美卡多 (MELI) 2012 Q1 法說會逐字稿

Good day, and welcome to the MercadoLibre first 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 conference over to MercadoLibre management. Please go ahead.

Hello everyone, and welcome to the MercadoLibre earnings conference call for the quarter ended March 31, 2012. My name is Alex de Aboitiz, and I am the head of Investor Relations for MercadoLibre. Our senior manager presenting today is Pedro Arnt, Chief Financial Officer. Additionally, Marcos Galperin, Chief Executive Officer, and 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 turn the call over to Pedro.

Thank you Alex, and hello and welcome to everybody. Before I jump into a recap on the results of our most recent quarter, I'd like to provide you with an update on our current efforts as they relate to our ongoing strategy and as new initiatives gain speed in our quickly evolving e-commerce market.

A little under two years ago now, we set out on an ambitious agenda that involved rewriting our entire platform architecture to make it more flexible, open, and adaptable to new technologies. We made this decision knowing that it was of strategic importance not only for the optimization of our existing business but also to allow us to better respond to new challenges and opportunities that our ecosystem faces in the rapidly changing and evolving landscape we operate in.

Today, as we recap how 2012 has started, it's important that we point out that we are pleased with how we have been executing against the strategy we outlined. Our New World platform, as we called it, already makes it easier for us to advance on the ambitious product and service roadmap we have set out, enabling parallel improvements and a faster pace of innovation across our different business units.

Not only has this allowed us to pick up our pace of innovation, but it has also enabled us to start thinking ahead and making up for lost ground, as we make our initial forays into mobile commerce, social commerce, verticalization of our category offerings, expansion of our payments platforms, and improvements in our customer service levels, and more.

This quarter and most of this year will be about continuing to build on the solid groundwork of our New World project, advancing on key improvements to the user experience across our marketplaces, payments, advertising, and shops services. We look forward to bringing you quarterly updates in the advances we make, starting with this quarter's highlights.

During this quarter, we saw sustained momentum in our metrics, while continuing to focus on executing the above-mentioned strategic initiatives. Advances made in the second half of 2011 to the way users shop online on our properties continue to drive additional growth. A quicker registration process built into our buying flow has consistently brought us a strong inflow of new users.

Now, in the first quarter of 2012, 3.6 million new users registered on MercadoLibre, a 37% growth, versus 2.7 million in the first quarter of last year. Simultaneously, the redesigned buying flows have kept unit sales growth above the market rate of growth, as we believe we continue to gain regional share of market in both units and volume.

To illustrate the sustained strength of our business, let me first highlight some of the key metrics for our latest quarter. 15 million items were sold on our marketplace, versus 10.9 million in the first quarter of 2011, a year-on-year growth of 38%.

Gross merchandise volume was $1.3 billion, versus $954 million in the same quarter of 2011, a year-on-year growth of 45% in constant currencies and 39% in US dollars.

We had 4.9 million transactions on our payments platform, versus 2.6 million in the same quarter of 2011, a year-on-year growth of 85%.

And, total payment volume reached $370 million, versus $245 million in the same quarter of 2011, a year-on-year growth of 61% in constant currencies and 51% in US dollars.

These metrics all illustrate the health of our e-commerce ecosystem from the perspective of both marketplace and payments, despite the foreign exchange headwinds we faced this quarter.

This solid execution is a consequence of improvements in the way we enable users to shop on our platform. Many of these first quarter improvements have been gradual iterations on previously launched products, services, or features, while others have been recently released product innovations that we believe will generate important long-term value.

Among these newer initiatives, I would like to mention a few. We surpassed 2.1 million downloads of our mobile application since it went live, promising a significant source of future volume. Additionally, during the quarter, we launched an HTML mobile version of our website and continued to improve the native iOS and Android versions of the application. You can now complete the entire purchasing flow, from search down to checkout, on the mobile app.

