美卡多 (MELI) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MercadoLibre Q1 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

Now, I'd like to turn the call over to Martin de los Santos. Mr. de los Santos, you may begin.

Hello, everyone, and welcome to the MercadoLibre earnings conference call for the quarter ended March 31, 2014. I'm Martin de los Santos, VP of Finance and head of Investor Relations for MercadoLibre.

Our senior management presenting today is Pedro Arnt, Chief Financial Officer. Additionally, Marcos Galperin, Chief Executive Officer, and Osvaldo Gimenez, Executive Vice President of Payments, 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 Factors" sections of our 10-K and other filings with the Security and Exchange Commissions, which are available on our Investor Relations website.

Finally, I would like to remind you that in the course of this conference call, we might discuss some non-GAAP measures. A reconciliation of those measures to the nearest comparable GAAP measures can be found in our first quarter 2014 earnings press release, available on our Investor Relations website.

Now, let me turn the call over to Pedro.

Thank you, Martin. Good afternoon and welcome, everyone, to our first quarter 2014 earnings call.

MercadoLibre's platform for ecommerce is off to a solid start this year and, as always, I want to highlight for you all our key developments, metrics, and areas of progress.

Reviewing key metrics for the first quarter, registered users topped the 100 million marker, reaching 103.7 million, up 21% year on year, after adding 4.3 million new registered users during the period.

Successful items grew 20%, reaching 21.7 million.

Gross merchandise volume grew 58% in local currencies, reaching $1.8 billion.

Total payment transactions grew 36%, to 9.2 million.

Total payment volume grew 64% in local currencies, reaching $664 million.

All this led to solid revenue growth in local currencies of 50% year on year. Excluding our Venezuelan operations, revenue growth in local currencies came in at an equally solid 39% year on year.

Additionally, mobile sales reached 14% of GMV.

MercadoEnvios, our suite of shipping solutions, surpassed 11% of items sold in Brazil and Argentina combined, and our mall initiative continued to move ahead as we onboarded a growing number of brands onto our platforms.

These are some of the headlines, but what best summarizes our first quarter is the consistent progress on stated goals, which are already proving transformative to the user experience we offer our buyers and sellers.

MercadoLibre has keyed in on a set of fast-growing initiatives which we view as value drivers to the Company in the future. While many continue to be in their early stages, as we have consistently pointed out, we believe that our sustained commitment to these catalysts will ramp growth of ecommerce for the Company [as they] gather further momentum and penetration.

Consequently, these have been the key strategic priorities for MercadoLibre during the first quarter and will continue to be so for the remainder of 2014.

As you may be familiar by now, these include the promotion of our payments and shipping solutions as strategic facilitators for ecommerce, helping to eliminate friction points and enhance user experience both on and off our platforms.

The ongoing development of mobile and category-specific vertical capabilities for our users, which are widening both our reach of consumers and of [suppliers] while generating new and customized markets for incremental trading on our platform.

The promotion of our open platform, making our services increasingly accessible to third parties, be they outside developers building new solutions or brands and retailers requiring technological integration and support for their businesses. Through this approach, we strive to be the technological partner of choice for anyone looking to trade on line throughout Latin America.

And finally, all of this necessarily is underpinned by ongoing efforts to deliver a constantly improving overall customer experience. We are devoted to innovation on this front, coming up with new solutions for the growing functionalities and features that we offer and anticipating rather than reacting to the needs of our users through investments in our technology products and customer service operations.

Beyond the highlights I started out with, let me give you a little more data around how these have evolved during the first three months of 2014.

Total payments penetration was up 291 basis points, with a strong push from on-platform payments, which reached new highs in our Marketplace, surpassing 60% of GMV in Brazil and 38% in Argentina by the end of the quarter. That's an on-platform penetration increase of 13 percentage points and eight percentage points of GMV, respectively, year over year.

Shipping also gained considerable ground, as MercadoEnvios' volume in Brazil went from 10% of successful items in December to more than 14% in March, and from 3% to 4% in Argentina for the same period.

Our mobile efforts doubled their year-on-year penetration from March to March, from 7% to 14% of our GMV, and our mobile app totaled 10 million downloads by the end of the quarter. Mobile remains accretive to our platform, as new registrations from either mobile web or app already account for approximately 20% of our total new users registering on our site during a given period.

