美卡多 (MELI) 2009 Q1 法說會逐字稿

Good day and welcome to the MercadoLibre First Quarter 2009 Earnings Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Pedro Arnt. Please go ahead, sir.

Thank you. Welcome, everyone, to MercadoLibre's earnings release conference call for the quarter ended March 31st, 2009. Company management presenting today are Marcos Galperin, Chief Executive Officer, and Hernan Kazah, Chief Financial officer. Nicolas Szekasy, our former CFO, will also be available during the Q&A to take some questions.

This conference call is also being broadcast over the Internet and is available through the investor relations section of our webcast. Before handing the conference over to Marcos and Hernan, I 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 first quarter 2009 earnings press release available on 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 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 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, K and other filings with the Securities and Exchange Commission, which are also available on our investor relations website. With that, let me hand the floor over to Marcos.

Good afternoon and thank you to all who have joined us today for this call. And we begin the call by commenting on our outlook and discussing some of the highlights from the first quarter of 2009. I will then turn the call over to Hernan Kazah, our CFO. After our prepared remarks, we will be available, along with Nicolas Szekasy, for your questions.

We are off to a very god start to fiscal year 2009, as our business demonstrated continued positive momentum on many levels and did so despite continued uncertainty in global and regional economies. More significantly, we are encouraged by our 29% growth in successful items, representing an acceleration for the fourth consecutive quarter in the annual rate of growth, this key metric. This healthy growth in successful items carried over to volume growth as gross merchandise volume, measured in local currencies, grew 41% year-over-year. I'd now like to highlight a few other key metrics for our first quarter. I remind you that growth rates are always year-over-year unless clarified otherwise.

Gross merchandise volume, measured in US dollars, grew 16%. Total payments volume grew 2% in US dollars and 32% in local currencies. Total net revenues increased 12% to 32.3 million, or 37% in constant US dollars. Revenue for our marketplace segment was $26 million, up 11%. Revenue for payments increased 19% to 6.4 million. Income from operations grew 3% to 6.8 million, with an operating income margin of 21%.

Net income was $5.4 million, up 161% and earnings per share was $0.12. As I mentioned a moment ago, the overall weak macroeconomic context seems to have only minimally impacted our business. We believe that this is the case because our industry is still in an early stage of development and is therefore more sensitive to the secular growth trends driving Internet and e-commerce usage than it is to the overall macroeconomy. And insofar as those trends go, we continue to track positive progress. Telco and industry analysts continue to forecast growth for Internet adoption, broadband subscriptions and e-commerce volume in the 20% to 30% range for this year. However, these positive industry trends do not make us immune to the current global economic environment.

As you may have noticed from the divergence between our growth rates in local currencies and in US dollars, the most significant impact of the current crisis on our business has been foreign exchange, as the US dollar was significantly weaker versus local currencies one year ago than it is today.

And, to a lesser degree, another area of impact has been our advertising business, where revenue growth has slowed down, as fewer advertisers have made investments in the first part of this year than in the past. I'll now address our product initiatives, an area that we strive to be leaders in and to drive competitive advantages from.

I began the call highlighting how pleased we are with the continued growth rate of successful items on our sides. We believe this growth is indicative of the strong ongoing and long-term growth potential of our business as we drive MercadoLibre into its next phase of corporate development. Behind the growth in successful items are several key product initiatives that I'd like to take a few moments to talk about.

These initiatives have enabled us to make significant progress on our stated goal of offering buyers and sellers an ever-improving online experience and have helped to elevate some elements of our offering into best-in-class status. While admittedly there is much opportunity that we haven't yet realized, particularly on the MercadoPago front, we are very pleased with the areas of our business in which we have achieved marked advances and are delighted with the positive impacts that these improvements have had on our performance.

While the most important advances has been our significant improvement in our search technology, over the past two years, we have elevated our search capabilities from a basic tool to one that we believe is rapidly reaching world class. Our search capabilities now include soft matching functionality, top query optimization, auto-suggest and typo corrections for queries and listed items. These functionalities not only drive customer satisfaction and elevate the total user experience, but also indirectly drive transactions by making it easier for customers to shop and raising the visibility and ease with which listed items are found.

