美卡多 (MELI) 2008 Q2 法說會逐字稿

Good day, and welcome to the MercadoLibre Second Quarter 2008 Earnings Results Conference Call. Today's conference is being recorded.

And, at this time, I would like to turn the conference over to Mr. Pedro Arnt.

Welcome, everyone, to MercadoLibre's earnings release conference call for the quarter ended June 30, 2008. Company management presenting today are Marcos Galperin, Chief Executive Officer, and Nicolas Szekasy, Chief Financial Officer. This conference call is also being broadcast over the internet and is available through the Investor Relations section of our Website.

Before handing the conference over to Marcos and Nicolas, allow me to remind you that during the course of this conference call we will discuss some non-GAAP measures. A reconciliation of those measures to the nearest comparable GAAP measures can be found in our second quarter 2008 earnings press release available from our Investor Relations Website.

In addition, 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 10-Q, 10-K and other filings with the Securities and Exchange Commission, which are also available on our investor relations website.

Now let me hand the floor over to Marcos.

Good afternoon, and thank you to all who have joined us today for this call. Over the course of the next few minutes, I'd like to walk you through some of the highlights from the second quarter and then hand the call over to Nicolas, who will speak in greater detail about our financial performance. After that, we will both be available for your questions.

Let me start out by noting that we are more than satisfied with the results of our second quarter as we continued our strong positive momentum and bolstered our market leadership position on the number-one online retail site in Latin America. Moreover, we are very pleased with the accelerating growth rates that our business delivered during the quarter that just ended. These rates are a result of our unwavering commitment to maintaining and enhancing a very high-quality platform for our growing user base. Further, we continue to benefit from favorable market trends, namely the rapid expansion of internet use, broadband internet access and PC penetration in Latin America. These factors, combined with our strong operational model, resulted in continued growth in gross merchandise volume and total payment volume, as well as increased take rates and rapid growth in advertising and classifieds.

For the second quarter, total net revenue was up 81.7% to $34.5 million over the same quarter last year, driven by strong performance from both our marketplaces and payment businesses. Revenue for our marketplace segment, which also includes classifieds and advertising, was $28.3 million, up 76% from the second quarter of 2007. This was led by solid growth in live listings, unique sellers, unique buyers, gross merchandise volume, and ad sales. In payments, revenue increased 113.4% to $6.2 million in the quarter. Continued increases in listings share, buyer adoption, and the benefits from our efficient payments platform drove MercadoPago's robust revenue growth.

During Q2, we made lots of progress improving our beta MercadoPago 3.0 product. Meanwhile, our 2.0 version continues to thrive in Brazil, where consumer credit has been very well received. As we mentioned in our press release, our results were impacted by $1.5 million in compensation expense related to our acquisition of TuCarro. Excluding the impact of this expense, income from operations grew 101.8% to $9.7 million with an operating income margin of 28.1% on a non-GAAP basis. As also mentioned in our press release, net income of $2.9 million, or $0.07 per diluted share, was also impacted by the same TuCarro Acquisition related expenses. Excluding those expenses, non-GAAP net income was $4.5 million, resulting in a non-GAAP earnings per share of $0.10 per diluted share. Allow me to remind you that reconciliation of all GAAP metrics to non-GAAP metrics can be found in the table accompanying today's press release.

During the second quarter, we worked to strengthen our foundation for sustainable, long-term growth. We added over 25 engineers to our IT team in order to help us continue to provide our community of users with a technically superior platform as well as meet the constantly evolving needs of our buyers and sellers. At the end of Q2, we had 162 employees dedicated to product and technology. We will continue to focus in growing our product development capabilities to capture the many opportunities available to us and to advance our platform.

We further integrated the Classified Media Group acquisition, which has progressed according to plan, both in the technical as well as the operational aspects. We continue to be very pleased with the addition of the Classified Media Group Website we acquired, TuCarro and Tulnmueble. We have already realized many synergies as we combine our online marketing and technology expertise with their brand leadership in online sales of autos and real estate, as well as offline marketing and ad sales knowledge. These acquisitions have been an additional source of growth for us and have enabled us to add to our strong leadership position in the region.

