美卡多 (MELI) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MercadoLibre Third Quarter 2017 Earnings Conference Call. (Operator Instructions)

I would now like to turn the conference over to Federico Sandler. You may begin.

Hello, everyone, and welcome to the MercadoLibre Earnings Conference Call for the quarter ended September 30, 2017. I am Federico Sandler, Head of Investor Relations for MercadoLibre. Our Senior Manager presenting today is Pedro Arnt, Chief Financial Officer. Additionally, Marcos Galperín, Chief Executive Officer; and Osvaldo Giménez, Executive VP of Payments, will be available for 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 our current assumptions, expectations and projections about future events. While we believe that our assumptions, expectations and predictions 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 section 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 2017 earnings press release available on our Investor Relations website.

Now, let me turn the call over to Pedro.

Thank you, Federico, and hello to everyone to our third quarter conference call for 2017.

Let's kick off by stating that we have delivered yet another quarter of solid financial and operational results. MercadoLibre is now positioned more clearly than ever as one of the central engines of the digital revolution of the retail landscape in Latin America. In many ways, the quarter has been our best this year so far, and we are delighted to witness firsthand how the company is executing against the set of goals it has set forth. Our aspirations are clear: we will strive to become an indispensable platform for our users that facilitates digital commerce, payments and credit. And as you will see throughout the results I will walk you through shortly, the primary driver in achieving that goal is continuing to grow as fast as possible and to gain as much economy of scale as possible over the next few years.

Throughout the quarter, as we increased the pace of investment behind product marketing and free shipping, we saw exceptional results in traffic, vibrancy and conversions in our marketplaces.

With that, let me now take you through some business KPIs from a consolidated perspective. Units sold accelerated for the second consecutive quarter to 55.8% year-on-year, reaching 74.2 million units sold, one of the fastest paces of unit volume growth in over 5 years. Gross merchandise volume surpassed the $3 billion mark for the first time ever, reaching $3.075 billion and accelerating by almost 40 percentage point year-on-year to 50.7% in U.S. dollars, while on an FX neutral basis, GMV accelerated for the fourth consecutive quarter to 93.8% year-on-year.

Total Payment Volume grew 86% on an FX neutral basis reaching $3.7 billion, while total payment transactions accelerated for the second consecutive quarter to 69.4%, reaching 62.3 million transactions. All of this led to solid revenue growth both in dollars and on an FX neutral basis growing at 60.6% and 79.4%, respectively.

Unique buyers accelerated for the second consecutive quarter to 31.1%, a total of 16.3 million unique buyers. And finally, registered users were up 21% year-on-year, adding 10 million new users during the quarter and surpassing the 200 million mark for the first time.

As we look ahead to the remaining quarter of 2017 and beyond, we will continue to direct our efforts in staying customer-centric and prioritizing the needs of our users. This means continuously innovating and even disrupting ourselves to improve the customer experience on our platforms and to deliver real, differentiated value to buyers and sellers. By making customer choice a priority for us, we continue to generate an ever-improving user experience that drives engagement and adoption of our services and solutions.

Now let's begin by diving deeper into our marketplace business. Let me start with the largest country, Brazil. The performance of our Brazilian marketplace has been stellar during the third quarter, especially as we head into tougher year-on-year comparisons during the second half of the year. Off a comp of 60.7 percentage points of growth during the third quarter of 2016, Brazilian units sold accelerated year-on-year to 68.2%, boosted in large part by our aggressive free shipping offerings and loyalty program, Mercado Puntos. Let me remind you that this is the sixth consecutive quarter of unit volume growth above 50% and also the fastest pace of growth in over 5 years.

As far as GMV is concerned, growth was equally impressive during the quarter in Brazil. On an FX neutral basis, gross merchandise volume accelerated 8 percentage points to 63% versus the third quarter of 2016, which had an FX neutral GMV growth at an already solid 55% year-on-year. Additionally, this quarter's year-on-year FX neutral GMV growth is almost 30 percentage points above our 4-year CAGR and a 14.7 percentage point improvement versus last quarter. Not only are we taking the right approach in stimulating buyer growth and engagement, but we also continue to expand our seller base while driving more traffic and traffic to these sellers. Case in point, unique buyers and unique sellers in Brazil accelerated sequentially to 40% and 33%, respectively. In line with that, conversions continue to improve in Brazil as well as items sold per unique seller grew 27% year-on-year, while items purchased per unique buyer grew by 20 percentage point when compared to the same quarter of 2016.

