美卡多 (MELI) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MercadoLibre third quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to hand the meeting over to management. Please go ahead.

Hello everyone, and welcome to the MercadoLibre earnings conference call for the quarter ended September 30, 2015. I am Martin de los Santos, Senior 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 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 on 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 may discuss some non-GAAP measures. A reconciliation of those measures to the nearest comparable GAAP measures can be found in our third quarter 2015 earnings press release available on our Investor Relations website.

Now, let me turn the call over to Pedro.

Thanks, Martin. Good afternoon, and welcome to our third quarter conference call for 2015.

As we report our earnings results and exit this third quarter, I'd like to kick off the conference call by saying that we continue to be optimistic about the future opportunities that lie ahead of us, going forward. Latin America offers a formidable growth market with solid business prospects and multiple factors which make us feel confident about the direction and shape our business is taking.

Complementing these external factors, our own internal strengths. Being a larger Company with increasingly diversified revenue streams, with better access to capital and an evermore capable team of employees will serve as powerful advantages in order to continue to effectively capitalize on and execute the forthcoming growth opportunities.

We are fortunate to do business in an industry that continues to grow even in adverse economic scenarios, consequence of a still underpenetrated secular trend in ecommerce. MercadoLibre is at the epicenter of this trend, a leader and benchmark when it comes to regional coverage, market share, unique visitors, and brand recognition.

Furthermore, our Company has a proven business model functioning as the platform of choice for the region's growing ecommerce ecosystem. This platform approach serves as a growth catalyst that continuously generates incremental business opportunities, while being financially sound and profitable.

We believe this quarter's results are a testament to all this.

Consequently, the cornerstone of our focus will continue to be centered on the execution of our platform-centered growth strategy and on scaling the business for the long term. We plan to achieve this by continuing to invest behind innovative and compelling ecommerce solutions for small- and medium-sized businesses as well as individual sellers, while also continuing to expand our relationships with large retail brands.

We envision MercadoLibre as the go-to partner in ecommerce solutions for all types of sellers, irrespective of their size and breadth. This is what drives our commitment behind our business lines: marketplaces, official stores, payments, financing, advertising, storefronts, and back-end ecommerce solutions. These are multiple fronts that will require investment, but that are also highly synergistic amongst themselves and should thus allow for a methodical and efficient growth strategy, going forward.

Before I delve into greater detail on some of the specific advantages made in our main strategic initiatives across our platform during the quarter, let me walk you through the high-level operational results that we have delivered.

Successful items grew 26%, reaching $34.0 million.

Gross merchandise volume rose 77% in local currencies, reaching $1.84 billion.

Total payment transactions grew 75%, to $22.0 million.

Total payment volume grew 95% in local currencies, reaching $1.4 billion and representing over 75% of our GMV for the quarter.

Registered users were up 20% year on year, reaching 138.4 million after adding 6.1 million new users during this quarter.

These operational highlights have led to solid revenue growth in local currencies of 68% year over year. Excluding our Venezuelan operations, revenue growth came in at an equally solid 54% year over year.

Despite currency devaluations, revenues in dollars grew 14%. Excluding our Venezuelan operations, revenues in dollars grew 15%. 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 36%, the Argentine peso by 10%, the Mexican peso by 20%, and the Venezuelan bolivar by 75% since the third quarter of 2014.

Now, let's take a closer look at the key initiatives and results by business unit, starting with our marketplace BU. As I have noted, the business continues to demonstrate its resilience. Units sold, which exclude the effects of inflation and local currency devaluations, grew at a healthy 26% year over year on a consolidated level. Successful items growth performed particularly well in Argentina, growing at 60% year over year. Brazilian units grew at 20%.

With regards to gross merchandise volume, during the third quarter we reverted the negative growth trend in US dollars and grew at 9%; while in constant currencies, GMV grew 77% for total MELI and 41% if we exclude our Venezuelan operations. Brazilian gross merchandise volume in constant currency grew at 30% during the quarter. These are strong figures, given the overall environment across the region.