We continued our work to build brand equity for MercadoLibre and MercadoPago, which we have found to be highly cost effective and a strong driver of revenue growth and growth in users. Of course, the best way to build brand equity is through solid execution and superior offerings, which we believe that we can sustain over the long term. However, as we grow, we will also continue to use incremental and cost-effective investments in advertising and brand marketing to supplement our already-strong, sought-after brand. A key example of this is our regional cable campaign that ran during the second quarter with excellent coverage throughout most major cable networks in Latin America.

Finally, I would like to address the growing community of professional small and medium-sized enterprises that have built their businesses around MercadoLibre. Our brand recognition and well-regarded reputation have helped to establish us as a preferred trading platform for these businesses. These users, which we have labeled [MercadoLideres] - Spanish and Portuguese for market leaders - make their livings by trading on our platforms and have formed a vibrant micro economy of entrepreneurs. As a study conducted by Nielsen in the region shows, already almost 40,000 people derive most of their monthly income by selling on our platforms. Moreover, while this class of seller has existed for some time in more established markets, it is a relatively new phenomenon in Latin America and one of which we believe we have been a key enabler. We fully expect that these MercadoLideres have the capacity to contribute even more significantly to our business as e-commerce becomes more fully engrained in the economy.

In summary, let me conclude by saying that we are looking forward to the second half of 2008 and are well positioned to leverage the positive growth trends influencing internet, broadband and PC penetration rates in Latin America.

As we strive to provide our buyers and sellers with the access to the best possible online marketplace, we will focus on ongoing improvement of our pricing and listing formats, constant expansion of our classified and advertising businesses, improving the overall buying experience and financing options, expanding our presence in the social shopping space by enhancing content, and capturing additional revenue from small, medium and large retailers.

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

Thanks, Marcos. I would like to take the rest of this call before taking questions to go into more detail on our financial performance.

Overall, Q2 was a very good quarter in which we generated accelerating revenue growth, achieved healthy gross margins, and delivered year-over-year economies of scale in our operating expenses, all of which resulted in solid bottom line growth.

Specifically, net revenues grew 82% to $34.5 million. Gross profit margin was healthy at 80%, slightly above Q2 last year. Income from operations was $8.1 million, operating income margin 23.6%, and net income was $2.9 million.

As Marcos mentioned earlier on during the call, our results were impacted by $1.5 million in compensation expenses related to our acquisition of TuCarro. Excluding this compensation expense, income from operations was $9.7 million which represented a growth rate of 102% versus Q2 of '07, operating income margin was 28.1%, and net income was $4.5 million, resulting in non-GAAP EPS of $0.10 per diluted share. Revenue growth was driven primarily by the addition of 1.6 million new confirmed registered users bringing the total to 28.1 million users of MercadoLibre, an acceleration of growth yielding a 50% increase in marketplace gross merchandise volumes to $515.5 million, an acceleration of growth yielding a 116% increase in the total payment volume to $66.8 million, and an improvement in our consolidated take rate to 6.7% from 5.5% for Q2 of '07. As always, we remind you that the take rate is a measure of revenues as a percentage of GMV.

On a consolidated basis, the take rate has increased in part because payments have grown faster than the marketplace, delivering additional revenues over GMV. In addition, we saw an increase in the marketplace segment take rate to 5.5% from 4.7% in Q2 last year, offsetting the slight decrease in the payment segment take rate to 9.2% from 9.3% a year ago.

The marketplace take rate growth versus last year was driven primarily by solid growth in classifieds and advertising, upgrades to our sorting algorithm, and changes in the pricing structure. The payments take rate was basically flat versus Q2 of '07 but lower than the prior quarters. This resulted primarily from an increase in the percentage of MercadoPago working capital needs that we funded with cash provided by operations in our marketplace segment. In these transactions where we finance extended payment terms offered to our users internally rather than by discounting receivables or incurring debt from third parties, the interest component of the revenue is recognized over the life of the financing. Therefore, these internally financed credit offerings are booked as revenues over the lifetime of the credit plan and not up front, as is the case when we finance the credit offering from third parties.

