美卡多 (MELI) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MercadoLibre Third Quarter 2016 Earnings Call. (Operator instructions) As a reminder, this conference call may be recorded. I would now like to turn the conference over to Federico Sandler. Your line is now open.

Hello everyone, and welcome to the MercadoLibre Earnings Conference Call for the quarter ended September 30, 2016. I am Federico Sandler, Head of Investor Relations for MercadoLibre. Our senior manager presenting today is Pedro Arnt, Chief Financial Officer. Additionally, Marcos Galperin, Chief Executive officer, will be available during today's Q&A session.

This conference call is also being broadcasted 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 on 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 disclosed 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 these measures to the nearest comparable GAAP measures can be found on our third quarter 2016 earnings press release, available in our Investor Relations website.

Now let me turn over the call to Pedro.

Thanks Federico, and welcome to everyone to our Third Quarter Conference Call for 2016. I'd like to kick-off by stating that this has been another excellent quarter for us. We continue to make progress in expanding our enhanced marketplace across all our geographies as we grow the adoption of our payments, credit, and shipping solutions in our marketplaces. More importantly, as a consequence of this, we have been able to sustain high growth rates in our trading volume, revenue, and customer satisfaction metrics.

Our off-marketplace business also had an excellent quarter, as our merchant services offerings for third party online customers and also offline customers through mobile POS's continue to gain share of overall revenue and payments volume, and are becoming a growing portion of our business.

With that in mind, let me walk you through some high-level operational results that we've delivered. During the third quarter of 2016, successful items grew 40%, reaching 47.6 million units. Gross merchandise volume rose 46% in local currencies, reaching $2 billion. Total payment transactions grew 68% to $36.8 million. Total payment volume grew 85% on an FX-neutral basis, reaching $2.1 billion, and surpassing our marketplace GMV for the first time in our history. And, 7.7 million new users were registered on MercadoLibre, 26% more than during the third quarter of 2015, bringing our confirmed registered users to 159.3 million.

These operational highlights I have just walked you through have led to a solid top-line growth on an FX-neutral basis of 66% year-on-year. Revenues in US Dollars grew 37% year-on-year, 14 percentage points above our three-year compounded annual growth rate and the highest growth rate we've delivered over the last four years.

Going forward, we remain committed to building and executing our enhanced marketplace as the central focus of our strategy, with a shift towards driving penetration of our shipping and fulfillment efforts, and growing payments adoption in smaller markets that still lag our larger markets where we have reached, or are on our way to reaching 100% adoption of MercadoPago.

Let me get into greater detail regarding our Marketplace business. We are encouraged by how strong execution continues to be across most markets. On this note, our Mexican and Brazilian businesses were high points of the quarter, performing very well in key metrics like units sold, GMV growth, and revenues, while also making significant strides when it comes to penetration of the value-added services we offer.

More specifically, Mexican units sold accelerated to a multi-year high of 33% year-on-year, up from 8% last year. Revenues in local currency also accelerated to 36% year-on-year, a 10 percentage point improvement when compared to the same period last year.

Our Brazilian business also keeps performing exceptionally well, and continues demonstrating its resilience despite tough macro conditions. Revenue growth in local currency accelerated to 62% year-on-year, a 15 percentage point increase when compared to the same period last year. On an FX-neutral basis, GMV grew 56% year-on-year, the third consecutive quarter of growth above 50% in that metric. Successful items grew at an equally impressive 61% year-on-year, being not only the fastest pace of growth in over 4 years, but also 25 percentage points above our three-year compounded annual growth rate.

As a counterbalance to the strength in those two markets, our Argentine operation, despite still delivering high growth, decelerated across certain KPIs. The slowdown in that business can be attributed primarily to our decision to make the adoption of MercadoPago mandatory on 100% of its listings that sell new items by quarter-end. We believe that the long-term impact of this decision is positive. Yet, as we also saw in Brazil when we took similar measures a few years ago, the short-term impact is to slow down the business, as users who are not accustomed to having to pay through MercadoPago generate a drop in conversion rates. In addition, the Argentine business conversion rates were also negatively impacted by a strike among workers of our largest carrier partner in Argentina during the month of September.