We kept advancing our mall initiative efforts, as we continue to onboard brands in Brazil and Argentina. By the end of the first quarter, we more than doubled our number of active, official branded stores, reaching a total of 85 stores by the end of March.

Our vertical category efforts continue to gain traction, led by sports and apparel.

And finally, our customer experience efforts remain in full gear, and we confirm this with significant gains to our net promoter scores during the first quarter.

So, all in all, we made good progress across our strategic initiatives, and we will continue to develop and execute our key business plans around these priorities during 2014.

We operate in a thriving competitive environment where online shoppers are becoming increasingly sophisticated. As a growing number of business models compete for traffic and user acquisition, often ramping up their marketing spend to do so, we remain convinced that the best ROI comes from investing in technology that drives ever-improving user experience.

Looking forward to the next few quarters, we must keep turning reliable payments and shipping into the norm on our platform, by penetrating MercadoPago and MercadoEnvios further, making sure we offer the best financing options, the most efficient settlement of transactions, and delivery of product.

We will cater to the ever more relevant mobile consumer by perfecting our capabilities on both [screens and risk] cases.

And we must keep expanding the mall concept on our platform, onboarding new brands at a faster pace, but also building new relationships with large retailers and within the development community.

Look for all this in the coming year.

Now, I'd like to take a closer look at our financials. The business drivers we've discussed yielded healthy growth rates to our P&L, partially offset by year-on-year foreign exchange headwinds that we continue to experience across our major countries. All growth rates are year-on-year unless I indicate otherwise.

For the first quarter of 2014, net revenues are $115.4 million, a 50% growth in local currencies, and 12% in USD. Excluding Venezuela, net revenues grew 39% in local currencies and 10% in dollars.

Income from operations was $34 million, a 19% growth in US dollars and 68% in local currencies. Excluding Venezuela, income from operations grew 5% in dollars and 29% in local currencies.

Net income before income and asset tax expenses was $39.1 million, growing 54% in US dollars and 117% in local currencies.

Net income was $30.3 million, growing 73% year on year in US dollars and 150% in local currencies. Excluding Venezuela, net income grew 48% in local currencies and 16% in dollars.

The resulting earnings per share were $0.69 for the quarter. Excluding Venezuela's impact on ForEx and income tax, earnings per share for the quarter would have been $0.63.

Now, let's take a look at our top line growth for the quarter. Marketplace revenues accelerated on strong revenues from optional placement fees [where the risk is], while final value fees maintained their solid year-on-year trend, in line with stable growth of our unit volumes sold.

Specifically for Brazil, our largest market, items sold grew 25% year on year, with local currency Marketplace revenues outpacing that and showing year-on-year acceleration versus prior quarter, mostly on favorable listing type mix.

Items sold in Venezuela grew 24%, while local currency GMV and related revenues grew substantially higher due to inflation in that country, partially offset by a significant devaluation of the bolivar during the quarter.

While I'm still on Venezuela, I'd like to remind you that, as we had informed earlier, we determined that the Venezuelan Sicad I exchange mechanism is the primary system through which the Company could request US dollars to settle transactions during the first quarter. As a result, the exchange rate we have used to remeasure the monetary assets and bolivar transactions of our Venezuelan operation as of January 24, 2014, has been the Sicad I exchange rate, the average of which was VEF10.1 per US dollar during the first quarter of 2014.

I will cover the P&L impact of this devaluation later on in my prepared remarks.

Additionally, there have been further developments in terms of Venezuelan exchange rate alternatives, and we are monitoring these closely to determine what is appropriate for MercadoLibre.

Specifically, during late-March of 2014, the Venezuelan government introduced an additional exchange mechanism known as Sicad II, which trades at approximately VEF50 to the US dollar. We have not requested to exchange currency at this new rate, but are currently evaluating the viability of Sicad II and its availability and accessibility during future periods.

The mechanism is still in its early stages, and there is very limited information being published around it. Hence, it is still very difficult to determine how the Sicad II mechanism works and the following constraints that would limit our ability to access it.

Depending on our final assessment of these issues and our ability to access the Sicad II market with consistency and regularity for both exchange and repatriation purposes, we could decide to start using this rate to remeasure the monetary assets and transactions of our Venezuelan operations. We will keep you posted on any developments along this front throughout the quarter.

