美卡多 (MELI) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen. I would like to turn the conference over to Company management.

Hello, everyone, and welcome to the MercadoLibre earnings conference call for the quarter ended September 30, 2011. My name is Alex (Inaudible), and I am the Head of Investor Relations for MercadoLibre. Company management presenting today are Marcos Galperin, our Chief Executive Officer, and Pedro Arnt, our 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.

I remind you that 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-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.

Thanks, all of you, for joining us on today's conference call.

MercadoLibre had an excellent third quarter. Items sold accelerated significantly versus the prior quarter, actually growing at the fastest rate since the first quarter of 2010. We believe that well-timed changes on our platform have combined with a very positive context for e-commerce in general, keeping supply and demand on our platform very active.

I would like to begin today by sharing some key metrics that highlight our performance, followed by a more in-depth [revision] of the progress of each of our business units. This will pave the way for a discussion of our work in progress and how we aim at keeping this momentum intact. Much of this has to do with our technology efforts underway and the traction we are getting out of our new platform architecture.

Now, as I call out some key performance metrics, please, bear in mind that they are year-on-year growth rates, unless specified otherwise.

In the quarter, confirmed registered users were up 23%. Items sold grew 38%. Gross merchandise volume grew 52%, reaching $1.348 billion in the quarter. And the number of payments performed through MercadoPago grew 103%, adding up to a total payment volume of $368.5 million. With solid growth coming from our remaining adjacencies, as well, our financial results showed marked acceleration from top to bottom.

In the third quarter, our Company generated revenues of $81.6 million, an increase of 46%, income from operations of $30 million, an increase of 55%, and net income of $26.3 million, an increase of 40%, resulting in $0.60 of earnings per share.

Pedro will soon go into greater detail on the health of our P&L, particularly as we were able to scale our business significantly. In the meantime, I would like to take a closer look at our ecosystem, addressing the significant progress of each of our business units.

Starting with our core marketplace, last quarter, we took some important steps to make buying on MercadoLibre an even more intuitive, social, and streamlined process. Social integration improvements to search and a better tracking of our user's history were some of the improvements we performed on our overall buyer experience. A shorter registration process, streamlined with our buying flow, led to the year's peak in quarterly registration of new users, as we saw 3.6 million new registered users on our site during Q3. That 28% growth rate is well above the typical growth in internet users for our region.

Our 52% growth in GMVE is well above our gain in users and shows how involved both new and existing users have been. Sellers are therefore seeing a positive trend in their conversion rates, meaning more successful listings over total listings and also greater item sales per average listing.

I would like to distinguish a few different effects that are taking place on our marketplace, each of them very positive for our market's dynamic.

New sellers are trying out our site, often starting out with our lowest-cost alternatives for listings and for selling. New and established sellers alike are finding success on our platform. Our premium listings offering the option to pay for the best placement and conversion on our site are also the ones posting the greatest gains in efficiency. In other words, we have a virtual cycle underway. MercadoLibre's listings are growing at a fast pace. The marketplace offers very good chances of success, and our demand, the foremost in the region, keeps growing. As users try our services, they find that they can pay to increase their chances of success significantly. In the meantime, eventual sellers with the occasional item for sale are not left out of our premium model.

We continue to focus on delivering an ever-improving user experience, adding on functionalities for our buyers and sellers. This quarter, we re-launched improved recommendation features on our platforms, calculating the best product choices for each user based on their track record on the site. We have also improved our recommendation capabilities with related searches that appear under our search box, maximizing possibilities of search success for our buyers and using their clicks to fine-tune the effectiveness of the application. Our testing has shown very good acceptance of these and other new features in the quarter, such as bookmarks to remember interesting products or to store a wish list.

Understanding the importance in improving conversion rates of good images and less clicks, we also added a browser feature for pictures on the search results page, allowing our users to get a better sense of the product before entering a specific listing. All of these improvements have already gained acceptance from our users.

