美卡多 (MELI) 2008 Q1 法說會逐字稿

Good morning and welcome to Mercadolibre's first quarter 2008 earnings conference call. Today's call is being recorded.

At this time I would like to turn the conference over Mr. Pedro Arnt. Please go ahead sir.

Thank you and welcome once again everyone for Mercadolibre's earnings release conference call for the quarter ended March 31, 2008. This conference call is also being broadcast over the Internet and is available through the investor relations section of our website.

Before I hand the conference over to Marcos and Nicolas, I 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 our 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 to 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 10Q, 10K and other filings with the Securities & Exchange Commission which are also available on our investor relations website.

With that, 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 first quarter and then hand the call over to Nicolas who will go into greater detail on our financial performance before we take your questions.

Q1 of 2008 was another good quarter for Mercadolibre. Despite the fact that Easter fell during the first quarter this year, we're off to a solid start to 2008. Our result continues to be driven by our very strong operational model and commitment to technical quality and reliability; our market leadership position in Latin America as the number one online retail site in all of our major markets as ranked by comScore Media Metrix and the continuous healthy expansion of Internet use and of Broadband Internet access across the region; growth in consumer confidence and PC penetration rates among Latin America; generally strong growth throughout Latin American economies including Brazil, which was recently granted investment grade status by Standard & Poor's, and our long-term focus in our users, buyers, sellers and visitors.

All these factors contributed to strong GMVe and TPV growth. In addition take rate continued to increase as our non-GMVe related revenues streams, advertising and classifieds, continued to grow very fast. For the first quarter total net revenue was up 75% to $28.8 million over the first quarter last year, driven by strong performance from both our Marketplace and Payments businesses.

We were also pleased that growth was solid across all countries in which we operate. Revenue for our Marketplace business unit, which also includes classified and advertisement, was $23.5 million, up 65% from the first quarter of 2007. This was led by solid growth in live listings, unique sellers, unique buyers and gross merchandise volumes.

In Payments revenue increased 137% to $5.4 million in the quarter. Generally Mercado Pago continued to deliver strong results, generating robust revenue and profitability growth. This was driven in great part by sustained year-on-year growth in listings, share, significant reductions in fraud rates and the success of credit card installments financing in Brazil.

Further, you may recall that in the fourth quarter we launched our efficient new Payments platform Mercado Pago 3.0 in Chile and Colombia, and are pleased that it has been well received. This new platform removes the escrow and shifts the payment of the processing fee from the buyer to the seller thereby making the process faster and more compelling.

Additionally, Mercado Pago 3.0 also enables payments both inside and outside of our platform, vastly expanding the addressable market for our payment platform. We expanded this platform to Argentina in February of this year and expect to expand Mercado Pago 3.0 to other countries in which we operate throughout 2008.

Separately, 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 that this accelerated growth underscores the real potential in these segments for Mercadolibre.

As we mentioned in our press release, our operating margin was impacted by a $0.4 million in compensation expense related to our acquisition of TuCarro. Including this extraordinary expense, our income from our operations was $6.5 million using an operating income margin of 22.7%.

Also as mentioned in our press release, net income of $2.1 million or 0.05 per diluted share was impacted by an effective tax rate of 58.1%. Higher taxes were largely the result of new tax introductions in Mexico in the form of the [year two] tax as well as certain non-deductibles in Venezuela, both of which resulted in an increase of the company's blended tax rate as a percentage of net income, before income and after tax.

Additionally, during the first quarter we made solid progress in realizing synergies of the TuCarro acquisition, particularly in IT and back end integration. The full integration and incorporation of TuCarro acquisition continues to advance according to plan and we are already showing TuCarro's listings in Mercadolibre's platform as well as leveraging cross-selling opportunities in ad sales.

We work to further establish the Mercadolibre brand by developing our cable television brand marketing campaign that is targeted to reach directly our user base. We launched the campaign in mid-April and the initial feedback has been overwhelmingly positive.