Also, to illustrate our sensitivity to a potential move to the Sicad II exchange mechanism for Venezuela reporting purposes, we have included a detailed sensitivity analysis in our earnings press release and 10-Q documents to be filed with the SEC.

Non-Marketplace revenues grew above 30% year on year in local currencies, robust though a deceleration versus last quarter's growth, mainly driven by a slowdown in Classifieds and Advertising businesses.

The main effect came from Classifieds, which slowed down, driven by a weak motors and real estate activity in our main countries, but particularly in Venezuela which has the highest share of classifieds than in the rest of our businesses.

Payments continue to post high growth through both our financing revenue stream and our off-platform processing revenues. Financing was very much in line with prior quarter, growing more than 40% in local currencies, while off-platform continued to outpace all other revenue streams, accelerating in Brazil while decelerating in Argentina, as some of the verticals for which we process payments were negatively impacted by the currency devaluation that occurred during the first quarter in that country.

Summing up our top line performance, the sum of our revenues grew a robust 50% in local currencies, constant versus last quarter's growth. Consolidated net revenues excluding Venezuela also maintained their previous-quarter growth rate of 39% year on year in local currencies.

And finally, local currency revenues by country grew: 30% for Brazil, also constant compared to the last quarter; 66% for Argentina; 9% for Mexico; 116% for Venezuela; and 31% for the segment that contains the remaining countries in which we operate.

Moving down our P&L, gross profit grew 13% in the first quarter, to $83.8 million. Gross profit margin was 72.7% of revenues, versus 72.1% in the first quarter of 2013 and 73.1% in the fourth quarter of 2013.

Year on year, higher payments processing fees resulting from growth in MercadoPago accounts for 121 basis points of margin contraction, partially offset by efficiencies in taxes also related to our payment volume. When you add scale of 120 basis points in our customer support operations, this accounts for the slight margin expansion versus prior year.

Operating expenses for the period totaled $49.8 million, 10% higher than in the same period of 2013. Operating expenses as a percent of revenues was 43.2% in the first quarter, versus 44.3% in the same quarter of last year and 34.4% in the fourth quarter of 2013.

Our yearly salary adjustments contribute to sequential margin compression, as typically happens each start of the year. Year on year, long-term retention plan accruals are lower by 124 basis points due to the lower stock price, and our fraud loss provisions kept posting year-on-year gains for a 300-basis point positive impact on margins. This gets partially offset by a write-off in tax credits, higher bad debt, and higher product development spending year over year. Let me break this down for you line item by line item.

Sales and marketing, our largest operating expense line, remained flat, at $22.4 million, or 19.4% of revenues, versus 21.7% for the same period last year.

A higher bad debt ratio than usual increased expenses by 105 basis points year on year, though this was amply offset by scale coming from salaries and chargebacks.

Scale in salaries accounts for 60 basis points of margin improvement, five basis points owing to lower long-term retention plan accrual year on year.

Chargebacks for our MercadoPago operation scaled almost 300 basis points year on year. Our efforts to substantially reduce our rate of chargebacks over total payment volume has definitely paid off, meaning that while payments far outpace revenue growth, the chargebacks they generate are [scaled].

Product development expenses grew 31%, to $12.3 million, representing 10.6% of revenues in the first quarter, versus 9.1% in the same period last year, with higher infrastructure as well as outsourced development costs partially offset by 43 basis points in lower long-term retention plan costs.

Finally, G&A increased 10% year over year, to $15.2 million in the first quarter, or 13.2% of revenues, versus 13.4% a year ago.

Salaries scaled 134 basis points, 77 of those coming from long-term retention plan, and outside services are also scaling approximately 80 basis points from lower legal fees than last year.

This scale is largely offset by more than 200 basis points worth of margin compression coming from a $2.4 million write-off of certain tax credits that will expire with the current software development law that applies to us in Argentina. While a new law replaces the old, extending benefits for five more years, unused tax credits from the previous law expired, generating these write-offs.

As a result of all this, operating income margin for the quarter was 29.5%, versus 27.8% in the first quarter of 2013.

Below operating income, we benefited from $3 million of interest income, down 11% year on year as a result of lower amounts invested.

In our ForEx line, we saw a $3.1 million gain, versus a $6.2 million loss in the first quarter of last year. Last year's loss resulted from the devaluation of Venezuela's local currency cash balances, which were considerable at the time.