Getting back on highlights for the quarter, category product selection continues to deepen at a fast pace, as the number of live listings being offered on our marketplace grew over 67% year-on-year, reaching 70.4 million listings. This growth in selection confirms that the changes we performed to our pricing strategy have been powerful igniters to keep deepening the SKU count on our platforms.

We also remain pleased with the advance of mobile on MercadoLibre as we strive to provide our users the best user experience across multiple screens and devices. During the third quarter, we continued to perform usability enhancements that contributed to capturing the growth of e-commerce into smartphones and tablets. Six out of ten new users registered through mobile devices during the quarter, while mobile sales reached slightly over one-third of our total gross merchandise volume. Finally, our mobile efforts contribute to 60% of our traffic, giving us great confidence that we are taking the right steps on our path to becoming a predominantly mobile company in the not so distant future.

Our payments business also performed well all throughout, processing over $2 billion of total payment volume for the first time in our history during a single quarter. In line with that, as mentioned earlier, our payment volume also surpassed for the first time ever, core Marketplace's gross merchandise volume. These are two very significant milestones for us, as they not only present material evidence that our payments strategy is the right one, but also that we are scratching the surface when it comes to the growth opportunities present in the payments spectrum.

Exiting the quarter, three out of four items sold on MercadoLibre are being paid for and settled through MercadoPago. This is a promising data point, given that we now know that buyers who adopt our payment solution show significantly higher net promoter scores, increased monetization rates, and better lifetime value metrics. This level of penetration is also a testament to the success we have had in driving adoption of our payment solution on our marketplaces across Latin America.

On a country-by-country basis, I am happy to report that as of this quarter, effectively 100% of transactions that take place in our Brazilian marketplace are done through MercadoPago.

On-platform penetration almost doubled in Mexico from where it was a year ago, reaching 76%. Argentina increased 20 percentage points during the same period, also to 76%, which is great news long term despite the short term dislocation to conversion rates this has caused and that I addressed earlier. Colombia and Chile delivered excellent results as well, with penetration reaching 47% and 28% this quarter versus 18% and 7% a year ago.

As our payments services keep spreading beyond our marketplace and into the wider e-commerce arena, MercadoPago's merchant service business continues to be one of the fastest-growing segments within our company. This quarter's results were no exception to this. Great execution of initiatives including cross-border payments and open platform integrations, combined with improvements of functionalities and product features, resulted in off-platform total payment volume growth on an FX-neutral basis of 101%, the sixth consecutive quarter of triple-digit growth in that metric.

Offline payments efforts have also evolved robustly during Q3. Adoption of mobile POS systems by merchants in Brazil continues to deliver promising results. Within a little over a year of its launch, transactions done through these devices already represent more than 20% of Brazilian off-platform total payment volume. Additionally, leveraging on the momentum we gained in Brazil, we have now launched our mobile POS solution in Argentina and Mexico during the quarter.

Continuing on to our shipping business unit, we are more convinced than ever that providing a good shipping solution to our users is a key piece of our enhanced marketplace flywheel. Not only that, but it is also a tool that will play a critical role in helping us maintain high growth rates for our business going forward, as the shipping experience will be a determining factor in delivering a world class user experience and customer satisfaction.

Shipping usage metrics have kept tracking positively, as already one out of every two items sold on MercadoLibre is being done through MercadoEnvios. Items shipped on the platform grew 86% to 23 million units during the quarter, with gains across all countries. On a country-by-country basis, close to three-quarters of items sold in Brazil are already being shipped through MercadoEnvios. In Mexico, where as of the month of August we began offering free shipping on items above $30 as well as fulfillment services to our merchants, results have exceeded our expectations with penetration of shipping on items sold reaching 43% versus 18% a year ago.

Additionally, adoption of our shipping solution in Colombia and Chile have also shown very encouraging advances in terms of adoption. These results for MercadoEnvios are very important to us. As we continue to scale the business for the long term, fulfillment, shipping and logistics will become key instruments to maximize value to our users.

