美卡多 (MELI) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MercadoLibre first quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to hand the conference over to Martin de los Santos, Vice President of Finance and Head of Investor Relations. Sir, please go ahead,

Hello, everyone, and welcome to the MercadoLibre earnings conference call for the quarter ended March 31st, 2015. I am Martin de los Santos, Vice President of Finance and Head of Investor Relations for MercadoLibre. Our senior manager presenting today is Pedro Arnt, Chief Financial Officer. Additionally, 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 might 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 Securities and Exchange Commission, which are available on our Investor Relations Website.

Finally, I would like to remind you that, during the course of this conference call, we might discuss some non-GAAP measures. A reconciliation of these measures to the nearest comparable GAAP measures can be found in our first quarter 2015 earnings press release available on our Investor Relations Website.

Now, let me turn the call over to Pedro.

Thanks, Martin. And welcome to all to our first results conference call for our 2015 fiscal year. We are pleased with the way 2015 has started, maintaining the strong momentum our platform has shown since the back half of last year.

The rollout of our enhanced marketplace in Brazil continues to advance, delivering improvements in operating, financial, and customer satisfaction metrics while we are starting to see positive returns along these same lines from our deployments of similar services in other markets.

When we look at the state of our marketplace in Brazil today and compare it to where we were at the same point last year, we can't help but feel optimism that we are well on our way to delivering a best-in-region user experience.

That optimism comes from seeing how our marketplace is offering users a constantly enhanced quality of service through successful rollouts of integrated payments, as we are already processing over 90% of Brazilian GMV through MercadoPago; quality shipping, with over 40% of all units sold in Brazil during March being delivered through MercadoEnvios; continued flow of attractive credit terms on our marketplace, exiting the quarter with over two-thirds of all GMV in Brazil having been done on credit; and consequently, yet another quarter of record net promotor score levels being registered.

Furthermore, it's important to note that we are accomplishing this while still delivering a healthy and profitable financial model.

And so, as we look forward to the rest of the year, we believe that the first quarter confirms the sustained momentum of our business and also points to a clear path for our Company through the remainder of 2015, replicating the success we are having in Brazil across all our geographies.

We are confident that, if we are successful in executing on this strategy, we will be in great shape for the foreseeable future.

Before I take you into greater detail on the specific advances made to our enhanced marketplace strategy, let me walk you through some key high-level operational results that has allowed us to deliver these strong results.

Registered users were up 22% year on year, reaching 126.7 million, after adding 5.7 million new users during the period. Successful items grew 26%, reaching 27.5 million. Gross merchandized volume grew 77% in local currencies, reaching $1.6 billion. Total payment transactions grew 62% to 14.8 million, the sixth consecutive quarter of acceleration in payment transaction growth. And total payment volume grew 102%, excluding foreign exchange headwinds, reaching $1 billion.

These operational highlights led to solid revenue growth in local currencies of 100% year over year. Excluding our Venezuelan operations, revenue growth in local currencies came in at an equally solid 64% year over year.

Despite currency devaluations, revenues in US dollars grew 28%. Excluding our Venezuelan operations, revenues in US dollars grew 40% year over year. These dollar growth rates are worth noting since they occur in a general context of strong currency devaluations across most of our markets. The Brazilian real has weakened by 35%, the Argentine peso by 11%, the Mexican peso by 15%, and the Venezuelan bolivar by 384% since March of 2014.

Let's take a closer look at the key initiatives and results by business unit, starting with payments. The focus during the last quarter was to continue driving on-platform MercadoLibre penetration of both payment processing and zero-cost installment credit plans and to continue deploying features and usability improvements that propel the growth of the merchant service business.

On both these accounts, our execution is proving successful, with total payment volume growing 56% in US dollars, despite the strong currency headwinds previously mentioned as, first of all, on-MELI penetration of MercadoPago reached a record high of 50%, up by more than 20 percentage points versus the same quarter of last year.

Brazilian penetration exited the quarter at 92%, effectively addressing all listings where it makes sense to pay through MercadoPago. These share gains have been driven primarily by four key catalysts: settlement exclusively through MercadoPago for all transactions larger than BRL200; improvements in approval and conversion rates of MercadoPago payments across all geographies; a recently launched feature that allows for MercadoPago to be offered on free listings; and sustained growth of MercadoEnvios that drives incremental payment adoption.

Secondly, continued adoption of our zero-cost installment plan, by quarter's end, 48% of all GMV in Brazil was being done on a zero-cost credit plan, quite remarkable given that the financing option did not even exist one year prior.

In Mexico, where we launched this option during November of last year, it accounted for 14% of all transaction volume in March, less than where Brazil was after five months, but a solid adoption rate nonetheless.