We strengthened our Board of Directors and Corporate Governors with the addition of Mario Vasquez, former President of Telefonica Argentina and with 23 years of auditing experience as a former head of Arthur Anderson in the southern corner of Latin America. Mr. Vasquez will chair our audit committee. Our Board of Directors is now comprised of a total of eight directors, of which six are independent.

Looking forward to the remainder of 2008 we are very pleased that the momentum we saw last year has carried over into the first quarter. And we are well positioned to leverage the positive growth trends influencing Internet, Broadband and PC penetration rates in Latin America.

For the remainder of 2008 we will remain focused on driving long-term value to our share holders by providing our buyers and sellers with the access to the best possible online marketplace. More specifically our efforts will concentrate on ongoing improvements of our pricing and listing formats, constant expansion of our classifieds and advertising segments, improving our search and financing options, expanding our presence in the social shopping space by enhancing content and offering small, medium sized and large retailers the tools they need to drive e-commerce both on and off our trading platforms. We believe this strategy will continue to drive growth for the company and provide value for our shareholders.

With that, I'd like to turn it over to Nicolas for a more detailed review of our financial performance. Then we'll both return to take the questions.

Thanks Marcos. Overall Q1 was a very good quarter in which we continued to deliver accelerating revenue growth. We achieved healthy gross margins and year-over-year economies of scale in our operating expenses and therefore generated solid profitability.

Specifically, net revenues grew 75% to $28.8 million. Gross profit margin was healthy at 79.1%. Income from operations was $6.5 million, operating income margin expanded versus Q1 of last year to 22.7%, and net income was $2.1 million. Revenue growth was driven primarily by the addition of 1.6 million new confirmed registered users bringing the total to 26.5 million, and acceleration to a 44% increase in Marketplace gross merchandise volumes to $450 million, and acceleration to a 96% increase in the total Payment volume to $52 million, and an improvement in our consolidated take rate to 6.4% from 5.3% for Q1 of '07.

You may recall the take rate is measured by revenues as a percentage of GMVe. On a consolidated basis the take rate has increased in part because payments have grown faster than the marketplace. That's driving the average take rate upwards. In addition, we saw an increase in the Marketplace segment take rate to 5.2% from 4.5% in Q1 last year, and an increase in the Payment segment to 10.2% from 8.5% a year ago.

The Marketplace take rate growth versus last year was driven primarily by upgrades to our sorting algorithms, changes in the pricing structure and solid growth in classifieds and advertising. The Payments take rate gains versus Q1 of '07 were driven mostly by the impact of 12 installments financing in Brazil. A 75% total year-over-year revenue growth in Q1 of 2008 represented a continued acceleration for the fifth quarter in a row as the growth rate in Q4 of last year had been 74%, in Q3 72%, in Q2 53% and in Q1 50%.

In Q1 2008 the Marketplace segment slightly accelerated the growth rate year-over-year versus Q4, and the payment segment slightly decelerated. Our Marketplace revenue grew 65% to $23.5 million and Payment revenues increased 137% to $5.4 million. The Marketplace represented 81% of revenues and Payments 19% versus an 86% 14% breakdown in the same quarter of last year.

We had a positive foreign exchange impact in Q1 of 2008. If we excluded the impact of currency rate changes and calculated total Q1 '08 top line using Q4 '07 exchange rates, the year-over-year growth would have been 72%. The acquisition of TuCarro also contributed to the company's revenue growth. If we subtracted the revenue from TuCarro the year-over-year growth would have been 68%.

Gross profit grew 76% to $22.8 million representing 79.1% of revenues versus 78.8% for the same period one year earlier. Improvements during Q1 2008 in cost of goods sold in the Payment segment was the key driver of this improvement and more than offset the higher rate of growth in payments as compared to the Marketplace.

Total operating expenses for the period totaled $16.3 million, a 63% increase year-over-year. As described for the top line year-over-year comparisons, the acquisition of TuCarro and exchange rates also contributed to the growth in expenses. In addition, there were some extraordinary effects and some differences for line items that we would like to highlight.