Another set of key advances that has seen completion of its rollout schedule during the first quarter is our upgraded item search results and view item pages. These pages, where users browse the products they have searched for and ultimately purchase products on, now appear less clustered, are more user friendly than prior versions, and have resulted better than previous versions in terms of conversion rates.

During Q1, we also completed the rollout of MercadoClicks, our proprietary text-link advertising platforms to all large markets, except Colombia. Through MercadoClicks, advertisers are able to attract traffic to their sites by purchasing text displays that appear on the primary MercadoLibre site, and it's an application intended to acquire as clients certain retailers that are attracted by our traffic but might not want to list on our platform as registered sellers.

The rollout has been very positive and the business traction we are seeing is also encouraging. Though MercadoClicks is currently limited to registered sellers with the MercadoLidere status, we have already signed up over 1,500 advertisers and are seeing continued organic growth in advertisers.

It is very early to draw conclusions about MercadoClicks, because it is still in beta stage. However, we expect that MercadoClicks will be a key element in driving scalable advertising revenue streams over the long run as we increase the number of advertisers that we offer our services to.

In our view, these product improvements demonstrate our commitment as Latin America's leading online marketplace to continually elevate our technical offering and improve our customers' overall experience, thereby maintaining and expanding our stronghold in this market. As a consequence of this dedicated effort, we continued to see very strong acceptance of our platform and acceleration in transactions throughout Latin America. Furthermore, this acceleration in growth throughout our platforms is a great stepping stone from which to focus on driving improvements in monetization, a facet of our business that has slipped slightly the last two quarters.

Hernan will discuss take rates in greater detail as he reviews our overall financial performance in a few moments. But I did want to mention that we are confident that we have the focus, the infrastructure in place, namely the market expertise and customer service capabilities, as well as high rates of transaction growth to more fully monetize our offering as it extends throughout the region. Finally, our belief is that we are on the right track and this is the right kind of problem to have. Our core business is accelerating and now we need to improve how we monetize that growth.

We prefer the challenge of having to improve take rates in a business that is showing solid growth in successful items and GMV than the opposite. We have succeeded over the past 10 years in accomplishing this and as long as growth in the business is healthy, we trust our ability to efficiently monetize that growth.

With respect to advertising, we believe the slower growth rate we saw during the quarter is partially a result of the weak economy that drove display ad spending lower and partially a consequence of improvement in our search capabilities. As our search has improved, the number of places where Adsense as the only search result has fallen.

Most of the pages where we now serve Adsense are pages that incorporate both MercadoLibre inventory and Adsense. As a consequence of this, the click-through rate on Adsense has fallen dramatically. Therefore, the monetization has also fallen.

This has led to decelerating growth in our advertising revenues during the quarter and this might continue to be the case over the short term. Over the long run, however, we are confident that a diminishing presence for Adsense as a result of the improved search functionality and our development of MercadoClicks is absolutely the right strategy for our Company and that it would enable us to drive a robust ad business going forward.

Turning for a moment to MercadoPago, we believe there remains a tremendous opportunity in the online payment space and we are committed to fully capturing it as our core business and Internet usage in Latin America further develops. While the 3.0 rollout of Pago has been slower than anticipated, we continue to be pleased with the acceptance of earlier versions of our product that are available. Because our number one priority remains the development of a technically superior 3.0 product, we continue to work carefully, consciously, and diligently on this front and are pleased with the advances that we are making.

In addition to continuing to take the necessary steps to sustain growth in our marketplaces business and driving advances in MercadoClicks and MercadoPago, we will also begin to take a closer look at a few new key strategic priorities for our business as we move forward in 2009 and beyond.