Our continued efforts directed at the expansion of our enhanced marketplace, combined with our focus on customer service, have resulted in improved buyer engagement metrics. Unique buyers as well as repeat buyers continued to show growth rates across all our markets, growing at double digits when compared to the same period of 2014 on a consolidated basis.

Additionally, the continuous growth in successful items per buyer also indicates that we are executing well on our initiatives to stimulate and maintain demand and vibrancy throughout our marketplaces.

On the pricing front, we have made some strategic adjustments during the third quarter, which are mainly aimed at reducing friction in listing products, deepening our SKU count, continuing to capture long-tail customers, providing more vibrancy to our marketplace, and improving overall customer experience and conversions while growing our gross merchandise volume.

During this quarter, we migrated to a final value, fee-only model in our Brazilian marketplace. By eliminating placement fees, we now have a much simpler payment structure of three listing combos: a premium combo at 16%, which includes installment payments; a classic combo, at 10% final value fee; and newer, free listings.

This free strategy consists of extending free listing durations from seven to 60 days, while giving these listings the ability to add our MercadoEnvios shipping services, financing options, and payment overlays, thus offering a substantially better value proposition for buyers and sellers, while at the same time giving us venues to monetize and generate incremental revenue from these free listings through the offering of these value-added services.

We are confident that such pricing changes will entice sellers to publish more listings on our marketplace, as they no longer have to assume the risk of paying fees in advance for products that might not sell as well. Combined with our freemium strategy, this should serve as powerful igniters to continue deepening our SKU count and creating greater content for buyers on our platforms.

Additionally, and as I will cover shortly, for those sellers that do wish to replace the [placement] fees we have discontinued with new formats to highlight their listings, we have launched ad formats in search results that link back to existing listings on our marketplace.

We have already seen the positive results of these changes, as we continue to see selection and SKU count expanding at very healthy rates as the number of live listings being offered on MELI's Brazilian marketplace grew by 92% year over year during the quarter.

As our enhanced marketplace is rolled out into other markets, we also plan to roll out this new pricing structure to these additional markets: Argentina, Mexico, Colombia, and Venezuela will soon follow.

Continuing on, our official stores initiatives have also impacted positively on our marketplace results, albeit to a lesser degree given that they still represent single digits of our total GMV. During the third quarter, we added 300 new official stores, totaling over 1,250, as we continue to onboard well-known brands into our ecosystem such as Columbia, Timberland, Fiat, 3M, and Swatch, amongst others.

On the mobile front, our investments behind this initiative continue to pay off very well, as conversion rates, mobile GMV growth, and new mobile registrations continue to deliver improving and promising results.

Moving on to our payments platform, MercadoPago continues to be the prime payment solution for facilitating transactions within our ecosystem and shows signs of an improving value proposition for merchants, as both approval rates continue to increase while merchant churn rates continue to decline as a consequence of an improved product offering and innovation that continues to differentiate us from our regional competitors.

Our payments solution has also continued to show rapid growth outside our marketplace, expanding its footprint through our merchant services business, setting record numbers in terms of countries covered and payments volume processed.

During the third quarter, we continued to witness compelling growth in total payment volume as a consequent of all this, despite a general context of currency devaluations and tough comps in 2014 that arose from the launch of our interest-free financing initiative in Brazil.

During the third quarter of 2015, total payment volume on our platform measured in local currencies grew 95%; while in US dollar, total payment volume on our platform grew at a healthy 42%.

Another important milestone was reached this quarter, as penetration of MercadoPago on our platform reached the highest GMV ever: 58% versus 46% during the same period of 2014. These gains have been primarily driven by implementation of settlement of payments exclusively through MercadoPago in Mexico for all listings where interest-free financing is offered, improvements in approval rates of MercadoPago across all geographies, and the continued adoption of our zero-cost installment plan in Brazil.

By quarter's end, 55% of all GMV in Brazil was being done at zero-cost credit plans, while approximately three-quarters of all Brazilian GMV had a financing overlay on them, confirming the importance of credit as a catalyst for consumption in that country.

