美卡多 (MELI) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MercadoLibre fourth quarter 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 follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to the Company.

Thank you, and welcome, everyone, to MercadoLibre's earnings conference call for the quarter and full year ended December 31st, 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 available 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.

Let me remind you that during the course of this conference call, management may make forward-looking statements relating to such matters as continued growth prospects for the Company, industry trends and product and technology initiatives. These statements are based on currently available information and our current assumptions, expectations and projections about future events.

While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on these forward-looking statements. Our actual results may differ materially from those discussed in this call for a variety of reasons, including those described in the forward-looking statements and risk factor sections of our 10-Q, 10-K and other filings with the Securities and Exchange Commission, which are available on our Investor Relations website.

With that disclaimer, let me hand the call over to our Chief Executive Officer, Marcos Galperin.

Thank you. I would like to welcome everyone to today's conference call. During today's call, Hernan and I will discuss our strong fourth quarter 2010 results, as we closed out another year of significant growth and innovation for our Company.

I am pleased to report that we ended the year with accelerated growth, as all of our businesses prospered throughout an excellent holiday season. This is a testament to the power of the e-commerce ecosystem we have built. Our value proposition continues to prove very attractive to the fast growing base of Internet users in Latin America.

The combination of low prices, unmatched product selection, clear and intuitive listing formats, increasingly seamless payment integration, and advertising services we offer continue to create great value for our buyers and sellers, while also adding large retailers to our client base.

Heading into 2011, we are extremely pleased with the prospects for our business. Let me quickly review a few highlights from the fourth quarter that give us enthusiasm in the progress that our business is making.

Traffic on our site, measured in unique visitors, is at an all-time high, having reached 32 million visitors towards the end of the year according to comScore, an indication that we are the preferred destination for e-commerce throughout the region.

Items sold increased by 31% over the fourth quarter of last year. Our payments operations continue to climb with a 135% increase in the number of payments made in MercadoPago over last year. Live listings at the end of the fourth quarter, a measure of the breadth of offerings on our platform, increased 59% over last year. We had a record gross merchandise volume of 988.1 million in the quarter, a 26% increase year over year.

These growth rates, on top of strong growth in the prior year quarter, highlight our continued success in executing against our business objectives, as well as sustained circular trends that favor our business.

It is also worth noting that these strong results have been achieved while still focusing significant IT resources on building our new technology platform, thus limiting our capacity to launch significant product improvements as we have done during 2009.

With that in mind, let me share with you some financial highlights that will provide a complete perspective on our quarterly performance. In the fourth quarter, our Company saw year-on-year growth in the key metrics generating revenues of $62.3 million, an increase of 27%, income from operations of $21 million, an increase of 17%, and net income of $15.9 million, an increase of 41%, resulting in earnings per share of $0.36.

As you may recall, our year-on-year revenue comparisons are negatively impacted by a change in MercadoPago financing operations, as revenues generated from insolvent-related financing charges are now reported net of the cost of discounting credit card receivables. Had financing receivables also been presold in Q4 2009, our expected year-on-year growth would have been 38% in net revenues and 44% in income from operations.

We believe the performance I have just outlined is a direct result of our focus on creating an ecosystem of products that strongly complement each other, thus driving better results than they would on their own. We feel this approach is intrinsic to our Company's growth.

I would now like to add some color on the quarterly performance of our business units. Let me start by covering our marketplace business. During the quarter, we continued to progress on a key element of our value proposition, constantly broadening the product selection available for our consumers by capturing more listings and sellers.

As you may recall, over the past few quarters we have pursued this goal by offering a simpler pricing schedule to high-volume sellers and free-listing alternatives to new sellers.

Fourth quarter 2010 marked an important inflection point for this strategy, as we successfully launched free listings in our largest market, Brazil. Consequently, core net listings in Brazil grew by 62% year over year, unique sellers grew by 44% year over year, and new listings grew by 88% year over year.