We plan to follow the rollout in Mexico with similar launches in other markets over the next few months. Complementing the strength of our on-MercadoLibre payments performance during the quarter was our merchant service business, which enables MercadoPago solutions on merchants' own Websites and apps.

Total merchant services, TPV, accelerated to 37% year over year in US dollars, or 65% excluding foreign exchange headwinds. Brazil and Argentina led the way with local currency growth of 53% and 61% year over year, respectively.

The renewed strength of the merchant service business comes primarily from improved traction in onboarding large clients whom we are now working with, such as AliExpress, Sony's PlayStation unit, Spotify, and wish.com, to mention a few, and declines in our merchant churn rates as a consequence of an improved product offering that continues to differentiate us from many of our competitors.

The strong performance of our payments business both aided and was aided by similar strength in the marketplace business. Performance in the countries where the rollout of our enhanced marketplace is further along outperformed smaller markets where we have yet to deploy many of those services, lending further evidence that our strategy is the right one.

Units sold sustained high growth levels, growing at 26% year over year, while units sold using at least one of our payments, shipping, official stores, or credit offerings, a measure for the success of our enhanced marketplace deployment, grew 38% year over year during the quarter. Excluding foreign exchange, GMV grew 77% for total MELI and 22% if we exclude our Venezuelan operations.

Some of the key factors driving marketplace performance were, one, progress in customer acquisition with registered user growth accelerating 34% year over year through improved marketing spend, SEO gains, and incremental user base starting to trickle in from mobile platforms; two, very solid selection expansion as the number of listings being offered on MELI grew by over 50% year over year, the fourth consecutive quarter of acceleration in that metric, as a consequence of improved sales efforts and an active promotional events calendar that is helping us convince sellers to list more inventory through us so that we can assist them in merchandizing more effectively; and third, marketplace growth was also in part attributable to improved customer retention and engagement, with the numbers of repeat buyers growing at a multiquarter high and the percentage of total GMV coming from repeat buyers at record levels.

This growing shift towards repeat purchase should also be interpreted as further proof of the improved user experience being delivered. Continuing with marketplace business, our official stores efforts, aimed at attracting a growing number of brands and branded retailers to MELI, also continues to evolve positively. This in part helped explain the growth in listings during the quarter, as total branded stores selling through our marketplace grew to over 750 versus 85 a year ago.

Some of the well-known brands that were onboarded during the quarter include Garmin, LG, Sony, Verbatim, Guess, Michael Kors, Marc Jacobs, Armani, and Donna Karan New York. Although the percentage of gross merchandise volume coming from these official stores is still in the single digits, we are pleased with the advances we are making with this new and promising seller segment and will continue working with these brands to drive more volume to their stores.

Our shipping initiative also played an important role in growing marketplace engagement metrics, as they continue to perform very well, with over 40% of units shipped in Brazil and more than 30% on a consolidated basis already being delivered through our shipping platform.

This latter metric is particularly relevant, underscoring the growing adoption of MercadoEnvios in Argentina, where nearly 20% of units sold are being shipped through it, as well as in Mexico, where just five months after launching, penetration is close to 10%.

Let me remind you that the shipping platform we are building aims to deliver top-in-class shipping and delivery alternatives to our buyers and sellers through a marketplace model, where we integrate the operations of logistic partners into our e-commerce offerings. From user's perspective, we are able to drive down the cost of shipping and generate consistent and improving service levels by working closely with these partners.

So far, the results we have seen are encouraging. And we aspire to drive penetration of Envios on marketplace to levels similar to MercadoPago over time, while eventually also offering the service to off-platform merchants, similar to what we have done with payments.

With that, I've covered some of the quarterly highlights for payments, financing, marketplaces, and official stores and shipping, the key initiatives behind our enhanced marketplace vision. As you can see, we believe they are all advancing well with ample room for further growth, particularly beyond Brazil.

Perhaps the most definitive confirmation of this beyond the strength in key operating metrics I just shared and the flow through to financials I will cover next is the sustained improvement in net promotor scores we continue to see. Q1 of 2015 was the seventh consecutive quarter of increases in NPS, with nearly a 20 percentage point improvement as compared to March of last year.

So, in summary, we are moving forward at a good pace with our initiatives to offer a marketplace where we have more touch points with the transaction and can thus secure a better experience. Our customers are perceiving these benefits, driving acceleration in growth of many key operational metrics and, most importantly, satisfaction metrics.

Before moving onto our review of our financials, I'd like to briefly mention our classifieds business unit as well. Over the past 12 months, we have made a series of moves on the corporate development front to strengthen our position in the real estate classifieds market to place it on par with the strong position we hold in automotive classifieds throughout the region.