During the quarter, we also made our initial forays into mobile commerce. Our new mobile applications already downloaded over 0.5 million times in less than 50 days is much more important for its huge potential going forward than for its immediate results. For now, let me just say that this new and convenient tool for browsing and buying via smartphones is bound to become a popular shopping alternative in a region with one of the highest rates of mobile penetration. As more of these mobile users begin using phones with broadband connectivity and internet capabilities, mobile should become an important source of activity and GMV for us. Our encouragement into mobile is a clear example of how we strive to stay on top of trends, even before they hit their inflection points.

Wrapping up our core marketplace, I can say that we are successfully catering to the evolving needs of an increasingly broad base of users. The current health of our volume confirms this, and I look forward to bringing you updates as this positive dynamic continues to unfold.

I would now like to turn to our classified marketplace, which continues to show very good traction versus last year, as illustrated by our 48% growth in total new listings this quarter. We also continued to promote it very actively foreseeing the millions of new users who will be coming online in the near future, often trying out classified solutions as their first step into e-commerce.

This quarter, we followed up on our recent radio campaigns in Brazil, Venezuela, and Colombia, spreading then to Argentina and to Mexico as well. A key factor in our growth is the way we are catering to the professional sector by improving our service and offering convenient packaged deals for broker/dealers with a continuous flow of classified volume. For this reason, of our growing listings volume, 37% now come from dealers versus 28% at this time last year. As part of our improved service to them, we have revamped our view item pages in motors, real estate, and services.

We remain extremely active on the classifieds front not just boosting our organic growth but also by improving our product and investing in marketing.

Moving on to our ads business, as a consequence of our stated strategy shift from display-driven advertising to search-driven advertising, search gained 175 basis points of revenue share over display banners quarter on quarter. The mix is now 64% Mercado clicks search revenue to 36% display revenue. At this time last year, the mix was exactly the opposite.

With total advertising revenues for the third quarter accelerating their year-on-year growth versus the second quarter significantly, it can be gathered that Mercado clicks has a growth-on-growth dynamic. As established advertisers grow at high, organic rates, we keep growing through client acquisition as well.

Advancing on our stated objective of building a bridge between large retailers and the MercadoLibre ecosystem, this quarter, we were able to add some very important names to our list of advertisers. To give you an idea of the breadth of industries we are reaching, this quarter, we signed on car manufacturers such as General Motors, Citroen, Peugeot, Ford, and Volkswagen, signing other businesses, new advertising clients, including Nextel and 3M.

Gearing Mercado Clicks towards large-scale clients has provided them an excellent entryway to e-commerce in many cases. It has also assured us a new way of monetizing our ample traffic. We look forward to developing this high-margin business well into the future as we have many directions in which to expand and multiple spaces to cover. Even as Mercado Clicks revenues grow in the triple digits, our cost per click is still evolving as we maximize the volume of quality traffic that we bring to our clients. This business is still at an early stage, and I see it as a great opportunity.

Now let's review our payments business. Payments continue to perform very well, most recently, growing at a rate of 94% year on year. That's a total payment volume of $368.5 million this quarter versus $189.9 million in the third quarter of 2010. While off-platform payments grew at a much faster pace, meaning that we are quickly expanding volume outside of our own marketplace, today MercadoPago is still mainly concentrated on our platform, and we have driven its impressive year-on-year growth by bundling it with our marketplace fees, eliminating any possible barrier to entry that a separate processing fee might generate.

As a result, MercadoPago is now offered as a means of payment on almost all listings, and buyers have been using it more and more. Third quarter payments penetration measured as total payments volume over gross merchandise volume for the period was 27% versus 21% a year earlier. Our installment plans offered exclusively through MercadoPago continue to prove an additional incentive for buyers as finance volume continues to grow at approximately the same rate as PPV.

While MercadoPago growth unfolds, we continue to keep our focus on positive innovation and substantial improvements to our user experience as the key to success. With this in mind, this quarter, we launched a new MercadoPago checkout process, representing a great improvement in terms of usability, aesthetics, and efficiency. Our new checkout spans across Mercado Pago's on- and off-platform offerings, taking place on a light box that is superimposed over the specific listing or merchant's Website where the transaction is taking place. This allows for an improved integration of MercadoPago with outside merchants, allowing buyers to use the service without having to leave the merchant's Website.