As you can see, the results have been positive, and we will continue to deploy the pricing structure now available in Argentina and Brazil to other markets, as we believe it strikes the right balance between maximizing consumer selection on the platform and one pricing that's applied.

Within our classifieds marketplace, a similar dynamic played out during the quarter, as we launched free listings in Mexico and Argentina, which had previously been available only in Brazil and Chile. As a result, choice in cars available on our platforms improved significantly, as did revenues.

This suggests that our strategy of moving to a premium model is playing out. Non-revenue generating free listings have become an important part of the product offering in Brazil, Chile, Argentina, and Mexico, but there has also been a steady flow of upgrades from free to better placement alternatives that we have been able to monetize accordingly.

Visitors to the classifieds categories have also increased as a result of improved product choice, driving additional paid listings by dealerships. This positive cycle resulted in year-over-year classifieds revenue growth of 71% for the quarter.

Another business unit that continued to transition well into a new business model during the fourth quarter is our advertising offering. As we have noted throughout the year, MercadoClics, our search advertising solution, is doing a great job of replacing a model previously based exclusively on display advertising. At this time last year, search advertising represented less than 10% of our advertising revenues, compared to roughly half of all advertising revenues at the end of the fourth quarter.

This mix shift was possible due to MercadoClics growing more than 4x during the last year. During the quarter, MercadoClics surpassed 11,000 active advertisers, of which 1,700 were first-time advertisers.

MercadoClics active advertisers include such brand names as Sony Style, Apple Store, Walmart, Telefonica de Argentina, Casas Bahia, PontoFrio, Falabella, HP, Dell, and [Liverpool].

As you know, as a platform we have historically been very successful at bringing buyers to small- and medium-sized businesses. With MercadoClics, for the first time, plan to build a rich, scalable and sustainable relationship with the larger brands in the region. We believe that bringing these recognized brands to our platform is a very positive development for all its participants.

While MercadoClics is still very small, generating less than 5% of our revenues, we believe that it is well on its way to becoming a significant revenue stream. It has quickly gained recognition, and is making a name for itself as a valid complement to existing investments in search advertising platforms, as retailers are eager to access the largest source of e-commerce traffic in the region.

From a business perspective, it allows us to generate additional high-margin revenues, mainly from traffic that was not converting on our platform, thus proving to be incremental revenue rather than cannibalization of our core fees.

Perhaps more importantly, we're now offering our buyers the option to compare marketplace offers with those of large branded retailers, all within MercadoLibre, thus providing them with an overall better buyer experience.

I would now like to review the progress of MercadoPago, which had a nice full year in terms of penetration of our marketplace and is a key driver of our strong performance.

Our bundled pricing approach has proven to be the ideal way to spread the value of MercadoPago at no added cost on our marketplace. As we reported last quarter, the transition to this pricing went seamlessly in Brazil, and it is moving forward with the same success as this initiative saw in Argentina throughout the year. That's an important move forward in our two largest MercadoPago operations, and more will follow suit in 2011.

In the fourth quarter, consolidated MercadoPago continued to see many of the trends we have experienced throughout the year. TPV accelerated its growth to 74% year over year versus 67% in the third quarter, penetrating our GMVe even further at 24% in the fourth quarter of 2010 versus 17% a year ago. We believe this metric is bound to keep growing, as our new platform and our bundled pricing scheme is launched in our remaining payments operations.

Our largest MercadoPago operation is also our fastest growing [expression]. As you may remember, the third quarter saw Brazil reach a TPV penetration of 37% versus 31% in the second quarter. The momentum remained just as strong in the fourth quarter, as penetration kept rising to a new high of 43%. December closed with a penetration of 45%. That's practically a 50% increase in penetration since the initiative was implemented 6 months ago. Needless to say, we're immensely pleased with the results.

Our sellers' reaction to this new system was immediately very positive, as well as the response of Brazilian buyers who have been opting for our payment solution more than ever before now that it implies no charge to them. As buyers demonstrated great willingness to use MercadoPago during the holiday season, sellers saw clear benefits in the volume they generated.