G&A grew 99% year-over-year in Q1 of 2008, mainly due to the following factors. First, in the quarter we recorded a $0.4 million expense related to TuCarro, as mentioned by Marcos. The reason for this item was that, as part of the deal, $2 million out of the $19 million consideration paid were placed into a [national] account for 12 months.

The purpose of this escrow was to secure the obligations of the former shareholders [that remain as managers] pursuant to their employment agreement. Under EITF 95-8 we recognized the quarterly accrual of this contingent consideration paid to the former shareholders as an operational compensation for services and not as part of the purchase price.

During Q2 we have agreed with these former shareholders to an early release of the $2 million in exchange for a discount. Therefore, we expect that we will record the unaccrued amount net of the discount or $1.5 million in Q2 of this year.

Second, we expensed approximately $0.2 million related to the follow on offering that was withdrawn in March. And third, we had new public company expenses in Q1 of this year versus none last year.

Product and technology development expenses grew 79% compared to the same quarter one year ago, mostly as we added developers in our main Buenos Aires center and in our second center in the province of San Luis as part of our plan to increase our software development capabilities. And sales and marketing grew 46% versus Q1 of 2007.

As a result of the factors just discussed, income from operations including the TuCarro related expense grew 118% year-over-year to $6.5 million, representing a 22.7% operating income margin. Other expenses were $1 million of foreign currency losses, which were mostly generated as we transferred cash outside of Venezuela, and $1.5 million of interest expense and other financial charges which were mostly derived from financing costs incurred to fund Mercado Pago working capital needs in Brazil.

Pretax net income was $4.9 million, 163% higher than in the same quarter of last year. In terms of taxes we accounted $2.9 million in Q1 of 2008. This represented a tax rate of 58.1%, which as Marcos mentioned, was affected by a new tax in Mexico and some ForEx losses in Venezuela that are not deductible in addition to the impact of the sum of some of the acquisition-related non-deductible expenses recorded in Q1.

Net income for the three months ending March 31, 2008 was $2.1 million or $0.05 per diluted share, reflecting an increase of 108% compared with $1 million during the same period of 2007. Net cash provided by operating activities during Q1 of 2008 was $6.9 million versus $2.5 million in Q1 of 2007. We continue to generate strong operating cash flows in our Marketplace segment.

In addition, in Q1 we also generated working capital in our Payment segment as we funded our needs primary by discounting credit card receivables directly from some credit card processors. It was therefore recorded as a reduction in the funds receivable from customers' balance.

Net cash used in financing activities was $6.2 million, driven by the repayment of some of the loans [backed] with credit card receivables that we had outstanding last December. Purchases of property and equipment were $1.1 million in the quarter and depreciation and amortization was $0.7 million.

In summary, we're very pleased with our robust growth for the quarter and with our continued ability to achieve solid profitability gains.

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

(OPERATOR INSTRUCTIONS) We'll take our first question from Imran Khan of JP Morgan.

Yes, hi guys. This is [Joe Buschel] for Imran. A couple of questions; on ad revenue what was the ad revenue growth rate for the quarter? And are you guys seeing any improvements in conversions of listings with the rollout of Pago 3.0? Thank you.

Yes, let me first take the ad revenue question. As you know, advertising revenues is part of our Marketplace segment. We do not break that down. At the time of the IPO we were producing a specific number for advertising; at that time it was less than 1% of our revenues. What we can say is that it has been growing faster than the rest of the Marketplace segment, but we're not breaking down specifically the growth rate for that.

With respect to Mercado Pago, as you know we launched it in Argentina, which is the first time we launched it in a country that has the prior version of Mercado Pago. Initial results are good, but it's very early to draw conclusions. It's a new product, it's a [better] product I would say. We are working on fixing different bugs and to roll it out to the rest of the countries where we operate throughout the year.

Good, thank you.

Next question?

Next we go to Bob Ford of Merrill Lynch.

Good evening, everybody. It's just a follow up, Marcos, on Pago. I'm just curious, I think I can get a sense for how Pago sales are responding, but I'm curious as to how to consumers are responding to the switch in the [friction].