Moving on to Mexico, another central market for us. I would like to start by saying that it continues to perform extremely well across key KPIs. As a result of our aggressive investments in free shipping, customer acquisition and product and technology initiatives, we have continued to drive growth in that country. On an FX neutral basis, gross merchandise volume accelerated for the eighth consecutive quarter to 76.4% year-on-year. That's not only one of the fastest GMV growth rates on record for us in Mexico, but is also 44 percentage points above the 4-year CAGR and 23.4 percentage points above last quarter. And almost 60 percentage points higher than during the third quarter of last year.

In Mexico, when taking a look at units sold, the results of our growth investments are even more reassuring. During the third quarter of 2017, items sold also accelerated for the eighth consecutive quarter to an all-time high of 128% year-on-year growth and reached 6.5 million items sold. Moreover, unique buyers in Mexico accelerated for the fourth consecutive quarter to a multiyear high of 67.4% while purchase frequency per unique buyer has almost doubled over the last 2 years. We are also making strides in growing our seller base as unique sellers accelerated for the second consecutive quarter above 25% year-on-year, while items sold per unique seller grew by almost 80% year-on-year.

Additionally, product enhancements that we have launched in Brazil and Mexico are also permeating to other countries like Chile and Colombia, which are also accelerating in vibrancy, conversion and buyer engagement metrics. In line with that, I am pleased to report that Argentina has returned to a positive growth trajectory and expect to accelerate the business as we roll out the enhancements we have deployed in Brazil and Mexico over the next few quarters.

One of MercadoLibre's core differentiating factors is our deep selection and SKU count that we offer across multiple verticals in our marketplaces. As such, we remain the go-to destination for e-commerce in Latin America, and supply and product assortment continues to grow at a fast clip. Live listings being offered on MercadoLibre's marketplace accelerated to 51% year-on-year during the third quarter of 2017, reaching 106 million listings. That is not only the third consecutive third quarter of 50% year-on-year growth in this metric, but also the first time in our history that we have exceeded 100 million listings available on our websites at any given time.

Let's now take a minute to talk about our momentum in mobile. We are increasingly attracting consumers to transact on our mobile platforms and also in monetizing that traffic. In fact, we are well on our way to reach a historic milestone as GMV reaches 50% of our total. In line with that, we also continue to observe meaningful conversion improvement year-on-year both in our mobile web platform as well as our mobile app. The solid penetration gains and improvements in conversions are a direct consequence of our relentless focus to deliver the best user experience across multiple screens, devices and platforms.

Moving on to shipping and logistics. MercadoEnvios is a critical building block of our enhanced marketplace, not only allowing us to play an ever-important role in shipping products from sellers to buyers but also allowing us to close the loop in delivering a world-class user experience. Shipping usage metrics have kept tracking positively during the quarter. Our strategic initiatives centered on free shipping and loyalty are significantly contributing to accelerate Envios penetration. Consequently, items shipped on the platform grew by a solid 80% year-on-year to 42 million units, with solid volume gains across all countries. On a country-by-country basis, close to 3 quarters of items sold in Mexico are already being shipped through our shipping solution and network of carrier partners. In Colombia and Chile, where we began offering free shipping and loyalty programs in late June, results have exceeded our expectations with penetration of shipping on items sold reaching 54% and 30%, respectively.

Finally, payments. The accelerating scale of MercadoPago, combined with continually growing user engagement and retention not only resulted in solid payment volume and revenue growth during the third quarter, but also demonstrate the traction we are gaining when it comes to digital payments and FinTech throughout Latin America.

On a consolidated basis, on-MercadoLibre penetration of Pago grew by 1,000 basis points year-on-year and exited the quarter. More than 8 out of 10 items sold through our marketplace are already being paid for and settled through our payments solution. On a country-by-country basis, on platform penetration grew by 18 percentage points both in Argentina and Mexico from where they were a year ago, reaching 93%. Chile's penetration more than doubled versus a year ago to 57%, while Colombia grew almost 30 percentage points year-on-year to 75%. As a result, on-platform Total Payment Volume reached $2.8 billion, accelerating a fast clip both on an FX neutral basis at 80.4% year-on-year and in U.S. dollars at an equally solid 67.1% year-on-year.

