美卡多 (MELI) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to MercadoLibre Q3 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. (Operator instructions.) And as a reminder, this is being recorded.

I would now like to introduce Mr. Diego Escobar. Please begin.

Welcome, everyone, to MercadoLibre's earnings conference call for the quarter ended September 30, 2010. Company management presenting today are Marcos Galperin, Chief Executive Officer, and Hernan Kazah, Chief Financial Officer. Additionally, Osvaldo Gimenez, Senior Vice President of MercadoPago, will be present during today's Q&A session.

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 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 third quarter 2010 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 our current assumptions, expectations, and projections about future events.

While we believe that our assumptions, expectations, and projections are reasonable in view of 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 the 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.

Let me begin by summing up Q3 as a good quarter for us with sustained trading momentum on our platform, even as we continue to dedicate resources to longer term initiatives that have limited immediate impact.

Throughout Q3, we continued to observe the positive dynamic which I have described over the past few quarters, characterized by increasing levels of engagement by our users with our different service offerings. This increased complementary usage of marketplaces, classifieds, payments, and advertising guarantee both an ever-improving user experience for our customers as well as strengthened financial models for our Company as we move forward.

In the meantime, secular trends in technology remain steady and underline a strong future for e-commerce in the region where we operate, as growth in Internet and broadband penetration continue to be fortified by improving infrastructure, access to computers, and quality of connections available.

New consumers are spilling onto the Web at a rapid pace. And in Q3 alone, we added 2.8 million new users to our community of buyers and sellers, surpassing the milestone of 50 million users and ending the quarter with 50.2 million total confirmed registered users. This figure represents a 25% increase over last year.

The convergence of these internal and external factors allowed for a record gross merchandise volume of $888.1 million on the quarter, a 12% increase year-over-year and 26% higher than last year when measured in local currencies.

Items sold, possibly a better reflection of the stable rate of growth for our business, as it eliminates distortions brought about by currency fluctuations, grew even more robustly at 30% versus 2009. Growth in volume is transferring over to growth in revenues at an ever-faster pace as we are monetizing our gross merchandise volume more effectively than last year, mainly on the basis of our expanding payment service which has added value to more transactions than a year ago.

Total payment volume penetration has risen to 21% in Q3 versus 14% at this time last year. That's a strong jump in the number of transactions that are opting for frictionless payments, credit card purchasing, and the possibility to buy in installments. I will share more on that with you in just a moment.

But, first let me highlight the growth of some of our key metrics. In the third quarter, our Company generated the following year-on-year growth in operational metrics. 30% growth in items sold, 120% growth in number of payments made through MercadoPago, 26% growth in gross merchandise volume in local currencies, and 63% growth in total payments volume in local currencies. And the following key financial results, revenues of $56 million, an 11% growth versus last year, income from operations of $19.3 million, 2% over last year, net income of $18.8 million, a 91% growth versus last year, resulting in an earnings per share of $0.43.

I would like to pause for a moment here and clarify that revenues for the quarter were negatively impacted by a change in MercadoPago's financing operations as revenues generated from installment related financing charges are now reported net of the cost of discounting credit card receivables.

Had financing receivables also been presold in Q3 2009, the effective year-on-year growth in net revenues would have been 19.9% in US dollars and 33.6% in local currencies. This has no impact whatsoever on net income.

On the other hand, net income was positively impacted by a lower tax rate as we got some one-time tax benefits. Hernan will explain these issues in detail in just a minute.

We believe the quarterly financial performance is further proof of MercadoLibre's consistent execution while capturing the opportunity of this rapidly growing e-commerce region. I firmly believe that our focus on technology and innovation is what allows us to capture this growing potential quarter after quarter.

Let me now turn to some of the operational highlights of the quarter. During the quarter, our efforts on the IT front continued to center on the new software platform we are developing for our core applications. That project is an entire rewrite of most of our code, focusing on making it more robust, scalable, and, principally, more open.

The key deliverables that we hope to share with you over the next few quarters will be the incremental publication of the MercadoLibre API. The API will initially cover the core functions of our trading platform and eventually cover most of the functionality available on MercadoLibre, MercadoPago, MercadoClics, and MercadoShops.

In addition to this major milestone, we are also confident that the new platform will allow us to significantly shorten our own internal product development cycle, meaning that as we advance we will be able to rollout more new functionalities and services for our users than ever before.