In the meantime, our financing business benefited from MercadoPago's boost in volume. Higher payment volume combined with lower interest rates versus 2009 yielded financing revenue growth of 16%. Not taking into account the adjustments made in the presales of credit cards, this growth would have been 195%.

Looking exclusively at off-platform MercadoPago, e-commerce payments volume grew 138% quarter over quarter. Although this business is very new, we can expect it to grow steadily as merchants increase and the online volume of existing customers grows along with the rest of e-commerce.

Finally, let me give you a very brief summary of the advances we have made with MercadoShops. Our e-building solution closed the fourth quarter with nearly 5,000 sites up and running versus a little over 100 in the first quarter of the year. Brazil already accounts for more than half of this, but at the end of June it had exactly 1 active shop.

As our shops grow in number and size, they will become an important part of our suite of services and a great distribution channel for our payments and advertising solutions.

Turning to the technology front, let me take a moment to update you on our platform rewrite efforts. As I mentioned earlier, a significant portion of our engineering resources continues to focus on developing a completely new version of our technology.

We are pleased with the progress we have made on that front over the last two quarters. The recent fourth quarter deployments were successful and completed on time. There already are many new versions of our APIs available, and we have migrated portions of our websites over to the new technology and redesigned most of our development processes according to these new standards.

These advances put us well on track to complete the technology overhaul we set out to accomplish by our target date in the second half of this year. Once completed, the new technology will allow us to launch more frequent upgrades to our platform, to better capture the opportunities that mobile commerce provides and enable outside developers and business partners to build on our existing services.

One final point I would like to address is today's announcement that starting this quarter we will initiate a dividend program. We are pleased to be able to initiate this regular dividend policy. Our decision to launch a quarterly dividend is proof of our confidence in our financial strength and ability to generate sustained cash flow from operations going forward.

The anticipated dividend for the year amounts to approximately $14 million. We believe this amount is a balanced approach, allowing us to reward our shareholders with cash dividends while maintaining the appropriate cash level to aggressively invest in our business.

In the future, our expectation is to be able to increase this amount roughly in line with our growth in net income. We are confident you will receive this as yet another positive sign of the many steps we have taken as a Company over the last 11 years.

Wrapping up, our marketplace business is strong, our payments business continues to show outstanding growth, and we are starting to see positive contributions to our overall growth from our classifieds and advertising businesses as well.

We are very excited about the coming year and the innovations it will bring as our open platform comes to life. We are confident that we will continue to deliver strong operating and financial growth.

With that, I will turn the call over to Hernan for more details on our financials.

Thank you.

As Marcos just mentioned, the fourth quarter of 2010 proved to be an excellent close to another year of solid growth and accomplishments on our stated objectives. I would like to briefly list our financial highlights for the quarter before providing additional details on our financial performance.

In the quarter, we generated net revenues of $62.3 million, a gross profit margin of 77.9%, income from operations of $21 million, and net income of $15.9 million. Resulting EPS for the quarter was $0.36. Growth was driven primarily by volume increases in our businesses. Specifically, we saw a 31% increase in items sold, taking marketplace gross merchandise volume to a record 988.1 million. This is a 26% increase in US dollars and a 23% increase in constant dollars.

Within this Company, Brazil accelerated its growth in items sold to 27% versus 25% in the previous quarter. Local currency gross merchandise volume there accelerated to 8% year on year versus 4% in the previous quarter. US dollar gross merchandise volume growth for Brazil was 10%.

During the fourth quarter, we also generated solid growth in all of our key financial metrics, starting with healthy revenue growth in US dollars. Specifically, net revenues grew 27% in US dollars and 25% in local currencies. Top-line growth would be higher had we not engaged in the presale of receivables. It changed in our MercadoPago financial operations and has no impact on our bottom line.

Making revenues for the prior year quarter comparable by subtracting $4 million of costs directly associated with MercadoPago financing, growth was 38% in US dollars and 36% in local currencies.