All in all, while MercadoPago maintains its fast-paced trajectory, we know that we have levers such as these to boost its performance even further. In the meantime, our new MercadoPago 3.0 platform keeps gaining ground in Mexico, and we look forward to spreading it across the rest of our payments operations with an eye on Venezuela in the near future.

With all this in place and heading into a holiday season that typically shows a boost in the demand for our payments service and its financing options, I look forward to the next few months.

I see this as a very good moment for our business, particularly as our new technology platform is living up to the potential that we saw a year back. It is enabling important improvements to the services we offer, be it the recent and ongoing refreshing of our view item pages or the inclusion of social content, recommendations, bookmarks, and many other features that make purchasing on MercadoLibre a more dynamic and integrated experience ever more present in the day-to-day activity of internet users in our region. MercadoPago checkout is an example of how these tangible improvements extend through our ecosystem. And our new mobile app shows how new world helps us break new ground as well.

Our work in progress right now centers on continuing to extract value from this groundwork that we've laid out. In the meantime, we are also investing time in developing great, vertical shopping experiences. We know this will provide an ideal format for a wider array of product offerings, including fashion-related ones but extending to various types of articles that come in varying sizes, colors, and materials.

In other words, we are aware that e-commerce is expanding in all directions at once, broadening its breadth of operating considerably. Within this reality, we are uniquely positioned as the most relevant marketplace in Latin America, offering the widest range of choice and doing everything to continue leading the way.

With that, I will now turn the call over to Pedro for an in-depth look at our financials.

Marcos has just given you a look at the factors driving the present success of our business, and now I would like to show you how this flowed through our P&L, allowing us to post strong financial results in the third quarter. In doing so, I will quote specific growth rates, which are always year over year, unless I indicate otherwise.

Once again, unit volume was the key element underlying what proved to be strong revenue growth this quarter. Items sold grew 38% in the third quarter, accelerating from 26% a quarter ago. GMV grew at an even faster pace, 48% in local currencies and 52% in US dollars, for a total of $1.348 billion in the third quarter.

Within this total, Brazil grew 49% in items sold versus 32% in the previous quarter. Local currency GMV for that country, our largest, grew 46%, accelerating versus 17% in the second quarter of this year. US dollar GMV growth for Brazil was 56% year on year, also accelerating versus 31% in the prior quarter.

Now, turning to our financials, let me remind you that, as of this quarter, our revenues are entirely comparable on a year-on-year basis, since changes we made to MercadoPago's financing operations were already effective in the third quarter of 2010. For this reason, it is no longer necessary to call out apples-to-apples growth rates for the current period.

During this third quarter, we generated solid growth in all of our key financial metrics. Specifically, net revenues grew 46% in US dollars to $81.6 million, 41% growth in local currencies.

Gross profit margin came in at 75.4% versus 75.6% in the second quarter of 2011 and 79.5% in the third quarter of last year.

Income from operations grew 55% to $30 million, with an operating income margin of 36.7% versus 34.5% in the third quarter of 2010. Net income before income and asset tax expenses for the third quarter of 2011 was $35.1 million, representing 78% growth in US dollars. And net income was $26.3 million, a 40% growth year on year. This represents a 32.2% net income margin versus 33.6% a year earlier.

Now I would like to provide further depth on these results, starting with our top line. Consistent with the overall strength of the quarter across all our businesses, net revenues in US dollars accelerated year over year from 32% in the second quarter to 46% in the third quarter and from 22% to 41% in local currencies. On a country basis in local currencies, consolidated net revenues grew 38% for Brazil, 55% for Argentina, 14% for Mexico, and 57% for Venezuela.

Let me take a brief detour from this impressive acceleration in revenues to give you some detail on take rates. As is the case with most quarters in which gross merchandise volume grows significantly, as it did this quarter, take rate was down, as not all of our revenue sources are tied to GMV. Up-front fees, for example, increased less than gross merchandise volume as sellers saw increased efficiency on their listings as they were able to generate higher volume of sales per dollar invested in these fees.