Our classifieds business made firm progress in its transition towards a monetization model that charges listing fees only to professional sellers, and is free for regular users. Revenues from professional sellers grew 20% year-on-year in local currencies, and already represent two-thirds of the segment's total revenues, while listings grew 40% year-on-year to 2.4 million, an all-time high. Lastly, we have made a significant progress in the convergence of our classifieds platforms in Mexico and Colombia, to a more uniform experience which resulted in a significant product improvement and more verticalized experiences for our users.

Our efforts around customer experience have also paid off during the quarter. We have deepened the penetration of our online contact channels, which give users immediate access to a customer service representative, shortened queues, and reduced contact rates. All this has resulted in healthy metrics indicating we are responding faster and more effectively to our customers, thus elevating once again our Net Promoter Score during the third quarter of 2016.

One final update on office management and infrastructure. We are pleased to report that as of August 15th, we moved into our new campus in Brazil. With design inspired on campuses in the US, and particularly Silicon Valley, this state-of-the-art complex can house up to 2,000 employees in 183,000 square feet of shared workspace. The new development was based on three main objectives -- as a tool to attract and retain top talent, bring partners and customers together, and promote sustainability. Following these objectives, the construction of our new campus not only promotes integration among all our employees with shared workspaces in a great living area, but also allows us to be closer to our customers and partners in the city of Sao Paulo.

Additionally, our new headquarters in Brazil will also include several solutions that promote sustainability of the environment. Case in point, the campus has 2,000 photovoltaic rooftop panels that will generate half of the energy distributed on the campus -- all this in addition to having a 100% LED automated lighting system, which effectively reduces our power consumption by 75%.

This wraps up the strategic the progress report for the quarter. At the core of all these initiatives we've just covered is a commitment to a constant process of innovation that will keep allowing us to understand our users more, and consequently help us transform their transactional experiences for the better. All-in-all, we are pleased with the way each of the aforementioned aspects of our business are coming together to deliver value to our users, and look forward to continue developing the necessary capabilities in a rapidly-changing e-commerce space.

With that, let's review how these operational highlights have impacted our financials for the quarter.

We delivered net revenues of $231 million, a growth of 66% year-over-year on an FX-neutral basis, and the strongest quarter on record from a revenue perspective. Excluding Venezuela on an FX-neutral basis, total revenues grew by 61% year-on-year. In US Dollars, revenues grew 40%, the highest growth rate on a multi-year high unit volume sales.

Looking on a country by country basis, revenue growth for the third quarter on an FX-neutral basis was as follows -- Argentina 68%, Brazil 63% (sic - see press release, "62%"), Mexico 36%, and Colombia 52%. We saw strong marketplace revenue growth driven by mainly the acceleration of our unit volumes in Brazil and Mexico. Total marketplace revenues grew 71% year-on-year on an FX-neutral basis, the fourth consecutive quarter of growth above 60% in that metric.

In US Dollars, marketplace revenue growth came in at an equally strong 36% year-on-year, the fastest rate of growth in over two years. Non-marketplace revenues also experienced strong growth rates. In local currencies non-marketplace revenues grew 60%, and in US Dollars an equally solid 38% year-on-year. The main contributors to this growth came from the following items -- MercadoPago processing revenues grew 88% year-on-year on an FX-neutral basis driven by the solid growth of payments volume outside the marketplace. Shipping Revenues grew 82% year-on-year on an FX-neutral basis as adoption of our shipping solution in Brazil, Mexico and Colombia continue to penetrate items sold and gross merchandise volume. Our advertising business grew 84% year-on-year on an FX-neutral basis, thanks to the success of our Product Ads in Search format.

Moving down to gross profit, it grew 30% to $145.6 million. That leads to a gross profit margin of 63% of revenues, versus 66% in the same quarter last year, and 63% in the second quarter of this year. The year-on-year margin contraction is attributable to investments in hosting and customer service, representing 155 basis points of contraction, and 167 basis points of contraction from higher sales taxes due to the increased adoption of payments, credit and shipping services, as well as costs related to the sales of our mobile POS payment devices.