With this objective in mind, we have acquired a series of strong real estate sites and brands in Chile and Mexico through the purchases of Portal Inmobiliario and GuiaDInmuebles last year and more recently Metros Cubicos at the beginning of this quarter.

With these additions to our portfolio of classified properties, we now own and operate leading classified sites measured in traffic by comp score in multiple countries throughout the region. These acquisitions signal our commitment to becoming the leading vertical classifieds platform in these two segments.

As you may recall, recent results for the segment had been sluggish, as we are transitioning to a monetization model that has become primarily free for individuals looking to list their vehicles or properties and that charges listing fees only to dealers and realtors.

We believe that recent results for the business unit, aided by the above-mentioned acquisitions that are strong in the dealer/realtor segment, point to an inflection point in the trajectory of the business.

During Q1, we hosted 1.8 million live listings and saw revenue growth for the segment of 55% in local currencies over last year, both metrics that we think confirm this trend.

Let's now take a look at how these operational highlights translated over to strong financial results. All growths that I'll call out are year on year unless I indicate otherwise.

For the first quarter of 2015, net revenues were $148.1 million, 100% growth in local currencies, and 28% growth in US dollars. Excluding Venezuela, net revenues grew 64%, excluding foreign exchange, and 40% in dollars.

Income from operations was $25.6 million. Excluding certain one-off impairment charges due to the devaluation in Venezuela, which I will cover in more detail briefly, income from operations would have been $41.8 million, up 23% from $34 million during the first quarter of last year.

Net income before income asset tax expenses was $16.4 million. Excluding these one-off impairments and ForEx losses in Venezuela, it would have been $53 million, or 36% higher than Q1 of 2014.

Net income was $1.7 million. Again, excluding the impairment ForEx and tax effects of the Venezuelan devaluation, net income would have been $34.6 million, up 14% from $30.3 million during the first quarter of 2014. All of this resulted in earnings per share of $0.04 for the first quarter. Excluding the impacts of Venezuelan devaluation, earnings per share for the quarter would have been $0.78.

As you've obviously noted, we've called out the results both on an as-reported manner and also with certain exclusions related to Venezuela. The reason for this are the recent changes to Venezuelan currency exchange rates that impact the year-over-year comparisons as well as expectations for the remainder of the year.

As we reported in the 8-K on April 6th, we adopted the SIMADI floating exchange rate in Venezuela as of March 31st, 2015, to remeasure our bolivar-denominated monetary assets and liabilities and to remeasure our revenues and expenses.

At the end of the first quarter, the SIMADI rate traded at roughly VEF193 per US dollar, considerably higher than our previously employed SICAD 2 rate, which was approximately VEF52 to the dollar.

As a consequence of our transition to this new exchange rate on March 31st, we've booked a $32.8 million loss in the first quarter that includes $16.2 million impairment charges on our long-lived fixed assets, a foreign exchange loss of $20.4 million resulting from the devaluation of our local currency net monetary assets in Venezuela, and a deferred income tax gain of $3.8 million derived from the loss on foreign exchange related to the revaluation of US dollar-denominated liability.

These effects were similar to those we experienced during the second quarter of last year, when we moved from SICAD 1 to SICAD 2 exchange rates in Venezuela.

As SIMADI was adopted the last day of the quarter, revenues and expenses for our Venezuelan P&L were measured at the SICAD 2 exchange rate for the entirety of the three-month period. The second quarter of 2015 will begin to show the effects of our full transition to the new SIMADI exchange rate.

We believe these changes reflect the reality of our Venezuelan operation under current situations and have the added consequence of further reducing our future exposure to Venezuelan currency swings, as the segment should represent less than 5% of our total revenue for the upcoming quarters.

With that explanation, now, let's take a look at our top-line growth for the quarter. Before breaking down the revenue streams, I'd like to remark that all of our business units accelerated in their US dollar year-over-year growth, despite strong currency headwinds.

In Q1, we saw strong marketplace revenue growth of 14% in dollars, driven mainly by growth in unit volume. In local currencies, marketplace revenues grew by 96%, driven by GMV growth, excluding foreign exchange of 77%. Excluding Venezuela, marketplace growth was 24% in US dollars and 46% in local currencies.

Non-marketplace revenues also experienced strong growth during the quarter, accelerating in both local currencies and US dollars for the fourth consecutive quarter. The main contributions to this growth came, in order of relevance, from financing revenues accelerating to local currency growth of 100% year on year, aided by the high adoption of our interest-free listing type in Brazil.

In dollars, financing revenues accelerated for the fourth consecutive quarter. MercadoPago processing revenues grew 66% in local currencies, driven by the solid growth of payments volume outside of our marketplace platforms.