Likewise, and as Marcos mentioned, some of our new technology initiatives have obviously proven extremely successful at generating new merchandise volume, a considerable portion coming from entirely new users, which typically generate lower initial take rates but present us with the opportunity of further engagement and growth in the future.

Additionally, classifieds and consumer financing revenues, although continuing to see great traction, grew at a lesser pace them GMV during the quarter.

All of these factors combined resulted in a consolidated take rate of 6.05% versus one of 6.3% in the third quarter of last year. Needless to say that, despite this expected decline in take rate, we are extremely pleased with the evolution of our top line.

Turning for a moment to a more detailed look of our cost structure during this third quarter, gross profit grew 38% to $61.6 million, representing 75.4% of revenues, declining from 79.5% in the third quarter of 2010. These 410 basis points of gross margin contraction are primarily attributable to increased penetration of MercadoPago transactions and the costs associated with processing this added payment volume.

In other words, as we have stated numerous times, this contraction in margins is a consequence of a mix shift towards a lower-margin business that is nonetheless generating significant incremental revenues and profit.

To a lesser extent, gross margin contraction was also caused by incremental investments in customer service, as we continue to concentrate on improving the support extended to our user base.

Moving on to OpEx, which, for the period, were 38.7% of revenues, representing a decline from 45% in the same period last year, an improvement of 630 basis points, mostly attributable to leverage achieved on our operating expenses. In absolute terms, operating expenses totaled $31.6 million, a 26% increase over the same period in 2010.

More specifically, sales and marketing remain the largest line item expense, increasing 36% for the quarter to $16.7 million, from $12.3 million in the prior-year quarter. As a percentage of revenue, sales and marketing was 20.5% versus 22% for the same period last year. Most relevant in driving scale in the sales and marketing expenses were, first, customer-acquisition-related marketing costs that were down $0.5 million in absolute terms when compared to the previous-year quarter, reflecting our continued capacity to grow our user base organically. Second, bad debt grew by 30% in absolute terms on revenue growth of 46%, also helping us scale sales and marketing.

Moving on, product and technology expenses grew 40% to $5.9 million, compared with $4.2 million for the third quarter of 2010, mainly driven by the strengthening of our IT team and increased investments in technology. Regardless of this growth, as a percentage of revenues, product development for this quarter was 7.3% of revenues versus 7.6% for the same period last year.

And, finally, G&A grew 3% year over year to $9 million in the third quarter of 2011. This moderate growth is explained by certain one-time expenses in 2010 related to new office buildings and also by a reduction of approximately $1 million from our 2011 long-term retention plan accrual, which is based on our stock price at the time of calculation. As a percentage of revenues, G&A was 11% versus 15.5% for the same period last year.

Moving on from that OpEx structure, operating income for the third quarter of 2011 was $30 million. For this quarter, improved leverage on our operating expenses was sufficient to offset the gross margin compression I mentioned earlier, leading to operating income margins for the quarter of 36.7% versus 34.5% in the third quarter of 2010.

Below operating income, we benefited from $2.9 million of interest income, aided by higher cash balances and interest rate yields in Brazil. We also recorded a $3.3 million foreign exchange gain, as US dollar balances appreciated in local currencies, arriving at a pretax income of $35.1 million, 78% higher than in the same quarter of last year.

Tax expense was $8.8 million in the third quarter, representing a lower tax rate than usual due to a reversed tax valuation allowance in Brazil of $2 million. The resulting blended tax rate was 25.1% versus a very low 4.9% in the third quarter of 2010, as we had then reversed an even larger valuation allowance.

Net income for the three-month period ended September 30, 2011 was $26.3 million, reflecting an increase of 40% when compared with $18.8 million during the same period of 2010, despite the increase in blended tax rate. This increase represents a 32.2% net income margin, resulting in basic net income per common share of $0.60.

In terms of cash flow, purchase of property and equipment, intangible assets, and business acquired, [net of cash] for the quarter totaled $9.3 million. $5.5 million of these correspond to the acquisition of 60% of Mexican classified site AutoPlaza, an operation with revenues currently estimated at approximately $0.3 million per quarter, not very material, but that we feel has a very strong brand and upside potential as we integrate it into the MercadoLibre ecosystem over the next few years.

