美卡多 (MELI) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MercadoLibre Q2 Earnings Conference Call. (Operator instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to Company management. Please go ahead.

Welcome, everyone, to MercadoLibre's earnings release conference call for the quarter ended June 30, 2010. Company management presenting today are Marcos Galperin, Chief Executive Officer, and Hernan Kazah, Chief Financial Officer.

This conference call is also being broadcast over the internet and is available through the Investor Relations section of our Website.

I remind you that during the course of his 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 2010 earnings press release, available on our Investor Relations Website.

In addition, management may make some 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 available on our Investor Relations Website.

Now let me hand the floor over to Marcos.

Thank you, and welcome, everyone, to today's conference call. I would start us off today by discussing our second quarter performance, including some insights into market trends and how they compare to our business growth. I will also provide additional details on certain product and service enhancements that we carried out during the quarter as part of our ongoing efforts to continuously improve on the buying and selling experiences. Then I will hand the call over to Hernan, who will take you through our financial performance in greater detail. After Hernan's comments, we will open up the call for questions.

Overall, we turned in a solid performance, despite Q2 being affected by softer demand as a result of the FIFA World Cup and no major launches on our platform that could have served as growth catalysts for our business. I will discuss these two items in more detail shortly.

During Q2, we added 2.5 million new users to our community of buyers and sellers, ending the quarter with 47.4 million total confirmed, registered users, representing approximately one-quarter of the total internet population in the region. This also represented a 25% increase in our registered user base over the previous year, outpacing internet audience growth for the region, which (inaudible) recently estimated at 23%.

Gross merchandise volume for the quarter was $798 million, a 22% increase year over year and 35% higher than last year when measured in local currencies. Putting this in market context, this is an excellent rate of growth even within Latin America's quickly evolving e-commerce space.

Importantly, many of the underlying drivers behind the positive evolution of e-commerce in the region remain strong, as broadband penetration, PCs per household, and mobile penetration are all growing at double-digit rates. As new users come online, they also choose to use MercadoLibre for their online shopping.

Our second quarter results reflect the positive impact these trends are having on our top line. Notably, our core business sustained an excellent rate of expansion, and MercadoPago, our Payments business, grew even faster, maintaining its growth and growth dynamic as it continues to penetrate our Marketplace business, as well as growth of platform.

To further illustrate all this, let me highlight some of the key operational metrics. In the second quarter, we generated the following year-on-year comparisons - 34% growth in items sold, 91% growth in number of payments made through MercadoPago, 35% growth in gross merchandise volume in local currencies, 74% growth in total payments volume in local currencies.

Importantly, we were able to post these growth rates despite the negative effect of the soccer World Cup on our second quarter volume. In terms of our business, there were four dates in June when each of the three largest economies in the region saw transaction volumes fall to about half their normal volume, corresponding with the dates in which those countries played the World Cup matches.

Additionally, in anticipation of the adverse impact on user attention and the increased rates for TV advertising during the World Cup, we postponed our offline cable TV campaign for 2010 until August, whereas our 2009 campaign started to run in May. Last year, we saw measurable increases in initial traffic when this campaign launched.

Despite these factors, we are extremely pleased with our growth momentum for the quarter.

Turning to our financial results, net revenues for the quarter were $52.5 million, an increase of 28% year on year. Income from operations grew 52%, with an operating income margin of 35.8%.

Net income reached $11.7 million, a 75% improvement over last year.

This solid Q2 performance is further proof of MercadoLibre's consistently solid execution in a rapidly growing region and of its focus on technology and innovation in an industry that does not sit still.

Now turning to a review of each business unit, looking at our Marketplace business, the second quarter marked a healthy continuation of the positive momentum we have been witnessing for several quarters. During Q2, our Marketplace reached an all-time high of 8.1 million live listings, a growth of 87% year over year; this strong supply is matched by what is by far the largest traffic of potential buyers in Latin America, with an impressive level of unique visitors that approximate 30 million.

We believe that there are two critical drivers to the sustained performance of our Marketplace on both the demand and supply sides - first, the secular internet trends that I mentioned earlier on and, second, our constant focus on upgrading our platform to offer an ever-improving user experience to our community.

Regarding this last point, let me add color on some relevant Marketplace platform upgrades. These product initiatives highlighted, although by themselves not as impactful as some other upgrades we have announced in past quarters, are nonetheless relevant steps in our efforts to deliver an unmatched shopping experience that combines the value, selection, and uniqueness of a Marketplace with the efficiency, trust, and consistency of traditional retail channels.