Importantly, this initiative implies an important dedication of our IT resources towards a project that strengthens our future adaptability and capacity for innovation while foregoing product launches and short term innovations that might have contributed to our growth in the immediate quarter.

We are eager to see the effects of this project in what is now our closer future, enabling us to tackle a list of innovations including, but not limited to, deploying our services for mobile devices as they increasingly become tools for e-commerce, becoming compatible with a wider range of third parties interested in using our marketplace as a business platform for developing tools and applications, and, as mentioned previously, increasing the speed of execution of our product enhancements.

Now for a closer look at operational highlights from our business units. Our classifieds business is showing renewed strength after we tweaked our business models by introducing free listing options. Quarter classifieds grew faster than the marketplace, as its revenues were up 61% when measured in constant dollars.

Notable in this reacceleration is the fact that an increasing number of the many new cars listed under the free option are upgrading to paid listing alternatives. This validates our strategy of offering a free classified alternative as a key customer acquisition tool to then be monetized through up-sale and cross-sale offerings.

This achievement is notorious in (inaudible), where unique new sellers have grown 89% year-over-year. Also key to the improvement in results is the fact that listings coming from dealers kept growing to 28%. This shows that the transition from a fully C-to-C model to a hybrid one, that also has impacted the dealership segment, is moving forward in classifieds with a strong degree of success.

Moving on to advertising, our MercadoClics advertising solution continues to gain traction and make up for the decline in ad revenues brought about by our decision to gradually phase out most of the display advertising positions except for those available in free listing pages. We see MercadoClics beginning to gain the recognition among advertisers that we hope will eventually position it as a valid complement on existing investments in search advertising platforms.

We have effectively doubled the number of advertisers using MercadoClics over the last two quarters. Represented within that group are renowned retailers as well as small and medium sized businesses, and even merchants who already sell on our site but see the added value of tying their offers to well selected key search words as well.

Case in point to the strong momentum we see behind MercadoClics ad base from a very small base is that of the top 25 Latin American retailers, we already have as clients Wal-Mart, Casas Bahia, Magazine Luiza, CBD (inaudible) with their brands Extra and Portofino, (spoken in foreign language), Best Buy, Dell, and Apple Store, among others.

Given the solid results we have seen, we will continue to focus on search advertising, prioritizing continued growth in the number of advertisers using the platform, improving click through rates, and making campaign management, particularly for large volume campaigns, easier through improved tools and features.

And now, I'd like to move on to the developments in our payments and core marketplace businesses. Possibly the highlight of our operations in the quarter was Brazil's well-executed migration to the MP3 payment platform. This was timed to coincide with the implementation of our new bundled pricing fees, and the transition was carried out seamlessly.

Our sellers responded very well to the new system and our buyers have demonstrated increased willingness to use MercadoPago now that they have no longer to pay for processing and have the products better integrated into their purchasing flows.

Consequently, we have seen a sharp increase in TPV penetration, that is TPV as a percentage of GMV in Brazil for the quarter. This figure rose from 33% to 39% in just the last three months. We are eager to keep witnessing this evolution going forward.

As buyers adopt MercadoPago in increasing numbers, they are also proving more likely to chose financing options when they do so. As a result, finance payments volume increased along with general payments penetration in the quarter, contributing to overall revenue growth as well.

In the meantime, express checkout, launched along with bundled pricing, has also notably improved the integration of MercadoPago in our marketplace. Another driver for this increased adoption we are seeing, buyers are finding a purchasing flow that is increasingly quick, simple, and integrated with payment, encouraging our marketplace and payment growth simultaneously.

Their increasing choice of our payment solution is also greatly improving the efficiency of transactions that sellers accomplish, and as such, they have readily accepted the value added in this new system.

The results have been encouraging enough in Argentina and Brazil so far that we will be moving forward with the same initiative in Mexico in the next few quarters.

Now, we have already covered MercadoPago in terms of its integration with our marketplace. But, I would like to specifically address the growth we are seeing in a few key metrics there. This growth remains crucial to our long-term prospects, and I want to break it into its different components.

First of all, as called out previously, TPV saw an impressive 57% growth year-on-year. This was achieved primarily by bundling MercadoPago into every MercadoLibre page listing at no extra cost for the sellers of Argentina and Brazil. As a result, MercadoPago had an impressive 86% share of all live listings in Q3, up 28 percentage points versus last year.