The 82% total year-over-year revenue growth in Q2 of '08 represented a continued acceleration for the fifth consecutive quarter. In Q2, the marketplace segment slightly accelerated its year-over-year growth rate which compensated for a slight deceleration in the payment segment. Our marketplace revenues grew 76% to $28.3 million, and payments revenues increased 113% to $6.2 million. The marketplace represented 82% of revenues and payments the remaining 18% versus an 85/15 breakdown in the same quarter of last year. In addition, the benefit from foreign exchange appreciation was $1.1 million versus Q1 of '08 and $3.4 million versus Q2 of '07. The acquisition of TuCarro also contributed to the Company's revenue growth.

Gross profit grew 84% to $27.6 million, representing 80% of revenues, a 110 basis point improvement versus 78.9% for the same period one year earlier. Improvements during Q2 in cost of goods sold in the payment segment was the key driver of this increase in gross profit margin and more than offset the higher rate of growth in our lower gross margin payments business.

Total operating expenses for the period totaled $19.4 million, a 91% increase year over year, or 75% growth if exclude the TuCarro compensation costs. As described for the top line year-over-year comparisons, both local currency appreciations and the integration of the operations of TuCarro had an impact in the growth of all expense line items.

In addition, there were some specific drivers per expense line and some nonrecurring items that we would like to highlight. As Marcos said, product and technology development is a key area of focus for us. Expenses in this area grew 68% versus the same quarter last year. Sales and marketing grew 62% for the quarter and represented 29.8% of sales versus 33.4% of sales in the prior-year quarter. This increase was driven primarily by our cost-effective and carefully planned investments in online marketing designed to capture new users and bolster our market position. G&A grew 109% in Q2 of 2008. Public company expenses continue to be a key factor in the year-over-year comparison growth of G&A expenditures. And, last, in Q2, we recorded the $1.5 million noncash expense related to TuCarro described before, which was treated separately in the compensation costs related to acquisitions line in the income statement. As you may recall this is the final installment of our $2 million amount that was originally structured as an escrow for 12 months to secure the obligations of former shareholders that remained as managers. We recognized the quarterly accrual of this amount in Q1, and, during Q2, we agreed with these former shareholders to an early release of the $2 million in exchange for a discount. Therefore, in Q2, we have recorded the remaining unaccrued $1.5 million, thus ending all payments related to this concept.

As a result of the factors just discussed, income from operations, excluding this compensation expense, was $9.7 million, representing a 28.1% operating income margin. Below the operating income line, other expenses were driven by $2.1 million in foreign currency losses, which resulted from two different sources. The first one was the foreign exchange cost incurred as we transferred cash outside of Venezuela, and the second was the accrual of ForEx losses driven by cash and short-term investment balances held by some of our subsidiaries in US dollars as the US dollar weakened versus local currencies. We also booked $1 million of interest expense and other financial charges which were mostly derived from financing costs incurred to fund MercadoPago working capital needs in Brazil.

Pretax net income was $5.4 million, 124% higher than the same quarter of last year. Tax expense was $2.5 million in Q2 of 2008. This represented a blended tax rate of 45.5%. We made some progress driving our tax rate down versus Q2 of last year and Q1 of this year as we obtained some efficiencies through our tax planning efforts. This improvement in our blended tax rate occurred despite the fact that this quarter the $1.5 million accrued compensation expense related to TuCarro reduced our pretax income while the related tax credit had a full valuation allowance. Our blended tax rate excluding the TuCarro compensation costs was 35.4% in Q2.

Net income for the three months ended June 30, 2008 was $2.9 million, reflecting an increase of 399% when compared with $0.6 million during the same period of 2007. Net income before the TuCarro compensation costs was $4.5 million resulting in a basic net income per common share of $0.10 on a non-GAAP basis.

Net cash provided by operating activities for the six-month period ended June 2008 was $6.6 million versus $5.5 million in Q2 of 2007. We continued to generate strong operating cash flows in our marketplace segment. We funded working capital requirements in our payment segment by discounting credit card receivables directly from some credit card processors, which we recorded as a reduction in the funds receivable from customers line and by using liquidity generated in our marketplace business. Excluding the effect of the TuCarro compensation costs, net cash provided by operating activities would have been $8.5 million.