Operating Expenses totaled $91.9 million, up 38% from last year's third quarter, on an as-reported basis. If I break down our OpEx lines, Sales & Marketing grew 28% year-on-year to $39.7 million, growing less than revenues and representing 17% of sales. Product Development expenses grew 53% year-on-year to $26.1 million, representing 11% of revenues. Expense growth in this line continued to dilute margins as a result of our investments in our IT headcount, which grew over 40% year-on-year. General & Administrative expenses grew 42% year-on-year to $26.1 million, growing faster than revenues, and representing 11% of sales. Salaries and wages explained most of the G&A expense growth, driven by accruals to our long-term retention plan.

On that matter, increased compensation costs related to the LTRP were a relevant driver of margin compression across all our OpEx this quarter. The year-over-year impact of the retention factor alone was 420 basis points of negative margin compression, as our stock went from $91 in September 2015 to $185 by the end of September 2016.

As a result of this, on an as-reported basis, operating income for the quarter was $53.7 million, up 19% versus last year. Below operating income, we saw $6.4 million in financial expenses mostly corresponding to the interest accrual on the convertible bond we issued in June of 2014. Further down, interest income was $9.9 million, up 71% year-on-year, explained by higher interest rates on a larger investment base, as our MercadoPago stored balances have increased versus the third quarter of last year. Our ForEx line was negative $4.8 million during the quarter, mainly due to the depreciation of US Dollar balances held for the most part by our Brazilian subsidiary as the Brazilian Real appreciated during the quarter.

Income tax expenses ascended to $13.4 million during the quarter, yielding a blended tax rate for the period of 26%. Consequently, as reported net income came in at [$38 point million] (sic - see press release, "$38.9 million") or 17% of revenues in during the third quarter, resulting in a basic net income per common share of $0.88. Purchase of property, equipment, intangible assets and advances for property and equipment totaled $22.9 million. For the period ended September 2016, free cash flow, defined as cash from operating activities less payments for the acquisition of property, equipment, intangible asset advances for property and equipment, net of financial liabilities, was $78.7 million, versus $6.2 million (sic - see press release, "$6.3 million") in the same period last year. Cash, short-term investments and long-term investments at the end of the quarter totaled $627 million.

Wrapping up, we declared our quarterly dividend of $6.6 million, or $0.15 cents per share, payable on January 16, 2017 to shareholders of record as of the close of business on December 31, 2016.

And with that we can end today's call, but before, I'd like to once again state that we believe our strong third-quarter results both from an operational and financial perspective are consequence of our focus on execution, user experience and customer satisfaction. As we head into the last quarter of 2016 and into 2017, our efforts going forward will continue to be geared towards leveraging the gains we have made from advances in our enhanced marketplaces, and off-platform payment efforts. We hope to continue to make strides on growing our payments business both on- and offline, and in building our logistics capabilities so as to deliver an efficient and cost effective shopping experience for our users. We can now take your questions.

Thank you. (Operator instructions) Our first question comes from the line of Gene Munster of Piper Jaffray. Your line is now open.

Hey, good afternoon, and congratulations on your continued operational excellence. I have a question on the enhanced marketplace. You talked about shipping fulfillment and payments as being the focus. Can you give us any sense in terms of what the necessary investments are to maintain the momentum in those in the next year? And then, separately, is some of the acceleration and the growth that you had talked about, was because of change in the pricing started in December? I guess it's a two-part question. One is, I guess starting this December, should we start to expect a little bit of a step-down as we anniversary that benefit? And second, in Mexico in particular, that's a jump despite the fact that Amazon is more of a player there -- any sense in terms of how Amazon, overall, is doing relative to your business in Mexico? Thanks.

Thanks Gene, hi. So, the first question on pace of investment, as you know, we don't guide. I think you're seeing, if you look at the recent P&L, that we have been investing behind these businesses and we've been seeing very strong results. What we're building out today in terms of fulfillment in shipping continues to be for now, an asset-light approach, where we're working through partners in both the carrier and also the warehousing spaces. So, we don't anticipate under the current plan, huge increases in CapEx.

The same goes in payments, where we're seeing margin compression at the gross margin level as that business grows, but I think if you look at the recent past, you can get a sense of the cadence at which margins have been compressing as a consequence of growth in those businesses. And again, always important to mention that we firmly believe that the strong top line we're seeing is a consequence of continuing to push payments, credit, shipping, fulfillment, because they build a much better user experience.