This will keep approaching a 100% adoption as we implement the same steps in other countries, in turn driving TPV penetration up from the current 21% level.

Simultaneously to getting to a point where all listings on the platform offer MercadoPago, we also plan to drive penetration further by creating incentives for buyers along the way. Results so far show that once they try our payment solution, they are inclined to keep using it for future purchases. Increased usage will come with many opportunities in the form of stored balance, stored payments, and shipping preferences on the critical mass of buyers, which will be interesting to merchants inside and outside of our platform.

As we continue growing the percentage of transactions that flow through MercadoPago, the benefits of MercadoPago gradually will reach all of our users, providing them with smooth settlement of transactions, a trustworthy buyer protection program, the advantages of clear records, and stored balance.

Additionally, sellers see improved conversion and volume as buying and paying become integrated on our platform. This is the enormous opportunity ahead of us on our own platforms.

In terms of the off platform segment, the opportunities for growth are also very large as we begin to reach out to more merchants, nascent and established, and as our existing off platform partners see their online volume grow along with the rest of e-commerce.

Brazil off platform payments illustrate this perfectly. Of MercadoLibre e-commerce payments, volume grew 98% quarter-over-quarter. And we expect to keep a rapid growth rate for several quarters. As this happens, off platform will become an increasingly important component of our business and we look forward to its evolution.

Before handing things over to Hernan, I would like to stress the solid progress we are making while preparing our new platform architecture, which will allow us to advance even further. Certain parts will be running on new standards by year-end. And over the next few quarters, we hope to advance on the entire site.

As I detailed earlier, these changes will allow us to shorten development time for new site launches in the future while allowing us more possibilities with third party developers. It implies no added investment, but rather a redirecting of IT resources, a time cost which we believe is well worth incurring.

While on the IT front, I would also like to congratulate our engineering team for yet another award received. On this occasion, we were the recipients of the 2010 Oracle Enable the Eco-Enterprise Award, announced by Oracle at their Open World Conference in San Francisco this quarter.

This award showcases customer successes using technology to support green business practices as well as sustainability initiatives that improve business efficiencies while having a positive environmental impact. Oracle has honored 15 global customers, and we are proud to be among them. We believe this highlights not only our engineering excellence but our commitment to being a socially responsible and environmentally sustainable Company.

This is an excellent note on which to congratulate our entire team here at MercadoLibre for the hard work carried out so far this year. We have just crossed the 1,500 employee mark as we continue to invest in top talent to carry out our ambitious plans going forward. And as a management team, we are all extremely proud of each one of them for the work they are carrying out.

In the immediate future, we are gearing things up for the year-end shopping season, which is about to kick off in Latin America. We are confident that 2010 will see record numbers of both buyers and sellers coming to MercadoLibre for their holiday buying, selling, and paying, placing us once again at the center of the growing tide that is e-commerce in Latin America.

I will now let Hernan walk you through the key financials and accounting points for the quarter, and look forward to addressing your questions right after that.

Thank you. As Marcos just mentioned, the third quarter of 2010 was another strong quarter for us as our combined businesses generated solid results.

In the quarter, we generated net revenues of $56 million, a gross profit margin of 79.5%, income from operations of $19.3 million, leaving operating income margin at 34.5%, and net income of $18.8 million, a net income margin of 33.6%. Resulting EPS for the quarter was $0.43.

As Marcos mentioned, I would like to provide you with greater clarity on two changes in our operations which have taken place as of Q3. It's important to highlight that these adjustments occur as we adapt to our users' needs and capture opportunities to enhance our business. Neither of these changes has any impact on our net income or EPS.

The first of these operational changes is the consolidation of our segment reporting. Whereas we previously reported marketplace and payments as separate business segments, as of the third quarter of 2010 we have begun to report them both as one single segment.

This is the result of the recent integration of our payments business and fees into the marketplace operations. As we have explained in prior calls, in the process of bundling our payment processing fees into our marketplace final value fees in all countries where we operate, in this way offering the improved buyer experience provided by our payment service at no extra cost to our users.

It was carried out in Argentina at the end of last year, and has now been implemented in Brazil as well to coincide with the rollout of MP3 in that country.

As a result of this pricing change in Brazil, our payments business no longer charges its own separate processing fee for transactions that occur on the MercadoLibre marketplace platform in that country, eliminating the principal source of revenues that justified reporting payments as a separate segment.