As we continue to increasingly onboard merchants of all sizes, we further expand the ubiquity and value of the MercadoPago brand and move closer towards our vision of becoming an essential financial service for users. This quarter's results were no exception to this. Our merchant service business, where we process payments away from our marketplaces, continues to go from strength to strength, not only as one of the fastest-growing non-marketplace revenue streams, but also as an increasing driver of overall Total Payment Volume growth.

Great performance of commercial initiatives and enhancements in functionalities resulted in consolidated off-platform Total Payment Volume accelerating for the third consecutive quarter to 107.6% year-on-year on an FX neutral basis. The drivers of this growth story came from solid execution in Brazil, which delivered the tenth quarter in a row of triple-digit TPV growth on an FX neutral basis at 155.6% year-on-year as well as solid gains in TPV growth in Argentina, Mexico and Chile, where the TPV of those countries has grown north of 55% year-on-year for over nine quarters. One of the future growth engines within FinTech that excite us the most is our ability to efficiently score, originate and distribute credit offerings to merchants selling on MercadoLibre. Our merchant lending business, Mercado Credito, effectively capitalizes those aforementioned efficiencies. And I am pleased to report that during the quarter, we continued to see solid traction in loan origination growth both in Argentina and Brazil along with low default rates. We have a strong conviction that we are seeding a business that is highly synergistic with our core marketplace and that also builds merchant loyalty and that in the not so distant future, could be a significant contributor of top line and bottom line to our overall business.

In terms of off-line payments, we are also encouraged to see sales and adoption of our mobile point-of-sale systems picking up nicely. When compared to the third quarter of 2016, mobile POS devices sold in Brazil increased by nearly 450% year-on-year. Additionally, not only our physical point-of-sale devices has become one of the largest contributors to off-platform TPV in Brazil, approaching 30% of that country's payment volume but we are also observing improvements in user retention as well.

Wrapping up. Although Q3's results clearly reflect a pickup in our pace of execution, we still have a lot of work ahead of us in order to deliver on our product road map and continue strengthening our position.

With that, let's review how the solid operational highlights I have just walked you through flow to our financials. Just as every quarter, greater detail on this can be found in the accompanying presentation to these prepared remarks.

We delivered net revenues of $370.7 million, a growth rate of 60.6% year-on-year and the largest yet from an absolute value perspective in a single quarter. On an FX neutral basis, results continue moving up into the right as we delivered our 14th quarter in a row of revenue growth above 60%, reaching 79.4% year-on-year growth, excluding the impact of currency fluctuations.

Looking on a country-by-country basis. Monetization continues to perform well and is sequentially accelerating in all countries. For the third quarter, revenue growth was as follows: 71% for Brazil; 51% for Argentina; 82% for Mexico; 42% in Colombia; 45% in Chile; and 91% in Uruguay. All of these expressed on an FX neutral basis.

Unit volume acceleration in Brazil and Mexico were the most significant contributors to the strong marketplace revenue we delivered during the quarter. This is mainly a result of the strong traction we are seeing in these countries due to the investments in free shipping, loyalty and customer acquisition I mentioned earlier. On an FX neutral basis, total marketplace revenues accelerated to 97.5% year-on-year, the fourth consecutive quarter of growth above 60% and almost 27 percentage points above the same period last year. Core marketplace revenues in dollars came in at a solid 69.1% year-on-year. Mexico's performance is worth noting here as well as marketplace revenues on an FX neutral basis grew in the triple digits for the third consecutive quarter to 109% year-on-year. That's a 43-point increase versus the same period last year and one of the fastest growth rates in over 5 years. U.S. dollar revenues accelerated for the fourth consecutive quarter to 120% year-on-year, also a multiyear high.

Looking at non-marketplace revenues, we also saw solid growth rates during the third quarter. In local currencies, non-marketplace revenues grew 54% and in U.S. dollars, revenues accelerated 49% year-on-year. The two main contributors to these growth were: financing fees, which accelerated to 56.8% year-on-year on an FX neutral basis; and MercadoPago processing revenues, which accelerated to 83.9% year-on-year on an FX neutral basis.