Additionally, adoption of our payments solution in Chile, launched during the second quarter of 2015, has shown very encouraging advances in penetration on our platform, growing at a very fast clip, albeit from a very low base due to the fact that full implementation of the solution remains fairly recent.

Complementing the strength of our on-platform MercadoLibre payments performance during the quarter was our merchant service business, which enables MercadoPago solutions on merchants' websites and apps. This continues to be an extremely exciting prospect for us, as we believe the opportunity to capitalize payment volume off of our marketplace is multiple-times larger than on our marketplace.

We believe that such initiative will not only serve as an igniter to allow us to cross sell other value-added services such as shipping and financing to merchants off our marketplace, but also bring in significant incremental revenues.

It is also important to highlight that all the countries where we offer our merchant service solutions have shown triple-digit revenue growth rates when looked at in local currencies, a clear sign that we are executing well on this front.

This continued strength of the merchant service business is mainly driven from the success of our commercial teams in onboarding larger clients and new clients in key open-platform integrations, as well as cross-border payments in Brazil and Mexico which are growing strongly and becoming a relevant percentage of our payment volume mix.

On the mobile payments front, there have also been very encouraging early-stage advances, demonstrated by the steady adoption and usage growth of some of the innovations we have recently launched, such as our mobile POS systems and peer-to-peer transfer product.

Our shipping initiatives have also played an important role in growing our marketplace engagement metrics as they continue to perform well, with over 60% of the units shipped in Brazil and over 45% on a consolidated basis being done through MercadoEnvios.

This latter metric is particularly relevant, underscoring the growing adoption of our shipping solution across the board and particularly in Mexico, where just nine months after launch of the solution penetration is nearing 20% of all units sold on our Mexican marketplace. Additionally, adoption of our shipping solution in Colombia, launched during the second quarter of 2015, has also shown encouraging advances in penetration and adoption.

We remain confident that the roll-out of our shipping solution will continue to contribute synergies to our enhanced marketplace, which is already a compelling value proposition, and will also serve as a tool in sustaining growth rates for our business, going forward, while helping us to continue to bridge the gap with first-party retailers.

In conjunction with what we had mentioned during prior quarters, we not only aspire to drive the penetration of our MercadoEnvios shipping solution on our marketplace to levels similar to what MercadoPago has shown, but we have also begun to offer our shipping solution to off-platform merchants during the third quarter of 2015 in both Argentina and Mexico.

We have also made important advances in regards to our cross-docking initiatives in an effort to increase our shipping offers and shorten delivery times, provide the best prices, and maximize value to our customers.

On this front, we continue to grow the percentage of items shipped that pass through MercadoLibre-controlled sortation centers and have added additional carriers in Brazil beyond our master agreement with Correios. In Argentina, we have started our systems integration with additional carriers and expect to begin trial runs of cross-docking shipments at select sortation centers by the end of the fourth quarter of this year.

Moving on, we are pleased with the results of our advertising business, as well. The success and continuous innovation of our product ads solution has contributed growth acceleration in local currency revenues of 176% year over year.

In line with this, we have also launched a new product ad: ad placements within search results. This incremental source of revenue could effectively serve as a substitute to the insertion fees we discontinued as a result of the rollout of our new pricing structure in Brazil, as merchants continue to be enticed to purchase our advertising solution in order to redirect traffic to their own listings within MELI. This initiative is currently being deployed in Brazil, and we expect to launch it in Argentina and Mexico, as well, in the near future.

With that, we have covered the key initiatives behind our vision of an enhanced marketplace, including marketplaces, payments, financing, official stores, and shipping, as well as some highlights in other business lines.

We believe that these strong business results and initiatives show the resiliency of our business model, as it continues perform strongly regardless of FX and macro headwinds. Our vision of having more touchpoints with the transaction continues to confirm our belief that the buyer experience is greatly improved and friction between buyers and sellers significantly reduced as we roll out our enhanced marketplace.