We also made progress on verticals which, as I mentioned earlier, is an important initiative for future growth. While consumer electronics still represent more than 50% of what is sold on our marketplace, vertical categories such as sports and apparel are beginning to show their potential, and we believe we can speed this up.

In the first quarter, we launched the first phases of vertical fashion categories in Brazil, making it quick and simple for our sellers to offer more variety in terms of colors and sizes, and improving the visual interface for apparel product pages with better pictures and zoom capabilities. We are very excited with the initial results and will continue with more subcategories throughout the second quarter.

In the meantime, it is exciting to see that another of our initiatives, social integration, is making its first steps. We are increasingly exploring innovative ways to leverage social networks, integrating them with the experience of buying and selling on our platform. Although actual gross merchandise volume being generated through social networks is not yet material, we believe we are laying a solid foundation by increasing the amount of commerce content distributed by our users throughout their social [grasp].

We are already seeing millions of users per day streaming MercadoLibre products through their social networks, and we see increased potential going forward.

In beginning to match optimizations made to the buying flow in the second half of last year, this quarter we increased the pace of improvements made to the selling flow and seller inventory management tools, with the objective of ensuring that sellers on our platform have the proper tools to manage increased traffic, transactions, and information being generated by our platform.

Our classifieds marketplace has also benefitted from new vertical functionality rollouts as its own vertical features have undergone significant improvements over time. During the first quarter, we made progress on our real estate platform, with a newly launched quick-view feature, more prominent highlights of our most popular offerings, and an open API for realtors to bulk list properties onto MercadoLibre. These enhancements and our focus on professional broker-dealers in both motors and real estate are all driving the current success of this business, as reflected in its solid top line growth.

And, finally, during the quarter, we finalized the first stage of our migration over from a proprietary CRM that had served us until now to Salesforce. This initial milestone means that all customer service queues are now running on salesforce.com platform, and we can advance with greater efficiency on the constant process of improving customer interaction processes and service levels.

Before I walk us through our financial results, I would like to address our payments business quarterly performance in particular. After a thriving holiday season, payments volume decelerated in the first quarter of 2012. Solid transaction growth of 85% year over year was partially offset by lower average payments in dollars, as we experienced FX headwinds year over year, saw a lower proportion of multiple item or large ticket payments after the holiday season, and witnessed less demand for installment options.

To a lesser extent and on a more positive note, lower average payments year on year also resulted from our impressive off-platform payments growth, which has brought a variety of new e-commerce players into our ecosystem, such as group discount sites and a diversity of other stores that generate lower ticket payments on average.

We are obviously pleased with this particular lower average ticket driver as the growth of payments outside of our marketplace occurs across a diversity of different players, allowing us to grow with them and develop our e-commerce ecosystem in the region.

While factors behind our decelerating first quarter growth were mainly, as I just mentioned, seasonal or FX-related, in part this deceleration was also attributable to the fact that most of our MercadoPago programming efforts in the first quarter focused on long-term initiatives as we continued transitioning from old to new architecture in payments, completed our migration to a new and more flexible gateway, and kept improving our fraud scoring models and CRM capabilities, helping us to ensure that the growth of MercadoPago occurs alongside a steady improvement to our user experience.

This focus on the back end came at a cost in terms of short-term growth rates as a consequence of two main factors -- on one hand, less innovation on consumer-facing features on the Mercado platform during the quarter, and some non-planned downtime during the March migration to the new architecture generating operational backlogs and loss of total payments volume that had been fully fixed by April.

Moving on to our financial results for the first quarter of 2012, we believe our e-commerce ecosystem continues to perform well because of the additional value it is providing our users quarter after quarter and year after year.

As this platform grows and develops, we are retaining our focus on offering increasingly better service and satisfaction to both our buyers and sellers alike. We are convinced that this is the right strategy, and we must continue to focus on executing against it. As long as we do so, we trust that financial results will accompany regardless of other external factors such as macro conditions or changes in the competitive landscape.

Allow me now to highlight some of our key financial metrics before going into further detail on our performance in this quarter. I will call out year-on-year growth rates unless specified otherwise.