Moving down our income statement. Gross profit grew 21% year-over-year during the third quarter of 2017 to $175.8 million. Gross profit margin was 47.4% of revenues versus 63% in the third quarter of last year and 54.2% in the second quarter of 2017. The main drivers of gross margin compression during the second quarter can be attributed to investments in free shipping in Brazil, Mexico, Colombia and Chile, which accounted for a reduction of 1,774 basis points of gross margin year-on-year. Additionally, higher COGS related to the sales of our mobile POS payment devices primarily contributed an additional 112 basis points of margin compression when compared to the same period of last year. These effects were somewhat offset by 248 basis points of sale tax leverage. Moreover, collection fees contribute 93 basis points of improved margin due to the lower cost of processing credit cards in Argentina. Combining these effects resulted in a gross margin compression of 1,566 basis points year-on-year for the quarter.

Moving down the income statement. Operating expenses ascended to $148.3 million or 40% of revenues. Sales and marketing grew 111.8% year-over-year to $84 million or 22.7% of revenues versus 17.2% for the same period last year, resulting in 549 basis points of margin contraction. Higher off-line and online marketing investments, mainly in Brazil and Mexico, contributed 539 basis points of margin compression. Additionally, increases in our Buyer Protection Program contributed to an additional 147 basis points of margin contraction, which was offset by 62 basis points of cost-savings in bad debt and salaries and wages.

Product development expenses grew less than revenues at 24.2% to $32.4 million, representing 8.7% of revenues in the third quarter versus 11.3% a year ago. 76 basis points of scale were driven by salaries and wages notwithstanding enlarging our IT headcount by more than 110 employees during the quarter alone. The rest of the year-on-year accretion, 180 basis points, is the result of revenues growing faster than office expenses and maintenance costs.

General and administrative expenses grew 21.5 percentage points year-on-year to $31.8 million, growing less than revenues and representing 8.6% of sales. As a result of this, on an as-reported basis, operating income for the quarter was $27.5 million, down 48.7% versus last year. The low operating income we saw $6.7 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 $14.2 million, up 43.6% year-on-year explained by higher interest rates on a larger investment base as our MercadoPago store balances have increased versus the third quarter of last year.

Our ForEx line was positive $1.6 million during the quarter due to an appreciation of U.S. dollar balances held by our subsidiaries.

Income tax expenses ascended to $9 million during the quarter, yielding a blended tax rate for the period of 24.5 percentage points. Consequently, as reported, net income came in at $27.7 million or 7.5 percentage points of revenue during the third quarter, resulting in a basic net income per common share of $0.63.

CapEx purchases totaled $17.6 million for the quarter. Cash, short-term investments and long-term investments at the end of the quarter totaled $682 million.

Wrapping up, we declared our quarterly dividend of $6.6 million or $0.15 per share payable on January 16, 2018, to shareholders of record as of the close of business on December 31, 2017.

And with that, we can end today's call and take your questions.

(Operator Instructions) Our first question comes from Irma Sgarz of Goldman Sachs.

Good afternoon, good evening. Just 2 quick questions, firstly on your fulfillment initiative. If you could just provide maybe a bit quick update on where you are in terms of rolling out fulfillment centers or sortation centers in Brazil? And how quickly do you think that initiative could scale? And the second question is maybe somewhat connected but with the impressive item growth that you have specifically in Mexico and Brazil and connected with that free shipping program. Do you see already some benefits to scale in driving such big volumes through MercadoEnvios? Or maybe putting it more simply, are you already seeing the per-unit shipping costs coming down on the back of the scale benefits from your significant item growth that you're seeing in these countries?

Hi, Irma. Thanks for the question. So fulfillment in Brazil is live and we are on-boarding an increasing number of sellers. It's still very small. And so we will continue to iterate and build from here and hopefully, scale that as quickly as possible. But we haven't given any specific guidelines or targets. I think it's good news to know that our sellers are already shipping inventory to us and we're fulfilling for them. And then, in terms of unit growth, I would say that we don't yet see any significant impact of scaled growth in driving down costs. I think the focus right now is the quality of the service. It's continuing to speed up the service, It will have greater adoption of our different shipping offerings. Scale benefits to cost will come as we grow it out, but it's not something that is occurring yet nor that we are extremely focused as of yet.