This fact is confirmed not only by the strength of the operating metrics that I just covered, but also on how these metrics are flowing through to our financials and by the sustained improvement in customer satisfaction net promoter scores. During the third quarter of 2015, we saw the ninth consecutive quarter of increases in NPS, which grew by another seven percentage points sequentially over the previous quarter.

We'd now like to review how these operational highlights have impacted our financials. As always, growths are year on year unless I specify otherwise.

Net revenues came in at $168.6 million, a 14% growth in US dollars and 68% FX-adjusted. Excluding Venezuela, net revenues grew by 54% in constant currencies.

Income from operations was $45.3 million, decreasing by 4% in dollars but growing by 33% in constant currencies and 32% in constant currencies excluding Venezuela.

Net income before income and asset tax expenses was $47.6 million, decreasing 8% in dollars and growing 31% in constant currencies, 31.5% in constant currencies if we exclude Venezuela.

Net income came in at $45.6 million, growing 35% in dollars and 72% in local currencies, or 91% in local currencies excluding Venezuela.

All resulting in earnings per share of $1.03.

Let me start by breaking down revenue growth for you. Marketplace revenues grew 56% in local currencies, driven by solid unit growth year over year, especially in Argentina where units sold accelerated to its highest level in many years.

I'd like to note an ongoing trend. As our enhanced marketplace strategy penetrates our gross merchandise volume, our core take rate increasingly shifts to and spreads through non-marketplace revenue streams. In other words, as financing and shipping grow, they are taking on incremental take rate at the expense of marketplace take rate.

All in, we continue to monetize more per user, but the segment breakdown favors non-marketplace over marketplace revenues. Hence, marketplace revenues as a percentage of GMV dropped 41 basis points year over year, and non-marketplace revenues that include financing and shipping revenues gained 77 basis points year over year.

With that introduction, let me now give you some color on the non-marketplace revenue growth. Non-marketplace revenues experienced notable local currency growth of 89% in the third quarter.

In order of relevance, this growth was mainly driven by payments, in which merchant services grew north of 100% in local currencies, thanks to the increased adoption of MercadoPago throughout the region, and financing revenues, which grew 81% in local currency, mostly propelled by the adoption of our interest-free listing type, widely adopted in Brazil and more recently growing nicely in Mexico and Chile.

Shipping revenues continue to grow at a fast pace, reaching over 6% of net consolidated revenues during the third quarter.

Advertising continued to accelerate its revenue growth, consolidating as one of the fastest growing components of our top line.

And finally, classifieds revenues, which are also growing, pushed by the professional sellers segment.

The slight deceleration we experienced in non-marketplace revenues is primarily explained by the tough comps from a year ago, since our most thriving initiatives -- free financing and shipping -- were already fully in place by this quarter one year ago.

When looked at by country operation, top line growth in local currencies in our largest markets broke down as following: 47% in Brazilian reais in Brazil; 83% in Argentine pesos in Argentina; 26% in Mexican pesos in Mexico;, and 281% in Venezuelan currencies in Venezuela.

Before moving on, I'd like to briefly comment on three noteworthy impacts on our P&L in terms of costs during this quarter.

First, the Company was granted a tax holiday under the new software development law in Argentina that expires in 2019, as we disclosed earlier in September. This holiday allows us to have a relief in income tax and payment roll taxes related to software development activities which are located in Argentina, retroactive to September of 2014.

Therefore, this quarter we booked a one-time income tax gain of $10.4 million and a payroll tax cost gain of $3.1 million for the retroactive benefit, as well as a total of $6.7 million under both concepts for the current period's business, less $1.4 million of audit fees related to the allowance of the tax holiday.

Second issue is that we partially reduced the yearly accrual on our long-term retention plan this quarter due to the lower stock price levels at which MELI traded, positively affecting margins by 309 basis points.

And finally, foreign exchange headwinds continue to be relevant for understanding the margin compression during the quarter, as our largest operations continue to weaken their currencies against the US dollar. In general, to give you a sense of the FX impact, had currencies remained constant over the past 12 months, EBIT margin contraction would have been minimal, as foreign exchange accounts for 491 basis points of our overall margin declines.