Specifically, during the first quarter of 2012, net revenues grew 36% in US dollars, to $83.7 million, a 44% growth in local currencies.

Gross profit margin was 74.8%, versus 76.7% in the first quarter of 2011 and 76% in the fourth quarter of 2011.

Income from operations grew 29%, to $24.9 million, with an operating income margin of 29.8%, versus 31.4% in the first quarter of 2011. In local currencies, operating income grew 36% year on year during the first quarter.

Net income before income/asset tax expense, was $26.9 million, representing 34% growth.

And, net income was $19.6 million, a 40% growth year on year. This represents a 23.5% net income margin, versus 22.9% a year earlier. In local currencies, net income grew 47% year on year in the first quarter.

And, now, for a detailed discussion of these results, starting with our top line. Since our core marketplace fees represent the majority of revenues, gross merchandise volume remained a principal factor behind our year-on-year revenue growth.

Final value fees continue to grow at a very solid pace, also driven by year-over-year pricing as a consequence of processing more payments on our marketplace and charging for greater value delivered.

This was partially offset by a greater share of lower monetizing GMV than last year, as Mexico and Venezuela did not offer free listings a year ago. I remind you that these free listings continue to be an important part of our strategy as they are a seller acquisition tool and improve selection for buyers.

In the meantime, upfront fees accelerated this quarter, due to price adjustments in the first quarter on our optional listing formats that offer better placement to sellers.

Total payment volume growth also contributed to our top line, not only through bundled pricing on platform but also through off-platform payments that contributed standalone processing fees on significantly more volume than last year, as this business expanded organically and geographically. Mexico and Venezuela contributed growing off-platform payments in the first quarter of 2012, while these operations had not been launched in the first quarter of last year.

Additionally, financing revenues contributed to revenue growth on the basis of a higher payments volume choosing installment options versus a year ago, partially offset by a shift to lower installment purchases that carry a lower spread.

Topping off our revenue growth, classifieds and advertising grew at a very good pace on the basis of enhanced features and a larger client base than last year. Classifieds and ad sale revenue for the first quarter of 2012 grew 43.4% combined, over the first quarter of 2011.

In summary, the underlying drivers of each of our revenue streams were healthy, as indicated by the following growth on a country basis. In local currencies, consolidated net revenue growth was 29% for Brazil, 85% for Argentina, 35% for Mexico, and 66% for Venezuela. In terms of units sold, items grew 43% for Brazil, 31% for Argentina, 33% for Mexico, and 42% for Venezuela.

Let me now take a detailed look at our cost structure during the first quarter. Gross profit grew 33% to $62.6 million, representing 74.8% of revenues, versus 76.7% in the first quarter of 2011. Year-on-year gross margin contraction is attributable to increased interchange fees associated with processing additional payment volume, as well as $1.2 million of incremental other costs of goods sold, mainly related to MercadoPago as well.

Operating expenses for the period were 45% of revenues, versus 45.3% in the same period last year, 30 basis points improvement in operating leverage which would have been higher in the absence of certain events specific to this quarter which I will describe shortly.

In absolute terms, operating expenses totaled $37.7 million, a 35% increase versus the first quarter of 2011. More specifically, sales and marketing remain the largest line item expense, increasing 32% for the quarter, to $17.4 million, and continuing to show cost efficiencies having decreased as a percentage of revenues to 20.8%, from 21.5% for the same period last year.

Aiding the natural leverage of our business model in this expense line during the quarter, we received a reimbursement of $0.6 million from one of the banks that process our payments in Brazil for amounts erroneously processed in the second quarter of last year, a charge that we had absorbed in our P&L during that period.

It's also important to note that we were able to obtain this leverage despite chargebacks increasing year on year at a faster pace than revenues, as a driver of this cost line is our rapidly growing payments volume. Spending on these fraud loss provisions during the quarter totaled $2.4 million more than they did in the first quarter of 2011.