These initiatives, as most initiatives we undertake, are designed to improve the overall trading experience on our platforms, and through that generating value for our users and consequently our shareholders. These priorities include continuing to work our product catalog with the aim of offering a variety of catalog-related functionalities and browsing possibilities. Focusing on the checkpoint payment and shipping processes of the products purchase flow, enhancing the selling experience on MercadoLibre through improved seller item pages and revamped seller retention and ramp-up programs.

We believe that focusing on these initiatives will enable us to continue growing our revenue and market share at a fast pace and help us to maintain our strong market leadership position for many years.

We expect that in particular these initiatives will help us solidify our position as the platform of choice among Internet consumers who use MercadoLibre as their primary venue for e-commerce. I'd now like to turn it over to Hernan for a more detailed review of our financial performance. Following that discussion, we'll be back for Q&A.

Thanks, Marcos. I would like now to go into more detail on our financial performance before taking your questions. Overall, Q1 was a very good quarter in which we accelerated our operating metrics, generated revenue growth, achieved healthy gross margins and delivered year-over-year economies of scale in our total expenses, all of which resulted in solid bottom-line growth.

Specifically, net revenue grew 12% year-over-year to $32.3 million, a 37% growth in constant dollars. Gross margin was healthy, at 79.5%, slightly above Q1 last year. Income from operations was $6.8 million, operating income margin, 20.9%, and net income was $5.4 million, a 16.7% net income margin.

Revenue growth was driven primarily by a 29% year-over-year increase in successful items, taking marketplace gross merchandise volume to 521 million, a 16% annual increase in US dollars, a 41% jump in local currency, and a DPD of $53.2 million, 2% growth in US dollars, or 32% growth in local currency.

These positive results more than offset a negative ForEx effect, which accounted for $7.2 million, of lower revenues than in the same quarter last year. On a consolidated basis, take rate fell to 6.2% from 6.41% in Q1 of 2008. Seen independently, marketplace segment take rate fell to 5% from 5.2% in Q1 of last year and payments segment take rate rose to 12% from 10.2% a year ago as financing revenues over [TPV] grew in line with higher interest rate costs.

Take rate decline versus last year was driven primarily by high growth coming from smaller country operations that have a lower marketplace optimization and little or no penetration of our payments or other business segments, the negative impact of currency devaluations on the fixed part of our revenue structure, mainly insertion fee caps and optional feature fees that we have not raised yet, despite increases in local currency ASPs. And, as Marcos mentioned earlier, we experienced a drop in advertising revenues as we continued improving our own search technology and saw a weaker display ad market.

Our marketplace revenues grew 11% to $26 million, and payments revenues increased 19% to $6.4 million. The marketplace represented 80% of revenues and payments the remaining 20%, relatively on par with an 81%, 19% breakdown for the first quarter of 2008. Gross profit grew 13% to $25.7 million, representing 79.5% of revenues, versus 79.1% for the same period a year earlier, as we continued to drive economies of scale in customer service, connectivity and site operations and improved economic terms obtained from payment processors.

Operating expenses for the period totaled $18.9 million, a 16% capacity year-over-year, while increasing as a percentage of sales to 58% from 56% in Q1 '08. I would like to stress that the year-over-year evolution of these operating expenses is not entirely an apples-to-apples comparison, since there are certain new items included within these expense lines that require additional explanation. As part of our tax planning initiatives, this quarter we paid $400,000 of withholding taxes that were recorded in their corresponding expense line above operating income.

Additionally, in Q1 of 2009, we began to account as operational expenses all our Venezuelan ForEx losses related to intra-company payables and foreign supplier invoices, rather than reflecting them as ForEx losses below the operating income line. The total impact of this change was $2.1 million, when compared to the method of accounting used last year for these expenses.

Of this $2.1 million, $1.6 million was included as operating expenses, 48% in marketing, 14% in product and technology, and 39% in G&A and $0.5 million as COGS. With this in mind, sales and marketing remained the largest line item expense and grew 11% for the quarter to $10.2 million. As a percentage of sales, it remained relatively flat, representing 32%. Product and technology development remains a key area of focus for us. Expense in this area grew 51%, to $2.6 million, compared with $1.7 million for the first quarter of 2008, reflecting in part the expansion of our team.