Our new pricing system, which does away with insertion fees in favor of a simple, tiered structure of final value fees and optional placement fees, is now available in our six largest markets and will continue to be rolled out everywhere during the course of this year. The decision to complete the rollout everywhere was a direct result of sustained Marketplace business momentum over the past three quarters under this system, while improving value to different seller segments.

The fact that we continued to generate strong up-front fees, despite having replaced our previous insertion fees for optional placement fees, gives us a strong sense of the value our high-volume sellers perceive in our premium selling options. In other words, we have moved from a pay-to-list paradigm to one where sellers pay for placement without having sacrificed on the top line. High-volume sellers have clearly understood that. In a Marketplace with the liquidity of ours, paying for placement provides a great ROI, particularly when we are talking about large inventories of quality articles to sell.

Simultaneously, by eliminating insertion fees, we have been able to make the Marketplace more attractive to low-volume sellers and low-rotation items, as they only pay us if they are successful in selling their items, capturing a higher amount of their inventory.

In the second quarter, we also increased the relevance of buyer's feedback ratings in our sorting algorithms. In doing so, we have effectively raised the bar and driven more volume straight to the merchant, who has been showing the strongest track record of customer satisfaction.

Also during the quarter, we began restricting sellers who are not in the highest tiers of feedback ratings from using our gold and diamond selling options, which offer the best placement on our site. This restriction further ensures that the most visible supply on the site is also that being offered by the best sellers. Importantly, since our product supply level is tremendously healthy, in large part due to the improvements made around listing formats, we can safely promote excellence at no detriment to choice on the Marketplace. Even by restricting the exposure of less-exhaustive sellers, buyers are still finding what they are looking for on MercadoLibre.

As we are learning from the comments we have been receiving throughout the quarter, these improved filters are being well received among our top seller base. The sellers who have the highest ratings of buyer satisfaction are finding this dynamic particularly rewarding as their exposure improves on the platform. It is a self-fulfilling cycle where we create and nurture an important base of professional merchants, small and medium-sized businesses alike, that achieve their critical mass on our site and, therefore, take an active interest in maintaining their reputations at the highest levels at all times.

I am convinced that these initiatives are what keep us ahead of the game in all respects, ensuring that our Marketplace adheres to the highest standards of quality at all times and providing the best level of service within the entire e-commerce space.

Finally, regarding our Marketplace business, all of these pricing, feedback, and sorting improvements were executed while we continued to thoroughly work on an entirely new site architecture, one that we internally call ground zero and which is designed to make our Marketplace platform more open, flexible, and dynamic. It will allow us to take more advantage of various new form factors, such as tablets and phones, better enables third-party developers to use our Marketplace as a business platform, and continues to increase the speed of execution of our product enhancements and geographic rollouts. We expect to have made substantial progress in our new Marketplace architecture by yearend.

Moving on to Payments, let me start out with a brief recap of our key goals for MercadoPago. As we have stated many times previously, we are very excited with the evolution of MercadoPago. Our growth plans for MercadoPago are aggressive, which we believe is consistent with the size of the opportunity and the privileged position we occupy in the space. We believe that the Payments segment of our business will eventually surpass the Marketplace segment, as online payments takes off in Latin America, creating a vast merchant services market for us to operate in. We also believe our Marketplace business provides the best possible runway for a payments business, allowing us to become the largest payments player of our type as we continue to grow the adoption of MercadoPago in our Marketplace, a key competitive advantage.

Therefore, we see ourselves successfully pursuing the Payments opportunity on those two fronts - growing our penetration within MercadoPago and in the wider space of e-commerce merchant services.

Turning to our own platform performance in the quarter, the most recent incentives we put in place to drive adoption of MercadoPago on our Marketplace continued to ramp up the growth of MercadoPago in Argentina. The combined pricing mechanism that we have been offering there since late last year has driven penetration from below 5% at the beginning of this initiative to 12% at the end of Q1, to above 15% at the end of Q2.

The positive results led us to pursue a similar initiative for our largest market, Brazil. On June 26, we raised Marketplace fees in Brazil as part of our combined pricing for the launch of our new Payments platform called MP3. We have also worked diligently with sellers to communicate how the new fee structure will work. Remember that, up until now, Brazil was under our MP2 platform, which charged buyers for the usage of MercadoPago. As of the launch of MP3 on July 16, this cost is incurred by the seller through a single Marketplace fee.