It should be noted that MercadoPago continues to charge a processing fee for off platform transactions and a financing fee both on and off platform to buyers who purchase in installments. These sources of revenues are not yet material enough to justify a separate reporting segment.

But, as they continue to grow, we will reevaluate this in the future as they increase their share of total revenues. Therefore, for the time being, we will report consolidated revenues and direct costs broken down by geographic segment.

The second operational change I want to address today is in our MercadoPago financing operations. Due to the continuous growth of MercadoPago's TPV and particularly in the growth in financed TPV, as of July 2010 we started to pre-sell a significant portion of our credit card receivables in order to better manage their growth volume and to generate increased predictability in the associated interest rate cost.

Presale of receivables implies giving certain financial institutions advance notice of our intent to sell to them a portion of the credit card receivables that we will accumulate over upcoming months. This practice allows us to better forecast the expected financial cost on the sale of our future receivables, to improve negotiations around the cost of discounting those receivables, and to limit the risk of not finding trading partners for those receivables.

Consequently, MercadoPago consumer financing revenues are now the net amount collected from financial institutions as the result of preselling installment related financing receivables, and there is no longer an expensive line associated with the cost of discounting them.

In our press release, we are providing a table that may prove helpful to analyze the annual evolution of the Company's top line, as it shows consolidated net revenues since Q3 of 2008 net of MercadoPago financing costs.

Having clarified these two issues, I will now provide a more detailed review of our key financial metrics. All growth rates are year-on-year unless I specify otherwise.

During the third quarter, we generated solid growth in all of our key financial metrics, starting with healthy growth in our revenues in US dollars, despite a continued foreign exchange headwind versus last year.

Specifically, net revenues were $56 million, 11% growth in US dollars and 23% growth in local currencies. Making revenues for the prior year quarter comparable by subtracting $3.9 million of cost directly associated with MercadoPago financing, growth was 20% in US dollars and 34% in local currencies.

Gross profit margin was healthy at 79.5% versus 78.3% in Q2 of 2010 and 79.5% in Q3 of last year.

Income from operations grew 2% to $19.3 million with an operating income margin of 34.5% versus 35.8% in Q2 of 2010 and 37.5% in Q3 of 2009.

Net income before income and asset tax expense for Q3 2010 was $19.8 million, representing 59% growth in US dollars. Net income was $18.8 million, a 91% growth year-on-year. This represents a 33.6% net income margin versus 19.5% a year earlier.

Revenue growth was driven primarily by volume. Specifically, we saw a 30% increase in items sold, taking marketplace gross merchandise volume to $888 million. This is a 12% increase in US dollars and a 26% increase in constant currency.

Within this total, Brazil, with a 25% growth in items sold, grew local currency gross merchandise volume by 4% in the quarter versus a US gross merchandise volume growth of 11%.

Gross merchandise volume comparisons are particularly difficult in Brazil for the second half of 2010, as last year the Brazilian real appreciated considerably over a very short period of time while the local currency prices of typically US denominated products did not adjust downward immediately. The result was a considerable spike in US dollars ASPs at this time of last year, making for a very tough year-on-year comparison that extends into Q4.

Another factor driving our revenue growth was the expansion of our bundled pricing, which is higher than the prior standalone final value fee and which increased TPV penetration. As TPV grows, finance volume in our site also tends to grow, and this contributes additional financing revenues.

In local currencies on a country basis, consolidated net revenue growth was 7% for Brazil, 48% for Argentina, 11% for Mexico, and 61% for Venezuela. In US dollars, consolidated net revenues grew 14% for Brazil, 44% for Argentina, 15% for Mexico, and declined 35% for Venezuela.

Note that Brazil's revenue growth is deeply impacted by the preselling of MercadoPago financing receivables. Had we presold receivables in Q3 of 2009 as well, revenue growth for Brazil would have been 30% in US dollars and 22% in local currencies.

Consolidated take rate declined to 6.30% versus 6.40% in Q3 of 2009, and 6.58% in Q2 of 2010. Under both comparisons, the decline in take rate is strictly due to the new presenting of MercadoPago receivables.

Turning to our P&L for the third quarter, gross profit grew 11% to $44.5 million, representing 79.5% of revenues, the same as in Q3 of 2009.

Operating expenses for the period reached 45% of sales, totaling $25.2 million, a 19% increase. Specifically, sales and marketing remained the largest line item expense, growing 11% for the quarter to $12.3 million. As a percentage of revenues, sales and marketing reached 22% versus 21.8% for the same period last year.