Our next question comes from Robert Ford of Bank of America Merrill Lynch.

Congratulations on the growth. It's very impressive, particularly in Mexico. And I was curious, do you feel as if you finally succeeded in jumpstarting Mexico? And if so, how do you think about maybe withdrawing the subsidies or shifting or segmenting the market a little bit so you can maybe ease off in Mexico, in particular? And it appears as if you're employing different structures in different marketplaces. So you have a range of experiences. And I was wondering if you're finding a sweet spot among those.

Great. So clearly, Mexico has been a phenomenal performer for us so far this year, growing units north of 120%. We're very pleased but we also recognize there are still lots of work, and we'd like to continue growing at a very high clip for many more years. It certainly has performed very well. In terms of subsidies and cost, the focus continues to be to solve for growth and scale and free shipping clearly is an important driver of that. So we will continue to invest aggressively behind free shipping. We are simultaneously, very gradually changing pricing. We've already announced and it's live during the fourth quarter, a slight tweak to the level of subsidies that we offer in free shipping in Mexico and some other countries. So as we always said, we will as we move forward, manage the investment and the cost and how we price it but the focus continues to be to invest aggressively and to grow out the scale of our logistics operation and free shipping as much as we can. And then, in terms of (inaudible) I think, like we've always said, there is a lot of innovation going on. It's all focused on benefiting buyers and sellers. And I think we don't try to isolate which ones have greater impact or less impact. We see the ecosystem as a whole, and they're all fairly interconnected. So as long as we continue to innovate on different fronts, hopefully that will allow us to continue growing and sustaining these levels of growth.

Our next question comes from Deepak Mathivanan of Barclays.

Two questions from me. So the first one, obviously, the competitive environment in Brazil has changed with Amazon expansion. Just wanted to get your thoughts on that. And can you talk about what you're seeing more recently from consumer demand and supply from seller side? And then on the second question. We noticed that you're making some tweaks to the seller commission structure in Brazil. Should we expect any impact to take rate under this as more and more sellers gets transitioned into this program over the next few quarters?

Sure. So let's see. We competed over the last 18 years. It's something that I think is -- something we've enjoyed doing and comes as a consequence of operating in a large and attractive market. And our approach to competition, I think, has always been the same, which is, we think of our consumers, we built back from them and we see how we can innovate on their behalf. We benchmark and we learn from others where applicable. And I think the more you compete, you compete against the best in the world. It's good for our consumers and it leads our execution to get increasingly better. And I think the consequence of this approach over the years and until this time is that we've done incredibly well, and that's how we'll continue to look at competition in the competitive environment. I think we've always said that on the demand side, our business is more about what I just mentioned, innovating on behalf of our consumers and focusing on the product and the technology. That's showing what's happening at macro level. So we attribute a large part of the acceleration and the growth to what we've done on the platform and the product. And then, your final point around the tweak to subsidies. As I mentioned before, as we continue to look at how we subsidize free shipping, how much of that is paid by us, how much is paid for by the merchants, we also look to pricing and it's something that is dynamic and that we'll continue to tweak going forward. Just bear in mind that when we alter subsidy that doesn't necessarily change the take rate. It doesn't impact revenue, it impacts our cost structure. It impacts how must COGS were flowing through our P&L versus getting our sellers to pay for. So depending on how the pricing and the subsidies are moved by, it could either increase take rates or improve margins on that specific line. But when we change the level of subsidy, it just means less cost for us, not necessarily more revenues.

Our next question comes from James Friedman of Susquehanna.

This is Jamie from Susquehanna. I wanted to ask you about your comments about the growth in the merchant service off-platform. I think you characterized it as going from strength to strength. I was just wondering what some of the value proposition from the merchant's perspective are resonating? So when you go into these merchants off-platform and have the conversation, why is it that your payments solutions are gaining adoption?

Jamie, this is Osvaldo. I'd say that in Brazil mostly, we see it working very well. It's what we call our open platform solution because it stays on APIs, which enables sophisticated merchants to integrate the credit cards in whichever way they want. And we see that really taking off over the last couple of years and particularly, in the last few quarters. And also we see the mPOS business growing very nicely both in Brazil and in Argentina, but in scale wise, Brazil is significantly larger.