The new system has been well accepted by sellers, and we expect to see similar improved adoption by buyers throughout Q3, as they can now use MercadoPago without paying any additional fees. In a country where Payments penetration, measured as total payment volume over gross merchandise volume, was already in the high 20s, we see a high potential for further usage on the part of buyers from this point on.

The benefits of increased usage of MercadoPago are multiple and include frictionless and speedy settlement of transactions, a better and safer buying experience for buyers, improved conversion and volume for our sellers, as well as more efficient operations for them as buying becomes paying, clear online records of payments for buyers and sellers, and the possible building of stored balance, facilitating and encouraging future operations through our Payments system and/or our Marketplace. All of this ultimately leads to better overall operational and financial metrics for the Company.

In terms of the merchant services franchise, during the second quarter, we took a very important step that laid the foundation for the business we are building out. We officially launched our off-platform MercadoPago service in Brazil on April 28 with a press conference, starting off from a very similar base at the beginning of the quarter, this initial push has already doubled the number of our tiered merchants in Brazil compared to those we have in Argentina. Brazil's off-platform TPV, still a marginal proportion of total TPV, grew at approximately 90% quarter on quarter, showing the potential of the Brazilian market.

The off-platform business is also growing through increased usage of MercadoShops, our comprehensive e-commerce solution for small merchants that was launched in Argentina during Q1. We look forward to rolling out MercadoShops to Brazil and other markets in the coming quarters, generating further synergies.

Going forward, we expect this nascent merchant services business to take on an ever-increasing importance within our Company as we deploy salespeople, new products, marketing campaigns, and partnerships to expand this key strategic initiative.

Before handing things over to Hernan, I would like to provide some additional color to put the size of the e-commerce opportunity and MercadoLibre's potential role into sharper perspective. We are already the recognized leader in an e-commerce market that is only at the threshold of what it will become, a market which, in 2009, was just over 16 billion, based on the best available estimates, and of which we already represent an important portion, even as we continue to gain market share. This market represents less than 1% of the region's retail sales today. It is an unmistakable trend that more and more of the retail volume will continue to move online, as has been the case globally.

Payment solutions such as MercadoPago, which are key enablers for this entire market, are at an even earlier stage, promising greater upside.

These secular trends should provide sufficient momentum for MercadoLibre to continue growing at a solid pace for many years to come. Everyone at MercadoLibre is working to ensure this happens through the value of the service and user experience we provide our community. I am extremely confident that the progress we are making will solidify us as leaders in this incredibly attractive market.

With that, let me turn the call over to Hernan.

Thanks, Marcos. Let me go over our financial metrics and the drivers supporting them. After that, we will be happy to take your questions.

Q2 was a great quarter for MercadoLibre. Once again, our financial results reflect the strong health of our volume metrics, starting with very strong top line growth in US dollars, despite a foreign exchange headwind versus last year. Strong and expanding margins make this flow directly to our bottom line growth.

Let me briefly review our financial metrics. Please remember that all growth rates are year over year unless specified.

During the second quarter, most of our key financial metrics evolved positively. Specifically, net revenue grew 28% to $52.5 million, a 39% growth in local currency. Gross profit margin was healthy at 78.3%. Income from operations was $18.8 million, with an operating income margin of 35.8%. And net income was $11.7 million, a 22.2% net income margin versus a net income margin of 16.3% a year earlier, growing 74.8%.

Revenue growth was driven primarily by two factors - first, a 34% increase in items sold, taking Marketplace gross merchandise volume to $798.1 million. This is a 22% increase in US dollars and a 35% increase in local currency. Within this total, Brazil, with a 28% growth in successful items, grew local currency gross merchandise volume by 13% in the quarter versus US gross merchandise volume growth of 30%, as the local currency prices of import-intensive or competitive products were adjusted downwards year over year, even as their US dollar prices increased. This applies to consumer electronics, for example, which are an important part of our gross merchandise volume. Second, a total payment volume of $147.8 million, 86% growth in US dollars, or 74% in local currency.