The current devaluation in Venezuela generates a ForEx loss of only $1.3 million, a smaller impact, and the local currency holdings in Venezuela have been considerably reduced year over year after the purchase of commercial real estate in that country. These losses are more than offset by a $4.6 million ForEx gain resulting from the appreciation of US dollar current assets held by our Argentine subsidiary.

Income tax expense was $8.8 million in the first quarter, resulting in a blended tax rate of 22.4%, lower than usual and considerably lower than 30.9% in the same prior-year quarter. The prior-year quarter had an unusually high tax rate due to Venezuela's larger and non-deductible FX loss in that period.

In the current quarter, US dollar liabilities on Venezuela's balance sheet appreciated, resulting in losses recognized under Venezuelan GAAP driving Venezuela's effective tax rate down to 2%. Excluding these impacts, blended tax in the first quarter would have been 31.4%.

Net income margin came in at 26.3% in the first quarter, versus 17.1% for the same quarter of 2013, resulting in a basic net income per common share of $0.69. Excluding the foreign exchange loss and income tax effect resulting from Venezuela's [devaluation], earnings per share would have been $0.63.

Purchases of property, equipment, and intangible assets during the quarter totaled $7.1 million, primarily driven by upgrades in hardware and software critical to our business. For the period ended March 2014, this resulted in free cash flow -- defined as cash from operating activities less payment for the acquisition of property, equipment, intangible assets, and acquired businesses net of cash acquired -- was $20.5 million, versus $24 million last year.

Cash, short-term investments, and long-term investments at the end of the quarter totaled $263.5 million.

This ends my review on the solid start to the year, with financials accompanying solid performance from our main business drivers.

I look forward to updating you throughout 2014 as we keep working on the strategic goals we discussed today, driving important improvements to our value proposition, and helping to speed up the rate at which ecommerce takes hold of our region's retail space.

With that, we'd now like to take your questions.

Thank you. (Operator Instructions) Mark Miller, William Blair.

[Pedro], nice result, and thank you for all the detail.

Could you explain the wider differential in the growth rates between unit growth, which was stable, 20%, from the fourth quarter to the first quarter, and then the acceleration in the local currency GMV growth, from 49% to 58%?

So, primarily when you look at the consolidated numbers, what we're seeing there is that some of the markets where we operate have high inflation rates, primarily Argentina and Venezuela. And so, that drives local currency GMV growth in those markets primarily to accelerate significantly more than successful items. So, it's essentially an inflation issue.

Great. And then, the market growth for ecommerce, I guess I'd like to know your view of what that is right now in Brazil and across all your markets? And in your view, are you holding share or gaining share at this rate?

There are different measures of market growth. We believe we are growing at market or above market in the different markets. So, we aspire to grow between 20% and 30% per year. We believe ecommerce is growing roughly at those rates. And that's what we have been doing the last several years, and we aspire to continue doing that in the next several years.

And to be clear, Marcos, are you talking in terms of unit growth or in terms of total dollar fee growth?

Unit growth for us is very important. Volume is very important. And revenues is very important. So, we look at all these metrics.

Okay. I guess, moving on, for the shipping solution, you highlighted the importance of that as well as payments. What can the Company do to drive even faster penetration growth? Is there anything you might consider for your sellers to pick that up at a faster pace? I know it's moving nicely in Brazil, but how about across the enterprise?

Let me take the shipping part, and Osvaldo from MercadoPago can take the payments part. I believe you asked about shipping and payments penetration. Is that correct?

Basically, on the shipping side, it seems like a clear win for the customer experience, and also my understanding is that it's a positive solution for the seller, as well. So, what are the constraints to you in moving that along faster? And anything that we should expect this year that could cause a step-function increase there?

Shipping is growing really fast. We are very, very pleased with the evolution of MercadoEnvios. Its growth continues unabated on a month-by-month -- actually, a weeks-by-weeks basis. And we expect to see the same growth trend in the future, because we're very happy with the way both sellers and buyers are adopting this product.

As we've said, it's bringing down costs in the system. It's standardizing and improving the buyer experience, with standardized shipping costs and tracking.

So, overall, we're very pleased with how this is evolving, and hopefully we'll continue to see penetration of shipping going up, particularly in Brazil and Argentina, where these are the two countries where we have launched the solution and it is more and better implemented.