G&A grew 23% in Q1 of 2009, as we included the cost of the 2008 and 2009 management long-term retention plan, versus none of it last year, and strengthening our Brazilian management team. Resulting operating income for Q1 '09 was $6.8 million, 3% higher than in the same period last year.

Below operating revenue income at the relevant lines were $2.6 million of interest expenses and other financial charges, which were mainly due to the costs of discounting MercadoPago credit card coupons in Brazil and $1.9 million of ForEx gain, driven by the cash balance held by the subsidiaries in the US. Pretax income was $7.1 million, 43% higher than the same quarter last year, and tax expenses was $1.7 million in Q1 of 2009. This represented a blended tax rate of 24% versus 58% in Q1 of last year. Our tax rate reflected certain one-time benefits, as well as efficiencies delivered by our tax planning efforts thus far.

Net income for the three months ended March 31st, 2009, was $5.4 million, reflecting an increase of 160% when compared with the $2.1 million during the same period of 2008, a 16.7% net income margin and resulting in a basic net income per common share of $0.12. The net income grew 198% versus Q1 of last year when measured in constant dollars. Net cash provided by the operating activities for the three-month period ended in March 2009 was $4.5 million, versus $6.9 million for the same period of 2008. We continue to generate strong operating cash flows in our marketplace segment, and we continue to fund working capital requirements in our payments segment by discontinuing credit cards receivables, [keeping] cash flow positive in this segment as well.

Net cash used in investing activities was minus $5.1 million in the quarter, driven by CapEx of $2.6 million. During the quarter, we continued to carry out our previously disclosed strategy of selling put options in connection with the share repurchase program. We sold written put options for226,000 of our own shares at strike prices of $10 and $12. We have collected a premium of $296,000, net of commissions, and we have recognized a gain of $173,000 in Q1. Additionally, all put options sold during Q4 of last year expired without being exercises, and we booked a gain of $185,000 during Q1 for the sale of those put options.

In Q1, we will also record a $130,000 gain if the outstanding put contracts are not exercised. Cash, short-term investments and long-term investments at the end of the quarter total $60.1 million. I would like to wrap up by reiterating Marcos's sentiment that we are 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. Operator?

Thank you. (Operator Instructions) We will go first to Imran Khan with JPMorgan.

Hi, this is Leif Ljungqvist, calling in for Imran. Thank you very much for taking our questions. A couple of questions. One, I was wondering if you could talk about on the marketplaces how conversion has been trending, if you have been seeing anything in on that. And then for MercadoPago, I was wondering if you could give an update on interest rate trends, especially in Brazil, as far as what interest rates you're facing and what you're seeing in April and how that's affecting the segment. Thank you very much.

Hello, this is Marcos. With respect to conversion rates, that's a metric that we don't disclose typically. As you know, we focus a lot in successful items and we strive t have the greatest number of live listings as possible, so as long as we are able to serve the right listings to our users when they perform their queries, we don't think conversion is that valuable of a metric. Therefore it's not a metric that we really track or disclose.

Hernan, can you help us with the MercadoPago question?

So in terms of your second question, Imran, the situation of interest rates is improving in Brazil. At the beginning of the quarter, we're paying a little bit over 2% per month to discount MercadoPago receivables. That rate has gone down. Today, we're paying around 1.7% per month and the trend continues to go downward, so we hope to continue seeing the interest going down and reflecting those improvements into the cost of financing for our buyers.

Thank you.

We'll go next to Malindi Davies of Susquehanna.

Hi, good afternoon. Our first question is about seller retention trends, if you could give some color there and explain a little bit about why it's a new priority that you mentioned today. And then, also, what level is advertising at this quarter and what does the year-over-year rate look like? Thank you.

Good afternoon. With respect seller retention, one of the reasons why we think it's a key priority going forward is as we continue to grow and attract new sellers we are also focused on growing the business of our existing sellers and we can do a better job than what we have been doing so far in helping our existing sellers scale. So that is one area of focus that we will be focusing on moving forward.