Net cash used in financing activities for the first six months of the year was $7.6 million, driven by the repayment of some of the loans backed with credit card receivables that we had obtained in prior quarters to final MercadoPago.

Net cash provided by investing activities was $2.1 million in the first half of this year. Purchases of property and equipment were $2.7 million after excluding the effect of the TuCarro compensation costs. Cash provided by investing activities was $0.2 million.

In terms of subsequent events, we would like to take note that the board of directors of MercadoLibre approved an employee retention program for a total amount of $2.3 million, or $2.5 million if we include some payroll taxes. This program will be payable 50% in cash and 50% in shares. The vesting will be 17% in year one, 22% in year two, 27% in year three, and 34% in year four, and payments will be done in the first half of the year following vesting. That means that the payment on the 17% vesting in 2008 will be executed in the first half of 2009.

From an accounting point of view, we will accrue an estimated 46% of the program during 2008 on a pro rata basis beginning this month and for the remainder of the year. Therefore, approximately $1.1 million will be reflected as an expense during Q3 and Q4 of this year.

I would like to wrap up by reiterating Marcos' sentiment that we're very pleased with our robust growth for the quarter and with our continued ability to achieve solid bottom line gains.

And now we would be pleased to answer your questions.

Thank you. (Operator Instructions). And we'll go first to Imran Khan at JP Morgan.

Yes. Hi. This is [Les Palinski] calling in for Imran, who's traveling. Thank you very much for taking our question. One question is-- It seems like we saw acceleration both in GMV and TPV growth in the second quarter. And I was wondering if you could talk about what the key drivers of that were and whether you think that these factors are sustainable or if there is anything that was more of a one-time nature? And then my second question is-- If you could give any data points about how the rollout of the new version of MercadoPago has gone-- You know, has it had any impact on TPV or an auction metrics? Thank you very much.

Hi. So acceleration was based on an increase in the growth rate of the successful items or number of transactions that we process. GMV grew off of that acceleration in successful items. We also are seeing and have been seeing for some time an increase in average selling prices as users become more used to trading online and therefore are willing to purchase more expensive items. Also, a penetration of MercadoPago that is typically used for higher ASP transaction growth. We also see an increase in ASP. And finally, currency appreciations have also helped in US dollar GMV.

As we've said for some time, e-commerce and broadband, in general, are growing at a 30% to 50% rate across the region, and that's the rate of growth that we expect our core business to continue growing for the next several years.

(Operator Instructions). And we will go to Robert Ford with Merrill Lynch.

Marcus, I also noticed that there seemed to be a big ramp up in classifieds. And I was wondering if you could give us an example of what you are doing to drive gains there.

Hi, Bob. Yes. Classified is growing very nicely for us. In our core marketplace, we launched our new platform for motors some time ago, and it's driving excellent results. Listings have been growing very nicely. Services has also grown very nicely for us across all the various platforms. We continue to focus more than what we had done in the past in driving dealers to our platform.

So, overall, I think our core product offering and the marketing activities that we are doing are providing excellent results. Obviously, in addition to that, TuCarro acquisition has been a very good acquisition for us. The integration is working very well. We are combining their offline marketing knowledge and their brand, their knowledge, and relationship with dealers in Colombia and Venezuela with our online marketing skills and our technology platform skills, and that combination seems to be working very well. Also, culturally, both companies have a lot in common. They are also e-commerce pioneers in the region. So we are very happy with that acquisition with the initial results we're seeing there.

Thank you. And then, lastly, I had a question with respect to the foreign exchange losses. Nico touched on Venezuela and then (inaudible) at other markets. But I was curious. Given the outlook for Venezuela and the difficulty in repatriating profitability, is this the kind of level that we should look for in the second half of the year as well, Nico?

In terms of the ForEx loss line, which was around $2 million this quarter, approximately half of that was the result of transfers of funds outside of Venezuela, and the other half was the result of cash balances that other subsidiaries, such as Brazil and Argentina, have in US dollars. And, as a result of the weakening of the US dollar, we had to accrue a loss for those cash reserves in Q2.