Consequently, for the period ended September 30, free cash flow, defined as cash flow from operations less purchase of property and equipment, intangible assets, and businesses acquired, net of cash, totaled $19.2 million. Cash, short-term investments, and long-term investments at the end of the quarter totaled $168 million, a testament to the consistently increasing strength of our balance sheet.

This quarter, we also paid our quarterly dividend on October 17 to all stockholders of record as of the close of business on September 30 in the amount of $0.08 per share.

Wrapping up before we get to questions, as we have just seen, our Company continues to be in excellent shape, undoubtedly benefiting from our own recent innovations, in addition to underlying e-commerce trends that remain extremely positive. Our business is getting bigger and better as we enhance our fast-paced, organic growth with innovations that immediately capture value for our users and bring about additional growth in volume.

With the busiest part of the year immediately ahead of us, I look forward to a vibrant holiday shopping season and to the next update we bring you on this exciting time for our Company.

Having said that, thank you, and we'd like to take your questions now.

Gene Munster, Piper Jaffray.

Congratulations. It's probably an understatement here, given these numbers. But, first, in terms of-- can you just recap the Brazil growth in local currency?

Brazil revenue growth in local currency was 38%.

Okay. And then, second, you obviously had impressive GMV numbers here. Marcos mentioned several factors that played into that. Are there one or two factors that had a greater impact? How should we think about those going forward for the next year? In other words, are the things that happened in the September quarter that had this impact on GMV going to create easy comps, I guess, for the next three quarters? Then one follow-up question.

Great. So, as we've always been very clear to mention, we still believe that product changes and developing better user experience and enhancing the platform continue to be the key to growth in the Company. I think what we're seeing now is the playing out of many of the technology improvements that we've rolled out.

So, in terms of a comp issue, I think we always strive to continue innovating and improving. I think, sometimes, you deploy things on the platform that have a greater impact than others, but, ideally, there are still a lot more improvements to come going forward that could potentially generate sustained momentum going forward.

Okay. There weren't one or two factors that--? It was just such a step function up in terms of GMV growth. There wasn't one or two items that you can attribute that result from. Is that correct?

There are many moving pieces to this business. We've launched a lot of new technology, and that's probably a combination of all those improvements that go live onto the platform.

Okay. My final question is the take rate decline, which you went through. Was that planned on your part to bring that down a little bit, or was it just all these other factors that you have in play ended up causing a mix shift that ended up resulting in the lower take rate?

Again, as we've said, we don't manage take rate targets. What I tried to outline is that, when you have such strong growth in GMV driving the marketplace business, I think it's natural that some of the other business units that are growing at very strong pace as well might grow a little bit less than GMV. And then, just because of the math that generates a take rate decline. But I wouldn't attribute this in any way to any pricing or managed decisions. Simply, a very strong, GMV-driven marketplace quarter.

Okay. And then my final question. Just, over time in terms of years, do we expect take rate to gradually go higher?

Again, I think what we've always said is the ideal combination is to be able to grow the business without having to price upwards. We do feel there's room for pricing, if at some point we feel that's the right decision. But we're not thinking take rate going forward. We're thinking about growing the business and managing it for growth.

Great. Thank you. Congratulations.

Ross Sandler, RBC Capital Markets.

This is actually [Andre] on for Ross. I was wondering. Could you give us a little color about items sold growth by country and also about the exit run rate for growth-- the items sold growth in 3Q going into 4Q?

Units sold or successful item growth by some of the major geographies? Brazil grew at 49%, Argentina 27%, Mexico 29%, Venezuela 42%. So extremely solid in terms of units shipped, which is a metric that strips out any currency or other issues.

And, in terms of momentum, as you know, we don't comment on the current quarter.

All right. Great. Thank you.

Jordan Rohan, Stifel Nicolaus.

First of all, what a stellar report. So there's certainly nothing to pick on. So I apologize if this seems a little nitpicky. But, in the past, there's been some challenge in getting some money out of Venezuela and various forms of investments, perhaps including real estate and bonds, that would help facilitate that. Can you comment on how much cash is currently in Venezuela right now and how much you've been able to get out of it over the course of the last quarter? Thank you.