Hi, Bob. As we were saying initial results are good. As you know, we have the new version that buyers do not have to pay for using it, so obviously good results from buyers in that sense. Now sellers have to pay for the cost; I think they understand the value of this. So as I was saying early, it's a new product, it's a [better] product, but we believe it's going to be fantastic for Mercadolibre in the medium term and long term, and we look forward to rolling it out to other markets.

And at these levels right now, do you think acceptance rates have stabilized amongst some of your Pago sellers, or are they still pushing back a little bit?

No, I think they have stabilized. Obviously, as you know, we have lots of leverage to drive adoption of Mercado Pago amongst our Pago sellers and our sellers in general, particularly as we include offering Mercado Pago as one of the relevant items in our sorting algorithm. We are not doing that yet because, as we were saying, we want to make sure we have the product working in the right way before we start promoting it aggressively amongst our sellers.

Okay, great. And maybe could address the full year effective tax rate, at least your expectations, because it sounds like when it comes to the (inaudible) that's something that's not going to change, right?

Yes, as we said the tax rate in Q1 was affected by the impact of some extraordinary expenses related to TuCarro plus some other US-based expenses which are not deductible. And in addition to that we had an impact from this [year two] tax in Mexico and from some ForEx losses in Venezuela that in the past we could deduct, but not any more.

So basically as we go forward we estimate that the tax line in the P&L, as a percentage of pretax income, should be lower going forward than in Q1; as you know the tax rate in most of the countries where we operate is around 35%. We are basically currently analyzing the impact of some of these new taxes and some of this new FX and some of these expenses which are not tax deductible and we will be revaluating our tax planning as a result of our current analysis. So that's it, yes, basically.

Okay. But is it fair to say that lower than the first quarter, but perhaps higher than the effective tax rate that we saw last year which was around 33%, 32.8% something like that?

We're currently revaluating our tax planning as a result of some of these new indications and some of these new taxes. So probably we can be more specific down the road once we have a clearer picture.

I understand, alright. And lastly, can you give a sense of what percentage of GMVe right now is getting done on installments in Brazil?

So a fraction of our GMVe is being paid through Mercado Pago. If you look at our consolidated numbers it's roughly between 12% and 15% I believe. And the majority of those payments in Brazil are being done through installments.

Okay, great. Thank you very much.

Thank you.

Q1 it was close to 12% penetration. TPV divided by GMVe Q1 overall.

Our next question will come from Steve Weinstein of Pacific Crest.

Great, thank you. I just have a couple of questions for you. When I look at the geographic breakdown you provide in the release, can you help us understand how the ad revenue would be allocated across the segments? Is it reflective of the overall revenue mix with the company? Or is it more weighted towards certain geographies now?

And then, second, just quick scan the numbers, it does look like Mexico is a lower margin business for you, relative to the other geographies. I'm wondering if you could just talk about what those factors are today and whether those are near term or longer term? Do you think those could be issues?

Sure. The ad, as we said before we don't break that down, but there's no reason why it shouldn't follow the same patterns as revenues in general. So our view of this is that it should be very similar in terms of our revenues breakdown overall.

In terms of Mexico, in some ways between Brazil, that has the advantages of scale and therefore margins are better there, and Argentina that has about the same size as Mexico, but has a lower cost structure. In general costs in Argentina are lower than in Mexico, labor costs in particular. So in some ways Mexico is in the middle of a larger country and a country with a lower cost basis. As the business grows we would like to see that it scales similarly to what we have seen in Brazil and eventually margins there will be converging to what we have in Brazil.

Good. Thank you.

Next we'll go to Ricardo Fernandez from Banco Itau.

Yeah hi, everybody. First a request. I don't know if it's everybody, but I always get your reports two minutes before the conference call starts and it's difficult to look at the numbers and ask a question intelligibly in two minutes. I don't know if you guys work on that or it's my system, I don't know.

The first question is looking at GMV. It grew a little bit shy of 44% year-over-year in US dollar terms which, if you assume the breakdown for Brazil would be some 15% less that in local currency, which is not as good as probably the market leader in, we'll call, it retail. The question I have then is, are you noticing a slow up in terms of transactions in local currencies for whatever reason? Or is this completely in line with your numbers?