In terms of changes in pricing, if you recall the changes in pricing have been staggered in the different countries throughout the last year. And if we look at the evolution of live listings in the different countries, they continue to be very solid but we can see there that Brazil is beginning to slow down its rate of listing and SKU growth somewhat as it anniversaries the changes in pricing. But that's getting, to a large extent, covered by other countries like Argentina, Mexico, Chile, and Colombia where we're continuing to see acceleration in the growth of live listings, because those countries launched the new pricing schemes somewhere later. And, even Brazil, where we're decelerating, listing count is still growing close to 90% year-on-year. So, still very, very strong metrics in terms of listing growth.

And then finally, the question on Mexico -- we've seen very strong performance in Mexico, and it's a consequence again of the rollout of our enhanced marketplace and our ability to deliver a better experience for our users. Still work to be done there. We're going to continue investing and improving what we offer our users in terms of payments and shipping. Mexico is the country where we first launched fulfillment services, and hopefully as we continue to focus on that the business will continue to perform well.

Thank you.

Thank you, and our next question comes from the line of James Friedman of Susquehanna. Your line is now open.

Hi, thanks, it's Jamie. Pedro, I was wondering if you could help us dimensionalize some of the payments volume. I know you spoke to some of this, but how should we be thinking about the non-marketplace TPV, and where is that originating from? Is that the physical point of sale? Is that at small businesses? Is it micro-merchants? Is it mobile, [IPOS]? Some color about where that growth is coming from, would be helpful.

Great. So, the payments business away from the marketplace has been performing very well, through its different channels. It's about 21% of our TPV comes from non-marketplace, as we just said in the prepared remarks. That's growing at 1 percentage point above 100, so 101%. So, very, very solid growth. That's on an FX-neutral basis.

We also indicated that in Brazil, which is the country where we have the longest track record now of the physical POS's, so the offline business, that already represents about one-fifth of Brazilian off-marketplace [TPV]. So, that would be what's coming in terms of offline growth.

And then, customer segments are fairly varied. I think we highlighted two that are growing very strongly, or performing very well in cross-border payments, helping global players process and settle payments in Latin America. And then also, it's a business where we continue to work with large customers and also with a long tail, and the growth is fairly even across most of that merchant service business.

Again, when you're growing 101% on an FX-neutral basis, you're growing quite well across most of your segments.

If I could just have one follow-up, could you give us some perspective about the mix of large versus small merchant, as you're growing the non-marketplace revenue? TPV?

Yes, I don't think we've been disclosing the specific growth rates for the different segments, but again, we see solid growth across the board.

Okay. Thanks for the follow-up.

Thank you. Our next question comes from the line of Irma Sgarz of Goldman Sachs, your line is now open.

Yes, hi, good afternoon, good evening. Just following up on Mexico, just judging from the rate of growth that both you are reporting and from what we understand some of the main players are growing in that market, do you understand that potentially the market is now getting to that sort of long-awaited tipping point, of finally taking off and realizing its potential? Do you think you are actually creating some of the ecosystem that was needed for the customer to be moving online? And what do you think is sort of the key catalyst, there? Is it more on the payments side, or is it more in shipping? You mentioned the free shipping that you're offering there, at very attractive conditions. Or is it something else? My first question.

And then, in terms of returning back to the off-platform, offline payments, the POS systems, specifically in Brazil, where do you think your competitive advantages lie compared to some of the other operators in the market? Because we understand that it's quite a competitive marketplace. What do you think you are offering that is different, that is driving the rapid adoption rates? Thanks.

Hi, Irma. So, first of all on Mexico, we're seeing obviously strength coming out of our Mexican business. It's been some of the highest growth rates in a very long time. I still think, and we believe, there's still significant growth around Mexican e-commerce. This is still very early stages. Mexico has lower levels of retail online than other countries in the region. So, are we getting closer to a tipping point or not? Hopefully, but there's still significant run room for growth, and this is still very early stage -- not only in Mexico, but everywhere, but I would say even more so in Mexico.