Segment revenues broke down as follows. Our Marketplace revenues grew to $37.2 million, a 20% increase in US dollars and 37% in local currency. Payments revenues reached $15.3 million, a 55% growth in US dollars and 42% in local currency. Brazil continues to be the most significant Payments business. Overall, Marketplace accounted for 71% of our total revenues and Payments for the remaining 29%, representing an impressive increase in the share of total revenues of our Payments business relative to the 76/24 breakdown for the second quarter of 2009. This follows directly from the growth in penetration of total payment volume over gross merchandise volume in all our countries where the Payments business currently operates, enhanced by the pricing initiative in Argentina that Marcos mentioned earlier.

In local currency on a country basis, consolidated net revenue growth including both Marketplace and Payments businesses, was 26% for Brazil, 62% for Argentina, 19% for Mexico, and 69% for Venezuela. In US dollars, consolidated net revenue grew 45% for Brazil, 55% for Argentina, 26% for Mexico, and minus 41% for Venezuela. These growth rates reflect how our strong volume growth extends throughout all countries.

On a consolidated basis, take rate rose to 6.58% from 6.27% in Q2 of 2010, as Payments continues to gain share of total revenues.

Taken independently, Marketplace segment take rate fell to 4.66% from 4.76% in Q2 of last year, and Payments segment take rate fell to 10.37% from 12.43% a year ago. The Marketplace take rate decline versus last year was driven primarily by lower revenues coming from classifieds, mostly due to the change in the exchange rate that we report Venezuela's revenues at, since we have a sizeable classifieds business in Venezuela, particularly after the acquisition of TuCarro. This change had a considerable impact on classifieds revenues. Have in mind that we reported Q2 2010 results at the average parallel exchange rate of 6.35 bolivares to the US dollar, while we reported Q2 2009 at the previous official exchange rate of 2.15.

Quarter on quarter, Marketplace take rate improved from 4.51% to 4.66%. Core Marketplace take rate improve year on year and remained steady quarter on quarter. This positive effect on take rate was mostly due to the favorable impact of pricing adjustments we continue to carry out, primarily raising maximums on all of our placement fees during the quarter.

Payments take rates versus Q2 of 2009 fell from 12.43% to 10.37%, mostly as a result of lower financing revenues due to more favorable interest rates compared to those of Q2 2009.

Processing fee revenues as a percentage of TPV fell to 5.87% from 6.09% in Q2 2009. Financial revenues as a percentage of TPV fell to 4.5% from 6.34% in Q2 2009. In both of these cases, the matching cost lines related to these revenues dropped by similar levels, sustaining MercadoPago margins on both the processing and financing fees. In other words, the decline in take rates are a consequence of us passing on cost savings to our users in the form of lower prices.

While on the subject of Marketplace and Payments revenues, let me further explain how we are performing and reporting the combined pricing strategy between Payments and Marketplace that have been implemented for more than two quarters in Argentina and, as Marcos mentioned, that we have recently launched in Brazil.

As we have stated, the objective of this initiative is to remove price barriers for the adoption of MercadoPago for both buyers and sellers, thus maximizing adoption and penetration of MercadoPago. Additionally, we would like to be able to carry this out in a way that does not negatively affect consolidated revenue growth in our business.

The mechanism that we have devised to accomplish these goals is twofold. We will be offering MercadoPago as a payment option on the platform for no added fee. Using MercadoPago to pay for a transaction, we have no added cost to either buyers or sellers. We recover their revenue that we are no longer charging through MercadoPago fees by raising MercadoLibre Marketplace fees. The amount by which we will raise those fees is determined by how much total payment volume is growing and what its starting penetration over gross merchandise volume is. The greater the increase in payments volume or the higher its initial penetration, the higher the price increase, so as to totally or partially make up for these payment fees not being directly charged.

As you aware, the mechanism I have just described has been in place in Argentina since Q4 of last year. In that market, we initially increased the final value commission on premium listings by 50 basis points. More recently, as Argentina's total payment volume penetration of gross merchandise volume advanced from 12% to 15% during the second quarter, we increased our final value fees in those listings by another 100 basis points to cover the processing fees for responding to this new level of TPV.

In a similar fashion, as of Q3, our Brazilian operation has also bundled Payments into its Marketplace fees. The recent increase in premium listings final value fees in Brazil was 150 basis points higher than the initial increase in Argentina, since Payments penetration in Brazil starts from a higher base.

In terms of segment accounting, for the time being, we will continue to report the Payments segment independently from the Marketplace segment, despite the combination of the processing fees. The Payments segment revenue will be comprised of all consumer financing revenue plus an intercompany revenue allocation, whereby a portion of the Marketplace fees will be reported as Payments revenues to reflect the combined pricing of both services.