Yes, so apologize for getting the numbers right before the call. We would like to make that with a little bit more time for the next call. With respect to our growth rate in Brazil, revenues grew 54% year-on-year. GMV overall grew 44% as we were saying. We had overall 3 percentage points quarter-over-quarter growth due to currency. So I would say overall we are satisfied with our growth. Local currency, average selling prices have increased everywhere and so overall we are very satisfied with our growth rate this quarter everywhere. And obviously Brazil is a very large part of our business and is the key driver to our overall growth rate.

But are you seeing any -- go ahead, sorry.

It's just to complement that [ASPs] have grown in part due to currency, but also importantly, as Marcos was saying, we saw this in every country, as users have become more comfortable over time using the Internet, buying over the Internet, they have shifted to higher ticket items. And also in our case as Mercado Pago has grown in penetration, the Mercado Pago ASP is higher than the non-Mercado Pago ASP, so that has also driven prices for us in general.

Okay, but the question is on general merchandizing value, looking at it more like a retailer, although you're not. In my opinion it seems to me that you're beginning to fall behind in terms of total merchandise moved on your website versus the B2W websites. And even perhaps some of the other ones like [Sadive] which was much smaller, but they're seeing much faster [rais] growth rates. I just wonder if this is something that you expected, or is it something that you're trying to improve? Just a quick comment on that.

Overall we focus on our growth rate. General large retailers, medium retailers and small retailers we view them as clients, not as competitors. What we do is put together buyers and sellers within our platform, or increasingly outside of our platform, as a marketplace, not as a retailer. And therefore what we do is focus on our growth rates. We are satisfied with our growth rates everywhere. We are satisfied with our growth rates in Brazil. We are at some marketplace by far the site with the largest attraction and visitors and people coming over to buy. And we will continue to focus on our buyers, our sellers, our visitors and in trying to help all of them succeed doing e-commerce. This includes the large retailers in Brazil and everywhere in Latin America.

Just got one clarification. Typically when you look at the revenues from retailers, they include the financing business in there. In our case our Payments business, our Payments revenues, which is largely driven by Brazil, is segmented and it's shown separately. And that, as we said, has grown 137% year-over-year in Q1 '08.

Okay, thanks a lot. Take care.

Thank you.

Next we'll go to Tim Boyd of American Technology.

Yes, thank you. I was wondering if you'd comment at all on the breakdown -- your other countries segment of the Marketplace revenue was a pretty big acceleration in year-over-year growth. I don't know if you can give us any color on which countries there are growing the fastest.

And as a second question if you can comment at all about the progress with rolling out Mercado Pago 3.0 in Brazil. Can you give us a conservative estimate of when you think that will be complete? Thanks.

Yes, the others segment is broken down into some larger countries for us, that's Venezuela, Colombia, Chile and then a bunch of medium-sized countries and then some other operations that we launched later on in Central America and the Caribbean in which we still don't even charge. So the service there is offered for free. I would see that going forward as an additional opportunity for portfolio growth here.

So these are mostly countries that are smaller and are less mature, relative to Brazil, Mexico or Argentina. So we expect there to see stronger growth and also there we don't have the full pricing spectrum even in some of the other countries, and we have some more pricing opportunities so that is also part of the equation.

Is it fair to say that the larger of these less mature countries are contributing most growth at this point?

Yes, I think that's fair to say that, yes.

Thank you.

The second part of the question, can you say that again?

Sure. It's just from a Mercado Pago 3.0 rolling it out in Brazil. Can you give us an estimate that you feel comfortable with in terms of when you believe that will be complete?

Yes. We want to complete the process in Argentina. The expectation is '08, but we don't have a specific date that we can communicate at this point.

Alright. Thank you.

Thank you, Tim.

Next we'll go to [Steven Dew] from Royal Bank of Canada.