Okay. That's helpful, Osvaldo. And then, if you could just follow up with an additional question. Could you talk about the role of credit, both the merchant cash advance relevance of credit in terms of your ability to continue to grow the payment side of the solution? Yes, any comments on the credit environment relative to the merchant side would be helpful.

Yes. I think we're very excited about credit initiatives. In the merchant side, we are doing 2 things. We are advancing funds to merchants who are already processing readers and instead of having to wait, I don't know, a couple of times, days to collect the cash -- collect the funds right away. And that is very helpful for our merchant. And also we are facilitating working capital to merchants up to 2 months in sales, particularly for them to be able to stock up before such days -- such as Cyber Monday or the holiday season or (inaudible) and enable them to grow. We believe that this is something that is -- in countries where for small and medium businesses, sometimes it's hard to tap the formal banking systems. It's something that is really handy to our merchants. They can do it just with a couple of clicks. And so far, the conversion, meaning of every 1000 offers we make, the conversion is really high. There's a lot of interest coming from the merchants to take credit from us.

Our next question comes from Andre Baggio of JPMorgan.

Can you talk a little bit more about Argentina? We have seen the beginning of acceleration. And you mentioned that you want to implement things that you already made in Brazil which, I believe, it's -- relates to Mercado points and also to the free shipping. And so if that's the case, do you have any kind of a rollout? Or how do you explain that acceleration that we already saw in this quarter?

Yes. So many of the big innovations that have been very successful in Mexico and Brazil, free shipping, the loyalty program, have not yet been rolled out to Argentina. And as we've been saying throughout the year, we anticipate launching those in Argentina next year. In Argentina, what we're seeing is a combination of two things: improved execution; a more aggressive approach to marketing. We began to invest more aggressively in Argentina in terms of customer acquisition. About nearly 3 incremental percentage points of local margin in sales and marketing and customer acquisition. And I think also in all fairness, the comps that were extremely tough leading into this quarter, if you look at last year, peaked off a little bit and that also explains part of the acceleration.

Our next question comes from Scott Devitt of Stifel.

Pedro, I was wondering if you could just provide free shipping and subsidized free shipping share by market? And how you expect that to trend through 2018? And if that's better off-line with Federico, that's fine as well. But if you're willing to share on the call, that would be great. And then secondly, following up on off-platform and Pago, Pago's success off-platform now, which is following kind of a similar path to PayPal in the U.S. and Europe. And PayPal deployed a platform strategy as merchant services got bigger. Both grew via organic product expansion but then also M&A. And I'm just wondering how you are thinking about product expansions from here with Pago in terms of the willingness. Or should we start thinking about more extensive M&A the way that PayPal did in the U.S.?

Great. So in general free shipping adoption continues to grow nicely. If we look at the percentage of GMV of our shipped volume, so of the volume that goes through MercadoEnvios, what percentage of that is done in free. In Brazil, it's already north of 70, Mexico and Chile is north of 90, and Colombia is nearly 90%. So clearly, high-ticket items that are being shipped through us, the vast majority of them are free shipping to our consumers, and our consumers really react positively to that. So the leverage that we will continue to focus on is driving more volume to MercadoEnvios and away from merchants using their own shipping solutions. The value proposition is quite compelling to our merchants and it should be able to continue to drive that. Launching it in the market that don't have it yet and then, continuing to improve speed of delivery. And eventually, like the first question that I covered, after we focused on adoption and quality of service, start driving down cost to make the economics of that more and more attractive. But extremely pleased with the percentage of GMV that goes through Envios that is already free shipping.

And with regards to MercadoPago, we are very excited with the organic growth opportunities we see. We have been opening new transactional businesses. Over the last couple of years, we introduced the mobile -- the mPOS first in Brazil, then in Argentina and Mexico. We -- our wallet is taking off also in these 3 countries. We introduced first merchant -- credit to merchant and we are test (inaudible) that in credit to consumers. We are very excited with the opportunities we have. We don't believe now we have a need to look for M&A opportunities to be able to grow. We have looked into some opportunities. About a year ago, we bought a very small gateway. And with that team, we have just launched a gateway first in Argentina and we will be expanding it to other countries. It works through the same API as MercadoPago does. It enables merchants to process payments with their own merchant number. So we're really excited about the opportunity we have. We're not looking really -- we're not really (inaudible) to be able to grow.