Our advertising business, though a small portion of our non-marketplace revenues, experienced high growth, thanks to good results from the new ad format product ads and classified revenues, which accelerated to 55% year-over-year growth in local currencies, as I previously mentioned.

All of these effects resulted in a robust net revenue growth of 100% year over year in constant dollars and 64% in constant dollars, excluding Venezuela.

Total revenue growth in local currencies for each country were 58% for Brazil, 94% for Argentina, 32% for Mexico, and 284% for Venezuela.

Moving down our P&L, gross profit grew 23% in the first quarter to $103.4 million. Gross profit margin was 69.8% of revenues versus 72.7% in the first quarter of 2014 and 70.5% in the fourth quarter of 2014.

This represents a loss of 285 basis points of margin, primarily from 237 basis points of higher processing fees resulting from the growth of MercadoPago, a business unit with lower margins than those of our marketplace, and 104 basis points incremental sales taxes generated by our shipping and financing initiatives, which were partially offset by 35 basis points of scale and customer support as we continue to streamline those operations.

Operating expenses for the period totaled $77.8 million. Excluding the one-time impairment charge related to our Venezuelan fixed assets, operating expenses totaled $61.6 million, a 24% growth versus last year's first quarter.

As a percentage of revenues, operating expenses were 52.5% in the first quarter versus 43.2% in the same quarter last year and 42.4% in the fourth quarter of 2014.

Excluding the one-off, operating expenses were 41.6% of revenues during the first quarter, 162 basis points of margin improvement versus last year.

Let me break the remaining OpEx down for you line item by line item. Sales and marketing, the largest operating expense line, grew 17% year over year to $26.2 million, or 17.7% of revenues, versus 19.4% for the same period last year.

Year-over-year scale was mainly driven by successful collection efforts, leading to improvements of 242 basis points in bad debt and 70 basis points in charge-back improvements from our MercadoPago operation.

These were partially offset by 132 basis points of margin contraction due to higher investments in our buyer protection program as we expand the guarantees and coverage we offer our buyers to entice greater engagement.

Product development expenses grew 41% to $17.2 million, representing 11.6 percentage points of revenues in the first quarter versus 10.6% in the same period last year. This contraction in margin is due primarily to 131 basis points of salaries and wages increments, 29 basis points of those coming from the long-term retention plan, as we added north of 200 engineers to our talent pool versus last year.

Finally, G&A increased 19% to $18.1 million during the first quarter, or 12.2 percentage points of revenues, versus 13.2% a year ago if we exclude the impact of the Venezuelan devaluation.

This scale in G&A is largely driven by an easy comp, as last year's Q1 had roughly 200 basis points from a write-off of certain tax credit related to the expiration of the prior software development law in Argentina.

This quarter, we also saw 83 basis points of efficiencies in outside services due to savings in legal fees, all this offset by a contraction of 116 basis points in salaries, 102 of those coming from the long-term retention plan, and 30 basis points from depreciations and amortizations due to the acquisition of Portal Inmobiliario in the second quarter of 2014 and our new offices in Argentina, which we started amortizing in January of 2015 once we had moved into them.

As we highlight each start of the year, our annual merit compensation and inflation adjustments account for a significant part of the increase in our salaries and wages line items in the first quarter and the resulting margin compression.

Total salary and wage expenses, a component of our COGS as well as our OpEx lines, grew 7% on a Q-on-Q basis and 41% on a year-on-year basis. Additionally, headcount grew 22% versus last year, as we added almost 500 employees over the last 12 months.

Furthermore, long-term retention plan accruals were higher by 142 basis points, as I've broken out in some of the line items previously noted, due to a higher stock price, also negatively impacting the scalability of the business.

Finally, also included in OpEx was the aforementioned charge of $16.2 million for impairment on our Venezuelan long-lived fixed asset remeasured at the SIMADI exchange rate. As a result, operating income for the quarter was $25.6 million, or 17.3 percentage points of revenues.

However, excluding the one-time impairment charge, operating income would have been $41.8 million, or 28.2 percentage points of revenues, versus 29.5% in the first quarter of 2014 and 28% last quarter.

Below operating income, we benefited from $4.3 million of interest income, up 42% year on year, thanks to higher interest rates on larger amounts invested. We also saw a $5 million loss in financial expenses, a majority of these corresponding to interest accrual on our convertible bond.

In our ForEx line, we saw an $8.6 million loss versus a $3.1 million gain in the first quarter last year. The adoption of SIMADI in Venezuela generated foreign exchange losses of $20.4 million, which were partially offset by $10.1 million of net increase in the value of our foreign exchange holdings in Brazil.