In terms of your second question, we do not break down our marketplace revenues by marketplace core advertising and classifieds. We did so when we did the IPO, and by that item we mentioned that advertising revenues were around 1%. They grew at a faster pace during a few quarters and this has not been the case in the current quarter.

We'll go next to Matt Bendixen with Craig-Hallum Capital.

Hey. This is actually Mark Argento with Matt here. Just a quick question. Could you just give us a little more color on Venezuela, about how you guys are reporting that segment now, up in the operating line items a little bit, so we can get a little bit better idea what's going on there?

Sure, we can. What we are doing now is we believe is taking a more conservative approach from an operating income perspective. Now what we're doing is reflecting in the corresponding operating expense line the cost of all the invoices that we have from suppliers and all the inter-company bills that we have in US dollars. Those expenses are being reflected at the parallel exchange rate, so instead of being reflected as we did last year at [2.15] bolivars per dollar, we're reflecting that at approximately six bolivars per dollar, so that increases the amount of expenses that we're charging into our Venezuelan account and reduces, of course, the impact of these changes in the ForEx line, where we used to have this impact.

Is this a new change in Q1, or does this reflect back to Q4 and what you had put in the 10-K there?

This is a new thing that we are now accounting for within operating expenses. Before Q1, so that is Q4 and before that, those expenses were reflected at the official exchange rate within the operating expense line, so it's just a change that will go forward since the beginning of this year.

All right, that's helpful. Then in terms of the payments business, I apologize. I jumped on the call a little late, but in terms of trends there, I know interest rates are up, but are you encouraged to see as they go down that more utilization of MercadoPago or any color there in terms of the trend?

Yes, hi, Mark. This is Marcos. Yes, we are encouraged. MercadoPago finished the quarter on a strong note and as interest rates are coming down and we are transferring those lower rates to our users we are seeing greater traction.

Great, thank you.

Thank you.

We'll take our next question from Steve Ju of RBC Capital Markets.

Hi, good afternoon, guys. So I just want to go through the Venezuelan thing once more, because I'm afraid I'm not quite getting it. So I guess the 1.6 million in expenses that is now above the line used to be below the line and that was purely the difference between your [question] on the parallel exchange rate and this is now being reclassified as being above the line because I guess the thought here is that this is the cost of doing business here in Venezuela.

So I guess if that's the case is the revenue and the GMB being recognized at the parallel exchange rate or the official exchange rate? Can you walk us through that? And also the percentages, can you walk through the percentages of where that was allocated on the expense line items again?

Yes, sure. So what you were saying about where we are registering now the impact of ForEx losses in Venezuela, you are right. In total, we reflected $2.1 million of extra expenses related to Venezuela. Of those, $1.6 million were in the operating expense lines and $0.5 million were in COGS, in cost of revenues.

Okay, so on an apples-to-apples basis, versus the way you were doing it before, then your EBITDA would have been something like $9.5 million.

Our EBITDA margin would have been 31%, doing apples to apples, the way we used to do it before. And when you look at where those items were allocated, approximately 35% were allocated in marketing, around 30% in G&A, 10% in products and technology and, as I told you then, another $0.5 million within cost of revenues.

In terms of how we are accounting for gross merchandise volume and revenues, we continued to do so in the -- at the official exchange rate.

Sorry, this is Nicolas. Just one thing, because you act for $2.6 million, the other part is $400,000 of withholding taxes that we were not paying in the past. Now we're paying those, mostly out of Brazil, and those were recognized as operating expenses on the lines that are generating the payments overseas. Obviously, the flipside, the other side of the coin, is that by doing these new tax structures, we have been able to bring the [net] tax rate downwards. So net-net, on a net income basis, the ForEx part on Venezuela is different and the tax part over time should be positive.

What tax rate should you be using for the balance of the year?

We are happy with the initiatives we have been implementing. This particular quarter, we had a tax rate that was particularly low because of some one-timers, but some of the things also will stay for the rest of the year. We have a tax rate in Brazil of approximately 35%, a tax rate of approximately 28% in Mexico and lower than in Argentina because of a special promotion that we subscribe to.