G&A grew 34% year over year, to $12.7 million in the first quarter, impacted by the accrual of $1 million pertaining to our long-term retention plan based on our higher stock price during the quarter. In addition, this quarter, we accrued $0.9 million corresponding to a claim from Venezuelan tax authorities of previously unpaid taxes.

As a percentage of revenues, G&A was 15.2%, versus 15.4% in the same period last year. The leverage would have been more significant without the one-offs I just discussed.

Product and technology expenses grew 47%, to $7.6 million, compared with $5.2 million for the first quarter of 2011, mainly through increased investments in headcount and technology-related services as we continue to expand and strengthen this team which is essential to the plans for our business.

One additional point of note pertains to seasonal salary and wage increases. The first quarter has the largest sequential increase in payroll costs, due to annual inflation and merit compensation adjustments. Total salary and wage expenses in OpEx for the quarter grew 24% on a sequential basis and 33% versus last year, as headcount grew by more than 60 employees sequentially and more than 250 employees versus a year ago.

All this leading to operating income for the first quarter of 2012 of $24.9 million. Operating income margin for the quarter was 29.8%, versus 31.4% in the first quarter of 2011, a decline primarily driven by increased chargebacks and one-off expenses.

Below operating income, we benefitted from $3.1 million of interest income, aided by higher cash balances and interest rate yields in Brazil.

With these numbers, we arrive at a pretax income of $26.9 million, 34% higher than in the same quarter of last year.

Tax expense was $7.3 million in the first quarter of 2012, resulting in a blended tax rate of 27%, versus 29.9% in the first quarter of 2011, and also 29.9% in the fourth quarter of 2011. Year-over-year tax improvements were mainly driven by greater mix coming from Argentina, where we have our lowest tax rate, and certain tax efficiencies we benefitted from in Brazil during this quarter.

Net income for the three months ended March 31, 2012, was $19.6 million, reflecting an increase of 40% when compared with $14.1 million during the same period of 2011. This represents a 23.5% net income margin, up from 22.9% for the same quarter of 2011, resulting in a basic net income per common share of $0.45.

Property and equipment and intangible asset purchases for the quarter totaled $3.7 million. Consequently, for the period ended March 31, 2012, net cash provided by operating activities less property, equipment, and intangible asset purchases totaled $15.3 million of free cash flow, versus $12.2 million last year.

Cash, short-term investments, and long-term investments at the end of the quarter totaled $201.7 million.

Wrapping up our first quarter results, we think the solid momentum of our business reinforces our focus on product and execution against the strategic initiatives I outlined at the beginning of this conference call.

I look forward to a year that will continue to bring new improvements to the user experience we deliver, improvements that over time have proven the most effective driver of growth to our business. As our suite of e-commerce offerings keeps broadening its already unmatched selection, we will continue working on the most efficient formats to bring buyers and sellers together and allow them to transact online as efficiently as possible. I am eager to report back to you on our progress as we strive to make this happen throughout 2012.

With that, we will now take your questions.

Thank you. (Operator Instructions) Stephen Ju, Credit Suisse.

Hey guys. So, as you think about some of your medium- to longer-term strategic initiatives, you called out mobile earlier, but I'm wondering if you can give us an update on your shipping and fulfillment efforts? And, I know it's early days on mobile, but any sort of observations you can share with us in terms of transaction velocity or ASPs of the user base right now? Thank you.

So, hi, Stephen. This is Marcos. So, with respect to our strategic initiatives, mobile, as Pedro mentioned in his prepared remarks, we're making great progress during Q1 and also during Q2. We are seeing accelerating growth both in transactions and in GMV, and we're very pleased with the results. And, we have a roadmap of continuous product improvements. So, we are very satisfied with the progress thus far, and expect to continue making progress in this front.

With respect to social, also as Pedro mentioned, it's an important strategic area where we're making different experiments, particularly more recently in Q2 we have done some very interesting integrations in Argentina, where we're seeing some very interesting metrics but, mostly in activity, not as much in transactions. But, we're very happy with the initial results we're getting there.