Moving on. Gross profit grew 7% year over year during the third quarter, to $111.8 million.

Gross profit margin was 66.3% of revenues, versus 70.7% in the third quarter of 2014 and 67.4% in the second quarter of 2015.

As MercadoPago and shipping keep gaining share of our revenues, there is an incremental impact of payment processing fees and sales taxes over revenues, which account for most of our gross margin contraction. These effects were somewhat offset by scale in customer support.

Additionally, of the 435 basis points of total gross margin compression, foreign exchange fluctuations explain 171 basis points.

Operating expenses grew 16% year over year, reaching $66.5 million and representing 39.5% of revenues versus 38.8% in the same quarter last year and 44.9% during the second quarter. Let me break all this down for you.

Sales and marketing grew 6% year over year, to $31.1 million or 18.5% of revenues versus 19.9% for the same period last year and 18.9% last quarter. The 142 basis points of scale are mainly driven by improvement in bad debt and scale in marketing expenses, partially offset by higher fraud prevention expenses which are associated with the growth of payments and shipping solutions.

Here, as well, to give you a notion of ForEx impact, excluding ForEx fluctuations sales and marketing would have scaled 62 additional basis points.

Product development expenses grew 26%, to $17 million, representing 10.1% of revenue in the third quarter versus 9.2% in the same period last year and 12.7% in the second quarter of 2015. Growth in compensation costs from continuing investments in our engineering talent pool, which grew almost 70% versus last year in headcount, as well as incremental investments in software, licensing, and consulting costs drove this deleveraging. These cost increases were partially offset by scale obtained by the software development law and long-term retention plan.

ForEx fluctuations impacted margin negatively by 196 basis points, since most of our IT count is located in Argentina, the operation with the smallest currency weakening year over year against the US dollar.

General and administrative expenses increased 28% year over year, to $18.4 million, representing 10.9% of revenues, versus 9.7% a year ago and 13.4% during the second quarter of 2015. This 116 basis points of contraction is mainly explained by a one-time reversal of tax credits during the third quarter of last year which affect comps and, to a lesser degree, by higher compensation costs. This contraction was partially offset by a reduction in the long-term retention plan accrual.

Foreign exchange fluctuations in the case of G&A explain 61 basis points of this margin contraction.

As a result of all this, operating income for the quarter was $45.3 million, or 26.8% of revenues, versus 31.9% in the third quarter of 2014. Of the 502 basis points of contraction in EBIT, 491 basis points can be explained by FX fluctuations, meaning if currency exchange rates had remained constant versus last year, margins would have been almost flat.

Please bear in mind that, as I mentioned before, our operation margins were aided by two large effects this quarter: the software development law relief in labor tax and the long-term retention plan accrual.

Below operating income, we saw $6 million in financially expenses, mostly corresponding to interest accrual on our convertible bond issued last year.

Interest income was $5.8 million, up 32% year on year due to higher interest rates and larger invested amounts compared to the third quarter of 2014, mainly explained by MercadoPago's growth and the consequent float and cash balance increases that it causes versus the last year.

Our ForEx line is positive $2.6 million in the quarter due to the appreciation of US dollar balances held by our subsidiaries, mostly explained by our Brazilian and Argentinian holdings, and partially offset by US dollar-denominated liabilities in some other markets.

Net income before taxes totaled $47.6 million, down 8% year over year and representing 28.2% of revenues versus 35% during the third quarter of last year.

Income tax expense was $2 million in the third quarter, a blended tax rate of 4.2%. This line item saw the highest positive impact of the software development law, a total of $16 million -- $10.4 million corresponding to prior-period's adjustments. Excluding non-recurring impact of these tax adjustments, the blended tax rate for the period would have been 27.2%, down from 34.9% in the same quarter of last year and 41.9% during the previous quarter.

Net income came in at $45.6 million, or 27.1% of revenues versus 22.8% in the third quarter of 2014. Excluding one-offs, net income was $33.1 million, or 19.6% of revenues.