So we believe that for the balance of the year we should be below 35% and below last year's.

Okay, thank you.

We'll take our next question from Steve Weinstein of Pacific Crest.

Great, thank you for taking my questions. Just a couple of questions for you. One, I want to make sure that I understand. When you break out the direct contribution by region, in Venezuela, where you're showing about a $2.3 million marketplace contribution, is that after the $2.1 million in extra expenses? Or is that showing up in the consolidated numbers? I want to see how we're looking at that. And then my second question would be, you spoke about the acceleration you're seeing in the sold items, but the business overall, even on a currency-neutral basis, isn't really accelerating, so I wondered if you could kind of talk about what those differences are and when those metrics may move more in alignment?

Okay, Steve, so regarding your first question, about direct contribution of Venezuela, the numbers we reported include the $2.1 million using the new method of accounting, so that's net of that.

With respect to the business overall, we feel we are seeing a very good acceleration across the various countries in terms of key operational metrics. We also feel there is some improvements we can do with respect to monetizing that gross merchandise volume and successful item growth. So we are very satisfied with the way the business overall is trending with respect to our marketplace business.

In terms of local currency, we grew gross merchandise volume 41% in Q1 and that metric was 32% in Q4, so we saw nine points of acceleration in terms of local currency gross merchandise volume and in terms of successful items we grew 22% in Q4 and 31% in Q1 of '09, so we saw -- sorry, 29% in Q1 of '09, so we saw some good acceleration there as well.

Great, thank you.

Thank you.

As a reminder, it is star, one, if you would like to ask a question. And we will go next to Robert Ford of Merrill Lynch.

Good afternoon, everybody. First of all, Hernan, I had a question with respect to the foreign exchange gains that you booked in the quarter of $1.9 million. How much of that is actually coming from Venezuela, and as we seek to model that, should we be looking at the changes in the parallel FX rate quarter on quarter? Thank you.

Sure, so of $1.9 million that we recorded that as gains in ForEx, approximately half of those come from Venezuela and the remaining half from the rest of the countries, particularly Argentina, where we also saw some appreciation of the dollars that those companies held in the US.

Okay, so that would imply based on -- and it's the difference in the parallel FX rate, right?

For the Venezuela case, yes.

Yes, and my understanding is that the move was about 15% from December to March, so that would imply about $6 million in dollar-denominated assets that you're marketing up on a parallel FX rate for Venezuela, is that correct?

Yes, I don't recall correctly, I think that the exchange rate was approximately 5.9 in bolivars per dollar, and now it's around 6.4, so that is what is reflected in that change.

Yes, I think you guys used 5.4, but I could be mistaken. The other question I had was with respect to Pago in Argentina, and the penetration rates before the transition or the acceptance among power sellers before the transition was relatively high. I want to say off the top of my head it was about 67%, 68%, and then it declined dramatically, but you've made some progress, and I was curious to know how that's going, how you see the take-up, and what you can do to encourage greater acceptance of Pago among your power sellers?

Hi, Bob. This is Marcos. So Pago in Argentina with respect to adoption is trending relatively well, as you have noticed. However, we are really not focused in promoting greater adoption of the current version of Pago in Argentina, Chile or Colombia. As I mentioned in the prepared remarks, we are really focused in having our new version. Our current 3.0 version is a beta version, and that's where our bigger focus is, and also in growing the version of MercadoPago that we have available in Brazil, Mexico and Venezuela that is very well accepted, particularly in Brazil.

So whatever you're noticing in Argentina is organic growth, but we are really not focused in driving the penetration of MercadoPago in Argentina, the current version of MercadoPago in Argentina.

And just one follow-up, Marcos, and that is when you look at some of the platforms, like the virtual stores sites for Local Web in Brazil, right now I think their gross spread on payments is about 4.5%, but that includes insertion fees and managing the entire -- I guess it would be similar to an e-shop. Do you see that -- do you find that as a potential threat to gross spreads, or can you enhance the payments product to allow for greater take rate payments?