Catalysts, I don't think we try to separate. I think we see the power of combining the different pieces of the marketplace. You can pay online if you have access to credit. If you have free shipping, which we think is helping a lot in Mexico and improving selection, all of that goes into just a combined better user experience. And I think if you try to offer only one of those, it's not nearly as powerful. So, we look at it as a bundled ecosystem, and enhanced services that all play off of each other.

And then, if you look at the penetration rates in Mexico of the different services, there's still room to grow. Shipping, we said, is at 43% for the full quarter in Mexico. Payments, we said, is at 75% full-quarter. So, there's still room to grow the adoption of those services on our platform.

Moving over to your second question on Brazil, in terms of mobile POS's, first of all, it's a very large addressable market, still in its very early stages. We're coming in with what we believe is a disruptive approach to this. We are using the distribution capabilities that we have on our marketplace, our contact with merchants, our ability to do effective online marketing, and we're also servicing segments that haven't historically been a strong focus for large banks and large acquirers. So, in a very large market with underserved segments, there's also significant room for us to grow and to continue to offer that service effectively.

Perfect. Thank you very much.

Thank you. Our next question comes from the line of Marcelo Santos of JPMorgan, your line is now open.

Hi, good evening. Thanks for taking the question. My first question is regarding the cross-border payments that you mentioned had a good performance. So, just a little bit more color and what kind of users and usage is this? And the second one is about the competitive environment in Brazil. Just wanted to understand how you're seeing, given that there are other players there, a growing marketplace. So, if you're seeing some maybe pressure into larger sellers, or if it's something that is really not moving the needle? So, that's my two questions.

Great. So, cross-border payments is facilitating the operations typically of larger, global consumer internet companies who do business in Latin America, sometimes cross-border business, to collect and settle their payments throughout the region. So, we work with large Asian companies, we work with many North American companies, that essentially need to collect throughout Latin America from Latin American or foreign consumers in the region, and use our cross-border capabilities to collect and then settle. We can offer them local credit cards, local payment means, and a lot of very local capabilities that they otherwise might not have if they use other global partners. Clearly, it's a very rapidly growing segment which reflects that we're doing a good job there.

Competitive environment, I think we focus on our business and how it's performing in Brazil. This is the fifth consecutive quarter of units sold acceleration. Our Brazilian business grew 61% in terms of units sold, which is obviously an incredibly strong number, and I think that's what we need to continue to do -- focus on our users and how our business is performing, and if it continues to perform this way then obviously we'll continue to gain shares.

Okay, thank you very much.

Thank you. Our next question comes from the line of Michel Morin of Morgan Stanley, your line is now open.

Thank you. So, two quick questions, Pedro. First, the free shipping in Mexico, can you give us a little bit more detail as to kind of what led you to that decision to start offering that? And is that something that is still ongoing, and how long would you expect to keep that going?

And then secondly, on Argentina, you mentioned the switch-over and the impact that that's had on growth in terms on forcing Pago adoption. How long should we expect that to take before we see the growth rate recover? Thank you.

Michel, sorry, can you repeat the second one? We got cut off slightly.

Yes, it was on Argentina, and the impact of the Pago adoption. Based on your experience elsewhere, how long of an impact should we expect? How long before your growth rate kind of returns, return to where they should have been?

Right. So, first question on free shipping in Mexico. First of all, consumers like free shipping, and it improves the user experience and the net promoter scores. So, we're experimenting with that, and the results we've seen so far are positive and we'll continue to experiment. Just one note, remember that because of the way we account for the shipping, where we are not the ones actually doing the shipping but our carrier partners, free shipping in our financials come up as contra-rev, not incremental cost. Just bear that in mind.

So, continue to experiment, and if we continue to see positive results we'll give you guys update in the future.

Pago, I think in Brazil if you look at the sequence towards the back half of 2014, in the case of Brazil -- and that doesn't necessarily mean it's the same everywhere -- it took two to three quarters before it really began to spike up again, the growth, once we had been through the transition of getting users accustomed to paying mandatorily through Pago. Obviously, in the case of Brazil, the results eventually have been very, very strong. Let's see if Argentina performs in a similar way, or not.