This resulted in a basic net income per common share of $1.03 -- $0.75, excluding from prior-period adjustments, versus $0.76 in the third quarter of 2014, a fair apples-to-apples comparison eliminating one-off impacts.

Purchases of property, equipment, intangible assets and advances for property and equipment net of financial liabilities during the quarter totaled $8.2 million.

For the period ended September 2015, free cash flow -- defined as cash from operating activities less payments for the acquisition of property, equipment, intangible assets, advances for property and equipment, net of financials liabilities -- was $6.3 million, versus $42.1 million in the same period last year.

Cash, short-term investments, and long-term investments at the end of the quarter totaled $526.8 million.

Wrapping up, we declared our quarterly dividend of $4.5 million, or $0.103 per share, payable on January 15, 2016, to shareholders of record as of the close of business on December 31, 2015.

This concludes my review of the business for the third quarter.

Summarizing what we've seen, we'd like to reiterate that we envision the opportunity to be capitalized in ecommerce as large as we have ever seen it, given the infancy of the industry combined with our unique regional leadership. Not only are we just beginning to scratch the surface in what respects to ecommerce, payments, and logistics, but having successfully sorted many competitive and technological challenges over the past years gives us more assurance that we have the ability and capability to successfully execute all our initiatives, going forward.

This is reflected by the performance of our business units across the board as they continued to show strong traction, while also confirming that our business model is not only innovative, but also financially sound and resilient and performs in both positive and negative macroeconomic conditions.

We remain excited about our business and future prospects and will continue to focus relentlessly on innovation and execution of our strategic initiatives, which we believe will lead the way for us to continue to be the de facto ecommerce platform throughout Latin America for many years to come.

We can now take your questions.

(Operator Instructions) Ross Sandler, Deutsche Bank.

This is (inaudible), on behalf of Ross. A couple of quick questions. We know you don't provide guidance looking forward. But given the environment, could you give us a sense of what should be the EBITDA margin we should assume long term and medium term? And then, I just have a quick follow-up on that.

As you mentioned, we don't give guidance. I think what we've tried to do as an indicator of what's happening with the business is to give you very specific call-outs of how much of the margin contraction has been foreign exchange related and how much of it has actually been the operational cadence of investing behind our business.

And I think going forward, what you should see -- and of course stripping currency -- is what we said at the beginning of the year. We feel extremely positive about some of the initiatives that we've been rolling out on the shipping and logistics front, on the payments front, on the off-platform payments front, in customer service. And we feel that this is the right moment to invest behind these initiatives to continue to consolidate our top line growth and grow at what probably are above-market rates in most of our markets.

Okay. Great. And then, just a quick one. Could you give us a sense of what was the penetration of free installments in Argentina and maybe the other countries you operate in?

Sorry. Can you repeat that?

Yes. Just wondering if you could give us a sense of the penetration of free installments in Argentina and in the other countries you operate in?

Sure. Absolutely. Let me give you the total financed volumes for the different markets, which is a combination of free financing and not-free financing. But it's the overall flow of credit and over time should migrate towards free installments.

So, in Argentina, it's in the mid-30%s. Brazil is about 75%. Mexico is in the low-20%s. And then, it's very recent launch in Chile.

Great.

Gene Munster, Piper Jaffray.

Congratulations. Pedro, you just mentioned that you believe that you can grow at or above overall ecommerce rates in most of your geographies. Would Brazil be considered one of those countries that you believe you can grow at or above?

And then, second, in terms of the impact of what's happening in Argentina and the broader view about a potential devaluation, how should investors kind of map out that potential impact over the next several quarters?

What we saw this quarter -- let me just give you some of the call-outs again -- Brazil grew revenues in Brazilian reais at 46%, grew GMV in Brazilian reais at 30%.

So, we believe -- and we'll have to wait and see some more reported numbers from others -- but all the data that we've seen out of Brazil showed significantly weaker numbers in terms of ecommerce growth for this quarter. So, our sense is that certainly our marketplace at this point in time is growing at above the rate of ecommerce in Brazil.