Gross profit margin was healthy at 77.9% versus 79.5% in the third quarter of 2010 and 78.9% in last year's fourth quarter.

Income from operations grew 17% to $21 million with an operating income margin of 33.6% versus 36.5% in the fourth quarter of 2009.

Had we presold receivables in last year's fourth quarter, gross margin for the period would have been 32.4% and year-on-year income from operations growth would have been 44%.

Net income before income and asset tax expense for the fourth quarter of 2010 was $22.1 million, representing a 48% growth in US dollars. Net income was $15.9 million, a 41% growth year on year. This represents a 25.6% net income margin versus 23% a year earlier.

These growth rates were achieved despite the adjustment in our MercadoPago financing operations detailed in the third quarter. Let me briefly remind you that this operational change affects our year-on-year comparisons at the level of revenues, operating income and margins over revenues, while having no impact on our net income or EPS.

Our bundled pricing explains further growth in our revenues versus our gross merchandise volume, as these bundled fees covered the equivalent of last year's standalone final value fees plus a higher total processing charge based on increased volume transactions through MercadoPago.

Financed volume on our site has grown hand in hand with accelerating payment volume and generating increasing revenues from financing even in the comparison versus prior year when we did not pre-sell receivables. We expect this favorable dynamic to continue as MercadoPago keeps gaining ground in countries where it has already been implemented, and also as we expand our MP3 platform to other countries, quickly making MercadoPago the payment alternative of choice throughout MercadoLibre.

Also, as Marcos mentioned, we saw accelerating contribution of classifieds to our revenues. The renewed pace of this business, tied to an impressive growth in listings, even surpassed growth coming from our revenues tied to gross merchandise volume.

In terms of sponsorship revenues, 2010 was an excellent transition year as the proceeds from our search advertising solution, MercadoClics, offset the phasing out of display advertising, even as it is targeted from a much smaller base. At this rate, MercadoClics should contribute nicely to our revenue growth going forward.

All these factors combined generated the following revenue growth in our top-four countries. In local currencies, on a country basis, consolidated net revenue growth was 15% for Brazil, 52% for Argentina, 12% for Mexico, and 57% for Venezuela.

In US dollars, consolidated net revenues grew 18% for Brazil, 46% for Argentina, 18% for Mexico, and 68% for Venezuela, as the fourth quarter of last year was the first quarter to be accounted for at the [country's pilot rate] rather than at the previous official rate of [215], hence eliminating the extremely adverse FX comparison that accompanied us for the rest of the year.

Note that Brazil's revenue growth is deeply impacted by the change in our financing operations involving the presale of MercadoPago financing receivables. Had we presold receivables in the fourth quarter of 2009, revenue growth for Brazil would have been 33% in US dollars and 29% in local currencies.

Consolidated take rates rose to 6.31% versus 6.23% in the fourth quarter of 2009 and 6.30% in the third quarter of 2010.

Turning to our P&L for the fourth quarter, gross profit grew 25% to $48.5 million, representing 77.9% of revenues, declining from 78.9% in the fourth quarter of 2009, as payments implied more processing cost over revenue.

Operating expenses for the period were 44.2% of sales, totaling $27.6 million, a 32% increase. Specifically, sales and marketing remained the largest line item expense, increasing 22% for the quarter to $14 million.

As a percentage of revenues, sales and marketing was 22.5% versus 23.5% for the same period last year.

Product and technology remains a principal focus for us. Expenses grew 42% to $4.4 million, compared with $3.1 million for the fourth quarter of 2009, as we continued to build our team in this crucial growth area.

G&A grew 48% year over year in the fourth quarter of 2010. This growth was particularly high in the quarter as we are now required to use a portion of our tax benefit in Argentina to fund related audits, and we accrued this expense retracting to the beginning of the year.

Additionally, we had higher expenses than usual related to the move of our new offices in Brazil and with the construction of our new headquarters in Argentina.

Resulting operating income for the fourth quarter of 2010 was $21 million.

Another relevant item from the quarter was $1.9 million of interest income mainly from conservative fixed-income investments.