We had similar impact in the last couple of quarters but not as material as this one. This is the result of our treasury policy that we have had for many, many years of transferring all of the excess cash balances that we have in the subsidiaries - convert them into US dollars and transfer them to the US, given that the latest developments of the US dollar relative to other currencies has not played out well.

Great. Thank you very much.

And we'll go next to Steve Weinstein of Pacific Crest.

Just a couple things to help us understand this a little better. So you had some acceleration in GMV. Can you say--? What were the impacts of currency on that? Did it still accelerate on a currency-neutral basis? Also, was there any other factor - like any particular market or anything that you did that would drive that acceleration? You know, how should we think about that in terms of sustainable?

And then, also, the difference between marketplace revenue growth in GMV is still pretty substantial. Can you help us understand how much more of that is ad revenue improving versus you changing your fee structure or the growth in the classifieds? If we could just understand those components a little bit better, it will help us understand, I think, the sustainability of that trend.

Okay. In terms of the first question, importantly, successful license accelerated this quarter. So that was a positive on the GMV acceleration as well. Specifically, the impact from ForEx was 11% of incremental GMV relative to what it would have been if exchange rates had been the same as of Q2 of '07. And the impact for revenues was exactly the same as for GMV - 11% higher.

In terms of the other question - what is creating the gap between GMV growth and marketplace growth, it's a combination of factors. Clearly, the growth in advertising revenues and classifieds is part of that, and also some of the reshufflings in our pricing structure would be a component. So it's a mixture of several different factors.

Thank you.

And our next question comes from [Steven Drew] at RBC Capital Markets.

Can you go over what kind of fee structure changes you have rolled through the marketplaces and what direction you'll take that in the future - and, specifically, around the insertion fee and the final value fee. And second, what is your CapEx outlook now for the balance of the year? Thanks.

Yes. In terms of pricing, what we have been doing on an ongoing basis has been recalibrating what we had and trying to shift more of our revenue base towards final value fees unless coming from insertion fees. So that is something that we have been doing on a constant basis. And that has resulted in a very significant increase of our total listings. So that's with respect to the revenues.

With respect to the CapEx, the expectation that we have is that it should be less, or around 5% of revenues, and that has not changed.

As you saw the listings-- probably acceleration from the fee structure changes-- Is it safe to assume the conversion rates went down a little bit?

Yes. Conversion rates went down a bit. Yes.

Again, that's not really the way that we look at this, necessarily. If through free insertions or very low insertions we can bring back to the platform, a significant amount of incremental listings that generate incremental GMV and incremental revenues, we are not so focused on the conversion there. We believe that, through our sorting algorithm, we can still provide a great buyer experience for our users amidst a much larger supply and a much larger inventory offering.

To complement that, historically, we have been very strong in fixed price listings under new listings-- new items being listed. So, we have a high component of multiple-item listings as retailers use our platform, and, therefore, conversion rate is not a variable that we track that closely.

And while we're on the search ranking algorithm, I remember you guys were talking about maybe inserting an advertising component - I guess a key word search type of advertising component to that. Is that still in the books? Is that still in the works? Or any sort of update that you can give there?

Yes. Historically, we have been very successful at putting buyers and sellers together. On the seller side particularly, small and medium-sized sellers-- that is, small retailers-- that is our platform. But we haven't been that successful at sustainably retaining large sellers on our platform, as they typically like to sell from their own platform. But they are very interested on our traffic. We are the fourth-largest destination as a site in Latin America, and we are by far the largest e-commerce destination site in terms of traffic. So, we believe that there is a possibility for us to intelligently sell some of this traffic to large retailers in terms of advertising revenues.

Thank you. I'll get back in the queue.

And we will go next to Scott Devitt at Stifel Nicolaus.

First, I just wanted to see if you could update us on-- You had mentioned in the past looking for an outside vendor to provide capital on the financing side of your business. It doesn't seem like you've done at this point in time, and I was wondering on the progress there.