For Argentina, we are allocating 6% of total payment volume as Payment segment revenues. And, in Brazil, the accounting will occur using 3.5% of total payment volume. We are confident that this new pricing scheme will work just as seamlessly in Brazil as it has in Argentina, and we are very eager to see the growth of this business, considering the added incentive to buyers who, as of now, pay no additional cost whatsoever to use MercadoPago.

Of course, we are aware that there are multiple moving pieces involving user dynamics, which means that an essential part of this process will continue to be monitoring this evolution as it plays out, making sure that we shape the business in accordance with what users' behavior [ascribes]. As MercadoPago keeps growing, we will make sure that our reporting of this segment continues to be an accurate reflection of how this business evolves.

Returning to our P&L for the second quarter, gross profit grew 27% to $41.1 million, representing 78.3% of revenues versus 79% in Q2 of 2009. The slight decrease in margin is due to the fact that our Payments business with lower gross margin gained share over the Marketplace.

Operating expenses for the period totaled $22.3 million, a 12% increase, while decreasing as a percentage of sales to 42.4% from 48.6% in Q2 '09. Specifically, sales and marketing remained the largest line item expense, growing 14% for the quarter to $11.5 million; though, as a percentage of revenues, sales and marketing contracted significantly to 21.8% versus 24.6% for the same period last year, illustrating the advantages we've been able to drive from optimized investments in traffic.

Product and technology remains a principal focus for us. Expenses grew 29% to $4 million, compared with $3.1 million for the second quarter of 2009, as we continued to build our team in this area that is crucial to our growth.

G&A rose 2% in Q2 of 2010, showing our continued commitment to cost management and our periodic survey of the most cost-efficient providers available to meet our needs.

Resulting operating income for Q2 2010 was $18.8 million, 52% higher than in the same period last year.

Other relevant items from the quarter were $0.9 million of interest income, mainly from conservative, fixed-income investments; $3.4 million of interest expense and other financial charges, mainly derived from our discounting of MercadoPago credit card coupons in Brazil; and a $35,000 foreign exchange loss, driven by the effect of currency fluctuations on the cash and investment balances that our subsidiaries held in the US.

Let me take a moment to describe the foreign exchange situation in Venezuela, which many of you have been asking about. On May 14, 2010, pursuant to certain foreign currency exchange control regulations, the Venezuelan central bank suspended all trading of foreign currencies through parallel market transactions. Prior to that decision and up until May 13, 2010, our Venezuelan subsidiaries had been buying US dollars in a freely traded parallel market and had used the average parallel exchange rate to re-measure our Venezuelan accounts.

Trading of foreign currencies was reopened as a regulated market on June 9, 2010 with the Venezuelan central bank as the only institution through which foreign currency-denominated transactions can be brokered. Under the new system, the foreign currency securities transaction system, called SITME, entities domiciled in Venezuela can buy US dollar-denominated securities only through banks authorized by the Venezuelan central bank. Additionally, the SITME imposes volume restrictions on an entity's trading activity, limiting such activity to a maximum equivalent of $50,000 per day, not to exceed $350,000 per month. This limitation is non-cumulative, meaning that an entity cannot carry over unused volume from one month to the next.

As a consequence, starting on June 9, 2010, we have transitioned from the parallel exchange rate to the SITME rate, and we'll continue re-measuring our Venezuelan accounts through this new weighted average (inaudible) exchange rate published by the Venezuelan central bank, which is the same rate, roughly 5.3 bolivares to the dollar and which we could convert our bolivares into US dollars in June and July.

For the period beginning on May 14, 2010 and ending on June 9, 2010, during which no open foreign currency markets operated, we applied US GAAP guidelines that clearly state that, if a exchangeability between two currencies is temporarily lagging the transaction date or balance sheet date, the first subsequent rate at which exchanges could be made shall be used. Accordingly, the June 9, 2010 exchange rate published by the Venezuelan central bank has been used to re-measure transactions during this blackout period.

And, now, returning to our P&L, pretax net income was $16.3 million, 96% higher than in the same period quarter of last year.

Tax expense was $4.7 million in Q2 of 2010. This represented a blended tax rate of 28.6% versus 29.8% in Q1 and 19.8% in Q2 of 2009, as, last year, we registered some one-time benefits. Going forward, also bear in mind that we still have some tax credits related to previous acquisitions, particularly in Brazil, that we will try to use in the next few quarters.