And, verticalization, as Pedro mentioned, is also a key strategic area for us. We made some progress in Q1, which continues in Q2.

And, with respect to shipping, we continue to work strongly in this front, but still in the back end. So, nothing that we can show in the front end. So, we will be announcing this when we have concrete things to show in the front end.

And, any sort of, you know, color on whether user behavior on mobile? You know, is there faster velocity in terms of transaction? Is there higher or lower ASPs? Anything to that effect?

No. The type of ASPs is quite similar, maybe a little bit lower but, you know, very similar.

OK. Thank you.

Thank you.

Thank you. Gene Munster, Piper Jaffray.

Good afternoon. Maybe you could talk a little bit about, you mentioned New World earlier, and maybe one or two things, you talked a minute ago about shipping, but one or two things that you think will be impactful that we can really, investors can really wrap their head around? And, maybe talk a little bit about when we might see that, kind of in the [mill]? I know you don't want to really commit to a specific time, but is this first half of 2013? Back half of 2013? Or, any sort of thoughts on that?

And, then, second, Pedro, if you can just talk a little bit about just the GMV, your perspective? I know in your prepared remarks, you did on GMV growth of 45%. I think some of the Street was a little bit higher. Obviously, you don't give guidance, but how we should think about that number? Thanks.

Great. So, Gene, in terms of impact of New World initiatives, we tried to give some color, and Marcos just went over those, what we think are the most interesting long-term items we're working on. Obviously, some of those might take time to actually have significant impact on the P&L, but I think we believe strongly that once they hit stride, they can be very significant -- verticalization of categories, mobile, improvements in our customer service offering.

And, I think in terms of the more specific short-term stuff, as we've always said, New World platform has allowed us to [aerate] on a much more constant and efficient way on the overall platform. And, so, there are small tweaks that at times have bigger or smaller impact. Hard to predict, but the pace of innovation and the pace of work within the Company I think is significantly more rapid than it was two years ago.

I think also in the prepared remarks, we point out that there's a lot of work that's now being done on the payments back end, and hopefully we will emerge from that with a very, very solid payments product both in deeper integration on the marketplace and in advancing on making payments through MercadoPago compulsory on the platform over the long run, but also in the off-platform business.

Those are the areas where we are placing the most focus now.

In terms of GMV growth, as you said, we don't issue guidance. I think what we've always said is the e-commerce market in the region seems to be growing, depending on the market, anywhere between the mid-20%'s to low-30%'s. In most of these markets, our growth rate is above that. So, I think we continue to be very satisfied with the fact that we believe we are still market share gainers. And, that's really what we strive for, to continue to sustain rates of growth that are above the rate of growth of the e-commerce market.

That's good perspective. And, just back to the New World, in terms of the timing, and you know, I think you mentioned four initiatives there, and it's kind of a continuation. So, is this kind of a building momentum? Or, could we see a point, kind of the back half of 2013, where you would think that we could see some reacceleration and some growth at that point, as these initiatives are kind of well in place?

Again, I think being consistent with what we've said all along, I think it's important to understand that the [comps] get progressively more difficult this year, given the phenomenal initial results of the New World launch last year. We always have new initiatives that are rolling out. Very difficult to be able to tell in advance what the impact of those are. So, we'll keep you posted as the year develops, but impossible to commit to any specific type of number at this point.

All right. Thank you.

Thank you. Mark Miller, William Blair.

Hi. Good afternoon. Pedro, you called out with Pago the initiatives being more focused on the long term and more back end in nature, and less innovation on the consumer-facing initiatives. Can you, I guess, walk us through the transition you see in this business, maybe through the rest of the year? Is there going to be an acceleration in terms of customer-facing initiatives? And, then, the downtime that you experienced in March, you said it was fully fixed by April. Was that by the end of the month? Should we expect that there's still some slower revenues in Pago as a result this quarter? Or, was that early in the quarter? Thanks.