And then, separately, you mentioned this $1.1 million expense in the second half. And I apologize; you were cutting out when you were mentioning that. I'm wondering. Is that stock-based compensation noncash and, if so, which lines it will flow through in the income statement? Thanks.

Yes. In terms of the financing partner, what we're seeking is someone that can help us upgrade what we currently have and what we have had for the last several years since we launched at MercadoPago to offer consumer financing. So it's capital but also know-how and supporting in that area. We are working on that. This is something that is not familiar to us because we're working with third parties, but we're making progress. But there's nothing specific to announce at this time.

And with respect to-- The other question was on the TuCarro compensation cost or on the retention plan?

I'm sorry. I just heard a $1.1 million expense to flow through the second half.

Yes. So, basically, the board has recently approved a long-term compensation plan - $2.3 million overall or $2.5 million if we add some payroll taxes. It's going to be payable 50% cash and 50% stock. It accrues-- we vest over time. So, for the first year, the vesting will be 17%, payable next year. The accounting accrual, however, is going to be 46% this year.

Okay. And so half of that is a cash expense and operating expenses.

All of this will be an operating expense. 46% of this will be an operating expense in 2008. And 50%-- Of 17% of this will be a cash expense next year for this specific plan that was approved for 2008.

Thanks.

And we will go next to Sandy Braun at Gilder, Gagnon.

I was just wondering if you could give us a little detail on your rollout of MercadoPago 3.0 perhaps country by country and how it's been implemented so far in the countries that have it, what the usage is like, how the sellers feel about the cost, and if you could just talk about the schedule for countries that don't have it yet for the next few quarters? Thanks.

So MercadoPago 3.0 is available in Chile, Colombia and, more recently, in Argentina. Chile and Colombia were two smaller markets where we initially tested this version. Argentina is the first larger market where we rolled it out. And, in Argentina, we have-- Under much larger number of transactions, we have encountered some instabilities in the backend, and we have made a lot of progress in the last several months in fixing these instabilities. The product is working well. It has been very well received by sellers and buyers, but we want to make very sure that it's up to the level where we want it to be before rolling it out, particularly to Brazil, where the 2.0 version is really thriving. So we continue with our plan to roll out MercadoPago 3.0 to the remaining countries where we don't have it today. But we are not committing to any dates.

Okay. If you talk about the potential impact for 3.0 in Brazil, from what I have heard or talked about with management before is that 2.0 is looking very well and that everyone seemed to be happy with that. Can you just talk about what the potential is for an increase with 3.0? Do you think it's necessary to improve the business there?

Absolutely. Currently, overall, MercadoPago has a penetration of roughly 13% of our gross merchandize volume. We believe this could be significantly higher with a version where the buyer doesn't have to pay an additional cost to use MercadoPago. And we also believe there is a huge opportunity for an efficient and scalable and safe payment system outside of our platform. So we believe the opportunity is really big, and we believe that Brazil-- that is, by far, the most sophisticated and advanced e-commerce market in the region-- is where the opportunities are biggest.

Okay. And the last thing. I believe they said in the past perhaps that you wouldn't introduce it in Brazil during-- Would it be the Christmas season there? can you just expand upon that? Are there times where you just absolutely will not roll it out?

We will not commit to any date.

Okay. Thank you.

And we will take a follow-up from Steven Drew with RBC Capital Markets.

Sorry if you went over this before, but what tax rate should we be using for the balance of the year? And any changes to the competitive landscape that you've noted in any of your operating territories? Thanks.

Yes. For 2008, we expect blended tax rate above 40% for the full year.

For the full year? Okay.

Yes.

In terms of the competitive landscape, nothing. We haven't noticed anything in particular. This is an evolving landscape, but we feel very comfortable with the progress we have been making and the position we currently have.

And there are no more questions at this time. I would like to turn the call back over to management for any additional or closing remarks.

So thank you to everyone who has attended this evening. We look forward to our next earnings call, where we will once again share with you an update of our business. And I think, with that, we can wrap up.

Thank you. Bye-bye.

And that does conclude today's conference. We appreciate your participation, and you may now disconnect.