Yes. The balance sheet probably holds roughly $7 million in Venezuela; so, not a very significant amount, given our overall balance sheet. The challenges continue to remain. There's government-sponsored auctions and bond issuances that you can subscribe to. And, at times, you will be blended an allocation and, at times, not. And then a few other alternative methods, always regulated by the government and that we continue to apply to-- but the current situation is the same as before, where the Venezuelan subsidiary generates more cash than it's able to on an ongoing basis repatriate.

I think, notwithstanding, it continues to be a very strong business for us and an operation that, when you look at the numbers, performs extremely well.

Is there enough of a tech infrastructure there to actually build up employees and, therefore, costs in that geography?

There is. We have a small and growing customer service center there. And so, certainly, that's one thing we could do, either for the local operation or even, if it makes sense, from other perspectives also try to set up operations there that would service the other markets. So it's something that we certainly look at and analyze.

All right. Thanks, and congrats again, guys.

Marcelo Santos, JPMorgan.

My first question is regarding total payment value as a percentage of GMV; let's say, the MercadoPago penetration. In the past quarters, we were seeing sequential increase of this percentage. And now it has stayed in line with the second quarter. I would like to understand why. Did it increase because of the strong growth on GMV or some other factor? And how should it behave going forward? This is the first question.

And I have a question-- a second question now, and then you can answer both in a row. The second question is about fulfillment. I would like to understand better the steps of your initiatives in logistics and fulfillment in Brazil and Argentina.

I will take the first question. I think the rate of GMV penetration was driven by two facts. The first one was the acceleration in number of new users that drove part of our GMV growth. New users typically use less MercadoPago than other users, and so that drives the average down.

And the second part is that many of the (inaudible) initiatives we've worked on during the quarter were-- are only being rolled out now. So we didn't have any (inaudible) initiatives in the (inaudible) rollout during Q3. And those two made the (technical difficulties) remain flat during the quarter.

With respect to fulfillment, there's nothing to report during Q3. As we always say, there are two friction points on a market base. One is statements, and we're working hard to solve that one. The other one is fulfillment. And we're very focused on it. And that's-- as we make progress towards solving that friction point, we will definitely be reporting that progress. At this point, I would say that we are very focused on it and analyzing it, particularly in Brazil.

Okay. Thank you very much.

(Operator instructions). Dan Su, Morningstar.

In the recent analyst day presentation, you shared with us new (inaudible) GMV and repeat (inaudible) GMV. I find that to be very helpful. Do you have similar stats for the past quarter?

And, also, what's the percentage of registered users that did transactions in the quarter?

And, then, I have a follow-up.

Great. We don't disclose on a quarterly basis either of those two numbers. I think what we've said conceptually, and you can see that from the acceleration in confirmed registered users is that there's been an improved conversion from visiting the site to registering on the site and also, obviously, to transacting on the site, hence the strength in the GMV numbers.

But we don't break out on a quarterly basis the specifics between new and existing (inaudible).

Okay. My other question is-- if I look at the average purchase price by looking at the GMV versus the items sold, the purchase price for the past quarter actually moved up 10% year over year and is slightly up sequentially. So it looks like the influx of new customers, starting with lower-priced purchases was offset by other, more positive factors. Can you talk about those?

And what's the trend do you see in the coming quarters? Thank you.

I think a couple of things that are important to bear in mind when looking at year-over-year evolution on the platform-- I think one point that you bring up is age of user. There are also currency issues that have historically manifested/impacted our ASP significantly. I think, given how fluctuating ASP has been historically, the Q-on-Q evolution, which is very stable in terms of US dollars, I think shows that there aren't any significant changes in category profile or purchasing profile versus what we can see in the prior quarter. Q3 was about similar in most of the large geographies, specifically, in Brazil, to what it was Q2 for Brazil and a slight increase of about $2 overall. But I would say very similar business performance Q2 versus Q3 from an ASP perspective.

Thank you.

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