These effects all led to net income before taxes of $16.4 million, which would have been $53 million were we to exclude Venezuela's impairment charges and ForEx losses. That is 36% above last year's first quarter numbers.

Income tax expense was $14.7 million for the quarter. As happened with the switch to SICAD 2 in the second quarter of 2014, US dollar liabilities on Venezuela's balance sheet further appreciated, resulting in losses recognized under Venezuelan GAAP for a one-off tax benefit of $3.8 million.

As reported, US GAAP blended tax rate was 89%, driven by the one-time charges in Venezuela that I previously mentioned, which are non-deductible under US GAAP. Excluding impacts of this devaluation on G&A, ForEx, and taxes, the blended tax rate for the first quarter would have been 34.8%, up from 22.4% in the same quarter last year.

The year-on-year increase results mainly from a higher tax rate in Argentina, due to the expiration of the software development tax law. As we noted last quarter, if we are eventually granted access to the new tax holiday the government has launched, we currently understand we will be able to recognize certain tax gains in future quarters.

Net income came in at $1.7 million, or 1.2 percentage points of revenues, during the first quarter, resulting in a basic net income per common share of $0.04. Had there been no impairment to foreign exchange and income tax effects resulting from Venezuela's devaluation, net income would have been $34.6 million, a margin of 23.3%, and an EPS of $0.78 versus 26.3% and $0.69 a year ago, respectively.

Purchases or property, equipment, and intangible assets during the quarter totaled $8.3 million. For the period ended March 2015, 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 $29.9 million versus $20.5 million last year.

Cash, short-term investments, and long-term investments at the end of the quarter totaled $558 million.

Wrapping up, we declared our quarterly dividend of $4.5 million, or $0.103 per share, payable on July 15th, 2015, to shareholders of record as of the close of business on June 30th, 2015.

That wraps up my review of financial and operational metrics for the quarter. In summary, our businesses continue to perform well with good traction along most of our strategic initiatives and very positive customer feedback, primarily in Brazil, where the rollout of our latest services is further along.

We will spend the remainder of the year very focused on rolling these services out to more markets and are confident the results should also be positive there once we do so. We look forward to sharing the advances on these fronts with you in the upcoming quarters.

We can now take any questions you might have.

(Operator Instructions). Mark Miller, William Blair & Company.

Hi, good afternoon, everyone. Pedro, we covered a lot of ground in your remarks. I guess my first question would be on the acceleration in the new confirmed users on the site, up 33%. That's the fastest in three years. Could you expand on what you think is driving that? How much of that is coming from marketing?

And then on the marketing spend, my understanding is the way you're shifting that increasingly to mobile, there can be a longer payback, but ultimately a higher lifetime value. So, can you just tell us where we are also in that inflection point?

Sure. So, I think, as we noted in the prepared remarks, what we've seen in the quarter are improvements in our marketing execution, no radical departures in how we're investing the money. There is an increment in terms of amount spent. But, by and large, it's been more solid execution. Mobile is being accretive in that sense. We've I think gotten better at SEO and also in converting registered users.

So, the short answer, Mark, I think is we were simply more efficient with our marketing spend. We did spend more during the Q, but not a dramatic departure. If you look at online customer acquisition investments as a percentage of revenue, there isn't any significant change there, about 10 basis points incremental versus last year. So, really, it's been primarily better execution.

And then in terms of cohort analysis or lifetime values, we really haven't been disclosing much. We have said, as you mentioned, that it's what's been behind the incremental spend and our greater confidence in acquiring users. But, we haven't gotten into any incremental detail.

Great. That's helpful. And then just to I guess think about the deployment of the enhanced marketplace, all the features to other markets, what are the biggest constraints to you there? Is it that they have to move in concert with each other, the Envios together with financing, or is it people? I guess, how should we think about the rate of uptake across other markets to replicate Brazil? Thanks.

Sure. So, there's probably two different drivers behind uptake. The first part of your question was more of an execution issue and how we determine the roadmap for rollout. If you think of these incremental services, primarily payments, but also Envios, they do require technology integrations with third parties.

And so, part of our roadmap in terms of determining how quickly we can deploy to other countries is driven by the different partners, whether they be financial institutions or logistics and shipping companies, and how quickly we can build technology overlays that interact with theirs. So, there is a both internal manpower issue, but also our partners.

The other I would say element in understanding pickup is just what the inherent demand for these different services could be in these new markets. And I think we've alluded into the past, for example, how Brazilian consumers are the ones that are the most accustomed and most versed to buying on credit. And so, that explains the very strong adoption we've seen of the credit piece in Brazil.