Hi, Mark. This is Osvaldo. In terms of the initiatives themselves, during most of Q1, what we worked on was first on accelerating integration from Old World to New World, particularly regarding what is related to the payment flow, so that users are able to pay totally in the New World platform. And, we will complete that part of the migration during this quarter.

Then, we also worked on the migration from Old World gateway to New World gateway. We already completed that migration. And, that was what some of the backlog generated by the end of February and beginning of March. I think we have already ironed out most of those. So, we are happy with the results we are getting today.

And, finally, the last point was the migration in our scoring fraud prevention tools, [both] scoring tools and CRM tools. We migrated to Salesforce and, again, this also generated most of the backlog by end of February, beginning of March. It was solved, and the numbers we're getting in April are better than before those migrations.

And, going forward, I'd say, starting this quarter, but mostly [up in], this migration that included [up in] next quarter, we'll be focusing more on front-end, you know, improvements, in order to improve the user experience, once that we are happy with the results we are seeing with the back end.

The non-planned downtime you highlighted in March, is that negative smaller than in the second quarter, than it was in the first quarter?

Yes. Yes. It was, the unplanned downtime was, had impact both in the front end. It was very short in the front end, but also when we migrated the CRM, in the first days of Salesforce, there was some downtime in the back end, too, which made the process of approving some payments slower than they usually are. But, this is working fine today.

OK. And, my other question was on the $2.4 million, Pedro, that you highlighted in terms of the chargebacks. And, could you just discuss what's happening there with the fraud loss? And, to what extent do we anticipate higher costs to continue versus this being a one-time event?

The most important point to highlight there is that fraud losses on credit card transactions, the driver there is TPV, not revenue. So, that's an expense line that won't necessarily scale, because the underlying driver is our total payment volume, which is growing at a significantly faster pace than our revenue, fortunately.

I think more importantly we feel confident that our fraud models are improving and are adapted as they are intended to. And, we should drive down the chargeback-related fraud losses as a percentage of TPV down going forward. Historically, they've been lower than where they are today, and we think that through continued execution, we can drive them down to levels where they were at previously. So, that should also improve the cost line that we've expensed on chargebacks over the last two, three quarters.

Great. Thanks.

Thank you. Marcelo Santos, J.P. Morgan.

Good evening. I have two questions, mostly related to Brazil. I wanted to know what's the impact that you have been seeing from the decline in the interest rates in Brazil, have [comparably] become more aggressive? Do you think you lose competitiveness with this decline? And, related to that, my second question, I wanted you just to comment a little bit on Brazilian growth, which has decelerated a bit in terms of both revenues and items sold? Is this related to the interest rates? Or, is there any specific thing you could mention here?

So, I think typically we begin to get most of the relevant readouts of Brazilian e-commerce around this time, as some of the large retailers report their online numbers. The numbers we saw yesterday from Nova indicate that we continue to grow at a faster pace than their online properties. Let's see what happens as we gather other data points. But, similar to the answer we gave Gene, I think although there was some deceleration, the business continues to grow above market and at a rate that we're very comfortable with.

In terms of financing, I think if anything, we've seen the overall financing environment from a competitive perspective become more rational over the last three, four quarters. And, I think that sustained throughout the first quarter. So, I don't think our level of competiveness around the financing offer has necessarily disimproved other where it was a year ago. But, if anything, it's probably slightly better.

The payments business I think was more impacted on a seasonal basis by the fact that generally consumers tend to buy a lot more on financing during the fourth quarter, and by some of the migration operational issues that we mentioned, in addition to currency headwinds.

Thank you very much.

(multiple speakers) on Pedro's comments, I mean, we grew successful items in Brazil, 43% year on year, and GMV local currency, 38% year on year. So, we're pretty pleased with those growth rates.

Thank you very much.

Thank you. This concludes the Q&A portion of today's conference call. Thank you for your participation in the MercadoLibre first quarter earnings conference call. This does conclude the program, and you may now disconnect. Thank you, and have a wonderful day.