And just bear in mind that although Argentina did slow down, it's continued to grow GMV on an FX-neutral basis at a healthy rate.

Right, okay. Perfect, thank you. And sorry, on the free ship -- coming back to the free shipping, is that something you've ever done anywhere else before, or is this new?

No, I think it's something that we've communicated widespread, and a program as comprehensive as the one we have in Mexico, this is the first time we've experimented at that scale.

Okay great, thank you very much.

Thank you. (Operator instructions) Our next question comes from the line of Tom Champion of Cowen, your line is now open.

Hi, good afternoon. Thanks for taking the question. Just curious if you could comment on the relationship between listings growth and marketplace items sold? It looks like listings growth was very healthy again this quarter, but items sold growth might have ticked down a little bit, and maybe that has something to do with the policy changes in Argentina? But, wondering if we should think of the very healthy listings growth as a tailwind to items sold growth going forward?

And then, just looping back to Brazil, understand that units growth accelerated -- I'm just curious if Brazil GMV growth decelerated from 64% to 56%? I'm just curious if I heard that right. Thank you.

Sure. So, obviously selection, depth of SKU count, and being able to find what you're looking for on the marketplace is a key driver of our business. I wouldn't necessarily say that they have to be very closely-matched, unit growth and listings, but over longer periods of time we think that better selection and improved selection is one of the critical components of growing units.

It did decelerate somewhat, Q-on-Q as I said, but it's still growing on a consolidated basis, very, very strongly. We're growing listing counts by 67% year-on-year during the quarter. So, we do believe that if we continue to sustain this kind of growth it will be a tailwind for our business.

Oh, right -- so Brazil, yes, Brazil gross merchandise volume on an FX-neutral basis grew at 55% for Q3, and unit growth grew at 61%. So, we continue to see a little bit of category mix shift toward lower-ticket items.

Okay, thank you.

Thank you, and our next question comes from the line of Stephen Ju of Credit Suisse. Your line is now open.

Okay, so thanks. I apologize if this was covered already, but just wondering from a product perspective where you guys are in terms of I guess serving up shipping-as-a-service? It seems like if you are -- I think you made that acquisition a quarter ago, which helps you track packages across the region. So, I would imagine that over time, that is going to be a very good service for the sellers to adopt. And I think you guys mentioned, I think, penetration in Brazil in terms of the number of packages that are being used with MercadoEnvios. So, just wondering from a seller-by-seller standpoint, if you guys are already managing the vast majority of what the sellers sell on MercadoLibre, or if this is sort of small batches of their overall volume, but greater seller adoption? Thanks.

So, let's see. The shipping penetration rates, like we called out -- and if you are looking specifically at Brazil -- is at 72% of all units bought are shipped through our platform. So, obviously, that's a very high percentage. We don't break that up by seller segment, but suffice to say that for most sellers, we're doing most of their shipping on our platform given how high penetration is. And, there's a tendency on shipping for it to be even higher when you look at larger sellers and the long tail.

Mexican penetration is at 43%, that's almost -- it's more than double versus a year ago, so growing also extremely well, as is the case for Colombia and Chile.

So, as we continue to drive overall penetration of the shipping solution, that will mean that a greater percentage of our sellers' businesses are being shipped through us.

And then, the other relevant data point is that as I mentioned earlier, in Mexico as of the second half of this year, we've also begun to offer our sellers fulfillment services and capabilities, which should also help us onboard a larger amount of our large sellers' business as they also fulfill through us.

Currently, I think most of this is largely pass-through on the income statement, where you're not making that much money on it, but as a service is there an opportunity for you guys to I guess charge for the service, either on a per-package basis or on a fixed-amount basis at some point in the future?

I would say that the focus right now is on improving the user experience, onboarding more and more merchants. We see a significantly better cohort in terms of most key performance indicators, both net promoter scores, average selling prices, engagement metrics, when they are buying from merchants who ship through us. So really, the focus now rather than improving our margin, or making margin off of the shipping services, is to drive adoption on the merchant side and usage on the buyer side -- hence, the free shipping promotion in Mexico and the fact that we're not running this business right now with profit in mind. Longer-term, we'll see when we get there.

Thank you.