Good afternoon, everybody. So I'm looking at the number of successful items sold and it seems to be decelerating, but the average ticket is coming up to compensate to drive the GMV acceleration. So can you give us some more color in terms of what's driving this? Is it a shift of consumer behavior? Or is seller adoption perhaps in the lower ticket non-consumer electronics categories a bit slower than you would have expected? Thanks.

So successful license has been decelerating during '07. We believe largely a consequence of the new sorting algorithm we introduced during Q1 of '07 that [punished] those transactions, those successful items that were not successfully being converted into final value fees being paid. Our sellers learned and modified their behavior throughout the year. We believe this had an impact in decelerating successful items and didn't have a similar impact in revenues. In Q1 of '08 as expected this effect started to disappear and the growth rate of successful items stabilized relative to Q4. We would expect the growth of successful items going forward to resemble the growth of broadband and e-commerce growth in the region.

Yes, thank you.

(OPERATOR INSTRUCTIONS) Next we'll go to [Vic Kumar] from [Soundpost Partners].

Hi guys. I just wanted to get a better sense for what drove the Marketplace take rate. And specifically whether changes made in pricing or sorting algorithms in Q1 of this year versus Q4 '07?

Yes, we did significant changes throughout Q1 of last year. So we have seen all of last year the effect and some of the effect in Q1 of this year. And that's the largest chunk of the project, but we have also been doing some upgrades as we went along. We have also been doing some recalibrations in our pricing structures throughout last year. We continued doing that in Q1 of this year, in Q1 of '08, large sum marginal price increases. On top of that classifieds and advertising have been growing faster than the core marketplace and those also drove the take rate expansion in Q1 of this year versus Q1 of last year.

Typically, the change in pricing, the direction where we're going is lowering the fixed cost, that is insertion fees, and increasing the variable costs, that is the costs that are tied to our successful transaction.

But what drove the quarter-over-quarter increase from Q4 '07 to Q1 since most of those changes are already implemented, I guess?

It's some recalibrations as we said in prices. Some price increases, although marginal, in Q1 of this year and a strong performance in classifieds and advertising even relative to before.

Okay, thank you.

Next question?

Next we'll go to [Peter Lyons] of Oscar Gruss.

Hi guys, I have two questions. One, if you could address the impact of the removal of the CPMS tax in Brazil. How that affects any of these transactions? How it affects your costs?

And also if you could give me a sense on the currency effect for your operating expenses. You mentioned it with regards to the revenues. I'm curious in general terms what you saw as the effect on your OpEx.

Yes, on the removal of the CPMS tax there was an increase in another tax which I think is the IOF, and both effects were compensating each other basically. So there hasn't been a significant impact one way or the other.

Can you repeat the second question please?

Yes, you mentioned in your opening remarks about the impact on revenues from currency fluctuations. If you could address the same type of impact on OpEx due to currency fluctuation.

Yes, one second. It was approximately 2 percentage points more expensive in Q4 relative to if we used the exchange rate of Q4 of last year.

Okay. So 2% more expensive quarter-over-quarter?

Yes. And when we talked about revenues we were also doing the same calculation Q1 '08 revenues using the Q4 '07 exchange rates.

Okay, great. I got you. And also in general terms, do you notice a seasonality effect in the first quarter, particularly in Brazil? Things might slow down; how do you see any impact from seasonality?

Yes. We have quite strong negative seasonality in Q1. It's the summer in the southern hemisphere so that affects Brazil mostly, but also some of our operations. We also have carnival in Brazil in February; that takes basically one week where business is very soft. So normally you will see that Q1 is our softest quarter and Q4 is our strongest quarter. Particularly this year Easter, which is a softer week for us, fell in Q1 and last year it fell in Q2, so that also affected our year-over-year comparisons this year.

Okay, great. Thank you very much.

As it appears there are no further questions at this time I'd like to hand this conference back over to management for any additional or closing remarks.

Once again thank you everyone for attending and we hope to hear from you again in next quarter's release. Thank you very much.

Ladies and gentlemen, that does conclude today's teleconference. We'd like to thank you all for your participation and have a great day.