Product and technology remains the principal focus for us. Expenses grew 28% to $4.2 million compared with $3.3 million for the third quarter of 2009 as we continued to build our team in this crucial growth area.

G&A grew 26%, including certain one-time costs associated with the closing of non-operating subsidiaries and with our new offices in Brazil. Resulting operating income for Q3 2010 was $19.3 million.

Other relevant items from the quarter were $1.4 million of interest income mainly from conservative fixed income investments, $600,000 of interest expense and other financial charges, and a $354,000 foreign exchange loss driven by the effect of currency fluctuations on the cash and investment balances that our subsidiaries held in the US.

Pretax net income was $19.8 million, 59% higher than in the same quarter of last year. Tax expense was $1 million in Q3 of 2010. This represented a blended tax rate of 4.9% versus 28.6% in Q2 of 2010 and 20.5% in Q3 of 2009, as we benefitted from a tax reversal of the tax evaluation allowance in Brazil resulting from our tax planning strategies to use our accumulated tax loss carryforward credits from acquired companies.

Net income for the three months ended September 30th, 2010 was $18.8 million, reflecting an increase of 91% when compared with $9.9 million in the same period of 2009. This represents a 33.6% net income margin, and resulted in a basic net income per common share of $0.43.

Note that net income grew 109% versus Q3 of last year when measured in constant US dollars.

Net cash provided by operating activities for the three month period ended September 30th, 2010 was $15.9 million at 28.4% of net revenues.

CapEx for the quarter was $6.6 million including our investment to acquire a new office in Argentina. Consequently, for the three-month period ended September 30th, 2010, net cash provided by operating activities less CapEx, another measure for free cash flow, totaled $9.2 million.

Cash, short term investments, and long-term investments at the end of the quarter totaled $116.9 million.

These results reflect the sound momentum of our business and the efficient management of our resources as we deploy initiatives against our stated plan. The leverage to promote increasing use of our payments service on and off MercadoLibre are obviously in place, and we are eagerly awaiting for the fourth quarter which is typically a strong quarter for MercadoPago. We also expect to experience a volume boost from holiday season shopping on our marketplace.

Overall, MercadoLibre is poised for excellent growth and prospects are promising. And we look forward to managing our business in the context of this great opportunity.

With that, we will be happy to take your questions.

Thank you. (Operator instructions.) Our first question comes from Imran Khan from JPMorgan.

Yes, hi. Thank you very much for taking my questions. A couple of questions. First, I was wondering how is your view about the competitive positions of Pago if PayPal is considering to increase their presence in the Latin American market? So, that's question number one.

And question number two is, items growth rate was 30%. And I think local currency GMV grew 26.5%, if I'm correct. Can you talk about the driver of the ASP decline? Thank you.

Imran, how are you? This is Marcos.

Good. How are you doing?

Very well, thanks. Let me answer the first question, and then Hernan will take second.

So, overall, MercadoPago and MercadoLibre operate in a highly competitive environment, as you know, with many existing players and new players. And we expect that situation to continue to be like that for many years to come, given the attractiveness of the market.

We have always operated in a very competitive environment, and we have done pretty well thus far. And we expect to continue doing very well.

The second question in and around gross merchandise volume, that metric in constant dollars increased 26%. In US dollars, it increased 12%.

What we mentioned is that ASP, in Brazil particularly, went down. When you look at what happened last year, the Brazilian real appreciated considerably over a short period of time. And in Q3 and part of Q4 last year, sellers did not adjust their prices immediately. So, in a way, we had some benefits last year in terms of gross merchandise volume when measured in local currency that now is playing against us.

I think an important metric to look at in Brazil is the growth of successful items, of items sold, which grew 25% versus Q3 last year.

Thank you, Marcos, Hernan, and Pedro.

Our next question comes from Gene Munster from Piper Jaffray.

Good evening, and just another follow up on the GMV question. As you mentioned, 26% local currency growth, down from 35% last quarter but up against a really tough 52% comp a year ago. Is there any just general thoughts you can help us with in terms of thinking about GMV growth over the next year? I'm not asking for guidance, but is this a number that you think would go down over time in terms of local currency growth rate relatively stable? Any thoughts on that? And then, I have a follow up question.