Okay.

With regards to Argentina, I think we've had some overall market-friendly news on the political side, with the first round of elections. There's still a second round of elections to come, and I think we should probably wait to see what the outcome is. And at that point, it might make more sense to give some color on what we see going forward in terms of the prospects for Argentina.

Okay. And then, just I guess one final question. You talked about the impact of shipping and finance on making more money from existing users. Is that -- I assume that's a trend that you would expect to continue? Is there any reason why that trend may pause temporarily?

I think when we look at our monetization rates, we continue to see our shipping initiatives and our financing initiatives as businesses that are both important drivers of a better user experience for anyone buying or selling on MELI. And additionally, they also generate incremental volume for us in terms of revenues.

Now, if you look at what the evolution in the different geographies is, is right now we have Brazil very well penetrated with both of those services and the other markets a few steps behind and growing. So, long term we expect to see levels of penetration across the board in our different geographies reaching Brazilian levels, and that should be very incremental to revenues.

Short term, if you look at sequential monetization, you might see it flat line a little bit -- it actually did this quarter, sequentially -- simply because the catch-up from the smaller markets towards Brazilian levels isn't happening overnight. And so, there's a mix shift away from Brazil in terms of revenue to other countries that are still lower in terms of take rate.

So, the answer is, long term we continue to see improved monetization in take rate from shipping and from finance. There might be some smooth-line quarters sequentially.

Great.

Stephen Ju, Credit Suisse.

Pedro, anything you can share in terms of the uptake rate among your sellers on the new search ad unit? And how do you think your sellers are going to be balancing this product versus the use of interest-free payments as a means for incremental lead generation on your platform?

Stephen, can you just repeat -- sorry about that -- the second half of the question. I got the first half.

They could either use the ads in the search results or they can use interest-free financing as a means of lead generation. So, your sellers have multiple, I guess, channels for generating leads. So, how do you think they'll balance the use of one versus the other?

Great. Let me just start with search products, what we're doing -- just to make sure, because I think there are different flavors in different marketplaces globally -- is we have began in Brazil to inject within search results sponsored ads that look a lot like the core listings. But if you click on them, they redirect back to a MELI listing. And it does have a legend that says that it's a sponsored insertion.

So, it's not that we're actually charging CPC on the core search results, but every "x" core search result listings, whether on mobile or desktop, we will inject a paid advertising.

So, we think there's tremendous potential there in terms of incremental inventory. It keeps the user within our website or mobile experience by redirecting back to a listing on MELI. And the initial uptick is actually quite positive.

So, I think we're optimistic about that product rolling forward. It has only been rolled out to 50% of the Brazilian volume, as we speak, and to no other markets. So, we need to continue monitoring that, going forward.

In terms of the choice between installments as a way to get preferred search result or opting for the advertising product, we're seeing a bit of both. So, depending on the seller profile, the ASP side -- is it an item that credit will really drive more volume, or is it perhaps a lower ASP item where placement is more relevant? -- sellers are choosing. So, I don't think it's one or the other.

We have done away with placement fees in Brazil. And so, many of the sellers that used to pay up for the placement fees are opting for the search advertising.

So, at this point, I think there's no conclusive data that says that it's one over the other; it's very driven by seller profile and by product profile.

Thank you.

Marcelo Santos, J.P. Morgan.

My question is about GMV growth. In Brazil, you mentioned a figure of 30%. And looking to your regulatory filings, it looks like this figure was more close to mid-teens in the first half of the year. Maybe I'm not reading that correctly, but that's what I get from the filings. So, was there actually a real acceleration in GMV in the country? This is the first question.

When we look at GMV in reais in Brazil, you are correct. It grew 11%, Q1; 15%, Q2; and 30%, Q3. So, definitely we've seen very strong improvement in our business in Brazil. And I would say it's a combination of, first of all, the continued penetration of payments, of financing, and of shipping, which make for an improving user experience.