Net income for the three months ended June 30, 2010 was $11.7 million, reflecting an increase of 75% when compared with $6.7 million during the same period of 2009, a 22.2% net income margin and resulting in a basic net income per common share of $0.26. Net income grew 95% versus Q2 of last year when measured in local currency.

Net cash provided by operating activities for the three-month period ended June 30, 2010 was $14.6 million, or 27.9% of net revenues. We continued to generate strong operating cash flows in our Marketplace segment, and we continued to fund working capital requirements in our Payments segment by discounting credit card receivables, being cash flow positive in this segment as well.

CapEx for the quarter was $2.5 million. Consequently, for the three-month period ended June 30, 2010, net cash provided by operating activities less CapEx, a non-GAAP measure of free cash flow, totaled $12.1 million.

Cash, short-term investments, and long-term investments at the end of the quarter totaled $109 million.

These results reflect the great momentum our business is gaining, and we eagerly anticipate this to continue through the second half of the year. The tailwinds to our growth are multiple, ranging from the secular trends that accompany internet growth in the region to the excellent health of macroeconomic and retail indicators in particular, spurred by accessible credit and growing demand for it. All of this, combined with the continuous improvement we plan to incorporate to our technology, favors our Marketplace business while our Payments operation supports this underlying growth and builds on top of it as our users begin to see the advantages of paying through our platform. These combined factors provide MercadoLibre with a solid possibility for growth. Needless to say, we're eager to keep managing our business with the prospect of what is to come.

With that, let us take your questions.

(Operator instructions). Imran Khan, J.P. Morgan.

A couple of questions. Gross merchandise volume per item was down 8%. Obviously, foreign exchange had an impact. Can you talk about what else drove that decline?

And, secondly, as the Payment business mix shifts towards processing and away from financing, should we expect take rates to go down? And can you talk about the cross sell opportunity on financing as more people use Pago on pay on the Brazil side? Thank you.

With respect to the first part of your question, successful items, which is perhaps a more pure measure of vibrancy in the Marketplace, accelerated slightly - we believe mostly caused by the factors we mentioned on the call, which were the World Cup; the fact that we did not have our cable and TV campaign during Q2 of 2010, whereas we did have it in Q2 of 2009 (the cable and TV campaign during 2009 had an impact in traffic and transactions); and the fact that many of the improvements we did over a year ago to our platform have cycled, and we are focused in our ground zero architecture. And, therefore, the upgrades that we did during Q2 were not as significant as the ones that we did over a year ago. So, mostly, those were the causes of the deceleration.

With respect to the take rate part of your question, Hernan is going to complement here. But we will continue to have a financing part of the business in MercadoPago, and the financing will continue to be paid for by the buyers.

Got it. Thank you very much. I appreciate your time.

Gene Munster, Piper Jaffray.

Congratulations. A question on the World Cup. You mentioned four dates. Our back-of-the-envelope is that probably added 2% negative impact on revenue. Is that matched and consistent about how you guys are calculating the impact?

That's more or less exactly what we are calculating. It's around 2% negative impact because of those days with lower activity than usual.

Okay. Then, second, you mentioned the new ground zero Marketplace by yearend. From a user perspective, you talked about phones and tablets and other business applications or usage. But will it be a different Marketplace from the user? And will that be kind of a one-time, flip the switch? Or is it going to be a migration through different product categories? Thanks.

This is going to be a major transformation in our architecture, both for the Marketplace and the Payments platform. It will be noticeable on the Marketplace platform first. And the objective is to be more open, more flexible, and more dynamic so that we can enable third-party developers to develop on top of our platform through the API and that we can better be present in multiple new formats that are increasingly popular, like the tablets and the mobile phones, the smartphones. So this will be on a stage-by-stage approach. It's not going to be a one-time event. It's going to be a one-time change, but it's going to enable multiple changes going forward. And it's also going to enable us to execute more rapidly and to do our rollout of the product upgrade more rapidly.

And, from a unit perspective, will they just go to the typical Mercado site on a computer? Will they be able to see the difference?

Well, they will be able to see many differences in the sense that many of the product upgrades that we would like to be doing take us today more time to do and to rollout. So we will-- The pace of change on our Marketplace on the Web will be significantly faster than what it is today.

Okay. One just final, quick question. Growth in Argentina at 34% versus 47% in Q1. Is there anything going on there - anything related to bundling up Pago? Any more insight on that trend?