Yes. In terms of local currency gross merchandise volume growth, we maintain the same position that we maintained in the past. That is, we're saying that e-commerce in the region will grow somewhere between 20% to 30% over the next few years, and we should be able to at least maintain our share there. So, that's more or less what we are forecasting for MercadoLibre going forward.

When you look at that in US dollars, you have the currency playing there a role. This time around, we still have some headwinds. As of Q4, we are going to be benefitting from that scenario if things remain as they are today. So, we think that now with a more stable horizon in terms of currency and exchange rates, we should see, in local currencies, the same long-term growth that we expect to see for US dollar gross merchandise volume.

And just my follow up question is that we've gone through and kind of done a back of the envelope in terms of your take rate based on the new numbers. And it seems to be going up about 30 basis points per quarter over the last couple quarters. Is that kind of what you're seeing? And how should we think about the rate and the pace that you start to increase take rate, especially now that you're accounting for Pago was a platform play? Does that change ultimately how you think about take rate? And then lastly, just what a long-term take rate goal might be.

Yes. Our main focus continues to be on growth. And whatever we do on pricing is what we think is best to ensure that our users get a good value for the services they are paying for. And we ensure also future growth.

We are currently doing lots of initiatives. On the one hand, we are bundling MercadoPago. Our intention is to try to expand penetration as much as possible. One the other hand, we are also, as Marcos mentioned, expanding listings throughout the site. And that, in the short run, also may produce a decline in take rate.

So, while the calculation you did is correct, if we were to account the MercadoPago financing revenues as we did in the past, you would have seen an increase of around 30 basis points on our take rate.

But, it's not that we are working against that target. Again, our target is to continue growing. And with all the changes we are doing on the platform and with the bundling of MercadoPago in Brazil and hopefully in new markets soon, we're trying to see what's the best equilibrium for us to keep on growing, for us to capture more users, and not that much managing the business to a certain take rate.

So, we may see a decline in take rate in the near term, and then move up over time?

You might see them going up or going down. As long as we see our revenues growing in a healthy manner, we won't care much about our take rate.

And do you think it could get to 12% in the next five years or 10 years? Any thoughts on that?

Not really. At this point, we don't have a long-term view on what is the target for take rate, though we've been saying for a long while that, assuming that Latin America is a more inefficient retail market, you could argue that there is lots of upside for us to try to have a higher take rate than whatever you consider is an equivalent take rate in a more developed retail market.

All right. Thank you.

Sure.

Our next question comes from Robert Ford from Bank of America.

Hello, everybody, and thanks for taking my question. I had a question with respect to payments, first of all. And you mentioned that the Brazilian off platform payment volume was up 98% quarter-on-quarter, which is phenomenal. And I was curious what the total payment volume was that's associated with that. And then, the number of total Pago users you have in Brazil.

And where do you stand in terms of your PCI certification?

Hi, Bob. How are you? This is Marcos. So, definitely off platform volume is growing very fast from a low base, as you know. But, both number of users and volume is growing very fast and starting to gain some sales. We are not opening up those numbers.

As Hernan mentioned in his prepared remarks, we are eventually going to be opening up the off platform revenues from MercadoPago as they become more significant. But, we are very, very happy and encouraged with the results we are having with MercadoPago in Brazil, both on platform and off platform. And obviously, we believe we have key competitive advantages there.

And in terms of PCI certification in Brazil and other marketplaces, do you know where you are right now?

Yes, we are extremely advanced there. We are in good shape.

Okay. And out of curiosity, I know eBay has two million users right now in Brazil, right? High net worth individuals that typically buy imported items. I'm curious as to why you didn't decide to joint venture with PayPal and go it alone.

That's an interesting question, Bob. Perhaps you should ask eBay. But, obviously it's not a question that we can discuss at this point.

But, as I said earlier, we're very excited with the way our business is going. And we think we have very solid competitive advantages. We don't particularly focus on any one competitor at any given point in time.

So, as I said before, there are many competitors, some new, probably other new competitors who will be coming on board later on. And I think the best thing we can do for us and our users and our shareholders is to focus on providing great value to our users and having great technology.

Okay. And then, just one last question. That is I noticed you began offering free listings in Brazil. You started that in Argentina, and I was curious what kind of traction you were getting in Argentina to expand the initiative out to Brazil.

It's going great. I mean, we really like the philosophy, which is the premium philosophy. So, you shouldn't be surprised if, down the road, we have a free listing option in every country where we operate.