When you think of the Envios platform, geographic distribution will be a relevant factor. Argentina, our transactions are more concentrated within the metropolitan area of Buenos Aires. So, that might lead to less rapid adoption than what we saw in Brazil. And there are some other external factors.

So, I think, all in, what we've said is Mexico and Argentina were already working, both on the credit piece and the Envios piece. We're seeing some good traction. But, as noted in the prepared remarks, the cadence of growth has been very strong yet less marked than Brazil. And then the subsequent markets that we're looking at for the rollouts of free credit and Envios eventually are probably some of the Andean markets, Chile and Colombia. And we haven't given specific dates there.

That's helpful, Pedro. Great results. Keep up the good work.

Gene Munster, Piper Jaffray.

I'll add my congratulations on the results. And, Pedro, if you could just walk through -- I know you had a lot of numbers there, and I might've missed some of them, but kind of what you see are the key metrics in Brazil.

And then separately, this has been a lot of different pieces that have been coming together that are adding up to these results. I guess, can you talk a little bit about the sustainability of this? In other words, do you feel that -- is there anything changing the competitive dynamic that could make you feel that we should anticipate these results continually?

And then my last question is, with the eBay spinout, does that have any impact on MercadoLibre?

Great. So, Brazilian market obviously continues to perform very well, driven in large part by the enhanced marketplace. Couple of numbers there. Let me just start with revenues, slight deceleration, but still very strong revenue growth in local currencies of 58%.

If you take into account the ForEx headwinds, that's still 31% in US dollars. When we look at total payment volume in Brazil in local currencies, it's growing at nearly 80%, 79%. That shows the strength of the payments business.

We said that 60-ish percentage of all Brazilian GMV is already being done on credit. So, that's phenomenal penetration of the credit offerings. And that's been one of the key drivers behind the growth in total payment volume. The merchant service business in Brazil is also performing well. And that also explains the growth in Pago.

And then shipping in Brazil, we're rapidly approaching half of all units being shipped through Envios. So, those are probably the key metrics to show the traction we're seeing behind the enhanced marketplace.

Just to interrupt you there, Pedro, on a -- how about successful items sold?

Sure. Units sold for Brazil was 26%. The other number we called out is, if you just look at the units through the enhanced marketplace, 38%, so very strong growth when we look at overall solid 26%. When we looked at the units sold that are using one of our credit, shipping, or payment solutions, that's growing even faster than the overall number.

You had asked about sustainability. Like we've always said, we're focused on replicating this to the other markets. We also think there still is room for increased adoption in Brazil. Shipping is not yet at 50%. So, that should also allow for some incremental growth. Having said that, obviously, the comps begin to get tougher as we move into the second half of the year, not so much Q2, given that that's really where the ramp up of the enhanced marketplace in Brazil began.

So, we'll be able to comment more on that when we get there. But, just in terms of comping, the comping really begins to get tough Q3 and Q4 for Brazil.

And then eBay's impact?

Sorry. Could you repeat the question on eBay and the impact?

Yes, the impact of eBay spinning out or becoming -- the marketplace becoming a separate business, how does that impact their relationship with you? Could there be some shares that could be coming afloat because of it, any potential other impacts that may -- whether it's M&A related or any other broader thoughts about what that spinout means in terms of MercadoLibre?

Yes, in terms of their shareholders, that's -- their shareholding, that really is a question for them, nothing we can comment. And in terms of impact on our business or things we're focusing on, like we've always said, we focus on what we can control and our users. So, I don't really anticipate that that's something that should have any relevant impact to what we're trying to build out here. And what they will do with the shares is a question for them.

Okay. Great. Thank you.

Ross Sandler, Deutsche Bank.

Thanks. Pedro, just wanted to follow up on the Brazil unit growth. I think last quarter was 33%. And I think you had a 3 point easier comp if my notes are correct from a year ago. But, so, if it was 26% this quarter, is it -- can you just talk about the macro environment that you're seeing in Brazil?

And then of all the things you're doing with the enhanced marketplace strategy, how much of a driver is the free installment program that's happening in Brazil? I think you said it was 48% of transactions right now. What do you think? Is that a meaningful driver of some of the acceleration you've seen in the last couple of quarters or at least quarter? And then as you comp through that, what do you think the growth rate might look like in Brazil?

And then the last question -- sorry, I know this is a lot -- but I was -- I think you said the GMV growth, excluding Venezuela, for overall MercadoLibre was 22% in local currency in the prepared remarks. Is that correct? Just wanted to make sure. Thanks.

Sure. So, first of all, units sold did decelerate in Brazil from 33% to 26% when you look at it consolidated. We've always shied away from macro explanations when the business is accelerating. And so, I think that also applies to when there's some deceleration.