From the side of payments, we are growing between [17% and 18%] of volumes of GMV, respectively, year over year in Argentina and Brazil. And this growth has been related, I would say, to better [positioning of the] price and also a good synergy between payments and shipping. [As we said, it fuels growth and selling together], and that has also driven the payment penetration.

Thanks. And just a final question, and I'll turn it over. What should we expect to be the impact to you from the World Cup? And to what extent might there be a somewhat of a diminution in the rate of ecommerce purchases to the extent people are otherwise entertained? And are there any positives for the Marketplace over that period?

The World Cup really is not a catalyst for additional trade or ecommerce. If anything, what we have observed from previous World Cup's is that consumers tend to not shop very much on those days. On top of that, the World Cup is being held in one of our markets this time, which is something we don't have experience with.

But I think, in general, retailers -- and it certainly applies to ourselves -- are saying that it's probably a bit of a headwind, if anything.

Jordan Rohan, Stifel.

Can you talk about the shifting competitive landscape in Brazil with new entrants, such as what you may have observed at all of Amazon's intentions and some recent announcements by eBay that they're launching some sort of an offering in Brazil for cross-border trade?

And try to differentiate if you could your platform there and the level of scale and the role that the MercadoLibre platform plays in Brazil. Tell us how you think it's truly differentiated.

I would say that Brazil, and even more so for other markets, are probably a few [faded] behind the US market in terms of both consumer expectations but also the ability, given existing infrastructure and logistics capabilities, to deliver the kind of service that a US consumer is accustomed to. However, I think we're all working diligently to get to those levels as quick as we can.

So, I would say that right now, when you look at the sellers who have onboarded our shipping solution in the different markets, they're actually offering a very competitive and very compelling shipping solution from both a time reliability and price standpoint.

I think some of the pilot programs we have in Argentina and that we will launch very soon in Brazil and that is very advanced, even allows us to do things such as overnight and, in some cases, even same-day delivery if you purchase an item before noon.

So, we are very much, I think, on the front-end in terms of the quality and reliability of the shipping solution.

Our challenge is to continue to drive adoption. So, as we've said, we're still in the mid-teens of adoption, growing very rapidly, and very pleased with those results, but the vast majority of the platform hasn't onboarded yet, and that's where most of the work is occurring right now.

Okay. And in Brazil, do you see American-owned companies offering a compelling service, in particular eBay, which seems to have some sights set on Brazil?

I think I would differentiate. Your question was around shipping and logistics. The overwhelming majority of ecommerce in Brazil is occurring intra-Brazil. The cross-border trade when we look at the overall volume of that is probably miniscule compared to the actual in-country ecommerce that's occurring.

Additionally, I think when we're talking about shipping --. And our belief has always been that one of the disadvantages of cross-border trade into the region is that obviously the product takes a lot longer to get there. So, when we look at the competitive threat in terms of shipping and who's competing against us, we're looking at the other Brazilian online retailers and what kind of offerings they have in terms of shipping on their platforms.

If you want a brief addressing of the eBay recently launched solution, essentially what we've seen is basically it's primarily cross-border trade. And our focus continues to be on how we can better our solutions and drive value to our customers, not so much on what other players are doing.

All right.

Gene Munster, Piper Jaffray.

Congratulations. If you could talk a little bit about Pago, the future as it rolls out? Is that going to be more or less adoption of a traditional online payment? Or, do you have aspirations around the digital wallet?

And then, a follow-up question.

What we are seeing is lots of growth coming both from on-platform and off-platform. And we [keep] moving forward, we see lots of opportunities in the mobile wallet arena. And so, it's a huge opportunity there in most of the countries we are in.

Okay. So, would you --? PayPal talks about it, kind of a more enhanced wallet. And Google talks about that. Is it the same kind of thought process you have, going far beyond just simple payments? Am I hearing you correctly, that that's something that is on the road map? Or, is it on the road map but so far down the road it doesn't really matter?

As you know, we typically do not like to speculate or give forward-looking statements about --. Obviously, we see a huge opportunity in payments. We started with an on-platform product. We expanded this off-platform to other websites.

Obviously, right now, mobile, it's a huge opportunity. And moving forward, with the [internal things]. So, it's likely to be many opportunities in many places. We are opening up our platform in mobile as we have done with our core Marketplace. So, together with the community of developers that is already working on top of our platform, we expect to take our payment solutions to many places.