And we believe, as you know, that we will have many millions of new users enter in the marketplace, the Internet and e-commerce, in the next three to five years. And we don't want to have any barrier preventing these new users from trying out our platform.

And the results in Argentina were very good. We saw growth in listings and in revenues. And that's why we have decided to roll this out to every other market.

Thank you very much, and congratulations.

Thank you.

Our next question come from Stephen Ju from RBC Capital Markets.

Good afternoon, everybody. So, Marcos, we're seeing some of the other marketplaces' platforms around the globe starting to offer fulfillment services to its sellers if they follow the Amazon model. Is this a business that MercadoLibre could think about offering someday? Thanks.

Hi. Good afternoon. Obviously, there are two major friction points in e-commerce. One is payments. The other one is fulfillment. We are extremely focused in solving payments. And as I mentioned in my prepared remarks, we aim at having 100% of payments flowing through our platform.

And obviously, fulfillment is still going to be our next focus. And we're starting to look into it as we speak. Having said that, we are not stating whether or not we will be doing fulfillment ourselves as of yet.

Okay. So, theoretically you could pick a fixed partner to handle some of the warehousing, but it's still too early to really say anything.

We would have a strategy that ensures that fulfillment is speedy and adequate for our users.

Okay. Thank you.

Thank you.

Our next question comes from Jordan Rohan from Stifel Nicolaus. (Operator instructions.)

There is goes. Thank you so much. So, my question is really one of direct contribution margin and the Brazilian market, which, by calculating compared to -- it looks like it fell from 51% to 38%. But, I just wanted to clarify that the decline is due to the inclusion of installment finance costs in the direct cost line, which correlates to the change in accounting that you discussed. Is that right? And what would it have been otherwise? Would it have been flat, up, or down slightly, something like that?

Yes. What you are saying, Jordan, is in the right direction. With this change in the operation of MercadoPago where we are preselling the receivables before we even get them, we are basically eliminating the costs that we used to reflect in the financial expense line. And those costs are directly subtracted from the revenue line. So, that affects the redistribution level, the margins.

Without that change, you would have seen still some fluctuation, because of the combination of MercadoPago with MercadoLibre fees, but not as extensive as the one you are seeing.

Okay. One follow up question, and it's a bit long. But, I'm going to do my best to keep it tight. But, essentially when you raised the take rate charged to the merchants in order to offset for the inclusion of MercadoPago's services, you would have to have assumed some sort of adoption rate by consumers in order to maintain revenue neutrality. So, let's just say that you raised it by 200 basis points and that covers you up to 40% TPV as a percentage of GMV.

So, my question is, with the big increase from 33 to 39 in TPV, if I heard that correctly, in Brazil, are you at the point where you have to institute another price increase in order to maintain revenue neutrality on that bundled approach? I hope that makes sense.

Yes, it makes a lot of sense. And if we were to try to maintain take rate and profitability on a gross margin level at both businesses, we should be doing the math you are doing. That's not necessarily the case.

On the one hand, as MercadoPago grows, we think that we can keep on extracting some scalability out of that business, better negotiations with credit card processors, and at the same time we might want to offer better pricing to sellers and to buyers and discount a little bit the pricing we are charging them.

So, if we were to maintain everything else equal, you are right. But, again, there are some savings that we are getting. And at the same time, we might want to be a little bit aggressive as long as, again, our revenues keep on growing at a healthy rate. We don't want to extract too much value out of them. We think that the current margins we have are quite large. So, we might try to pass on some of those points to the seller.

All right. Thank you very much.

Our next question comes from Steve Weinstein from Pacific Crest.

Great. Thanks for taking my questions. A couple questions for you. One, it seems like that the level of competition in Brazil has really increased over the last couple of quarters. You talked about 25% growth in items sold. I'm wondering if you think that that is keeping up with the e-commerce growth in Brazil particularly right now, or if you think you've lost any share or gained any share as the competition has gotten more intense?

Also, I think you had talked before, I think, about like a mid 30s or low 30s operating margin. I'm wondering if you could kind of update that, based on kind of the new accounting, where you'd like that to be.

And then, kind of a follow up on Jordan's question. It does seem as though the adoption of Pago is going really well, and that that would -- even though it could push revenue higher as you increase the final value fee, you have higher costs associated with that. Are you going to take a margin hit if the adoption continues to go up over, let's say, the next few quarters? Or, would you address pricing before that?