The deceleration is probably driven primarily by the fact that, although a lot of the growth is being driven by the move to the enhanced transactions, those transactions that have a credit overlay, a payments overlay, shipping overlay, and all three of those continue to grow very nicely. The growth rates once these services get more and more penetrated are less steep. And so, that's probably the biggest behind.

With Pago at nearly 90 -- over 90% adoption in terms of GMV already in Brazil, that means that you're beginning to max out the percentage of transactions on marketplace that didn't have Pago and now can access Pago and through Pago shipping and credit.

And so, I wouldn't explain the deceleration from macro factors necessarily. But, I think it has more to do with just normal oscillations in growth rate that the business has, in this part somewhat driven by already being more penetrated in many of these enhanced marketplace metrics. And again, we still think that the 26% in units growth is very solid growth for that market.

In terms of how relevant has the free installment been for credit and, more importantly, for overall growth, we think very relevant. When we look at the takeoff I was mentioning earlier in the back half of last year of the enhanced marketplace, where it really began to accelerate, that coincides with when we launched free installments. And that's not a coincidence.

The more buyer-friendly credit terms, namely free installments, have been a very strong driver of adoption of MercadoPago and of purchases on MELI overall. It hasn't been the only driver. I think the other factors have also been important, shipping being a very relevant one, better selection, better brand selling on the platform. But, definitely, credit has been very important.

The number we gave out this time is that nearly two-thirds of all GMV in Brazil is being done through credit. So, there's still some penetration that we can add. But, it's grown very quickly to be a majority of all Brazilian GMV.

And what was the third part of the question? Sorry.

Just what was the overall growth rate for GMV, excluding Venezuela, in local currency? I thought you had said 22%. But, you were going through a lot of numbers. So, I may have written that down wrong.

Just one second. It's -- you're correct. So, excluding Venezuela, gross merchandise volume, excluding ForEx, grew at 22%. If you take into account currency headwinds, and the dollar has strengthened versus all of our currencies, as we mentioned, then GMV growth, excluding Venezuela, was 5%. So, 22% ex-FX, 5% in dollar terms, as reported.

Great. Thanks, guys. And nice quarter. Thanks.

Marcelo Santos, JPMorgan.

Hi, good afternoon. Thanks for taking the question. I actually have two questions. First, on the large retailers, the official stores, I just wanted to understand a little bit better the dynamics of competition in there. You say you're trying to attract more volume to the -- through your platform.

When you do that, do you think you are taking share from the other e-commerce players, or you're really convincing these players to sell more in the marketplace? This is the first question, if you could throw some light there.

And the second is on the classified business. So, you said you made (inaudible) in the real estate offer. Do you feel that your classified property there, the portfolio is complete, or do you still see space and need for more M&A in there? They're the two questions.

Sure. So, in terms of the competitive pressure of the official stores, the way we've always seen it is purchases that occur online are still very small compared to offline throughout the region. It's still sub-5%, even for Brazil.

And so, when we onboard branded merchants, branded retailers that start offering their products online, many times, what you generate is a transaction that perhaps would've occurred offline, and you get it to occur online.

Yes, if it's occurring on MELI, by definition, it's not occurring on one of the other online players. So, in that sense, there's a market share gain. But, like we've always said, what's more relevant are the share gains that are occurring from offline commerce.

So, hard to do the counterfactual to say, if the purchase is occurring on MELI, by definition, it would have occurred otherwise on one of the online competitors because it could've been a purchase that would've occurred offline. And we've always been of the thought that that's a majority of where we're gaining share from.

So, as we onboard these brands, hopefully, what we're doing is moving customers away from buying something offline and buying it online that's more efficient and a better experience.

What's also true is that many of these brands, they are multichannel. So, they don't choose only one marketplace to sell through. But, in many instances, they offer their inventory on their own Websites and on MercadoLibre. And then that depends on where the demand is. So, if we continue to focus on our buyers and driving demand, we should be able to move more and more purchases through our marketplace that complements whatever volume they're selling direct through their own Websites, those that have their Websites.

In terms of real estate, I think we've always said that marketplace companies that operate in specific verticals that are interesting to us, those verticals certainly include real estate as well as motors and other verticals that exist, are always interesting M&A opportunities for us.

And so, I wouldn't say we feel our portfolio is complete. I'd say we continue to look for interesting companies that could be very easily tucked into what we're doing and brands that operate in vertical spaces that we've identified as strategic for us.

So, if you look at the case of Mexico, we had already bought one real estate company last year. And now, we've bought another one. So, we're comfortable adding to our portfolio, even within the same vertical if we think there are synergies and it makes sense.