Pretax net income was $22.1 million, 48% higher than in the same quarter of last year. Tax expense was $6.1 million in the fourth quarter of 2010. This represented a blended tax rate of 27.8% versus 4.9% in the third quarter of 2010 and 24.4% in the fourth quarter of 2009.

I remind you that in the third quarter, we benefited from a reversal of a tax valuation allowance in Brazil, and our current tax rate is a better reflection of the blended tax rate we are aiming to achieve through our efficient tax-planning efforts quarter after quarter.

Net income for the three months ended December 31st, 2010 was $15.9 million, reflecting an increase of 41% when compared with $11.3 million during the same period of 2009. This represents a 25.6% net income margin and resulted in a basic net income per common share of $0.36. Measured in constant dollars, net income grew 39% versus Q4 of last year.

Net cash provided by operating activities for the three months ended December 31st, 2010 was $25.9 million or 42% of net revenues.

Property and equipment and intangible asset purchases for the quarter totaled $3.1 million including our investments to acquire a new office in Argentina. Consequently, for the period ended December 31st, 2010 net cash provided by operating activities, less property and equipment and intangible asset purchases, totaled $22.8 million. Cash, short-term investments and long-term investments at the end of the quarter totaled $141 million.

Let me take the time to provide some additional detail on today's announcement regarding our future dividend payments. The first dividend payment will be of $0.08 occurring on April 16th, 2011, and all stockholders of record as of the close of business on March 31st, 2011 will be eligible.

We expect future quarterly dividends to be paid in April, July, October, and January. We believe this establishes a very sound practice as it is beneficial for our shareholders, and it enforces additional discipline on management, while still allowing the Company to accumulate sufficient cash for growth opportunities that may arise.

The Company's healthy cash balance today and expected positive cash flows should enable it to pay dividends going forward, always at the discretion of our Board of Directors, as they consider the evolving context of our earnings and other factors that may be relevant as they consider the interests of our shareholders.

I believe the results in the fourth quarter leave the Company in a position to continue growing in a thriving industry, propelled by segment trends and by our own innovation. The past year has kept us on a path of constant growth and scalability, leaving us poised for further growth along the lines already defined and the new ones to come.

Our marketplace should continue to provide plenty of runway for the fast-paced expansion of MercadoPago, and now we have to continue spreading its advantages to a growing number of our users. This will help to consolidate us as a prominent player in payments for the wider e-commerce landscape in Latin America.

It also increases our involvement in every transaction, as we provide increasing value, simplicity and safety to buyers and sellers. In the meantime, our broad base of offerings promises to complement our growth even further with the leverage provided by our marketplace.

This is why we are satisfied with the close of 2010 and look forward to the opportunities we have ahead.

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

(Operator Instructions) Gene Munster, Piper Jaffray.

Good afternoon, and congratulations.

The question is regarding the take rate. It was in line with where we were modeling, and any just general thoughts of how to think about take rates in 2011 and 2012. Thanks.

Thank you for your question.

So, as we've been saying in the last few quarters, we are satisfied with the margins that the business is showing today. So, we're not really managing the business to any particular take rates.

Long term, you know that there's room for us to have a higher take rates, but, again, we are more focused today on growth rather than on take rate. So, from that aspect, big change in that regard.

As MercadoPago expands its penetration on the marketplace, because of the excess cost that that implies, we might need to increase a little bit our fees, as we've been doing so in Brazil and Argentina. So, you might expect that, but that's the only thing that you will see in terms of take rates and nothing else in there in the next few quarters.

Okay.

So, can I summarize it -- don't expect any increases in take rate over the next few quarters, but beyond that as Pago gains adoption in Brazil, we could see take rate inch up?

Also, when -- if you look at consolidated take rates because of the growth of MercadoPago, that will push it to increase a little bit take rates, but it will not pushing take rates to increase our margins.

Okay.