Our next question comes from Stephen Ju of Crédit Suisse.

So Pedro, I think -- I don't think this is a metric that you guys disclosed. But you do disclose number of items sold and you do disclose the unique buyers. And so if solve for how many items are being purchased on a unique buyer basis, it seems like that growth continues to accelerate. So I'm just wondering if you can talk about the latest, the cohort of consumers that you're bringing on to the platform. Because it seems like they are probably purchasing at a materially faster velocity versus the people who were there before. Maybe your legacy cohort, legacy customers are buying more rapidly as well. So I'm just wondering as to the lifetime value of the new, I guess, customers, buyers that you're adding to the platform? Or whether that's inflecting positive, negative? Whether you feel better about that or not?

So we certainly continue to feel positive about the consistent growth in units per buyer, per quarter and per year. Our engagement metrics continue to trend better. Some of that, as you outlined, is the newer users that come on to the platform and experience the 2017 version of MercadoLibre, have greater repeat frequency and also recency and they buy more when they come back. We don't disclose the specifics of the different cohorts and certainly, we continue to see that newer cohorts, given that they're experienced with the platform from the first time -- and first time purchases are very important. With that, we improved the legacy cohorts. They do perform better. And I think, the other important factor here is that we're certainly not satisfied. We think that there is still room to significantly continue to drive those units per buyer per quarter, which are currently at around 4.5 units to numbers that are north of that. We think that category expansion will help us accomplish that as we get stronger in categories that will allow us to gather more share of wallet through users. And also as we continue to focus on improving the overall user experience, consumers should ship more and more of their buying behavior to our platform and away from off-line means and other online means. So very pleased with what we're seeing. Positive results from a cohort perspective and still think that there is a lot of work and a lot of upside.

Our next question comes from Brad Erickson of KeyBanc Capital Markets.

First, just related to Argentina and rolling out free shipping there at some point. How should we think about the unit volume exposure there? Would you anticipate it sort of hitting similar levels to what you're seeing in Brazil? And then, just also curious of the shipping costs sort of sharing arrangement would be similar to the relationships with the merchants you have in Brazil for free shipping.

Yes. So a couple of thoughts on this. If you were able to understand when I answered the question around free shipping with the data, what I was saying is that we have extremely high adoption of free shipping on the volume that goes through MercadoEnvios. And so the key driver is to drive more and more usage of MercadoEnvios. That's particularly relevant for Argentina, in that Argentina is one of the countries that still has some of the lowest adoption of MercadoEnvios. And so even if we were to have very high level of the initial free shipping adoption on MercadoEnvios platform, from a cost perspective and an overall impact perspective, it should be somewhat lower than Brazil or Mexico because Envios in Argentina is only roughly 1/3 of all units purchased whereas in Brazil in Mexico, it's nearly 75%. So that means that the initial launch of free shipping in Argentina shouldn't have as large a short-term cost impact. Hopefully, over time, we're able to expand adoption, and that's a great problem to have. Second part of the question is, will we subsidize 100% of shipping like we did in Mexico until the fourth quarter? Or will it be more similar to the Brazil model, where we pay for part of the shipping and the sellers, merchants pay for part of it? More likely to be the Brazil model, which is the latter, where we don't pay for all of shipping but we subsidize part of it as an incentive to get the sellers to pay for the rest of it.

Got it. That's great. And I guess following up on that first one. What I was really kind of getting at was do you target sort of a similar dollar value in terms of the items that you would ultimately expose to -- I understand we can do the math around Envios, but more just looking at sort of where you draw the line of dollar values that you expose to free shipping?

I think until we determine the plan and launch the plan, probably no disclosures that we need to make there. I think we attempt to have at least the ballpark similar coverage. But we'll have to see once we launch it next year.

Got it. And then just secondarily, can you talk about kind of how firm you are in establishing a floor for where you'll let EBITDA margins go during this period of entering into free shipping in most of your major market? Is that a little bit of a moving target still as you discover sort of how much elasticity you can drive with free shipping? Or is there a level where you sort of draw a line in the sand, thinking margins simply cannot go below that, given the offsetting scale benefits you gain on the higher GMV and revenue?