Okay. That's helpful. And my second question is just regarding some of the gives and takes in the business, in terms of comps going forward. Obviously, you don't give guidance, but your comments about the World Cup were helpful for us to think about the June quarter.

And can you just walk us through how you see the comps progressing in the back half of the year, whether it's units sold comps, or local GMV? And just which ones that you think we should be more aware of? And that may be helpful for us in tuning the models for the year here.

Gene, two quick reactions. The first is, again, we try to steer clear of forward-looking projections or anticipations of how the business might evolve.

A more macro answer is we're not facing any significant step-function change in most of the comp of the key metrics. So, I wouldn't place undue focus on the comp issues. We've done that in the past -- and I think I've said this a few times -- because we have seen step-function accelerations in our business at times, and therefore the comp issue becomes more relevant.

Right now, we're coming off of a fairly stable [last year] growth rates, as Marco said earlier within market growth rate ranges. And so, I think the focus should be more on how well we're executing and what we're doing in our strategic initiatives to drive the business, rather than any specifics around comps.

Okay. And then, I guess final question is the successful items sold, can you just remind me what the successful items sold growth was for Brazil in March versus December?

Brazil grew in the March quarter 25% units, down roughly 3% from 28% in the fourth quarter period.

All right.

Ross Sandler, Deutsche Bank.

So, the Brazilian growth you just called out seems to be holding up very well, and you mentioned earlier that Pago penetration is now, I think, 60% or north of 60% in Brazil, as a percent of GMV. So, can you just talk about maybe how the high penetration of Pago in Brazil is benefiting the whole flywheel effect versus where penetration stands in other markets where it might not be as high? Is it just the benefit you get from that?

And then, as you guys move from smaller sellers under your tiered listing model to these new branded stores, can you just talk about the impact on unit economics, if it's the same pricing or if there's a different pricing scheme?

So, with respect to the penetration of Pago in Brazil and overall Brazil growth rates, Brazil is, as Pedro was mentioning before, within our [central] market, the most advanced ecommerce market, and it's also the one where we have deployed better all of our tools, our ecommerce ecosystem tools.

Both payments and shipping have a substantially higher penetration there than in other markets. Relative to the US, it's still not the same type of ecommerce experience. And relative to the other countries in Latin America, consumers in Brazil are faster adopters of shipping and payments, et cetera.

So, we believe that with respect to what there is in those markets, we are competing well, and we are happy to see that the ecosystem is working very well there. Clearly, we like to have a shipping and a payment ecosystem and believe that when all the tools are working well, definitely one thing helps the other.

Pedro will help out with the pricing part of the question.

The way we're currently handling this is there isn't any significant change to the unit economics. The opportunity to sell through the Marketplace is actually a very compelling opportunity for many of these brands that are onboarding. It's a way to jump start their online operations and in some cases to start their online operations.

So, the pricing has been very similar to what we had already been charging large [power sellers and power sellers]. So, right now -- and this is still in the very early days -- there is no change to the unit economics. We'll monitor that going forward, but up to now it's a very similar financial model for a large retailer, a brand, or a power seller we had.

Got it. And one more, just on --. Pedro, I think you called out an operating income gain of $2.5 million from this Argentina tax situation. Can you just give us a little more clarification on that? And is that one-time? Did I hear you correctly? What exactly was that item?

Actually, it's a one-time loss. It's not a gain. We are beneficiaries of a tax holiday in Argentina, because of a software law. The original law expired this year. Fortunately, there's a new law that gives us an extension to these tax holidays for another five years. So, that's really the most relevant news.

On the flip side of that, there are certain tax credits that we had that we lose with the rollover to the new tax law. And so, that caused a one-off tax loss in the range of $2 million.

Got it.

Marcelo Santos, J.P. Morgan.

I have two questions. The first question is if you could from the operational point of view provide some update on how Venezuela is doing? Because of inflation, it's hard to see, excluding the currency effects, how they are going? So, for example, if you could provide item growth or just qualitatively.

And the second question is, you showed lower expenses with legal fees. Is it somewhat related to the improvement in customer experience? Is there a link there?

They are my two questions.

So, I think I understood, but it's a little bit garbled. I think the first one was around if we could give some sort of notion of structural growth in Venezuela, because inflation distorts the numbers somewhat.