And also, if you recall, one of the things we called out is that as we aggressively pushed the enhanced marketplace, to a certain extent certain transaction profiles that didn't want to use the incremental services were by design being left out of the marketplace.

We're [now] at the point where we're beginning to lap over the part of last year where we did away with that transaction profile. And so, this is genuine growth on what we believe is a much better transaction profile, in terms of the user experience and also that we monetize better.

Remember that in Brazil we're already doing roughly 95% of all marketplace transactions through MercadoPago; 75% of those have a credit overlay and over 60% are being done using Envios. So, really, very, very strong deployment of the enhanced marketplace there driving that growth.

Okay. And the second question, more or less related, is with the new way of pricing that you have, what was the impact on take rate, specifically on the marketplace; so, excluding that take rate increase that spills over to non-marketplace?

There are a couple of things to bear in mind. As you anticipate there, the new pricing, two things happen. First of all is it shifts revenues away from placement fees that we used to have towards either financing fees, because one way to get the preferred placement is to offer the listing through [Parcelado Seguros]. And also, to a lesser degree -- referring back to Stephen's question -- those placement revenues are also moving towards advertising, which are both non-marketplace segments.

So, one thing you'll see in Brazil is a dislocation from marketplace take rate to non-marketplace take rate.

And then, the second piece is it's probably too early to draw any definitive conclusions. It's only been live for a part of the third quarter. So, going forward, we can give you more detail.

But at the margin, there's a slight decrease in core marketplace take rate as a consequence of this revenue shift and of the incremental revenue not necessarily covering for the placement fees that we used to charge.

Okay.

Sorry. Just one final clarification. All in, on a sequential basis, the Brazilian take rate -- just to give you an order of magnitude, it's 10 basis points. So, it's essentially flat Q on Q, consolidated Brazilian take rate. Year on year, obviously it's up significantly.

All right.

Steve Weinstein, ITG.

I have two questions. The first one, I think you may have just partially answered. But in looking at the new pricing structure in Brazil, do you think from a seller's perspective it's a price increase, neutral, or decrease -- from their point of view?

And then, second, without having the placement fees, the incentive is obviously to list a lot more items, and there's probably less discretion coming from the seller's standpoint. I'm wondering what you have done from either a technology, a search algorithm, standpoint or how you're choosing to display the inventory to make sure that buyers are seeing the best items and the most relevant items when they visit the site?

Let me just start with the second question first, because I think that's really what drove the decision. When you look at what we've done with pricing, clearly what we were trying to accomplish here was not a price increase or a price decrease. It was, a, by removing placement fees which were not success driven to make it more enticing for sellers to list large and larger inventories with us.

Also, as we work more and more with large retailers and branded retailers, what they want to be able to do is to put inventory up and not have to worry about duration dates for that inventory. For a retailer, inventory basically is live until you run out of units. Placements fees had 30- or 60-day durations. So, we were adding complexity that branded retailers typically don't want to deal with.

By no longer having the placement fees, we can have inventory that is live on the site until there no longer are any SKUs left, which is going to be instrumental in helping us continue to push more aggressively with large retailers and branded retailers on the official store initiative.

Obviously, we're doing this because we're confident that our search and our sorting capabilities can handle this without hurting discovery or search or relevance for buyers. So, it's not something that concerns us. We think we've come a long way and we can handle that.

And then, the first question, is it a price increase or is it a price decrease? It's really -- we've tried to manage this in as price-neutral a way as possible. You can't always predict the elasticity. So, that's an ongoing process. But by and large, I think our calculations have been pretty accurate. As I said before, sequential take rate in Brazil has been pretty much in line with where it was the previous quarter.

So, so far, all the data we've seen, we've been able to switch pricing from a still placement fee model to a fully back-loaded variable model, without affecting monetization, which was our goal coming into this.

Sounds great.

Thank you. I have no additional questions at this time. I would like to turn the conference back over to management for any additional comments.

Great. No additional comments. Thanks, everyone, for listening. And as always, we look forward to updating you again with full-year results next quarter and giving you some idea as to what our plans are for 2016.

So, thank you very much.

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.