Thank you. Our next question comes from the line of Michel Morin of Morgan Stanley, your line is now open.

Thanks for taking the follow-up. Pedro, you gave us some data around the number of buyers and the growth in buyers in the last couple of quarters. I was wondering if you could do the same again today? And I also wanted to just follow up on the earlier question about the selling, the average selling price, because on a consolidated basis it has been declining rapidly. So, I was wondering if you can give us a little bit more color as to what's happening there, and maybe update us on where you are in terms of your exposure to consumer electronics? Thank you.

Great. So, unique buyer growth came in roughly in line with where it was last quarter, slightly down, again driven by Argentina. Brazilian buyer growth was 41%, up from 39% the previous quarter. Argentina was down given the issues we had mentioned from about 25% into the mid-teens. So, it's consistent with the successful item growth, what's happening on the geography, per geography base on buyers.

In terms of average selling price, as I said, we continue to see mix shift. Consumer electronics lost another 2 percentage points sequentially in terms of overall mix, from 43% to 41% this quarter, and that's being replaced in part by some lower ASP categories. Fashion is up about 1%, and then the other categories that aren't CE probably account for the rest of that change. So, the mix shift away from consumer electronics continues to carry out. Remember, that that is very much by design as we began to focus on expanding into more and more categories, and that's something we should continue to do as we start looking at consumer packaged goods and other areas of opportunity.

Right, and these are percentages of GMV, right?

Correct, percentage of total GMV.

Of GMV, okay. And this is really the main thing that's driving the average selling price lower, or there were other kind of country-related factors?

Currency tends to be at times an issue. I don't have that in front of me right now. I do have the mix shift, and that's been one of the biggest drivers. Then you could also have trading down in currency issues, but I don't have that off the top of my head.

Okay, that's fine. Thank you very much.

Thank you, and our next question comes from the line of Robert Ford of Bank of America, your line is now open.

Thank you, and good evening, everybody, and congratulations on the quarter, Pedro and Federico. I was curious, what percent of GMV in Argentina goes through Correo OCA, and how long was that strike?

Hi, Bob. Just one second, let me see if I can look at the data here for that.

Yes, because I would expect that OCA moves most of the packages for the drop-ship folks too, right?

Yes. So Bob, OCA is most, most is probably we're talking maybe here, slightly more than three-quarters of the roughly 30% that goes through MercadoEnvios. Okay? So, call that somewhere in the mid-20s of total units shipped.

The strike itself lasted about a week, maybe. The impact lingers on a little bit, as you have delays once those operations start picking up again, and consumers are seeing longer promised delivery windows. Remember that our algorithms predict when you will receive the package. When there is backlog, those delivery promises get extended, and so conversions get hurt as a consequence of that.

Did that have implications for buyer protection in the quarter as well?

No, because we -- when we adjust the delivery promises, the buyer protection is when we are off on what we promise to deliver. So, when the algorithm is aware of what's happening and we can bake in some added time for the strike, that hasn't had a significant impact on buyer protection.

Okay, no, great. And then if I could ask one question, and maybe you can dumb it down for me if I'm asking something that's improper -- but I was curious with respect to the conversion rates on your native apps. And when you look at the deltas versus a desktop experience, do you see opportunities to further improve those conversions, or do you think they're just simply limitations to the interface which will be too difficult to overcome?

No, I think everything we've learned in this business is that through iteration and improving the UX, you can continue to drive improved conversions. When we look at the deltas that still exist, for example if you look at web mobile -- not even native apps -- the delta is huge, and I'm sure we can continue to improve that. And the same applies for the native apps, as well. I mean, every time we redesign, we review, we A/B-test, we find ways in which we can improve it. And those conversions have been going up fairly consistently, and that delta has been shortening, and I expect that would continue to happen going forward.

That's helpful, thank you and congratulations again.

Thank you.

Thank you, and at this time I am showing no further questions. I'd like to hand the call back over to our CFO, Pedro Arnt, for your closing remarks.

Great. Thank you, everyone, and we look forward to giving you our next update at the end of the fourth quarter and beginning of next year. Bye bye.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program, you may all disconnect. Everyone have a great day.