Okay. Thank you very much.

Stephen Ju, Credit Suisse.

Yes, thanks. So, Pedro, I just wanted to understand this correctly. So, you mentioned two-thirds of GMV in Brazil is done on credit. And this includes interest-free and legacy financing. And also, presumably, the other markets are lagging this level of adoption. So, as you look over the next few years, especially given the context of interest-free financing, do you think this level becomes the new norm for the other regions as well?

Also, you touched on advertising in your prepared remarks. How have the conversations enhanced adoption among your sellers been? Do you think it'll be an uphill battle to convince them to use this product, or are there margin percent profit dollar tradeoff already well apparent to them? Thanks.

Sure. So, of the two-thirds that are done on credit, the way that breaks out is the new [barcelados sem juros], the installment free, really has become the lion's share of that. So, slightly less than 50% -- 48% is what we mentioned in the prepared remarks -- of GMV is free install for buyers. So, it -- the remaining 16% to 18% is what comes from the legacy credit.

Whether that's the new norm for the other countries two, three, four years down the line, difficult to tell. Credit is a very relevant component to retail in the region. And so, structurally, I don't think there are any reasons why that couldn't become the case. But, we need to continue executing and see where we get.

The initial results we're seeing are quite positive, although earlier stage than in Brazil and, like we said, with an adoption curve that's somewhat less aggressive than in Brazil, as was expected. So, I think we will get to very high levels of adoption of free installment. It might take a few years rather than a few quarters.

Switching over to the advertising business, the initial uptake of sellers using the product ads to redirect back into our marketplace has been very strong. We're seeing very solid growth in the advertising business in terms of revenue. And that revenue is primarily being driven by this new product ads advertising format.

It's still a small business, right? So, it's not even 5% of revenues. So, let's continue to monitor it. If it sustains these levels of growth, it could grow into a very nice revenue stream for us. And current indications are quite positive. It's a business that's growing well north of 50% in terms of revenues. Let's see if we can sustain that going forward for a few more quarters. But, all points seem positive right now.

And where are -- are there any more incremental territories that you've rolled out the interest-free financing? And where is the product ads -- where are the product ads live right now in terms of regions?

Yes. So, product ads, because that's internal, it's our own platform, our own technology, it doesn't require integrations with third parties, like we had mentioned before, is easier for us to roll out pan-geographically. So, it's present in most of the relevant countries and almost all of the sizable markets.

And the existing sales force, all they have to do is sell a new format. And a lot of this is also sort of self-serve because it's more of a seller-driven incremental merchandizing of their items. So, product ads is rolled out everywhere.

On the free installments, the focus so far has been Brazil, Mexico, and Argentina. We will be rolling out additional geographies over the next few quarters. I had mentioned earlier that Colombia and Chile in terms of size are the next markets that make sense. We haven't given out specific dates.

Thank you.

Michel Morin, Morgan Stanley.

Yes. Thank you. Two questions, Pedro. The first, I just wanted to clarify. You mentioned growth in the financing fees in the quarter. I'm not sure I got the number, 60-something percent. I wasn't sure if that was companywide or Brazil only.

Great. So, in constant currencies or in local currencies, the growth of financing revenues was actually 100%.

Okay. And in dollars? And that includes Venezuela.

Well, Venezuela doesn't have a financing product. So, in this case, it's not relevant. So, excluding Venezuela is also 100%. So, Venezuela has no impact on that.

So, Pedro, given kind of the growth that you're seeing here, and I know, historically, you haven't given us a quantification of how relevant this is, is there anything you can share with us to better frame how relevant this has become, especially in Brazil?

Yes.

Sir, does that conclude your question?

No, no. Just one second. We want to give some on that. I think it's a relevant question.

So, in terms of -- obviously, this has been growing very strongly. So, when we look at the component of revenue that's coming from financing on a consolidated basis, it's in the teens of overall revenue. Brazil, obviously, is somewhat stronger than that, so somewhat -- a little bit above that. It's been growing nicely and is roughly 20% of revenues.

Okay. That's very helpful. Thank you. And if I may, just on the adjustments to net income, just to be clear, to get to your $0.78, you're adding back the FX loss in Venezuela. But, you're not deducting the FX gains elsewhere, like in Brazil.

That's correct. Yes. So, all we do there is assume that the devaluation in Venezuela would not have occurred. That's the only thing that we -- .

-- Okay. That's clear. Thank you.

Thank you.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back to management for any closing comments.

Great. No, so, thank you, everyone, for your interest. We -- business continues to perform well, and we look forward to speaking to you again in the quarter with updates on how things have evolved during the second quarter of this year. Thank you, and goodbye.

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