleration in GMV, but it was an acceleration in the monetization of the business because of better pricing, because of the results of the new sorting algorithm that takes the best position for the best sellers. So that gives a good experience for our buyers and also better monetization for us, and also driven a little bit by some currency appreciation.

When I look some of the metrics, I think you're showing 18% growth in items sold and almost 40% growth in GMVs, so that the growth was basically split between more units and higher ASPs or per item. I'm wondering, where do you think you are on the ASP curve in terms of how much higher you can push that average price, and how much of that improvement is resulting of actions taken by MercadoLibre versus just central changes in the market? So how much of that is within your control versus just kind of market forces?

Yes, as you clearly highlighted, ASP has been going up, and the reason for that is, first, that the users in the region are feeling more and more comfortable buying online. So there's an upward trend for this ASP to go up, as users start to migrate into higher ASP items. At the beginning, they were buying collectors or cheaper computing supplies, and currently, they're buying expensive home equipment or laptops. So that's one reason why the ASP is going up.

The second important reason is that the percentage of transactions that float through MercadoPago has been increasing. So the company is growing at a faster pace than MercadoLibre. And the ASP of transactions going through MercadoPago is approximately 50% higher than the ASP that we have in MercadoLibre, mainly because of financing. So as MercadoPago gains share, that also pushes the ASP up.

And also, third, I'd say that some local currency appreciation is pushing the ASP up as well.

Okay. Then kind of a last question on the number of units [sort of] being sold, 18%. You're showing acceleration in a lot of other parts of the business. Like everything seems to be like have the acceleration curve except for number of items sold, which has decelerated. Teen growth is solid, but it seems much lower than all the other metrics for all the other current drivers in the business. Is there something you're working on specifically to drive the unit volumes faster as you go into 2008 because it would seem as that is the best longer-term predictor of what the growth is for the Company?

Yes, that's a very good question. Successful items for the full year grew 27% and 18% for the last quarter. We believe that the true underlying growth rate that we have there is higher than what you saw in 2007. And the main reason is because, as you may know, at the beginning of the year, we launched a new relevant sorting algorithm and that, among other improvements, what it did was to punish sellers that were creating fake bids to try to better position their own listings.

With the prior algorithm, when the seller was doing that, he could trick the system and make his listing more relevant. And as time went by during the year, sellers started to realize that when they use to try to improve their position of their listing, it was actually reducing it. So they stopped this behavior, and the total numbers have slightly declined as self-bidding disappeared. But we believe that the underlying growth rate that you will see in successful items is higher than this one.

Great. Thank you. That was very helpful.

Sure.

We'll take our next question from Stephen Jue with RBC Capital Market.

Good afternoon, gentlemen. Do you have a CapEx outlook for 2008? I know you're not giving guidance, but just a ballpark range?

We don't provide guidance. But if you look at our last year's, you're going to see that it has been less than 5% of revenues quite consistently. And we believe that at this point, it is a safe parameter.

Okay, thank you.

(OPERATOR INSTRUCTIONS)

We'll go next to Tim Boyd with American Technology.

Thank you. Just looking at the gross margin, actually, it looks like you improved that year-over-year, even though Pago is growing considerably faster than the marketplace revenues. Is that a function of price increases on the marketplace offsetting the lower gross margins drag from Pago, and how should we think about that going forward?

Particularly, in 2007, it has mostly been a function of our ability to leverage customer support expenses, which have grown at a much lower rate, both in our Pago operation and in our marketplace business. So that has been a key driver there of sustaining a fairly stable gross margin despite the fact that, as you said, MercadoPago has grown faster.

We believe -- and again, we don't provide guidance. But we believe that if MercadoPago continues growing gradually its share of the total revenue mix, we might find some other ways to continue offsetting the fact that MercadoPago has a higher cost of sales component. However, if MercadoPago really accelerates relative to the marketplace, eventually, we're going to see some dilution in the gross margin.

Okay, in terms of the increases, I think you've been very judicious about pushing through with the increases of your sellers over time. Can you talk at all about your thoughts on that for '08? Do you feel like hit you've hit an inflection point where you have some more pricing power, or do you just want to continue to be cautious to avoid the kind of trouble that eBay got themselves into?

We are very happy with what we have done in 2007, whereby we recalibrated our pricing structures, we broke down pricing differentiated per category and we adapted our pricing to the different economics of the different categories. And that was a win-win strategy because sellers in each category found that the pricing was more appropriate for their P&Ls and their needs, and the end-result of that was that we ended up increasing our overall take rate.

So we believe that in '08 we will be working along the same lines, finding -- calibrating the pricing structure and trying to find that the right price for different types of sellers and different categories. And in the process, we believe that we can continue gradually increasing our take rate.

Okay, just one final question, if I may? My understanding is that the Orkut, Google's Orkut, is a pretty deal in Brazil. Can you talk at all -- I mean, in social networking, monetizing social networking in the United States, given what Google said on the earnings call, has been difficult. Can you talk at all about the opportunity for you guys to partner with Google to try to monetize Orkut?

Yes, we have been talking to Google about exploring ways to advertise in Orkut, but nothing really substantial to comment at this point.

OK, thanks very much.

You're welcome.

(OPERATOR INSTRUCTIONS)

We'll go to Imran Khan JP Morgan.

Oh, yes. I don't know, and I might have missed it on the call, but have you guys broken out advertising revenue growth in the fourth quarter? And any color on the impact of the CMG acquisition and '08 numbers and possibly the take rate improvements in '08?

Advertising and classifieds are part of our marketplace segment, so we don't break advertising down specifically. But we could say is if you go back to the filing of the S-1 a few months ago, at that time, we were saying that advertising was around 1% of our total revenues, and advertising, per se, has been growing at a faster rate than the marketplace as a whole. So, now, it's higher than 1% of revenues.

With respect to the CMG transaction, that is not a material transaction, so we will not break down specifically the financials for CMG. As you might recall, they operate basically, of course, a classifieds site and a real estate classifieds site mostly in Venezuela and Colombia, and then also in a few markets as well. But we'll not be breaking down the results specifically for them because they are not a material operation for us.

Great. Thank you.

And there are no other questions at this time. I'd like to turn the conference back to our speakers for any closing remarks.

Thank you very much, everyone, for your time and your questions. And we look forward to speaking to you again after the end of Q1. Thank you.

Thank you, everyone. That does conclude today's conference. You may now disconnect.