MercadoPago in Argentina is growing very rapidly, and we're very excited with how it is going and the feedback we're getting from sellers and buyers. So, clearly, that's having a positive impact on the business overall.

The overall growth going from 47% to 34%-- Is there anything in particular in Argentina that we should be aware of?

No. In terms of transaction growth, that wasn't the case. So we are happy with the way the business is evolving in Argentina.

Okay. Great. Thank you.

Marianne Wolk, Susquehanna.

I want to understand the seller economic changes related to the Pago rollout in Brazil a little bit better. It sounded like you were raising the cost to the seller by about 150 basis points. I want to understand it. Is that true in each category? And that's a much bigger step up in costs than the step up you had-- I think you said 50 basis points in Argentina over the last few quarters. So, just wondering how the sellers are reacting to that big step up in costs. Are you seeing the same sort of favorable reaction to that?

And, then, my second question is with regard to the spending for the new Marketplace's ground zero architecture. You've had flat R&D for the last few quarters. Can you talk about how much money you're going to have to invest in this architecture and where we are in the rollout of the platform? Thanks very much.

All you mentioned around MercadoPago is true. What we've done in Brazil was basically we eliminated the MercadoPago processing fees that buyers were paying. And now we are-- we have only one single fee that is a Marketplace fee. To compensate for the revenue we're not getting any longer from MercadoPago buyer's fees, we increased MercadoLibre's Marketplace fees by 150 basis points. As you pointed out, that's more than what we've increased fees in Argentina because Payments in Brazil has a much higher penetration. So as to compensate those revenues, we needed to increase those fees at a higher level.

The fees that we're getting from sellers-- this is very early. We launched this mid-July. It's positive. And we made this change because we think this is the way for us to expand MercadoPago's penetration on the Marketplace and also for us to improve buyers' and sellers' experiences on the site. So we are definitely happy with the results we saw in Argentina. We think that we're going to replicate those results in Brazil and that, going forward, we'll do more of this expanding the penetration of MercadoPago in the countries where today we have it and also rolling out this bundled model into new countries.

With regards to your second question about ground zero initiatives and how much we're investing in technology and R&D, that's an area where we are investing ahead of revenue growth. So we're increasing the percentage of money that we allocate there in terms of revenues. And we will continue to do that. So far, we are happy with how that is evolving, and we think that within the investment we're currently doing we'll be able to accomplish the changes we want to have in the platform.

Can you just give us a sense of where you are in that investment cycle? Have you been investing in this for some time? Or is this a new investment that we should expect in the third quarter? And how long should it last?

This is part of the continuous investment that we do in technology. And the most significant expense item there is people - basically, engineers. So, as we've been saying in the last few releases, we've been investing in having more engineers. We've been growing the size of that team, and that's what is allowing us to get into this big initiative that we are doing now.

Thank you.

Robert Ford, Bank of America.

Congratulations on the quarter. Marcos, I had a question with respect to-- or maybe it's for Hernan-- with respect to the transfer pricing for the Pago. I was just curious as to why your transfer price in Brazil, 3.5% of total Payments volume and Argentina at 6%.

Basically, what we're doing is bundling pricing, as you well know. So we have to make the decision how to allocate those revenues between the Marketplace and the Payments business. What we are doing is, on the one hand, all the revenues that we collect as financing fees are definitely allocated 100% to MercadoPago. And the other fees that today is the bundled fees, we're allocating them between the two segments based on cost basis and also on margin. And, given that Argentina has a smaller operation, obviously, costs there have a higher impact than in Brazil, where we have a larger operation. And, also, in Brazil, MercadoPago makes some money out of financing fees that we do not have in Argentina. So part of the saving that MercadoPago is providing and one of the reasons why we didn't need to move the combined fees even higher was that we were able to compensate a little bit of that by increasing slightly the margins that we have on the financing side of MercadoPago. But you're certainly right that we moved prices, on the one hand, 6% and, on the other one, 3.5%. Part of that is volume. Part of that is that MercadoPago in Brazil has the financing business. And part of that is because what we think is the right pricing point for this.

That's great. Thank you. And, then, my second question has to do with the AFIP in Argentina. I understand that you began sharing information on transactions with them effective May 1, if I'm not mistaken. I was curious as to whether or not this new (inaudible) that goes into effect in November will be something that they expect from you. Or is that expected to come from your power sellers?