In the prepared remarks, we called out that Venezuela had actually delivered 24% unit growth. So, we shipped 24% more sold items this year than last, which given the situation in Venezuela is a pretty solid number.

I think the second part of the question related to legal expenses that actually improved and were a driver of scale, and if there's a connect between that and an improved customer experience?

There is. It might not be direct, but as we mentioned also our net promoter scores are improving. We are seeing significantly better fraud loss and fraud number of cases on the site. All of that eventually flows through to lower legal expenses. So, this is a connection between those two things.

Just a follow-up on the first question. I think in the previous quarter you had 12% item growth in Venezuela. So, is there something specific that prompted this recovery in the sales?

I think one thing you need to bear in mind is that Venezuela has been a very fluid situation. When we look at the first quarter of last year, that's when Chavez passed away and they had elections. So, I think some of this improvement has to do with the fact that the comp is somewhat easier, and also in general terms the last quarter was quite difficult for Venezuela. So was this quarter, but somewhat less so.

And I think if you combine those two things, you get to the 24% growth in terms of units, which is probably the best way to understand the actual health of the business.

Okay.

Michel Morin, Morgan Stanley.

And just to follow up on that earlier question on items sold in Venezuela, can you give us similar metrics in Argentina? What are you seeing there in light of the recent devaluation?

And also, I think in your prepared remarks you called out the slower Classifieds trends in Venezuela, but I think you also said that you were seeing weaker trends outside of Venezuela. So, I'm just wondering if you can elaborate a little bit more on that?

Argentina actually accelerated unit growth, but we haven't been calling out the unit growth for all the countries. Argentina accelerated about three percentage points versus the fourth quarter. So, if anything, the business there delivered better numbers this quarter than the last quarter.

And with respect to Classifieds and also Argentina and the devaluation, Argentina is also another country where we have a strong presence in Classifieds, particularly in the cars category which was strongly impacted by a devaluation and restrictions, et cetera, in the car industry in the country. So, that market has also had an impact in Q1.

Okay. That's very helpful. And if I can throw another in there, you saw divergent trends in Mexico and in the other countries. I know they're smaller, but I'm wondering if you can give us a little bit more color? Mexico had been accelerating and then there was this sharp slowdown this quarter. And then, the opposite happened in the other countries.

Mexico, in general, for us, it's a country where we are not pleased with the evolution of our business. We would like to see substantially higher growth rates and absolute numbers coming from Mexico. It has been the case for a while now.

And with respect to the other countries, there's --. We don't disclose on a country-by-country basis, but there's I would say some countries that are doing really well and others countries that are not doing that well. And every quarter, that varies a little bit.

Okay. All right.

Chad Bartley, Pacific Crest.

Certainly a lot of puts and takes around expenses in the quarter, but I did want to ask about the gross margin and operating margin expansion on a year-over-year basis that we saw. Is that a trend that you guys are managing to? Is that something we should expect going forward? Or, I guess just in general, any sort of update on how you're thinking about managing operating margin, particularly with some of the fluctuations in currencies and other variables?

Chad, I think you touched up probably the two critical drivers there. So, we continue to run a business that's quite scalable. I think sometimes for us the challenge is making sure that we're making the right investments in the right areas.

If you look at the OpEx and where we're scaling and where we're not scaling, that's exactly the way we think we should be running the business: product development continues to receive significant growth in investments; sales and marketing, somewhat less; and G&A, the least.

On the gross margin piece, I think we continue to aggressively try to offset the margin compression that comes from the good result in the payments business.

And so, that story should be the same going forward.

The one additional factor that I think did help this quarter -- and we've always said that -- is that when we do see strong devaluations or currency movements in Argentina, although that hurts our top line, we have enough of a cost base in Argentina that it significantly dilutes some of our cost as well.

And so, there are about slightly north of 250 basis points of OpEx margin improvements that come from the devaluation of the Argentine peso. And that's something that should continue to be there at least until we lap the comp, which is Q1, when the peso devalued significantly.

So, this is an example of something that we had been saying all along, which is Argentina was a good place, in a way, to have a lot of our cost base because of the assumptions, and now reality, of a devaluation of the peso going forward.

Got it. That's a good point. That's helpful.

I am not showing any further questions at this time.

Ladies and gentlemen, this does conclude the conference for today. Thank you all for participating. Everyone, have a great day.