Okay, Steve. Let me take your first question and then Hernan will take the following questions.

With respect to competition in Brazil, let me just clarify that in the marketplace business, we continue being far and away the leaders there. We don't see significant competition from other marketplaces.

With respect to the classifieds business, we see our cars, our motors vertical, gaining share very strongly, as I mentioned on my prepared remarks, with very strong growth in listings and in revenues. So, in the marketplace business, we believe we are extremely well positioned.

Our growth rate of 25%, we don't know exactly where the market is growing. We don't think that's a bad growth rate to have. We've seen this growth rate higher. And as I mentioned also in the prepared remarks, we have been very focused in developing of our new software architecture. And that implies that many of the things we could do to accelerate growth in the short term have been on the back burner.

So, this is a growth rate that is okay with us. We are not worried with our growth rate, and we are not worried with our competitive position. We believe we have an amazing competitive position.

And with respect to our payments business, it grew 98% off platform. And it also grew very fast on platform, 120% year-on-year in the number of payments. So, we believe we are doing quite well there as well.

For the other two questions, on the one about our margins and the targets we have there, we've been saying for a long while that our operating income margin target was above 30%. And even with the growth of MercadoPago, we thought that we could maintain that.

With this new operation in discounting MercadoPago receivables, that might change a little bit. But, nothing changes at the net income level. So, you can translate that with a more normal tax rate versus the great one that we had this quarter. And that should be a net income margin of above 20%, or around 20%. So, that should be the target.

In terms of final value fees and the impact of MercadoPago as its penetration grows over gross merchandise volume, certainly there are some direct costs that we need to cover as MercadoPago keeps on growing. But, as I answered in the prior question, we think that there are some savings that we can get from the growth of MercadoPago, some efficiencies that we gain also in the business in terms of bad debt and on those type of things that disappear whenever we are using MercadoPago. And also, we might want to pass on some of those savings to the users.

So, net-net, yes, there is some pressure in terms of direct costs as MercadoPago's position grows. But, we will be managing that, again, to make sure that revenues keep on growing at a very nice pace, but not necessarily take rate.

Thank you.

Our next question comes from Aaron Kessler from ThinkEquity.

Just a couple of housekeeping questions. On the tax rate, can you clarify what you view kind of the tax rate for Q4, maybe going into next year? And also, interest expense. I think you said about $500,000, $600,000 in the quarter. Maybe if you could just give us an explanation of what that was for. And then also, just on the G&A, it was a little higher. Was that due to some one-time costs there?

Yes. Sorry, one question was tax rate and the last one was G&A. The one in the middle I didn't get.

Interest expense. You still have a little above $500,000 of interest expense, just what that relates to.

Oh, sure. So, tax rate, the normalized tax rate that we should expect for our business is a little bit below 30%. This quarter in particular, we could use some valuation allowances that we had from acquisitions from companies that we did in the past. We still have some other initiatives that might help us maintain that below the normalized level. But, for modeling purposes, I think that assuming something close to 30% is a sound rate.

So, interest expense in terms of financial expenses. The most significant change there is that in the past there, we used to reflect the cost of discounting MercadoPago receivables, mostly in Brazil. And now, with the new operation that we have that we are reselling those receivables to the financial institutions, we no longer carry that cost. And basically, that was discounted from the revenue line.

No, I understand that. There's about $600,000 in costs in the quarter. I'm just trying to figure out what's left in interest expense.

We have some taxes that are recorded there from the MercadoPago operation.

Okay, great. And then, G&A?

Yes, G&A. We are having -- we are moving our office in Brazil, we are also moving our office in Argentina, to new buildings. And that has increased a little bit that line.

And as I mentioned also, we had a few subsidiaries that we are not using that had some accumulated tax benefits that we basically gave them away. And we registered that in that line. So, we have like an extra -- probably over $0.5 million in that line that are one-timers.

And also, when you look at G&A as a percentage of revenues, you have to bear in mind that now revenues from the financing part of MercadoPago revenues, they are discounted a little bit versus what they were last year.

Great. Thank you.

Sure.

I am not showing any other questions at this time.

Okay. Thanks, everyone, for your time and for your questions. And we look forward to further questions in the next quarter. Thank you very much.

Ladies and gentlemen, this does conclude today's program. You may now disconnect, and have a wonderful day.