We really don't comment on competing products. We operate in a very competitive space in all our lines of businesses and with respect to MercadoPago we feel very confident that we will leverage our marketplace to grow in there first and offer then the volume of buyers and sellers that already use MercadoPago to people who are selling outside of our platform to grow there. So that's going to be our strategy, and, as always, we're going to focus strongly in having a very good technical product, and that's where we are today.

Great, thank you very much.

Thank you.

And we'll go next to [Akiko Win] with Esemplia Emerging Markets.

Yes, hi, good afternoon. Just a quick question about Venezuela and to some extent Argentina, given the high inflationary sort of situation that we have in here, in those two markets. Are you able to provide us with a sense of growth on as sort of inflation-adjusted basis, both for Venezuela and Argentina, given the fact that these were two markets that were seeing the greatest growth on a local currency basis?

Yes, we do not disclose local currency revenues of these two markets. Clearly, there has been some inflation in both of them, but we feel that the underlying business continues to be very good in both countries and that the organic growth that we see there is real. If you could look at successful item growth in those two markets, you'd see that two of the markets that are growing at the fastest pace, so the growth that we see there is not just a refection of inflation. It is true growth coming from our platform.

But, I mean, given -- if I look at the number you posted in local currency terms, that you cited in the press release, if I sort of adjust for the exposure that you have in Venezuela and Argentina and account for the observed inflation rate, I should more or less be able to deduct, I don't know, maybe 10%, 15% of that growth rate, right? That's more or less a proxy, right?

I'm not sure if I follow -- maybe you can do a follow-up afterwards, to (inaudible).

That's fine. The follow-up question I had was one of the gentlemen asked a question about the treatment of parallel vis-a-vis official exchange rates in Venezuela. Why is that you guys are reflecting on the expenses parallel, but not on the revenue side? I mean, just simplicity seems to me that it is having effect of overstating profitability on Venezuela, in Venezuela operation?

Yes, we follow US GAAP rules, particularly FAS 52 that establishes that financial statements should be translated at the applicable rate for dividends [remnants], and that's what we've been doing. So we continue to work with the Venezuelan government to access dollars at the official exchange rates and that's for the time being the exchange rate that we aspire to move dollars out of Venezuela, eventually.

But you agree that from an economic point of view, because of the accounting distortions by US GAAP, the profitability in Venezuela has been overstated, right?

No, we were very pleased with the business we have in Venezuela. We're now being more conservative in the operating income -- in the operating expenses accounting that we're doing, and that's a business that has been growing a lot since we started there with the acquisition of [Ducaro], the expansion of the business increased. So it's a true market with true profitability, and then what happens with currency is something that we cannot control. We tried to reflect it as much as we can, but it's something that MercadoLibre does not control.

Thank you.

Sure.

We'll go back to Steve Ju with RBC Capital Markets.

This is probably looking a bit farther ahead, but I guess I'm assuming that the Gmarket transaction gets done. And is there any opportunity to be transporting the Gmarket advertising platform over to your side at some point, or do you kind of have something like that already in development internally? Thank you.

Well, what we have developed and launched and rolled out during Q1 is our MercadoClicks application, which enables any advertiser to buy traffic from our platform, not necessarily having to list their products on our platform as registered sellers. Currently, it is restricted to MercadoLideres. Those are our largest registered sellers, but this is aimed at -- the application is obviously developed so that anyone can use it, registered sellers or not, and we're very pleased with the initial steps that we have seen with MercadoClicks, with over 1,500 advertisers and growing.

Thank you.

Thank you.

That is all the time we have for questions today. I would like to turn the call back over to management for any closing remarks.

Great, thanks. We'd like to thank everyone who listened in on the call today, either by phone or via webcast. As always, we look forward to speaking with you again in the future and feel free to contact either myself or Hernan if you have any follow-on questions. Thanks again for your time, everyone. Goodbye.

This does conclude today's conference. We thank you for your participation.