And then, just a quick follow-up question. As we're looking at the listings quarter to date, they're up basically 6% over December. Obviously, historically, March is down in terms of revenue from December. Any just thoughts -- I know you guys don't give guidance, but could we see a March quarter just directionally in terms of revenue that would be up from December?

Well, we're happy with the initiatives we've launched in terms of listings. But, as you know, we don't comment on the current quarter.

Okay.

Can you state a -- is it -- were listings up, I guess, in Q1 of 2000 -- I don't have those numbers -- but Q1 of 2010, were listings up over December? Can you tell us that?

I think they were -- I will need to check that to make sure that is the case, but because in that quarter we launched free listings in classifieds in Brazil and kept on moving forward with some of those initiatives. And that might be the case, so it's something that we will check, Gene, and get back to you with the appropriate response then.

Thank you.

Jordan Rohan, Stifel Nicolaus.

Yes, a follow up to Gene's question. Specifically, as I understood it, when you bundled in MercadoPago into the broader MercadoLibre platform, you left yourself in a situation where as the increased -- as the penetration of MercadoPago increases, you actually would have -- bear the cost of MercadoPago, but wouldn't be able to charge more to the merchants unless you went back and raised price again for overall listings.

Did -- I had heard some discussion about that it may have happened in December. Did you go back in Brazil and raise take rate again for merchants? And if so, by how much and should that go through a -- should we factor that into our model?

And secondly -- and I apologize if I wasn't able to hear this, the sound was a little muffled, but the GMV gross in Brazil compared to last year, it had to be an acceleration, but I couldn't catch the number in local currency and in US dollars. Thank you very much.

I will answer your bundle. As you were saying, with the bundle with MercadoLibre and MercadoPago, we have found penetration increases by a significant amount. We are forced to increase our take rates to make up for the extra costs.

We haven't yet announced any pricing going forward, but when it is applied we will do so.

So, you did not go ahead and raise that again in December, right?

Well, we did increase prices in the past since we launched the bundled option in Brazil, and would like to do that in the future if penetration keeps on growing. But, there's nothing announced at this point.

All right.

And said fast, would you mind --?

-- And with regards --.

Go ahead.

I was going to answer your second question about gross merchandise volume -- in Brazil it grew 10% in US dollars and 8% in local currencies.

Okay, so a slight acceleration over last quarter's, which I think was a plus 4, is that right?

Yes, that's correct.

(Operator Instructions) [Ian Schafer] with Valiant Capital.

Hi, guys. Great quarter.

My question is regarding -- I think you may have just touched on it in the last question, but the local currency growth -- the conference call, there was a little bit of static on it, and I just wanted to get revenues year over year on a constant currency basis, the payment volumes and the GMV.

So, in Brazil, items sold grew 27% versus last year, gross merchandise volume in Brazil grew 10% in US dollars and 8% in local currencies.

If we look at revenues in Brazil doing an apples-to-apples to comparison, so setting aside the effect of the sale of receivables, revenues grew in Brazil 33% in US dollars and 29% in local currencies.

And what about blended total Company?

Total Company gross merchandise volume or --?

All three. I mean, I don't want it just by -- for Brazil.

Sure.

So, items sold grew 31% for the total Company. Gross merchandise volume grew 25% -- almost 26% in US dollars and maybe less in -- I don't have the exact figure here in local currencies.

Are the payment volumes in local currencies?

Payments grew -- total transactions grew 134%, TPV grew 74%, and in local currency they grew 71%.

71%. And total revenue? Is that the 29%?

In local -- total in local currency grew, like, 24%.

24%. Thank you. Great quarter.

GMV 23%.

And gross merchandise volume 23% -- that was the one I was missing.

Thank you. I am showing no further questions at this time. I'd like to turn the call back over to management.

Well, thank you everyone in attendance for your continued interest in the Company. We look forward to updating you on our business again next quarter. As always, we invite you to get in touch with either Hernan or myself should you have any follow-on questions.

Once again, thank you. Good-bye, and we look forward to speaking again soon.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference, and you may now disconnect. Everyone, have a wonderful day.