That is moving along. It's information that we are providing to the tax authorities. And we are connected to them through this electronic invoicing system. And we don't anticipate any issue in that regard.

And then, just to confirm, you've been exchanging information effective May 1. Right? -- in Argentina?

No. It's going to be as of September.

Okay. Thank you very much.

(Operator instructions). Jordan Rohan, Stifel Nicolaus.

Congratulations on the quarter, guys. If I heard correctly, you're talking about a take rate being higher, despite the elimination of insertion fees and have moved to paid placement. It seems really promising. Can you comment on the coverage ratio or the percentage of your listings pages where merchants have already used paid listings? Isn't this something that we can expect to go up from a very low number today to something pretty significant in the future so that it would way more than offset the insertion fees that have been eliminated? Thank you.

What we've done has been a long process. It's not something that has changed one quarter to the next. We've been removing listing fees by introducing final value fee only listings and, more recently in some countries, completely free listings. And, in those listings where we still have up-front fees, those fees are in the form of placement fees that they pay to have those listings with more prominence on the site and not so much just for the right of listing. So we still have lots of up-front fees. As Marcos mentioned in his remarks, a significant part of our revenues are still coming from that. It used to be 50/50; so, 50% coming from up-front fees and 50% from final value fees. Now it's more like 70/30 or 75/25; so, more final value fee loaded but still with some significant portion of our revenues coming from these up-front fees.

In terms of listings, Jordan, approximately 20% to 30% of the listings pay some sort of a placement fee. And they make up approximately 70% of the GMV.

Great. I have one follow-up. Can you talk directionally--? Maybe I just missed this when you were discussing the MP3 change in Brazil. But have you seen the penetration of Pago in Brazil start to get into the 30% level since you shifted the model to merchant pay? It has been in the 20s. I'm trying to just get some directional commentary on where it's headed already.

MercadoPago with Brazil-- penetration there was close to 30%. We've just launched the new product. We're happy with the results we're seeing there. So we do expect that penetration to go up. But we'll talk in more detail about that in our next earnings release.

Thank you. I appreciate it.

Steve Weinstein, Pacific Crest.

I just had a couple questions on Pago. The first one is-- I understand that you're trying to increase the final value fees to compensate for the greater adoption of Pago. I'm curious. How often are you evaluating that? And, realistically, how often do you think you can raise fees? I assume you wouldn't want to be raising fees every month, and so there's some exposure to the model as that occurs. But I'd like to get your feedback on that.

And, then, I had a little difficulty parts of the call, so forgive me if I heard this wrong. But it sounded like the financing piece of the Pago revenue-- it declined, I think, 4.5%. And I wasn't sure if that was reflective of things that you were doing to try and pass more value to consumers or if that was just a function of things happening in the market via lower interest rates or fees from the lenders that allowed you to pass that through. If I could get some clarification there, I'd appreciate it.

With regards to your question about how often we'll be able to move final value fees to keep on compensating for the growth that we expect to have in MercadoPago's penetration. So far, we can tell you that, in Argentina, we first increased prices when we launched the bundling of MercadoPago with MercadoLibre's system. And, recently, we did the second move in that direction. We think that, as long as we are increasing fees because we're offering a better alternative, a better service to buyers and sellers, we are going to be able to do that. If you look at what other marketplaces in the world charge for these combined solutions of offering a marketplace with payments, we think that we still have lots of upside there. But we will be doing that carefully. As you know, our most important target is to keep on growing our business. We are still in a very initial phase of the internet in the region-- of e-commerce in the region. So we want to make sure that, first, we grow, and then we really take a look at take rate. But we think that we do have lots of upside there. And, with the move we also did in Brazil, we're happy with the result we're seeing. So we do think that we're going to be able to maintain very healthy margins going forward with this combined pricing strategy.

With regards to financing fees, we mentioned that, in the last quarter, there were 4.5% versus 6.34% in the same quarter last year. So financing fees have gone down, mostly because we're getting better rates from the institutions where we go and basically discount the credit card coupons to get cash in advance. And those savings that we saw in that rate were passed on to buyers. We maintained, more or less, the same margins we had last year.

Thank you.

Thank you. I'm showing no further questions at this time. I would now like to turn it back over to management.

Okay. Thanks, everyone, for your time and for your questions, and we look forward to speaking to you in the next quarter. Thank you very much. Bye-bye.

Ladies and gentlemen, thank you for your participation. That concludes the conference. You may disconnect. And have a wonderful day.