So the technology industry is incredibly dynamic, and I think drawing lines in the sand for short-term results is probably not a great idea. So having said that, I think we have guiding principles with which we're trying to manage the business and communicate how we think through the business. I think we've been pretty consistent in communicating those. We really want to grow the business as fast as we can and continue to reach as much scale as we can. And commerce is incredibly sensitive to economies of scale because of logistics and other factors. And the quicker we can get to a top line that is multiples of what it is today, the closer we get to some sort of escape velocity where we really feel comfortable with our position. And we've always said that we strive to deliver positive EBITDA and that what we're trying to do is to over the mid- to long term, deliver incremental earnings. What happens on our trajectory between now and then is very much determined by how fast our top line is growing and the kind of returns we're seeing from these investments. So no hard line in the sand that we communicate outwards. We have pretty disciplined targets internally. But if things change, we're willing to change those if necessary.

Our next question comes from Richard Cathcart of Bradesco.

Just 2 questions. First of all, I just wanted to ask about the overhead expenses. The year-on-year growth in those overhead expenses slowed to around 30% from around 60% in the first half. So I just wanted to ask if you could give a little bit more color about what's going on? Kind of, are you slowing down some investments that you are making now in the first half in terms of hiring, et cetera? And then, just a second question. Going back to one of Pedro's answers about the share of free shipping. So you mentioned it was out of 70% share on volumes that we're going through Envios. And so I just wanted to ask about the other 30% of the volumes going for Envios that aren't using free shipping. Is that because free shipping is not available on those products? Or are consumers achieving something else?

Great. So most of the operational leverage that we're seeing in the business is not a consequence of a pullback in spend. But with the solid, solid top line growth that we have, we're able to invest as much as we need in those OpEx costs and still generate scale. So I don't think that there's anything that we're needing to invest less in when we look at dollars or just continuing to be aggressive in growing the business and delivering results to our consumers. It's simply that with these kinds of top line results, scale on OpEx is much easier to achieve, and that's what you're seeing flow through the P&L. What doesn't go through free shipping is primarily dictated by where we have the minimum for free shipping to start from. So we only offer free shipping above a certain dollar amount in each of the different countries. That floor is essentially lower depending on the user's loyalty level. But there is a certain floor beneath which we simply don't offer free shipping because the ASPs are too low. And that's what accounts for that 30%.

Okay. So on the purchases above that dollar level, the participation of free shipping would be much higher than 70% number that you mentioned?

Correct. So let's see. By definition, if you were above the minimum for free shipping, you have free shipping. So it should be 100%. There are certain seller profiles at the margin that we don't allow them to offer free shipping because their historical track record, we don't want to give them the free shipping subsidies. And so that's the only reason it isn't 100%.

Our next question comes from Tom Champion of Cowen.

Curious if there were any product categories that you'd call out that were particularly strong from a unit's perspective? And then, also as you reach this tipping point in mobile and in your GMV going above 50%, just curious how that impacts your product development? Or potentially, any categories of offerings that you'd want to pursue?

We haven't disclosed any particular changes in category growth cadence. We haven't aggressively launched any new large categories. I think that's something that we're beginning to work on and there are a few that we're excited about. But we haven't really started focusing products and platform rollouts to include those. So the growth we're seeing is similar from a category perspective to previous quarters. And there is strength pretty much across the board. Mobile hasn't crossed 50% yet. It's very close to accomplishing that. From a product development perspective, I think it's been many years now that we're extremely focused on mobile and that all development has to have either mobile first or a mobile priority. So I don't expect any changes in how we build out product. Mobile is already critical to us. So I don't think there's anything specific that we've identified that changes as mobile continues to penetrate north of 50 going forward.

And this does conclude our question-and-answer session. I would now like to turn the call back over to Pedro Arnt, Chief Financial Officer, for further remarks.

Thanks, everyone, for listening in. I look forward to catching up with many of you over the course of the next few weeks. And as always we look forward to updating you again next quarter once we are through our shopping season and the full year. Thank you.

Ladies and gentlemen, thank you for participating in today's presentation This concludes today's program. You may all disconnect. Everyone, have a great day.